As the Comptroller's Office decides whether to preempt a Rhode Island law restricting bank insurance sales it will be looking to the U.S. Constitution for guidance.
Article 6 declares that federal law overrules conflicting state laws. That means Congress can override state statutes but states cannot void federal laws.
Although this appears clear-cut, the state and federal governments have fought for 200 years over how much two laws must conflict before Article 6 is triggered.
The Supreme Court has ruled that any state law that clearly contradicts a federal law is automatically void. But normally states are fighting the federal government over finer distinctions.
That is the case in Rhode Island. The state law severely restricts who at a bank may sell insurance and where in the branch sales may occur.
The Office of the Comptroller of the Currency must decide if the Rhode Island law is at odds with the National Bank Act, which gives banks the right to sell insurance from places with fewer than 5,000 people.
"This is where we are right now with the Rhode Island legislation and bills being considered in other states," OCC Chief Counsel Julie Williams. "They don't prevent or bar banks from selling insurance. It is a question of how they will be controlled and restricted, and whether those efforts are so significant that they cross over the line."
There are two ways the OCC could preempt the Rhode Island law, even though it does not directly contradict the National Bank Act.
First, the agency could conclude that its regulations are so specific that there is no need for state oversight of the product. The Supreme Court has upheld this so-called "occupies the field" line of reasoning in scores of cases, ruling that Congress never would have permitted such an extensive regulatory system unless it intended to preempt state law.
An "occupies the field" argument, however, is unlikely to prevail. The comptroller already has conceded that state licensing laws apply to national banks, and he has not promulgated formal insurance sales regulations, preferring to issue a series of best practices guidelines instead.
"It could be applicable, but it isn't-because the comptroller has not decided to occupy the entire field," said David W. Roderer, a partner in the Washington office of the Goodwin, Procter & Hoar law firm.
This leaves only one other option. The comptroller could determine that the Rhode Island law frustrates the intent of the National Bank Act, even though the two laws do not directly contradict each other. The Supreme Court has sustained this sort of argument, concluding that states should not be able to undermine federal law.
"The comptroller is in an extremely strong position to hand down a decision that holds all or a substantial part of the Rhode Island statute is preempted because it frustrates portions of the National Bank Act," Mr. Roderer said. "The National Bank Act with regard to insurance powers is explicit and unambiguous about the comptroller's power to regulate bank insurance activities."
But Ann M. Kappler, a partner at the Washington office of the Jenner & Block law firm who represents insurers, said the issue is not cut-and- dried.
"The Rhode Island law really doesn't in any way significantly hamper a bank's ability to sell," Ms. Kappler said. "It puts some restraints on them, but you cannot say it would dramatically affect their ability to sell."
The agency is not expected to release its decision on preemption for at least several months.