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4000 - Advisory Opinions
Sale of Annuities by Bank as Agent for Insurance Company Where
Bank Does Not Engage in Any Activities Prohibited by the Glass-Steagall
Act is Permissible
FDIC 91-32 April 23, 1991 Mark A. Mellon, Attorney
{{6-28-91 p.4543}}
This is in response to your letter of February 18, 1991. Based on
your letter and telephone conversations with Mr. ***, legal counsel for
the *** (the "Bank"), it is my understanding that you wish to
ascertain whether the sale of the fixed and variable-rate annuities of
an insurance company by the Bank is permissible under the rules and
regulations of the FDIC. You state in your letter that the Bank
proposes to sell these annuities to the general public. A commission
will be paid to the Bank for the sale of each annuity but the amount of
that commission will not vary with the amount of annuities sold. The
Bank will not underwrite the annuities but will perform clerical
services in connection with their sale. Each purchaser of an annuity
will sign a form which states that the purchaser understands that the
annuity is an obligation of the insurance company and not of the Bank,
that the Bank is only acting as an agent on the behalf of the insurance
company and that the annuity is not insured by the FDIC.
Mr. *** has stated that the Bank will inform purchasers that the
Bank makes no warranties as to the annuities and that the annuities are
sold without recourse to the Bank. The Bank will not advise customers
to purchase the annuities but will instead inform them that they are
available as a service. Advertising and promotional materials will
clearly state that the annuities are provided by the insurance company
and not the Bank. The annuities will be sold in a separate and distinct
area of the Bank's premises by Bank employees who will act in a dual
employment capacity as Bank employees and representatives of the
insurance company. No deposit taking activity will occur in this
separate area. The employees who sell the annuities will not receive
commissions but will instead be paid a flat salary. Some of the
employees may only sell annuities on a part-time basis and will also
engage in taking deposits from customers. The employees who handle the
sale of annuities will not report directly to the insurance company but
will instead report to the Bank which will then report to the insurance
company. The annuity sales will be conducted entirely through the
Bank's commercial department and the Bank will make no purchases of
annuities on the behalf of the fiduciary accounts which the bank
administers through its trust department.
To answer your query, it must be determined whether the proposed
sale of annuities by the Bank is permissible under the Glass-Steagall
Act (the "Act") which restricts the securities activities of
depository institutions. Supreme Court decisions and administrative
determinations by federal financial regulatory agencies indicate that
variable-rate annuities should be considered to be securities for
purposes of the Act. 1
Section 21 of the Act (12 U.S.C. § 378) provides that a
state-chartered nonmember bank is prohibited from selling,
distributing, underwriting or issuing securities other than as provided
in section 16 of the Act. Section 16 (12 U.S.C. § 249(7th)) states
that the business of dealing in securities and stocks by a bank shall
be limited to purchasing and selling securities and stock without
recourse, solely upon order and for the account of customers and in no
case for its own account and the bank shall not underwrite any issue of
securities or stock. Based upon the representations made by you in your
letter and by Mr. ***, it is our conclusion that the proposed sale of
the annuities by the Bank as agent for an insurance
{{6-28-91 p.4544}}company fits within this exception. As
described, the Bank in the proposed arrangement will not engage in any
of the activities which are prohibited. It will instead limit its
activities to those which section 16 permits. We therefore conclude
that the Bank can engage in the sale of annuities under the terms you
have outlined without violating the Glass-Steagall Act.
The Bank will, however, have to ensure that its proposed sale of
annuities is in compliance with 12 C.F.R. Part 341-Registration of
Securities Transfer Agents, and 12 C.F.R. Part 344-Recordkeeping and
Confirmation Requirements for Securities Transactions. This is because
the proposed sale of annuities by the Bank comes within the scope of
both of these Parts. See 12 C.F.R. §§ 341.1 and 344.1.
It must be noted that the proposal to set aside space on the Bank's
premises for the sale of annuities might be deemed to be a lease by the
Bank to a third party to conduct business. Whether this is permissible
is a question that must be resolved under the state law of ***. The
FDIC would, of course, evaluate any leasing or other arrangement with a
third party for conformance with safe and sound banking practices. The
situation would be evaluated on the basis of the particular facts and
in view of the applicable laws and regulations of ***. The use of
space, equipment and personnel in connection with the sale of the
annuities requires that the bank be adequately compensated. What
constitutes adequate compensation will vary with the circumstances.
Full details regarding the proposed annuity sale arrangement should be
disclosed to the Bank's shareholders and should be approved by the
Bank's board of directors. Care should be taken to fully apprise all
potential purchasers of annuities that they are dealing with a separate
and independent entity from the Bank. Moreover, as in any such
relationship which could generate conflicts of interest, the
arrangement would probably be the subject of careful review during an
examination of the Bank. In connection with these matters, I have
enclosed an excerpt from the FDIC's Manual of Examination Policies
which discusses the topic of nonbanking activities conducted on a
bank's premises.
You request in your letter that the FDIC provide a letter which
states that the Bank is in compliance with the FDIC regulations on
capital maintenance, 12 C.F.R. Part 325. The Legal Division is unable
to provide such a letter. You may, however, contact the Memphis
Regional Office of the FDIC and speak to the review examiner for the
part of *** where the Bank is located. The telephone number of the
Office is (901) 681-1603.
In closing, we wish to stress that this letter in no way constitutes
an endorsement or approval of the Bank's proposal to sell fixed and
variable-rate annuities. The FDIC reserves the right to take issue with
the manner in which the annuities are sold depending upon the facts and
circumstances in any particular instance. While the FDIC does not
presently have any regulation or policy statement dealing specifically
with the sale of annuities on the premises of an insured nonmember
bank, it is conceivable that such action may be taken in the future. If
such action is taken, the Bank would of course be subject to such a
regulation or policy statement. Lastly, this letter does not constitute
a comprehensive review of the proposed sale of annuities in terms of
safety and soundness, conformance with any and all applicable laws and
regulations, conflicts of interest, etc. The failure or omission of
this letter to raise or comment upon any such issue should not be read
to constitute a conclusion on the part of the FDIC that no such issue
exists.
I hope that this letter is responsive to your query. Please do not
hesitate to contact me if you have any questions on this or any other
matter.
1The Supreme Court has found that variable-rate annuities are
securities for purposes of the Securities Act of 1933. Securities
Exchange Commission v. Variable Life Insurance Co., 359 U.S. 65
(1959). When asked to consider whether commercial paper was a security
under the Act, the Supreme Court looked to the Securities Act of 1933
which defines security to include "any note." 15 U.S.C.
§ 77(b)(1). The Supreme Court found that commercial paper was a
security for purposes of the Act. Securities Industry Association
v. Board of Governors of the Federal Reserve System, 488 U.S. 137
(1984). Although the Supreme Court has not decided whether a variable
annuity is a security under the Act, in light of their finding in
Variable Life Insurance, supra, and their construction of
the Act and the Securities Act of 1933 in pari materia, it
is probable that they would find it to be one. The Office of the
Comptroller of the Currency has found that variable-rate annuities are
securities for purposes of the Act. See Interpretive Letter
No. 331, April 4, 1985, reprinted in [1985-1987 Transfer
Binder] Fed. Banking Law Rep. (CCH) § 85,501. The Federal Reserve
Board has determined that variable-rate annuities should be considered
securities for the purposes of section 32 of the Act (12 U.S.C. § 78)
which prohibits the directors and employees of member banks from
working for entities which underwrite or issue stocks and securities.
12 C.F.R. § 218.112. Go Back to Text
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