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

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2 NATIONSBANK OF NORTH CAROLINA, N.A., et al.,

a “ Petitioners, %

:

VARIABLE ANNUITY LIFE INSURANCE

COMPANY, et al., —

Vr BO Se oe

Respondent.

¢

EUGENE A. LUDWIG, COMPTROLLER OF THE

CURRENCY, et al., ;

* Petitioners, |

VARIABLE ANNUITY LIFE INSURANCE

COMPANY, et al.,

Respondent.

¢

On Writ Of Certiorari

To The United States Court Of Appeals

For The Fifth Circuit

¢

BRIEF OF NATIONAL ASSOCIATION OF

INSURANCE COMMISSIONERS AS AMICUS CURIAE

IN SUPPORT OF RESPONDENT

¢

Susan E. Martin

Counsel of Record for

Amicus Curiae, In Support

Respondent

Dowiase Witcox

National Association of

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TABLE OF CONTENTS

Page

as da Wid eke seeo% 60650 ons t48 C0884 08 i

Ed eird discerned baisnsesieseancess ii

Se Oe I CD been dcvccccscescsseucésces 1

Summary of the Argument ....................068. 2

MDE SER PETTY Ty Te EY TEC ET OPT EE TTT Tree 3

I. THE FIFTH CIRCUIT CORRECTLY HELD

THAT SECTION 92 OF THE NATIONAL

BANK ACT PROHIBITS NATIONAL BANKS

FROM SELLING INSURANCE IN CITIES

WITH MORE THAN 5,000 RESIDENTS...... 3

Il. ANNUITIES ARE INSURANCE PRODUCTS

WHICH MAY NOT BE SOLD BY NATIONAL

BANKS IN CITIES WITH MORE THAN 5,000

PE, San ORO Os Reece tedseredcesecescess 5

A. ANNUITIES ARE INSURANCE PROD-

UCTS REGULATED BY STATE INSUR-

ANCE DEPARTMENTS PURSUANT TO

STATE INSURANCE LAWS............. 5

B. ANNUITIES POSSESS REQUISITE CHAR-

ACTERISTICS OF INSURANCE PROD-

8 OFT TT CCL CTT TTT CC TERT TTT Tee 13

Il. THE DISTRICT COURT IMPROPERLY

DEFERRED TO THE COMPTROLLER’S DECI-

PEPE OCT TTT TTT TT TTT eT TTT TT TCT LET Tee 14

IV. BANK SALES OF ANNUITIES ARE NOT

INCIDENTAL BANK POWERS NECESSARY

TO CARRY ON THE BUSINESS OF BANKING

Peery Cee eve TT eT Ter TT UOT TTT CT Te TTT Tee 16

V. THE FIFTH CIRCUIT PROPERLY

REFRAINED FROM A GLASS-STEAGALL

ETS SEPP eee TCT eee eT TT eT eT ET 17

EG a RE ER ne aC ae or 18

il

TABLE OF AUTHORITIES

Page

Cases

American Land Title Association v. Clarke, 968 F.2d

150 (2d Cir.), cert. denied, 113 S.Ct. 2959 (1993)..... 4

BPS Guard Services, Inc. v. NLRB, 942 F.2d 519 (8th

oO | 16

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

Council, Inc., 467 U.S. 837, 104 S.Ct. 2778, 81 L.

ie” Ry er 2, 15

Group Life & Health Ins. Co. v. Royal Drug, 440 U.S.

205, 99 S.Ct. 1067, 59 L. Ed. 2d 261 (1979)...... 2, 13

Lechmere, Inc. v. NLRB, 112 S.Ct. 841, 117 L. Ed. 2d

7D CRODED 2... 0c cccnwccscecsenaenu sen uum ene 16

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

York State Banking Dept., No. 38, 83 N.Y. 2d 353,

1994 N.Y. LEXIS 324 (Ct. App. N.Y., March 30,

BODE)... cc ccceccccsucsocccgnusneneeu een 14

Nicklos Drilling Co. v. Cowart, 927 F.2d 828 (5th Cir.

|) er 16

Presley v. Etowah County Commission, 112 S.Ct. 820,

ee ee BR 16

Saxon v. Georgia Association of Independent Insur-

ance Agents, 399 F.2d 1010 (5th Cir., 1968).......... 4

U.S. National Bank of Oregon v. Independent Insur-

ance Agents of America, 113 S.Ct. 2173, 124 L. Ed.

26 GBB CIDDG). 2. oc cccncvsccccscccesccunecnnee seem 3

VALIC v. Clarke, 998 F.2d 1295 (5th Cir., 1993),

rehearing denied, 13 F.3d 833 (5th Cir., 1994)

occccececsesscssseseenoesennenannnen 3, 4, 5, 11, 13, 16

VALIC v. Clarke, 786 F. Supp. 639 (S.D. TX,

Houston Dbv., BORE) ... ccccstccecevdécsanenneueen 3, 15

ill

TABLE OF AUTHORITIES - Continued

Page

STATUTES

Glass-Steagall Act, 12 U.S.C. §§ 347a, 347b, 412

ees ccc acccessccccececcccs 3, 17

McCarran-Ferguson Act, 15 U.S.C. §§ 1011, 1012

EEUU CES cece nencccccccccccesece » » & 8

National Bank Act, 12 U.S.C. § 24 (Seventh) (1994) passim

National Bank Act, 12 U.S.C. § 92 (1994)........ passim

TEX. INS. CODE § 1.01A(b) (NILS 1993)............. 1

TEX. INS. CODE §§ 22.23, 3.33, 3.42, 3.44c, 3.49-2,

I I is cece ccc cscs ccccccccccces 6

Citations Omitted for State Annuity Statutes and

Regulations; See Footnotes 1-7.................. 7-12

OrTHER AUTHORITIES

BLACK’S LAW DICTIONARY 59 (6th ed. 1990) ..... 14

BLACK’S LAW DICTIONARY 403 (6th ed. 1990) ..... 4

NAIC Model Laws, Regulations and Guidelines,

| 10

NAIC Model Laws, Regulations and Guidelines,

ae eee ee ee Oe Oem. (ISPS) ....... 2.22.0... .0000e, 10

NAIC Model Laws, Regulations and Guidelines,

Se 11

NAIC Model Laws, Regulations and Guidelines,

ae oe Oe aoe OF OOM. (IOPE) ... 2.2... cece cece ees 7

iv

TABLE OF AUTHORITIES - Continued

Page

NAIC Model Laws, Regulations and Guidelines,

Vol. II, p. 255 et seq. (1994) ......-- 0s eee e reece 11

NAIC Model Laws, Regulations and Guidelines,

Vol. II, p. 260 et seq. (1994) .....--- 602-0 eee e ees 8

NAIC Model Laws, Regulations and Guidelines,

Vol. IIL, p. 613 et seq. (1994). ....--- 6. cece eee eee: 11

NAIC Model Laws, Regulations and Guidelines,

Vol. IV, p. 805 et seq. (1994)......-- 0. eee e ee eee eee, 9

NAIC Model Laws, Regulations and Guidelines,

Vol. IV, p. 821 et seq. (1994)......-- 6. eee rere ees 11

NAIC Model Laws, Regulations and Guidelines,

Vol. IV, p. 825 et seq. (1994)... ..--- 6. eee eee eee: 11

NationsBank brief, S.Ct. (July 1994).......... 14, 16, 17

OCC brief, S.Ct. (July 1994)............5-- 5, 13, 14, 16

Op. OCC, unpublished (March 21, 1990) ...... 3, 15, 17

INTEREST OF AMICUS CURIAE

The National Association of Insurance Commission-

ers (NAIC) is a non-profit, unincorporated association of

the principal insurance regulatory officials of the 50

states, the District of Columbia, territories and insular

possessions of the United States. The NAIC is interested

in filing this brief in furtherance of its objectives to serve

the public by assisting the several state insurance regula-

tory officials in improving state regulation of the business

of insurance and promoting fair and equitable treatment

of insurance policyholders and claimants.

The Executive Committee of the NAIC, which con-

sists of seventeen insurance commissioners from all

regions of the country, voted to file a brief of Amicus

Curiae in this action, on behalf of the full NAIC member-

ship. The interest of the NAIC in filing this brief is based

on the commissioners’ collective interest in retaining reg-

ulatory authority over the sales of annuities.

The insurance commissioners have been charged by

the McCarran-Ferguson Act, 15 U.S.C. §§ 1011, 1012

(1994), and by their own state statutes. See, e.g., TEX. INS.

CODE § 1.01A(b) (NILS 1993) to regulate the business of

insurance. Accordingly, insurance commissioners have

consistently regulated:

e the life insurance companies that are licensed to sell

annuity products;

e the development and characteristics of annuity prod-

ucts; and

e the agents who sell annuity products.

The insurance commissioners respectfully encourage

this Court to affirm the decision of the Fifth Circuit,

VALIC v. Clarke, 998 F.2d 1295 (5th Cir., 1993), rehearing

denied, 13 F.3d 833 (5th Cir., 1994), so that the sale of

annuities will remain within the regulatory scope of

authority of the individual state insurance departments.

The NAIC believes that this would be in the best interest

of the public insurance consumers whom the regulators

are charged to protect.

SUMMARY OF THE ARGUMENT

The decision of the Fifth Circuit in VALIC, 998 F.2d

1295, should be affirmed because the Fifth Circuit cor-

rectly held that Section 92 of the National Bank Act, 12

U.S.C. § 92 (1994), prohibits national banks from selling

annuities in cities with more than 5,000 residents. The

Section 92 insurance prohibition clearly applies to annu-

ity sales because annuities are insurance products. Evi-

dence that annuities are insurance products is found in

the extensive compilation of insurance laws regulating

annuities as insurance products, as well as the fact that

annuities possess all requisite characteristics of insurance

products. See, Group Life & Health Ins. Co. v. Royal Drug,

440 U.S. 205, 211, 99 S.Ct. 1067, 1073, 59 L. Ed. 2d 261

(1979).

Both the district court and the Fifth Circuit consid-

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

Council, Inc., 467 U.S. 837, 104 S.Ct. 2778, 81 L. Ed. 2d 694

(1984) to determine whether it would be proper to defer

to the decision of the Office of the Comptroller of the

Currency (OCC), Op. OCC, unpublished (March 21,

1990), which allowed national banks to sell annuities in

cities of any size. However, the district court’s Chevron

analysis was faulty. VALIC v. Clarke, 786 F. Supp. 639 (S.D.

TX, Houston Div., 1991). Congress specified in Section 92

that bank sales of insurance should be limited to small

towns. Therefore, the OCC’s decision, and the district

court’s deference to that decision, frustrated Congres-

sional intent by authorizing national bank sales of annu-

ities in cities with more than 5,000 residents.

Although Petitioners argue that annuity sales were

incidental and necessary to the business of banking, Con-

gress has not specified this. See, 12 U.S.C. § 24 (Seventh)

(1994). Additionally, there is no evidence to support such

a claim.

Finally, Petitioner NationsBank argued that the Fifth

Circuit erred by failing to consider the Glass-Steagall Act,

12 U.S.C. §§ 347a, 347b, 412 (1994). That Act, however,

was never at issue in this case, because the OCC never

relied on it. Op. OCC (March 21, 1990).

+

ARGUMENT

I. THE FIFTH CIRCUIT CORRECTLY HELD THAT

SECTION 92 OF THE NATIONAL BANK ACT PRO-

HIBITS NATIONAL BANKS FROM SELLING

INSURANCE IN CITIES WITH MORE THAN 5,000

RESIDENTS

Section 92 of the National Bank Act, 12 U.S.C. § 92

(1994), was enacted in 1916 and its validity was recently

affirmed by this Court in U.S. National Bank of Oregon v.

Independent Insurance Agents of America, 113 S.Ct. 2173,

124 L. Ed. 2d 402 (1993). Section 92 grants national banks

authority to “act as the agent for any fire, life or other

insurance company .. . by soliciting and selling insurance

and collecting premiums on policies issued by” insurance

companies when the banks are “located and doing busi-

ness in any place the population of which does not

exceed five thousand inhabitants.” 12 U.S.C. § 92.

The Fifth Circuit relied on the plain language of

Section 92 to determine that it “explicitly authorizes

national banks in towns with a population smaller than

5,000 to act as insurance agents.” VALIC, 998 F.2d at 1298.

As the Fifth Circuit pointed out, its earlier decision in

Saxon v. Georgia Association of Independent Insurance

Agents, 399 F.2d 1010 (5th Cir., 1968) reached the same

conclusion by applying the canon of statutory construc-

tion expressio unius est exclusio alterius meaning that “the

expression of one thing is the exclusion of another.”

BLACK’S LAW DICTIONARY 403 (6th ed. 1990). Apply-

ing the same canon of statutory construction in this case,

the Fifth Circuit concluded that because Section 92 explic-

itly authorizes national banks to act as insurance agents

in towns of less than 5,000, insurance sales in towns of

more than 5,000 are prohibited. VALIC, 998 F.2d at 1298.

The Fifth Circuit noted that the Second Circuit fol-

lowed this reasoning in American Land Title Association v.

Clarke, 968 F.2d 150 (2d Cir.), cert. denied, 113 S.Ct. 2959

(1993). The Second Circuit reversed a Comptroller’s

directive that allowed national banks to act as title insur-

ance agents in towns of more than 5,000 residents. The

Second Circuit wrote: “had Congress intended to grant

national banks located in towns with a large population

the authority to sell insurance, it would never have lim-

ited the grant of authority in Section 92 to national banks

in locations with under 5,000 residents.” Id. at 155.

The Fifth Circuit’s decision is clearly based on sound

logic, accepted rules of statutory construction, and sup-

porting precedent. In fact, the Fifth Circuit cited several

other cases that relied on the same canon of statutory

construction. VALIC, 998 F.2d at 1298 (citations omitted).

Additionally, legislative history supports the Fifth Cir-

cuit’s holding that national banks may act as insurance

agents only in those towns with less than 5,000 residents.

VALIC, 998 F.2d at 1299.

Il. ANNUITIES ARE INSURANCE PRODUCTS

WHICH MAY NOT BE SOLD BY NATIONAL

BANKS IN CITIES WITH MORE THAN 5,000 RES-

IDENTS

A. ANNUITIES ARE INSURANCE PRODUCTS

REGULATED BY STATE INSURANCE

DEPARTMENTS PURSUANT TO STATE

INSURANCE LAWS

The OCC argued that it b=s “been charged by Con-

gress with the oversight and regulation of national

banks.” OCC brief, S.Ct., p. 13 (July 1994). Subsequent

language implies that this Court, therefore, should be

swayed to defer to the OCC’s letter ruling of March 21,

1990. Id. at 14. This argument ignores, however, well-

established rules of deference (See, § III. herein) as well as

the McCarran-Ferguson Act, 15 U.S.C. §§ 1011, 1012

(1994).

In 1945, Congress enacted the McCarran-Ferguson

Act which dictates that the business of insurance and

every person engaged therein shall be subject to the laws

of the several states which relate to the regulation or

taxation of such business. 15 U.S.C. § 1012. The declared

purpose of this Act indicated that Congress concluded

state regulation of the business of insurance was in the

public interest. 15 U.S.C. § 1011. The McCarran-Ferguson

Act authorized, and in fact required, the states to develop

a complete scheme of statutes and regulations which

would govern the underwriting, sales, claims, licensing,

and other aspects of insurance transactions. See, e.g., TEX.

INS. CODE §§ 22.23, 3.33, 3.42, 3.44c, 3.49-2, 21.27, 3.28

(NILS 1988). Many of the state laws controlling annuities

and the insurance companies that provide them, as well

as the insurance agents who sell them, are based on

NAIC model laws and regulations.

The NAIC has developed, over a period of many

years, a comprehensive scheme of model statutes and

model regulations to govern all lines and aspects of insur-

ance underwriting, sales, solvency, licensing, and opera-

tions. These laws and regulations were carefully

developed through a quasi-legislative process in a public

forum, by insurance regulators and their staffs. These

insurance experts, including attorneys, actuaries, rating

experts, economists, and insurance specialists

thoughtfully crafted the annuities statutes and regula-

tions to provide maximum protection and security for

purchasers of annuity contracts. The NAIC annuities

models include six model regulations, a buyer’s guide for

annuities, annuities mortality tables, reserve valuation

guidelines, and two statutes.

More specifically, the NAIC Model Variable Annuity

Regulation, NAIC Model Laws, Regulations and Guidelines,

Vol. Il, p. 250 et seq. (1994), provides requirements for:

the qualifications of insurance companies to issue vari-

able annuities; separate accounts for companies to issue

variable annuities; separate accounts for reserves for ben-

efits; filing of contracts; variable annuity contracts; non-

forfeiture benefits; required reports; foreign company

protections for policyholders; and qualifications of agents

for the sale of variable annuities. This model has been

adopted in substantial part by twenty-three states.! Four-

teen other states have adopted similar or related legisla-

tion or regulations.?

1 ALASKA ADMIN. CODE tit. 3 §§ 28.010 to 28.190 (1973)

(All variable contracts); ARK. INS. RULE & REG. 6 (1970); CAL.

ADMIN. CODE tit. 10 R. 2525 to 2533.1 (1972); COLO. ADMIN.

INS. REG. 4-1-1 (1994); DEL. INS. REG. 1 (1980) (All variable

contracts); GA. ADMIN. COMP. ch. 120-2-22 (1969); IDAHO

INS. REG. 16 [IDAPA 18.01.16] (1993) (All variable contracts);

IOWA ADMIN. CODE §§ 191-31.1 to 191-31.7 (1988); KAN.

ADMIN. REGS. §§ 40-15-1 to 40-15-8 (1986); 806 KY. ADMIN.

REG. § 15:010 (1984); LA. INS. REG. 28 (1969); MISS. INS. REG.

LA & H 78-2 (1978); MO. ADMIN. CODE tit. 20 § 400-1.020

(1985); N.C. ADMIN. CODE tit. 11 ch. 11(B) § .0302 to .0305

(1988); N.D. ADMIN. CODE §§ 45-04-02-01 to 45-04-02-08

(1986); OKLA. INS. REGS. §§ 365:10-9-10 to 365:10-9-18 (1969);

P.R.R. RULE XLV (1975); S.C. INS. R. 69-12 (Part A) (1988); S.D.

ADMIN. R. 20:06:07:01 to 20:06:07:08 (1986); TENN. ADMIN.

COMP. ch. 0780-1-17 (1978) (All variable contracts); VA. INS.

REG. 3 (Case No. INS18623) (1969); WIS. ADMIN. CODE § INS.

2.13 (1981) (All variable contracts); WYO. INS. REGS. ch. XVI.1

(1968).

2 D.C. R. & REGS. tit. 26 § 1004 (1961); FLA. ADMIN. CODE

§§ 4-10.001 to 4-10.017 (1974); ILL. ADMIN. REG. §§ 1451.10 to

1451.100 (1972) (Parts of model; applies to all variable con-

tracts); IND. ADMIN. tit. 760 R. 7 §§ 1-7-1 to 1-7-8 (1971); ME.

INS. REG. ch. 310 (1984); MD. ADMIN. CODE tit. 9 subtit. 30 ch.

42 §§ .01 to .09 (1988); MICH. ADMIN. CODE R. 500.621 to

Similarly, the Model Variable Contract Law, NAIC Model

Laws, Regulations and Guidelines, Vol. II, p. 260 et seq. (1994),

details the licensing requirements applied to domestic life

insurance companies which sell variable annuities. Section 4

of this model provides that the commissioner of insurance

shall have sole authority to regulate the issuance and sale of

variable contracts, and to issue such reasonable rules and

regulations as may be appropriate to carry out the purposes

and provisions of the Act. Thirty-four states have adopted

this model in substantial part*® and another seventeen states

500.629 (1978); MONT. CODE ANN. §§ 30-10-103 to 30-10-104

(1991); N.J. ADMIN. CODE §§ 11:4-1.1 to 11:4-1.5 (1959) (All

variable contracts); N.M. INS. REGS. §§ 13-1-1 to 13-1-9 (1958);

N.Y. ADMIN. CODE tit. 11 §§ 50.1 to 50.12 (Regulation 47)

(1971); PA. ADMIN. CODE tit. 31 §§ 85.01 to 85.40 (1981) (Parts

of model); TEX. ADMIN. CODE §§ 3.701 to 3.706 (1985); UTAH

INS. R590-133 (1989).

3 ALA. CODE §§ 27-38-1 to 27-38-6 (1986); ALASKA STAT.

§ 21.42.370 (1980); ARK. STAT. ANN. §§ 23-81-401 to 23-81-405

(1975); CAL. INS. CODE § 10506 (1984); COLO. REV. STAT.

§§ 10-7-402 to 10-7-405 (1977); CONN. GEN. STAT. § 38a-432

(1983); DEL. CODE ANN. tit. 18 § 2932; HAW. REV. STAT.

§ 431:10D-118 (1988); IDAHO CODE §§ 41-1936 to 41-1939

(1971); 215 ILL. COMP. STAT. 5/245.21 to 5/245.25 (1977); IOWA

CODE §§ 508A.1 to 508A.5 (1973); KY. REV. STAT. § 304.15-390

(1986); LA. REV. STAT. ANN. § 22:1500 (1976); ME. REV. STAT.

ANN. tit. 24-A § 2537 (1973); MISS. CODE ANN. §§ 83-7-27 to

83-7-49 (1978); MO. REV. STAT. § 376.309 (1983); MONT. CODE

ANN. §§ 33-20-601 to 33-20-606 (1989); NEV. REV. STAT.

§ 688A.390 (1971); N.M. STAT. ANN. § 59A-20-30 (1985); N.C.

GEN. STAT. § 58-7-95 (1979); N.D. CENT. CODE §§ 26.1-33-13 to

26.1-33-17 (1985); OKLA. STAT. tit. 36 § 6061 (1973); OR. REV.

STAT. §§ 733.220 to 733.230 (1973); 40 PA. CONS. STAT. § 506.2

(1974); R.I. GEN. LAWS §§ 27-32-1 to 27-32-9 (1977); $.C. CODE

ANN. §§ 38-67-10 to 38-67-50 (1988); S.D. CODIFIED LAWS

ANN. §§ 58-28-13 to 58-28-31 (1971); TENN. CODE ANN.

or territories have adopted related legislation or regulations.*

The model and the similar laws adopted by the individual

states are intended to apply to domestic life insurance com-

panies involved in the sale of variable annuities.

The Standard Non-Forfeiture Law for Individual

Deferred Annuities, NAIC Model Laws, Regulations and

Guidelines, Vol. IV, p. 805 et seq. (1994), governs such

specifics as non-forfeiture requirements, minimum

values, computation of present value of policies, calcula-

tion of cash surrender values, calculation of paid-up

annuity benefits, maturity date, disclosure of limited

death benefits, inclusion of lapse time considerations,

proration of values, and additional benefits. This model law

has been adopted in substantial part by forty-seven states,‘

§§ 56-3-501 to 56-3-509 (1970); TEX. INS. CODE ANN. art. 3.75

(1985); UTAH CODE ANN. §§ 31A-5-217.5 (1992); VT. STAT.

ANN. tit. 8 §§ 3855 to 3859 (1981); WASH. REV. CODE ANN.

§§ 48.18A.010 to 48.18A.900 (1983); W.VA. CODE §§ 33-13A-1 to

33-13A-5 (1977); WYO. STAT. § 26-16-502 (1983).

4 ARIZ. REV. STAT. ANN. § 20-651 (1982); D.C. CODE

ANN. § 35-639 (1981); FLA. STAT. §§ 627.801 to 627.807 (1982);

GA. CODE ANN. § 33-11-34 (1982); KAN. STAT. ANN. §§ 40-436

to 40-438 (1972); MD. ANN. CODE art. 48A § 362 (1973); MASS.

GEN. LAWS ch. 175 § 132F (1982); MICH. COMP. LAWS

§ 500.925 (1974); MINN. STAT. §§ 61A.13 to 61A.21 (1978); NEB.

REV. STAT. §§ 44-2201 to 44-2221 (1969); N.H. REV. STAT. ANN.

§§ 408:23 to 408:34 (1977); N.J. REV. STAT. §§ 17B:28-1 to

17B:28-15 (1981); N.Y. INS. LAWS § 4240 (1984); OHIO REV.

CODE ANN. § 3911.011 (1969); P.R. LAWS ANN. tit. 26 §§ 1329

to 1335 (1974); VA. CODE §§ 38.2-3113 to 38.2-3113.1 (1992);

WIS. STAT. § 611.25 (1971), § 632.45 (1979).

5 ALA. CODE § 27-15-28.1 (1984); ALASKA STAT.

§ 21.45.305 (1978); ARIZ. REV. STAT. ANN. § 20-1232 (1977);

ARK. STAT. ANN. §§ 23-81-301 to 23-81-312 (1981); CAL. INS.

10

and the Virgin Islands adopted related legislation.®

Additionally, the NAIC has adopted an Interest-

Indexed Annuity Contracts Model Regulation, NAIC Vol.

II, p. 235 et seq. (1994), a Model Annuity and Deposit

Fund Disclosure Regulation, NAIC Vol. II, p. 245 et seq.

CODE §§ 10168 to 10168.10 (1979); COLO. REV. STAT.

§§ 10-7-501 to 10-7-510 (1977); CONN. GEN. STAT. § 38a-440

(1978); DEL. CODE ANN. tit. 18 § 2929A (1980); D.C. CODE

ANN. § 35-508 (1978); GA. CODE ANN. § 33-28-3 (1982); HAW.

REV. STAT. § 431:10D-107 (1988); IDAHO CODE § 41-1927A

(1989); 215 ILL. COMP. STAT. 5/229.4 (1977); IND. CODE

§§ 27-1-12.5-1 to 27-1-12.5-10 (1977); IOWA CODE § 508.38

(1981); KAN. STAT. ANN. § 40-428a (1978); KY. REV. STAT.

§ 304.15-315 (1978); LA. REV. STAT. ANN. § 22:173.1 (1991); ME.

REV. STAT. ANN. tit. 24-A §§ 2541 to 2551 (1979); MD. ANN.

CODE art. 48A § 408B (1980); MASS. GEN. LAWS ch. 175 § 144A

(1979); MICH. COMP. LAWS § 500.4072 (1987); MINN. STAT.

§ 61A.245 (1979); MONT. CODE ANN. §§ 33-20-501 to 33-20-513

(1979); NEB. REV. STAT. §§ 44-407.10 to 44-407.23 (1979); NEV.

REV. STAT. §§ 688A.361 to 688A.369 (1979); N.H. REV. STAT.

ANN. §§ 409-A:1 to 409A:10 (1979); N.J. REV. STAT. § 17B:25-20

(1981); N.M. STAT. ANN. § 59A-20-33 (1985); N.Y. INS. LAW

§ 4223 (1985); N.C. GEN. STAT. § 58-58-60 (1979); N.D. CENT.

CODE §§ 26.1-34-01 to 26.1-34-10 (1985); OHIO REV. CODE

ANN. § 3915.073 (1983); OR. REV. STAT. §§ 743.275 to 743.295

(1977); 40 PA. CONS. STAT. § 510b (1980); R.I. GEN. LAWS

§§ 27-4.4-1 to 27-4.4-12 (1993); S.C. CODE ANN. §§ 38-69-210 to

38-69-320 (1988); S.D. CODIFIED LAWS ANN. §§ 58-15-72 to

58-15-81 (1977); TENN. CODE ANN. §§ 56-36-101 to 56-36-112

(1978); TEX. INS. CODE ANN. art. 3.44b (1977); UTAH CODE

ANN. § 31A-22-409 (1986); VT. STAT. ANN. tit. 8 § 3750 (1981);

VA. CODE § 38.2-3220 to 38.2-3229 (1986); WASH. REV. CODE

ANN. §§ 48.23.410 to 48.23.520 (1987); W.VA. CODE § 31-13-30a

(1977); WIS. STAT. § 632.435 (1979); WYO. STAT. §§ 26-16-401 to

26-16-411 (1983).

6 See also N.Y. ADMIN. CODE tit. 11 §§ 44.0 to 44.12 (Reg.

127) (1986); V.I. CODE ANN. tit. 22 §§ 970 to 975 (1968).

11

(1994), a Two-Tier Annuity Model Regulation, NAIC Vol.

Il, p. 247 et seq. (1994), a Modified Guaranteed Annuity

Regulation, NAIC Vol. II, p. 255 et seq. (1994), Replace-

ment of Life Insurance and Annuities Model Regulation,

NAIC Vol. IIL, p. 613 et seq. (1994), Model Guideline

Concerning the Commissioners Annuity Reserve Valua-

tion Method, NAIC Vol. IV, p. 825 et seq. (1994), and

Model Rule (Regulation) for Recognizing a New Annuity

Mortality Table for use in Determining Reserve Liability

for Annuities. NAIC Vol. IV, p. 821 et seq. (1994).

Collectively, these model laws and regulations and

the actual state laws and regulations based on the NAIC

prototypes, illustrate the comprehensive nature and

detail of insurance laws and regulations governing all

aspects of annuities transactions. Indeed, the Fifth Circuit

noted that all fifty states currently regulate annuities

under their insurance laws. VALIC, 998 F.2d at 1301, cit-

ing, state laws.? The complexity and inclusiveness of

7 ARK. STAT. ANN. §§ 23-64-102(1), (3) (1987); CAL. INS.

CODE § 101 (1977); COLO. REV. STAT. § 10-1-102(7) (1990);

CONN. GEN. STAT. § 38-68t(a) (1990); DEL. CODE ANN. tit. 18

§ 512 (1989); FLA. STAT. ANN. § 624.602(1) (1990); GA. CODE

ANN. § 33-7-4 (1990); HAW. REV. STAT. § 431:1-204 (1985);

IDAHO CODE §§ 41-103, 41-312 (1977); ILL. INS. CODE ch. 73,

art. I, § 4 (1982); IND. CODE §§ 27-1-2-3(s) (1986); IOWA CODE

§ 508.31 (1990); KAN. STAT. ANN. § 40-401 (1990); LA. REV.

STAT. ANN. § 22:6(1) (West 1969); ME. REV. STAT. ANN. tit. 24-

A, § 411 (1990); MD. INS. CODE ANN. Act 48A, §§ 46(1), 65

(1991); MASS. GEN. L. ch. 175, § 47(16) (1987); MICH. COMP.

LAWS Ann. § 500.602 (West 1990); MINN. STAT. ANN. § 61A.01

(1986); MISS. CODE ANN. § 83-7-1 (1972); MO. REV. STAT.

§§ 375.158(2), 376.010 (1968); MONT. CODE ANN. § 33-2-108(2)

(1990); NEB. REV. STAT. § 44-201 (1990); NEV. REV. STAT.

§ 680A.110 (1988); N.H. REV. STAT. ANN. § 408:24 (1983); N.J.

12

these laws and regulations is an indication of the serious-

ness with which state insurance departments regulate

annuities as part of the responsibilities delegated to them

by Congress. These laws were developed specifically for

sales of annuities by life insurance companies, not by

banks. If national bank subsidiaries are permitted to sell

annuities, as allowed by the Comptroller’s decision,

banks may well be circumventing the laws intended to

protect those who purchase annuity contracts from insur-

ance companies.

The plain meaning of the annuities laws and regula-

tions found in the insurance codes of the various states

indicates that annuities are insurance products governed

by insurance laws and regulations which are enforced by

individual insurance departments, pursuant to Congres-

sional delegation of authority. 15 U.S.C. §§ 1011, 1012.

~

REV. STAT. ANN. § 17:17-1(c) (1990); N.M. STAT. ANN.

§ 59A-7-2 (1988); N.Y. Ins. Law § 1113(a)(2) (McKinney 1990);

N.C. GEN. STAT. §§ 58-7-15(2), 58-39-15(15) (1990); N.D. CENT.

CODE §§ 26.1-26-11(1), (18) (1990); OHIO REV. CODE ANN.

§§ 3902.02, 3911.01 (1990); OKLA. STAT. tit. 36 § 702 (1990); OR.

REV. STAT. § 731.170(2) (1990); 40 PA. CONS. STAT. § 382(a)(1)

(1990); R.I. GEN. LAWS § 27-32-1(a) (1989); $.C. CODE ANN.

§§ 38-1-20(7), (19) (1989); S.D. CODIFIED LAWS ANN. § 58-6-20

(1990); TENN. CODE ANN. § 56-2-201(4) (1986); TEX. INS.

CODE ANN. art. 3.01, § 1 (1981); UTAH CODE ANN.

§ 31A-1-301(44)(d) (1991); VT. STAT. ANN. tit. 8, § 3717 (1984);

VA. CODE ANN. § 38.2-602 (1986); WASH. REV. CODE

§ 48.11.020 (1984); W.VA. CODE § 33-1-10(a) (1988); WIS. STAT.

§ 71.42(3), 610.21(4) (1980); WYO. STAT. § 26-1-102(a)(xvi),

(xvii), 26-16-101 (1983).

13

B. ANNUITIES POSSESS REQUISITE CHARAC-

TERISTICS OF INSURANCE PRODUCTS

Furthermore, the NAIC supports the Fifth Circuit's

description of annuities which summarizes the many sim-

ilarities between annuities and life insurance. The Fifth

Circuit properly noted that both life insurance and annu-

ities rely on actuarial calculations of mortality risk and

risk-spreading, thereby satisfying a well-established

requirement that insurance include some transfer and

distribution of risk. VALIC, 998 F.2d at 1301, citing, Group

Life & Health Ins. Co. v. Royal Drug, 440 U.S. 205, 211, 99

S.Ct. 1067, 1073, 59 L.Ed. 2d 261 (1979).

The Fifth Circuit wrote:

Both life insurance and annuities transfer the

economic risk of death from the policyholder to

the insurance company. Life insurance protects

the insured against the economic risk of the

insured’s dying prematurely, while an annuity

contract protects the insured against the possi-

bility of outliving her resources. By issuing

numerous life insurance and annuity contracts,

an insurance company spreads the risk of poli-

cyholders living longer or shorter than pre-

dicted. VALIC, 998 F.2d at 1301.

The OCC suggested that Black’s Law Dictionary sup-

ports its claims that annuities have investment charac-

teristics, not insurance characteristics. OCC brief, S.Ct., p.

26 (July 1994). The OCC failed, however, to observe that

the same dictionary defines an “annuity policy” as “an

insurance policy providing for monthly or periodic pay-

ments to insured to begin at fixed date and continue

l4

through insured’s life.” BLACK’S LAW DICTIONARY 59

(6th ed. 1990) (emphasis added).

Additionally, Petitioners argued that a recent New

York case found annuities to be investment products.

OCC brief, S.Ct., pp. 34-35 (July 1994); NationsBank brief,

S.Ct., pp. 5-6 (July 1994), citing, New York State Ass‘n. of

Life Underwriters v. New York State Banking Dept., No. 38,

83 N.Y. 2d 353, 1994 N.Y. LEXIS 324 (Ct. App. N.Y., March

30, 1994). In that case the Court upheld a decision by the

state banking department that authorized state-chartered

commercial banks to purchase and sell annuities, either

directly or through a subsidiary. The New York case,

however, is inapplicable in the case at bar, because the

New York case is based on New York banking law which

applies to New York banks, not the National Bank Act

which governs activities of national banks. Id. at 1994

N.Y. LEXIS 324 *17.

Furthermore, NationsBank argued that the New York

case will give New York bank competitors an advantage

over national banks. NationsBanks brief, S.Ct., p. 6 (July

1994). A competitive marketplace is clearly a benefit to

consumers, however, and certainly not a legal cause for

reversing the Fifth Circuit’s opinion.

Ill. THE DISTRICT COURT IMPROPERLY

DEFERRED TO THE COMPTROLLER’S DECI-

SION

The Comptroller’s challenged letter permitted

NationsBank Securities, a subsidiary of NationsBank

National Bank of North Carolina, to sell annuities. Op.

15

OCC, unpublished (March 21, 1990). Briefly, the Comp-

troller classified annuities as “primarily financial invest-

ments,” Op. OCC (March 21, 1990) at 3, which national

banks are authorized to sell under Section 24 (Seventh)

and Section 92 of the National Bank Act. Id. at 3, 6, 7, 8.

The District Court affirmed the Comptroller’s letter, hold-

ing that “the Comptroller did not incorrectly interpret the

controlling statutory provisions. His reasonable inter-

pretation was no more than a ‘permissible construction,’

all that is required in order to secure this Court’s defer-

ence.” VALIC v. Clarke, 786 F. Supp. 639 at 642 (S.D. TX,

Houston Div., 1991).

To determine whether deference should be given to

the Comptroller’s decision, both the District Court and

the Fifth Circuit considered Chevron U.S.A., Inc. v. Natural

Resources Defense Council, Inc., 467 U.S. 837, 104 S.Ct.

2778, 81 L.Ed. 2d 694 (1984). The Chevron decision estab-

lished the two issues that a Court must consider when

reviewing a statutory interpretation made by an adminis-

trative agency:

(1) “Whether Congress has directly spoken to the pre-

cise question at issue;” and if not,

(2) “Whether the agency’s answer is based on a permiss-

ible construction of the statute.” Id. at 842-43, 104 S.Ct. at

2781.

The plain language of Section 92 clearly limits insurance

sales by national banks to towns with less than 5,000

inhabitants. See, § I. herein. Since this plain language

evidences Congressional intent, the District Court erred

in deferring to the OCC’s contrary ruling. It is well-

established that courts are obligated not to defer to an

16

administrative agency's interpretation of a statute if the

interpretation frustrates the intent of Congress. VALIC v.

Clarke, 998 F.2d at 1299, citing, Presley v. Etowah County

Commission, 112 S.Ct. 820, 117 L. Ed. 2d 51 (1992); Nicklos

Drilling Co. v. Cowart, 927 F.2d 828, 831-32 (5th Cir. 1991);

Lechmere, Inc. v. NLRB, 112 S.Ct. 841, 847-848, 117 L. Ed.

2d 79 (1992); BPS Guard Services Inc. v. NLRB, 942 F.2d

519, 523 (8th Cir. 1991).

The Fifth Circuit Wrote:

The district court erred in reaching the second

step of the Chevron analysis because our inter-

pretation of § 92 in Saxon was based on the plain

language of the statute which exhibits Congress’

clear intent to permit only banks in towns with

less than 5,000 inhabitants to sell insurance

products. VALIC, 998 F.2d at 1299.

IV. BANK SALES OF ANNUITIES ARE NOT INCI-

DENTAL BANK POWERS NECESSARY TO

CARRY ON THE BUSINESS OF BANKING

Both the Federal Petitioners, OCC brief, S.Ct., pp.

39-44 (July 1994), and the Banking Petitioners, Nations-

Bank brief, S.Ct., pp. 19 et seq. (July 1994), have argued

that Section 24 (Seventh) of the National Bank Act autho-

rizes bank sales of annuities. Section 24 (Seventh) grants

national banks “all such incidental powers as shall be

necessary to carry on the business of banking.” National

Bank Act, 12 U.S.C. § 24 (Seventh) (1994). The statute

specifically lists the “necessary powers” that Congress

envisioned: “discounting and negotiating promissory

notes, drafts, bills of exchange, and other evidences of

debt; . . . receiving deposits; . . . buying and selling

17

exchange, coin, and bullion; . . . loaning money on per-

sonal security; . . . obtaining, issuing, and circulating

notes....” Id.

Selling annuities was not an incidental power speci-

fied by Congress in Section 24 (Seventh). Even if one was

swayed by arguments that the sale of annuities is func-

tionally equivalent to other authorized activities, the sale

of annuities certainly could not be found to be necessary

to the business of banking. Traditional banking services

will not be impaired because a bank is not permitted to

sell annuities. The Fifth Circuit wrote that, “even conced-

ing arguendo that the power to sell annuities would be

incidental to banking, by no stretch of the imagination

can that power be deemed ‘necessary.’ ” VALIC, 998 F.2d

1295 at 1302.

V. THE FIFTH CIRCUIT PROPERLY REFRAINED

FROM A GLASS-STEAGALL ANALYSIS

NationsBank argued that the Fifth Circuit erred “in

not reaching the Glass-Steagall Act issue given its dispo-

sition of the other issues in the case.” NationsBank brief,

S.Ct., p. 32 (July 1994). The Glass-Steagall Act, 12 U.S.C.

§§ 347a, 347b, 412 (1994), however, was never at issue in

this case. The OCC letter that was the basis for this

litigation never relied on the Glass-Steagall Act as author-

ity. Op. OCC (March 21, 1990). In fact, the OCC letter

stated: “ .. . since we find that brokerage of fixed annu-

ities is a permissible activity for national banks regardless

of whether fixed annuities are Glass-Steagall securities, it

is unnecessary at this time to determine the status of the

contracts under the Glass-Steagall Act.” Id. at 3.

+

18

CONCLUSION

Congressional intent, as evidenced by the plain lan-

guage of Section 92 of the National Bank Act, 12 U.S.C.

§ 92, clearly dictates that national banks shall not sell

insurance in cities with more than 5,000 residents. Peti-

tioners argued that annuities are not within the scope of

the Section 92 limitation. However, annuities are insur-

ance products, sold by life insurance companies, regu-

lated by state insurance commissioners, and possessing

requisite insurance characteristics. Therefore, the Fifth

Circuit properly held that national banks are not autho-

rized to sell annuities in towns with more than 5,000

residents. Petitioners’ argument that the Fifth Circuit

erred because the sale of annuities is incidental and nec-

essary to banking is unpersuasive. For these and all other

reasons detailed in this brief, the National Association of

Insurance Commissioners respectfully urges the Court to

affirm the decision of the Fifth Circuit.

Respectfully submitted,

Susan E. Martin

Counsel of Record for

Amicus Curiae, In Support

of Respondent

E.tten Dottase WiLcox

National Association of

Insurance Commissioners

120 W. 12th Street

Suite 1100

Kansas City, Missouri 64105

(816) 842-3600