Washington - The Supreme Court heard oral arguments yesterday in a high-stakes banking case that ultimately could have the banking and insurance industries clamoring for Congress to change the Glass-Steagall Act and the National Bank Act.
During the argument, the justices sought guidance on what Congress intended in those acts with respect to the ability of national banks to sell annuities, and whether annuities should be characterized as securities or insurance products. But few clear answers surfaced at the session, attorneys present at the argument said.
The case could have major implications for the debate in the next Congress on modernizing the financial services industry, including changing the Glass-Steagall Act to let banks underwrite municipal revenue bonds, attorneys said.
Because of uncertainty over what Congress intended, the justices could come out with a narrow decision that safisfies neither the banking nor the insurance industries, forcing them to seek a legislative remedy, said a congressional banking attorney. The sections of the two acts at issue in the court case are also at issue in the long-running legislative debate, the attorney said.
The high court previously has not hesitated to force parties in cases to seek political solutions, and the court could do so in the banking case, the, attorney said.
The case, NationsBank v. Variable Annuity Life Insurance Co., asks whether national banks located in communities of greater than 5,000 people can act as agent for the sale of both fixed and variable annuities.
The U.S. comptroller of the currency ruled in 1990 that NationsBanc Securities Inc., a brokerage subsidiary of NationsBank of North Carolina, has the power to sell annuity products under the National Bank Act of 1863.
The comptroller also ruled that annuity contracts are securities, rather than insurance, under the Glass-Steagall Act of 1933. The act, which generally separates commercial from investment banking, specifies limited securities brokerage powers for national banks.
In general, annuities are contracts under which the purchaser makes premium payments to the issuer in return for the right to receive payments over a fixed period or for the life of the purchaser or beneficiary. As is the case with most annuities, NationsBank wants to market annuities on the basis of their tax-deferred investment attributes.
Variable Annuity Life Insurance Co., a Houston-based insurance company known as VALIC, sued to overturn the comptroller's ruling and to enjoin NationsBank from selling annuities. The U.S. Court of Appeals for the Fifth Circuit ultimately ruled for VALIC in 1993, when it rejected the comptroller's decision and held that the bank act plainly prohibits national banks from selling insurance in communities of more than 5,000 residents.
The appeals court reasoned that since Congress specified that national banks can sell insurance in small communities, it must have intended that banks in larger communities could not have such power.
At stake in the case are billions of dollars worth of business for the insurance and banking industries.
Steven Rosenthal, an attorney with Morrison & Foerster in Washington who argued the case for NationsBank, said thrift institutions, credit unions, and up to two-thirds of state banks sell $13.5 billion worth of annuities, a year. That figure represents 19.3% of overall annuity sales, he said at yesterday's argument. National banks should be allowed to compete with these types of financial institutions, he said.
Edward DuMont, an assistant to the solicitor general who argued for the U.S. comptroller, said the bank act lists certain core banking activities and leaves "ample scope" for the exercise of other powers that might be "incidental" to carrying on "the business of banking." Selling annuity products falls under these "incidental" powers, he said.
Justices Sandra Day O'Connor and Ruth Bader Ginsburg asked whether there are limits to the "business of banking" and whether any investment instrument could fall within its scope. Not all investment instruments would be covered, but it would be a mistake to view the banking industry as "frozen" in time when the bank act was passed and amended in the first third of this century, DuMont said. Selling annuity products "is a power that is necessary to carry on the business of banks" in a changing market, he said.
Rosenthal said NationsBank is seeking to act as agent to only sell annuity products, which would not involve bank underwriting or let the bank become a general insurance agent.
But attorney David Stewart of Ropes & Gray in Washington, who argued for VALIC, said that annuities have the same elements as general casualty life insurance because they pool risk. Purchasers buy life insurance to insure against loss of income due to death, and people who die early are subsidized by people who die late, he said.
Purchasers of annuities also pool risk, and people who die late are subsidized by people who die early, he said.
But Justice Stephen Breyer said people who buy annuities are buying an income stream, and he asked why providing annuity products "isn't more like banking" than underwriting stocks and bonds. People put money into a bank account and the bank pays interest; why can't a bank say instead it will save a customer's money and pay it back through an annuity if the customer wishes? he asked.
Justice David Souter said an annuity provides an income stream regardless of how much money the purchaser has at the time of maturity, and annuities therefore do not seem to insure against incomes loss.
Ginsburg also questioned why annuities could not be viewed from the perspective of banks serving customers who want to invest for a return. She corrected a statement by Stewart that the comptroller's 1990 decision interpreted bank powers at the time they were perceived by Congress when the 1863 bank act was passed.
"The argument was that the business of banking changes over time," not that it has been the same all along, she said.