The widely reported efforts of certain banks and the insurance industry to fashion compromise federal banking legislation has presumably faltered.
Their draft legislative package would have redefined the authority of banks to engage in various insurance activities, and included annuities brokerage within the restrictive scope of its provisions.
Bad News from New York
The victory that the agents were unable to win in this Congress, however, may yet be within their reach in the courts.
In another blow to the asserted authority of banks to offer annuities, a New York State court recently declared that state law does not authorize such brokerage activities.
Significantly, Justice Harold J. Hughes of the New York Supreme Court ruled that state-chartered banks are without authority to broker fixed or variable-rate annuity products under the "incidental power" provision of New York State Banking Law.
That statute mimics the "incidental power" provision of federal banking law, 12 United States Code section 24 (seventh), which identically reads that banks are thereby authorized to "exercise all such incidental powers as shall be necessary to carry on the business of banking."
In this most recent decision, in the matter of New York State Association of Life Underwriters Inc. et al. v. Considine, Justice Hughes noted that state law does not expressly authorize state banks to broker annuities, and he observed that the activity is not "necessary" to accomplish the enumerated powers set forth in the state statute. Therefore, he reasoned, no such authority exists.
The restrictive reasoning of that lower court disturbingly echoed the narrow construction of section 24 (seventh) of the National Bank Act articulated in the recent decision by the U.S. Court of Appeals for the Second Circuit in American Land Title Association v. Clarke.
Such narrow reasoning under the federal statute endangers national banks' ability to offer innovative financial products, particularly annuities and investment-related products and services.
The most recent New York decision rejected an interpretation of New York State law by Jill Considine, the state's former banking superintendent.
Reining In a Regulator
In so doing, the court emphasized that repeated attempts to have the Legislature authorize state banks to sell annuities had failed to win approval.
Justice Hughes suggested that "whatever the virtue of a public policy allowing state chartered banks to compete with federal banks," it is not the banking superintendent's place "to establish that agenda for the state."
He noted nevertheless that some support exists under federal precedent for a broader reading of the federal statute.
Appeal of the new decision is expected.
The insurance industry lost no time, however, in placing the new declaratory ruling before the U.S. Court of Appeals for the Fifth Circuit, which is currently reviewing a challenge to the Comptroller's interpretation of the National Bank Act as authorizing fixed annuities sales under federal law.
Thus the essential statutory flexibility embodied in the National Bank Act for banks to develop and market new financial products is likely to be redefined by the judiciary over the coming months.
Mr. Roderer, formerly the legislative counsel of the Office of the Comptroller of the Currency, practices in Washington and New York as banking law partner with the firm of Jones, Day, Reavis & Pogue.