prospects for banks selling life insurance sales may appear shrouded in a thick haze. After all, the Supreme Court is set to decide next year whether state officials can ban bank insurance sales outright. And Congress is debating several measures that would block further bank inroads into this lucrative business. But bankers shouldn't be too put off by the legal uncertainty , according to banking attorneys. Bankers have a lot more leeway then they realize in the marketing of life insurance right now. "The ones who think they are pushing the envelope probably haven't even reached the envelope yet," says David Roderer, a partner at Winston & Strawn in Washington. There are at least a half dozen legitimate ways for banks to broker all types of life insurance products. These options vary from leasing out lobby space to life insurances agencies, to special exemptions for banks in small towns, to asking regulators to treat life insurance the way they do annuities. With the passage of the Garn-St Germain Act 13 years ago, Congress banned most banks from selling life insurance. But it included enough loopholes that insurance agents are now finding it difficult to keep bankers out. That's why the banking industry made $TK million off life insurance sales in TK, according to the Association of Banks in Insurance. The Supreme Court case and the legislative threat primarily affect only the ability of banks to sell insurance from small towns under a National Bank Act provision. So, even if the bank industry loses, lobby-leases and other exemptions not connected to the court challenge will still be available. The Supreme Court case pits Barnett Banks Inc. against the Florida insurance commissioner, who argues that the McCarran-Ferguson Act of 1945 gives his agency the authority to regulate, and thus ban, bank insurance sales. The banking company and the Office of the Comptroller of the Currency, however, argue that the National Bank Act expressly permits such sales from branches in towns with fewer than 5,000 residents. Bankers have some momentum going into this case. A federal appeals court in Chicago ruled Oct. 4 that banks do not have to limit insurance sales from small-town branches to small-town residents. The decision, which reversed the trial court's ruling, essentially allows a bank to sell insurance state-wide from the small-town branch. Bankers, who already are using phone solicitations and mailings from the small-town branch to target a wider audience, can exploit the small-town rule, says Richard Whiting, general counsel at the Bankers Roundtable. It is just a matter of time before a bank asks the Comptroller's office for permission to open a branch of the agency in a major city, essentially skirting the small-town requirement. But he warned bankers not to hold their breath. "The Comptroller doesn't want to answer that because that would bring a fire storm" of protest from agents, Mr. Whiting said. The legislative debate is constantly changing, making it hard to determine what a final proposal will say. But Mr. Roderer said lawmakers are moving in two directions. First, some lawmakers want to freeze the Comptroller's authority to over bank insurance sales. Second, many of those same lawmakers also want to allow banks and insurance companies to own each other. The prospects for legislation are murky, but nothing is expected to pass until after the Supreme Court rules in the Barnett case sometime next year, Mr. Roderer said. If the banks win the court case, then the potent insurance lobby will mount a full-court press to move these bills through Congress. Bankers need to be ready, he said. Lawmakers have many more agents as constituents than they do bankers, he added. While the town-of-5,000 rule is under attack, other options are considered much safer. The easiest - and safest from a legal standpoint - is the lobby lease. In essence, the bank rents out part of a branch to an insurance agency, which pays the institution a flat fee plus a percentage of all policies written. "This is a vehicle whereby any national bank can have someone come in," Mr. Whiting said. The advantage here is that customers need only walk across the lobby to satisfy their insurance needs, he said. But the bank doesn't profit directly from each sale, likely limiting the amount of fee income it can earn. The lobby lease got a nudge of support this summer from the Comptroller's office, which took the concept a step further and gave banks permission to allow their employees to work for the insurance agency part time. Julie Williams, chief counsel at the Comptroller's office, said these part-time employees must follow all applicable state licensing laws. Bank holding companies with assets of less than $50 million also have unimpeded access to the insurance sales market, said Mr. Whiting, who teaches a course on bank insurance sales at Georgetown University Law Center. This exemption covers 4,500 of the 6,000 holding companies, he said. The only condition is that the holding company cannot be a subsidiary of another holding company with assets of more than $50 million, he said. In other words, a megabank can't create a small holding company to take advantage of the provision. Another 16 holding companies with assets above $50 million can sell insurance as well. These companies, including Norwest Corp., qualified for a grandfather clause in the Garn-St Germain Act, which stripped the Federal Reserve Board of the authority to let holding companies own insurance agencies. Bankers could take another approach. Rather than trying to exploit loopholes, they could attempt to reclassify life products as investment vehicles. This what the comptroller previously did with annuities. The comptroller, once he declares the products as financial instruments, could rule that they are "incidental" to banking and thus permitted under the bank act. "To date that has not been used to authorize the sale of life insurance," Mr. Whiting said. "But that is a possibility. The case could be made." The only problem - no one has yet asked. "No one has come to us and said, these are the features of universal life - can banks do this as incidental to banking," Ms. Williams said. Once someone asks, the agency will review the issue, she said. Gary Hughes, general counsel to the American Council of Life Insurers, said his group will vehemently oppose any effort by the Comptroller's office to deem life products something other than insurance. "If the comptroller wants to sing that song again we will take him to task," he said. But Mr. Roderer said a strong case can be made that universal life insurance more closely resembles a mutual fund rather than an insurance product. Both investments are tied to the performance of underlying assets and are used for long-term savings rather than to provide a lump sum at death, he said. Mr. Hughes, however, said a sizable difference exists. Insurance companies have to pay out a lump sum if the person dies after making only a single payment. State-chartered banks must follow their state's rules. For most states, that means they can do whatever a national bank does. For banks in 27 states, that means they can sell the product outright. The rest must either wait for either a change in the state law or switch to a national charter.

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