In an encouraging sign for banks, the Supreme Court agreed Monday to consider whether banks should have the right to sell annuities.
Annuities -- tax-sheltered retirement investments -- have been increasingly popular at banks. But banks in the business have been hampered by an array of conflicting state and federal laws. A favorable ruling by the high court could put that confusion to rest.
Last year, a federal appeals court in New Orleans concluded that annuities were insurance products, which national banks can sell only from small towns. Acting on behalf of the Office of the Comptroller of the Currency, the Department of Justice appealed to the Supreme Court.
'A Good Sign'
Legal experts said the Supreme Court may well side with the industry.
The high-court justices "would not have agreed to hear the case if they uniformly agreed" with the New Orleans ruling, said Melanie Fein, partner at Arnold & Porter, Washington. "It's a good sign they might overturn" the lower court's decision.
Eugene A. Ludwig, comptroller of the currency, swiftly praised the Supreme Court's move.
"The ability to sell annuities, along with the fee income collected from these activities, is of great importance to the continuing health of the national banking system," he said.
Annuity sales have grown steadily over the past few years, with banks counting for a larger and larger share. Total sales were $72 billion last year, up from $53.6 billion in 1990, according to the Association of Banks in Insurance. Banks posted $14.5 billion of last year's volume, the trade group said, up from less than $10 billion a few years before.
Gap in the Product Line
The court's decision will affect all national banks by defining their power to sell fixed-and variable-income annuities. Without this power, lawyers say, there would be a gap in banks' retail product lines.
A bank without annuities "is like a restaurant that is unable to sell alcohol," said Robert M. Kurucza, a partner with Morrison & Foerster in Washington. "If someone is going to enjoy a fine dinner, they want to be able to have a nice bottle of wine."
But industry experts warn that even a Supreme Court ruling in banks' favor will not ensure smooth sailing. Some states may still challenge banks' rights to sell the products within their borders, said Ms. Fein of Arnold & Porter.
The Supreme Court will take up the case next term. A decision could come as early as December or as late as next June.
Had the court not agreed to hear the case, "it would have been a setback, but not a fatal one," said Michael F. Crotty, the deputy general counsel for litigation at the American Bankers Association.
Mr. Crotty noted that the case raises several issues, and the court could look at all or just a few of them. The final impact on banks will depend on how narrowly the court rules, he said.
The New Orleans case, which the Variable Annuity Life Insurance Co. brought against NationsBank of North Carolina, pits the banking industry against insurance agents.
National banks are generally prohibited from selling insurance, but there is an exception for bank branches in towns with fewer than 5,000 people. Big banks want to use small-town branches as a springboard for wider sales.
The products are popular with bank customers, and could even outpace mutual fund sales at some institutions, said A. Michael Lipper, president of Lipper Analytical Services.
"Today, banks sell more mutual funds than annuities," he said. "We think at some point in the future some banks will sell more annuities" than funds.
