Although regulators are offering a better way to sell insurance, national banks are opting for the safest route - through small towns.

As long as a national bank's insurance agency is based in a town with fewer than 5,000 people, the Office of the Comptroller of the Currency allows sales from any branch, even those located in large cities.

But the Comptroller's Office issued a much broader rule last month, designed to let national banks sell insurance - as well as other products - without restriction through operating subsidiaries.

While the so called "op-sub rule" drew heavy fire from the insurance industry, banks' authority to sell insurance from small towns has already withstood a Supreme Court challenge.

"While there are many of us in the industry that feel an operating subsidiary can undertake this activity and not run into the restrictions faced by a national bank, the town-of-5,000 ruling is clearly permissible and going to be very hard to attack," said Steven A. Bennett, senior vice president and general counsel of Banc One Corp.

Banc One plans to operate an insurance agency from Alta, Colo.

If it weren't for the threat of lawsuits, the op-sub rule would be a more cost-effective route for national banks to enter the insurance business. Some banks don't have a presence in small towns, and therefore would have to set up offices in order to use the town-of-5,000 ruling.

Additionally, a bank's small-town agency will be barred from expanding beyond insurance sales. This would thwart a natural evolution into other related business lines, said Kathleen W. Collins, Washington counsel for the Financial Institutions Insurance Association.

"The town-of-5,000 subsidiary will always be restricted to acting as an agent," Ms. Collins said.

"Under the new op-sub rule, banks could make additional requests to perform other insurance services, such as limited underwriting, as they gained experience with sales," she said.

Nevertheless, bankers seeking permission to sell from small towns said the limits will not constrain them.

"The town-of-5,000 rule is good for us because we are in plenty of towns that won't have over 5,000 folks living in them any time in my lifetime," said Gary L. Ryan, senior vice president and corporate counsel of Hibernia Corp., New Orleans.

"We believe we'll be able to do exactly what any nonbank insurance agent can do."

While national banks have been operating small-town insurance agencies for years, in November the Comptroller's Office said for the first time that banks may send agents to meet with customers outside the small town - including big-city branches.

First Union Corp., Charlotte, N.C., got the first approval while Mellon Bank N.A. in Pittsburgh got the second. At least 12 other banking companies have applications pending.

David de Gorter, senior vice president and head of First Union's insurance group, said his institution is still figuring out which local rules apply in the seven states where it has permission to open small town agencies.

"We're a little like the dog that chased the car: Now that we've caught it, we have to figure out exactly what we do with it," Mr. de Gorter said. "We're evaluating our options and developing a strategy that will work in concert with state regulation."

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