Activities and Investments of Insured State Banks

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 362

RIN 3064-AB20

Activities and Investments of Insured State Banks

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Response to petitions for rulemaking.

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SUMMARY: On April 29, 1993, the FDIC sought comment on whether to amend

its regulations governing insurance underwriting by well-capitalized

insured state banks and their subsidiaries to provide that excepted

insurance underwriting activities may only take place in the state in

which the bank is chartered and in the state in which the bank's

insurance underwriting subsidiary is incorporated. After reviewing the

comments, the FDIC has determined not to amend the regulation.

FOR FURTHER INFORMATION CONTACT: Curtis L. Vaughn, Examination

Specialist, (202) 898-6579, Division of Supervision, FDIC, 550 17th

Street NW., Washington, DC 20429 or Pamela E.F. LeCren, Senior Counsel,

(202) 898-3730, Legal Division, FDIC, 550 17th Street NW., Washington,

DC 20429.

SUPPLEMENTARY INFORMATION:

Background

On December 19, 1991, President George Bush signed into law the

Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)

(Pub. L. 102-242, 105 Stat. 2236). Section 303 of FDICIA added section

24 to the Federal Deposit Insurance Corporation Act, ``Activities of

Insured State Banks'' (FDI Act)(12 U.S.C. 1831a). With certain

exceptions, section 24 of the FDI Act limits the activities and equity

investments of state chartered insured banks to the activities and

equity investments that are permissible for national banks. Well-

capitalized insured state banks and their subsidiaries that were

lawfully providing insurance as principal in a state on November 21,

1991 may continue to provide insurance of the same type to residents of

the state, individuals employed in the state and any other person to

whom insurance was provided without interruption since such person

resided, or was employed, in the state. (Section 24(d)(2)(B), 12 U.S.C.

1831a(d)(2)(B)).1

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\1\Section 24(d)(2)(B) reads as follows: (2) Insurance

Underwriting Prohibited.--

* * *

(B) Continuation of Existing Activities.--notwithstanding

subparagraph (A), a well-capitalized insured State bank or any of

its subsidiaries that was lawfully providing insurance as principal

in a State on November 21, 1991, may continue to provide, as

principal, insurance of the same type to residents of the State

(including companies or partnerships incorporated in, organized

under the laws of, licensed to do business in, or having an office

in the State, but only on behalf of their employees resident in or

property located in the State), individuals employed in the State,

and any other person to whom the bank or subsidiary has provided

insurance as principal, without interruption, since such person

resided in or was employed in such State.

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On June 16, 1992, the FDIC's Board of Directors adopted a proposed

regulation implementing the above described insurance underwriting

provisions of section 24. (12 CFR part 362, ``Activities and

Investments of Insured State Banks'', 57 FR 30435, July 9, 1992). The

preamble accompanying the proposed regulation indicated that it was the

FDIC's intention to construe the reference to ``in a state'' as

excepting insurance underwriting activities by an insured state bank

only in the state in which the bank was chartered and as limiting the

subsidiary of the bank to insurance underwriting activities in the

state in which the subsidiary was incorporated and doing business as of

November 21, 1991.

The final rule adopted by the FDIC's Board of Directors did not

limit the geographic scope of the insurance underwriting exception to

the bank's home state and the subsidiary's state of incorporation. (57

FR 53213, November 9, 1992). At the conclusion of the comment period,

the FDIC's Board of Directors decided that the proper construction of

section 24(d)(2)(B) was that the insurance underwriting exception

should extend to any state in which the bank or its subsidiary was

underwriting insurance on November 21, 1992. The change of position

resulted from information brought to the FDIC's attention during the

comment period. (See discussion at 57 FR 53226, November 9, 1992).

The FDIC was subsequently petitioned pursuant to section 553(e) of

the Administrative Procedure Act (5 U.S.C. 553(e)) to repeal that

portion of part 362 construing the phrase ``in a state'' and to seek

further comment before adopting any provision concerning insurance

underwriting by insured state banks. The FDIC granted the petitions and

solicited public comment on whether that portion of part 362 dealing

with the geographic scope of the insurance underwriting exception

should be amended to read as had originally been proposed or should be

left unchanged (58 FR 25953, April 29, 1993). In doing so, the Board

indicated that it was of the opinion that the position reflected in

part 362 as adopted in final was correct but that it was possible that

further comment on the issue would bring additional information to the

FDIC's attention that should be weighed by the agency.

Comment Summary

Thirty-three comments were submitted in response to the request for

comment. Of the thirty-three comments, twenty-three urged the FDIC not

to modify the regulation and ten urged the FDIC to amend part 362 so as

to return the language regarding the insurance underwriting grandfather

to that which had been originally proposed. The arguments on either

side can be summarized as follows:2

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\2\In addition to addressing the geographic scope of the

insurance underwriting exception, one comment expressed the concern

that part 362 allows banks that are not well-capitalized to take

advantage of the insurance underwriting exception, and three

comments objected to the FDIC's posture, reflected in the preamble

accompanying part 362 when it was adopted in final, that annuities

are not insurance. Both of these issues were raised in the section

553(e) rulemaking petitions which were filed with the FDIC. When the

petitions were taken up by the FDIC, the Board of Directors declined

to reopen the rulemaking on part 362 on either issue. It was (and

still is) the FDIC's posture that part 362 does not permit an other

than well-capitalized bank to take advantage of the insurance

underwriting exception. Persons who read the regulation as so

allowing are misreading the regulation. It was (and likewise still

is) the agency's position that in applying part 362 and section 24

of the FDI Act the FDIC should apply the law pertaining to national

bank powers as construed by the Office of the Comptroller of the

Currency (OCC). It has been the OCC's opinion that an annuity

contract is not a contract of insurance. Although recently a court

came to the opposite conclusion, the OCC has asked the Supreme Court

to review that decision. (Ludwig v. Variable Annuity Life Ins. Co.,

petition for cert. filed, ______ U.S.L.W. ______ (U.S. April 13,

1994)(No. 93-1613). Until such time as the issue is finally decided,

the FDIC will continue to follow the OCC's view on this matter.

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Leave regulation as is:

(1) The language of section 24(d)(2)(B) is clear and unambiguous on

its face and should be construed without resort to any analysis of the

FDI Act's legislative history. The most important tool in determining

the meaning of a statute is the text of the statute itself and there is

no need to go beyond that text if the statute is unambiguous. The use

of the indefinite article ``a'' in the phrase ``in a state'' has a

clear meaning which is consistent with part 362 as adopted by the FDIC.

Congress could have inserted language such as ``state of charter'',

``state of incorporation'', ``home state'', etc. but it chose not to do

so. That approach having been rejected by Congress, the FDIC should not

by regulation impose restrictions that Congress chose not to impose.

(2) If the FDIC feels compelled to resort to an analysis of the FDI

Act's legislative history, that history clearly shows that Congress

specifically rejected the result contemplated by the FDIC in its

original proposal. The comments pointed to specific language changes

from an earlier version of the legislation as evidence of the fact that

Congress specifically chose not to adopt the more limited version of

the exception which was originally reported out of committee in the

Senate.

(3) The FDIC should not place any weight on the unpublished

conference committee transcript as such exchanges are not reliable

evidence of legislative intent. Even if the FDIC were to consider that

transcript in determining its views on the proper construction of the

section, the exchanges set out in the transcript are ambiguous and

should not be relied upon to override much clearer statements made to

the entire legislative body.

(4) In the opinion of the commenters, those who oppose the existing

regulation do not understand how the insurance industry operates. In

order for a bank or a subsidiary of a bank to underwrite insurance in a

state, the bank and/or subsidiary must be licensed by the state to

underwrite in that state. No one state can authorize its banks or their

subsidiaries to underwrite insurance in any other state. Those other

states, however, may do so. The existing regulation does not,

therefore, permit a state bank to use its home state as a spring board

to launch a nationwide underwriting campaign. The regulation limits the

availability of the exception to those states in which a bank or

subsidiary was licensed to underwrite (i.e., in which the bank or

subsidiary was ``lawfully providing insurance as principal'').

Reinstate original interpretation:

(1) The FDIC improperly attached substantive importance to the

technical amendment which substituted the word ``a'' for ``that'' in

the insurance underwriting exception (the exception originally used the

phrase ``in that state'').

(2) There is ample support in the legislative history demonstrating

the intent of Congress to limit the insurance underwriting exception to

the state in which the bank is chartered and the state in which the

subsidiary is incorporated. The FDIC placed too much emphasis on the

remarks of Senator Roth who was not a conferee and overlooked the

statements of conferees as reflected in the conference committee

transcript.

(3) The FDIC's interpretation of the statute allows state banks to

underwrite insurance in any state in which the bank sold insurance

policies on November 21, 1991. The rule thus exposes banks and the

deposit insurance fund to exactly the risks section 24 sought to

prevent.

Decision After Review of the Comments

The FDIC is persuaded by the comments which urge the FDIC not to

amend part 362. A careful review of the comments leads the FDIC to

conclude that while the original intent of the legislation that

ultimately became section 24(d)(2)(B) may have been to restrict the

exception to a bank's home state and the state of incorporation of the

bank's subsidiary, subsequent changes to the language of the section

were made which broadened the scope of the exception.

The exception as originally reported out of committee on the Senate

side limited the exception to ``that'' state in which the bank and its

subsidiary were lawfully providing insurance as principal on July 15,

1991. The legislation at that point also contained a transition rule

which permitted an insured state bank and any of its subsidiaries which

were lawfully engaged in insurance underwriting activities made

unlawful by the bill to continue to underwrite insurance for one year

after the enactment date of the legislation. A section-by-section

analysis of the exception as worded when reported out of committee on

the Senate side indicated that the exception allowed a bank to continue

to provide insurance of the same type to residents or an individual

employed in the state in which the bank is chartered. These things

taken together demonstrate that the provision as reported out of

committee probably was intended to limit the insurance grandfather to a

bank's home state.

The language as reported out of committee was subsequently amended,

however, to refer to providing insurance as principal in ``a'' state;

the grandfather date was changed to November 21, 1991; the transition

rule was deleted; and the section was given the heading ``Continuation

of Existing Activities''. It is the agency's belief that these changes

had a substantive impact on the legislation and were not merely

technical changes. It is a tenet of statutory construction that the

best indication of the meaning of a statute is the statute itself and

that where the language of a statute is plain on its face, the statute

should be accorded its plain meaning. Norfolk and Western Railway Co.

v. American Train Dispatchers Ass'n, 499 U.S. 117 (1991).

It is the agency's opinion that the plain meaning of the phrase

``in a state'' as used in section 24(d)(2)(B) as ultimately adopted

means in ``any'' state in which the bank and/or its subsidiary were

lawfully underwriting insurance on November 21, 1991. The word ``a'' is

defined in Webster's Dictionary to mean either ``one'' or ``any''.

According to Black's Law Dictionary (Fourth Ed., 1989), the proper

meaning of the word ``a'' depends upon the context in which it is used.

It may mean one where only one is intended or it may mean any one of a

great number. As there are many states in the United States and any of

those states may have authorized the lawful provision of insurance as

principal on November 21, 1991, the context of the word ``a'' in

section 24(d)(2)(B) appears to be ``any'' and not ``one''. Furthermore,

there is nothing in the text of the provision itself which suggests

that the phrase ``in a state'' is limited to encompassing activities in

the bank's chartering state or the subsidiary's state of incorporation.

The statute could have used words like ``home state'' or ``chartering

state'' but it does not. The elimination of the transition rule in

conjunction with the addition of the heading ``continuation of existing

activities'' are also evidence that the changes made to the statute

resulted in a substantive amendment to the scope of the insurance

underwriting exception.

As the regulation is, in the FDIC's view, consistent with the plain

meaning of section 24(d)(2)(B), there is no need to rely upon

legislative history in construing the statute. However, the FDIC did

carefully review all of the legislative history brought to the agency's

attention.3 We find that as there are conflicting statements in

the legislative history, the history of the section is not necessarily

very enlightening. To the extent that the history does shed light on

the issue under consideration, however, the FDIC finds that the history

is weighted more in favor of the position reflected in the FDIC's

current regulation which, as we have already indicated, is consistent

with the plain meaning of the language of the statute.

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\3\Although the FDIC re-opened the comment period with the

thought that by doing so additional information pertaining to the

section's legislative history might be brought to the agency's

attention, the additional comment period did not produce any

material not previously on the record.

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In consideration of the above, the FDIC's Board of Directors has

voted to decline to amend Sec. 362.5 of the FDIC's regulations.

By Order of the Board of Directors.

Dated at Washington, DC this 24th day of May, 1994.

Federal Deposit Insurance Corporation.

Robert E. Feldman,

Acting Executive Secretary.

[FR Doc. 94-13366 Filed 6-7-94; 8:45 am]

BILLING CODE 6714-01-P