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

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QUESTIONS PRESENTED

1. Whether the Fifth Circuit misapplied the Chevron

Standard when it did not adopt the Comptroller’s new construc-

tion of 12 U.S.C. § 24(7) or his new determination that annuities

do not constitute “insurance” for purposes of 12 U.S.C. § 92,

even though the Comptroller contradicted his prior construction

of those statutes. (No. 93-1612)

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. (No.

93-1612)

3. Whether federal law permits national banks, wherever

located, to act as agents in the sale of annuities. (No. 93-1613)

4. Whether the sale of annuity contracts is “necessary to

carry on the business of banking” under 12 U.S.C. § 24(7).

DISCLOSURE OF CORPORATE PARENT

American General Corporation is the parent corporation of

respondent, Variable Annuity Life Insurance Company.

iii

TABLE OF CONTENTS

QUESTIONS PRESENTED .............

DISCLOSURE OF CORPORATE PARENT ... .

TABLE OF AUTHORITIES ............

COUNTER-STATEMENT OF THECASE .... .

A. 1863: Congress Establishes National

Banks With Limited Powers ........

B. 1916: Congress Grants Limited Authority

To Small-Town National Banks To Act As

Agent For Insurance Companies ......

C. 1968: The Fifth Circuit Blocks Insurance

Agency Activity By National Banks In

Fg PA rar ae oe ee ee

D. 1978: The Comptroller Rules That Section

92 Bars The Sale Of Annuities By Large-

Town National Banks ............

E. 1990: The Comptroller Reverses

Himself On The Sale Of Annuities By

F. 1992: The Second Circuit Holds That

Section 92 Bars Large-Town National

Banks From Selling Title Insurance

G. Proceedings In The Courts Below... . .

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

ES io e-h ncng em be Br ete te 88

I. SECTION 92 BARS NATIONAL BANKS

FROM SELLING ANNUITIES IN TOWNS

WITH POPULATION OVER 5,000 .... ..

II.

A. By Granting Certain Insurance Powers To

National Banks In 1916, Congress Denied

Any Other Insurance Powers ........

1. The Legislative Genesis of Section 92

2. This Court Has Long Relied upon the

Expressio Unius Principle .......

3. The Comptroller May Not Redraft

I eae a a6 4 eS ee 8

B. The Comptroller Erroneously Concluded

That Annuities Are NotInsurance .... .

1. Annuities Are Insurance. ........

2. When Section 92 Was Enacted,

Annuities Uniformly Were Understood

er ee

a. Annuities Have Been Viewed as

Insurance since the Origin of the

Life Insurance Business ...... .

b. The States in 1916 Considered

Annuities to Be Insurance. .... .

3. Like Life Insurance, Annuities Have

Some Investment Function .......

4. All of NationsBank’s Annuities Are

PE, ieee

SECTION 24(7) DOES NOT AUTHORIZE

NATIONAL BANKS TO SELL

eM eg etl ss 6

A. When Congress Enacted Section 24(7), It

Conferred Limited Powers Upon

et tee elk ws

1. The New York Free Banking Act of

1838 Denied Banks the Power to Sell

Ca al Ge ere es ele ek bb. 0 4

2. The “Business of Banking” Is Not a

Highly Elastic Term. ..........

B. This Court Has Construed Section 24(7) As

A Grant Of Limited Powers. ........

C. The Sale Of Annuities Is Not Part Of The

“Business Of Banking” ...........

D. Section 92’s Specific Prohibition Would

Prevail Over Any General Power In

CE? 5 5 6 4 bh es eo Oe 88

CONCLUSION

APPENDICES

— -— --. & 2.2 + @. C62 2 ees Be es € 8) =. 2 Se

TABLE OF AUTHORITIES

Cases Pages

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

150 (2d Cir. 1992), cert. denied, 113 S. Ct.

Se ee a ee 6-8

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

SE Gna! 3-5 oe ee % 6 de 42

Arthur v. Cumming, 91 U.S. 362 (1876) .... .. 14

Bankers Life Ins. Co. v. Laughlin, 160 Neb. 480

TS + G6 oh ee we 688 25

Burck v. Taylor, 152 U.S. 634 (1894) ....... 14

Busic v. United States, 446 U.S. 398 (1980)... . 49

California Bank v. Kennedy, 167 U.S. 362

DS << oo ores ob ay b&w ees 4 41

Camp v. Gress, 250 U.S. 308 (1919)... 2.2... 14

Central Nat'l Bank of Washington v. Hume, 128

atk 5 sk 8 6 ee 22

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

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

TGR 9 Se Sn, passim

Cipollone v. Liggett Group, Inc., 112 S. Ct. 2608

IR ee ae a ae kw « 5 o 9 aw ee 14

City of Walla Walla v. Walla Walla Water Co.,

ee Ns ok a ee 14

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

ee ahs Pere es ere ee he 8 43-44

Cockrill v. Abeles, 86 F. 505 (8th Cir. 1898)... . 42

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

ee be ke ee ek le a os ce 43-44

vii

Commonwealth v. Metropolitan Life Ins. Co., 254

CR bo kis oes 6 ew 8 24

Concord First Nat'l Bank v. Hawkins,

Ge 41

Continental Casualty Co. v. United States,

a 14

Cooper v. Hill, 94 F. 582 (8th Cir. 1899)... ... 42

Corporation Comm'n v. Equitable Life Assurance

Society of United States, 73 Ariz. 171

ae taG ea a a Miale -¢ ie 44 0 8 24

Crawford Fitting Co. v. J. T. Gibbons, Inc.,

a 49

Curtis v. Leavitt, 1S N.Y.9 (1857) ....... 37-39, 45-46

Dalby v. India & London Life Assurance Co.,

oe BO ee ee ee 23

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

_ << Sarre ene Te ee eee 24

Demarest v. Manspeaker, 498 U.S. 184(1991) . . 11

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

ee ee ae 23

Fanning v. Gregoire, 16 How. (57 U.S.) 524

RRB Er Me cd an oa Pin, 14

First Nat’l Bank v. Converse, 200 U.S. 425

I re eats snr anene Gs 6 ae 3 42

First Nat'l Bank v. Hartford, 273 U.S. 548

A Oe er 43-44

First Nat'l Bank v. Missouri, 263 U.S. 640

I Rea Ce aia ee be a is 40,48

First Natl. Bank v. National Exch. Bank,

EG rer he eg Lier ns 14,41

Vill

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

BOI eran olen eval gre ageing: 43-44

Good Samaritan Hospital v. Shalala, 113 S. Ct

I ee 17

Grigsby v. Russell, 222U.S.149(1911)...._. 22, 30

Group Life & Health Ins. Co. vy. Royal Drug Co.,

440 U.S. 205(1979)... 22.2, 19, 25

Helvering v. Le Gierse, 312 U.S. 531 (1941)... 19, 23-24

In re Rhodes’ Estate, 197 Misc. 232 (N.Y. Surr.

eee ree) 24

In re Southern’s Estate, 257 A.D. 574 (1939) _._. 24

In re Walsh, 19 F. Supp. 567 (D. Minn. 1937) . _ 24

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

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

Desert oe 45

Independent Ins. Agents vy. Department of Banking

& Fin., 248 Ga. 787 (1982). ....... 43

Inland Waterways Corp. v. Young, 309 U.S. 517

Ia ee tada) icine tt aeigt 4]

INS v. Cardoza-Forseca, 480 US. 421(1987) .. 17

Jarecki v. G.D. Searle & Co., 367 U.S. 303

ey ee ee eT 27

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

& Sav. Bank, 114 S. Ct. 517 (1993)... 31

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

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

cc RE TE a te ee Pe gg? 24

Leatherman v. Tarrant County Narcotics

Intelligence & Coordination Unit, 113 S. Ct

Scale vera ade te et: + 14

I a ct ——

Logan County Nat'l Bank v. Townsend,

Bow wm. G7 CRRA) ww ww ew ee

a en ear

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

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

436 U.S. 956 (1978). .............

Marion v. Sneeden, 291 U.S. 262 (1934) .....

Merchants’ Nat'l Bank v. State Nat’! Bank,

10 Wall. (77 U.S.) 604(1870) ........

Merchants’ Nat’l Bank v. Wehrmann,

202 U.S. 295 (1906). .............

Miller v. Youakim, 440 U.S. 125(1979) ......

Nashville Milk Co. v. Carnation Co., 355 U.S. 373

ee ce ee ee

National R.R. Passenger Corp. v. National Ass’n

of R.R. Passengers, 414 U.S. 453 (1974) .. .

National Retailers Corp. v. Valley National Bank,

604 F.2d 32 (9th Cir. 1979)... .. 2...

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

New York State Banking Dep't,

83 N.Y.2d 353 (1994) ............

NLRB v. United Food & Commercial Workers

Union, Local 23, 484 U.S. 112 (1987) . . .

Paul v. Virginia, 8 Wall. (75 U.S.) 168 (1869)...

People ex rel. Metropolitan Life Ins. Co. v. Knapp,

193 A.D. 413(1920) .............

People v. Utica Ins. Co., 15 Johns. 358

8 me Ce ee

Pension Benefit Guar. Corp. v. LTV Corp.,

WO US. GCP... we cc 1]

Phoenix Mutual Life Ins. Co. v. Bailey, 13 Wall.

(80 U.S.) 616 (1871) .......2.22... 23

Pine Grove v. Talcott, 19 Wall. (86 U.S.)

FA a 14

Presley v. Etowah County Comm'r,

112 S.Ct. 820(1992) ........2.2... 7,39

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

aS ee ae ee ots ee ew ce wc 31, 34, 48

SEC v. Variable Annuity Life Ins. Co.,

359 U.S. 65(1959)........... 26, 30, 32, 34, 48

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

399 F.2d 1010 (Sth Cir. 1968) ........ passim

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

(2d Cir. 1989), cert. denied, 493 U.S. 1070

NS a ae ee 45

St. Paul Fire & Marine Ins. Co. v. Barry,

G35 US. 551 (1978)... ww kkk 29

State ex. rel. Equitable Life Assurance Soc 'y v.

Ham, 54 Wyo. 148 (1939) ........ 24

Sturges v. Draper, 12 Wall. (79 U.S.) 19 (1871) . . 14

Talmage v. Pell, 7 N.Y. 328 as 37, 39, 41

Texas & Pacific Ry. Co. v. Pottorff, 291 U.S. 245

TEE age a ne rr 40-41, 45

Udall v. Tallman, 380 U.S.1(1965)......_.. 13

United States Dep't of Treasury v. Fabe, 113 S. Ct.

EE 3S Pieie es Foe ek: 30

United States v. Arredondo, 6 Pet. (31 U.S.) 691

SS eee an rn StL ey 13

United States v. County of Macon, 99 U.S. 582

a ee ee

United States v. Erwin, 147 U.S. 685 (1893). . . .

United States v. South-Eastern Underwriters Ass Nn,

322 U.S. 533 (1944). .......2.2.....

United States v. Sweeny, 157 U.S. 281 (1895) . . .

United States v. Vogel Fertilizer Co., 455 U.S. 16

DRS 6 Ned oo 6s eae eo Ka

United States v. Wells Fargo Bank, 485 U.S. 351

SA een

Variable Annuity Life Ins. Co. v. Clarke, 786 F.

Supp. 639 (S.D. Tex. 1991). .....2....

Variable Annuity Life Ins. Co. v. Clarke, 998 F.2d

1295 (Sth Cir. 1993), reh’g denied,

13 F.3d 833 (SthCir. 1994). ........

Watt v. Alaska, 451 U.S. 259(1981) ........

Wood v. United States, 16 Pet. (41 U.S.) 342

ARGS ECS Ah Arey Oe ores

Constitutional Provisions, Statutes & Rules

eg 8 ee

WP IIE |. wo G6 ee oie ee cel

I or ete ee Nee eel

2 | PE te eee ee

weUSE. GRC). ...........6..

Pe OI ss ee ee ard et

passim

Act of Feb. 25, 1863, ch. 58 § 11, 12 Stat. 668. . .

Act of June 3, 1864, ch. 106, § 8, 13 Stat. 99

Act of June 16, 1933, ch. 89, 48 Stat.162 .....

McCarran-Ferguson Act, 59 Stat. 34 (1945)... .

McFadden Act of 1927, 44 Stat. 1226 .......

MD a cc cw wc eed

Ariz. Rev. Stat. § 3428(2) (1913). .........

1915 Cal. Stat.ch.768,§1.......2.....

Del. Code Ann. tit. 18, § 1701(a) (1993)... ...

Del. Code Ann. tit. 18, § 1715(a)(2) (1993) ....

Fla. Stat. Ann. § 624.602(1) (West 1993) ..._..

1899 Ind. Actsch.28,§1 .............

1893 Ky. Actsch.171,§106............

1869 Mich. Pub. Acts77,§1............

Miss. Code Ann. § 83-19-1(j) (1993) _.....

1913 Neb. Laws ch. 154,§78 ...........

N.H. Rev. Stat. Ann. § 401:1 (IID (1993 Supp.) . .

N.Y. Ins. Law § 1113(a) (Consol. 1994)... ... .

1838 N.Y. Laws 245, 249 ch.260,§ 18 ......

1849 N.Y. Laws ch. 308,§1 ...........

N.C. Gen. Stat. § 58-58-1(1991) .........

1872 Ohio Laws 150 ch.2,§1...........

Or. Rev. Stat. § 731.154 (1993) ..........

1875 Tenn. Pub. Actsch. 142,810 ......_..

et ey a ew

ee ie ee es

xiii

1909 Tex. Gen. Laws ch. 108,§1 ......... 29

Tex. Ins. Code Ann., art. 3.01§1(1994) ..... 19

1913 Wash. Sess. Laws.ch.109,§2........ 29

1850 Wis. Laws ch. 232,81 ............ 29

Legislative And Administrative Materials

Pujo Report, Money Trust Investigation, 62nd

Cong., 3d. Sess., H. Rep. 1593 (1913) 46

2 Fed. Res. Bull. (Feb. 1,1916) .......... 3,13

53 Cong. Rec. 11,001 (1916) ...... 3, 13, 40, 43, 49

Hearings on the Consolidation of National

Banking Associations, Senate Banking and

Currency Comm., S. 3316, 68th Cong.,

2d Sess.(1925) ................ 46

H.R. Rep. No. 873, 78th Cong., Ist Sess. 8-9

A 19

58 Fed. Reg. 64483 (Dec. 8,1993)......... 17

OCC Interpretive Letter No. 241, reprinted in [1983-

1984 Transfer Binder] Fed. Banking L. Rep.

(CCH) 7 85,405 (Mar. 26,1982) ....... 5,31

OCC Interpretive Letter No. 283, reprinted in [1983-

1984 Transfer Binder] Fed. Banking L. Rep.

(CCH) ¥ 85,447 (Mar. 16,1984) ....._.. 44

OCC Interpretive Letter No. 326, reprinted in [1985-

1987 Transfer Binder] Fed. Banking L. Rep.

(CCH) ¥ 85,496 (Jan. 17,1985)... ..... 44

OCC Interpretive Letter No. 331, reprinted in [1985-

1987 Transfer Binder] Fed. Banking L. Rep.

(CCH) J 85,501 (Apr. 4, 1985) ........ 5, 34

XiV

OCC Interpretive Letter No. 356, reprinted in [1985-

1987 Transfer Binder] Fed. Banking L. Rep.

(CCH) ¥ 85,526 (Jan.7, 1986) ........ 44

OCC Interpretive Letter No. 388, reprinted in [1988-

1989 Transfer Binder] Fed. Banking L. Rep.

(CCH) J 85,612 (June 16,1987) ....... 44

OCC Interpretive Letter No. 494, reprinted in [1989-

1990 Transfer Binder] Fed. Banking L. Rep.

(CCH) { 83,083 (Dec. 20, is, 47

Miscellaneous

43 Am. Jur. Insurance, § 3 (es accede 21

Joseph K. Angell, A Treatise on the Law of Fire

and Life Insurance (Boston, Little, Brown &

Ce. Se . vi ewido 27

Kenneth Black, Jr. & Harold D. Skipper, Jr., Life

Insurance (12thed. 1994)... ..__. 18, 20, 26, 33-34

Black's Law Dictionary (6th ed. 1990)... . _ | 18

Frederick G. Crane, Insurance Principles and

Practices (2ded. 1984) ...... 2... 18,20

Denise W. DeFranco, Chevron and Canons of

Construction, 58 Geo. Wash. L. Rev. 829

eer tae 15

Glossary of Insurance Terms (Robert W. Osler

and John S. Bickley, eds..1972) ....... 19, 28

William Greider, Secrets of the Temple (1987) . . 35

Hardy, Risk and Risk-Bearing (1931) ....._. . 21

Solomon S. Huebner, Life Insurance ( ae 27

John R. Ingrisano and Corinne M. Ingrisano,

The Insurance Dictionary (3d ed. 1990) _ . . 19

ee eee

A. Fingland Jack, An Introduction to the History

of Life Assurance (1912) ........... 27

J.H. James, A Practical Treatise on Life and Fire

Assurance; Annuities and Reversionary

Sums; and Leases for Terms and For Lives

(London, Doughty & Co. 1868). ....... 26, 27

| Joseph A. Joyce, A Treatise on the Law of

Insurance of Every Kind (2ded.1917) ... . 26

William A. Kerr, The Law of Insurance (1902) . . 28

IV Loss, Securities Regulation 2534

Mc ee ete te 31

McGill's Life Insurance (Edward E. Graves &

Lynn Hayes, eds.,1994).......... 19, 21-22, 33

Robert I. Mehr et al., Principles of Insurance

EE eee 18, 33

Merritt Glossary of Insurance Terms (Thomas E.

Seem Sed. 1993) .............. 19

Albert H. Mowbray et al., Insurance

EE 31

Edwin J. Perkins, The Divorce of Commercial and

Investment Banking: A History, 88 Banking L.

EEE ee 46

George Richards, A Treatise on the Law of

Insurance (3d ed.1909).......... 26

Ridgely, Government Control of Banks and Trust

Companies, 23 Annals 17 (1904) (Comptroller

oftheCurrency) ............... 46

David Shapiro and Thomas Streiff, Annuities

a . . 28, 32-33

Xvi

Carl B. Swisher, 5 History of the Supreme Court

of the United States: The Taney Period.

| 35

Edward L. Symons, The “Business of Banking”

in Historical Perspective, 51 Geo. Wash. L.

Rev. 676 (1983) ............. 37, 39-40, 43, 47

William R. Vance, Handbook of the Law of

Insurance (1904) ..........2...2.. | 30

William R. Vance, Handbook on the Law of

Insurance (3ded.1951)............ 21-22, 31

Webster's Tenth New Collegiate Dictionary

i Oe ee 21

James J. White, Banking Law (1976)... .. . 35

Lester W. Zartman and William H. Price,

Life Insurance (1914) .......2.2.2~CO«~*” 27

+ ee ee

——- SU et Oy OR es A a le ae,

et eeten

Nos. 93-1612, 93-1613

IN THE

Supreme Court of the United States

October Term, 1994

NationsBank Of North Carolina, N.A.. et al.,

Petitioners,

Variable Annuity Life Insurance Company,

Respondent.

Eugene Ludwig, Comptroller Of The Currency, et al.,

Petitioners,

Vv.

Vanable Annuity Life Insurance Company,

Respondent.

On Writs Of Certiorari

To The United States Court Of Appeals

For The Fifth Circuit

BRIEF OF RESPONDENT

COUNTER-STATEMENT OF THE CASE

This case concerns whether NationsBank, a national bank

based in Charlotte, North Carolina, can sell annuity contracts

through a subsidiary. R. 57-59.!_ As proposed by NationsBank,

annuity purchasers could choose from a number of annuity

opuons, in return for either a single or multiple premium. R. 13.

Purchasers also could direct whether premiums are accumulated

“solely in a variable account, solely in a fixed account or in a

References to “R.__” herein are page references to the record on

appeal to the court of appeals.

combination of variable and fixed accounts.” Jd. Purchasers

could change this allocation prospectively and also “transfer all

or a portion of the accumulated value of any annuity account to

another annuity account.” /d. Pay-out options would include the

right to receive annuity payments “on a fixed or variable basis

or partly on a fixed basis and partly on a variable basis.” Jd.

Annuities are a form of insurance that national banks in

large towns cannot sell both because of the limitations imposed

by 12 U.S.C. § 92, and because they have no authority to do so

under 12 U.S.C. § 24(7).

A. 1863: Congress Establishes National Banks

With Limited Powers

Congress established the national banking system in 1863,

and specifically defined national bank powers in Section 11 of

that legislation. Act of Feb. 25, 1863, ch. 58,§ 11. 12 Stat. 668.

The following year, Congress amended Section 11, Act of June

3, 1864, ch. 106, § 8, 13 Stat 99, 101. That statute, codified at

12 U.S.C. § 24 (Seventh) (“Section 24(7)”), provides that na-

tional banks have the power:

[t]o exercise . . . all such incidental powers as shall be

necessary to carry on the business of banking; by

discounting and negotiating promissory notes, drafts,

bills of exchange, and other evidences of debt: by

receiving deposits; by buying and selling exchange,

coin, and bullion; by loaning money on personal

security; and by obtaining, issuing, and circulating

notes . .

Fifty years later, the Federal Reserve Board considered

whether a national bank could act as an agent or broker in the

Sale of insurance. Noting that the power to sell insurance is not

Specified in the statute, the Board determined that “writing

insurance On commission is in no sense incidental to any of the

ANT, a ere etl ae ie

enumerated powers of a national bank.” 2 Fed. Res. Bull. 73,

74 (Feb. 1, 1916).

B. 1916: Congress Grants Limited Authority To

Small-Town National Banks To Act As Agent

For Insurance Companies

The Comptroller of the Currency in 1916 agreed with the

Federal Reserve Board that national banks have no power to sell

insurance. 53 Cong. Rec. 11,001 (1916). To provide “small

national banks” with additional revenue, Comptroller John

Skelton Williams asked Congress to grant “limited” authority

to national banks located in small “villages and towns” “to act

as agents for insurance companies in the placing of policies of

insurance.” Jd. He sought congressional action because “the

Comptroller of the Currency has no right to authorize or permit

a national bank to exercise powers not conferred upon it by law.”

Id. Comptrolier Williams observed that, under existing law,

“[nJational banks are not given either expressly nor by necessary

implication the power to act as agents for insurance companies.”

Id.

Although he was wary of allowing banks “to trespass upon

outside business naturally belonging to others,” the Comptroller

explained that the smal] amount of business generated at small

town national banks would “not [be] likely to assume such

proportions as to distract the officers of the bank from the

principal business of banking.” /d. Comptroller Williams

pointedly advised Congress that “it would be unwise and there-

fore undesirable to confer this privilege generally upon banks

in large cities where the legitimate business of banking affords

ample scope for the energies of trained and expert bankers.” Jd.

At the Comptroller’s urging, Congress enacted 12 U.S.C.

§ 92 (“Section 92”), Act of Sept. 7, 1916, ch. 461, 39 Stat. 753,

which provides that national banks:

located and doing business in any place the population

of which does not exceed five thousand inhabitants, .

.- May... act as the agent for any fire, life, or other

insurance company . . . by soliciting and selling

insurance ....

C. 1968: The Fifth Circuit Blocks Insurance Agency

Activity By National Banks In Larger Towns

Saxon v. Georgia Ass'n of Indep. Ins. Agents, Inc., 399 F.2d

1010, 1014 (Sth Cir. 1968), construed Section 92 to “prohibit

national banks from carrying on the business of insurance agents

in places of more than 5,000 population.” Applying the princi-

ple of expressio unius est exclusio alterius (“the expression of

one thing is the exclusion of another”), Saxon reasoned that by

conferring limited insurance agency powers upon small-town

national banks, Congress “clear{ly]” intended to deny “any other

power” for national banks to act as insurance agents. Jd. at 1014,

1016. Noting the legislative genesis of Section 92, Saxon

further explained that prior to enactment of the law, it was

“universally understood that no national banks possessed any

power to act as insurance agents.” Jd. at 1013 (emphasis in

Original). Saxon therefore rejected the assertion that national

banks could act as insurance agents under 12 U.S.C. § 24(7).

D. 1978: The Comptroller Rules That Section 92

Bars The Sale Of Annuities By Large-Town

National Banks

In an opinion letter dated June 16, 1978, the Comptroller

ruled that a national bank’s proposal to broker annuities as agent

for an insurance company “would constitute the bank a seller or

broker of insurance in violation of the provisions of 12 U.S.C.

§ 92.” R. 7-8 (reproduced in Brief in Opp., at App. A). The

Comptroller rejected the bank’s attempt to evade Section 92 by

characterizing its role as “fiduciary.” The Comptroller observed

that “in reality” “the bank is receiving [a fee] for the sale of

insurance.” Jd.

ER ek SEE 8 ott tr eee te en ae

— el a Ley re diet &

athetti ee ee

A few years later, the Comptroller similarly ruled that

Section 92 would prohibit a national bank from acting as agent

in the sale of life insurance. OCC Interpretive Letter No. 241,

reprinted in [1983-1984 Transfer Binder] Fed. Banking L. Rep.

(CCH) { 85,405 (Mar. 26, 1982) (“OCC Ltr. 241”). The Comp-

troller explained (id. at 77,508):

it is highly unlikely that a court would consider the

activities of a national bank which acted as an agent

in the sale of life insurance as incidental to banking

under 12 U.S.C. § 24(7).

E. 1990: The Comptroller Reverses Himself On The

Sale Of Annuities By National Banks

By letter dated March 21, 1990 (the “Approval”), the

Comptroller approved NationsBank’s proposal to sell annuities

as agent for life insurance companies. The Approval conceded

that “annuities have historically been a product of insurance

companies” and that “annuities often share with insurance the

need for actuarial calculations” of “mortality risk.” Na-

tionsBank Pet. App. 38a-39a. To avoid the Statutory limits on

the insurance activities of national banks, the Compwoller re-

named annuities, calling them “financial investment instru-

ments.” He then asserted that national banks have the inherent

power to “broker a wide variety of financial investment instru-

ments.” /d. at 38a. The Comptroller added that fixed annuities

are “similar to” variable annuities, which he previously had

allowed national banks to broker. /d. at 39a: OCC Interpretive

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

Banking L. Rep. (CCH) 4 85,501, at 77,773-77 (Apr. 4, 1985)

(“OCC Ltr. 331”).

The Approval disagreed with Saxon’s holding that the

limited “insurance agency power in Section 92 .. . negates the

existence of any other power to act as an insurance agent.” 399

F.2d at 1014; NationsBank Pet. App. 42a. The Approval also

expressed “doubt{ ] that the word ‘insurance’ in Section 92 can

be construed to include annuities.” /d. at 43a. The Approval

never mentioned the Comptroller’s 1978 conclusion that Sec-

tion 92 bars national banks from selling annuities, except in

small towns.

F. 1992: The Second Circuit Holds That Section 92

Bars Large-Town National Banks From Selling

Title Insurance

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

1992), cert. denied, 113 S. Ct. 2959 (1993), construed Section

92 to prohibit national banks from selling title insurance, as

agent, in towns with more than 5,000 inhabitants. Applying the

expressio unius principle and examining the legislative genesis

of Section 92, American Land Title agreed with Saxon that “had

Congress intended to grant national banks located in towns with

large populations the authority to sell insurance, it would never

have limited the grant of authority in section 92 to national banks

in locations with under 5,000 inhabitants.” /d. at 155. The court

held that the statutory phrase “any fire, life, or other insurance

company” “makes inescapable the conclusion that Congress

intended [Section 92] to apply to ‘any .. . insurance company,””

including a title insurance company. /d. at 156 (emphasis in

original).

G. Proceedings In The Courts Below

After VALIC brought suit challenging the Approval, the

district court denied VALIC’s motion for summary judgment

and granted petitioners’ cross-motions for summary judgment.

Variable Annuity Life Ins. Co. v. Clarke, 786 F. Supp. 639 (S.D.

Tex. 1991) (NationsBank Pet. App. 29a-34a). The court of

appeals reversed. Variable Annuity Life Ins. Co. v. Clarke, 998

F.2d 1295 (Sth Cir. 1993), reh’g denied, 13 F.3d 833 (Sth Cir.

1994) (NationsBank Pet. App. 1a-28a).

Finding that the language and legislative genesis of Section

92 establish Congress’ meaning, the court of appeals reaffirmed

——_

Saxon’ s holding that “under § 92 ‘national banks have no power

to act as insurance agents in cities of over 5,000 population.’”

NationsBank Pet. App. 6a, 10a. The court noted that when the

intent of Congress is clear, deference to an administrative inter-

pretation is not appropriate under Chevron U.S.A., Inc. v. Natu-

ral Resources Defense Council, Inc., 467 U.S. 837 (1984).

NationsBank Pet. App. 9a (citing Presley v. Etowah County

Comm'r, 112 S. Ct. 820 (1992)). The court also cited the 1992

ruling in American Land Title Ass’n that, as Saxon held (Na-

tionsBank Pet. App. 7a), “‘had Congress intended to grant

national banks located in towns with a large population the

authority to sell insurance, it would never have limited the grant

of authority in section 92 to national banks in locations with

under 5,000 inhabitants.’”

The court of appeals disagreed with the Comptroller's

alternative contention that Section 92 does not apply because

“annuities are not insurance.” NationsBank Pet. App. 10a. The

court observed that the Comptroller had concede.’ that “annui-

ties have historically been a product of insurance companies”

and that annuities are based on “actuarial calculations” of mor-

tality risk. Jd. at 10a, 13an.4. The court reported that “[aJll fifty

States Currently regulate annuities under their insurance laws.”

Id. at 1la. Since annuities transfer and distribute mortality risk,

the court concluded that annuities are “insurance in the true

sense of the term.” /d. at 12a, n.3.

The court of appeals rejected the Comptroller’s assertions

that Section 92 does not limit the sale by national banks of

“specialized” insurance products like annuities and that the

selling of annuities is an “incidental power’ granted to national

banks under 12 U.S.C. § 24(7). Stressing Section 92’s bar

against large-town national banks serving as agents for “any. . .

insurance company,” the court refused to engage in the “arbi-

trary exercise of examining whether a particular type of insur-

ance product conforms to a platonic form of ‘general’

insurance.” NationsBank Pet. App. 13a (quoting American

Land Title, 968 F.2d at 156), 14a. The court of appeals also

observed that the sale of annuities is not “necessary to carry on

the business of banking” under Section 24(7), and even if it were

necessary, the specific bar of Section 92 would control over that

more general statute. /d. at 15a (citing American Land Title, 968

F.2d at 157).

The full court of appeals denied the petition for rehearing

en banc, with four judges dissenting. NationsBank Pet. App.

19a. Six judges were recused, while one member of the panel

was a senior judge and did not participate in the en banc process.

SUMMARY OF ARGUMENT

National banks may exercise only those powers that have

been granted by Congress. The Comptroller's Approval of

national bank sales of annuities violates the limitations in Sec-

tion 92 and exceeds the authority granted by Section 24(7) of

the National Bank Act.

Enacted in 1916, Section 92 granted insurance agency

powers solely to national banks in small towns. That limited

grant of powers includes a denial of such powers to national

banks in larger communities. As embodied in the expressio

unius principle, the structure of Section 92 denies to national

banks those insurance agency powers not affirmatively granted.

This construction of the statute is powerfully supported by the

contemporaneous statements of the Federal Reserve Board and

the Comptroller of the Currency, both of which concluded that

national banks have no other insurance agency powers.

The language of Section 92 provides no basis for the

Comptroller's distinction between “general” insurance agency

activity and the sale of “specialized” insurance products like

annuities, which the Comptroller claims that large-town national

banks can handle. The Comptroller also demonstrates his lack

of experience with insurance when he claims that annuities are

not insurance under Section 92.

Insurance experts have agreed throughout the nineteenth

and twentieth centuries that annuities insure against the loss of

income that often accompanies aging and retirement. Just as life

insurance protects against the loss of income due to premature

death, annuities protect against the loss of income due to the

passage of time. Moreover, the Comptroller’s emphasis on

dictionary definitions of insurance as an “indemnity” is mis-

placed, because neither life insurance nor annuities are properly

characterized as indemnities.

Both annuities and life insurance share the basic insurance

characteristics of: (i) protecting against the loss of income (ii)

by pooling contributions of many individuals and sharing mor-

tality-based risks among them, and (iii) basing premiums and

payouts on actuarial predictions of mortality.

State insurance law overwhelmingly agrees with the con-

clusion that annuities are insurance. Because of its traditional

primacy in insurance regulation, state law is particularly signifi-

cant here. When Section 92 was adopted, the statutes of 38

States defined the sale of annuities as part of the insurance

business; today, 42 states specifically define annuities as insur-

ance.

Section 24(7) presents a second barrier to the Comp-

troller’s Approval. The sale of annuities cannot be found in any

of the express powers granted to national banks by that statute.

Indeed, the bank powers clause of Section 24(7) was based on

the New York Free Banking Act of 1838, which was construed

in 1857 not to grant state banks any powers to engage in

insurance activities, including annuities. When Congress bor-

rowed that provision in 1863 in the predecessor to Section 24(7),

it necessarily adopted that construction for national banks as

well.

Nor can the power to sell annuities be found in the grant of

“such incidental powers as are necessary to the business of

banking.” That provision is not an elastic grant of whatever

power might allow a national bank to enter a profitable new line

of business; it gives authority only for those activities directly

related to an express power of national banks.

The Comptroller has no support for his claim that annuities

are a “financial investment instrument” of the type that national

banks historically have brokered. The brokerage authority of

national banks has been limited to generally marketable securi-

ties; there is no market for any individual’s annuity. Accord-

ingly, the sale of annuities is neither a traditional bank activity

nor tied directly to any express banking power, and thus is not

within Section 24(7). Even if the power to sell annuities could

be found within Section 24(7), that general statute would be

overridden by the specific prohibition in Section 92.

The Comptroller demands judicial deference for his views

on these points, repeatedly citing Chevron U.S.A. v. Natural

Resources Defense Council, supra, and similar cases. Fed. Br.

15, 23-24, 25, 37, 43. The NationsBank petitioners invoke

Chevron no fewer than ten times. NationsBank Br. 14, 15, 16,

17, 22, 39, 40, 41, 42, 43, 45.

This clamor for judicial deference cannot conceal the

Comptroller's failure to “give effect to the unambiguously

expressed intent of Congress.” Chevron, 467 U.S. at 843. The

Comptroller’s misapplication of Chevron is based on his failure

to “employ([] traditional tools of statutory construction,” id. at

843 n.9, including examining the statutory structure and lan-

guage, considering the legislative genesis of both Section 92 and

Section 24(7), reviewing the historical understanding of what

annuities and insurance are, and applying the expressio unius

principle. These “traditional tools of statutory construction”

demonstrate that Congress intended to deny insurance agency

powers to national banks in larger communities. Chevron re-

quires the Comptroller to “give[] effect” to that intent.

Just as fundamental, however, is the Comptroller’s misun-

derstanding of the character of insurance and annuities, a mis-

understanding that reflects his agency’s lack of experience with

insurance. The Comptroller has embraced concepts that have

been rejected by his predecessors, by most state legislatures, by

insurance scholars, and by this Court. Even at its most deferen-

tial, Chevron requires that a statutory interpretation be “rational

and consistent with the statute.” Pension Benefit Guar. Corp.

v. LTV Corp., 496 U.S. 633, 650 (1990) (quoting NLRB v.

United Food & Commercial Workers Union, Local 23, 484 U.S.

112, 123 (1987)). Chevron does not require deference to error.

ARGUMENT

I. SECTION 92 BARS NATIONAL BANKS FROM

SELLING ANNUITIES IN TOWNS WITH POPU-

LATION OVER 5,000

The Comptroller cites two grounds for rejecting the appli-

cation of Section 92 to bar NationsBank’s sale of annuities: (i)

because Section 92 supposedly does not reach “specialized

insurance products,” and (ii) because he claims that annuities

are not insurance. Both contentions are contrary to the congres-

sional intent in Section 92 as determined by the traditional tools

of statutory construction, and are not reasonable.

A. By Granting Certain Insurance Powers To Na-

tional Banks In 1916, Congress Denied Any

Other Insurance Powers

Our construction begins with the language of the statute.

Demarest v. Manspeaker, 498 U.S. 184, 187 (1991). Section

92 provides:

In addition to the powers now vested by law in

national banking associations . . . [,] any such asso-

ciation located and doing business in any place the

population of which does not exceed five thousand

inhabitants, ... may... act as the agent for any fire,

life, or other insurance company . . . by soliciting and

selling insurance ....

By granting only to small-town national banks the specific

power to serve as agent for an insurance company to sell

insurance, the statute reflects the congressional intent that other

national banks have no insurance agency powers.

The Comptroller concedes that “Section 92 carries some

negative implication; Congress would have had little reason to

grant small-town banks the power to act as general insurance

agents if it had thought, in 1916, that any national bank could

already do so under Section 24 Seventh.” Fed. Br. at 40-41.

Petitioners argue that although Section 92 bars national

banks in larger communities from “unrestricted operation of a

general agency for fire, life or other casualty insurance,” it

allows the sale of “specialized” insurance products; they also

Suggest that the expressio unius principle somehow conflicts

with Chevron. See Fed. Br. at 39-41; NationsBank Br. at 37-39.

The first contention has no basis in Section 92; the second is

wrong.

1. The Legislative Genesis of Section 92

The legislative genesis of Section 92, which petitioners

largely ignore, establishes that Congress intended that only

small-town national banks have any insurance agency powers.

The Compwtroller of the Currency and the Federal Reserve Board

concluded in 1915 and 1916 that national banks had no author-

ity, express or implied, to engage in insurance agency activities.

See pp. 2-3, supra. Finding that “writing insurance on commis-

sion is in no sense incidental to any of the enumerated powers

of a national bank,” the Board wrote that “[a]ny such extension

8 me ene

= Se 8 tt ee a centimmtin Sew Le

hemeatiicantind aie

of the powers of national banks must be left to the consideration

of Congress.” 2 Fed. Res. Bull. 73, 74 (Feb. 1, 1916).

One year later, Comptroller Williams heeded that advice

and proposed enactment of Section 92. In his letter to Congress,

the Comptroller affirmed that national banks had no power to

act as insurance agents. 53 Cong. Rec. 11,001 (1916). Comp-

troller Williams asked Congress to grant some insurance agency

powers to national banks, but stressed that this new authority

“should be limited to banks in small communities” because

those banks presented a case of special need. Jd. Citing public

policy concerns, Comptroller Williams pointedly stated (id.):

I think it would be unwise and therefore undesirable

to confer this privilege generally upon banks in large

Cities where the legitimate business of banking affords

ample scope for the energies of trained and expert

bankers. I think it would be unfortunate if any move-

ment should be made in the direction of placing the

banks of the country in the category of department

stores.

Comptroller Williams’ explanation of the purposes of Section

92, which he drafted, must be accorded great weight in deter-

mining Congress’ intent. See United States v. Vogel Fertilizer

Co., 455 U.S. 16, 31 (1982). Comptroller Williams’ views are

particularly significant both because they are the conteinpora-

neous construction by the executive official charged with im-

plementing the statute, Udall v. Tallman, 380 U.S. 1, 16 (1965),

and because he “participated in developing the provision.”

Miller v. Youakim, 440 U.S. 125, 144 (1979).

2. This Court Has Long Relied upon the

Expressio Unius Principle

The Fifth Circuit’s application of the expressio unius prin-

ciple is solidly grounded in this Court’s rulings. United States

v. Arredondo, 6 Pet. (31 U.S.) 691, 725 (1832) (Expressio unius

“is an universal maxim in the construction of statutes’). Indeed,

Congress is presumed to draft legislation so that strict applica-

tion of the expressio unius rule will conform precisely to its will.

United States v. Wells Fargo Bank, 485 U.S. 351, 357 (1988)

(unanimous).

This Court has relied on the expressio unius principle in

dozens of cases. First Nat'l Bank v. National Exch. Bank, 92

U.S. 122, 128 (1876), applied the principle to the incidental

powers clause of Section 24(7), explaining that “[djealing in

stocks is not expressly prohibited [to national banks]; but such

a prohibition is implied from the failure to grant the power.” See

also Continental Casualty Co. v. United States, 314 U.S. 527,

533 (1942) (“a legislative affirmative description implies denial

of the non-described powers’) (internal quotation marks omit-

ted); United States v. Sweeny, 157 U.S. 281, 286 (1895); Camp

v. Gress, 250 U.S. 308, 315 (1919) (Brandeis, J.).?

Nor is the Court’s reliance on the expressio unius principle

confined to ancient precedent. Two Terms ago, a unanimous

Court employed the principle to reject a heightened pleading

standard for civil mghts cases alleging municipal liability.

Leatherman v. Tarrant County Narcotics Intelligence and Co-

ordination Unit, 113 S. Ct. 1160, 1163 (1993). See also Cipol-

lone v. Liggett Group, Inc., 112 S. Ct. 2608, 2618 (1992)

(applying principle); National R.R. Passenger Corp. v. National

Ass'n of R.R. Passengers, 414 U.S. 453, 458 (1974) (by author-

izing Certain private lawsuits against Amtrak, Congress impli-

Other early cases in which the Court relied upon the expressio unius

principle include: City of Walla Walla v. Walla Walla Water Co., 172 U.S.

1, 22 (1898); Burck v. Taylor, 152 U.S. 634, 648 (1894); United States v.

Erwin, 147 U.S. 685 (1893); United States v. County of Macon, 99 U.S. 582,

590 (1879); Arthur v. Cumming, 91 U.S. 362, 364 (1876); Pine Grove v.

Talcott, 19 Wall. (86 U.S.) 666, 674-75 (1874); Sturges v. Draper, 12 Wall.

(79 U.S.) 19, 27 (1871); Fanning v. Gregoire, 16 How. (57 U.S.) 524 (1854);

and Wood v. United States, 16 Pet. (41 U.S.) 342, 364 (1842) (Story, J.).

ae _——

edly precluded other claims); Nashville Milk Co. v. Carnation

Co., 355 U.S. 373, 375-76 (1958) (applying expressio unius).

As one of the “traditional tools of statutory construction,”

the expressio unius principle should be employed under Chev-

ron, and the court of appeals properly did so. Denise W.

DeFranco, Chevron and Canons of Statutory Construction, 58

Geo. Wash. L. Rev. 829, 839 (1990) (endorsing expressio unius

as useful tool under Chevron for ascertaining congressional

intent).

3. The Comptroller May Not Redraft

Section 92

Both expressio unius and the legislative genesis of Section

92 establish the Comptroller’s error in viewing Section 92 as

permitting the sale of “specialized” insurance products in larger

towns. The Comptroller’s contention finds no textual support in

Section 92. The concepts of “general” and “specialized” insur-

ance products are nowhere in the statute, which bars national

banks from acting as agent for “any” insurance company in the

sale of “insurance,” whether it be termed “general” or “special-

ized.” Indeed, the Comptroller offers no principled standard by

which a “general” insurance product might be distinguished

from a “specialized” product, except to assert that he has the

authority to do so. Fed. Br. at 41.

Because he cannot base his argument on the text of the

Statute, the Comptroller proposes to redraft Section 92. Bran-

dishing the maxim ejusdem generis, the Comptroller asserts that

although the statute bars national banks from acting as agent for

“any fire, life, or other insurance company,” Congress really

meant to say “fire, life, or other general insurance company.”

Fed. Br. at 41; see also NationsBank Br. at 46-47; NationsBank

Pet. App. 43a. Redrafted in this manner, the Compwtroller ar-

gues, Section 92 relates solely to “general” insurance companies

and their products, and does not restrict national bank sales of

“particular” insurance products (like annuities) that he may

decide are “incidental to the business of banking.” /d.

The Comptroller’s redrafting cannot succeed. The Comp-

troller and Congress understood in 1916 that national banks had

no authority to sell any kind of insurance, see pp. 12-13, supra,

and nothing in Section 92 vaguely resembles an affirmative

grant of insurance powers to large-town banks.

Moreover, the adjectives “fire, life or other” modify the

couplet “insurance company,” not the single word “insurance.”

Although the word “insurance” appears later in the statute, it

arises in a different clause and is not modified in any manner;

“fire, life or other” modifies only “insurance company.” Peti-

tioners long have conceded that NationsBank is selling annuities

as agent for “life insurance” companies. R. 53-55. Using the

statutory language, NationsBank thus seeks to “‘act as the agent”

for a “fire, life or other insurance company.” Inserting “general”

before “insurance company” would not help the Comptroller’s

argument at all.?

B. The Comptroller Erroneously Concluded That

Annuities Are Not Insurance

The Comptroller concedes that “annuities have historically

been a product of insurance companies” and that annuities, like

conventional life insurance, typically possess an “element of

mortality risk.” NationsBank Pet. App. at 38a. The Comp-

troller ruled as recently as 1978 that the sale of annuities by a

national bank “would constitute the bank a seller or broker of

insurance in violation of the provisions of 12 U.S.C. § 92.”

> If the adjectives “fire” and “life” have any significance beyond mere

recitation of two common examples of insurance companies, it is to illustrate

that Congress intended for Section 92 to apply to all lines of insurance. That

is, Section 92 applies not only to policies of indemnification (such as “fire”

and other casualty insurance), but also to policies of insurance that pay a

defined sum of money upon determinable contingencies (like “life” insurance

and annuities). See pp. 21-23, infra.

oa” eae

R. 7-8 (reproduced at Brief in Opp. App. la). The Comptroller

now insists that annuities are not insurance under Section 92.

But as this Court repeatedly has stated, an agency interpretation

of a statute “which conflicts with the agency’s earlier interpre-

tation is ‘entitled to considerably less deference’ than a consis-

tently held agency view.” Good Samaritan Hospital v. Shalala,

113 S. Ct. 2151, 2161 (1993) (quoting JNS v. Cardoza-Fonseca,

480 U.S. 421, 446 n.30 (1987) (quoting Watt v. Alaska, 451 U.S.

259, 273 (1981)).4

The Comptroller's reversal of position is based on his

misunderstanding of annuities and insurance, upon a few incom-

plete dictionary definitions, and upon a smattering of case law

which he misconstrues. Before according Chevron deference,

this Court must employ “traditional tools of statutory construc-

tion” to determine whether the word “insurance” in Section 92

includes annuities. Even according deference, the Comp-

troller’s conclusions are not rational or consistent with the

Statute and cannot be sustained.

* — The Comptroller attempts to dismiss his 1978 ruling as “informal

advice by an agency lawyer,” and advances the same rationale for avoiding

his 1982 ruling that Section 92 prohibits national banks from selling life

insurance. Fed. Br. at 38 n.19. This rationale is totally inconsistent with the

Compwoller’s reliance in his brief upon other opinions by OCC legal staff.

See, e.g., Fed. Br. at vii-viii (citing OCC Letter Nos. 271, 331 and 499);

NationsBank Br. at viii-ix (citing OCC Letter Nos. 271, 331, 429 and 499).

For example, petitioners rely on the Compwtroller’s 1985 decision to allow

national banks to sell variable annuities (OCC Lw. 331), see Fed. Br. at 7, 8,

28; that decision came in a letter by the Assistant Director of OCC’s Legal

Advisory Services Division, the same official who signed the Comptroller’ s

1978 and 1982 rulings on which we rely. Moreover, FDIC regulations treat

all OCC legal opinions as authoritative, including those signed by the Assis-

tant Director of the OCC’s Legal Advisory Services Division. See 58 Fed.

Reg. 64483 (Dec. 8, 1993) (state banks may rely on “any order or interpreta-

tion issued in writing” by OCC).

1. Annuities Are Insurance

The most traditional mode of statutory construction 1s to

examine the meaning of the central terms according to historical

context, common understanding, and the understanding of those

terms in other legal settings. “Insurance,” as used by Congress

in 1916, included annuities.

After a brisk trot through a few dictionary definitions, the

Comptroller announced his view that “annuities are not insur-

ance” because they do not incorporate “the element of indemni-

fication against risk.” NationsBank Pet. App. 44a-45a; see id.

47a (annuities “lack the basic insurance characteristic of 1ftdem-

nification against risk”); Fed. Br. 25. But the Comptroller

ignores the risk against which annuities insure, and indemnifi-

cation is not the sole hallmark of insurance.>

Insurance scholars largely agree that annuities are insur-

ance, stressing that annuities insure against the loss of income

that may accompany aging and retirement. One work states

succinctly: “The annuity is true life insurance. It is insurance

against living too long — against outliving one’s ability to

provide an income for himself.” Robert I. Mehr et al., Princi-

ples of Insurance 538 (4th ed. 1966). Another recent text also

defines annuities as insurance, explaining that annuities “protect

against the possibility of outliving one’s income.” Kenneth

Black, Jr. & Harold D. Skipper, Jr., Life Insurance 147-48 (12th

ed. 1994); see Frederick G. Crane, Insurance Principles and

Practices 254 (2d ed. 1984) (“life annuities are a form of

insurance’).

* Had he read his dictionaries more carefully, the Comptroller might

have avoided this error. The most recent volume of Black's Law Dictionary

(6th ed. 1990) includes the definition of “annuity policy” as “An insurance

policy providing for monthly or periodic payments to insured to begin at fixed

date and continue through insured’s life”. Jd. at 90; see id. at 802 (“annuity

insurance” is an “insurance contract calling for periodic payments to the

insured or annuitant for a stated period or for life’’).

meerunid ——

Broadly defined, insurance is a “formal social device for

reducing risk by combining exposures.” Glossary of Insurance

Terms 77 (Robert W. Osler and John S. Bickley, eds., 1972);

see also John R. Ingrisano & Corinne M. Ingrisano, The Insur-

ance Dictionary 152 (3d ed. 1990) (defining insurance as a

“[p]rotection, through specified money compensation or reim-

bursement for loss provided by written contract against the

happening of specified chance or unexpected events”). As this

Court explained in Helvering v. Le Gierse, 312 U.S. 531, 539

(1941), “risk-shifting and risk-distributing” are the hallmarks of

insurance. See H.R. Rep. No. 873, 78th Cong., Ist Sess. 8-9

(1943) (McCarran-Ferguson Act) (insurance is “the distribution

of risk according to hazard, experience, and the law of aver-

ages’); Group Life & Health Ins. Co. v. Royal Drug Co., 440

U.S. 205, 220-21 (1979). The nature of the risk assumed

determines the kind of insurance involved.

Life insurance is a “contractual system of risk-sharing

under which contributions are accumulated and redistributed to

meet the economic consequences of the uncertain duration of

life.” Merritt Glossary of Insurance Terms 117 (Thomas E.

Green Sth ed. 1993). Some state statutes define life insurance

to include contracts “conditioned upon the continuance or ces-

sation of human life.” See, e.g., Miss. Code Ann. § 83-19-1(j)

(1993); N.C. Gen. Stat. § 58-58-1 (1991); Tex. Ins. Code Ann.,

art. 3.01, § 1 (1994). That statutory formulation illustrates how

annuities properly are viewed both as a type of life insurance

and as the “opposite” of conventional life insurance. Annuities

insure the risks of long life (“continuance” of human life), while

conventional life insurance insures the risk of brief life (“‘cessa-

tion” of life).

A leading text explains the relationship between annuities

and conventional life insurance, and why annuities are insurance

(McGill's Life Insurance 109-10 (Edward E. Graves & Lynn

Hayes, eds., 1994) (emphasis in original):

The primary function of life insurance is to create

an estate or principal sum; the primary function of an

annuity is to liquidate a principal sum, regardless of

how it was created. Despite this basic dissimilarity in

function, life insurance and annuities are based on the

same fundamental pooling, mortality and investment

principles.

In the first place, both life insurance and annuities

protect against loss of income. Life insurance fur-

nishes protection against loss of income arising out of

premature death; an annuity provides protection

against loss of income arising out of excessive lon-

gevity. It might be said that life insurance provides a

financial hedge against dying too soon, while an

annuity provides a hedge against living too long.

From an economic standpoint, both contingencies are

undesirable. A second common feature is the utiliza-

tion of the pooling technique. Insurance is a pooling

arrangement whereby all make contributions so that

the dependents of those who die prematurely are

partially compensated for loss of income: an annuity

is a pooling arrangement whereby those who die

prematurely make a contribution on behalf of those

who live beyond their life expectancy and would

otherwise outlive their income. A third common fea-

ture is that the contributions in each case are based on

probabilities of death and survival as reflected in a

mortality table.... Finally, under both arrangements,

contnbutions are discounted for the compound inter-

est that the insurance company will earn on them.

See Black & Skipper, supra, at 149; (“annuities are simply

another type of insurance, and both life insurance and annuities

are based on the same fundamental principles”); Crane, supra,

at 251 (annuities and life insurance both “are based on the law

of large numbers, both are insurance, and the rates for both are

based on average mortality rates”).

Thus, while annuities and conventional life insurance both

involve the transfer and distribution of mortality risk, they

approach that risk from opposite directions (William R. Vance,

Handbook on the Law of Insurance 32 n.24 (3d ed. 1951) (citing

Hardy, Risk and Risk-Bearing 67 (1931)):

[T]he uncertainty of the length of human life . . . takes

two forms — the risk that one may live so long as to

use up the funds which he has provided to support

himself in old age and the risk that he may die before

the end of his normal working life. Each contingency

needs to be provided against.®

The Comptroller relies on dictionary definitions that stress

the concept of indemnity, a feature of property or casualty

insurance. But that reliance ignores the plain fact that some

types of insurance — life insurance and annuities — are not

indemnities. As McGill’s Life Insurance observes (supra, at

752), “A life insurance policy therefore is not a contract of

indemnity, but one to pay a stated sum.” See Vance, supra, at

106 (life insurance “in no way resembles a contract of indem-

nity”); 43 Am. Jur. Insurance, § 3 (1982) (“contract of life

insurance is not one of indemnity, but is an absolute engagement

to pay a Certain sum at the end of a definite or indefinite time”).

Indemnification entails providing a “security against hurt,

loss, or damage.” Webster’s Tenth New Collegiate Dictionary

591 (1993). In the case of fire or property insurance, the insurer

indemnifies the risk that a loss may take place within a given

term. A specific insured may not experience any loss, or any

° — Itmakes no difference whether a particular annuity contract takes the

form of an immediate annuity, where the payments to the annuitant begin

immediately, or a deferred annuity, where the insurer’ s payments are delayed

until an agreed-upon date. The insurance company assumes a mortality risk

at the inception of either contract. See also n. 12. infra.

loss may be small, but the insurance company takes the risk that

the total actual losses will be more or less than the premiums

paid plus investment income. In the case of life insurance,

however, the event upon which payment is to be made is certain

to occur. As one authority explains, the certainty of death

(Vance, (3d ed.), at 105):

introduces into this contract of life insurance a pre-

dominant element of speculative investment. The

presence of this element necessarily precludes the

application of the principle of strict indemnity, since,

as is easily seen, in the average case the insurer only

pays back the money that has been given to him to

hold in quasi trust for the insured plus interest and less

expenses.

Second, life insurance is not a contract of indemnity be-

cause of “the difficulty to be encountered in fixing any sort of

pecuniary value upon life.” /d. at 106. The insured “might be

one whose life was rather a burden upon the [beneficiary] than

a benefit possessing a pecuniary value.” Jd. In contrast, the loss

from a burned-down building can be quantified far more objec-

tively. See McGill's Life Insurance, supra, at 752 (life insur-

ance is not indemnity because “the value of a person’s life to

that person is without limit, [so] no sum payable upon his or her

death will be in excess of the loss suffered’’).’

For over one hundred years, this Court has recognized that

life insurance is not a pure indemnity, but is simply a contract

“tO pay a certain sum of money upon the occurrence of an event

which is sure at some time to happen.”” Central Nat'l Bank of

Washington v. Hume, 128 U.S. 195, 205 (1888). See also

Grigsby v. Russell, 222 U.S. 149, 156 (1911) (Holmes, J.) (view

The practical effect of life insurance not being an indemnity is that

subrogation does not apply to life insurance policies. Accordingly, a life

insurer cannot be subrogated to a claim by the decedent's estate that death

was caused by the negligence of a third party.

that life insurance is contract of indemnity “long has disap-

peared”). As explained in Phoenix Mutual Life Ins. Co. v.

Bailey, 13 Wall. (80 U.S.) 616, 619 (1871) (citing Dalby v. India

& London Life Assurance Co., 15 C.B. 365 (1854)):

Life insurances have sometimes been construed [as

contracts of indemnity], but the better opinion is that

the decided cases which proceed [in this fashion] are

founded in an erroneous view of the nature of the

contract. ... Insurers in such a policy contract to pay

a certain sum in the event therein specified, in consid-

eration of the payment of the stipulated premium or

premiums, and it is enough to entitle the insured to

recover if it appears that the stipulated event has

happened . . . as the contract is not merely for an

indemnity, as in marine and fire policies.

Annuities are the same. After the annuitant has paid the stipu-

lated premium or premiums (during the accumulation phase),

the insurance company pays a Certain sum to the annuitant so

long as he or she is still living (the “stipulated event’). The

Statutes of twenty-three states define insurance as contracts

providing for payments upon “determinable contingencies,” a

formulation that includes both indemnity and non-indemnity

insurance. See Appendix A, infra.

The different purposes for annuities and conventional life

insurance — one insuring against long life and the other against

premature death — largely explain the court rulings inaptly cited

by the Comptroller to support his theory that annuities are not

insurance. See NationsBank Pet. App. 45a; see also Fed. Br. at

36, NationsBank Br. at 42.

Helvering v. Le Gierse and Estate of Keller v. Commis-

sioner, 312 U.S. 543 (1941), did not consider whether annuities

are insurance. Rather, those cases held that proceeds from a life

insurance policy did not qualify for exclusion as “insurance”

from decedent’s gross estate for federal tax purposes. The life

insurance was purchased simultaneously with annuities, within

a month of impending death, as part of a scheme to avoid estate

taxes. The mortality risk of the life insurance policies and the

annuities, being opposites, “counteracted each other” so no real

risk was transferred. Le Gierse, 312 U.S. at 541. This Court's

refusal to be taken in by tax avoidance schemes certainly does

not establish that annuities are not “insurance” under Section

92. See In re Rhodes’ Estate, 197 Misc. 232 (N.Y. Surr. Ct.

1949) (same; “death benefit” component of annuity contract did

not qualify for insurance tax exclusion because mortality risk

was offset by annuity component). In fact, by holding that the

mortality risk of annuities “counteracted” the mortality risk of

life insurance, Le Gierse acknowledged that annuities do in-

volve the assumption of mortality risk.’

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

Cl. 1939), cert. denied, 309 U.S. 675 (1940), did not hold that

annuities are not insurance. Kernochan held that a widow's

“refund” of the decedent’s payments into a retirement fund did

not qualify for exclusion from his estate as life insurance.

Accord In re Southern’s Estate, 257 A.D. 574, 576 (1939)

(noting that “joint survivorship annuity” would qualify as insur-

ance).? In re Walsh, 19 F. Supp. 567, 572 (D. Minn. 1937),

A number of federal tax statutes define annuities to be insurance. See

26 U.S.C. § 816(a) (“life insurance company” defined as “an insurance

company which engages in the business of issuing life insurance and

annuity contracts”); 26 U.S.C. § 408(b) (“individual retirement annuity”

defined as “an annuity contract . . . issued by an insurance company’); 26

U.S.C. § 501(m)(4) (“[flor purposes of this subsection, the issuance of

annuity contracts shall be treated as providing insurance”), 26 U.S.C. §

8 14(b) (“insurance contract” defined to include “annuity contract”).

® The Comptroller cites several other decisions involving interpretation of

state tax laws. See People ex rel. Metropolitan Life Ins. Co. v. Knapp, 193 A.D.

413 (1920); Commonwealth v. Metropolitan Life Ins. Co., 254 Pa. 510 (1916);

Daniel v. Life Ins. Co., 102 S.W.2d 256 (Tex. Civ. App. 1937); and State ex.

rel. Equitable Life Assurance Soc'y v. Ham, 54 Wyo. 148 (1939), see also

Corporation Comm'n v. Equitable Life Assurance Soc'y, 73 Ariz. 171 (1951).

held that an annuity did not qualify for a life insurance exclusion

because the “primary purpose” of the exclusion was to protect

the beneficiaries of life insurance policies. Because annuities

primarily benefit the insureds, the exclusion did not apply.

2. When Section 92 Was Enacted,

Annuities Uniformly Were Understood

to Be Insurance

A second traditional tool of statutory construction is to

examine the common understanding of a disputed term at the

time the statute was enacted. While construing “insurance” in

the McCarran-Ferguson Act, this Court observed that the “‘con-

temporary perception” of the meaning of insurance “is highly

significant in ascertaining congressional intent.” Group Life &

Health Ins. Co. v. Royal Drug Co., 440 U.S. 205, 227 (1979).

Accordingly, it is “highly significant” that annuities were un-

derstood in 1916 to be a product of a “fire, life, or other insurance

company” involving the sale of “insurance.” The Comptroller

has never addressed this question.

Each of these cases held that the annuity “premiums” received by insurance

companies were not taxable under state law as premiums of insurance. As

the Comptroller has cautioned, however, the tax treatment of annuities is not

necessarily meaningful in determining whether annuities are insurance. Fed.

Pet. at 12, n.4. The special tax treatment of annuity premiums has been

codified in the Internal Revenue Code, without affecting other provisions of

the federal tax code that define annuities as insurance. See 26 U.S.C. §§

805(a)(2), 807(b),(c)(1), 816(b)(1) (annuity premiums reserved for future

payment not taxed). In any event, the cases cited by the Comptroller reflect

a minority view of the narrow state tax issue presented, and were aptly

criticized in Bankers Life Ins. Co. v. Laughlin, 160 Neb. 480 (1955) (collect-

ing contrary authorities from Iowa, New Hampshire, Missouri, Massachu-

setts, Arkansas, Kansas, California, and Mississippi).

a. Annuities Have Been Viewed as

Insurance since the Origin of the Life

Insurance Business

Annuities have been part of the insurance business for

hundreds of years. See SEC v. Variable Annuity Life Ins. Co.,

359 U.S. 65, 81 (1959) (Brennan, J., concurring) (“the granting

of annuities has been considered part of the business of life

insurance’’). Indeed, life insurance and annuities have been sold

by life insurance companies since the first insurers were estab-

lished in England and in this country.

The first insurance company in England was founded in

1698 as “a widow’s fund, an annuity scheme.” 1 Joseph A.

Joyce, A Treatise on the Law of Insurance of Every Kind 43 (2d

ed. 1917). The creation of corporations in America with the

power both “to insure lives and grant annuities” dates back to

before the Revolution. George Richards, A Treatise on the Law

of Insurance 17 (3d ed. 1909). Founded in the 1760s for the

benefit of Protestant clergy, the first chartered insurance com-

panies in this country offered annuities. Joyce, supra, at 44-45.

Life insurance “at the time of its original introduction” took two

forms: ordinary whole life insurance and the granting of annui-

ties. J. H. James, A Practical Treatise on Life and Fire Assur-

ance; Annuities and Reversionary Sums; and Leases for Terms

and For Lives 24 (London, Doughty & Co. 1868).

Throughout the nineteenth century, annuities were under-

stood to be part of the insurance business. In 1812, Pennsylva-

nia granted a charter to the Pennsylvania Company for the

Insurance on Lives and Granting Annuities, “the first North

American insurer organized for the sole purpose of selling life

insurance and annuities to the general public.” Black & Skipper,

supra, at 53. A leading commentator wrote in 1868 that annui-

ties are a form of life insurance. James, supra, at 28.

Several varieties of annuities developed during the 1800s.

J. H. James in 1868 reported the availability of (i) “survivorship

ee SO

ne ——

annuities” (“payable to one person on the death of another’), (ii)

“deferred annuities” (“payable on and after the attainment of a

given age’’), (iii) “immediate annuities,” and (iv) annuities with

refund features (“annuity-assurances”) (“a yearly allowance is

made to the purchaser during life, and an agreed portion of the

deposit is returned ... on death’’).!° James characterized all of

these annuities as “Life Assurance.” Jd. at 24-29. See also

Joseph K. Angell, A Treatise on the Law of Fire and Life

Insurance xi, 303-04 n.2 (Boston, Little, Brown & Co. 1854)

(describing immediate, deferred and survivorship annuities as

“official forms” of life insurance).!!

Annuities were still regarded as insurance in the years

immediately preceding enactment of Section 92. A leading

1915 textbook classified annuities as one “leading group{]” of

life insurance. Solomon S. Huebner, Life Insurance 47, 58

(1915). Professor Huebner observed that annuities protect

against the “hazard” of outliving one’s income, and are based

on the same principles as conventional life insurance. /d. at 111.

Accord Lester W. Zartman and William H. Price, Life Insurance

278 (1914) (“function of life insurance is to protect the family

and to provide . . . for old age’””). He described various kinds of

then-current annuities, including immediate annuities, deferred

annuities, life annuities, term annuities, single premium annui-

ties, level premium annuities, joint survivor annuities, and an-

nuities with refund features. Huebner, supra, at 58-59; see

A. Fingland Jack, An Introduction to the History of Life Assur-

ance 165 (1912) (annuity contract “certainly is life assurance”’);

10 Mr. James claimed that he invented refund annuities.

'! Annuities always have been paired and associated with life insurance,

especially in the context of state insurance statutes. See pp. 29-30, infra.

Applying the principle noscitur a sociis (“a word is known by the company

it keeps”), annuities should be deemed a form of life insurance. See, e.g.,

Jarecki v. G.D. Searle & Co., 367 U.S. 303, 307 (1961) (applying principle).

William A. Kerr, The Law of Insurance 12-13 (1902) (defining

“insurance” to include annuities).

The Comptroller thus erred when he claimed that deferred

annuities and refund annuities are “modern” and “contempo-

rary” inventions that are “even less like insurance” than the

“classic immediate-payout, lifetime-based fixed annuity.” Fed.

Br. at 28-34. There is nothing “modern” about deferred annui-

ties or refund annuities, which insurers had been selling for more

than fifty years when Congress enacted Section 92. Like so-

called “classic” annuities, these products uniformly were con-

sidered to be insurance. !?

ae Part of the Comptroller’s confusion regarding “modern” annuities may

be due to his slavish reliance upon a single source, David Shapiro and Thomas

Sweiff, Annuities (1992), which is cited sixteen times in his brief. That 113-page

volume was written by two financial planners and is intended primarily to provide

“information on how to position and market annuities.” /d. at iii, ix. It makes no

pretense of being a scholarly work, but is principally a marketing manual. Indeed,

the book commits serious historical errors. For example, the authors assert that

before the 1970s “annuities had no provision for liquidity or other cash benefits

other than annuitization,” id. at 6, even though refund annuities were available

one hundred years earlier. See pp. 26-27, supra.

The Comptroller also misunderstands refund annuities generally. He

claims that because a refund annuity may return the principal if the purchaser

dies during the payout phase, it “eliminate[s] any mortality risk on the part of

the purchaser” Fed. Br. at 34, and is therefore not insurance. This assertion

turns the basic concept of insurance on its head. The purchaser of insurance,

including a refund annuity, wishes to transfer as much mortality risk to the

insurer as possible. The function of insurance is to “reduc[e] risk by combin-

ing exposures,” Glossary of Insurance Terms, supra, at 77, which a refund

annuity achieves admirably. The issuer of the refund annuity assumes from

the purchaser both types of mortality risk: early death and long life. The

Compwoller’s “critique” of refund annuities establishes that they are insurance.

The Comptroller also errs when he claims there is “no mortality risk”

in hypothetical deferred annuities that offer the option, at the end of an

accumulation period, to take a lump sum payment, or the option for fixed

payments for a term certain, or the option for “systematic withdrawals”

b. The States in 1916 Considered

Annuities to Be Insurance

In the years prior to 1916, most state law also recognized

that annuities are insurance. By 1916, eighty percent of the

States (38 of 48 states) had enacted statutes declaring that the

business of insurance included the granting of annuities. See

Appendix B, infra (listing state statutes).

The first general law in New York for incorporating insur-

ance companies gave insurance companies the power “to make

insurance upon the health or lives of individuals and every

insurance appertaining thereto or connected with health or life

risks, and to grant, purchase, or dispose of annuities.” 1849

N.Y. Laws ch. 308, § 1; see also 1850 Wis. Laws ch. 232, § 1.

California, like many other states, expressly classified annuities

as a form of life insurance. 1915 Cal. Stat. ch. 768, § 1. See,

e.g., Ariz. Rev. Stat. § 3428(2) (1913); 1899 Ind. Acts ch. 28,

§ 1; 1893 Ky. Acts ch. 171, § 106; 1869 Mich. Pub. Acts 77,

§ 1; 1913 Neb. Laws ch. 154, § 78; 1872 Ohio Laws 150 ch.

2, § 1; 1875 Tenn. Pub. Acts ch. 142, § 10; 1909 Tex. Gen.

Laws ch. 108, § 1; 1913 Wash. Sess. Laws ch. 109, § 2.

The contemporaneous views of the States are particularly

Critical to understanding the meaning of “insurance” in Section

92 because state law has predominated in insurance matters.

After this Court held that the regulation of insurance was outside

Congress’ constitutional authority, Paul v. Virginia, 8 Wall. (75

U.S.) 168, 183 (1869), “the States enjoyed a virtually exclusive

domain over the insurance industry.” St. Paul Fire & Marine

Ins. Co. v. Barry, 438 U.S. 531, 539 (1978).!3 As this Court

through death of the purchaser. Fed. Br. at 34. So long as one of the options

offered in an annuity includes a benefit defined by the purchaser’s life, the

issuer assumes mortality risk from the moment the contract is signed. That

mortality risk will be relieved if the purchaser exercises a withdrawal option,

for example, but would have been present for the entire preceding period.

'3 State regulation of insurance remains paramount despite this Court's

1944 ruling that insurance is in interstate commerce and subject to federal

recognized in SEC v. VALIC, “[{w)hen the States speak in the

field of ‘insurance,’ they speak with the authority of a long

tradition.” 359 U.S. at 68-69. In contrast, the Comptroller has

virtually no experience with insurance or annuities.

The States overwhelmingly continue to provide that annui-

ties are insurance. As the court of appeals observed, “[a]ll fifty

states currently regulate annuities under their insurance laws.”

NationsBank Pet. App. 11a (collecting authorities). Forty-two

states currently have statutes expressly defining annuities as

insurance, as a kind of insurance, or as life insurance. See

Appendix A, infra (listing state statutes).

3. Like Life Insurance, Annuities Have

Some Investment Function

The Comptroller insists that annuities are not insurance

because “they are primarily a vehicle for investment.” Na-

tionsBank Pet. App. 45a; see also Fed. Br. at 34-37; Na-

tionsBank Br. at 41-42. The presence of an investment feature

in annuities is not inconsistent with its character as insurance.

Justice Holmes wrote that “life insurance has become in our days

one of the best recognized forms of investment and self-com-

pelled saving.” Grigsby v. Russell, 222 U.S. 149, 156 (1911).

Several years earlier, Professor Vance observed that life insur-

ance “is not now confined to mere insurance against the risks

and accidents of life, but also includes, as perhaps its most

important element, the feature of investment.” William R.

Vance, Handbook of the Law of Insurance 16 (1904). Vance

emphasized the dual nature of life insurance: the pooling of

mortality risk and the “investment of savings.” Jd. at 16-17.

Most life insurance policies have significant investment

components. Traditional whole life insurance has many invest-

jurisdiction. United States v. South-Eastern Underwriters Ass'n, 322 U.S.

533 (1944). After that decision, Congress swiftly adopted the McCarran-Fer-

guson Act, 59 Stat. 34 (1945), to “restore the supremacy of the States in the

realm of insurance.” United States Dep't of Treasury v. Fabe, 113 S.Ct. 2202,

2207 (1993).

ment features, yet it is undeniably insurance.!4 See OCC Ltr.

No. 241; Vance, (3d ed.), supra, at 105 (life insurance has a

“predominant element of speculative investment”). Albert H.

Mowbray et al., Insurance 307 (6th ed. 1969) (“All basic [life

insurance] policies other than term insurance include a savings

or investment component”). That an insurance product also

performs some investment function cannot mean that the prod-

uct is not insurance under Section 92.15

4. All of NationsBank’s Annuities Are

Insurance

The annuities to be sold by NationsBank include the right to

select either a fixed annuity, or a variable annuity, or some

combination of fixed and variable features. NationsBank Pet.

App. 35a. All of NationsBank’s annuities are insurance under

Section 92 because, applying the criteria developed by insurance

experts, (i) they protect against the loss of income due to long life,

(ii) they pool the contributions of many individuals and share the

mortality-based risks among them, and (iii) their premiums and

payouts are based on actuarial predictions of mortality.!6

'4 One such “investment” feature of traditional whole life insurance is

the steady accumulation of cash value, upon which the insurer pays interest

or dividends. See IV Loss, Securities Regulation 2534 (supp. ed. 1969)

(defining “continuous spectrum” from pure insurance through pure invest-

ment, where “straight life” and “annuities” are toward the center).

'S The NationsBank petitioners mistakenly suggest that John Hancock

Mutual Life Ins. Co. v. Harris Trust & Sav. Bank, 114 S. Ct. 517 (1993),

Supports their view that annuities are not insurance. NationsBank Br. at 44.

That case held only that certain aspects of a group annuity contract did not

qualify as a “guaranteed benefit policy” under the Employee Retirement

Income Security Act of 1974 (ERISA). John Hancock did not consider

whether annuities are insurance.

16 The Compwoller complains that annuities for a term certain (that is,

not tied to the span of any individual's life), lack mortality risk and should

not be deemed insurance. Fed. Br. at 34. Both the insurance industry and

insurance regulators treat such annuities as insurance, but the question of their

true nature is not before this Court. NationsBank has not proposed to sell

term certain annuities.

The fixed annuity options offered by NationsBank are

plainly insurance. In two cases construing federal securities

laws, this Court confirmed the traditional view that fixed annuity

contracts are insurance. See SEC v. VALIC, 359 U.S. at 69; SEC

v. United Benefit Life Ins. Co., 387 U.S. 202, 206 (1967). Thus,

so long as a fixed annuity is one of the options available to

NationsBank’s annuity purchasers, the product is insurance and

NationsBank cannot sell it. Although the Comptroller offers

misleading statistics evidently designed to imply that fixed

annuities are a trivial portion of the market, see Fed. Br. at 33

n.16, the financial planner’s manual cited by the Comptroller

reports that between 75 and 85 percent of annuity purchases are

“fixed annuities.” Shapiro and Streiff, supra, at 50.

This Court’s recognition that fixed annuities are insurance

also applies to the fixed annuity component of the combination

fixed-variable annuities that NationsBank wishes to sell. United

Benefit, at 206 (“provisions dealing with operation of the fixed-

payment annuity were purely conventional insurance provi-

sions”). Indeed, United Benefit involved a mixed annuity

product (the “Flexible Fund’’) like some of those NationsBank

seeks to sell. The fixed annuity component of combination

annuities is certainly insurance under Section 92, so Na-

tionsBank cannot sell those, either.

Many variable annuities, in fact, guarantee a minimum

return that operates like a fixed annuity. See, e.g., R. 14 (Na-

tionsBank concedes that variable annuities “frequently .. .

guarantee[] minimum investment return”). The Comptroller

has admitted that fixed and variable annuities are “similar” and

that “[bJoth can offer the investor a stream of payments extend-

ing over his life, and both may involve actuarial calculations.”

NationsBank Pet. App. 39a. See also SEC v. VALIC, 359 U.S.

at 70 (“actuarially both the fixed-dollar annuity and the variable

annuity are calculated by identical principles”). The Comp-

troller has stated that the “only” difference is that fixed annuities

“offer a reduced level of risk,” but the guaranteed return com-

ponent of a variable annuity functions like a fixed annuity and

is insurance under Section 92.

As the Comptroller concedes, many variable annuities also

have a fixed payout. Fed. Br. 6. The mortality risk of those

annuities plainly establishes that they are insurance. During the

accumulation period, the purchaser’s premiums are used to

purchase “accumulation units” of the specified investment pro-

gram. When the contract converts to the payout phase, the

accumulation units are converted to annuity units. The value of

the annuity units, which determines the size of the future pay-

ments to the annuitant, is based both on the value of the assets

in the variable annuity account and on mortality expectations

for the annuitant. McGill’s Life Insurance, supra, at 123; Black

& Skipper, supra, at 159-60; Mehr et al., supra, at 409. The

issuer assumes the mortality risk of having to make extra pay-

ments to long-lived purchasers beyond the value of the premi-

ums paid plus investment earnings. A further element of

mortality risk arises because most variable annuities “have some

form of death benefit,” Shapiro & Steiff, supra, at 60, requiring

the return upon death of premiums paid regardless of the per-

formance of the purchaser’s variable annuity account.

Finally, even a pure variable annuity with a variable payout

incorporates mortality risk when the accumulation units are

converted to annuity units, and if there is a death benefit. These

annuities, too, are insurance.

Although variable annuities were not developed until the

1950s, annuities already were widely differentiated by the time

Section 92 was enacted in 1916. See pp. 26-27, supra. There

is no reason to conclude that Congress in 1916 would have

wanted to allow national banks to sell this newer variety of

annuity any more than the many other varieties (e.g., deferred

annuities, refund annuities) then understood to be insurance.

Moreover, variable annuities continue to be regulated as insur-

ance by the states. See, e.g., Del. Code Ann. tit. 18, §§ 1701(a),

1715 (a)(2) (1993); Fla. Stat. Ann. § 624.602(1) (West 1993):

Neb. Rev. Stat. § 44-201 (3)(1990 Supp.); N.H. Rev. Stat. Ann.

§ 401:1 (111)(1993 supp.); Or. Rev. Stat. § 731.154 (1993); Black

& Skipper, supra, at 160.

Citing SEC v. VALIC and United Benefit, the Comptroller

protests that variable annuities cannot be considered insurance

under Section 92 since they have been deemed “securities” for

purposes of federal securities regulation. See OCC Ltr. No. 331.

Those cases did not hold that variable annuities are not “insur-

ance,” per se, nor did the Court find that “insurance” and

“securities” are mutually exclusive terms. See SEC v. VALIC,

359 U.S. at 80-81 (Brennan, J., concurring) (variable annuities

“[o}bviously . . . have elements of conventional insurance”).

SEC v. VALIC and United Benefit held only that variable

annuities do not qualify for the exemption from securities reg-

istration which Congress provided for “insurance” and “annuity

contract[s]”. The Court stressed that variable annuity contracts,

regardless of their mortality risk, include some investment risk

for the purchaser, since his return will vary according to the

performance of the investments. Consequently, a variable an-

nuity purchaser is entitled to disclosure of the insurer’s invest-

ment policies through registration under the Securities Act of

1933. SEC v. VALIC, 359 U.S. at 77 (Brennan, J., concurring);

United Benefit, 387 U.S. at 210. That holding is entirely con-

sistent with the conclusion that because variable annuities in-

Clude the pooling and spreading of mortality risk, they are

“insurance” that national banks may not sell under Section 92.

This conclusion is reinforced by the regulatory treatment

of “variable life insurance” (VLI), which provides both a guar-

anteed minimum death benefit plus a further death benefit

determined on the basis of the performance of the specific

investments made with the premiums paid. Black & Skipper,

supra, at 114-17. The potential fluctuation of the additional

death benefit has prompted application of the federal securities

laws to VLI policies to ensure that purchasers are informed

concerning the controlling investment policies. Jd. Neverthe-

less, VLI policies, like variable annuities, include mortality risk

which is pooled and spread, and they are insurance.

Il. SECTION 24(7) DOES NOT AUTHORIZE

NATIONAL BANKS TO SELL ANNUITIES

Americans have engaged in numerous disputes over the

proper powers of banks in a democracy. e.g., M’Culloch v.

Maryland, 4 Wheat. (17 U.S.) 316 (1819). Passions have run

high on issues such as the First and Second Banks of the United

States, both of which expired due to political opposition. !7

Bank failures often have triggered political reactions based on

a mistrust of the concentrated economic power of banks. Only

the bank panics of the late 19th and early 20th century overcame

political opposition to the establishment of the Federal Reserve

System, while the Great Crash of 1929 prompted the imposition

of new restrictions on the scope of bank activities. See James J.

White, Banking Law, 23-34 (1976): William Greider, Secrets of

the Temple, 271-75 (1987).

The bank powers clause of Section 24(7) should be under-

stood in the context of that history. The statute does not make

a broad grant of powers to banks, but lists five specific powers:

(1) discounting and negotiating promissory notes, drafts, bills of

" reflecting on the Second Bank of the United States, then-Chief

Justice Taney wrote in 1845 that “the overthrow of the Monster was the

greatest of all the public services of Genl. [Andrew] Jackson.” R.B. Taney

to Ellis Lewis, Oct. 25, 1845, reprinted in Carl B. Swisher, 5 History of the

Supreme Court of the United States: The Taney Period, 1836-64, 127 (1974)

(emphasis in original). If the bank had survived, Taney wamed, “that corpo-

ration would at this day have been virtually governing the country; —

corrupting its councils — & directing the operations of the government as

might best suit the cupidity or ambition of those at the head of the corpora-

tion.” Jd.

exchange, and other evidences of debt; (ii) receiving deposits,

(iii) buying and selling exchange, coin, and bullion, (iv) loaning

money on personal security, and (v) obtaining, issuing, and

circulating notes. As the Comptroller tacitly acknowledges, the

sale of annuities fits within none of those specific powers.

Consequently, the Comptroller proposes an expansive

reading of the statute’s grant of “such incidental powers as shall

be necessary to carry on the business of banking,” and points to

a supposed tradition of brokering “financial investment instru-

ments.” The statutory language supports neither proposition,

both of which challenge over 150 years of limited national bank

powers. Demanding Chevron deference yet again, petitioners

argue that the “business of banking” has “evolv(ed]’’ into the

business of “provid[ing] retail financial services.” NationsBank

Br. at 17-18; Fed. Br. at 23. Competitive pressures in the

“dynamic financial services marketplace,” they contend, have

forced the Comptroller to permit “new and expanded activities

not explicitly granted by Congress.” /d.

The traditional tools of statutory construction, however,

refute the Comptroller’s position. The legislative genesis of

Section 24(7) demonstrates that Congress intended to grant only

limited powers to national banks, and the “business of banking”

does not include the sale of annuities.

A. When Congress Enacted Section 24(7), It

Conferred Limited Powers Upon National Banks

1. The New York Free Banking Act of 1838

Denied Banks the Power to Sell

Annuities

As enacted in 1863, Section 24(7) was modeled on Section

18 of New York’s Free Banking Law of 1838.!8 Petitioners

8 The New York Free Banking Act provided (1838 N.Y. Laws 245,

249, ch. 260, § 18): :

Such association shall have power to carry on the business of banking,

by discounting bills, notes, and other evidences of debt, by receiving

correctly observe that early decisions construing the New York

Statute are an important indicator of Congress’ intent in enacting

Section 24(7). Fed. Br. at 17; NationsBank Br. at 30 n.18.

The definition of bank powers in the New York Free

Banking Act closely tracked individual banking charters in New

York, which specified limited bank powers. Edward L. Sy-

mons, Jr., The “Business of Banking” in Historical Perspective,

51 Geo. Wash. L. Rev. 676, 686 (1983) (“only the powers

specifically granted could be exercised by a chartered bank”).

Banks chartered under that Act were to have the same powers

as banks with special charters. /d.

An early case under the New York Act held that banks had

no power to traffic in stocks. Talmage v. Pell, 7 N.Y. 328

(1852). Since the statute included no express authority to deal

in stocks, the court considered whether such activity was inci-

dental to “the express powers of the association.” Jd. at 344.

The court held that it was not, because the power to traffic in

stocks was neither “necessary [nor expedient to accomplish the

purpose for which banks are instituted.” Jd. at 345. The “busi-

ness of banking,” the court added, is not whatever “the directors

[of the bank] might deem advantageous to the corporation.” /d.

at 343.

A similarly narrow view of bank powers prevailed in Curtis

v. Leavitt, 15 N.Y. 9 (1857), a case heavily relied upon by

petitioners and their amici. See Fed. Br. at 17-18; Conference

of State Bank Supervisors Br. at 12; New York Clearing House

Ass'n Br. at 16-18; American Bankers Ass’n Br. at 11. As in

Talmage v. Pell, the New Y ork judges asserted that corporations

have “such powers as are specifically granted by the act of

deposits; by buying and selling the gold and silver bullion, foreign coins

and bills of exchange, in the manner specified in their articles of

association for the purposes authorized by this act; by loaning money

on real and personal security; and by exercising such incidental powers

as Shall be necessary to carry on such business. . . .

incorporation, or as are necessary for the purpose of carrying

into effect the powers expressly granted, and as not having any

other.” Curtis, 15 N.Y. at 157 (Brown, J.) (emphasis added);

see also id. at 54 (Comstock, J.) and 209 (Paige, J.).

Curtis held that banks had the power to borrow money, but

the case did not hold that incidental bank powers should be

“broadly interpreted.” Compare Fed. Br. at 17. Two judges

found that the power to borrow is necessary to perform enumer-

ated bank powers. 15 N.Y. at 214-215 (Paige, J.); Id. at 158-60

(Brown, J.). Two other judges concluded that the power to

borrow is so basic that it is incidental to every business. /d. at

56 (Comstock, J.); id. at 169 (Shankland, J.). Judge Comstock

also held that the statute’s enumerated powers “cover the whole

ground of banking,” that is, that the list of specific powers was

a complete list of allowable bank activities. Jd. at 56.!9

Remarkably, petitioners never mention that portion of Cur-

tis dealing with annuities, which specifically stated that the

“business of banking” includes neither “insur[ing]) property

against loss by fire, nor insur[ing] lives, nor grant[ing] annut-

a Judge Comstock also noted that the power to borrow money was

incidental to the express power to receive deposits. /d. at 53. A fifth judge

concluded that banks had no such power, and dissented.

Even passages quoted by petitioners — when not taken out of context

— support the view that incidental powers must be directly related to an

express power. For example, the Compwoller cites Judge Comstock’s state-

ment that the statutory enumeration of powers was “not intended to ‘restrict

the appropriate business of banking.” Fed. Br. at 18. But the quoted passage

continues, in the same sentence, that the statutory specification of express

powers was an “eminently useful” legislative definition of “th[{e] business [of

banking]” that “left nothing to construction or in doubt.” Curtis, 15 N.Y. at

58. The Comptroller also selectively quotes the statement that “no human

sagacity can foresee what implied powers may” prove necessary in the future.

Fed. Br. at 18. But the next sentence emphasizes that unless the claimed

power is “directly and immediately appropriated to the execution of the

specific powers . . . it cannot be recognized as within the scope” of the bank's

incidental powers. Curtis, 15 N.Y. at 157-58.

ties.” 15 N.Y. at 212 (Paige, J.) (emphasis added). In support

of this conclusion, Curtis cited an earlier New York case, People

v. Utica Ins. Co., 15 Johns. 358 (N.Y. Sup. Ct. 1818), which

held that an insurance company could not engage in banking

Operations. Taken together, these cases demonstrate that when

Congress enacted Section 24(7), the business of banking was

understood to exclude the business of selling annuities and other

insurance.2°

2. The “Business of Banking” Is Not a

Highly Elastic Term

Within the structure of Section 24(7), the “business of

banking” is not so elastic as petitioners wish. Rather, Congress

specified the principal elements of the business of banking

through the express grants of power in Section 24(7). One

thoughtful commentator, who is cited approvingly by the peti-

tioners and their amici, reads Talmage and Curtis to construe

the “business of banking” as “heavily dependent on the customs

and usages of banking over many centuries, thereby limiting the

business of banking to a coherent and principled group of

activities.” Symons, supra, at 697. Professor Symons con-

cludes that the “business of banking” in Section 24(7) is limited

Petitioners rely heavily upon arecent decision by the New York Court

of Appeals upholding the state banking department's opinion that annuities

are not insurance. New York State Ass'n of Life Underwriters, Inc. v. New

York State Banking Dep't, 83 N.Y .2d 353 (1994). That decision is frankly

unfathomable in light of the holding in Curtis v. Leavitt and of the existence

of a New York statute that specifically defines “annuities” as a “kind{] of

insurance.” N.Y. Ins. Law § 1113(a) (Consol. 1994). The court decision to

allow the Banking Superintendent to overrule a validly-enacted state statute

is perhaps best viewed as an example of judicial deference sliding into judicial

abdication. Cf. Presley v. Etowah County Comm'n, 112S. Ct. 820,831 (1992)

(“[dJeference does not mean acquiescence”). In any event, the New York

court observed that New York “has no statute that is analogous to 12 U.S.C.

§ 92,” so that decision has no relevance to the Section 92 issue in this case.

New York State Ass'n of Life Underwriters, 83 N.Y .2d at 365 (distinguishing

the decision of the Fifth Circuit, below).

to the “historical activities of deposit taking, credit granting, and

credit exchange.” Jd. at 692, 680-82. The sale of annuities as

agent for insurance companies falls outside that description.

The Comptroller’s expansive view of the National Bank

Act is remarkable for its arrogation of lawmaking powers and

for its reversal of the longstanding congressional policy that

national banks have only limited powers. The Comptroller's

approach to bank powers would result in the “expansion of the

business of banking into every financial activity that a bank

considers to be economically attractive.” Jd. at 726. Comp-

troller Williams sought to avoid that outcome when he advised

Congress in 1916 that “it would be unfortunate if any movement

should be made in the direction of placing the banks of the

country in the category of department stores.” 53 Cong. Rec.

11,001 (1916).

B. This Court Has Construed Section 24(7) As A

Grant of Limited Powers

In construing bank powers under Section 24(7), this Court

repeatedly has stated that powers not conferred by Congress are

denied. E.g., Logan County Nat'l Bank v. Townsend, 139 US.

67, 73 (1891). Incidental bank powers exist only as needed to

effectuate an express power. As stated in First Nat'l Bank v.

Missouri, 263 U.S. 640, 659 (1924) (national banks lack inci-

dental authority to establish branches):

Certainly an incidental power can avail neither to

create powers which, expressly or by reasonable im-

plication, are withheld nor to enlarge powers given;

but only to carry into effect those which are granted.

Texas & Pacific Ry. Co. v. Pottorff, 291 U.S. 245, 253 (1934)

(Brandeis, J.), held that a national bank had no power to pledge

its assets to secure private deposits. The Court explained (id.)

(citations omitted):

The measure of [a national bank’s] powers is the

Statutory grant; and powers not conferred by Congress

are denied. For the Act under which national banks

are Organized constitutes a complete system for their

government{.]

Finding no historical evidence that the practice of pledging

assets “ever prevailed among national banks,” Pottorff rejected

the claim that the power to pledge assets was incidental to the

express power to “receiv(e] deposits.” Jd. at 254.

The Court reached a similar conclusion with respect to the

power to pledge assets to secure the deposits of State funds,

rejecting the expansive argument that banks have the “inherent

power’ to pledge assets to secure deposits of public funds. /d.

at 264. Marion v. Sneeden, 291 U.S. 262, 264, 271-72 (1934)

(Brandeis, J.); accord Inland Waterways Corp. v. Young, 309

U.S. 517 (1940) (both historical practice and separate statute

authorized Secretary of Treasury to exact security for federal

monies deposited in national banks).

California Bank v. Kennedy, 167 U.S. 362 (1897), also

supports a narrow construction of Section 24(7). Kennedy held,

as did Talmage v. Pell for New York state banks, that national

banks have no independent power to deal in stocks on their own

account. The Court reasoned that “(t]he prohibition is implied

from the failure to grant the power.” /d. at 367. See also

Concord First Nat'l Bank v. Hawkins, 174 U.S. 364 (1899)

. (national banks lack power to hold stock for investment).!

21 Kennedy distinguished an earlier case which allowed a national bank

to acquire stocks for resale because that bank accepted the stock as a bona

fide compromise of a doubtful debt. First Nat'l Bank v. National Exch. Bank,

92 U.S. 122, 128 (1876). The power to take appropriate steps to collect a debt

was incidental to banks’ express credit granting powers, and would not

involve the bank “in the ordinary business of buying and selling for profit.”

Id. at 128. (

The congressional policy of keeping banking separate from

other economic activity is reflected in many rulings construing

Section 24(7). This separation keeps bankers focused on bank-

ing and also preserves banks as a neutral source of credit by

ensuring that banks do not compete with their borrowers. First

Nat’! Bank v. Converse, 200 U.S. 425 ; +6), held that a bank

could not engage in a manufacturing enterprise, even though the

bank had acquired stock in the company to recover on a debt of

the company’s corporate predecessor. The Court differentiated

between taking stock as collateral for resale and taking stock for

the purpose of operating a non-banking business. Id. at 439.

Consistent with this principle, Merchants’ Nat'l Bank v.

Wehrmann, 202 U.S. 295 (1906), held that a bank could take a

partnership interest in a land development business to recover

on a bad debt, but only to obtain an accounting of the partnership

property and receive a share of any remaining balance. /d. at

301-02.

Arnold Tours, Inc. v. Camp, 472 F.2d 427 (Ast Cir. 1972),

reversed the Comptroller’s determination that operating a travel

agency, a car rental agency, and selling travel insurance are all

incidental powers of national banks. The court of appeals held

that those services fall outside the “normal traditional range” of

banking, but allowed banks to perform such banking functions

as selling travellers’ checks and foreign currency, making travel

loans, and issuing letters of credit. Id. at 430, n.6 and 438.77

See also Cockrill v. Abeles, 86 F. 505 (8th Cir. 1898) (national

bank could not operate mill acquired in satisfaction of debt);

Cooper v. Hill, 94 F. 582 (8th Cir. 1899) (national bank could

Amold Tours also dismissed NationsBank’s current argument that

“necessary” as used in Section 24(7) must take its meaning from “necessary”

as used in the “Necessary and Proper” clause of Article I of the Constitution.

NationsBank Br. at 22. As Amold Tours states, different principles of

construction apply to constitutional and statutory provisions, consttuuonal

implied powers “are to be generously construed.” 472 F.2d at 431 (citing

M’Culloch v. Maryland, 4 Wheat. (17 U.S.) 316, 407 (1819)).

repair mining property received in payment of debt, but could

not operate mine); Saxon, supra (national banks may not sell

insurance); National Retailers Corp. v. Valley National Bank,

604 F.2d 32 (9th Cir. 1979) (national bank cannot provide

electronic data processing services); cf. Independent Ins. Agents

v. Department of Banking & Fin., 248 Ga. 787, 789 (1982)

(under Georgia statute identical to Section 24(7), state bank

could not operate insurance agency).

The policy of limiting banks to banking has been a constant

in American history. In the wake of massive bank failures

during the Great Depression, Congress enacted the Glass-Stea-

gall Act to prohibit commercial banks from engaging in invest-

ment banking. Act of June 16, 1933, ch. 89, 48 Stat. 162. In

proposing insurance powers for small-town national banks,

Comptroller Williams stressed the trivial impact of his proposal.

In his letter to Congress, he explained that “in many small

places” insurance sales are “not sufficient to take up the entire

time of an insurance broker, and the bank is not therefore likely

to trespass upon outside business naturally belonging to others.”

53 Cong. Rec. 11,001 (1916). Comptroller Williams also noted

that this modest new insurance power would not be “likely to

assume such proportions as to distract the officers of the bank

from the principal business of banking.” /d.

Petitioners cite a handful of decisions finding particular

activities to be incidental to banking. See, e.g., Merchants’

Nat'l Bank v. State Nat'l Bank, 10 Wall. (77 U.S.) 604 (1870);

Clement Nat'l Bank v. Vermont, 231 U.S. 120(1913); First Nat'l

Bank v. Hartford, 273 U.S. 548 (1927); Colorado Nat’! Bank v.

Bedford, 310 U.S. 41 (1940); Franklin Nat'l Bank v. New York,

347 U.S. 373 (1954). None of these cases challenges the

principle that an incidental bank power must be directly related

to an express bank power, such as deposit taking, credit granting

(i.e., “loaning money’’) or credit exchanging (i.e., “discounting

and negouating”). See generally, Symons, supra, at 701-14.

Merchants Nat’l Bank, for example, held that the power to

certify checks is incidental to the express power to receive depos-

its. 10 Wall. (77 U.S.) at 649. Clement Nat'l Bank found that

the power to pay state taxes on depositors’ accounts is incidental

to the express power to receive deposits coupled with the state’s

power to collect taxes by garnishment. 231 U.S. at 140. First

Nat’! Bank of Hartford stated that the power to sell mortgages

and evidences of debt is incidental to the express powers to

“discount{] and negotiat{e] promissory notes, drafts, bills of

exchange, and other evidences of debt,” and to loan money on

real estate mortgages. 273 U.S. at 559-60 (citing Section 24(7)

and law now codified at 12 U.S.C. § 371(a)). Colorado Nat'l

Bank reasoned that the power to conduct a safe-deposit business

is implied by banks’ express powers to accept “special deposits”

and to invest in safe-deposit corporations. 310 U.S. at 48-50

(citing 12 U.S.C. § 133 and proviso added to 12 U.S.C. § 24(7)

in 1927). Finally, Franklin Nat’l Bank held that the express

power to receive deposits implies the power to “let the public

know about it” by advertising. 347 U.S. at 377-78.

Most of the lower court decisions cited by petitioners also

tie incidental powers to banks’ enumerated powers.?> See, e.g.,

23 Even the Compwtoller usually justifies new incidental powers with

relation to banks’ enumerated powers. See, e.g., OCC Interpretive Letter No.

283, reprinted in {1983-1984 Transfer Binder] Fed. Banking L. Rep. (CCH)

4 85,447 at 77,609 (Mar. 16, 1984) (sale of credit-related life and disability

insurance and involuntary unemployment insurance “is directly related to the

bank’s express lending authority”); OCC Interpretive Letter No. 326, reprinted

in (1985-1987 Transfer Binder] Fed. Banking L. Rep. (CCH) { 85,496 at

77,756 (Jan. 17, 1985)(power to broker options incidental to express power to

broker securities); OCC Interpretive Letter No. 356, reprinted in [1985-1987

Transfer Binder] Fed. Banking L. Rep. (CCH) ¢ 85,526 (Jan. 7, 1986)(power

to execute orders for agricultural and metals futures contracts for customers is

incidental to “banks’ express lending power” provided that activity “is limited

to hedging transactions in connection with loans to Bank customers”), OCC

Interpretive Letter No. 388, reprinted in [1988-1989 Transfer Binder] Fed.

Banking L. Rep. { 85,612 at 77,940 (June 16, 1987) (issuance of mortgage-

M & M Leasing Corp. v. Seattle First Nat'l Bank, 563 F.2d 1377,

1382-83 (9th Cir. 1977), cert. denied, 436 U.S. 956 (1978)

(secured auto loan in form of lease arrangement is incidental to

express power to “loan{] money on personal security,” but bank

could not provide repair services or insurance coverage); Secu-

rities Indus. Ass'n v. Clarke, 885 F.2d 1034, 1049 (2d Cir.

1989), cert. denied, 493 U.S. 1070 (1990) (sale of mortgage

pass-through certificates is incidental to express power to sell

mortgage loans). Even Independent Bankers’ Ass'n v. Hei-

mann, 613 F.2d 1164 (D.C. Cir. 1979), cert. denied, 449 U.S.

823 (1980), which misapplied Section 92 in approving the sale

of credit life insurance, attempted to justify that activity under

Section 24(7) as directly related to banks’ express power to loan

money on personal security. Jd. at 1170. In contrast, the

Comptroller makes no claim that the sale of annuities is directly

related to any enumerated bank power.

C. The Sale Of Annuities Is Not Part Of The

“Business Of Banking”

The Comptroller contends that the sale of annuities is a part

of the “business of banking,” which assertedly includes the

“power to broker financial investment instruments.” Na-

tionsBank Pet. App. 38a. This supposed power appears no-

where in Section 24(7), and the Comptroller cites no authority

to suggest that such a bank power predated enactment of that

Statute in 1863. Indeed, the evidence is all to the contrary.

When New York enacted the Free Banking Act of 1838

and when Congress later enacted Section 24(7), they each

intended to define the “business of banking” as it was then

understood, and to leave “nothing to construction or in doubt.”

See Curtis, supra, 15 N.Y. at 58 (Comstock, J.); Pottorff, supra,

291 U.S. at 253 (statute is full measure of bank powers and

backed pass-through certificates “represents nothing more than the negotia-

tion of evidences of debt and the sale of real estate loans, which is expressly

authorized under 12 U.S.C. §§ 24(Seventh) and 371(a)”).

constitutes “complete system”). Nothing in either statute sug-

gests the existence of a power to broker financial investment

instruments. Banks could scarcely broker annuities under an

amorphous “financial investment instruments” power when it

was Clearly understood in 1863 that banks could not sell annui-

ties. Curtis, 15 N.Y. at 212 (Paige, J.).

The Comptroller insists that the power to broker financial

investment instruments derives from banking tradition, Na-

tionsBank Pet. App. 38a, but the historical support is very thin,

and cannot be stretched to cover annuities. By the beginning of

this century, national banks were pressuring the Comptroller for

the power to trade in securities, which many state banks could

do but national banks did not. See Ridgely, Government Con-

trol of Banks and Trust Companies, 23 Annals 17, 24 (1904)

(Comptroller of the Currency).

The Comptroller responded to these complaints in 1902 by

quietly authorizing national banks to purchase and sell debt

securities. A few national banks established security affiliates,

but this practice was denounced as beyond the powers of na-

tional banks by the congressional Pujo Committee in 1913, Pujo

Report, Money Trust Investigation, 62d Cong., 3d Sess., H. Rep.

1593 (1913) at 151, and by Sen. Carter Glass in 1925. Hearings

on the Consolidation of National Banking Associations, Senate

Banking and Currency Comm., S. 3316, 68th Cong., 2d Sess.

(1925) at 111 (“There is nothing in the national banking act that

permits it”); see generally, Edwin J. Perkins, The Divorce of

Commercial and Investment Banking: A History, 88 Banking

L.J. 483, 488-95 (1971).

The sale of securities by national banks finally was ap-

proved in the McFadden Act of 1927, which authorized national

banks to engage in the “business of buying and selling invest-

ment securities.” 44 Stat. 1226. Following the Crash of 1929,

the Glass-Steagall Act of 1933 limited that power to “purchasing

and selling . . . securities and stock without recourse, solely upon

the order, and for the account of, customers, and in no case for

[the bank’s] own account.”” 12 U.S.C. § 24(7).

These events, decades after enactment of the National Bank

Act, do not establish that the “business of banking” in Section

24(7) includes the sale of annuities. First, even the powers

granted 60 years later in the McFadden Act did not reach

annuities. In addition to being an insurance product, and there-

fore not a true stock or security, annuities are fundamentally

different from the “investment securities” covered by that law.

Banks principally have been allowed to broker investment se-

Curities to assist Customers in transferring assets in forms that

are highly liquid. In contrast, both variable and fixed annuities

are purchased by individuals for themselves, and the premiums

and payouts are uniquely tailored to the mortality expectations

for each individual and his or her financial situation. An annu-

ity, once issued, is not negotiable in any marketplace, since most

annuities are measured by the remaining life of the annuitant.

See Symons, supra, at 718 (annuities are not part of “business

of banking” because they are “long-term, nonmarketable invest-

ments, locking up assets rather than providing a pool of liquid-

ity”).

Thus, the Comptroller cannot justify the sale of annuities

by national banks on the basis of his customary rationale for

bank brokerage powers: that “’ Banks are regular, active partici-

pants in the financial trading markets and normally will have

trading expertise.”” Fed. Br. at 21 (quoting OCC Interpretive

Letter No. 494, [1989-1990 Transfer Binder] Fed. Banking L.

Rep. (CCH) { 83,083, at 71,199 (Dec. 20, 1989)) (emphasis

added). Banks have no trading expertise with respect to annui-

ties, both because annuities are not traded in any market and

because banks have no expertise at all about annuities, which

are an insurance product. Thus, although national banks have

been authorized to broker a variety of negotiable securities,

options and futures, see Fed. Br. at 22 n.8 (listing OCC rulings),

those activities provide no basis for permitting national banks

to sell insurance products that are not marketable investment

secunities.

Moreover, NationsBank proposes to sell annuities that will

have a fixed annuity option, and others with combination fixed

and variable features. Because both SEC v. VALIC and United

Benefit established that fixed annuities are not securities, see p.

32, supra, any product including a fixed annuity feature cannot

be deemed a security within the bank’s brokerage authority.*4

D. Section 92’s Specific Prohibition Would Prevail

Over Any General Power In Section 24(7)

Even if the sale of annuities could be called part of the

“business of banking” under Section 24(7), any general author-

ity conferred by that statute could not overcome the specific

insurance agency prohibition in Section 92. As the court of

appeals reasoned, a “power which has been withheld or denied

by Congress cannot be found to exist as an ‘incidental’ and

‘necessary’ power.” NationsBank Pet. App. 16a (quoting

Saxon, 399 F.2d at 1014). First Nat’l Bank v. Missouri applied

the same principle (263 U.S. at 659):

[I]t is wholly illogical to say that a power which by

fair construction of the statutes is found to be denied,

nevertheless exists as an incidental power.

By granting limited insurance agency authority in Section 92,

Congress “negate[d] the existence of any other power to act as

24 NationsBank argues that the Glass-Steagall Act expressly authorizes

it to sell its annuities. NationsBank Br. at 30-37. As the Comptroller

recognized in his Petition, however, “this case does not present that issue.”

Fed. Pet. at 6-7 n.3. To the contrary, the Comptroller’s Approval specifically

eschewed any reliance upon the Glass-Steagall Act (NationsBank Pet. App.

37a-38a), and that statute was not mentioned by the district court or the court

of appeals in their respective opinions. Indeed, NationsBank’s Glass-Steagall

Act theory is not even fairly included in its own “Questions Presented.” See

Sup. Ct. R. 14.1(a). The prohibition of Section 92 would override any

authority under NationsBank’s Glass-Steagall Act theory, in any event.

an insurance agent under the general provisions of Section

24(7).” Saxon, 399 F.2d at 1014. That specific prohibition

prevails over any general banking authority conferred by Sec-

tion 24(7). See Crawford Fitting Co. v. J. T. Gibbons, Inc., 482

U.S. 437, 445 (1987) (“where there is no clear intention other-

wise, a specific statute will not be controlled or nullified by a

general one”); Busic v. United States, 446 U.S. 398, 406 (1980)

(“a more specific statute will be given precedence over a more

general one, regardless of their temporal sequence”).

CONCLUSION

The power to establish national banks, and to decide what

powers those banks will have, belongs to Congress, which has

not given them the power to sell annuities. With due regard to

Chevron, Comptroller Williams explained long ago that “the

Comptroller of the Currency has no right to authorize or permit

a national bank to exercise powers not conferred upon it by law.”

53 Cong. Rec. 11,001 (1916). As the court of appeals aptly

concluded its opinion below, (NationsBank Pet. App. 17a):

[If] banks seek[] more power than they are currently

granted under §§ 92 and 24(7) . . . [they] should look

to Congress, not the Comptroller . . . or the courts.

This Court should affirm the judgment of the court of appeals.

Respectfully submitted,

Of Counsel MARTIN E. LYBECKER

DAVID OVERLOCK STEWART

William A. Wilson (Counsel of Record)

The Variable Annuity Life ALAN G. PRIEST

Insurance Co. RAYMOND C. ORTMAN, JR.

2929 Allen Parkway ROPES & GRAY

Houston, TX 77019 1001 PENNSYLVANIA AVENUE,

(713) 831-5491 N.W.

SUITE 1200 SOUTH

WASHINGTON, DC 20004

(202) 626-3900

CURRENT STATE STATUTES DEFINING

INSURANCE AND ANNUITIES

(1) (2) (3) (4)

Annuity= Insurance=

Annuity= A Kind Of Annuity=Life Contingent

State Insurance Insurance Insurance Payment

Alabama xX

Alaska xX

Arizona 4

Arkansas xX

California X

Colorado xX

Connecticut

Delaware X X

Florida xX

Georgia

Hawaii xX

Idaho

[llinois X

Indiana xX

Iowa xX

Kansas xX X

Kentucky \

Louisiana X

Maine xX

Maryland

Michigan xX

Minnesota xX

Montana xX

Nebraska

Nevada

New Hampshire

New Jersey \

New Mexico xX X

New York

North Carolina X

North Dakota xX

Ohio xX

Oklahoma xX X

a a

PS KO OK OO

mK mM

(1) (2) (3) (4)

Annuity= Insurance=

Annuity= A Kind Of Annuity=Life Contingent

State Insurance Insurance Insurance Payment

Oregon X X X

Pennsylvania X

Rhode Island X

South Carolina X X

South Dakota X X .

Tennessee X

Utah xX

Vermont x X

Virginia xX

Washington X X

West Virginia X X

Wisconsin xX

Wyoming x X .

TOTALS: 15 20 14 23

NOTES

(1)

(3)

(4)

State statutes in this category specifically define “in-

surance,” “insurance contract” or insurance “policy”

to include annuities. A number of states do not define

“insurance” per se.

State statutes in this category specifically list annuities

as a “class,” “kind,” “type” or “line” of insurance.

Many states’ statutes do not specifically enumerate

the various kinds of insurance.

State statutes in this category specifically define life

insurance to include annuities. In order to minimize

double counting, no entry is made under this category

if a state falls in category (1) or (2).

State statutes in this category define insurance to

include the “‘pay[{ment of] a specified amount or bene-

fit upon determinable contingencies” or words of

similar import.

SOURCES

Ala. Code §§ 27-1-2, 27-5-3 (1994)

Alaska Stat. §§ 21.12.055, 21.90.900 (22) (1993)

Ariz. Rev. Stat. Ann. §§ 20-103, 20-254.01 (1993)

Ark. Code Ann. § 23-60-102 (1) (1993)

Cal. Ins. Code § 101 (West 1994)

Colo. Rev. Stat. 10-1-102 (7) (1994)

Conn. Gen. Stat. § 38a-1 (10) (1993)

Del. Code Ann. tit. 18, §§ 102, 1715, 2302 (1993)

Fla. Stat. Ann. §§ 624.02, 624.602 (West 1993)

Ga. Code Ann. § 33-1-2 (2) (1994)

Haw. Rev. Stat. §§ 431:1-201, 431:1-204 (1994)

Idaho Code § 41-102 (1994)

Ill. Ann. Stat. ch. 215, para. 5, § 4 (Smith-Hurd 1993)

Ind. Code Ann. § 27-1-5-1 (Burns 1994)

Iowa Code Ann. § 507B.2 (West 1994)

Kan. Stat. Ann. §§ 40-247, 40-601 (1993)

Ky. Rev. Stat. Ann. §§ 304. 1-030, 304.5-030 (1987)

La. Rev. Stat. Ann. §§ 22:5 (1), 22:6 (1) (West 1994)

Me. Rev. Stat. Ann. tit. 24-A, §§ 3, 703 (West 1993)

Md. Ann. Code art. 48A, §§ 2, 65 (1993)

Mich. Comp. Laws Ann. § 500.602 (West 1994)

Minn. Stat. Ann. § 60A.06 (1) (West 1994)

Mont. Code Ann. § 33-1-201 (5) (1993)

Neb. Rev. Stat. § 44-201 (1993)

Nev. Rev. Stat. Ann. § 120A.090 (Michie 1994)

N.H. Rev. Stat. Ann. § 401:1 (1993)

NJ. Stat. Ann. §§ 17:17-1(c), 17:22A-2 (e) (1994)

N.M. Stat. Ann. §§ 59A-1-5, 59A-7-2 (Michie 1992)

N.Y. Ins. Law § 1113 (a) (Consol. 1994)

N.C. Gen. Stat. § 58-58-1 (1991)

N.D. Cent. Code § 26.1-26-02 (1) (1993)

Ohio Rev. Code Ann. § 3902.02 (A) (Baldwin 1993)

Okla. Stat. Ann. tit. 36, §§ 102, 702 (West 1994)

Or. Rev. Stat. §§ 731.102, 731.154 (1993)

Pa. Stat. tit. 40, § 1171.3 (1994)

R.I. Gen. Laws § 27-3.2-2 (1993)

S.C. Code Ann. § 38-1-20 (19) (Law. Co-op. 1976)

S.D. Codified Laws Ann. §§ 58-1-2 (10), 58-6-20 (1994)

Tenn. Code Ann. § 56-2-201(4) (1989)

Utah Code Ann. § 31a-1-301 (1994)

Vt. Stat. Ann. tit. 8, §§ 4722, 4793 (1993)

Va. Code Ann. §§ 38.2-106, 38.2-107 (Michie 1994)

Wash. Rev. Code Ann. §§ 48.01.040, 48.11.020 (West 1994)

W. Va Code §§ 33-1-1, 33-1-10 (1994)

Wis. Stat. § 71.42 (3) (1993)

Wyo. Stat. §§ 26-1-102 (a) (xv), 26-5-119 (1994)

EARLY STATE STATUTES DEFINING THE

BUSINESS OF INSURANCE

TO INCLUDE THE GRANTING, SELLING AND

DISPOSING OF ANNUITIES

State Statute

Arizona Ariz. Rev. Stat. § 3423 (1913)

Arkansas 1913 Ark. Acts 220

California 1915 Cal. Stat. 1534 ch. 768, § 1

Colorado 1913 Colo. Sess. Laws ch. 99, § 29

Connecticut 1883 Conn. Pub. Acts ch. 90, § 1

Florida 1851 Fla. Laws ch. 313, § 1

Idaho 1901 Idaho Sess. Laws 169 ch. 2, § 6

Illinois 1911 Ill. Laws 377, § 1

Indiana 1899 Ind. Acts ch. 28, § 1

Iowa 1900 Iowa Acts ch. 65, § 2

Kansas 1907 Kan. Sess. Laws ch. 227, § |

Kentucky 1893 Ky. Acts ch. 171, § 106

Louisiana 1908 La. Acts. 203, § 1

Maine 1899 Me. Acts ch. 55

Maryland 1868 Md. Laws ch. 471, § 99

Massachusetts 1907 Mass. Acts. ch. 576, § 66

Michigan 1869 Mich. Pub. Acts 77, § |

Minnesota 1895 Minn. Laws ch. 175, § 27

Mississippi 1904 Miss. Laws ch. 79, § 3

Missouri 1869 Mo. Laws 27, § 1

Nebraska 1913 Neb. Laws ch. 154, § 78

Nevada 1891 Nev. Stat. ch. 98, §9

New Jersey 1914 NJ. Laws ch. 88

New Mexico 1909 N.M. Laws ch. 48, § 25

New York 1853 N.Y. Laws ch. 463, § 1

North Carolina

North Dakota

Ohio

Oklahoma

Pennsylvania

South Carolina

Tennessee

Texas

Vermont

Washington

West Virginia

Wisconsin

Wyoming

1899 N.C. Sess. Laws ch. 54, § 55

1891 N.D. Laws ch. 73, § 1

1872 Ohio Laws 150

1909 Okla. Sess. Laws ch. 21, § 3

1911 Pa. Laws 581 § 1

1910 S.C. Acts 420, § 10

1875 Tenn. Pub. Acts ch. 142, § 10

1909 Tex. Gen. Laws ch. 108, § 1

1915 Vt. Pub. Acts 158, § 1

1913 Wash. Sess. Laws ch. 109, § 2

1907 W. Va. Acts ch. 77, § 17

1850 Wis. Laws ch. 232, § 1

1911 Wyo. Sess. Laws ch. 50

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.