A federal appeals court in Cincinnati set the stage this week for Supreme Court action on a crucial case involving insurance sales by national banks.

The U.S. Court of Appeals for the Sixth Circuit refused to reconsider its Owensboro National Bank decision, in which it held that states cannot bar national banks from selling insurance in towns of under 5,000. Parties to the case were notified of the decision Thursday.

"At a minimum, this sets up the possibility for Supreme Court review," Bankers Roundtable general counsel Richard Whiting said. "At a maximum, its sets up a precedent that can be used by other states."

Meanwhile, banks may be making progress on a second front. Industry sources said they expect the Comptroller's office to override a series of proposed annuity sales rules that limit the ability of banks to offer the insurance product.

The Florida insurance and banking commissioners are considering the rules at a hearing today.

The stakes are high for banks. A Supreme Court ruling in the industry's favor would open the door to widespread insurance sales, potentially providing banks with many millions of dollars a year in fee income.

Comptroller Eugene A. Ludwig, who intervened in the case on behalf of the bank, praised the appeals court decision to let its own ruling stand.

"This decision lets national banks continue to provide their customers with the financial services and products they want," he said in a prepared statement.

Insurance industry advocates said they were disappointed. "We were hopeful the Sixth Circuit would review the decision," said Ann Kappler, a partner at Jenner & Block who represents the major insurance trade groups in the case. "But it may just be a reflection that the court realized that the issue ultimately is going to be resolved by the Supreme Court."

The ruling in Cincinnati contradicts a decision by the U.S. Court of Appeals for the 11th Circuit, which said in late January that McCarran- Ferguson Act gives states the right to regulate, and thus ban, bank insurance sales.

The 11th Circuit is deciding whether to reconsider its decision. But banking advocates, who have vowed to appeal a loss to the high court, are not hopeful.

"If the 11th Circuit does not turn around, then we will have a conflict in the circuits," said Michael Crotty, deputy general counsel at the American Bankers Association. "The Supreme Court will take it up on cert, and we will win there."

Banking industry attorneys feared that the Sixth Circuit, which decided the case with a 2-1 split, would reverse itself. That would eliminate the split between the circuits and seriously jeopardize the industry's push for Supreme Court review.

"It was endangered," Mr. Crotty said. "That danger has now passed."

"We managed to preserve the case for Supreme Court review," agreed David Roderer, a partner at Winston & Strawn who represents 10 banking groups in this case.

On the issue of the Florida rules, OCC spokeswoman Janis Smith said it is premature to say whether the Comptroller will preempt the state rules.

"We are watching with great interest how the Florida rules are developing, and we will assess how the rules impact national banks with regard to national banking law," she said

Industry officials, however, said they fully expect the Comptroller to jump into the fray.

"I would think that if this proposed Florida rule makes the sale of annuities uneconomical, then the OCC will definitely take the position that the rule is preempted," said Ronald Glancz, a partner at Venable, Baetjer, Howard & Civiletti.

"The Comptroller is well aware of the proposal, is itself reviewing the specifics in determining how to best approach it," Mr. Roderer added. "Litigation has to be considered one of its best approaches."

The Comptroller would act once a Florida bank formally asked to sell annuities, Mr. Glancz said. The OCC would issue an interpretive letter approving the request. State officials then would have to file suit to prevent bank sales.

The draft regulations come in response to the Supreme Court's decision earlier this year in NationsBank v. Valic, which held that national banks can sell annuities. Banking industry advocates said the rules are so severe that no bank could successfully enter the business.

"They technically say you can sell annuities," Mr. Crotty said. "But the terms and conditions are so onerous that you almost don't want to go to the trouble."

The rules prevent banks from offering the Retirement CD, an FDIC-insured product that resembles a traditional annuity. They also prevent banks from leasing any lobby space on a percentage lease basis to annuity firms, and from collecting referral fees from annuity underwriters. And they prevent banks from offering back-office support to any annuity sales unit that they are able to create.

"We just don't know if it is an opening shot or for real," Mr. Roderer said.

Ms. Kappler, who also is tracking the Florida rules for the insurance industry, said she considers them a fallback position in case the Supreme Court eventually forces the state to permit annuity sales.

"Our view has been, and we urge this in state after state, that there should be a separation between the two businesses," she said. "These proposed regulations are strong in that regard."

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