The American Council of Life Insurers sued the government Tuesday for allowing Magna Corp. to retain insurance offices in Missouri after converting from a state to a federal charter.

The trade group, in a suit filed in U.S. District Court here, said the order by the Office of the Comptroller of the Currency is illegal because it allows the bank to sell insurance outside small towns.

The decision is "arbitrary, capricious, an abuse of discretion, and otherwise not in accordance with law," the life insurers said.

The group also charged that the order permits Magna to engage in an activity barred by the National Bank Act. This precedent could be used to let banks underwrite insurance, it said.

"We regret having to take this step, but it had to be taken to prevent banks from entering the business of underwriting insurance through the back door," said Gary E. Hughes, the trade group's chief counsel.

OCC Chief Counsel Julie L. Williams said the group may have filed the suit for political reasons, hoping to pressure the banking industry into agreeing to legislation limiting its insurance powers. "This suit is not constructive," Ms. Williams added. "It is misguided. But we are confident of the merits of the position we took."

A banking lawyer said he doesn't expect the lawsuit to advance far. "The OCC has been allowing state banks that convert to national charters to keep the powers they exercised under the state charter since the 19th century," said William J. Sweet Jr., a partner at the Washington law firm of Skadden, Arps, Slate, Meagher & Flom.

The OCC in November 1995 gave Magna permission to convert from a state to a federal charter. It also said Magna could keep 33 insurance agencies it operates, regardless of their location. Insurance groups protested the ruling, saying the National Bank Act restricts banks to selling from small towns.

But the OCC said a separate provision in the act permits banks to retain any business owned before conversion, including insurance offices in large cities.

The ruling set off a firestorm of criticism on Capitol Hill, with House Banking Committee Chairman Jim Leach accusing the Comptroller of "thumbing his nose at Congress," which was considering restricting bank insurance powers.

The trade group for insurers asked for an immediate injunction to prevent the OCC from issuing similar orders in the future.

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