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American Bar Association




The conflict over turf between the banking industry and the insurance agents has heated up again. In the 1993 case Variable Annuity Life Ins. Co. v. Clarke, 1 the Fifth Circuit held banks have no power to sell fixed annuities issued by insurance companies in cities with more than 5,000 inhabitants. On June 6, 1994, the Supreme Court granted certiorari to review the decision. 3 Both the Clinton Administration and members of Congress are considering steps toward resolving this issue. Concerned that the flight of high-quality borrowers from the banking system has rendered bank lending increasingly risky, the Comptroller of the Currency has stated that unless banks diversify into other safe lines of business, banks' safety and soundness is in jeopardy. 4 His remarks are believed to represent the Clinton Administration's policy concerning the structure of the banking industry.5 For the insurance industry, long-time supporter Senator Christopher Dodd (D-Connecticut) recently abandoned efforts to repeal section 92 of the National Bank Act, which served as one legal basis for bank powers to sell insurance products such as annuities. 6 Whether banks have or should have the power to sell annuities is but one of many currently debated issues involved in the major reshaping and restructuring of our financial system. Consensus is slow to emerge. Even the banking and insurance industries do not represent a united front, and each is divided into factions that favor or disfavor banks' power to sell annuities. 7 The airing of conflicting views, however, helps to better understand and guide the progress of the financial system.

This Article deals with two questions involving banks' powers to issue and sell annuities. One question relates to the domain of insurance companies and their regulators. Are annuities "insurance contracts" exclusively reserved to insurance companies or are annuities "insurance business" in which insurance companies as well as other institutions may engage? The second question relates to banks' powers to engage in annuities business. Even if annuities are insurance business, in which not only insurance companies but also others may engage, are annuities the type of instruments which banks have the power to issue? Further, even if banks may issue these annuities, may they buy and sell annuities issued by other banks?

Answers to these two questions are complicated because annuities are complex and varied instruments, with different components, designed to meet different needs, issued by different financial institutions, and, most importantly, offered under different names. This Article suggests that essentially identical instruments can appear in different forms under different names, even though they are traditionally issued by different financial institutions. Banks can design and issue annuities in the form of deposits, in competition with insurance annuities. Such an instrument was recently offered by Blackfeet National Bank-a retirement certificate of deposit. 9

Part I of this Article defines, dissects and classifies annuities.10 Part II discusses insurance annuities and identifies those annuities that are "insurance contracts" exclusively reserved to insurance companies and those annuities that are not "insurance contracts," but constitute "insurance business." 11 This part also describes the regulatory systems that apply to different types of annuities.12 I conclude that most annuities fall within the "insurance business" category, not exclusively reserved to the insurance industry or its sales force. 13 Part III of the Article discusses bank powers to issue instruments that function like certain types of annuities (bank annuities) and concludes that banks have express powers to issue and sell these types of annuities and "incidental powers" to sell such annuities issued by other banks.14 Because tax treatment would be crucial to successful marketing of annuities, Part III explores this area and shows that the tax treatment does not depend on the nature of the issuing institution. Therefore, bank annuities sold by the issuing banks and by other banks will receive the same tax treatment as insurance issued annuities.

I conclude that without changing the policies underlying the current regulations, banks may design, issue and sell certain annuities (without life contingencies), even in the Fifth Circuit's jurisdiction.16

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