Amicus Curiae Brief — NationsBank of North Carolina, N. A. v. Variable Annuity Life Insurance
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Nos. 93-1612 and 93-1613
IN THE
Supreme Court of the Unite
OCTOBER TERM, 1994
NATIONSBANK OF NORTH CAROLINA, N.A.. ef al.,
V.
Petitioners,
VARIABLE ANNUITY LIFE INSURANCE CO..
Respondent.
EUGENE LUDWIG, COMPTROLLER OF THE CURRENCY, et ai.,
V.
Petitioners,
VARIABLE ANNUITY LIFE INSURANCE CO..
Respondent.
ON WRIT OF CERTIORARI TO THE UNITED STATES
COURT OF APPEALS FOR THE FIFTH CIRCUIT
EE
BRIEF OF THE NEW YORK CLEARING HOUSE ASSOCIATION
AS AMICUS CURIAE IN SUPPORT OF PETITIONERS
See
H. RODGIN COHEN
MICHAEL M. WISEMAN
THEODORE EDELMAN
ROBERT J. GIUFFRA, JR.
SULLIVAN & CROMWELL
Of Counsel
NORMAN R. NELSON
General Counsel
THE NEW YORK CLEARING
HOUSE ASSOCIATION
Of Counsel
JOHN L. WARDEN
Counsel for The New York
Clearing House Association,
Amicus Curiae
125 Broad Street,
New York, New York 10004.
(212) 558-4000
July 29, 1994
ee
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TABLE OF CONTENTS
INTEREST OF AMICUS CURIAE ............ 2
SUMMARY OF ARGUMENT ............... 3
Ee a ae ee 5
I.
II.
III.
THE FIFTH CIRCUIT DIRECTLY
CONTRAVENED CHEVRON IN OVERRIDING
THE OCC’S REASONABLE DETERMINATION
THAT NATIONAL BANKS MAY
i fe tee ce bee 5
THE GREAT WEIGHT OF AUTHORITY
SUPPORTS THE OCC’S CONCLUSION
THAT ANNUITIES ARE FINANCIAL
INVESTMENT INSTRUMENTS, NOT
Se 8
SECTION 24 (SEVENTH) AUTHORIZES
NATIONAL BANKS TO ENGAGE IN ALL
ASPECTS OF THE “BUSINESS OF
BANKING,” INCLUDING THE BROKERAGE
OF ANNUITIES AND OTHER FINANCIAL
INVESTMENT INSTRUMENTS. ............. 13
A. The Language and Legislative
History of the NBA Support the
OCC’s Interpretation of the
~« ( Yet ae 14
B. This Court’s Decisions Support
the OCC’s Construction of the
“Business of Banking.” ............. 19
il
C. The Brokerage of Financial
Investment Instruments, Including
Annuities, Is Part of the “Business
of Ranking.” ..cccesttueseeee
D. The Brokerage of Annuities by
National Banks Is Supported by
Sound Banking Policy. .........
IV. SECTION 92 DOES NOT LIMIT THE
“BUSINESS OF BANKING” POWERS OF
NATIONAL BABB. ..ccccesseuneen
CONCLUSION ....ccccccsecssesuen
Page
iii
TABLE OF AUTHORITIES
Cases
Aluminum Co. of Am. v. Central Lincoln
Peoples’ Util. Dist., 467 U.S. 380 (1984)
American Ins. Ass'n v. Clarke,
656 F. Supp. 404 (D.D.C. 1987),
aff'd, 865 F.2d 278 (D.C. Cir. 1988) ...
Arnold Tours, Inc. v. Camp,
472 F.2d 427 (Ist Cir. 1972) ........
Auten v. United States Nat’l Bank,
re
Awotin v. Atlas Exch. Nat’l Bank,
TE «cas esceeces
Block v. Pennsylvania Exch. Bank,
253 N.Y. 227, 170 N.E. 900 (1930) ...
Chevron U.S.A., Inc. v. Natural Resources
Defense Council, Inc.,
Ee
Clarke v. Securities Indus. Ass’n,
re
Clement Nat’l Bank v. Vermont,
rere
iV
Page(s)
Colorado Nat’! Bank v. Bedford,
EE eee eee ee ee ee 19, 20-21
Curtis v. Leavitt,
ae cecncnevoe be eke 16, 17-18
Daniel v. Life Ins. Co.,
102 S.W.2d 256
Cees Ge HE, UTD ee chev cte enews sasen 9
Delaware v. New York,
SED EG HOE bc Seco sscedecevessos 23
Dyer v. Broadway Central Park,
252 N.Y. 430, 169 N.E. 635 (1930) .......... 18
First Nat’l Bank v. Taylor,
907 F.2d 775 (8th Cir.),
cert. denied, 498 U.S. 972 (1990) ............ 21
First Nat’l Bank v. City of Hartford,
Bee es ED ncn ees ade ween oenene 19
First Nat’l Bank v. Converse,
yD ee eae ee ee 25
First Nat’l Bank v. National Exch. Bank,
Ge Wes SE ED oe ede eee eeesesecasecs 20
Franklin Nat’l Bank v. New York,
ee Ws SUED a cee cc ccceracecess 19, 21
Helvering v. Le Gierse,
£8 fo) rrr rr rare Ty Te ee ye 9
Hughey v. United States,
i is os eek hk eae oe oe 29
Independent Bankers Ass'n of Am. v.
Heimann, 613 F.2d 1164 (D.C. Cir.
1979), cert. denied, 449 U.S. 823
EE a i A 27, 29
Independent Ins. Agents of Am., Inc. v.
Board of Governors, 736 F.2d 468
nS tbs eene 6 od oh eh OS 27-28, 29
James v. Appel,
Es 5 on bk Ss od 60 4 he OO 16
John Hancock Mut. Life Ins. Co. v.
Harris Trust & Sav. Bank,
RR 10
Kirkman v. Farmers’ Sav. Bank,
28 F.2d 857 (8th Cir. 1928)................ 17
Logan County Nat’l Bank v. Townsend,
oR ne 20
M&M Leasing Corp. v. Seattle First Nat'l
Bank, 563 F.2d 1377 (9th Cir. 1977),
cert. denied, 436 U.S. 956 (1978) .......... 21-22
McCulloch v. Maryland,
17 U.S. (4 Wheaton) 316 (1819) ............. 18
Merchants’ Bank v. State Bank,
77 U.S. (10 Wallace) 604 (1871) ............. 20
vi
Page(s)
Miller v. King,
|. ke |. er eee rrr. 19-20
Moskal v. United States,
— fe f)| 6 eee ee ee 14
New York State Ass’n of Life Underwriters, Inc.
v. New York State Banking Dep't,
83 N.Y.2d 353, 632 N.E.2d 876,
610 N.Y.S.2d 470 (1994) .........444- 3, 7, 8-9,
19, 24
Prudential Ins. Co. of Am. v. Howell,
29 N.J. 116, 148 A.2d 145 (1959)... 2... eee 9
Saxon v. Georgia Ass’n of Indep. Ins. Agents,
399 F.2d 1010 (Sth Cir. 1968) ............ 28, 29
SEC v. United Benefit Life Ins. Co.,
eR re ee ee ee 9-10
SEC v. Variable Annuity Life Ins. Co. of Am.,
SED US. GCG cc ccc ccc ccsccces 10, 11, 12
Securities Indus. Ass’n v. Board of Governors,
' is & 0, | ee ee 23
Sneeden v. City of Marion,
Ls be er ee ee 17
Springer v. Government of the Philippine
Islands, 277 U.S. 189 (1928) ........-.24.8- 28-29
Texas & Pacific Ry. v. Pottorff,
291 U.S. Pe css 6 asso 644 06s 60 O08 25
Vii
Page(s)
United States v. Philadelphia Nat’! Bank,
ee 7, 23
Wyman v. Wallace,
Bee WB. TOP GIIOD ccc cc ccccnccuccces 20
In re Young, 806 F.2d 1303 (Sth Cir. I as es i ot eine 9
Statutes and Rules
OE ee i i 7
ee DG i'n boa sé eked ek bees 7
12 U.S.C. § 24 (Seventh) ............... passim
na ar ft Ee passim
ee 10
Se ee EE a oo ob 0'o hbk ck ee es l
Congressional Materials
CONG. GLOBE, 37th Cong., 3d Sess.
TPE has Ok Oe te ds oy heb deen 16
CONG. GLOBE, 37th Cong., 3d Sess.
en er ee 16
CONG. GLOBE, 37th Cong., 3d Sess.
oo a a re ee ee 16
Viil
53 CoNnG. REC. 11,001 (1916) .........25008- 28
53 ConG. REC. 11,002 (1916) ........ ever 28
Miscellaneous
1 JOHN A. APPLEMAN, INSURANCE LAW & PRACTICE
ToT. | errr er cee eee eee 8
Are Annuities Insurance or Investment
Products? The Newsletter of the Bank-
Insurance Industry, 1993-3, at 2
(published by Kenneth Kehrer Assocs.,
Princeton, N.J.) oc ccc cece ccc ccc ssccees 11
BLACK’S LAW DICTIONARY 802
ee i 4
Kurt Cerulli & David Nadig, Variable
Annuities Add a Steady Flow to Bank
Brokerages’ Revenue Streams,
THE AMERICAN BANKER, July 14, 1993,
ee eee eS ee 2
BRAY HAMMOND, BANKS AND POLITICS
IN AMBRICA (1957) . 0... cc er ce cree cevenes 15
Henry Harfield, The National Bank Act and
Foreign Trade Practices,
61 HARV. L. REV. 782 (1948) ......--5252 06s 17
Ralph F. Huck, Whar Is the Banking Business ?,
21 Bus. LAW. 537 (1966) ........--ecceees 17
ix
Page(s)
OCC Interpretive Letter No. 494, reprinted
in [1989-1990 Transfer Binder] Fed.
Banking L. Rep. (CCH) 4 83,083
6 eee 13-14, 17,
20, 22
DAVID SHAPIRO & THOMAS F. STREIFF,
ANNUITIES (1992) ..........cccccce 8, 11, 12
2A SUTHERLAND ON STATUTORY CONSTRUCTION
@ 40.00 OO O86. 1992) .. ccc ccc cccee 14-15
2B SUTHERLAND ON STATUTORY CONSTRUCTION
S S2-GS GO Ob. 1992) 0 ccc ccc cence 16
Edward Symons, The “Business of Banking” in
Historical Perspective, 51 GEO. WASH. L. REV.
es ce Pe 15-16, 17
Karen Talley, Bank Annuity Sales Seen Surging
in 93, THE AMERICAN BANKER, June 30, 1993,
RR A Res ne 2
Phillip R. Trimble, The Implied Power
of National Banks to Issue Letters
of Credit and Accept Bills,
oe VALE LJ. TID (IDM) 0. ww ccc eee 17
: a
r
a ae
IN THE
Supreme Court of the Gnited States
October Term, 1994
Nos. 93-1612 and 93-1613
NATIONSBANK OF NORTH CAROLINA, N.A., ef ai.,
Petitioners,
Vv.
VARIABLE ANNUITY LIFE INSURANCE CO.,
Respondent.
EUGENE LUDWIG, COMPTROLLER OF THE
CURRENCY, ef ai.,
Petitioners,
Vv.
VARIABLE ANNUITY LIFE INSURANCE CO.,
Respondent.
ON WRIT OF CERTIORARI TO THE UNITED STATES
COURT OF APPEALS FOR THE FIFTH CIRCUIT
BRIEF OF THE NEW YORK CLEARING HOUSE
ASSOCIATION AS AMICUS CURIAE IN
SUPPORT OF PETITIONERS
Pursuant to Rule 37.3 of this Court, The New York
Clearing House Association (the “Clearing House”)
respectfully submits this brief with the consent of all parties.
INTEREST OF AMICUS CURIAE
The Clearing House is an unincorporated association of
eleven leading commercial banks in the City of New York.’
Four of the Clearing House member banks are national
banking associations subject to the National Bank Act (the
“NBA”)? and, thus, to the supervision and regulation of
petitioners the Comptroller of the Currency and the Office of
the Comptroller of the Currency (together, the “OCC”). The
Clearing House often appears as an amicus curiae in cases,
such as this, raising important questions of banking law.
The Clearing House has a substantial interest in the
questions presented here because of its member banks’
involvement in the brokerage of annuities, an important and
growing part of commercial banking. In 1993, commercial
banks, including Clearing House member banks, sold an
estimated $16 billion worth of annuities, see Karen Talley,
Bank Annuity Sales Seen Surging in ’93, THE AMERICAN
BANKER, June 30, 1993, at 17, and such sales represented
approximately seven percent of all bank brokerage activity.
See Kurt Cerulli & David Nadig, Variable Annuities Add a
Steady Flow to Bank Brokerages’ Revenue Streams, THE
AMERICAN BANKER, July 14, 1993, at 12.
In addition, relying on the authorizations and regulations
of the OCC and other bank regulators, Clearing House
' The members of the Clearing House are The Bank of New York,
The Chase Manhattan Bank, N.A., Citibank, N.A., Chemical
Bank, Morgan Guaranty Trust Company of New York, Bankers
Trust Company, Marine Midland Bank, United States Trust
Company of New York, National Westminster Bank USA,
European American Bank, and Republic National Bank of New
York.
2 Ch. 106, 13 Stat. 99 (1864) (codified, as amended, in sections
of Title 12 of the United States Code).
ee er re | .
3
member banks sell as agents other products related to the
business of banking that, unlike annuities, are generally
considered insurance. The sale of these products, which
include credit life, credit disability, mortgage life, mortgage
disability and involuntary unemployment insurance, provides
millions of dollars in revenues to national banks each year.
More generally, the Fifth Circuit’s crabbed construction
of the “incidental powers” clause of Section 24 (Seventh) of
the NBA calls into question the extent to which national
banks may continue to respond, as they have for more than
100 years, to the rapidly evolving needs of their customers.
The OCC has authorized national banks to engage in many
activities, not specifically enumerated in the NBA, that are
incidental to the “business of banking.” If the NBA had to be
amended every time national banks sought to offer new
banking products or services, such banks could not compete
successfully with other financial intermediaries, including
savings banks, securities brokerage firms and mutual funds.
SUMMARY OF ARGUMENT
1. The Fifth Circuit flatly contravened the principle of
judicial deference established by this Court in Chevron
U.S.A., Inc. vy. Natural Resources Defense Council, Inc. , 467
U.S. 837, 842-45 (1984) (“Chevron”), in not deferring to the
OCC’s determination that the brokerage of annuities by
national banks is authorized under Sections 24 (Seventh) and
92 of the NBA. Congress did not clearly bar national banks
from brokering annuities in the NBA, and interpretation of
the statutory term “business of banking” in Section 24
(Seventh) requires the OCC’s special expertise.
Indeed, the respective determinations by the New York
Court of Appeals in New York State Association of Life
Underwriters, Inc. v. New York State Banking Department,
83 N.Y.2d 353, 363-64, 632 N.E.2d 876, 881-82, 610
N.Y.S.2d 470, 475-76 (1994) (“NYSALU”), and by the Fifth
Circuit judges who dissented from the denial of rehearing en
4
banc (24a-27a),’ that annuities are not a form of
insurance—but financial investment instruments of the sort
that banks have long sold—demonstrate powerfully that the
OCC had far more than a reasonable basis—all that was
necessary under Chevron—for authorizing national banks to
broker annuities.
The Fifth Circuit's failure to defer to the OCC’s
reasonable interpretation of the NBA threatens regulatory
predictability and stability in the commercial banking
industry. If national banks could not rely on OCC regulations
under, and interpretations of, the NBA, they would be
deprived of the predictability necessary for the development
of innovative banking practices.
2. The Fifth Circuit’s de novo determination that
national banks may not act as agents for the sale of annuities
rests on the mistaken proposition that annuities are a
““general’ type of insurance” and not a financial investment
instrument. (14a). From that premise, the court reached two
erroneous conclusions: (i) that the sale of annuities as agent
is not included in the express grant of authority in Section 24
(Seventh) for national banks to engage in all aspects of the
“business of banking,” and (ii) that such business is the sale
of a form of general insurance that Section 92 limits to banks
in towns of 5,000 or fewer inhabitants. (13a-17a).
a. The great weight of authority firmly establishes that
annuities are financial investment instruments, and it is
settled that banks may act as agents for the sale of securities,
certificates of deposits and other financial investment
instruments to their customers. The court below ignored this
authority and relied, instead, on a mistaken conception of
annuities and an unfounded—and, indeed, unarticulated—
> Citations in the form “__a” are to the appendix to the petition for
a writ of certiorari in No. 93-1612.
5
construction of national banks’ power to conduct the
“business of banking.”
Both the language of, and decisions interpreting, the
incidental powers clause support the OCC’s determination
that national banks are expressly authorized to engage in all
aspects of the “business of banking.” The brokerage of
annuities is clearly part of the business of banking, because
such brokerage (i) involves the financial intermediation that
is the essence of banking, and (ii) is akin to the brokerage of
securities expressly permitted by Section 24 (Seventh).
Moreover, by increasing the availability of annuities and by
allowing national banks to compete on an equal footing with
state-chartered banks and other financial intermediaries in the
growing annuities market, the OCC’s determination promotes
sound banking policy.
b. Even if annuities are considered “insurance” for
purposes of Section 92, the NBA should not be construed to
bar national banks located outside of small towns from
brokering annuities and credit-related insurance products that
are incidental to the business of banking. The statutory
language and legislative history support the OCC’s
interpretation that Section 92 is a supplemental grant of
authority for national banks located in small towns and does
not otherwise restrict the “business of banking.”
ARGUMENT
I. THe Fiera Circurr DIRECTLY CONTRAVENED
CHEVRON IN OVERRIDING THE OCC’S REASONABLE
DETERMINATION THAT NATIONAL BANKS MAY
BROKER ANNUITIES.
This Court has “long recognized that considerable
weight should be accorded to an [agency’s] construction of a
statutory scheme it is entrusted to administer.” Chevron, 467
U.S. at 844. Such judicial deference is particularly
appropriate where, as here, “[t]he subject under regulation is
6
technical and complex.” Aluminum Co. of Am. v. Central
Lincoln Peoples’ Util. Dist., 467 U.S. 380, 390 (1984); see
also Clarke v. Securities Indus. Ass’n, 479 U.S. 388, 403-06
(1987) (applying Chevron to OCC’s interpretation of federal
banking laws).
1. Under Chevron, if “Congress has not directly
addressed the precise question at issue, . . . a court may not
substitute its own construction of a statutory provision for a
reasonable interpretation made by the administrator of an
agency.” 467 U.S. at 843-44. Thus, if a “statute is silent or
ambiguous with respect to the specific issue, [administrative]
regulations are given controlling weight unless they are
arbitrary, capricious, or manifestly contrary to the statute.”
Id. at 843-44.
In reviewing the construction of a statute by the OCC or
another agency, a “court need not conclude that the agency’s
construction was the only one it permissibly could have
adopted, . . . or even the reading the court would have
reached if the question initially had arisen in a judicial
proceeding.” Jd. at 843 n.11. Rather, the court must defer to
the OCC’s construction of the NBA as long as that
interpretation is reasonable. See Clarke v. Securities Indus.
Ass’n, 479 U.S. at 403-04.
As shown below, the Fifth Circuit violated these settled
principles of judicial deference in overruling the OCC’s
reasonable construction of Sections 24 (Seventh) and 92 of
the NBA to permit national banks to broker annuities. It
plainly was within the OCC’s province to determine that
annuities are not “insurance” for purposes of Section 92, but
rather are a form of financial investment instrument of the
type that national banks have long sold pursuant to their
power to engage in the “business of banking.”
Nothing in the NBA or its legislative history indicates
that Congress intended to prohibit national banks from
brokering annuities. Sections 24 (Seventh) and 92 do not
7
refer to “annuities” or define the statutory terms “business of
banking” or “insurance,” and those provisions certainly do
not manifest the “clear” intent required by Chevron for a
court to override an administrative agency’s determination.
467 U.S. at 842. On the contrary, the incidental powers
clause of Section 24 (Seventh)—like the provision of the New
York Banking Law upon which it is based—“does not consist
of common words of clear import, and that clause is
susceptible to differing interpretation.” NYSALU, 83 N.Y.2d
at 360, 632 N.E.2d at 879, 610 N.Y.S.2d at 473. In these
circumstances, the Fifth Circuit erred in considering de novo
matters that Congress had left to the special expertise of the
OCC.
2. The Fifth Circuit’s failure to follow Chevron
threatens the OCC’s expert administration of the NBA and
the development of banking generally. Congress has
specifically charged the OCC with the administration of the
NBA, see 12 U.S.C. §§ 1, 21-216(a), and has left many parts
of that regulatory scheme to the implementing regulations of
the OCC and other bank regulators, which “maintain virtually
a day-to-day surveillance of the American banking system.”
United States v. Philadelphia Nat’! Bank, 374 U.S. 321, 329
(1963). Certain aspects of this scheme, especially those
enacted many years ago, require interpretation and,
frequently, reinterpretation to account for changing financial
and technological developments, as well as consumer needs
and preferences.
Since the enactment of the NBA in 1864, significant
evolution has occurred in commercial banking and in the
financial services industries in general. There have been both
a proliferation of, and a growing homogenization in, products
offered to consumers. For example, there is now relatively
little difference for consumers among the wide range of
money market and various other financial investment
instruments offered by banks, brokerage firms and mutual
funds. National banks must be able to rely on OCC
8
regulations and interpretations in order to respond to the
changing requirements of the increasingly competitive
marketplace for financial products and services.
The decision below, if allowed to stand, would pave the
way for courts to substitute willy-nilly their construction of
the NBA for the reasoned interpretations of the OCC, even
where the regulators’ interpretation is supported by the
statute’s language and legislative history. Such an approach
inevitably would result in piecemeal and inconsistent
application and development of the federal banking laws. It
also would threaten the ability of national banks to meet their
customers’ demand for new financial products and services.
Il. THE GREAT WEIGHT OF AUTHORITY SUPPORTS THE
OCC’s CONCLUSION THAT ANNUITIES’ ARI
FINANCIAL INVESTMENT INSTRUMENTS, NOT
INSURANCE.
There is no sustainable basis for the Fifth Circuit’s
ruling, based on its impermissible de novo review of the
OCC’s decision, that “[a]nnuities are certainly no less a
‘general’ type of insurance than land title insurance or
automobile insurance.” (14a). This erroneous determination
is the basis for the Fifth Circuit’s equally misplaced holdings
(i) that “annuities have nothing to do with the primary
business of banking,” and (ii) that Section 92 bars national
banks from brokering annuities. (13a-14a).
Although insurance companies first developed and
offered annuities, they have long been “recognized as
investments rather than as insurance.” 1 JOHN A. APPLEMAN,
INSURANCE LAW & PRACTICE § 84, at 295 (1981); see
DAVID SHAPIRO & THOMAS F. STREIFF, ANNUITIES 7 (1992)
(annuities “are primarily investment products”). As the New
York Court of Appeals has recognized unequivocally, the
“great weight of authority supports the position that annuities
4 ee ae
9
are not insurance.” NYSALU, 83 N.Y.2d at 363, 632 N.E.2d
at 881, 610 N. Y.S.2d at 475.4
“Annuit[ies] and insurance are opposites.” Helvering v.
Le Gierse, 312 U.S. 531, 541 (1941). Purchasers of
insurance seek to protect against financial loss in the event of
some adverse occurrence: death, disability, catastrophes such
as floods or fires, or various other events causing injury or
property damage. They seek protection (insurance), not
investment income; indeed, if the insured-against loss does
not occur, the insured does not receive any return on his or
her premiums. Compare BLACK’s LAW DICTIONARY 90 (6th
ed. 1990) (annuities) with id. 802 (insurance).
In contrast, purchasers of annuities, as is the case for
purchasers of other bank investment products, seek a long-
term return in the form of payments over time and not
protection against some loss. In making investment decisions,
consumers compare the investment risk and return of
annuities with those of other investments available from
banks and other financial intermediaries. “Any risk that the
prepayment [premium] would earn less than the amount paid
to [the annuitant] as an annuity [is] an investment risk similar
to the risk assumed by a bank; it [is] not an insurance risk.”
Helvering v. Le Gierse, 312 U.S. at 542; see also SEC v.
United Benefit Life Ins. Co., 387 U.S. 202, 207-08 ( 1967)
(“In fixing the necessary premium [for an annuity] mortality
experience is a subordinate factor and the planning problem
* See, e.g., In re Young, 806 F.2d 1303, 1306 (Sth Cir. 1987)
(quoting Jn re Howerton, 21 Bankr. 621, 623 (N.D. Tex. 1982))
(“an annuity is essentially a form of investment”); Prudential Ins.
Co. of Am. v. Howell, 29 N.J. 116, 148 A.2d 145, 148 (1959)
(“The risks assumed under life insurance policies and under
annuity contracts are diametric opposites.”); Daniel v. Life Ins.
Co., 102 S.W.2d 256, 260 (Tex. Civ. App. 1937) (an annuity “is
essentially a form of investment, and uniformly held to be purely
such”).
10
is to decide what interest and expense rates may be expected.
There is some shifting of risk from the policyholder to
insurer, but no pooling of risks among policyholders. In other
words, the insurer is acting in a role similar to that of a
savings institution.”).
The Fifth Circuit’s “finding” that annuities are general
“insurance” conflicts with this authority and cannot be
reconciled with SEC v. Variable Annuity Life Insurance Co.
of America, 359 U.S. 65, 71-73 (1959) (“VALIC I”), where
this Court held that variable annuities are securities that must
be registered with the Securities and Exchange Commission
and are not “insurance” products exempt from such registra-
tion under the McCarran-Ferguson Act, 15 U.S.C. §§ 1011-
1015. As the Court emphasized, annuities do not involve
“true underwriting of risks, the one earmark of insurance as
it has commonly been conceived of in popular understanding
and usage.” VALIC I, 359 U.S. at 73 (footnote omitted).
In interpreting the Employee Retirement Income Security
Act, this Court recently reaffirmed its holding in VALIC I
that a variable annuity “is not an ‘insurance policy’...
because the contract’s entire investment risk remains with the
policyholder.” John Hancock Mut. Life Ins. Co. v. Harris
Trust & Sav. Bank, 114 S. Ct. 517, 527 (1993) (emphasis in
original). VALIC J should similarly guide the Court in
construing the NBA.
The Fifth Circuit broadly proscribed the brokerage by
national banks of both variable and fixed annuities. (See 3a,
13a). Although referring to variable annuities, which
comprise the bulk of annuities currently sold, the reasoning
of VALIC I applies to fixed annuities as well. As the OCC
determined, and the Fifth Circuit did not dispute, “[flixed
annuities differ [from variable annuities] only in that [fixed
annuities] offer a reduced level of risk, combining for the
risk-averse investor the best aspects of both certificates of
deposit and annuities.” (39a-40a).
ee
11
i
In addition, the Fifth Circuit erroneously focused solely
on annuities for which the benefits are paid over the duration
of the annuitant’s life (a life income option). (See 12a, 27a).
Most annuities pay benefits, however, for a specified period
(a term certain option, e.g., five, ten or fifteen years) or in
a lump-sum distribution of the entire cash value of the
annuity. See DAVID SHAPIRO & THOMAS F. STREIFF, supra,
at 2-4 (describing types of annuities).°
The Fifth Circuit also leapt from the observation that
“{ajll fifty states currently regulate annuities under their
insurance laws,” to the erroneous conclusion that the broker-
age of annuities is excluded from the business of banking.
(lla, 13a). The brokerage of an investment is not removed
from the business of banking merely because that investment
is regulated by an agency other than the OCC, or is subject
to laws other than the NBA.® If that were the case, then
banks could not sell securities, which are regulated by the
SEC under the federal securities laws, as well as by state
regulators under state securities laws. In VALIC J, this Court
rejected the notion that annuities must be deemed insurance
for all purposes simply because the states regulate annuities
* According to a study by the Society of Actuaries and Life
Insurance Marketing Association, over the 12-year average life of
an annuity, only 16.8 percent of annuity holders annuitize (i.e.,
elect to receive payments for life); the overwhelming majority
elects some other type of withdrawal such as full or partial
repayment. See Are Annuities Insurance or Investment Products ?,
The Newsletter of the Bank-Insurance Industry, 1993-3, at 2-3
(published by Kenneth Kehrer Assocs., Princeton, N.J.).
* “*Banking’ and ‘insurance’ are not mutually exclusive busi-
nesses; ‘from a functional point of view there is a considerable
overlap between the [two].’” American Ins. Ass'n v. Clarke, 656
F. Supp. 404, 409-10 (D.D.C. 1987), aff'd, 865 F.2d 278 (D.C.
Cir. 1988) (quoting HENRY HARFIELD, BANK CREDIT AND
ACCEPTANCES 184 (Sth ed. 1974)) (brackets in original).
12
as insurance for certain purposes. The Court held that the
“meaning” of “insurance or annuity” under federal statutes
“is a federal question,” and that “how states might have ruled
is not decisive.” 359 U.S. at 69.’
In addition, the Fifth Circuit ignored the OCC’s
reasonable conclusion that annuities resemble securities that
banks are specifically authorized to sell to their customers.
(See 37a-38a). Section 24 (Seventh) expressly provides that
national banks may “purchas[e] and sell[] securities and stock
without recourse, solely upon the order, and for the account
of, customers,” and, as is shown below, banks have
historically sold securities to their customers.
The OCC also reasonably determined that annuities
“functionally” resemble certificates of deposit that banks
routinely offer to their customers. (40a-41a). The similarity
between these two financial investment instruments is such
that “the annuity is now the favorite alternative to the CD,”
DAVID SHAPIRO & THOMAS F. STREIFF, supra, at 8. Aside
from their power to conduct the “business of banking,”
national banks may also sell these investment instruments
because of the express authorization in Section 24 (Seventh)
for such banks to “receiv[e] deposits.”
In sum, the OCC had far more than the reasonable basis
that is necessary under Chevron for its determination that, for
purposes of the federal banking laws, annuities are financial
investment instruments, not general insurance.
’ As is discussed below, however, because the “incidental
powers” clause of Section 24 (Seventh) was taken virtually
verbatim from early bank legislation in New York, interpretations
of the corollary provision of New York law are persuasive—if not
dispositive—here. See, infra, at 16-19.
13
Ill. SECTION 24 (SEVENTH) AUTHORIZES NATIONAL
BANKS TO ENGAGE IN ALL ASPECTS OF THE
“BUSINESS OF BANKING,” INCLUDING THE
BROKERAGE OF ANNUITIES AND OTHER FINANCIAL
INVESTMENT INSTRUMENTS.
Having erroneously determined that annuities are a form
of “general” insurance, the court below compounded its error
under Chevron by disregarding the OCC’s considered
construction of the incidental powers clause of Section 24
(Seventh). Without providing any explication of the meaning
of Section 24 (Seventh) or any delineation of the scope of the
“business of banking,” the court concluded that “conceding
arguendo that the power to sell annuities would be one
incidental to banking, by no stretch of the imagination can
that power be deemed necessary.” (15a). The court
erroneously construed the word “necessary” to require that
an activity be essential—or “intimately related to the bank’s
primary business of lending”—to be permissible under
Section 24 (Seventh). (14a).
Whether an activity is “necessary” to the “business of
banking” under Section 24 (Seventh) does not, as the Fifth
Circuit held, depend upon whether that activity is charac-
terized by some general label, such as “insurance” or
“banking,” or is otherwise essential to “lending.”* Rather,
as the OCC determined (38a (citing OCC Interpretive Letter
No. 494, reprinted in (1989-1990 Transfer Binder] Fed.
Banking L. Rep. (CCH) 4 83,083, at 71,194-71,201 (Dec.
* Lending is, of course, only one aspect of the business of
banking. In any event, labeling is no substitute for analysis in
construing the NBA. See American Ins. Ass'n v. Clarke, 656 F.
Supp. at 408 (“there can be no serious quarrel with the [OCC’s]
assertion that it is entitled to look beyond the label given a certain
activity to determine whether or not it is permissible”).
14
20, 1989) (“Interpretive Letter No. 494”)),° the inquiry must
focus on whether the activity is consistent with the historic
function of banks as financial intermediaries.
A. The Language and Legislative History of the
NBA Support the OCC’s Interpretation of the
“Business of Banking.”
1. By its terms, Section 24 (Seventh) authorizes
national banks to engage in all aspects of the business of
banking. While the statute identifies five specific powers that
are granted to national banks, it also expressly authorizes
those banks to exercise “all such incidental powers as shall
be necessary to carry on the business of banking.”"® It is a
settled rule of construction that “a court should ‘give effect,
if possible, to every clause and word of a statute.’” Moskal
v. United States, 498 U.S. 103, 109-110 (1990); see 2A
SUTHERLAND ON STATUTORY CONSTRUCTION § 46.06, at
° The OCC’s determination that national banks may broker fixed
annuities incorporated the reasoning of its earlier interpretive letter,
which had permitted such banks to “broker a wide variety of
financial investment instruments,” such as agricultural, oil and
metals futures. (See 38a).
© Section 24 (Seventh) provides that national banks may 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 according to the provisions of title 62
of the Revised Statutes. The business of dealing in securities and
stock by the association shall be limited to purchasing and selling
such securities and stock without recourse, solely upon the order,
and for the account of, customers, and in no case for its own
account, and the association shall not underwrite any issue of
securities or stock .. . .” (Emphasis added)
15
119-20 (Sth ed. 1992) (“A statute should be construed so that
effect is given to all of its provisions, so that no part will be
inoperative or superfluous, void or insignificant. . . .”)
(footnotes omitted). In order to give full effect to all of the
language of Section 24 (Seventh), it is necessary to construe
the five enumerated powers as archetypes or examples of
banking powers and not as the exclusive list.
If the Fifth Circuit’s interpretation of Section 24
(Seventh) were correct, Congress would not have included
the term “business of banking” in the NBA, because it would
have been superfluous. Instead, Congress would have
confined Section 24 (Seventh) to the enumerated powers and
incidental powers necessary to carry out those enumerated
powers. By expressly authorizing national banks to carry on
the broadly-phrased “business of banking,” rather than just
the specifically-enumerated powers and activities incidental
to those powers, Congress plainly expressed its intent to
authorize banks to engage in the full panoply of activities that
are necessary for banks to fulfill their function as financial
intermediaries. This authorization includes those activities
that would develop in response to inevitable changes in the
financial world and the public’s demand for banking services.
2. The OCC’s interpretation of the incidental powers
clause as not being confined to the specifically enumerated
powers in Section 24 is consistent with the origins and history
of the NBA, including the contemporaneous construction of
the New York law upon which the NBA was patterned.
The NBA replaced the National Currency Act, which
had been enacted a year earlier in 1863. Congress passed
these measures to induce state-chartered banks to convert to
federal charters in order to promote the development of a
national currency and banking system. See BRAY HAMMOND,
BANKS AND POLITICS IN AMERICA 724-27 (1957). During the
first half of the nineteenth century, bank regulation was
almost exclusively the province of the states. See Edward
16
Symons, The “Business of Banking” in Historical
Perspective, 51 GEO. WASH. L. REV. 676, 688-89 (1983).
Accordingly, Congress looked to state law—and parti-
cularly New York law—in formulating the powers of national
banks. Congress adopted the “incidental powers” clause of
Section 24 (Seventh) nearly verbatim from the New York
Free Banking Act of 1838, see Arnold Tours, Inc. v. Camp,
472 F.2d 427, 431 (1st Cir. 1972), and the legislative history
indicates that Congress sought to confer upon national banks
all of the powers then possessed by New York banks to carry
on the business of banking.'' “When a statute is [copied]
from another, even a foreign, State, it generally is presumed
to be adopted with the construction which it has received.”
James v. Appel, 192 U.S. 129, 135 (1904) (Holmes, J.); see
2B SUTHERLAND ON STATUTORY CONSTRUCTION § 52.02, at
198 (Sth ed. 1992) (“courts of the adopting state usually
adopt the construction placed on the statute in the jurisdiction
in which it originated”).
The incorporation of New York law included the judicial
construction of that law prevailing at the time of the
enactment of the NBA, most especially the decision in Curtis
v. Leavitt, 15 N.Y. 9 (1857), which is considered the seminal
decision on the meaning of the statutory term “business of
'' The Currency Act’s principal draftsman, Representative
Spaulding, explained that “(tJhe bill in all its essential features is
like the free banking law of the State of New York, which has
been in successful operation in that State since 1838,” and that it
is intended “to nationalize the banking system of New York.”
Conc. GLoBE, 37th Cong., 3d Sess. 1114, 1141 (1863). Similarly,
Representative Baker stated: “I would like to see all the States of
the Union adopt the free banking system of the State of New York
in its present completeness and perfection.” /d. at 1142.
17
banking” under New York and federal law.'? This Court,
and lower federal courts, have thus relied on Curtis in
construing the NBA." The OCC similarly relied on Curtis,
which the court below ignored in its decision, in determining
that national banks may broker annuities. (See Interpretive
Letter No. 494 at 71,196).
In Curtis, the New York Court of Appeals held that the
incidental powers clause of the New York Free Banking Act
did not limit the power of banks to the specifically
enumerated powers, but, instead, authorized the inclusion of
other banking activities as they developed over time. See 15
N.Y. at 58 (Comstock, J.) (“Those specifications were
evidently intended not to restrict the appropriate business of
banking, but as a mere legislative definition of that busi-
ness.”). As Judge Brown explained in a concurring opinion:
The implied powers [of a bank] exist by virtue of
the grant [to do the business of banking], and are
not enumerated and defined; because no human
Sagacity can foresee what implied powers may, in
the progress of time, the discovery and perfection
of better methods of business, and the ever-varying
attitude of human relations, be required to give
? See, e.g., Edward Symons, supra, at 694-98; Ralph F. Huck,
What Is the Banking Business?, 21 Bus. Law. 537, 540-42 (1966);
Phillip R. Trimble, The Implied Power of National Banks to Issue
Letters of Credit and Accept Bills, 58 YALE L.J. 713, 718 (1949);
Henry Harfield, The National Bank Act and Foreign Trade
Practices, 61 HARV. L. REV. 782, 798-99 (1948).
° See, e.g., Auten v. United States Nat’l Bank, 174 U.S. 125, 143
(1899); Arnold Tours, Inc. v. Camp, 472 F.2d at 431; Sneeden v.
City of Marion, 64 F.2d 721, 724 (7th Cir. 1933); Kirkonan v.
Farmers’ Sav. Bank, 28 F.2d 857, 861 (8th Cir. 1928).
18
effect to the express powers. They are, therefore, left to
implication.
Id. at 157."
The New York Court of Appeals later reaffirmed the
need to construe the state’s banking law to meet the changing
demands of the business of banking. In Dyer v. Broadway
Central Park, 252 N.Y. 430, 169 N.E. 635 (1930), for
example, the court rejected the argument that all contracts by
banks to purchase securities on behalf of their customers
were ultra vires, stating: “Banks ex necessitate have been
required to extend their functions and perform services
formerly foreign to the banking business. Courts have taken
cognizance of that fact in passing upon cases involving
questions of banking law.” Jd. at 433, 169 N.E. at 636. The
court cautioned that “care should be exercised not to cripple
[banks] and break down their usefulness by a narrow and
unreasonable construction of the statutes which will result in
unwisely limiting their usefulness in the transaction of
business under modern conditions.” Jd. at 434, 169 N.E. at
636.
Relying on Curtis and its progeny, the New York Court
of Appeals recently confirmed that the incidental powers
clause of the New York Banking Law empowers state-
'* Curtis squarely rejected the even more extreme notion, which the
Fifth Circuit adopted (15a), that the inclusion in the incidental
powers clause of the term “necessary” limits banks to the exercise
of only those incidental powers that are essential to the exercise of
specifically enumerated powers: “But necessity is a word of
flexible meaning. There may be an absolute necessity, a great
necessity, and a small necessity; and between these degrees there
may be many others depending on the ever varying exigencies of
human affairs.” Curtis, 15 N.Y. at 64 (Comstock, J.); see also
McCulloch v. Maryland, 17 U.S. (4 Wheaton) 316, 413-15 (1819)
(the term “necessary” “frequently imports no more than that one
thing is convenient, or useful, or essential to another”).
19
chartered banks to adapt their product lines to meet changing
economic conditions and the evolving demands of commercial
banking customers: “the clause must be construed as an
independent, express grant of power, intended to reflect the
ever-changing demands of the banking business.” See
NYSALU, 83 N.Y.2d at 363, 632 N.E.2d at 881, 610
N.Y.S.2d at 475. Based on this conclusion and principles of
judicial deference similar to those articulated in Chevron, the
Court of Appeals held that it was not unreasonable for the
New York Banking Department to have determined that New
York-chartered banks may broker annuities because annuities
are financial investment instruments of the type that banks
have historically been permitted to sell. Jd. at 364, 632
N.E.2d at 882, 610 N.Y.S.2d at 476.
The approach in NYSALU rests on the same principles
that Congress incorporated into the NBA and, thus, is far
more in keeping with Congress’s intent in enacting Section 24
(Seventh) than is the Fifth Circuit’s restrictive interpretation
of the incidental powers clause.
B. This Court’s Decisions Support the OCC’s
Construction of the “Business of Banking.”
This Court has consistently given full effect to the
language of the incidental powers clause of Section 24
(Seventh) and has authorized national banks to exercise
powers that are not limited to those that are essential to the
performance of one of the enumerated powers.’’ For
'S See, e.g., Franklin Nat'l Bank v. New York, 347 U.S. 373, 377
(1954) (“business of banking” includes power to advertise bank
services); Colorado Nat'l Bank v. Bedford, 310 U.S. 41, 48-50
(1940) (conduct safe-deposit business); First Nat'l Bank v. City of
Hartford, 273 U.S. 548, 559-60 (1927) (sell and deal in mortgages
and other evidences of debt); Clement Nat’l Bank v. Vermont, 231
U.S. 120, 140 (1913) (pay taxes on behalf of depositors); Miller v.
(continued...)
20
example, in First National Bank v. National Exchange Bank,
92 U.S. 122 (1875), one of its earliest decisions interpreting
Section 24 (Seventh), this Court rejected the notion that the
“incidental” powers of national banks are limited to those
that are necessary to the performance of the specifically
enumerated powers: “These powers are such as are required
to meet all the legitimate demands of the authorized business,
and to enable a bank to conduct its affairs, within the general
scope of its charter, safely and prudently. This necessarily
implies the right of a bank to incur liabilities in the regular
course of its business, as well as to become the creditor of
others.” Id. at 127 (emphasis added). See also Miller v.
King, 223 U.S. 505, 511 (1912) (collecting judgment on
behalf of depositor is not “so disconnected with the banking
business as to make it in violation of” Section 24 (Seventh));
Logan County Nat’l Bank v. Townsend, 139 U.S. 67, 73
(1891) (national bank possesses “such incidental powers as
are necessary to carry on the business of banking for which
it was established”).
Moreover, this Court’s decisions confirm that the
incidental powers clause authorizes national banks, consistent
with their function as financial intermediaries, to engage in
those activities that have “grown out of the business needs of
the country.” Merchants’ Bank v. State Bank, 77 U.S. (10
Wallace) 604, 648 (1871) (power to certify checks); see also
Colorado National Bank, 310 U.S. 41, 49-50 (1940)
(“national banks do and for many years have carried on a
safe-deposit business,” and “such a generally adopted method
'S(.. continued)
King, 223 U.S. 505, 511 (1912) (collect judgment on behalf of
depositor); Wyman v. Wallace, 201 U.S. 230, 243 (1906) (borrow
money). Although the OCC expressly relied upon these decisions
in permitting national banks to broker financial investment
instruments, see Interpretive Letter No. 494 at 71,196-71,197, the
court below did not mention, much less reconcile, this authority.
21
of safeguarding valuables must be considered a banking
function authorized by Congress”); Clement Nat'l Bank v.
Vermont, 231 U.S. 120, 140 (1913) (paying taxes on behalf
of depositors “promote{s] the convenience of [the bank’s]
business”).
The Court’s most recent decision construing the
incidental powers clause, Franklin National Bank v. New
York, 347 U.S. 373 (1954), makes clear that Congress has
authorized national banks to fulfill their role as financial
intermediaries by meeting the “modern” requirements of the
business of banking. In holding that national banks could
advertise their services, the Court eschewed the static
interpretation of “necessary” adopted by the Fifth Circuit
below, instead requiring only that the activity be “usual and
useful” to modern banking:
Modern competition for business finds advertising
one of the most usual and useful of weapons. We
cannot believe that the incidental powers granted to
national banks should be construed so narrowly as
to preclude the use of advertising in any branch of
their authorized business.
Id. at 377 (emphasis added).
The Fifth Circuit’s construction of the incidental powers
Clause of Section 24 (Seventh) also conflicts with that of the
other courts of appeals. See First Nat’l Bank v. Taylor, 907
F.2d 775, 778 (8th Cir.) (collecting cases holding that “the
‘incidental powers’ of national banks are not limited to
activities that are deemed essential to the exercise of express
powers”), cert. denied, 498 U.S. 972 (1990). The Ninth
Circuit, for example, has emphasized that the NBA “did not
freeze the practices of national banks in their nineteenth
century forms,” and that the incidental powers clause
“permit([s] the use of new ways of conducting the very old
business of banking.” M&M Leasing Corp. v. Seattle First
Nat'l Bank, 563 F.2d 1377, 1382 (9th Cir. 1977), cert.
22
denied, 436 U.S. 956 (1978). The Fifth Circuit below
completely ignored this authority.
This Court should now reaffirm that the incidental
powers clause constitutes, as the OCC determined, an express
grant of authority to national banks—separate and apart from
the five other express powers—to engage in such activities as
are necessary “to meet all the legitimate demands” of the
“business of banking” as that business evolves to serve the
changing needs of our dynamic economy and society. Even
if the Court discerns any ambiguity on this point, and it
should not, Chevron requires that the OCC’s entirely
reasonable construction of the clause to that effect be
sustained.
C. The Brokerage of Financial Investment
Instruments, Including Annuities, Is Part of
the “Business of Banking.”
In authorizing national banks to broker annuities, the
OCC relied on its prior determination that such banks “may
broker a wide variety of financial investment instruments.”
(See 38a). That decision, in turn, was based on (i) the settled
power of banks, as part of the “business of banking,” to
broker “a wide variety of financial, investment, and monetary
instruments and other financial commodities,” and (ii) the
express provisions in Section 24 (Seventh) permitting banks
to broker securities and to extend credit. See Interpretive
Letter No. 494 at 71,199-71,201. The OCC’s determination
properly reflects the historic role of banks as financial
intermediaries and correctly construes Section 24 (Seventh)
to permit banks to offer new financial products, such as
annuities, which their customers demand.
The business of banking is one of financial
intermediation. As this Court has recognized, “[t]he very
object of banking is to aid the operation of the laws of
commerce by serving as a channel for carrying money from
23
place to place,” Auten v. United States Nat’l Bank, 174 U.S.
at 143 (citing Curtis v. Leavitt, 16 N.Y. 9 (1857)), and banks
are “the intermediaries in most financial transactions.”
Philadelphia Nat'l Bank, 374 U.S. at 326; see also Delaware
v. New York, 113 S. Ct. 1550, 1554 (1993) (“in the modern
financial services industry,” banks serve as “financial
intermediaries” in the “clearing{]” of “securities
transactions”); Auten, 174 U.S. at 142 (quoting GILBART ON
BANKING, vol. 1, p. 2) (a banker is “a dealer in capital”);
Block v. Pennsylvania Exch. Bank, 253 N.Y. 227, 230-31,
170 N.E. 900, 901 (1930) (Cardozo, J.) (“The central
function of a commercial bank is to substitute its own credit,
which has general acceptance in the business community, for
the individual's credit, which has only limited acceptability.
. . . Whatever is an appropriate and usual incident to this
substitution or exchange of credits, instead of being foreign
to the functions and activities of banking, is in truth of their
very essence.”).
Banks serve as financial intermediaries both as principals
and as agents. As principals, banks receive deposits from
certain customers and extend credit to other customers. As
agents, banks sell financial investment instruments and
obligations, including loans, deposits, commercial paper,
bonds, stocks and futures, issued by other parties to bank
customers. Not all of these instruments and obligations were
in existence at the time of the enactment of the NBA; many
grew out of the changing requirements of bank customers and
the economy. Annuities are simply another such financial
investment instrument.
The court below completely ignored that banks “long
have arranged the purchase and sale of securities as an
accommodation to their customers.” Securities Indus. Ass’n
v. Board of Governors, 468 U.S. 207, 215 (1984).
“Congress expressly endorsed this traditional banking
service” in enacting the Glass-Steagall Act and, thus,
approved in Section 24 (Seventh) the power of banks to
24
broker securities for their customers “‘to the same exteni as
heretofore.’” Jd. at 215 & n.13 (quoting S. Rep. No. 77, 73d
Cong., Ist Sess. 16 (1933)). The fact that the incidental
powers clause authorized national banks to broker securities
prior to the passage of the Glass-Steagall Act makes clear
that such banks possessed the power to broker other financial
investment instruments as well.
The power of commercial banks to broker securities—
and, by extension, other forms of financial investment
instruments—was so well established that in 1930 then-Chief
Judge Cardozo of the New York Court of Appeals recognized
that “[t]here is no question that the practice of banking as it
has developed in our day” includes the brokerage of
securities, and indeed, that “[t]he practice is so general that
it may be the subject of judicial notice.” Block, 253 N.Y. at
232, 170 N.E. at 901-02. Construing the New York Banking
Law, the court did not confine the “business of banking” to
the specific activities previously performed by commercial
banks. Rather, “the [cJourt acknowledged that the
development and the evolution of business must be
considered.” NYSALU, 83 N.Y.2d at 362, 632 N.E.2d at
880, 610 N.Y.S.2d at 474 (explaining Block).
The New York Court of Appeals recently relied upon
Block, and its focus on the function of banks as financial
intermediaries, in approving the brokerage of annuities by
New York-chartered banks. See NYSALU, 83 N.Y.2d at 362,
632 N.E.2d at 880, 610 N.Y.S.2d at 475 (quoting Block, 253
N.Y. at 232, 170 N.E. at 901) (“the test of a bank’s power
to undertake certain activities ‘is the relation of the act to that
substitution of credits which is of the essence of the banking
function’”). The court stressed that “State-chartered
commercial banks commonly broker other financial
investment instruments, including certificates of deposit and
various types of securities, which closely resemble
annuities.” Jd. at 364, 632 N.E.2d at 882, 610 N.Y.S.2d at
476.
25
Because the brokerage of financial investment instru-
ments has historically been performed by, and is one of the
functions of, national banks, the OCC reasonably determined
that the brokerage of annuities is part of the “business of
banking.”
D. The Brokerage of Annuities by National Banks
Is Supported by Sound Banking Policy.
In construing the scope of the “business of banking”
powers of national banks, this Court has taken into account
the impact of a particular activity on bank Safety and
soundness. See, e.g., Awotin v. Atlas Exch. Nat’! Bank, 295
U.S. 209, 214 (1935) (“purpose and effect of the [NBA] is
to protect their depositors and stockholders and the public
from the hazards of contingent liabilities”); Texas & Pac. Ry.
Vv. Pottorff, 291 U.S. 242 ( 1934) (national bank’s pledge of
its assets to secure deposit “contrary to good banking
practice”); First Nat’l Bank v. Converse, 200 U.S. 425, 439
(1906) (national bank may not “engage in or promote a
purely speculative business or adventure”).
There is no evidence that permitting national banks to
broker annuities would jeopardize their safety and soundness.
Because national banks act Only as agents for the sale of
annuities—and not as the issuer—they incur no principal risk,
no interest rate risk, and no actuarial risk. On the contrary,
barring national banks from the brokerage of annuities would
place national banks at a competitive disadvantage vis-a-vis
New York-chartered banks (and banks chartered by other
States that follow the New York approach) and other
financial intermediaries (including brokerage and insurance
companies with bank affiliates) that possess the power to
broker annuities. The existence of such fundamental
differences in the powers of national and state-chartered
banks is contrary to Congress’s intent in enacting the NBA
and would sharply devalue the charters of national banks by
retarding necessary innovation by those banks.
26
In any event, Chevron required the lower court to defer
to the OCC’s determination that the brokerage of annuities by
national banks (i) is a “logical complement to other financial
services [banks] offer[],” such as investment advice and
discount brokerage services, (ii) “will provide a valuable
additional source of income and will help [such banks]
compete effectively with other providers of financial
services,” and (iii) will “benefit” consumers by “increas[ing
the] range of products made available” to them. (47a-48a).
7 7 -
The foregoing considerations establish that Section 24
(Seventh) authorizes national banks to broker annuities and
dispel any notion that Congress has legislated to the contrary.
Even if these considerations were less definitive, the Fifth
Circuit had no basis to substitute its own views for the
reasonable interpretation of the OCC. Under Chevron, absent
“clear” evidence of congressional intent to bar the brokerage
of annuities, Chevron, 467 U.S. at 842, the Fifth Circuit was
required to defer to the OCC.
IV. SECTION 92 Does Not Limit THE “BUSINESS OF
BANKING” POWERS OF NATIONAL BANKS.
Having erroneously concluded that annuities are a form
of “insurance” (10a), the Fifth Circuit compounded its error
under Chevron by holding that Section 92 bars national banks
in communities of more than 5,000 persons from acting as
sales agents for all “insurance” products, even those that are
incidental to the business of banking. (See 14a-17a). This
conclusion conflicts with Section 92’s language and
legislative history, which, as the OCC determined (42a-43a),
demonstrate that that provision is a supplemental grant of
authority to banks in small towns to engage in insurance-
27
related activities that are not within the business of
banking."
Although ackno ‘edging its obligation under Chevron
(8a-9a), the Fifth Circuit nonetheless rejected the OCC’s
position, reasoning that Section 92 “exhibits Congress’ clear
intent to permit only banks in towns of less than 5,000
inhabitants to sell insurance products.” (9a). The Fifth
Circuit first ignored the explicit statement in Section 92 that
the powers conferred by that section were “/iJn addition to
the powers now vested by law in national banking
associations,” 12 U.S.C. § 92 (emphasis added). This is an
unequivocal statement that Section 92 imposes no limits on
powers granted, by Section 24 (Seventh) or otherwise, to
national banks but only supplements those powers. See
Independent Bankers Ass'n of Am. v. Heimann, 613 F.2d.
1164, 1170 n.18 (D.C. Cir. 1979), cert. denied, 449 U.S.
823 (1980). In addition, Section 92's legislative history
indicates that “Congress was concerned only with providing
small-town banks with an additional profit source, not with
prohibiting city banks from selling insurance.” Independent
© Section 92 provides:
“In addition to the powers now vested by law in national banking
associations organized under the laws of the United States any such
association located and doing business in any place the population
of which does not exceed five thousand inhabitants, . . . may,
under such rules and regulations as may be prescribed by the
[OCC], act as the agent for any fire, life, or other insurance
company authorized by the authorities of the State in which said
bank is located to do business in said State, by soliciting and
selling insurance and collecting premiums on policies issued by
such company; and may receive for services so rendered such fees
between the said association and the insurance company for which
it may act as agent.” (Emphasis added).
28
Ins. Agents of Am., Inc. v. Board of Governors, 736 F.2d
468, 477 n.6 (8th Cir. 1984)."’
The court below then attempted to support its strained
construction of Section 92 by relying on its prior decision in
Saxon v. Georgia Association of Independent Insurance
Agents, 399 F.2d 1010 (Sth Cir. 1968), rendered sixteen
years before this Court’s decision in Chevron. (6a, 16a-17a).
In Saxon, the Fifth Circuit did not defer to the OCC’s
interpretation of Section 92 (as is now required by Chevron),
but instead misapplied the maxim of construction expressio
unius est exclusio alterius to conclude that Section 92
implicitly bars national banks located outside of small towns
from operating a general life and casualty insurance agency.
399 F.2d at 1013-14.
The Fifth Circuit’s continued reliance upon the maxim
of expressio unius was entirely misplaced. (See 15a-16a).
Even if it had been proper to apply this maxim in construing
Section 92, that analysis could have at most demonstrated that
the statute impliedly bars national banks in towns of more
than 5,000 persons from engaging in general insurance
activities if such activities are not incidental to the business
of banking. Section 92 does not address—and, thus, the
maxim cannot be invoked to restrict—the powers granted to
national banks by Section 24 (Seventh) to engage in
insurance-related activities that are incidental to the business
of banking. Cf. Springer v. Government of the Philippine
Islands, 277 U.S. 189, 206 (1928) (maxim of expressio unius
'7 Section 92’s sponsor, Senator Owen, described this provision
as “giving some additional powers to the small banks to act as
agents in insurance matters.” 53 CONG. REC. 11,002 (1916); see
also 53 ConG. REc. 11,001 (1916) (OCC statement that Section 92
was based on consideration of “how the powers of these small
national banks might be enlarged”).
29
“must yield whenever a contrary intention on the part of the
law-maker is apparent”).
Moreover, the OCC’s determination that Section 92
applies only to the activities of national banks acting as
agents for “general” forms of insurance, such as “fire” and
“life” insurance, is supported by the principle ejusdem
generis—a general term in a statutory list “should be
understood in light of the specific terms that surround it.”
Hughey v. United States, 495 U.S. 411, 419 (1990). Under
the Fifth Circuit’s expansive reading of Section 92, the
Statutory terms “fire” and “life” insurance would be mere
surplusage, because all forms of insurance are included in the
phrase “any . . . insurance company.” In contrast, the OCC’s
interpretation gives effect to each word of the statute, by
reading Section 92 as addressing only the general forms of
insurance enumerated in the provision.
Contrary to Chevron, the panel below rejected the
OCC’s determination even though the OCC’s position is
consistent with the decisions of two other courts of appeals.
See Independent Bankers Ass’n v. Heimann, 613 F.2d at
1170 (upholding the OCC’s ruling that national banks outside
of small towns could sell credit life insurance); Independent
Ins. Agents v. Board of Governors, 736 F.2d at 477 n.6
(upholding Federal Reserve’s approval of application to
engage in credit-related property and casualty insurance, and
noting “strong argument” that Saxon was “wrongly
decided”). This conflict demonstrates that the statute does not
clearly evince Congress’s intent to bar banks from brokering
annuities. On the contrary, these decisions confirm, at the
least, that the OCC had a reasonable basis for its
determination that Section 92 should not be read to have that
effect.
30
CONCLUSION
The judgment below should be reversed.
Respectfully submitted,
JOHN L. WARDEN,
125 Broad Street,
New York, New York 10004.
(212) 558-4000
Counsel for The New York
Clearing House Association,
Amicus Curiae
H. RODGIN COHEN
MICHAEL M. WISEMAN
THEODORE EDELMAN
ROBERT J. GIUFFRA, JR.
SULLIVAN & CROMWELL
Of Counsel
NORMAN R. NELSON
General Counsel
THE NEW YORK CLEARING
HOUSE ASSOCIATION
Of Counsel July 29, 1994
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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.