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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

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 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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