A federal appeals court this week backed a state's right to regulate bank insurance sales, turning the legal tide yet again on this controversial issue.
The U.S. Court of Appeals for the Seventh Circuit decided Monday that Illinois insurance regulators may bar a bank from selling the "retirement CD."
Although this annuity-like product has lost much of its promise, the decision is important because it says state insurance regulators may define and regulate insurance products. That's what House Banking Committee Chairman Jim Leach's financial modernization bill would do.
"The decision implements the Leach bill without legislation," said Rick Fasold, president of American Deposit Corp., creator of the retirement CD. "States can define products as insurance and then prohibit them."
Banking lawyer David Roderer agreed, saying, "This case goes a long way toward the Leach proposal.
"It would allow a state to establish regulatory controls - even prohibitions - over the core activities of a national bank," the Winston & Strawn partner said. "Any product that has a shifting of risk could be defined as insurance."
In the Illinois case, the appeals court said the retirement CD is a fixed-rate annuity, an insurance product subject to state regulation.
While the U.S. Supreme Court in 1995's Valic decision said banks could sell annuities without interference from state insurance regulators, the decision in this case said Valic does not cover fixed-rate annuities like the retirement CD.
The Supreme Court took on another bank-insurance question in March, ruling that Florida regulators could not prevent Barnett Banks Inc. from selling insurance from towns with fewer than 5,000 people. But the Seventh Circuit said the Barnett case does not apply because a different section of the National Bank Act was at issue.
Barnett dealt with section 92 of the bank act, which specifically allows banks to sell insurance from small towns. The retirement CD case focused on section 24, which deals with the power to accept deposits and enter into contracts. This section says nothing about insurance. Therefore, the appellate judges ruled, the National Bank Act must give way to the McCarran-Ferguson Act, which allows state insurance rules to trump federal law.
The retirement CD was unveiled in 1994 as a way for banks to hold on to long-term deposits. Customers could deposit a lump sum in a tax-deferred, federally insured account in exchange for periodic payments at retirement for the rest of their lives. Blackfeet National Bank in Browning, Mont., was the first to offer the product via ads in national newspapers.
In December 1994, Illinois' acting director of insurance pronounced the retirement CD a fixed annuity and told Blackfeet to quit selling it in Illinois. The bank and American Deposit sued but lost at the trial court level. The plaintiffs appealed, setting the stage for Monday's ruling.
American Deposit has until May 27 to decide whether to appeal the ruling to the full panel of judges of the Seventh Circuit. (Monday's ruling was made by a three-judge panel, which split 2-1. The lone dissenter wrote a 42-page explanation.) Mr. Fasold of American Deposit said Thursday that no decision had been made on appealing.
Currently, banks sell annuities for insurance companies, earning a fee. With the retirement CD, banks could retain the funds. Kenneth Kehrer Associates in Princeton, N.J., said banks sold $10.7 billion of the $46.4 billion in fixed-rate annuities bought last year. Nearly 800 banks have obtained licenses from American Deposit to sell its product.
