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

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ok Nos. 93-1612, 93-1613 | OFFICE OF T

IN THE

Supreme Court of the United States

OCTOBER TERM, 1994

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

Vv. Petitioners,

Vanable Annuity Life Insurance Company,

Respondent.

Eugene Ludwig, Comptroller of the Currency, et ai.,

Vv. Petitioners,

Variable Annuity Life Insurance Company,

Respondent.

On Writs Of Certiorari

To The United States Court Of Appeals

For The Fifth Circuit

BRIEF OF AMICI CURIAE TOM GALLAGHER,

TREASURER AND INSURANCE COMMISSIONER OF

THE STATE OF FLORIDA, ET AL.,*

IN SUPPORT OF RESPONDENT

DAVID J. BUSCH

Counsel of Record

FLORIDA DEPARTMENT OF

INSURANCE

Office of Legal Affairs

645A Larson Building

200 E. Gaines Street

Tallahassee, FL 32399-0307

(904) 922-3110 (ext. 4146)

September 8, 1994

* Complete list of sponsoring states and counsel appears on inside cover.

TABLE OF CONTENTS

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

INTEREST OF THEAMICI CURIAE ........

SUMMARY OF ARGUMENT ........... 5

8, ge ee Ee

I. BECAUSE INSURANCE LAW AND

PRACTICE TREAT ANNUITIES AS

INSURANCE, SO DO THE STATUTES

oy Beas See oe 6

A. State Insurance Law And Practice

Customarily Have Treated Annuities As

eri eM eer ee 7

B. In 1863 And 1916, Annuities Were

Considered Insurance .......... i)

C. Current State Insurance Law Regulating

ee te 12

ee ia a wk oe Sg 13

0 14

EES 15

Il. THE COMPTROLLER SEEKS TO OVER-

RIDE STATE REGULATORY POLICIES,

WHICH WOULD INJURE CONSUMERS 16

A. The Comptroller Seeks The Total

Destruction Of State Regulation .... 17

B. Bank Abuses In Selling Non-Bank

eS a! iw wets Bo 0 « « 19

aaa arr ae ee ae 22

EE L's oC a 6 c's 4 6 oO 6 ee we 8 Al

TABLE OF AUTHORITIES

CASES PAGES

Alessi v. Raybestos - Manhattan, Inc., 451 U.S.

FOS CUBES) «0 6s pe ee ee ee 16

Barnett Banks, N.A. v. Gallagher, 839 F. Supp.

835 (M.D. Fla. 1993), appeal pending

No. SS-S5US CLERNGIED 6 ei bce ce ee es 17,18

Board of Trustees of the Md. Teachers & State

Employees Supplemental Retirement Plans

v. Life and Health Ins. Guaranty Corp.,

50S EE, Te eek ae ck ws es 15

Department of Insurance and Treasurer v. James

Mitchell and Company, et al.,

No. 93-2442 (Fla. Div. of Admin.

Hearings, Aug. 30,1994) ............ 20

Fort Halifax Packing Co. v. Coyne,

Gea We BGREED bbw bn si ees eee 16

Glastonbury Co. v. Gillies, 209 Conn. 175 (1988) .. —‘:17,18

Glendale Fed. Sav. & Loan Ass’n v. State

Dep't of Ins., 587 So. 2d 534 (Fla. Dist.

Ct. App. 1991), review denied, 599 So.

26 FSGS Ge, Go 5 a a a ee 18

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

440 UB. FPG 6 ahi hae be 9,10

Massachusetts v. Morash, 490 U.S. 107 (1989) .. . 5, 16

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

York State Banking Dep’t, 632 N.E.2d 876

OLY. SO: i ick cee ee a ee 10, 11 -

Owensboro Nat’l Bank v. Moore, 803 F.

Supp. 36 GRD. Tp Boee kon ew clecle ces 17

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

Production Credit Ass'n of Fla. v. State Dep't of

Ins., 356 So. 2d 31 (Fla. Dist. Ct. App. 1978) . 17

Prudential Ins. Co. v. Benjamin, 328 U.S. 408 (1946) 9

SEC v. National Sec. Inc., 393 U.S. 453 (1969) .. . 9

SEC v. United Benefit Life Ins. Co.,

cg tt te te 9

SEC v. Variable Annuity Life Insurance Co.,

es ow wt te et 9

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

EES 8

United States Dep’t of Treasury v. Fabe,

Rn gg wc ee te et ee 8

United States v. South-Eastern Underwriters Ass'n,

ET ss 5 5 5 oe po oe 8,9

CONSTITUTIONAL PROVISIONS, STATUTES

& RULES

EEE passim

EES Se passim

McCarran-Ferguson Act, 59 Stat. 33-34, 15 U.S.C.

I ee tt tt we 2,8

ES 2

BE eee 11

Conn. Gen. Stat. § 38a-769 (1993) .......... 4

Conn. Gen. Stat. § 38a-775 (1993) .......... 3,4

Conn. Gen. Stat. § 38a-800 (1993) .......... 4

1851 Fla. Laws ch. 313,§ 1(3)........-...-. 2, 10

Fla. Stat. Ann. § 624.03 (1993). ........... 13

Fla. Stat. Ann. § 624.33 (1993). ........... 13

eee ee a ee

=] ee SS eS ae ee oe”)hlCmh lhl ee

Fla. Stat. Ann. § 624.401 (1) (1993) .........

Fla. Stat. Ann. § 624.406 (1) (1993) .........

Fla. Stat. Ann. § 624.428 (1) (1993) .........

Fla. Stat. Ann. § 624.509 (1) (1993) .........

Fla. Stat. Ann. § 624.602 (1993)

Fla. Stat. Ann. § 624.988 (1993)

a = a a eS a ae

fs ee ee ea ae a ee ee

Fla. Stat. Ann. § 625.012 (3) (1993) .........

Fla. Stat. Ann. § 625.012 (4) (1993) .........

Fla. Stat. Ann. § 625.012-.83 (1993) ..........

Fla. Stat. Ann. § 625.041(2) (1993) .........

Fla. Stat. Ann. § 625.121 (1993)

Fla. Stat. Ann. § 625.121(2) (1993) .........

Fla. Stat. Ann. § 625.121(5) (1993) .........

Fla. Stat. Ann. § 625.121(7) (1993) .........

Fla. Stat. Ann. § 625.121(9) (1993) .........

Fla. Stat. Ann. § 625.121(12) (1993).........

Fla. Stat. Ann. § 626.051 (1993)

Fla. Stat. Ann. § 626.241(3) (1993) .........

Fla. Stat. Ann. § 626.776 (1993)

Fla. Stat. Ann. § 626.780 (1993)

Fla. Stat. Ann. § 626.781 (1993)

Fla. Stat. Ann. § 626.797 (1993)

oe ae a. © ae 2 ee) ae oni ee

. Fla. Stat. Ann. § 626.951(2) (1993) .........

Fla. Stat. Ann. § 627.401 (1993)

Fla. Stat. Ann. § 627.410 (1993)

Fla. Stat. Ann. § 627.411 (1993)

Fla. Stat. Ann. § 627.451 (1993)

Fla. Stat. Ann. § 627.464(1993) ........... 13

Fla. Stat. Ann. § 627.471 (1993) ........... 13

Fla. Stat. Ann. § 627.481 (1993) ...........

Fla. Stat. Ann. § 627.919(1993) ........... 3

Fla. Stat. Ann. § 631.001 (1993) ........... 3

Fla. Stat. Ann. § 631.712(1993) ........... 13

Fla. Stat. Ann. § 631.715(1) (1993) ......... 14

Fla. Stat. Ann. § 631.715(2)(a)(3) (1993) ...... 14

Se Be SS, 3

jf RF’ 6) eee 10

Md. Ann. Code art. 48A, § 65 (1994 Repl. Vol.) . . 4,15

Md. Ann. Code art. 48A, § 75 (1994 Repl. Vol.) .. 15

Md. Ann. Code art. 48A, § 83 (1994 Repl. Vol.) . . 15

Md. Ann. Code art. 48A, § 165 (1994 Repl. Vol.) . . 15

Md. Ann. Code art. 48A, § 167 (1994 Repl. Vol.) . . 15

Md. Ann. Code art. 48A, § 520 (1994 Repl. Vol.) . . 15

Md. Ann. Code art. 48A, § 632 (1994 Repl. Vol.) . . 15

ee ea a 10

Ch. 2, Title 33, Mont.Code Ann. .......... 15

Ch. 10, Title 33, § 103(19), Mont. Code Ann. ... 15

Ch. 15, Title 33, Mont.Code Ann. ......... 15

Ch. 16, Title 33, Mont.Code Ann. ......... 15

Ch. 17, Title 33, Mont.Code Ann. ......... 15

EEE ee ee 11

ES 8) 10

N.D. Cent. Code § 26.1-01-03 ............ 4

N.D. Cent. Code § 54-12-01 ...........-.-. 4

1909 Okla. Sess. Laws ch.21,§3 .......... 11

Sa Ge Ga ee es os eb ela. 4

BOS Sree, ee, Bee a sk hi old eleid 10

MISCELLANEOUS

AARP, Bank Investment Products Survey

Se ee. 20

Buist M. Anderson, Anderson on Life Insurance

Sa ae are 8

Joseph K. Angell, Treatise on the Law of Fire

and Life Insurance (Boston, Little,

Brown & Co. 1854)............... 10

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

Life Insurance (12thed. 1994) ......... 7,8

Stephen Brobeck, Credit Life Insurance: The

Nation's Worst Insurance Rip-Off (June 4,

1990) (Consumer Federation of America

Gb ote elaine & wo 6s 6 3 0s 2, 3, 19

Conn. Jt. Standing Comm. Hearings, Ins. and Real

Se, POU 6d Pl lee cid ove 18

Florida Dept. of Ins., 1993 Annual Report, 310

SORE oli ct-ace. 8 SRL BD Kaki 6+ 0 3

Solomon Huebner, Life Insurance (3d ed. 1935). . . 1]

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

Fire Assurance; Annuities and Reversionary

Sums; and Leases for Terms and For Lives

(London, Doughty & Co. 1868). ........ 10, 12

1 Joseph A. Joyce, A Treatise on the Law of Insur- ,

ance of Every Kind (2d ed.1917)........ 7,8

William A. Kerr, The Law of Insurance (1902) .. . 11

— Tene Feo ee

vii

Robert I. Mehr et al., Principles of Insurance

ir? +. ss be 5 6 «0 << 7

NationsBank Accused of Deceptive Tactics, Wash.

I, os lS Se a se we oo 21

NationsBank Under Fire for Alleged Staff

Bonuses on Brokerage Referrals, American

EE ee eee 21

OCC Interpretive Letter No. 623 reprinted in

[1993 Transfer Binder] Fed. Banking L. Rep.

(CCH) { 83,505 (May 10,1993) ........ 17

William R. Vance, Handbook on the Law of

Insurance (3d ed. 1951)............. 7

Lester W. Zartman, Life Insurance (1914) ...... 11

Nos. 93-1612, 93-1613

IN THE

Supreme Court Of Che United States

October Term, 1994

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

Vv. Petitioners,

Variable Annuity Life Insurance Company,

Respondent.

Eugene Ludwig, Comptroller of the Currency, et al.,

v. Petitioners,

Variable Annuity Life Insurance Company,

Respondent.

On Writs Of Certiorari

To The United States Court Of Appeals

For The Fifth Circuit

BRIEF OF AMICI CURIAE TOM GALLAGHER,

TREASURER AND INSURANCE COMMISSIONER OF

THE STATE OF FLORIDA, ET AL,

IN SUPPORT OF RESPONDENT

The Commissioner of Insurance of the State of Florida

(Tom Gallagher), the Attorney General (Richard Blumenthal)

and the Acting Insurance Commissioner of the State of Con-

necticut (William J. Gilligan), the Insurance Commissioner of

the State of Maryland (Dwight K. Bartlett, III), the Montana

State Auditor and Commissioner of Insurance and Securities

(Mark O’Keefe), the Attorney General of the State of North

Dakota (Heidi Heitkamp), and the Attomey General of the State

of Rhode Island (Jeffrey B. Pine) hereby respectfully submit this

brief as amici curiae in support of the Respondent in accordance

with Supreme Court Rule 37.3. All parties have consented to

this filing, and their written consents are filed with this brief.

INTEREST OF THE AMICI CURIAE

All of the amici curiae are state governmental officers or

agencies engaged in the regulation of insurance underwriting

and sales practices, or are the chief legal officers of their states.

The regulation of insurance has been confided to the states

throughout this nation’s history, as currently codified in the

McCarran-Ferguson Act, 59 Stat. 33-34, 15 U.S.C. §§ 1011, 1012.

The principal responsibilities of state insurance regulators

are to ensure fair treatment of consumers and the solvency of

insurers. To that end, we control the representations that insur-

ance agents may make in the sales process, the contract terms

that may be offered, and the sales tactics that may be utilized.

We also regulate the reserves that insurance underwriters hold,

and their actuarial practices, to protect their solvency and ability

to meet their obligations to policyholders.

By allowing national banks to sell annuities, which are

insurance under the laws of each of our states, the Comptroller’s

decision ignores the historic role of state insurance reguiation

and will harm consumers.’ By way of comparison, the entry of

banks into the credit life insurance business caused dramatic

increases in the price of that product and in the use of coercive

Sales tactics, along with a degradation of underwriting standards

that can undermine the solvency of insurers. One consumer

group has called credit life insurance “The Nation’s Worst

Insurance Rip-Off,” due largely to abusive bank practices. See

Stephen Brobeck, Credit Life Insurance: The Nation’s Worst

' For example, it has been Florida’s view that annuities are insurance for

more than 140 years. An 1851 Florida statute provides that insurance com-

panies shall have the power to write insurance, plus the power “to grant,

purchase or dispose of annuities.” 1851 Fla. Laws ch. 313, § 1(3).

Insurance Rip-Off (June 4, 1990) (Consumer Federation of

America Report).

Because of these abuses and the potential for further abuses

by banks involved in insurance matters, several state legislatures

have adopted “anti-affiliation” laws, which bar financial insti-

tutions from certain insurance activities. E.g., Fla. Stat. Ann. §

624.988 (1993); Conn. Gen. Stat. § 38a-775 (1993). The Comp-

troller’s approval of national bank entry into the annuities

business works to defeat that state policy and causes the same

harms we have experienced in the market for credit life insurance.

The Florida Department of Insurance has comprehensive

powers to protect this State’s policyholders, including: (i) the

licensing of insurance agents and insurers, id. at §§ 626.051,

626.776-.797, (ii) the regulation of the financial condition of

insurers to ensure adequate assets, id. at §§ 625.012-.83, and (iii)

control of actuarial practices, rates, and contract terms, id. at

§§ 625.121, 627.451-.481, 627.401-.919. In 1992, the Depart-

ment issued over 41,000 licenses to agents and undertook

roughly 2,500 enforcement actions against agents, resulting in

more than 300 adverse license actions or fines. The Department

regulates more than 800 life and health insurers, and in 1992

opened 163 investigations into those companies while conduct-

ing examinations of all domestic insurers.

The Florida Insurance Department also manages the Flor-

ida Life and Health Insurance Guaranty Association, which

stands behind all life insurance and annuity contracts written in

the state up to $100,000 of cash benefits. Jd. at §§ 631.001-

.735. Insurer insolvency has been a significant problem in the

industry in recent years. Three Florida life insurers were dis-

solved in 1992, the most recent year for which statistics are

available. These companies had more than $600 million of

insurance in place. Florida Dept of Ins., 1993 Annual Report,

at 16-17, 310 et seq. (1993).

2 Other insurers were driven into mergers because of their shaky financial

aon

Richard Blumenthal is the Attorney General of the State of

Connecticut. William J. Gilligan is the Acting Insurance Com-

missioner of the State of Connecticut, and is charged with

administering and enforcing the insurance laws of the State of

Connecticut, including the licensing of insurers and insurance

agents, Conn. Gen. Stat. §§ 38a-769 to 38a-800 (1993), and the

regulation of the financial condition and insurance practices of

insurers, id. at § 38a-775.

Dwight K. Bartlett III is the Insurance Commissioner of

the State of Maryland, and is charged with administering and

enforcing the insurance laws of the State of Maryland. In that

Capacity he is represented by the Attorney General of Maryland.

Md. Ann. Code art. 48A, § 65 (1994).

Mark O’ Keefe is the State Auditor and Commissioner of

Insurance and Securities for the State of Montana, and has

comprehensive powers to license and regulate insurers and

agents in that state.

The Insurance Commissioner of the State of North Dakota

is responsible to see that all of the laws respecting insurance

companies are executed faithfully and must report in detail to

the Attorney General of the State of North Dakota any violation

of law relative to insurance companies and their officers or

agents. N.D. Cent. Code § 26.1-01-03. Heidi Heitkamp is the

Attorney General of the State of North Dakota. In her capacity

as Attorney General, she is charged with instituting and prose-

cuting all actions and proceedings in favor or for the use of the

State which may be necessary in the execution of the duties of

a state officer, such as the Insurance Commissioner. N.D. Cent.

Code § 54-12-01.

Jeffrey B. Pine is Attorney General of the State of Rhode

Island, which regulates the insurance business through the

Rhode Island Department of Business Regulation, which also

regulates banking activities. Rhode Island law bars financial

institutions from selling insurance. R.I Gen. Laws § 27-3-47.

SUMMARY OF ARGUMENT

By rejecting the unwarranted expansion of national bank

powers sought by the Comptroller of the Currency (“Comp-

troller’), the court of appeals preserved critical state powers to

regulate insurance and protect consumers. Those state powers

date from the early years of this nation, and were expressly

endorsed by Congress in the McCarran-Ferguson Act. The two

statutes at issue, 12 U.S.C. § 92 (“Section 92”) and 12 U.S.C. §

24 (Seventh) (“Section 24(7)’), should not be interpreted in

derogation of state powers.

Because insurance regulation has been reserved specifi-

cally to the states by tradition and statute, petitioners commit a

serious error when they ignore state law concerning annuities

and insurance. At the time of enactment of Section 92 (in 1916)

and Section 24(7) (in 1863), only the states had any role in

insurance regulation. Accordingly, any construction of those

statutes must consider the law of insurance — which was

exclusively state law — in 1863, in 1916, and today. State law

uniformly has deemed annuities to be insurance.

Moreover, the court of appeals’ decision best preserves

state insurance law, and federal statutes should be construed,

when possible, to preserve state law. Massachusetts v. Morash,

490 U.S. 107, 119 (1989). Indeed, the Comptroller consistently

has taken the view that federal law preempts all state regulation

of national bank activities. If his views were to prevail in this

case and on that preemption question, state regulators would

lose their ability to regulate annuity activities by national banks.

That outcome would leave consumers highly vulnerable to

serious abuses that have accompanied bank entry into the sale

of other non-bank products.

ARGUMENT

I. BECAUSE INSURANCE LAW AND PRACTICE

TREAT ANNUITIES AS INSURANCE, SO DO

THE STATUTES IN THIS CASE

Insurance law and practice are particularly important to the

Comptroller’s interpretation of the two statutory passages at the

center of this case.

First, Section 92 reflects the Comptroller’s view in 1916

that national banks had no power to sell the products of “fire,

life, or other insurance compan{ies]” by “soliciting and selling

insurance.” To determine whether annuities fall within that

Statutory language, this Court should ask whether annuities were

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

company” involving the sale of “insurance.”

Second, Section 24(7) gave national banks the following

affirmative powers:

[AJll such incidental powers as shall be necessary to

carry on the business of banking; by discounting and

negotiating promissory notes, drafts, bills of ex-

change, 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. . . .

To determine whether the sale of annuities fits within any

of these powers, this Court should ask whether Congress in

1863, or at any point since, had any basis for believing that the

sale of annuities was covered by the powers enumerated in the

1863 legislation.

This Court must examine the historical evidence because,

contrary to petitioners’ suggestion, annuities are an ancient

product of insurance companies, not some “cutting-edge” finan-

cial innovation of the 1990s that statutes should be stretched to

reach. Annuities were familiar to legislators in 1863 and in

1916. Indeed, the annuities NationsBank wishes to sell have a

classic fixed-payout option that would have been very familiar

to those legislators. NationsBank Pet. App. 36a. The statutes

enacted by those legislators must be construed in light of the

insurance practices and the state insurance laws of those times.

A. State Insurance Law And Practice Customarily

Have Treated Annuities As Insurance

For over two hundred years in this country, annuities have

been considered a form of insurance by insurance companies,

scholars, consumers, and state legislatures. One insurance ex-

pert cogently summarized the relationship between life insur-

ance and annuities (William R. Vance, Handbook on the Law of

Insurance 32 (3d ed. 1951)):

[Every individual] must face the risk of living so short

a term that his dependents will suffer want and also

the risk that he may live so long that he himself will

suffer want. Modern life insurance companies as-

sume both these risks. The ordinary life policy pri-

marily cares for the loss of support to the dependents;

the endowment or insurance income policy, and the

annuity, for the need of the insured in a possible

protracted old age.

See Robert I. Mehr et al., Principles of Insurance 406 (6th

ed. 1976) (“The life annuity is true life insurance. It is insurance

against living too long. . . .” ); Kenneth Black, Jr. & Harold D.

Skipper, Jr., Life Insurance 149 (12th ed. 1994) (“annuities are

simply another type of insurance, and both life insurance and

annuities are based on the same fundamental principles’).

Annuities have been part of the insurance business from

the beginning of the insurance industry. The very first life

insurance company in England was founded in 1698 by the

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

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

ed. 1917). The first chartered insurance companies in this

country were established in the 1760s for the benefit of families

of Presbyterian and Episcopal clergy, and involved annuities.

Id. at 44-45. In 1812, Pennsylvania granted a charter to the

Pennsylvania Company for the Insurance on Lives and Granting

Annuities, “ the first North American insurer organized for the

sole purpose of selling life insurance and annuities to the general

public.” Black & Skipper, supra, at 53.

Certain state governments began to regulate insurance in

the 1850s. Buist M. Anderson, Anderson on Life Insurance 12

(1991). The states’ responsibility for regulating insurance was

powerfully reinforced by this Court’s holding in Paul v. Vir-

ginia, 8 Wall. (75 U.S.) 168, 183 (1869), that “[i]ssuing a policy

of insurance is not a transaction of commerce” subject to federal

law. After that ruling, “the States enjoyed a virtually exclusive

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

Ins. Co. v. Barry, 438 U.S. 531, 539 (1978).

This Court changed its view on that interstate commerce

issue 75 years later in United States v. South-Eastern Under-

writers Ass'n, 322 U.S. 533 (1944), finding that the sale of an

insurance policy occurs in interstate commerce and is subject to

federal jurisdiction. Congress moved quickly to “restore the

supremacy of the States in the realm of insurance” by adopting

the McCarran-Ferguson Act in 1945. United States Department

of Treasury v. Fabe, 113 S.Ct. 2202, 2207 (1993). That statute

declares that “the continued regulation and taxation by the

several States of the business of insurance is in the public

interest,” 15 U.S.C. § 1011, and then provides that “{nJo Act of

Congress shall be construed to invalidate, impair, or supersede”

any state insurance law “unless such Act specifically relates to

the business of insurance.” Jd. at § 1012(b).

This Court has stressed that the McCarran-Ferguson Act

was adopted because “Congress clearly remained concerned

about the inroads the Court’s decision [in South-Eastern Under-

writers Ass’n] might make on the tradition of state regulation of

insurance.” SEC v. National Sec., Inc., 393 U.S. 453, 458

(1969). Indeed, Congress declared “expressly and affirmatively

that continued state regulation and taxation of this business is in

the public interest and that the business and all who engage in

it ‘shall be subject to’ the laws of the several states in these

respects.” Prudential Ins. Co. v. Benjamin, 328 U.S. 408, 430

(1946).

At no time, however, did Congress or any state take any

step suggesting that annuities may not be regulated by the states

as insurance. As the court of appeals pointed out in this case,

all fifty states currently regulate annuities as an insurance prod-

uct. NationsBank Pet. App. 1 la.

The historical and true character of annuities as insurance

was acknowledged in SEC v. Variable Annuity Life Insurance

Co., 359 U.S. 65 (1959). In that ruling, the Court determined

that for the purpose of disclosures under the Securities Act of

1933, certain variable annuities should be deemed securities.

Justice Brennan’s influential concurring opinion stressed, how-

ever, that “the granting of annuities has been considered part of

the business of life insurance.” Jd. at 80-81. The Court also

found that fixed annuities are insurance and require no securities

disclosures. Jd. at 75-81. That conclusion was reinforced by

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

206 (1967), that the pay-out portion of even a variable annuity

involves “conventional insurance provisions, and thus [is] be-

yond the purview of the SEC.”

B. In 1863 And 1916, Annuities Were Considered

Insurance

The general understanding of the nature of annuities when

Congress acted in 1863 and 1916 is very important. For exam-

ple, Group Life & Health Ins. Co. v. Royal Drug Co., 440 US.

205, 227 (1979), construed the phrase “business of insurance”

in the McCarran-Ferguson Act by looking at the “contemporary

perception” of what constituted “providing insurance” when the

law was enacted. That “contemporary perception,” the Court

wrote, “is highly significant in ascertaining congressional in-

tent.” Id.

Petitioners have presented no evidence that before the

adoption of the National Bank Act in 1863, annuities were

considered not to be insurance; indeed, the evidence is all to the

contrary. In his 1854 Treatise on the Law of Fire and Life

Insurance, Joseph K. Angell described immediate, deferred and

survivorship annuities as “official forms” of life insurance, and

discussed annuity transactions as a primary feature of the life

insurance business. Joseph K. Angell, Treatise on the Law of

Fire and Life Insurance xi, 303-04 n.2, (Boston, Little, Brown

& Co. 1854). J.H. James wrote in 1868 that life insurance had

two primary forms: ordinary life policies and the issuance of

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

Assurance; Annuities and Reversionary Sums; and Leases for

Terms and For Lives 24, 28 (London, Doughty & Co. 1868).

Contemporaneous state law also classified granting annui-

ties as one of the activities of life insurance companies. For

example, New York’s first general law for regulating insurance

companies described them as having the power to “make insur-

ance upon the health or lives of individuals and every insurance

appertaining thereto or connected with health or life risks, and

to grant, purchase, or dispose of annuities.” 1849 N.Y. Laws

ch. 308, § 1.° See 1851 Fla. Laws ch. 313, § 1(3); 1868 Md.

Laws ch. 471, § 99; 1869 Mo. Laws ch. 27, § 1; 1850 Wis. Laws

ch. 232, § 1.

> The federal petitioners stress that two of the three members of the House

subcommittee that originated the 1863 statute were “New York bankers.”

Fed. Petitioners Br. at 18 n.6. Presumably, such banker-statesmen also knew

that annuities were part of the insurance business under New Y ork law.

Petitioners also stress a recent finding by the New York Court of Appeals

that even though New York statutes define annuities as insurance, “the weight

of authority” holds that annuities are not insurance. New York State Ass'n of

By 1916, when Congress adopted Section 92, the evidence

that annuities were considered only to be insurance is even

stronger, with more states specifically authorizing insurance

companies to sell annuities. E.g., 1915 Cal. Stat. ch. 768, § 1

(annuities are form of life insurance); 1914 N.J. Laws ch. 88,

§ 1 (insurance corporations empowered to sell annuities); 1909

Okla. Sess. Laws ch. 21, § 3 (insurance corporations may issue

annuities). Indeed, the great weight of authority held that an-

nuities were insurance. E.g., William A. Kerr, The Law of

Insurance 13, 888 (1902) (annuities are insurance contracts

governed by insurance laws); Lester W. Zartman, Life Insur-

ance 277-280 (1914) (categorizing annuities as life insurance

products).

Throughout the relevant period, the prevailing under-

standing of annuities was captured by the leading insurance

authority of the time, Prof. Solomon Huebner of the Wharton

School of Finance, also President of the American College of

Life Underwriters, in his textbook (Life Insurance 155 (3d ed.

1935) (emphasis added)):

The purpose of the annuity, it is seen, is to protect

against a hazard — the outliving of one’s income —

which is just the opposite of that confronting a person

who desires life insurance as protection against the

loss of income through premature death. Technically,

however, the two types of contracts are closely related

to each other, since the cost of both is computed on

the basis of similar data and principles. Sight should

not be lost of the fact that annuities are simply another

important means of insurance.

Life Underwriters v. New York State Banking Dep't, 632 N.E.2d 876 (N.Y.

1994). We cannot contrive a coherent explanation of the New York court's

surprising decision to read the state statute out of existence, a ruling that

reflects an unusual view of the proper powers of the judiciary.

In the face of this powerful historical evidence, petitioners’

erroneous constructions of Section 92 and Section 24(7) cannot

be maintained. There is no basis for concluding that Congress

in 1863 had any doubt that annuities were an insurance activity,

or that Congress had any intent to give national banks any

insurance powers. Similarly, Congress in 1916 unquestionably

understood that “insurance” in Section 92 included annuities,

which were solely written by “life . . . insurance companies.”

Petitioners argue that this historical evidence is irrelevant

because some annuity products are currently structured in a

manner different from the annuities sold in 1863 and 1916. That

contention has little force since the NationsBank product at issue

in this case includes a simple fixed annuity option, which is

identical to the annuities sold in 1863 and 1916, and then

understood to be insurance.

In any event, petitioners incorrectly argue that the “modern

annuities market” includes annuity options that were undreamt

of in the nineteenth century. See Fed. Br. at 33-35. Petitioners

argue that these supposed “modern” innovations include “‘re-

fund” annuities that return the purchaser’s principal at time of

death, or deferred annuities with withdrawal options. But in

1868, J.H. James carefully described both “deferred annuities”

and annuities in which “an agreed portion of the deposit is

returned to the representatives of the annuitant on death.” James,

supra, at 25. In fact, James described both types of annuities as

“examples of the more prominent features in Life Assurance

now introduced into general use.” Jd. at 24. Petitioners’ sup-

posedly modern innovations in annuities are at least 125 years old.

C. Current State Insurance Law Regulating

Annuities

Today, the marketing practices and financial conditions of all

insurers are regulated by the states. That includes the companies’

sale of annuities as illustrated by the following regulatory syn-

opses of state laws within the purview of the amici curiae.

1. Florida

Florida recognizes annuities as insurance in a variety of

ways. The very definition of “insurer” includes an indemnitor,

surety, or contractor entering into annuity contracts, § 624.03,

Fla. Stat. Ann. (1993), by reason of which the insurer is subject

to the Department’s regulation. Jd. at § 624.33. The definition

of “life insurance” includes “...the granting of annuity contracts,

including, but not limited to, fixed or variable annuity con-

tracts....” Jd. at § 624.602. Similarly, the definition of “life

insurer’ means an “insurer writing ... annuity contracts, variable

contracts, or any of such types of contracts.” Jd. at § 626.780.

An “ordinary-variable contract class insurer” includes the issu-

ance of “annuity contracts providing for payments or values

which vary directly according to investment experience.” /d. at

§ 626.781. Once a life insurer is granted a certificate of authority,

id. at § 624.401(1), it may grant annuities. /d. at § 624.406(1).

In Florida, no life insurer may deliver or issue an annuity

contract except through a Florida licensed insurance agent. /d.

at § 624.428(1). Florida insurance premium taxes are assessed

on annuity premiums. Jd. at § 624.509(1),(8). When Florida

seeks to determine the financial condition of an insurer, it

includes as assets its “annuity contracts and accrued interest

thereon,” id. at § 625.012(3)(4); liabilities include unpaid losses

and claims on annuity contracts. Jd. at § 625.041(2). The

“Standard Valuation Law” requires that the Department every

year value the annuity contracts of “every life insurer doing

business in this state...” Id. at § 625.121(2). The actuarial

analyses required to valuate policies and contracts is complex

and varies depending on the date the annuities were issued. /d.

at § 625.121(5)-(7),(9),(12).

The examinations for a license to be a life insurance agent

must cover variable annuities. Jd. at § 626.241(3). Unfair or

deceptive acts or practices in insurance sales were addressed in

a comprehensive fashion in 1959 when Florida passed what is

now Part X of Chapter 626, Florida Statutes, the “Unfair Insur-

ance Trade Practices Act.” Id. at § 626.951(2); ch. 59-205,

§ 379, Laws of Fla. One provision of the Act addresses prob-

lems encountered in Florida when financial institutions market

insurance. This “anti-affiliation” statute prohibits financial in-

stitutions from engaging in “insurance agency activities.”

Florida requires that insurance policies, including annuity

contracts, must be filed with the Department for approval. Jd.

at § 627.410. The forms are reviewed for compliance with

statutes which either explicitly reference annuity contracts, or

include them under the generic statutory definition of life insur-

ance. Annuity forms may be disapproved under this section

whenever they contain provisions which are misleading, am-

biguous, or whenever the benefits provided under the contract

are not reasonable, in accordance with reasonable actuarial

techniques, in relation to the premiums. /d. at § 627.411. By

Statute, a number of specific contract provisions must be in-

cluded in annuity contracts. Jd. at §§ 627.464-.471.

Insurer solvency is a\matter of grave concern to state

insurance regulators, and this is particularly so when banking

interests seek to market insurance products. Florida has estab-

lished the Florida Life and Health Insurance Guaranty Associa-

tion “to protect policyowners, insureds, beneficiaries,

annuitants, payees, and assignees of life insurance policies,

health insurance policies, annuity contracts and supplemental

contracts ... against the failure of an insurer issuing such poli-

cies or contracts ....” Jd. at §§ 631.712 and .715(1) (emphasis

added). The Association maintains three accounts, one being

“(t]he annuity account.” Jd. at § 631.715(2)(a)(3).

2. Maryland |

Similarly, annuities have been treated as fully regulated

insurance products in the State of Maryland. Annuities are

defined in Maryland’s Insurance Code as “all agreements to

make periodical payments where the making or the continuance

of all or some of a series of such payments, or the amount of any

such payment, is dependent upon the continuance of human

life...” Md. Ann. Code art. 48A, § 65 (1994 Repl. Vol.). As an

insurance product, an annuity may only be sold by a licensed

insurance agent or broker. /d. at §§ 165-67.

The financial condition of all insurers is regulated. Jd. at

§ 75, et. seq. Indeed, the Maryland Insurance Commissioner

annually values the reserve liabilities for all outstanding life

insurance policies and annuity business in the state. Jd. at § 83.

In case of insolvency of the insurance company, benefits under

annuity contracts are guaranteed by the Life and Health Insur-

ance Guaranty Corporation. Jd. at § 520, et. seq. See also Board

of Trustees of Md. Teachers & State Employees Supplemental

Retirement Plans v. Life & Health Ins. Guaranty Corp., 335 Md.

176, 642 A.2d 856 (1994). In addition, a tax is assessed against

the insurer on premiums for annuity contracts. Jd. at § 632.

3. Montana

The Montana State Auditor’s Office has comprehensive

powers to protect insurance policyholders and consumers and

purchasers of variable annuities under the Securities Law of the

State of Montana, including: (1) the licensing of insurance

agents and insurers, Ch. 17, Title 33, Mont. Code Ann. (MCA),

(2) the regulation of the financial condition of insurers to ensure

adequate assets, Ch. 2, Title 33 MCA, (3) control of actuarial

practices, rates, and contract terms, Chs. 15 and 16, MCA, and

(4) regulation of variable annuities under Section 33-10-

103(19), MCA. The Montana Auditor’s Office licenses more

than 650 life and health insurers and has issued over 17,500

licenses to agents. In 1993, it took action in 250 administrative

cases involving insurance companies and agents.

The Montana State Auditor’s Office presently licenses

approximately 20,000 persons as securities brokers, agents, and

dealers, some of which are involved in the sale of variable

annuities. State regulation attempts to ensure that the consum-

ers of such products are aware of what they are purchasing and

can make a reasoned decision. The State Auditor’s Office takes

approximately 15 administrative actions per year in the secu-

rities area.

The Montana State Auditor’s Office also assists the Mon-

tana Life and Health Insurance Guaranty Association, which

stands behind all life insurance and annuity contracts written in

the state up to $300,000 of cash benefits for life insurance and

$100,000 of annuity benefits. The Association is presently

involved in a major case of insolvency in Montana.

Because the Montana State Auditor is the Commissioner

of both Insurance and Securities of the State of Montana, he is

sensitive to the fact that banks deal mainly with investment risk

and some expense risk. Banks are never liable to customers for

more than the amount of money they invested plus the interest

earned on the money. The sale of annuities requires that premi-

ums and benefits be tied to a policyholder’s expected mortality

and other risks that are free of regulation. If banks were allowed

to market such insurance, serious problems would arise for

Montana consumers and would potentially undermine the sol-

vency of banks, the very institutions which, it is argued by

petitioners, are supposed to benefit from such a marketing

opportunity.

IL THE COMPTROLLER SEEKS TO OVERRIDE

STATE REGULATORY POLICIES, WHICH

WOULD INJURE CONSUMERS

This Court has insisted that unless Congress specifically

states that it intends to supplant state regulatory systems, statutes

should not be read to interfere with “the separate spheres of

governmental authority preserved in our federalist system.”

Fort Halifax Packing Co. v. Coyne, 482 US. 1, 19 (1987)

(quoting Alessi v. Raybestos-Manhattan, Inc., 451 U.S. 504, 522

(1981); see Massachusetts v. Morash, supra, 490 U.S. at 119.

The Comptroller, however, seeks to supersede all state regula-

tion of annuities based on a broadly expansive reading of Section

24(7), and an implausibly narrow reading of Section 92. In so

doing, the Comptroller would risk exposing consumers to the

abuses that have resulted from bank entry into non-bank busi-

nesses.

Notably, the Comptroller seeks to incur those risks to

vindicate a single “public” policy: to “provide additional in-

come for the banks.” Fed. Petitioners’ Br. at 11. That is hardly

a goal warranting the sacrifice of principles of federalism,

consumer protection, and sound statutory construction.

A. The Comptroller Seeks The Total Destruction Of

State Regulation

In response to a national bank’s proposal to sell annuities,

the Comptroller recently announced that his interpretation of

Section 24(7) preempts the Connecticut state requirements for

the licensing of insurance agents as well as that state’s prohibi-

tion on bank sales of insurance. OCC Interpretive Letter No.

623, reprinted in (1993 Transfer Binder] Fed. Banking L. Rep.

(CCH) { 83,505 at 71,612 (May 10, 1993), appeal pending sub

nom. Shawmut Bank Connecticut, N.A. v. Googins, No.

3:94CV14 (D. Conn.). The Comptroller’s attempt to preempt

state insurance regulation was upheld in Owensboro Nat'l Bank

v. Moore, 803 F. Supp. 24 (E.D. Ky. 1992), appeals pending

Nos. 92-6300, 92-6331 (6th Cir.), though it was rejected in

Barnett Banks, N.A. v. Gallagher, 839 F. Supp. 835 (M.D. Fla.

1993), appeal pending No. 93-3508 (11th Cir.).

At issue in each of those cases is a state “‘anti-affiliation”

statute, which bars financial institutions from engaging in insur-

ance activity. The Florida state courts have upheld that state’s

anti-affiliation law because the “Legislature has determined that

there is potential for abuse inherent in financial institutions

being involved in the sale of insurance.” Production Credit

Ass’n of Fla. v. Department of Ins., 356 So. 2d 31, 32 (Fla. Dist.

Ct. App. 1978). See also Glastonbury Co. v. Gillies, 209 Conn.

175, 182, 550 A.2d 8 (1988) (citing legislative history of Connecti-

cut anti-affiliation statute at Conn. Jt. Standing Comm. Hearings,

Ins. and Real Estate, 1973 Sess., at 181-85). These potential abuses

include “coercion, unfair trade practices, and undue concentration

of resources.” Glendale Fed. Sav. & Loan Ass’n v. State Dep’t of

Ins., 587 So. 2d 534, 537 (Fla. Dist. Ct. App. 1991)."

These legislative policies were considered by the district

court in Barnett Banks, which expressed concern that bank

insurance activities could imperil insurer solvency and con-

sumer protection. On the solvency issue, the court noted (839

F. Supp. at 842):

(I)n order [for the bank] to make a profit in automobile

loans or home mortgages, the insurance agents may

incur business they might otherwise reject because

they would be pressured by the bank to do so in order

to consummate the bank’s loan transactions. This

might lead to the over-insurance of risky business,

which could result in insolvency of the insurer.

The federal court found the consumer protection threat to be

equally clear (id.):

[T]he loan officers could steer customers to the bank's

insurance agent for the purpose of suggesting the sale of

insurance that is not needed, in order for the bank to make

a profit on the insurance policy. The concern herein

expressed is that an arms-length relationship be main-

tained among the bank, the loan officer and the insurance

agents. The maintenance of this relationship is for the

protection of the solvency of the insurance industry, and

the prevention of coercion, which in turn protects all

potential, present and future policyholders.

If the Comptroller prevails in this case and his policy prevails

in the preemption cases, the state regulatory Protection for

consumers and the ability adequately to provide for insurer

solvency will be destroyed.

B. Bank Abuses In Selling Non-Bank Products

Experience supports the concer of state legislatures over

bank abuses in the sale of non-bank products. Those abuses

have been found in bank sales of credit life insurance, annuities,

and securities. Indeed, such abuses recently have been alleged

concerning the Florida operations of petitioner NationsBank.

Credit life insurance provides the greatest experience with

bank sales of non-bank products, and the abuses have been

appalling. The 1990 study by the Consumer Federation of

America found that credit life insurance is “by far the most

overpriced insurance purchased by many consumers.” Steven

Brobeck, Credit Life Insurance, supra, at 1. The study found

that banks mislead borrowers about the need for such insurance and

coerce them into purchasing it at supracompetitive prices. Id. at 3.

The study also found that because banks effectively control

the purchasers of credit life insurance (the borrowers), the banks

can force “reverse competition” by squeezing insurers to pay

ever-higher commissions to the banks. In insurance parlance,

the “loss ratio” describes how much of each premium is retained

to cover losses by policyholders, with the balance going for

commissions and other administrative expenses. Ordinarily, a

loss ratio of 75% “allows both insurers and their lender agents

to earn a reasonable profit.” Jd. at 2. The Consumer Federation

study found, however, that the loss ratio for credit life insurance

in Florida was only 37% in 1988, because banks were able to

demand such massive commissions, leaving very low reserves to

cover the risks. Id. Such blatant gouging by banks undermines the

solvency of insurers, thereby placing consumers’ coverage at risk.

Our experience in Florida is consistent with that study. The

price of credit life insurance has risen steadily; the loss ratios

have shifted profoundly in the banks’ favor and thereby have

undermined insurer solvency; and many consumers have re-

ported coercive sales tactics by banks.

The problem of bank coercion of customers also has arisen

in a major Florida bank’s sales of annuities under a “lobby-

lease” arrangement.) Bank employees were paid a “bounty” of

at least $5.00 for every bank customer who made an appoint-

ment with the insurance agent, who was deceptively titled a Tax

Advantage Account Specialist. The agency sold annuities that

were structured so the purchaser did not actually acquire the

annuity that he or she thought was being purchased; rather, the

consumer bought only an interest in a trust managed by the bank,

which then bought annuities payable to the trust. The bank

received one-third of the insurance commission, plus fees for

managing the trust, and was liable only for gross negligence.

Department of Insurance and Treasurer v. James Mitchell and

Company, et al., No. 93-2442 (Fla. Div. of Admin. Hearings,

Aug. 30, 1994) (Recommended Order) (detailing “deceptive and

misleading” marketing program).

A further consumer protection issue is the erroneous belief

of many consumers that annuities purchased at banks are feder-

ally-insured. A recent survey sponsored by the American As-

sociation of Retired Persons found that out of 445 individuals

whose banks sold annuities, 40% thought the annuities were

federally insured, and 46% did not know whether they were or

not. AARP, Bank Investment Products Survey 9-10 (Jan. 1994).

This widespread misunderstanding is, in our experience, often

encouraged by the bank in a lobby-lease situation, and causes

consumers to misunderstand the risks associated with the prod-

ucts they are purchasing.

5 Under a “lobby-lease” arrangement, the bank rents space in its lobby to

an insurance agency, which is supposed to offer insurance products on a

completely independent basis. The arrangement is legal in Florida so long as

the insurance operation is conducted independently of the bank. We have

found, however, that the banks often blur the line between bank and insurance

agency, and many consumers believe they are buying insurance from the bank.

Finally, several complaints filed this summer include alle-

gations concerning NationsBank which are consistent with these

experiences. See NationsBank Accused of Deceptive Tactics,

Wash. Post, B1-B2 (July 29, 1994) (Appendix B); NationsBank

Under Fire for Alleged Staff Bonuses On Brokerage Referrals,

American Banker, 1, 8 (Aug. 3, 1994) (Appendix C). Accord-

ing to an administrative complaint filed by three former Na-

tionsBank brokers, (i) bank employees received cash bonuses

for “steering” bank customers to the higher-risk brokerage

department, (ii) bank customers were discouraged from invest-

ing in insured certificates of deposit, but were not told that

certain recommended securities were not insured, (iii) bank

employees “routinely” gave the brokers confidential informa-

tion about the customers’ accounts, and (iv) the bank intentuon-

ally blurred the distinction between the bank and the brokerage

operation. App. B. Another report stated that NationsBank

tellers received a 5 percent commission on all purchases of

securities by customers they referred, a policy that was replaced

by a $10.00 “bounty” for referrals resulting in sales. App. xd

All of these factors demonstrate the wisdom of preserving

state regulation of insurance products (e.g., Appendix D) against

the Comptroller’s assault. Indeed, the Comptroller's assertion

that bank sales of annuities create no solvency issues for banks

(NationsBank Pet. App. at 47a-48a) has a harsh irony for state

insurance regulators. Solvency issues will not be raised for the

banks, but will arise for the insurers and insurance regulators who

must cope with the banks’ market power. If national banks are

permitted to sell annuities to their captive customers, the banks

will quickly have sufficient market power to force insurers to offer

riskier products with greater commissions for banks.° This Court

should not embrace such a negative policy outcome based on

petitioners’ novel and unsupported statutory constructions.

6 This risk is not theoretical since two major annuity underwriters failed

in the early 1980s (Baldwin-United and Charter Security Life), while three

other insurers (First Executive, First Capital Holding and Guarantee Security

Life) failed in recent years.

CONCLUSION

For all of the foregoing reasons, and the reasons included

in the Brief of Respondent, the decision of the court of appeals

should be affirmed.

Respectfully submitted,

DAVID J. BUSCH

FLORIDA DEPARTMENT

OF INSURANCE

Office of Legal Affairs

645A Larson Building

200 E. Gaines Street

Tallahassee, FL 32399-0307

(904) 922-3110 (ext. 4146)

APPENDIX A

State Anti-Affiliation Statutes

Alaska Alaska Banking Code tit. 6, § 06.05.272 (1993)

Ark. Ark. Code Ann. § 23-64-203(b) (1987)

Colo. Colo. Rev. Sat. Ann. § 10-2-221(2) (West 1994)

Conn. Conn. Gen. Stat. Ann. § 38a-775 (West 1994)

Fla. Fla. Stat. Ann. § 626.988 (West 1994)

GA Ga. Code Ann. § 33-3-23 (1993)

IL Tl. Ann. Stat. ch. 215, para. 499. 1(e)

(Smith-Hurd 1994)

LA La. Rev. Stat. Ann. tit. 6, § 121-B(2) (West 1994)

ME Rev. Stat. Ann. tit. 24-A § 1514-A (West 1993)

MA Mass. Gen. Laws Ann. ch. 175, § 174(E) (West 1994)

MI Mich. Comp. Laws Ann. §§ 500.1242, .1207(3),

.1207(5), .2077(a) (West 1994)

NM N.M. Stat. Ann. § 59A-12-10 (1993)

NY N.Y. Insurance Law § 2501 (McKinney 1994)

Ohio Ohio Rev. Code Ann. § 3911.01 (Anderson 1993)

PA Pa. Stat. Ann. tit. 40, § 281(b) (1994)

R.L R.L Gen. Laws § 27-3-46 (1993)

VT Vt. Stat. Ann. tit. 8, § 4811(a)

CY I EEO Oe

APPENDIX B

“NationsBank Accused of Deceptive Tactics-

Former Brokers Cite Securities Sales Practices”

(The Washington Post - July 29, 1994)

NEW YORK, July 28 - Three former NationsBank brokers

are accusing the bank of deceptive sales practices that steered

bank customers to its brokerage department, discouraged savers

from investing in insured deposits and routinely gave confiden-

tial bank customer information to its brokers in order to solicit

them to buy securities.

The claim, filed today with the National Association of

Securities Dealers (NASD), comes as more and more commer-

cial banks enter the securities business. Legislators and regula-

tors have expressed concern that many bank customers fail to

understand the greater risks of brokerage purchases compared

with bank deposits.

Ellison Clary, a spokesman for NationsBank Corp. and its

brokerage unit, NationsSecurities, said, “We vigorously deny

the claims and feel that they are unfounded. We think the

procedures we have in place conform not only to the letter of

the securities and banking laws but also with the spirit of

disclosure and fair dealing that is inherent in those laws.”

He said that this is the first time such allegations have been

made against the bank, but he would not respond to the specific

claims.

The former employees, who worked out of three different

Florida branches of the bank, say that they were fired or quit last

month after witnessing the sales practices at NationsBank’s

brokerage subsidiary.

Charlotte, N.C.-based NationsBank, the biggest bank com-

pany operating in the Washington area, offers brokerage serv-

ices in 77 of its 386 branches in Maryland, the District and

Northern Virginia.

“TI could no longer sell investment products that I didn’t

think were good for the clients,” said Catherine B. Hovis, one

of the three former employees, in an interview. She resigned last

month as a NationsBank broker in Palmetto, Fla. “There was a

total lack of supervision. Second, it was an operational night-

mare. All lam doing is protecting my good name and everything

I have worked for.”

Clary said Hovis’s accusations were “groundless.”

Banks often sell mutual funds and securities in branches

that bear the seal of the Federal Deposit Insurance Corp., which

can lead customers to false assumption that the securities are

FDIC-insured or protected against loss. A recent study by the

Securities and Exchange Commission concluded that 60 percent

of people who buy mutual funds from banks think their invest-

ment is safeguarded by the FDIC.

In order to offer brokerage services, NationsBank agreed

last year to certain conditions set by the Office of the Comp-

troller of the Currency, which regulates federally chartered

banks, that require the bank to separate the brokerage operation.

A senior attorney at the OCC said the case is unusual and

that bank-brokerage complaints have not been widespread.

NationsBank and OCC spokesmen say that they are dis-

cussing the former employees’ allegations. If warranted, the

OCC could initiate a formal legal action that could lead to

revocation of its approval of NationsBank’s brokerage opera-

tion.

The NASD, which regulates the practices of brokers, could

refer the complaint to its enforcement division as part of an

arbitration hearing. The NASD can fine a company and bar or

suspend individuals or firms from the business.

The brokers are seeking millions of dollars in damages for

being forced out of their jobs after complaining about the

practices. The allegations surfaced last month when one of the

three former brokers filed a lawsuit against the bank for wrong-

ful dismissal.

The former brokers claim that NationsBank:

¢ Did not tell customers that bank employees were given

special cash bonuses for “steering” bank customers to the

brokerage department.

e Discouraged bank customers from investing in “CDs, sav-

ings accounts and other similar investment at NationsBank,

which would have been insured against loss of principal”

by the FDIC or the bank. Instead, customers were advised

to invest in products sold by the brokerage unit. They were

not told “that these products were actually uninsured secu-

4 ”

ries.

« “Routinely” gave to its brokers confidential bank customer

account information that was used “to solicit NationsBank

bank customers to purchase securities ... Such confidential

information was disclosed without the knowledge or per-

mission” of the bank’s customers.

¢ Intentionally blurred the distinction between the bank and

the brokerage. Brokers were based in the bank’s branches

and “were permitted virtually unrestricted access ... so that

their activities appeared (and were) completely integrated

with the operations of the bank.” This “created substantial

customer confusion” that made it easier to sell securities to

bank customers.

¢ Misled customers by “using names and color schemes

which were confusingly similar to the name and the dis-

tinctive color scheme {red, white and blue] of the bank.”

The result was that “customers thereby were led to believe

that the investments purchased were guaranteed by or

protected by NationsBank or by the FDIC.”

The complaint says, “These practices cannot be blamed on one

or two rogue individuals, but were and are systemic practices of

_.. NationsBank so as to unlawfully utilize securities profession-

als as mere conduits to trick risk-averse bank customers.”

APPENDIX C

“NationsBank Faces Heat on Referrals To Brokerage-

Branch Staff Allegedly Got Improper Bonuses"

(American Banker - August 3, 1994)

NationsBank Corp. has come under fire for an alleged

practice, said to have been abandoned in January, of paying

hefty cash bonuses to branch employees who referred business

to its brokerage affiliate.

Two pending lawsuits charge that the North Carolina-

based company violated banking and securities rules by paying

a 5% share of brokerage commissions to branch employees.

The practice was confirmed by a current employee of the

brokerage affiliate, NationsSecurities, who asked not to be

named. The company is a joint venture of NationsBank’s lead

banking unit and Dean Witter, Discover & Co.

A NationsBank spokesman declined to comment on the

incentives, which were disclosed in an arbitration claim filed

against NationsSecurities last month by 18 brokers.

Similar disclosures also were made in a separate suit by

three other brokers.

But the spokesman, Ellison Clary, reiterated statements the

bank has made over the past month that NationsSecurities abides

by both “the spirit and the letter” of baking and securities

regulations.

The statements came in response to suits by a handful of

former brokers and customers claiming that NationsSecurities

is systematically misleading customers about investments.

Several brokers not involved in the suits have taken excep-

tion to the claim that customers are misled, as has the bank,

which vigorously denies the charge.

But the brokers were in consensus in describing the incen-

tive program. If it existed, it would appear to belie the claim that

NationsSecurities was in full compliance with the rules.

“Banks in general are being very careful not to cross any

lines,” said Glen Casey, a consultant with Cerulli Associates ur

Boston, which advises banks about marketing investments.

“This case with Nations is a bit surprising if, in fact, the

allegations are true.”

According to the arbitration claim for the 18 brokers,

NationsBank had adopted the commission-sharing arrangement

before the formation of NationsSecurities in 1992.

In the program, tellers and customer service reps were

taught to identify and refer prospects to branch-based brokers.

The suit said that one unnamed branch employee in Texas got

a $3,000 bonus for a referral that resulted in a $1.5 million

investment. Another branch employee was said to have gotten

more than $2,000 from a referral that resulted in a $1 million

transaction.

In January, the bank changed the payout to a flat $10 fee

for referrals that led to sales.

Since last year, federal banking guidelines have barred

banks from paying branch employees bonuses that are contin-

gent upon the sales of investments.

Instead, bonuses can be paid only for referrals, whether or

not a sale is made. These rules are intended to help separate a

bank’s traditional business from its brokerage business. They

are also meant to keep unqualified people from selling invest-

ments. Likewise, the National Association of Securities Dealers

prohibits brokers from splitting commissions with people who

don’t have securities licenses. So do rules in some states in

which NationsBank operates, including Florida, Georgia, North

Carolina, and Virginia, according to the arbitration claim.

a iii |

The suit said that NationsBank alluded to these concerns

in a memo it distributed that listed two reasons for dropping the

arrangement.

One was that the plan didn’t compensate employees for

meeting “sales objectives.”

The other was that “OCC and NASD regulations” say such

incentives must “be normal and have no bearing on commis-

sions generated.”

Robert F. Miailovich, a senior regulator at the Federal

Deposit Insurance Corp., said that if a bank was sharing com-

missions, regulators would likely ask it to change the practice.

If the bank changed, it would likely face no further sanctions.

He could not say if any such discussions had been held with

NationsBank. A Securities and Exchange Commission official

who wished not to be identified said banks are excluded from

the commission-sharing restrictions in the securities dealers

group’s rules.

a as g , -w tune itithe

at wes eee ee ee ae eee Se ee ee —s 6 he

APPENDIX D

CHAPTER 4-150

LIFE AND HEALTH ADVERTISING REQUIREMENTS

PART II ADVERTISING OF LIFE INSURANCE

4-150.101

4-150.102

4-150.103

4-150.104

4-150.105

4-150.106

4-150.107

4-150.108

4-150.109

4-150.110

4-150.111

4-150.112

4-150.113

4-150.114

4-150.115

AND ANNUITY CONTRACTS

Purpose.

Applicability.

Definitions.

Method of Disclosure of Required Information.

Form and Content of Advertisements.

Disclosure Requirements for Annuity Contract

Advertisements.

Advertisements of Proceeds Payable, Premiums

Payable, or Limited, Graded, or Modified

Features.

Necessity for Disclosing Policy Provisions

Relating to Renewability, Cancellability, and

Termination.

Use of Dividends.

Testimonials or Endorsements by Third Parties.

Use of Statistics.

Disparaging Comparisons and Statements.

Jurisdictional Licensing and Status of Insurer.

Identity of Insurer.

Group or Quasi-Group Implications.

4-150.116 Introductory, Initial, or Special Offers.

4-150.117 Statements about an Insurer.

4-150.118 Application in Advertisement.

4-150.119 Enforcement Procedures.

4-150.120 _ Filing for Review.

4-150.121 Severability Provision.

4-150.122 _ Prior Rules.

“* *

PART II ADVERTISING OF LIFE INSURANCE

AND ANNUITY CONTRACTS

4-150.101 Purpose. The purpose of these rules is to provide

prospective purchasers with clear and unambiguous statements

in the advertisement of Life Insurance and Annuity Contracts,

and to assure the clear, truthful and adequate disclosure of the

benefits, limitations and exclusions of policies sold as Life

Insurance and Annuity Contracts. This purpose is intended to

be accomplished by the establishment of guidelines and stand-

ards of permissible and impermissible conduct in the advertising

of Life Insurance and Annuity Contracts to assure that product

descriptions are presented in a manner which prevents unfair,

deceptive and misleading advertising and is conducive to accu-

rate presentation and description of Life Insurance and Annuity

Contracts to the segment of the insurance buying public through

the advertising media and material used by insurance agents and

companies.

Specific Authority 624.308(1), 626.9611 FS. Law Imple-

mented 626.9541(1)(a), (b), (e), (k), (1), 626.9641 FS. History-

New 9-1-73, Formerly 4-35.01, Amended 6-12-88, Formerly

4-35.001.

4-150.102 Applicability.

(1) These rules shall apply to any Life Insurance Policy and

Annuity Contract “advertisement,” disseminated in this State

which the insurer knows or reasonably should know is intended

for presentation, distribution or dissemination in this State,

when such presentation, distribution or dissemination is made

either directly by an insurer or indirectly on behalf of an insurer,

by an agent, broker, producer or solicitor or any other person

who has either actual or apparent authority to act on behalf of

the insurer; provided the insurer shall not be responsible for

advertisements that are published in violation of written proce-

dures or guidelines of the insurer. Further, provided, that in

variable contracts where disclosure requirements are established

pursuant to Federal regulation, these rules shall be interpreted

0 as to minimize or eliminate conflict with such Federal Regu-

lation wherever possible.

(2) Every insurer shall establish and at all times maintain

a system of control over the content, form and method of

dissemination of all its Life Insurance and Annuity Contract

advertisements. All such advertisements, regardless of by whom

written, created, designed or presented, shall be the responsibil-

ity of the insurer(s) benefiting directly or indirectly from their

dissemination; provided the insurer shall not be responsible for

advertisements that are published in violation of written proce-

dures or guidelines of the insurer.

(3) Advertising materials which are reproduced in quantity

shall be identified by form numbers or other identifying means.

Such identification shall be sufficient to distinguish an adver-

tisement from any other advertising materials, policies, applica-

tions or other materials used by the insurer.

Specific Authority 624.308(1), 626.9611 FS. Law Imple-

mented 626.9541(1)(a), (b), (e), (k), (1), 626.9641(1) FS. His-

tory-New 9-1-73, Formerly 4-35.02, Amended 6-12-88,

Formerly 4-35.002.

4-150.103 Definitions. For the purpose of these rules, the terms

below are defined as follows:

(1) An “Advertisement” includes:

(a) printed and published material, audio visual material

and descriptive literature used by or on behalf of an insurer in

direct mail, domestic or regional publications which are distrib-

uted for viewing in Florida (i.e. newspapers, magazines, radio

scripts or TV scripts), billboards and similar displays; and

(b) descriptive literature and sales aids of all kinds issued

by an insurer, agent, producer, broker, or solicitor or any other

person who has either actual or apparent authority to act on

behalf of the insurer for presentation to members of the insur-

ance buying public, including but not limited to, circulars,

leaflets, booklets, depictions, illustrations, form letters, and

lead-generating devices as herein defined; and

by agents, brokers, producers and solicitors, announcers,

spokespersons, celebrities, and other persons, whether prepared

by the insurer or the agent, broker, producer, or solicitor, an-

nouncer, celebrity, or any other person who has either actual or

apparent authority to act on behalf of the insurer; and

(d) advertising material included with a policy when the

policy is delivered and material used in the solicitation of any

policy.

(2) The definition of “Advertisement” does not include:

(a) material to be used solely for the training and education

of an insurer’s employees, agents, or brokers;

(b) material used exclusively in-house by insurers;

not intended for dissemination to the public;

(d) individual communications of a personal nature with

current policyholders regarding existing coverage other than

material urging such policyholders to renew, increase or expand

coverages;

(e) correspondence between a prospective group policy-

holder and an insurer in the course of negotiating a group

contract;

(f) court approved material ordered by a court to be dis-

seminated to policyholders; or

(g) a general announcement from a group policyholder to

eligible individuals on an employment or membership list which

may include a brief description of coverage and is primarily a

notification that a contract or program has been written or

arranged; provided, the announcement must clearly indicate that

it is preliminary to the issuance of a booklet, pamphlet, brochure

or other similar paper preliminary to coverege by the insurer.

(3) “Application” means the form which must be filled in

by the person seeking to effectuate an insurance policy.

(4) “Application Period” also includes any enrollment

period.

(5) “Certificate” means any certificate issued under a group

Life Insurance and Annuity Contract which certificate has been

delivered or issued for delivery in this State.

(6) “Exception” means any provision in a policy whereby

coverage for a specified hazard is entirely eliminated; it is a

statement of a risk not assumed under the policy.

(7) “Institutional Advertisement” means an advertisement

having as its sole purpose the promotion of the readers’, view-

ers’ or listeners’ interest in the concept of Life Insurance and

Annuity Contracts or the promotion of the insurer as a seller of

Life Insurance and Annuity Contracts.

(8) “Insurer” includes any individual, corporation, associa-

tion, partnership, reciprocal exchange, inter-insurer, Lloyds,

fraternal benefit society, and any other legal entity which is

defined as an “insurer” in the Insurance Code of this State.

(9) “Invitation to Contract” means an advertisement which

is neither an institutional advertisement nor an invitation to

inquire.

(10) “Invitation to Inquire” means an advertisement having

as its objective the creation of a desire to inquire further about

life insurance and annuity contracts, which advertisement iS

limited to a brief description of coverage and which shall contain

a provision in the following or substantially similar form:

This policy has (exclusions) (limitations) (reductions of

benefits) (terms under which the policy may be continued in

force or discontinued). For costs and complete details of the

coverage call (or write) your insurance agent or the company.

{ whichever is applicable).

A “brief description of coverage” in an invitation to inquire

must be limited to a brief description of the loss for which

benefits are payable but may contain the dollar amount of

benefits payable, and/or the period of time during which benefits

are payable. An invitation to inquire may not refer to cost or

rates. As with all life insurance and annuity contract advertise-

meuts, an invitation to inquire may not:

(a) employ devices which are designed to create undue

anxiety;

(b) exaggerate the value of the benefits available under the

advertised policy;

(11) “Lead Generating Device” means any communication

directed to the public which, regardless of form, content, or

stated purpose, invites or elicits a response on the subject of

insurance and thereby results in the compilation or qualification

of a list containing names of or other personal information

regarding persons who have expressed a specific interest in an

insurance product or coverage and which is to be used to solicit

residents of this State for the purchase of Life Insurance and

Annuity Contracts or other insurance.

(12) “Life insurance policy and annuity contract” includes

any policy, plan, certificate, contract, agreement, statement of

coverage, rider or endorsement which provides for life insurance

or annuity contract benefits, or a combination thereof.

(13) “Limitation” means any provision which restricts

coverage under the policy other than an exception or a reduction.

(14) “Person” means any natural person, association, Or-

ganization, partnership, trust, group, discretionary group, Cor-

poration or any other entity.

(15) “Reduction” means any provision which reduces the

amount of the benefit; this term includes a situation where a risk

of loss is assumed, but payment upon the occurrence of such

loss is limited to some amount or period less than would be

otherwise payable had such reduction not been used.

Specific Authority 624.308(1), 626.9611 FS. Law Imple-

mented 626.9541(1)(a), (b), (e), (k), (1), 626.9641(1) FS. His-

tory-New 9-1-73, Formerly 4-35.03, Amended 6-12-88,

2-26-92, Formerly 4-35.003.

4-150.104 Method of Disclosure of Required Information.

All information required to be disclosed by these rules shall be

set out conspicuously, in the same type size as that used in the

body of the advertisement, and in close conjunction with the

statements to which such information relates, or under appro-

priate captions of such prominence that it shall not be mini-

mized, rendered obscure or presented in an ambiguous fashion,

or intermingled with the context of the advertisement so as to

be confusing or misleading.

Specific Authority 624.308 FS. Law Implemented

626.9541(1) FS. History-New 9-1-73, Formerly 4-35.04,

Amended 2-26-92, Formerly 4-35.004.

4-150.105 Form and Content of Advertisements.

(1) The form and content of a Life Insurance and Annuity

Contracts advertisement shall be sufficiently complete and clear

to avoid deception or the capacity or tendency to mislead or

deceive. Whether an advertisement has a capacity or tendency

to mislead or deceive shall be determined by the Commissioner

of Insurance from the overall impression that the advertisement

may be reasonably expected to create upon a person of average

education or intelligence, within the segment of the public to

which it is directed.

(2) Advertisements shall be truthful and not misleading in

fact or in implication. Words or phrases, whose meanings are

clear only by implication or by the consumer’s familiarity with

insurance terminology, shall not be used.

(3) An insurer must clearly identify its Life Insurance and

Annuity Contract as an insurance policy. With respect to any

product first filed to be offered to Florida residents on or after

the effective date of these rules, a policy trade name must be

followed by the words “Insurance Policy” or similar words

Clearly identifying the fact that an insurance policy is being

offered.

(4) No insurer, agent, broker, producer, solicitor or other

person shall solicit a resident of this State for the purchase of

Life Insurance and Annuity Contracts in connection with or as

the result of the use of any advertisement which:

(a) Contains any misleading representations, misrepresen-

tations, or is otherwise untrue, deceptive or misleading with

regard to the information imparted, the status, character or

representative Capacity of such person or the true purpose of the

advertisement; or

(b) Otherwise violates the provisions of these rules; Or

ance Code.

(5) No insurer, agent, broker, producer, solicitor or other

person shall solicit residents of this State for the purchase of Life

Insurance and Annuity Contracts through the use of a true or

fictitious name which is deceptive or misleading with regard to

the status, character, or proprietary or representative capacity of

such person or the true purpose of the advertisement.

(6) No insurer, agent, broker, producer, solicitor, or other

person shall use a lead generating device or list of prospective

insurers compiled therefrom, if the insurer, agent, broker, pro-

ducer, solicitor or other person knew or reasonably should have

known that the lead generating device or list of prospective

members was obtained in a manner which violates any provision

of the Florida Insurance Code or otherwise violates the provi-

sions of these Rules. No list of prospective insureds may be

purchased unless the purchaser requests from the seller any lead

generating devices that were used to compile the list and obtains

a specimen copy of any such devices that are disclosed.

(7) The contents of all advertisements, lead generating

devices, and lists of prospective insureds, regardless of by whom

prepared, created, designed or presented, shall be the responsi-

bility of the insurers benefiting directly or indirectly from its

use, if the insurer either requested the preparation of, or reason-

ably should have known of the content of the advertisement lead

generating device or list of prospective insureds.

(8) Each solicitation of coverage which insures a Florida

resident shall be from and contain the name of a Florida licensed

agent.

(9) No insurer, agent, broker, producer, solicitor or other

person shall effectuate insurance coverage prior to a full expla-

D10

nation of the coverage offered and completion of an application

form.

(10) A lead generating device conducted on behalf of an

insurer or agent shall contain the name of the insurer or agent

benefiting directly or indirectly from its use.

Specific Authority 624.308(1), 626.9611 FS. Law Imple-

mented 624.428, 626.112, 626.784, 626.9541(1)(a), (b), (€), (k),

(1), 626.9641(1) FS. History-New 9-1-73, Formerly 4-35.05,

Amended 6-12-88, 2-26-92, Formerly 4-35.005.

4-150.106 Disclosure Requirements for Annuity Contract

Advertisements. In addition to the requirements of 4-150.104

and 4-150.105, advertisements of annuity contracts shall be

subject to the following requirements:

(1) Advertisements of annuities containing a rate to be

earned, including but not limited to interest rates OF rates of

return, are prohibited unless all limitations and conditions which

affect the ultimate rate of return earned by the policyholder/an-

nuitant are disclosed prominently and conspicuously with equal

emphasis to describe the interest rate or rate of return. The

disclosure shall include:

(a) premium expense charges, if any;

(b) administrative charges, if any;

(d) any policy fees.

(2) Advertisements of two-tier annuities shall disclose:

(a) the interest rate on annuity accumulation fund;

(b) the interest rate for cash value accumulation fund; and

date of annuitization.

(3) An annuity advertisement shall not refer to an annuity

as a CD annuity, or in any terms that would lead a prospective

D11

purchaser to believe it is a negotiable instrume .it or anything

other than an annuity issued by a life insurance company.

Specific Authority 624.308, 626.9611 FS. Law Imple-

mented 626.9541(1)(a), (b), (e), @), 626.9641(1) FS. History-

New 2-26-92, Formerly 4-35.0051.

(a) No advertisement shall omit information or use words,

phrases, statements, references or illustrations if such omission

or such use has the capacity, tendency or effect of misleading or

deceiving purchasers or prospective purchasers as to the nature

or extent of any policy or contract benefit payable, loss covered

or premium payable

é-150.107 Advertisements of Proceeds Payable, Premi-

ums Payable, or Limited, Graded, or Modified Features

(1) Deceptive Words, Phrases, or Illustrations Prohibited

(a) No advertisement shall omit information or use words,

phrases, statements, references or illustrations if such omission

or such use has the capacity, tendency or effect of misleading or

deceiving purchasers or prospective purchasers as to the nature

or extent of any policy or contract benefit payable, loss covered

or premium payable. The fact that the policy or contract offered

is made available to a prospective insured for inspection prior

to consummation of the sale or an offer is made to refund the

premium if the purchaser is not satisfied, does not remedy

misleading statements.

(b) Invitations to contract must clearly reflect the insurer,

the agent, the policy form number(s), the type plan, premium

payable, payment period, and if applicable, changes in face

amounts and premiums.

being offered shall be made in close proximity to the advertised

face and premium amounts.

D12

(d) An advertisement of life insurance sold by direct re-

sponse shall not contain the phrase “no salesman will call,” or

“no agent will call,” or “by eliminating the agent and/or com-

mission we can offer this low cost plan,” or similar wording in

a misleading manner.

(e) Full benefit policies or contracts may use the term

“non-medical” or “no medical examination required” or similar

terms where issue is not guaranteed, but this statement shall be

accompanied by a further disclosure that health questions are

required and that issuance of the policy or contract may depend

upon evidence of insurability.

(f) A full explanation must be made of the use of units in

which a common premium is specified and varying face

amounts according to age are described.

(g) An advertisement which is an invitation to contract

Shall disclose those limitations affecting the basic provisions of

the policy.

(h) An advertisement which also is an invitation to join an

association, trust, or discretionary group may solicit insurance

coverage On aseparate and distinct application which requires

separate signatures for each application. The insurance program

must be presented so as not to mislead or deceive the prospective

members regarding the fact that they are purchasing insurance

as well as applying for membership, if that is the case.

(2) Limited, Graded or Modified Features.

(a) An advertisement for a policy or contract containing

graded, modified or other limiting benefits shall fairly and

accurately describe such negative features.

(b) If an insurer fails to require evidence of insurability as

a condition for issuance of a policy or contract with graded,

modified, or other limiting benefits an advertisement of such

policy or contract shall not state or imply that the applicant’s

physical condition or medical history will not affect the issuance

D13

of the policy or contract or payment of a claim thereunder. This

rule prohibits the use of the phrases, “no medical examination

required,” “no health questions asked,” and phrases of a similar

import in a misleading manner, but does not prohibit explaining

“guarantee issue” as long as it is done contiguous to and in a

manner as prominent as the term being defined.

Specific Authority 624.308(1), 626.9611 FS. Law Imple-

mented 626.9541(1)(a), (b), (e), (k), (1), 626.9641(1) FS. His-

tory-New 9-1-73, Formerly 4-35.06, Amended 6-12-88,

2-26-92, Formerly 4-35.006.

4-150.108 Necessity for Disclosing Policy Provisions Relating

to Renewability, Cancellability, and Termination. An advertise-

ment which is an invitation to contract shall disclose the provi-

sions relating to renewability, cancellability, and termination

and any modification of benefits, losses covered or premiums

because of age or for other reasons, in a manner which shall not

minimize or render obscure the qualifying conditions.

Specific Authority 624.308(1), 626.9611 FS. Law Imple-

mented 626.9541(1)(a), (b), (e), (k), (1), 626.9641(1) FS. His-

tory-New 6-12-88, Formerly 4-35.0061.

4-150.109 Use of Dividends.

(1) An advertisement shall not be used that utilizes or

describes dividends in a manner which is misleading or has a

tendency to mislead.

(2) An advertisement shall not directly or indirectly state

or imply that the amount of dividends or divisible surplus is

guaranteed; nor shall such advertisement state or imply that a

policyholder will profit by the growth of the company.

(3) Any comparison between participating and non-partici-

pating policies or contracts must be true and accurate.

Specific Authority 624.308 FS. Law Implemented

626.9541(1), (2) FS. History-New 9-1-73, Formerly 4-35.07, 4

D14

35.007.

4-150.110 Testimonials or Endorsements by Third Parties.

(1) Testimonials and endorsements used in advertisements

must be genuine, represent the current opinion of the author, be

applicable to the policy advertised and be accurately repro-

duced. The insurer, in using a testimonial or endorsement,

makes as its own all of the statements contained therein, and the

advertisement, including such statements, is subject to all the

provisions of these rules. When a testimonial or endorsement is

used more than one year after it was originally given, a confir-

mation must be obtained.

(2) A person shall be deemed a “spokesperson” if the

person making a testimonial, or endorsement:

(a) Has a financial interest in the insurer or a related entity

as a stockholder, director, officer, employee, or otherwise; or

(b) Is an entity formed by the insurer, is owned or control-

led by the insurer, its employees, or the person or persons who

Own or control the insurer; or

insurer in any of the above described capacities; or

(d) Is in any way directly or indirectly compensated for

making a testimonial or endorsement.

(3) Any person acting as a spokesperson, as defined in the

preceding paragraph, who performs any of the following acts in

an advertisement shall be considered soliciting an insurance

product, and such person shall be a licensed insurance agent

pursuant to the Florida Insurance Code:

(a) Solicits insurance or procures applications; or

(b) Engages or holds himself out as engaging in the busi-

ness of analyzing or abstracting insurance policies; or

D15

persons ‘relative to insurance contracts, or

(d) Performs an invitation to contract, except where per-

formed by a company officer in a manner which does not violate

Section 626.112(4), Florida Statutes.

(4) The fact of a financial interest or the proprietary or

representative capacity of a spokesperson shall be disclosed in

an advertisement and shall be accomplished in the introductory

portion of the testimonial or endorsement in the same form and

with equal prominence thereto. If a spokesperson is directly or

indirectly compensated for making a testimonial, endorsement

or appraisal, such fact shall be disclosed by use of the phrase

“Paid Endorsement” or words of similar import in a type style

and size that is at least equal to that used for the spokesperson’s

name or the body of the testimonial or endorsement, whichever

is larger. In the case of television or radio advertising, the

required disclosure must be accomplished in the introductory

portion of the advertisement and must be given prominence, and

if printed must be presented in a type style and size that is at

least equal to the largest type otherwise used in the advertise-

ment. The use of the phrase “Paid Endorsement” is not required

where the spokesperson is a company officer who is paid

generally but not specifically for making the advertisement.

(5) The disclosure requirements of this rule shall not apply

where the sole financial interest or compensation of a spokes-

person, for all testimonials or endorsements made on behalf of

the insurer, consists of the payment of union “scale” wages

required by union rules, and if the payment is actually for such

“scale” for TV or radio performances.

(6) An advertisement shall not state or imply that an insurer

or a policy or contract has been approved or endorsed by any

individual, group of individuals, society, association, organiza-

tion, governmental agency or other entity, unless such is the fact,

and unless any proprietary relationship between an organization

D16

and the insurer is disclosed. If the entity making the endorsement

or testimonial has been formed by the insurer or is owned or

controlled by the insurer, or the person or persons who own or

control the insurer, such fact shall be disclosed in the advertise-

ment. If the insurer or an officer of the insurer formed or controls

the association, or holds any policy-making position in the

association, that fact must be disclosed.

(7) When a testimonial refers to benefits received under a

policy for a specific claim, the claim data, including claim

number, date of loss, and other pertinent information shall be

retained by the insurer for inspection for a period of four years

or until the filing of the next regular report of examination of

the insurer, whichever is the longer period of time. The use of

testimonials which do not correctly reflect the present practices

of the insurer or which are not applicable to the policy or benefits

being advertised is not permissible.

(8) The provisions of subsections (2), (3) and (4) of this

section shall not apply to a written endorsement which does not

describe specific benefits, coverages or premiums and which is

made by an association of individuals which:

(a) has been in exigtence for more than one year prior to

making the written endorsement; and

(b) is formed for purposes other than soliciting insurance; and

by-laws; and

(d) has as its principal purpose some goal or objective other

than providing or soliciting insurance,

as determined by the Insurance Commissioner in accordance

with the procedures and requirements of Chapter 120, Florida

Statutes, the Administrative Procedure Act.

Specific Authority 624.308(1), 626.9611 FS. Law Imple-

mented 626.051, 626.784, 626.9541(1)(a), (b), (e), (k), @),

5 tee

D17

626.9641(1) FS. History-New 9-1-73, Formerly 4-35.08,

Amended 6-12-88, Formerly 4-35.008.

4-150.111 Use of Statistics.

(1) An advertisement relating to the dollar amounts of

claims paid, the number of persons insured, total amount of

insurance in force, relative standing, or similar statistical infor-

mation relating to any insurer or policy or contract shall not use

irrelevant facts, and shall not be used unless it accurately reflects

all of the relevant facts. Such an advertisement shall not imply

that such statistics are derived from the policy or contract

advertised unless such is the fact, and when applicable to other

policies or contracts or plans shall specifically so state.

(a) An advertisement shall specifically identify the policy

to which statistics relate and, where statistics are given which

are applicable to a different policy, it must be stated clearly that

the data do not relate to the policy being advertised.

(b) An advertisement shall not contain statements which

are untrue in fact, or by implication misleading with respect to

the assets, corporate structure, financial standing, age or relative

position of the insurer in the insurance business.

(2) An advertisement shall not represent or imply that claim

settlements by the insurer are “liberal” or “generous”, or use

words of similar import, or state or imply that claim settlements

are or will be beyond the actual terms of the contract. An unusual

amount paid for a unique claim for the policy advertised is

misleading and shall not be used.

(3) The source of any statistics used in an advertisement

shall be identified in such advertisement.

Specific Authority 624.308(1), 626.9611 FS. Law Imple-

mented 626.9541(1)(a), (b), (e), (k), (1), 626.9641(1) FS. His-

tory-New 9-1-73, Formerly 4-35.09, Amended 6-12-88,

Formerly 4-35.009.

D18

4-150.112 Disparaging Comparisons and Statements.

(1) An advertisement shall not directly or indirectly make

unfair or incomplete comparisons of policies or contracts or

benefits or comparisons of non-comparable policies or contracts

of other insurers, and shall not disparage competitors, their

policies or contracts, services or business methods, and shall not

disparage or unfairly minimize competing methods of market-

ing insurance.

(2) An advertisement should not contain statements such

as “no red tape” or “here is all you do to receive benefits.”

(3) Advertisements which state or imply that competing

insurance coverages customarily contain certain exceptions,

reductions or limitations not contained in the advertised policies

are unacceptable unless such exceptions, reductions or limita-

tions are contained in a substantial majority of such competing

coverage.

(4) Advertisements which state or imply in a misleading or

incomplete manner that an insurer’s premiums are lower or that

its loss ratios are higher because its organizational structure

differs from that of competing insurers shall not be used.

Specific Authority 624.308(1), 626.9611 FS. Law Imple-

mented 626.9541(1)(a), (b), (e), (k), (1), 626.9641(1) FS. His-

tory-New 9-1-73, Formerly 4-35.10, Amended 6-12-88,

Formerly 4-35.010.

4-150.113 Jurisdictional Licensing and Status of Insurer.

(1) An advertisement which is intended to be seen or heard

beyond the limits of the jurisdiction in which the insurer is

licensed shall not imply licensing beyond those limits.

(2) An advertisement shall not create the impression di-

rectly or indirectly that the insurer, its financial condition or

Status, or the payment of its claims, or the merits, desirability,

or advisability of its policy or contract forms or kinds of plans

D19

of insurance are approved, endorsed, or accredited by any

division or agency of this State or the United States Government

or if such relationship exists, such advertisement shall not

exaggerate or otherwise be misleading with respect to the nature

or extent of such relationship. This shall not include those cases

where permission is necessary to transact insurance within

military installations.

(3) An advertisement shall not imply in a misleading

manner that approval, endorsement, or accreditation of policy

forms or advertising has been granted by any division or agency

of the state or federal government. “Approval” of either policy

forms or advertising shall not be used by an insurer to imply or

state that a governmental agency has endorsed or recommended

the insurer, its policies, advertising or its financial conditions.

Specific Authority 624.308(1), 626.9611 FS. Law Imple-

mented 626.9541(1)(a), (b), (e), (k), (I), 626.9641(1) FS. His-

tory-New 9-1-73, Formerly 4-35.11, Amended 6-12-88,

Formerly 4-35.011.

4-150.114 Identity of Insurer.

(1) The name of the actual insurer shall be stated in all of

its advertisements. The form number or numbers of the policy

advertised shall be stated in any invitation to contract. An

advertisement shall not use a trade name, any insurance group

designation, name of the parent company of the insurer, name

of a particular division of the insurer, service mark, slogan,

symbol or other device which would have the capacity or

tendency to mislead or deceive as to the true identity of the

insurer or create the impression that the parent company would

have any responsibility for the financial obligation of the Insur-

ance Company.

(2) No advertisement shall use any combination of words,

symbols, or physical materials which by their content, phrase-

ology, shape, color or other characteristics, are so similar to

A» — ee ee ee

D20

combination of words, symbols, or physical materials used by

agencies of the federal government or of this State, or otherwise

appear to be of such a nature that it tends to confuse or mislead

prospective insureds into believing that the solicitation is in

some manner connected with an agency of the municipal,

county, state, or federal government, or if such relationship

exists, such advertisement shall not exaggerate or otherwise

mislead with respect to the nature or extent of such relationship.

(3) Advertisements, envelopes, or stationery which utilize

words, letters, initials, symbols, or other devices which are so

similar to those used by governmental agencies or other insurers

are not permitted if they may tend to mislead or confuse the

public into believing:

(a) that the advertised coverages are somehow provided by

or are endorsed by such governmental agencies or such other

insurers; or

(b) that the advertiser is the same as, is connected with, or

is endorsed by such governmental agencies or such other insur-

ers.

(4) No advertisement shall use the name of a state or a

political subdivision thereof in a policy name or description.

(S) No advertisement in the form of envelopes or stationery

of any kind may use any name, service mark, slogan, symbol,

or any device in such a manner that implies that the insurer or

the policy advertised, or that any agent who may call upon the

consumer as a result of the advertisement is connected with a

governmental agency.

(6) The use of letters, initials, or symbols of the corporate

name or a trademark that would have the tendency or capacity _

to mislead or deceive the public as to the true identity of the

insurer is prohibited unless the true, correct and complete name

of the insurer is in close conjunction and in the same size type

D21

as the letters, initials, or symbols of the corporate name or

trademark.

(7) The use of the name of an agency or other nomenclature

in type, size and location so as to have the capacity and tendency

to mislead or deceive as to the true identity of the insurer is

prohibited.

(8) The use of an address so as to mislead or deceive as to

the true identity of the insurer or any other entity or its location

or licensing status is prohibited.

(9) No insurer may use, in the trade name of its insurance

policy, any terminology or words so similar to the name of a

governmental agency or governmental program as to have the

tendency to confuse, deceive or mislead the prospective pur-

chaser.

(10) All advertisements used by agents, producers, brokers

or solicitors of an insurer must have prior written approval or

prior oral approval with subsequent written confirmation of

approval by the insurer.

(11) An agent who makes contact with a consumer, as a

result of acquiring that consumer’s name from a lead generating

device or from a list of prospective consumers compiled there-

from, or from an entity or individual providing such services,

must disclose such fact in the initial contact with the consumer.

Specific Authority 624.308(1), 626.9611 FS. Law Imple-

mented 626.9541(1)(a), (b), (e), (kK), (1), 626.9641(1) FS. His-

tory-New 9-1-73, Formerly 4-35.12, Amended 6-12-88,

Formerly 4-35.012.

4-150.115 Group or Quasi-Group Implications.

(1) An advertisement of a particular policy or contract shall

not state or imply that prospective insureds become group or

quasi-group members covered under a group policy or contract

and as such enjoy special rates or underwriting privileges, unless

D22

such is the fact. The term “enrollment” shall not be used except

in connection with the offer of group insurance.

(2) No solicitation of a particular class, such as governmen-

tal employees, which state or imply that their occupational status

of group members entitles them to reduced rates on a group or

other basis when, in fact, the policy being advertised is sold only

on an individual basis at regular rates.

Specific Authority 624.308(1), 626.9611 FS. Law Imple-

mented 626.9541(1)(a), (b), (e), (kK), (D), 626.9641(1) FS. His-

tory-New 9-1-73, Formerly 4-35.13, Amended 6-12-88,

Formerly 4-35.013.

4-150.116 Introductory, Initial, or Special Offers.

(1) An advertisement of an individual policy shall not

directly or by implication represent that a contract or combina-

tion of contracts is an introductory, initial, or special offer, or

that applicants will receive substantial advantages not available

at a later date, or that the offer is available only to a specified

group or individuals, unless such is the fact. An advertisement

shall not contain phrases describing an application period as

“special”, “limited", or similar words or phrases when the

insurer uses such application or periods as the usual method of

advertising Life Insurance and Annuity Contracts.

(2) An application period during which a particular insur-

ance product may be purchased on an individual basis shall not

be offered within this State unless there has been a lapse of not

less than six months between the close of the immediately

preceding application period for the same product and the

opening of the new application period. The advertisement shall

indicate the date by which the applicant must mail the applica-

tion, which shall be not less than ten days and not more than

forty days from the date that such application period is adver-

tised for the first time. This rule applies to all advertising media,

i.e., mail, newspapers, radio, television, magazines, and peri-

D23

odicals, by any one insurer. This prohibition shall not be appli-

cable to solicitations of employees or members of a particular

group or association which otherwise would be eligible under

specific provisions of the insurance code for group insurance.

The phrase “any one insurer” includes all the affiliated compa-

nies of a group of insurance companies under common manage-

ment or control.

(3) This rule does not require separation by 6 months of

application periods for the same insurance product in this State

if the advertising material is directed by an admitted insurer to

persons by direct mail on the basis that a common relationship

exists with more than one entity. Examples of such would be a

bank and its depositors, a department store to its charge account

customers, or an oil company to its credit card holders, and more

than one of such organizations is sponsoring such insurance

product at different times if providing such insurance under such

a method is not otherwise prohibited by law. However, the

6-month rule does apply to one specific sponsor to the same

persons in this State on the basis of their status as customers of

that one specific entity only.

(4) This rule prohibits any statement or implication to the

effect that only a specific number of policies will be sold, or that

a time is fixed for the discontinuance of the sale of the particular

policy advertised because of special advantages available in the

policy, unless such is the fact.

(5) The phrase “a particular insurance product” in Para-

graph (2) of this Section means an insurance policy which

provides substantially different benefits than those contained in

any other policy. Different terms of renewability, an increase Or

decrease in the dollar amounts of benefits, or an increase or

decre.se in any elimination period or waiting period from those

available during an application period for another policy shall

not be sufficient to constitute the product being offered as a

D24

different product eligible for concurrent or overlapping applica-

tion periods.

(6) Except for modified and step rated policies or contracts,

an advertisement shall not offer a policy or contract which

utilizes a reduced initial premium rate.

(7) Meaningless awards, such as a “safe drivers award”

shall not be used in connection with advertisements of Life

Insurance and Annuity Contracts.

Specific Authority 624.308(1), 626.9611 FS. Law Imple-

mented 626.9541(1)(a), (b), (e), (k), (1), 626.9641(1) FS. His-

tory-New 9-1-73, Formerly 4-35.14, Amended 6-12-88,

Formerly 4-35.014.

4-150.117 Statements about an Insurer. An advertisement

shall not contain statements which are untrue in fact, or by

implication misleading, with respect to the assets, corporate

structure, financial standing, age or relative position of insurer

in the insurance business. An advertisement shall not contain a

recommendation by any commercial rating system unless it

clearly indicates the purpose of the recommendation and the

limitations of the scope and extent of the recommendations. An

advertisement shall not imply that a holding company or sub-

sidiary of an insurer is a separate entity and responsible for the

insurer’s financial condition or contractual obligations unless

such is the fact and it is fully disclosed.

Specific Authority 624.308 FS. Law Implemented

626.9641(1), (2) FS. History-New 9-1-73, Formerly 4-35.15,

Formerly 4-35.015.

4-150.118 Application in Advertisement. Every application

for an individual policy or in-state group life insurance policy

Or an annuity contract, or enrollment form for an out-of-state

group contract which does not comply with Section

627.6515(2), F.S., must be taken by a Florida resident agent.

Therefore, to assure compliance with Florida Statutes, no adver-

D25

tisement for life insurance or an annuity contract in this State

containing an application for a life insurance policy or annuity

contract either for individual coverage, coverage under an in-

state group policy, or an out-of-state group policy which does

not comply with Section 627.6515(2), F.S., shall be used unless

such application contains the name of the Florida resident agent

or space for the Florida resident agent’s signature, and, the

completed application shall be returned to the Florida resident

agent.

Specific Authority 624.308(1), 626.9611 FS. Law Imple-

mented 624.428, 626.112, 626.784, 626.9541(1)(a), (b), (e), (kK),

(1), 626.9641(1), 627.5515(6) FS. History-New 9-1-73, For-

merly 4-35.16, Amended 6-12-88, Formerly 4-35.016.

4-150.119 Enforcement Procedures.

(1) Advertising File. Each insurer shall maintain at its home

or principal office a complete file containing every printed,

published or prepared advertisement of its individual policies

and typical printed, published, or prepared advertisement of its

group policies hereafter disseminated in this State with a nota-

tion attached to each such advertisement which shall indicate

the manner and extent of distribution and the form number of

any policy advertised. Such file shall be available for inspection

by this Department. All such advertisements shall be maintained

in said file for a period of either four years or until the filing of

the next regular report or examination of the insurer, whichever

is the longer period of time.

(2) Certificate of Compliance. Each insurer required to file

an Annual Statement which is now or which hereafter becomes

subject to the provisions of these rules must file with this

Department with its Annual Statement a Certificate of Compli-

ance executed by an authorized officer of the insurer wherein it

is stated that to the best of his knowledge, information and belief

the advertisements which were disseminated by the insurer

during the preceding statement year complied or were made to

D26

comply in all respects with the provisions of these rules and the

Insurance Laws of this State as implemented and interpreted by

these rules.

Specific Authority 624.308(1), 626.9611 FS. Law Imple-

mented 626.9541(1)(a), (b), (e), (k), (1), 626.9641(1) FS. His-

tory-New 9-1-73, Formerly 4-35.17, Amended 6-12-88,

Formerly 4-35.017.

4-150.120 Filing for Review.

(1) The Commissioner may, in his discretion, require the

filing with the Department, for review prior to use, of any life

insurance and annuity contract advertising material of an insurer

or particular insurers. Such advertising material must be filed

by the insurer with this Department not less than thirty (30) days

prior to the date the insurer desires to use the advertisement.

(2) An insurer shall file with the Department any or all life

insurance and annuity contract advertising material, except for

Institutional Advertisements, used or intended for use in the

State, when such advertisement or others which do not materially

differ are broadcast via television or radio or transmitted by

cable to any area or areas whose aggregate population comprises

more than 25% of the total population of the state according to

the last decennial census. Such advertisements shall be filed on

audio or audio/visual tapes as appropriate using either the actual

spokesperson or a “stand-in.” An audio/visual tape shall be on

VHS format. The advertising material may be filed thirty (30)

days prior to the date the insurer intends to use the advertising,

or may be filed contemporaneously with the date intended for

use. If the insurer files at least thirty (30) days prior to use, and

the Department has not issued a preliminary notice of violation

material changes in the production of the advertisement, the

insurer shall not be penalized for any use of the advertisement

which occurs within thirty (30) days after receipt of any sub-

D27

sequent preliminary notice asserting that the advertisement is in

violation of these rules.

(3) Subsection (2) above, shall be effective sixty (60) days

after the effective date of these rules. Subsection (2) shall not

apply to advertising material used by an insurer prior to the

effective date of these rules; provided, however, the Commis-

sioner may request, in his discretion, that an insurer submit any

such advertisement to the Department.

Specific Authority 624.308(1), 626.9611 FS. Law Imple-

mented 626.9541(1)(a), (b), (e), (k), (1), 626.9641(1) FS. His-

tory-New 6-12-88, Formerly 4-35.0171.

4-150.121 Severability Provision. If any section or portion of

a section of these rules, or any amendment thereto, or the

applicability thereof to any person or circumstance is held

invalid by a court, the remainder of the rules, or the applicability

of such provision to other persons or circumstances, shall not be

affected thereby.

Specific Authority 624.308(1), 626.9611 FS. Law Imple-

mented 626.9541(1)(a), (b), (e), (k), (I), 626.9641(1) FS. His-

tory-New 9-1-73, Formerly 4-35.18, Amended 6-12-88,

Formerly 4-35.018.

4-150.122 Prior Rules. These rules supersede and constitute a

revision of all prior rules pertaining to solicitation and sale of

Life Insurance and Annuity Contracts.

Specific Authority 624.308(1), 626.9611 FS. Law Imple-

mented 626.9541(1)(a), (b), (e), (k), (), 626.9641(1) FS. His-

tory-New 6-12-88, Formerly 4-35.020.

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.