Nos. 93-1612 and 93-1613 In the Supreme Court of the United States OCTOBER TERM, 1994 NATIONSBANK OF NORTH CAROLINA, N.A., ET AL., PETITIONERS v. VARIABLE ANNUITY LIFE INSURANCE COMPANY, ET AL. EUGENE LUDWIG, COMPTROLLER OF THE CURRENCY, ET AL., PETITIONERS v. VARIABLE ANNUITY LIFE INSURANCE COMPANY, ET AL. ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT BRIEF FOR THE FEDERAL PETITIONERS DREW S. DAYS, III Solicitors General FRANK W. HUNGER Assistant Attorney General PAUL BENDER Deputy Solicitor General EDWARD C. DuMONT Assistant to the Solicitor General MARK B. STERN JACOB M. LEWIS Attorneys Department of Justice Washington, D.C. 20530 (202)514-2217 JULIE L. WILLIAMS Chief Counsel L. ROBERT GRIFFIN ROSA M. KOPPEL YVONNE D. McINTIRE Attorneys Office of the Comptroller of the Currency Washington, D.C. 20219 (202)874-5200 ---------------------------------------- Page Break ---------------------------------------- QUESTION PRESENTED Whether federal law permits national banks, wher- ever located, to act as agents in the sale of annuities. (I) ---------------------------------------- Page Break ---------------------------------------- II PARTIES TO THE PROCEEDINGS In addition to the parties identified in the captions, the parties in the court of appeals included the United States, the Office of the Comptroller of the Currency, and NCNB National Bank of North Carolina and NCNB Securities, Inc. (the corporate predecessors of petitioners NationsBank of North Carolina, N. A., and NationsBanc Securities, Inc.). ---------------------------------------- Page Break ---------------------------------------- TABLE OF CONTENTS Page Opinions below . . . . 1 Jurisdiction . . . . 2 Statutory provisions involved . . . . 2 Statement . . . . 4 Introduction and summary of argument . . . .13 Argument: I. Acting as an intermediary with respect to cus- tomers' financial investments falls within a na- tional bank's statutory authority to exercise "all such incidental powers as shall be necessary to carry on the business of banking" . . . . 16 A. Federal law grants national banks broad and flexible authority to carry on the business of banking . . . . 16 B. Acting as an intermediary in customers' in- vestment transactions is traditionally part of or incidental to the business of banking . . . . 20 II. The Comptroller reasonably determined that the sale of annuities by national banks is not pro- hibited by 12 U.S.C. 92 . . . . 24 A. The Comptroller reasonably determined that annuities are not "insurance" for purposes of Section 92 . . . . 25 B. The Comptroller reasonably concluded that Section 92 does not prohibit agency sales of specialized "insurance" products outside small towns if the Comptroller has deter- mined that such sales are part of or inci- dental to the business of banking . . . . 40 Conclusion . . . . 44 TABLE OF AUTHORITIES Cases: American Ins. Ass'n V. Clarke, 865 F.2d 278 (D.C. Cir. 1988) . . . . 19 (III) ---------------------------------------- Page Break ---------------------------------------- IV Cases-Continued: Page American Land Title Ass'n v. Clarke, 743 F. Supp. 491 (W.D. Tex. 1989) . . . . 38 Arnold Tours, Inc. v. Camp, 472 F.2d 427 (1st Cir. 1972) . . . . 18 Associates in Adolescent Psychiatry, S.C. v. Home Life Co., 941 F.2d 561 (7th Cir. 1991), cert. de- nied, 112 S. Ct. 1182 (1992) . . . . 5-6 Beecham v. United States, 114 S. Ct. 1669 (1994 ) . . . . 41 Chatham County Hosp. Auth. v. John Hancock Mut. Life Ins. Co., 325 F. Supp. 614 (S.D. Ga. 1971) . . . . 36 Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984) 12, 15, 25, 37, 43 Cippollone v. Liggett Group, 112 S. Ct. 2608 (1992) . . . . 40 Clarke v. Securities Indus. Ass'n, 479 U.S. 388 (1987) . . . . l5, 20-21, 25, 37 Clement Nat'1 Bank v. Vermont, 231 U.S. 120 (1913) . . . . 18, 19 Colorado Nat'1 Bank v. Bedford, 310 U.S. 41 (1940) . . . . 18, 19 Corporation Comm'n v. Equitable Life Assur. Soc'y, 239 P.2d 360 (Ariz. 1951) . . . . 32 Curtis v. Leavitt, 15 N.Y. 9 (1857) . . . . 17, 18, 23 Daniel v. Life Ins. Co. of Va., 102 S.W.2d 256 (Tex. Civ. App. 1937) . . . . 36 Dickerson v. New Banner Inst., 460 U.S. 103 (1983) . . . . 36 Dyer v. Broadway Central Bank, 169 N.E. 635 (N.Y. 1930) . . . . 19 First Nat'1 Bank of Charlotte v. National Exch. Bank, 92 U.S. 122 (1876) . . . . 18,19 First Nat'1 Bank of E. Ark. v. Taylor, 907 F.2d 775 (8th Cir.), cert. denied, 498 U.S. 972 (1990) . . . . 19 Franklin Nat'1 Bank v. New York, 347 U.S. 373 (1954) . . . . 18, 19 Good Samaritan Hosp. v. Shalala, 113 S. Ct. 2151 (1993) . . . . 38 Helvering v. Le Gierse, 312 U.S. 531 (1941) . . . . 32 ---------------------------------------- Page Break ---------------------------------------- V Cases-Continued: Page Howerton, In re, 21 B.R. 621 (Bankr. N.D. Tex. 1982) . . . . 36 Hughey v. United States, 495 U.S. 411 (1990) . . . . 41 Independent Ins. Agents v. Board of Governors, 736 F.2d 468 (8th Cir. 1984) . . . . 39 Independent Ins. Agents v. Ludwig, 997 F.2d 958 (D.C. Cir. 1993) . . . . 38 Investment Co. Inst. v. Camp, 401 U.S. 617 (1971) . . . . 13, 15, 37 M & M Leasing Corp. v. Seattle First Nat'1 Bank, 563 F.2d 1377 (9th Cir. 1977), cert. denied, 436 U.S. 956 (1978) . . . . 19, 23 M'Culloch v. Maryland, 17 U.S. (4 Wheat.) 316 (1819) . . . . 23 Merchants' Bank v. State Bank, 77 U.S. (10 Wall.) 604 (1871) . . . . 18, 19 National R.R. Passenger Corp. v. Boston & Maine Corp., 112 S. Ct. 1394 (1992) . . . . 23, 24 New York State Ass'n of Life Underwriters v. New York State Banking Dep't: 598 N.Y.S.2d 824 (App. Div. 1993), aff'd, 632 N.E.2d 876 (N.Y. 1994) . . . . 36-37 632 N.E.2d 876 (N.Y. 1994) . . . . 19-20, 23, 28, 35 New York Stock Exch. v. Bloom, 562 F.2d 736 (D.C. Cir. 1977), cert. denied, 435 U.S. 942 (1978) . . . . 38 Rishel v. Pacific Mutual Life Ins. Co. of Cal., 78 F.2d 881 (10th Cir. 1935) . . . . 36 SEC v. Chenery Corp., 318 U.S. 80 (1943) . . . . 28 SEC v. United Benefit Life Ins. Co., 387 U.S. 202 (1967) . . . . 6, 35 SEC v. Variable Annuity Life Ins. Co., 359 U.S. 65 (1959) . . . . 6, 8, 30, 35, 36 Saxon v. Georgia Ass'n of Indep. Ins. Agents, 399 F.2d 1010 (5th Cir. 1968) . . . . 12 Securities Indus. Ass'n v. Board of Governors, 468 U.S. 207 (1984) . . . . 21, 24 Securities Indus. Ass'n v. Clarke, 885 F.2d 1034 (2d Cir. 1989), cert. denied, 493 U.S. 1070 (1990) . . . . 19 ---------------------------------------- Page Break ---------------------------------------- VI Cases Continued: Page Thomas Jefferson Univ. v. Shalala, No. 93-120 (June 24, 1994) . . . . 38 United States v. Bess, 357 U.S. 51 (1958) . . . . 36 United States v. Price, 361 U.S. 304 (1960) . . . . 40 United States v. Shimer, 367 U.S. 374 (1961) . . . . 43 Young, In re, 806 F.2d 1303 (5th Cir. 1987) . . . . 35 Statutes and regulation: Act of Feb. 25, 1863, ch. 58, 11, 12 Stat. 668 . . . . 16, 17 Act of June 3, 1864, ch. 106, 8, 13 Stat. 99 . . . . 17 Act of Dec. 23, 1913 (Federal Reserve Act), ch. 6, 13, para. 9, 38 Stat. 263 . . . . 3 Act of Feb. 27, 1927 (McFadden Act), ch. 191, 2, 44 Stat. 1226 . . . . 20 Act of June 16, 1933 (Glass-Steagall Act), ch. 89, 16, 48 Stat. 184 . . . . 7-8, 20 Securities Act of 1933, 3(a) (8), 15 U.S.C. 77c(a) (8) . . . . 35 Rev. Stat 5136 (1878) (12 U.S.C. 24) . . . . 2 12 U.S.C. 1 . . . . 13 12 U.S.C. 24 Seventh . . . . passim 12 U.S.C. 26-27 . . . . 13 12 U.S.C. 92 (Supp. V 1993) . . . . passim 12 U.S.C. 181 . . . . 13 26 U.S.C. 72 . . . . 7, 32 26 U.S.C. 72 (e) . . . . 7, 32 26 U.S.C. 72 (q) . . . . 7 26 U.S.C. 101 (a) . . . . 32 26 U.S. 816(a) . . . . 35 N.Y. Free Banking Law of 1838, ch. 260, 18, 1838 N.Y. Laws 249 . . . . 17 17 C.F.R. 230.151 (Rule 151) . . . . 35 Miscellaneous: American Council of Life Insurance, 1993 Life Insurance Fact Book Update (1993) . . . . 33 1 J. Appleman, Insurance Law & Practice (1981) . . . . 35 Black's Law Dictionary (6th ed. 1990) . . . . 23, 25, 26, 31 ---------------------------------------- Page Break ---------------------------------------- VII Miscellaneous-Continued: Page Cong. Globe, 37th Cong., 3d Sess. (1863) . . . . 17 53 Cong. Rec. (1916): p. 11,001 . . . . 39, 40 p. 11,002 . . . . 39 2 Fed. Res. Bull. 73 (1916) . . . . 40 Bray Hammond, Sovereignty and an Empty Purse: Banks and Politics in the Civil War (1970) . . . . 17, 18 David Hariton, The Taxation of Complex Finan- cial Instruments, 43 Tax L. Rev. 731 (1988) . . . . 29 Note, Reverse Annuity Mortgages and the Due- on-Sale Clause, 32 Stan. L. Rev. 143 (1979) . . . . 29 Office of the Comptroller of the Currency: OCC Interpretive Letter No. 241, [1983-1984 Transfer Binder] Fed. Banking L. Rep. (CCH) "Par" 85,405 (Mar. 26, 1982) . . . . 38 OCC Interpretive Letter No. 271, [1983-1984 Transfer Binder] Fed. Banking L. Rep. (CCH) "Par" 85,435 (Sept. 21, 1983) . . . . 22 OCC Interpretive Letter No. 326, [1985-1987 Transfer Binder] Fed. Banking L. Rep. (CCH) "Par" 85,496 (Jan. 17, 1985) . . . . 22 OCC "Interpretive Letter No. 331, [1985-1987 Transfer Binder] Fed. Banking L. Rep. (CCH) "Par" 85,501 (Apr. 4, 1985) . . . . 7, 8, 28 OCC Interpretive Letter No. 356, [1985-1987 Transfer Binder] Fed. Banking L. Rep. (CHH) "Par" 85,526 (Jan. 7, 1986) . . . . 22 OCC Interpretive Letter No. 357, [1985-1987 Transfer Binder] Fed. Banking L. Rep. (CCH) "Par" 85,527 (Feb. 26, 1986) . . . . 22 OCC Interpretive Letter No. 365, [1985-1987 Transfer Binder] Fed. Banking L. Rep. (CCH) "Par" 85,535 (Aug. 1, 1986) . . . . 22 OCC Interpretive Letter No. 387, [1988-1989 Transfer Binder] Fed. Banking L. Rep. (CCH) "Par" 85,611 (June 22, 1987) . . . . 22 ---------------------------------------- Page Break ---------------------------------------- VIII Miscellaneous-Continued: Page OCC Interpretive Letter No. 494, [1989-1990 Transfer Binder] Fed. Banking L. Rep. (CCH) "Par", 83,083 (Dec. 20, 1989) . . . . 21, 22 OCC Interpretive Letter No. 499, [1989-1990 Transfer Binder] Fed. Banking L. Rep. (CCH) "Par", 83,090 (Feb. 12, 1990) . . . . 6, 7, 28 Rev. Rul. 79-335, 1979-2 C.B. 292 . . . . 32 D. Shapiro & T. Streiff, Annuities (1992) . . . . passim Symons, The "Business of Banking" in Historical Perspective, 51 Gee. Wash. L. Rev. 676 (1983 ) . . . . 17 Webster's Third New International Dictionary (1986) . . . . 25, 26 ---------------------------------------- Page Break ---------------------------------------- In the Supreme Court of the United States OCTOBER TERM, 1994 No. 93-1612 NATIONSBANK OF NORTH CAROLINA, N. A., ET AL., PETITIONERS v. VARIABLE ANNUITY LIFE INSURANCE COMPANY, ET AL. No. 93-1613 EUGENE LUDWIG, COMPTROLLER OF THE CURRENCY, ET AL., PETITIONERS v. VARIABLE ANNUITY LIFE INSURANCE COMPANY, ET AL. ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT BRIEF FOR THE FEDERAL PETITIONERS OPINIONS BELOW The opinion of the court of appeals (Pet. App. la- 17a) 1. is reported at 998 F.2d 1295. That court's or- der denying rehearing and rehearing en banc, and ___________________(footnotes) 1 "Pet. App." refers to the appendix to the petition in No. 93-1612. (1) ---------------------------------------- Page Break ---------------------------------------- 2 the opinion dissenting therefrom (Pet. App. 18a- 28a), are reported at 13 F.3d 833. The opinion of the district court (Pet. App. 29a-34a) is reported at 786 F. Supp. 639. The approval letter of the Office of the Comptroller of the Currency (Pet. App. 35a- 48a) is unreported. JURISDICTION The judgment of the court of appeals was entered on August 26, 1993. A petition for rehearing was denied on January 13, 1994. Pet. App. 18a-19a. The petitions for certiorari were filed on April 13, 1994, and were granted on June 6, 1994. The jurisdiction of this Court rests on 28 U.S.C. 1254(1). STATUTORY PROVISIONS INVOLVED 1. Section 5136 of the Revised Statutes of 1878, 12 U.S.C. 24, as amended, provides in pertinent part as follows: Upon duly making and filing articles of as- sociation and an organization certificate a na- tional banking association shall become, as from the date of the execution of its organization cer- tificate, a body corporate, and as such, and in the name designated in the organization certifi- cate, it shall have power- * * * * * Seventh. To exercise by its board of directors or duly authorized officers or agents, subject to law, all such incidental powers as shall be neces- sary to carry on the business of banking; by discounting and negotiating promissory notes, drafts, bills of exchange. and other evidences of debt; by receiving deposits; by buying and sell- ing exchange, coin, and bullion; by loaning money ---------------------------------------- Page Break ---------------------------------------- 3 on personal security; and by obtaining, issuing, and circulating notes according to the provisions of title 62 of the Revised Statutes. The business of dealing in securities and stock by the associ- ation shall be limited to purchasing and selling such securities and stock without recourse, solely upon the order, and for the account of, custo- mers, and in no ease for its own account, and the association shall not underwrite any issue of securities or stock [.] 2. Section 13, para. 9, of the Federal Reserve Act, Act of Dee. 23, 1913, ch. 6, 38 Stat. 263, 12 U.S.C. 92 ( Supp. V 1993), provides as follows: In addition to the powers now vested by law in national banking associations organized under the laws of the United States any such associ- ation located and doing business in any place the population of which does not exceed five thou- sand inhabitants, as shown by the last preced- ing decennial census, may, under such rules and regulations as may be prescribed by the Comp- troller of the Currency, act as the agent for any fire, life, or other insurance company author- ized by the authorities of the State in which said bank is located to do business in said State, by soliciting and selling insurance and collecting premiums on policies issued by such company; and may receive for services so rendered such fees or commissions as may be agreed upon be- tween the said association and the insurance company for which it may act as agent: Pro- vided, however, That no such bank shall in any case assume or guarantee the payment of any premium on insurance policies issued through its agency by its principal: And provided fur- ther, That the bank shall not guarantee the truth ---------------------------------------- Page Break ---------------------------------------- 4 of any statement made by an assured in filing his application for insurance. STATEMENT 1. This litigation involves a challenge to the Comptroller of the Currency's approval of an ap- plication by the corporate predecessors of petition- ers NationsBank of North Carolina, N.A. and its brokerage subsidiary, NationsBanc Securities, Inc. (collectively, NationsBank), for permission for the subsidiary to act as an agent in the sale of a variety of fixed and variable annuity contracts. Although annuities come in many forms, in general they are contracts under which the purchaser makes one or more premium payments to the issuer, in return for the right to receive a series of periodic payments, which continue either for a fixed period or for the life of the purchaser or a designated beneficiary. See generally D. Shapiro & T. Streiff, Annuities 2-4 (1992) (hereafter Annuities). The annuity contracts that NationsBank proposed to sell were "designed to provide investors with the opportunity to invest and accumulate capital on a tax-deferred basis, for retire- ment or other long-term goals." Pet. App. 35a. "Immediate" annuities begin making periodic pay- ments shortly after the contract is purchased, and are primarily a mechanism for structuring the invest- ment of a given capital sum and its repayment on a level-payment, self-amortizing basis. 2. See Annuities 3. ___________________(footnotes) 2 That is, the amount of each periodic payment is fixed, and is calculated so that over the agreed or actuarially predicted payout period the purchaser will receive back an amount equal to the total premium paid, less applicable expenses and fees, plus interest at a predetermined rate. As explained below, modern annuities often guarantee a minimum fixed payment amount, but provide that the issuer may increase payments, in ---------------------------------------- Page Break ---------------------------------------- 5 Most annuities sold in the modern market, how- ever, are "deferred" annuities. Id. at 4. Deferred annuities involve an initial "accumulation period," during which the purchaser's payments are held and invested by the issuer, and interest or investment returns are periodically credited to the purchaser's account. See id. at 3. At the end of the accumulation period the purchaser generally has the right to select one of a number of options for repayment of the account's accumulated value, including lump-sum dis- tribution, systematic withdrawals, or the purchase of an "immediate" annuity (generally at rates specified in the original contract). Id. at 4. Annuities are commonly described as either "fixed" or "variable." Those terms refer to the terms on which the annuity issuer promises to hold and repay the purchaser's investment. The issuer of a fixed annuity promises that the purchaser's investment will earn interest (during both the accumulation and the payout phase) at a modest guaranteed rate. In addi- tion, most modern "fixed" annuities (including all those at issue in this case) also provide for the poten- tial payment of "excess " interest, at the issuer's dis- cretion and at whatever rate it may set from time to time (although a particular "excess" rate may be guaranteed for some period after inception of the contract). See Pet. App. 36a-37a & n. 1; see generally Annuities 34-36, 41-42 & illus. 5.1; Associates in Adolescent Psychiatry, S.C. v. Home Life Ins. Co., 941, F.2d 561, 564-568 (7th Cir. 1991) (discussing securities law consequences of particular "excess in- terest" structure ), cert. denied, 112 S. Ct. 1182 ___________________(footnotes) its discretion, on the basis of favorable overall investment experience. ---------------------------------------- Page Break ---------------------------------------- 6 (1992). Thus, the purchaser of a deferred fixed an- nuity relinquishes control over the invested premium and receives, in return, a general obligation of the issuer, backed by its overall credit and assets, that promises repayment of principal, a modest guaran- teed return, and the possibility of greater returns based on the issuer's investment experience. See Pet. App. 36a; see also Annuities 39-40, 69-70. In a "variable" annuity, on the other hand, the issuer typically promises to segregate premiums re- ceived from the purchaser into a separate account and to invest them in one or more of a number of possible investments-such as a group of mutual funds-as directed by the purchaser. The value of a deferred variable annuity during or at the end of the accumulation period is determined largely by the per- formance of the selected investments, although the issuer may guarantee preservation of principal or a modest minimum rate of return. Thus, the purchaser retains both substantial investment control and the associated risk of gain or loss. See generally Pet. App. 35a-36a; Annuities 5, 49, 51; Office of the Comptroller of the Currency (OCC), Interpretive Letter No. 499, [1989-1990 Transfer Binder] Fed. Banking L. Rep. (CCH) "Par", 83,090 at 71,211 (Feb. 12, 1990 ) (OCC Ltr. No. 499) (describing annuities in- volved in this case). A deferred annuity may be vari- able only during the accumulation period, or may continue to provide variable returns if the contract provides for (or the purchaser chooses) a variable annuity payout option. Compare, e.g., SEC v. United Benefit Life Ins. Co., 387 U.S. 202, 205-206 (1967), with SEC v. Variable Annuity Life Ins. Co., 359 U.S. 65,69-72 & n.13 (1959). ---------------------------------------- Page Break ---------------------------------------- 7 Both fixed and variable annuities are covered by an unique and complex set of federal income tax rules that generally allow for deferral of tax on the invest- ment returns allocable to a purchaser's annuity pay- ments until those returns are withdrawn during the payout phase of the contract. See 26 U.S.C. 72; Annuities 70-73. Because the tax rules also generally provide for penalties if an annuity investment is withdrawn before the purchaser is 59 1/2 years old, and for unfavorable tax treatment of amounts with- drawn before the maturity of the contract, annuities are frequently marketed as a tax-sheltered means of saving for retirement. See Annuities 7, 83-85, 107- 108; 26 U.S.C. 72(e) and (q) ; Pet. App. 38a. 2. NationsBank sought approval from the Comp- troller of the Currency for its proposal to act as a sales agent for (not as issuer of) a variety of annuity contracts that would allow purchasers to design "a flexible, multi-faceted investment package comprised of variable and fixed annuity options." Pet. App. 37a. The OCC Chief Counsel's interpretive letter underlying the Comptroller's approval of Nations- Bank's proposal (see id. at 35a) noted that the OCC had previously reached the conclusion that national banks have the authority to sell variable annuities, on the ground that "variable annuity contracts are securities, functionally resembling shares in a mutual fund, and * * * banks are authorized, pursuant to 12 U.S.C. 24 (7) to buy and sell securities for the account of customers. " OCC Ltr. No. 499 at 71,211, citing OCC, Interpretive Letter No. 331, [1985-1987 Transfer Binder] Fed. Banking L. Rep. (CCH) "par" 85,501 (Apr. 4, 1985) (OCC Ltr. No. 331). 3. The ___________________(footnotes) 3 The second sentence of 12 U.S.C. 24 Seventh (added by Section 16 of the Banking Act of 1933 (Glass-Steagall Act), ---------------------------------------- Page Break ---------------------------------------- 8 Comptroller adopted (Pet. App. 37a) the Chief Coun- sel's view that insofar as the annuities involved in NationsBank's proposal were "securities" within the meaning of 12 U.S.C. 24 Seventh, they would fall within the scope of that prior determination. The additional analysis provided by the Chief Counsel's letter and the Comptroller's approval in this case therefore focused on NationsBank's proposal to mar- ket fixed annuities, although the approval extended to the entire range of annuity products described in the bank's application. 4. The statutory grant of power to national banks, 12 U.S.C. 24 Seventh, provides that such banks may ___________________(footnotes) Act of June 16, 1933, ch. 89, 16, 48 Stat. 184) refers ex- pressly to the "business of dealing in securities and stock" by a national bank, but limits that business "to purchasing and selling such securities without recourse, solely upon the order, and for the account of, customers, and in no case for its own account," and provides that banks "shall not under- write any issue of securities or stock." OCC Ltr. No. 331 concluded (at 77,774 ) that because variable annuities are similar to shares in a mutual fund, they should be considered "securities" within the meaning of that provision, and there- fore within the power of national banks to sell "solely upon the order, and for the account of, customers." Compare SEC V. Variable Annuity Life Ins. Co., 359 U.S. at 71-72 (variable annuities are "securities" subject to the registration require- ments of the Securities Act of 1933); SEC v. United Benefit Life Ins. Co., 387 U.S. at 210-211 (1967) (same as to variable accumulation period of contract with fixed annuity payout option ). 4 The Comptroller determined (Pet. App. 37a-38a) that sales of fixed annuities were permissible even if such annuities were not "securities" for purposes of 12 U.S.C. 24 Seventh (see note 3, supra). He therefore had no occasion to consider the question whether fixed annuities are "securities," and that question is not presented in this case. ---------------------------------------- Page Break ---------------------------------------- 9 exercise "all such incidental powers as shall be neces- sary to carry on the business of banking." In apply- ing that general provision to NationsBank's applica- tion, the Comptroller stated that "[a]s part of their traditional role as financial intermediaries, [na- tional] banks have broad powers to buy and sell financial investment instruments as agent for cus- tomers," Pet. App. 38a. He noted that "[a]lthough annuities have historically been a product of insur- ance companies, they are primarily financial invest- ments," because annuity purchasers "are not seeking to pool a catastrophic risk such as death, injury, or property damage, but are instead seeking a guaran- teed, long-term return on their assets." Ibid. The opinion acknowledged the element of "mortality risk" present in some annuities, but concluded (in accord- ance with a number of authorities) that it "is essen- tially an investment risk, not an insurance risk," and that "although annuities often share with insur- ance the need for actuarial calculations, they are primarily a vehicle for investment." Id. at 38a-39a. Further, the Comptroller found a "close functional resemblance between fixed annuity contracts and other financial investment instruments that banks may sell as agent" (Pet. App. 39a), including vari- able annuities, conventional debt instruments, and certificates of deposit. Id. at 39a-41a. Indeed, "[t]he financial marketplace provides many exam- ples of instruments that, like fixed annuities, pay the investor a fixed stream of income over time in return for an initial investment." Id. at 41a. The Comptroller therefore concluded that "fixed annuity contracts are financial investment instruments that national banks have authority to sell as agent." Ibid. ---------------------------------------- Page Break ---------------------------------------- 10 The Comptroller next considered (Pet. App. 41a- 47a) whether 12 U.S.C. 92 (Supp. V 1993), which permits national banks in towns of 5,000 or fewer inhabitants to "act as the agent for any fire, life, or other insurance company * * * by soliciting and selling insurance and collecting premiums," by impli- cation prohibits national banks in larger towns and cities from selling annuities. He first noted the OCC'S traditional position that Section 92, which grants small-town banks general insurance agency powers "in addition" to their other powers as national banks, was intended only to provide such banks with an additional source of revenue, and implies no restric- tion on the powers conferred by Section 24 Seventh on all national banks, wherever located. Pet. App. 42a. Moreover, after reviewing available authorities (id. at 43a-47a), the Comptroller concluded that because annuities are "primarily a vehicle for invest- ment" (id. at 45a) and "lack the basic insurance characteristic of indemnification against risk" (id. at 47a), they should not in any event be considered "insurance" for purposes of Section 92. Pet. App. 47a. The Comptroller also pointed out (Pet. App. 42a- 43a) that Section 92 speaks only of a bank's power to act as an agent for any "fire, life, or other insurance company." Applying the principle of "ejusdem generis," he concluded that the statute should be read to apply only to "types of insurance that are similar to fire and life insurance, such as other general casualty insurance policies." Pet. App. 43a. Thus, even if annuities were to be considered "insurance" for purposes of Section 92, they would remain "a specialized product, unrelated to the gen- ---------------------------------------- Page Break ---------------------------------------- 11 eral life and casualty policies that section 92 con- cerns. " Pet. App. 43a. That Section would therefore have no application to annuities, which should be analyzed only to determine whether their sale was part of or incidental to "the business of banking" under 12 U.S.C. 24 Seventh. Pet. App. 43a. Finally, the Comptroller determined (Pet. App. 47a-48a ) that there were no policy or supervisory issues that counseled against permitting NationsBank to make agency sales of annuities. On the contrary, he noted that such sales would provide "a logical complement to other financial services offered by [NationsBank], such as investment advice and dis- count brokerage services," would provide additional income for the banks, and would help the bank "com- pete effectively with other providers of financial serv- ices." Ibid. Customers would also benefit from the increased range of products made available to them through the bank. Ibid. Because the bank would act only as agent, it would incur no interest rate or actuarial risks. Id. at 48a. Finally, in order to eliminate any risk of customer confusion, the Comp- troller required that NationsBank "expressly disclose in its advertising and promotional materials, and * * * when describing the [annuities] to customers, that the [annuities] are not products of [Nations- Bank] and are not FDIC insured," and obtain a signed statement from each annuity purchaser ac- knowledging the bank's agency status and the lack of federal insurance. Ibid. On those conditions, the Comptroller permitted NationsBank to proceed with agency sales of annuities. 3. Respondent Variable Annuity Life Insurance Company, an issuer of annuities, filed suit in federal district court to overturn the Comptroller's approval. ---------------------------------------- Page Break ---------------------------------------- 12 The district court granted summary judgment for the Comptroller. Pet. App. 29a-34a. Addressing pri- marily respondent's argument under 12 U.S.C. 92, the court found it "neither arbitrary nor capricious" to view that Section "as a supplemental powers pro- vision and not a limitation on national banks ['] incidental powers under 24(7)." Pet. App. 33a- 34a. Moreover, applying the principles articulated in Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984), the court deferred to the Comptroller's "reasonable interpretation" that "annuities are primarily financial investment instru- ments, not insurance" for purposes of the relevant banking laws. Pet. App. 33a. Finally, the court upheld as reasonable the Comptroller's determination that "annuities are a specialized product," unlike the general life and casualty insurance covered by Sec- tion 92. Pet. App. 34a. The court of appeals reversed. Pet. App. 1a-17a. Relying in substantial part on its decision in Saxon v. Georgia Ass'n of Indep. Ins. Agents, 399 F.2d 1010 (5th Cir. 1968), the court determined that 12 U.S.C. 92 imposes an affirmative limitation on the power of national banks not located in small towns to sell any form of "insurance." Pet. App. 6a-10a, 15a-17a. The court then rejected the Comptroller's conclusions that annuities are not "insurance" for purposes of Section 92 (Pet. App. 10a-13a) and that, in any event, the statute applies only to general forms of insurance akin to fire and life insurance (id. at 13a-14a). The court read the legislative history of Section 92 to indicate that the general banking authority conferred by 12 U.S.C. 24 Seventh "did not grant banks the power to sell insurance products." Pet. ---------------------------------------- Page Break ---------------------------------------- 13 App. 16a-17a. The court remarked in passing (id. at 15a) that even if agency sales of annuities were "incidental" to the "business of banking," the power to make them could not be deemed "necessary" to carrying on that business under Section 24 Seventh's general grant of "all such incidental powers as shall be necessary to carry on the business of banking." In any event, the court held that even if Section 24 Seventh, read alone, would authorize banks to sell annuities, the specific limitations that the court found in Section 92 would supersede anything to the con- trary in the more general statute. Pet. App. 15a-16a. The full court of appeals rejected petitioners' sug- gestions of rehearing en bane, with six judges recused and four dissenting. Pet. App. 18a-19a. The four dissenters observed that "Section 92 nowhere defines 'insurance,'" and reasoned that "[u]nder Chevron, this should leave it to the Comptroller to arrive at a reasonable definition, insofar as [the statute] relates to the industry within his jurisdiction." Id. at 24a. Their opinion reviewed a number of relevant authorities (id. at 24a-27a) and concluded that on the question whether annuities are "insurance" for purposes of Section 92, "[t] he better view-and cer- tainly a reasonable one that is entitled to deference under Chevron-is that of the Comptroller." Pet. App. 24a. INTRODUCTION AND SUMMARY OF ARGUMENT The Comptroller of the Currency has been charged by Congress with the oversight and regulation of national banks. See generally 12 U.S.C. 1, 26-27, 481; Investment Co. Inst. v. Camp, 401 U.S. 617, 626-627 (1971). In this case, the Comptroller deter- ---------------------------------------- Page Break ---------------------------------------- 14 mined that federal law permits such banks to act as agencies in the sale of annuities to their customers, because the power to conduct such sales is "inci- dental" to the "business of banking" under 12 U.S.C. 24 Seventh. That determination rests in large part on the Comptroller's conclusion that the annuities in question are functionally investment instruments for purposes of the federal banking laws, whether or not they are also "securities" that banks are expressly permitted to broker under Section 24 Seventh. Na- tional banks have traditionally served as intermedi- aries for their customers in the purchase and sale of financial investments. If annuities are invest- ments, then acting as an agent for their sale is certainly part of, or incidental to, the business of banking. The court of appeals overturned the Comptroller's decision in this case on the basis of two conclusions of its own: that annuities should be considered forms of "insurance" for purposes of 12 U.S.C. 92 (Supp. V 1993), and that Section 92 prohibits banks located outside small towns from acting as sales agents for any "insurance" product, even if the Comptroller has determined that sales of that product are incidental to the "business of banking." Both those conclusions are erroneous. Dictionary definitions, functional anal- ysis and relevant authorities all indicate that annuity products are distinctly different from policies of insurance: instead of focusing on indemnification from risk of loss, they focus largely or even exclu- sively on investment management and the return of principal and investment income over time. More- over, the language of Section 92 indicates that it is a grant of additional authority to national banks lo- cated in small towns to act as agents for the full ---------------------------------------- Page Break ---------------------------------------- 15 range of life and casualty insurance products, with- out regard to the relationship of those products to the business of banking; there is no reason to read it more broadly to prohibit national banks located in other places from acting as agents in the sale of particular "insurance" products when the Comp- troller has specifically determined that such sales are properly incidental to the banks' business within the meaning of the general grant of authority found in 12 U.S.C. 24 Seventh. In any event, the Comptroller's resolution of each of the questions of statutory interpretation involved in this case is clearly reasonable, and reflects the application of his specialized knowledge and policy judgment. The court of appeals erred in substituting its judgment for that of the Comptroller in an im- portant area entrusted by Congress to the Comp- troller's administrative oversight and regulation. Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 842-845 (1984) ; Clarke v. Securities Indus. Ass'n, 479 U.S. 388, 403-404 (1987 ) ; Investment Co. Inst. v. Camp, supra. ---------------------------------------- Page Break ---------------------------------------- 16 ARGUMENT I. ACTING AS AN INTERMEDIARY WITH RESPECT TO CUSTOMERS' FINANCIAL INVESTMENTS FALLS WITHIN A NATIONAL BANK'S STATU- TORY AUTHORITY TO EXERCISE "ALL SUCH INCIDENTAL POWERS AS SHALL BE NECES- SARY TO CARRY ON THE BUSINESS OF BANKING" A. Federal Law Grants National Banks Broad And Flexible Authority To Carry On The Business Of Banking The first sentence of 12 U.S.C. 24 Seventh author- izes national banks [t]o exercise * * * all such incidental powers as shall be necessary to carry on the business of banking; by discounting and negotiating promis- sory notes, drafts, bills of exchange, and other evidences of debt; by receiving deposits; by buy- ing and selling exchange, coin, and bullion; by loaning money on personal security; and by ob- taining, issuing, and circulating notes according to the provisions of title 62 of the Revised Statutes. That provision originated in Section 11 of the 1863 statute that first established the national banking system. Act of Feb. 25, 1863, ch. 58, 11, 12 Stat. 668. Section 11 granted national banks the power to carry on the business of banking by obtaining and issuing circulating notes * * *; by discount- ing bills, notes, and other evidences of debt; by receiving deposits; by buying and selling gold and silver bullion, foreign coins, and bills of ex- change; by loaning money on real and personal security * * *, and by exercising such incidental ---------------------------------------- Page Break ---------------------------------------- 17 powers as shall be necessary to carry on such business [.] The language, purpose, and original structure of the statute all indicate that Congress intended both to enumerate certain core banking activities, and also to leave ample scope for the exercise of other, un- enumerated powers that might be or become part of or "incidental" to carrying on the business of bank- ing. 5. Section 11 of the 1863 Act was modeled on Section 18 of New York's Free Banking Law of 1838, ch. 260, 1838 N.Y. Laws 249. See Cong. Globe, 37th Cong., 3d Sess. 1114 (1863) (remarks of Rep. Spauld- ing); Bray Hammond, Sovereignty and an Empty Purse: Banks and Politics in the Civil War 160 (1970). That fact is significant because, at the time Congress passed the 1863 Act, New York's highest court had made clear that the state statute was to be broadly interpreted. In Curtis v. Leavitt, 15 N.Y. 9 (1857), the state Court of Appeals upheld the power of banks chartered under the Free Bank- ing Law to borrow money in the course of their business, even though the statute did not specifically ___________________(footnotes) 5 One year after Section 11's initial passage, Congress changed its language to substantially the form it takes today. See Act of June 3, 1864, ch. 106, 8, 13 Stat. 99, 101. There is no indication that Congress intended the 1864 consolidation, of the statute's references to "carry[ing] on the business of banking" and "exercising * * * incidental powers" into one introductory clause to effect any substantive change in the authority conferred by the statute. See Symons, The "Busi- ness of Banking" in Historical Perspective, 51 Gee. Wash. L. Rev. 676, 700 (1983). Indeed, because the object of the 1864 Act was to encourage state banks to convert to national char- ters, it would have been counterproductive to use it to narrow the scope of national bank authority. Ibid. ---------------------------------------- Page Break ---------------------------------------- 18 grant any such power. One judge explained that the statutory specifications were not intended "to restrict the appropriate business of banking," id. at 58 (Comstock, J.), while another observed that the "implied powers" granted by the statute were "not enumerated and defined; because no human sagacity can foresee what implied powers may, [with] the progress of time, the discovery and perfection of bet- ter methods of business, and the ever-varying atti- tude of human relations, be required to give effect to the express powers." Id. at 157 (Brown, J.). 6. Similarly, this Court has long allowed national banks considerable flexibility in exercising, under the Comptroller's supervision, the authority granted by Section 24 Seventh. Thus, national banks have been permitted to certify checks, Merchants' Bank v. State Bank, 77 U.S. (10 Wall. ) 604 (1871); pur- chase securities in the course of settling a claim, First Nat'l Bank of Charlotte v. National Exch. Bank, 92 U.S. 122 (1876); pay state taxes on de- positors' accounts, Clement Nat'1 Bank v. Vermont, 231 U.S. 120 (1913); operate a safe deposit busi- ness, Colorado Nat'1 Bank v. Bedford, 310 U.S. 41 (1940); and engage in advertising, Franklin Nat'l Bank v. New York, 347 U.S. 373 (1954), although none of those activities is specifically mentioned in Section 24 Seventh. 7. ___________________(footnotes) 6 It is reasonable to assume that Congress was aware of the decision in Curtis when it passed the federal bank powers provision six years later. Arnold Tours, Inc. v. Camp, 472 F.2d 427, 431 (lst Cir. 1972). Two of the three members of the House subcommittee that originated the federal statute- including Elbridge Spaulding, its principal draftsman-were New York bankers. Hammond, supra, at 159-160. 7 This Court's decisions have adopted a pragmatic approach to the scope of bank powers. Thus, the Court has considered ---------------------------------------- Page Break ---------------------------------------- 19 Recent cases in the lower courts have continued to recognize that, because the banking business is con- tinually changing and evolving, the powers of national banks "must be construed so as to permit the use of new ways of conducting the very old business of banking." M & M Leasing Corp. v. Seattle First Nat'1 Bank, 563 F.2d 1377, 1382 (9th Cir. 1977), cert. denied, 436 U.S. 956 (1978) (power to enter into financing arrangements structured as leases) ; see also First Nat'1 Bank of E. Ark. v. Taylor, 907 F.2d 775, 778 (8th Cir. ), cert. denied, 498 U.S. 972 (1990 ) (debt cancellation contracts); Securities In- dus. Ass'n v. Clarke, 885 F.2d 1034, 1049 (2d Cir. 1989), cert. denied, 493 U.S. 1070 (1990) (issuance of mortgage pass-through certificates); American Ins. Ass'n v. Clarke, 865 F.2d 278, 281-282 (D.C. Cir. 1988) (provision of municipal bond "insurance"); Dyer v. Broadway Central Bank, 169 N.E. 635, 636 (N.Y. 1930) ("care should be exercised not to crip- ple [banks] and break down their usefulness by a narrow and unreasonable construction of the statues which will result in unwisely limiting their useful- ness in the transaction of business under modern conditions."). And the New York Court of Appeals has recently reaffirmed, in upholding the authority ___________________(footnotes) it relevant that an activity "has grown out of the business needs of the country," Merchants' Bank, 77 U.S. (10 Wall.) at 648; that it is a "reasonable and appropriate measur[e] * * * to meet all the legitimate demands of the authorized business," First Nat'1 Bank of Charlotte, 92 U.S. at 127; that it would "promote the convenience of [the] business:" Clement Nat'1 Bank, 231 U.S. at 140; that it is a "generally adopted method" of banking, Colorado Nat'l Bank, 310 US. at 50; or that "[m]odern competition for business finds [it] one of the most usual and useful of weapons," Franklin Nat'1 Bank, 347 U.S. at 377. ---------------------------------------- Page Break ---------------------------------------- 20 of New York banks to sell fixed and variable an- nuities under state law, its longstanding broad construction of the statute that provided the original pattern for Section 24 Seventh: "We have long been mindful that the business of banking is not static but rather must adjust to meet the needs of the customers to whom banking organizations provide a useful service." New York State Ass'n of Life Un- derwriters v. New York State Banking Dep't, 632 N.E.2d 876, 880 ( 1994). B. Acting As An Intermediary In Customers' Invest- ment Transactions Is Traditionally Part Of Or Incidental To The Business Of Banking 1. Brokerage of financial instruments, such as securities, has long been a customary part of the business of banking. Indeed, Congress acknowledged the power of national banks to engage in securities brokerage in Section 2 of the McFadden Act, Act of Feb. 27, 1927, ch. 191, 44 Stat. 1226, and Section 16 of the Glass-Steagall Act, Act of June 16, 1933, ch. 89, 16, 48 Stat. 184. The McFadden Act explicitly authorized banks to engage in "the business of buy- ing and selling securities"; the Glass-Steagall Act, a few years later, limited banks' "business of dealing in securities and stock" to purchasing and selling securities "solely upon the order, and for the account of, customers." 12 U.S.C. 24 Seventh. Neither Act created the authority for banks to broker securities; each merely recognized and regulated that authority, which stems instead from Section 24 Seventh's gen- eral grant of power to banks to "exercise all such incidental powers as shall be necessary to carry on the business of banking." See Clarke v. Securities Indus. Ass'n, 479 U.S. 388, 407-408 & nn.20-22 ---------------------------------------- Page Break ---------------------------------------- 21 (1987) (before McFadden Act, banks conducted secu- rities transactions "on a widespread * * * basis"); Securities Indus. Ass'n v. Board of Governors, 468 U.S. 207, 215 (1984) ("[b]anks long have arranged the purchase and sale of securities as an accommo- dation to their customers"; Glass-Steagall "expressly endorsed" that "traditional banking service"). The authority of national banks to broker invest- ment instruments for customers is not limited to instruments that are "securities" within the meaning of Section 24 Seventh and the Glass-Steagall Act. The Comptroller has explained that brokerage of in- vestment instruments is generally within the "busi- ness of banking," because of the financial aspects of such brokerage and its relationship to other tradi- tional banking functions: National banks possess various express or im- plied powers to invest in, trade, deal in, under- write, and otherwise act in various capacities with a wide variety of financial, investment, and monetary instruments and other financial com- modities (such as exchange, coin, and bullion). Banks are regular, active participants in the financial trading markets and normally will have trading expertise. It is a natural part of the same trading process for banks to serve as broker[s] for their customers in other transac- tions where the bank could not or does not serve as principal but where the trading activity is essentially similar. OCC, Interpretive Letter No. 494, [1989-1990 Trans- fer Binder] Fed. Banking L. Rep. (CCH) "Par", 83,083, at 71,199 (Dec. 20, 1989) (OCC Ltr. No. 494). The Comptroller has accordingly permitted national banks to broker various other types of investment instru- ---------------------------------------- Page Break ---------------------------------------- 22 ments on behalf of their customers, whether or not particular instruments would be considered "securi- ties" for purposes of Section 24 Seventh. 8. Thus, once the Comptroller had analyzed the characteristics of the annuities that NationsBank proposed to market and determined, as discussed below, that they were essentially investment instruments, it was reasonable for him to conclude that agency sales of such an- nuities fell well within the scope of national banks' traditional activities in brokering investment instru- ments for their customers. 2. The court of appeals suggested in passing (Pet. App. 15a) that Section 24 Seventh does not authorize agency sales of annuities, because the power to make such sales is neither "incidental" nor "necessary" to the "business of banking." Assuming that the court's brief remark to that effect should be regarded as an independent holding, it is incorrect. First, in light of ___________________(footnotes) 8 See OCC Ltr. No. 494 at 71,199-71,200 & n.4 (commodities futures and related options); OCC Letter No. 387, [1988-1989 Transfer Binder] Fed. Banking L. Rep. ( CCH) "Par", 85,611 (June 22, 1987) (real estate loans); OCC Letter No. 365, [1985-1987 Transfer Binder] Fed. Banking L. Rep. (CCH) "Par" 85,535 (Aug. 1, 1986) (financial futures); OCC Letter No. 357, [1985-1987 Transfer Binder] Fed. Banking L. Rep. (CCH) "Par" 85,527 (Feb. 26, 1986) (options on financial instru- ments and on financial futures); OCC Letter No. 356, [1985- 1987 Transfer Binder] Fed. Banking L. Rep. (CCH) "Par" 85,526 (Jan. 7, 1986) (agricultural and metal futures used for hedging); OCC Letter No. 326, [1985-1987 Transfer Binder] Fed. Banking L. Rep. (CCH) "Par" 85,496 (Jan. 17, 1985) (op- tions); OCC Letter No, 271, [1983-1984 Transfer Binder] Fed. Banking L. Rep. (CCH) "Par" 85,435 (Sept. 21, 1983) (real estate loans and equity interests). ---------------------------------------- Page Break ---------------------------------------- 23 the history discussed above, the language of Section 24 Seventh explicitly recognizing banks' "business of dealing in securities and stock," and banks' "tradi- tional role as financial intermediaries" (Pet. App. 38a), it is implausible to contend that brokering in- vestment instruments on behalf of customers is not "incidental" to the traditional, let alone the contem- porary, business of banking. Second, the suggestion that the power to engage in activities that are properly part of or incidental to the banking business should be restricted by some narrow concept of what is "necessary" cannot be reconciled with the well-established proposition that the statutory term "necessary" need not mean "in- dispensable." As this Court recognized long ago, par- ticularly when used to define general powers avail- able to meet changing and unforeseeable future cir- cumstances, the term need mean no more than con- venient or useful. M'Culloch v. Maryland, 17 U.S. (4 Wheat.) 316, 413-415 (1819); see also National R.R. Passenger Corp. v. Boston & Maine Corp., 112 S. Ct. 1394, 1402 (1992) ; Black's Law Dictionary 1029 (6th ed. 1990); Curtis v. Leavitt, 15 N.Y. at 64 (Comstock, J.); New York State Ass'n of Life Underwriters, 632 N.E.2d at 880; M & M Leasing, 563 F.2d at 1382. Moreover, even if the meaning of the word "necessary" in Section 24 Seventh might, at one time, have been open to question, that question has long been settled by the Comptroller, to whom Congress has entrusted the statute's administration, Both the Comptroller's view on that issue and his further determination of what "incidental powers" are "necessary" to allow national banks to conduct ---------------------------------------- Page Break ---------------------------------------- 23 the history discussed above, the language of Section 24 Seventh explicitly recognizing banks' "business of dealing in securities and stock," and banks' "tradi- tional role as financial intermediaries" (Pet. App. 38a), it is implausible to contend that brokering in- vestment instruments on behalf of customers is not "incidental" to the traditional, let alone the contem- porary, business of banking. Second, the suggestion that the power to engage in activities that are properly part of or incidental to the banking business should be restricted by some narrow concept of what is "necessary" cannot be reconciled with the well-established proposition that the statutory term "necessary" need not mean "in- dispensable." As this Court recognized long ago, par- ticularly when used to define general powers avail- able to meet changing and unforeseeable future cir- cumstances, the term need mean no more than con- venient or useful. M'Culloch v. Maryland, 17 U.S. (4 Wheat.) 316, 413-415 (1819); see also National R.R. Passenger Corp. v. Boston & Maine Corp., 112 S. Ct. 1394, 1402 (1992); Black's Law Dictionary 1029 (6th ed. 1990); Curtis v. Leavitt, 15 N.Y. at 64 (Comstock, J.); New York State Ass'n of Life Underwriters, 632 N.E.2d at 880; M & M Leasing, 563 F.2d at 1382. Moreover, even if the meaning of the word "necessary" in Section 24 Seventh might, at one time, have been open to question, that question has long been settled by the Comptroller, to whom Congress has entrusted the statute's administration. Both the Comptroller's view on that issue and his further determination of what "incidental powers" are "necessary" to allow national banks to conduct ---------------------------------------- Page Break ---------------------------------------- 24 their business are permissible constructions of the statute, and are entitled to deference. National R.R. Passenger Corp., 112 S. Ct. at 1402. II. THE COMPTROLLER REASONABLY DETER- MINED THAT THE SALE OF ANNUITIES BY NATIONAL BANKS IS NOT PROHIBITED BY 12 U.S.C. 92 In rejecting the Comptroller's decision in this case the court of appeals relied primarily on its conclusion that bank sales of annuities, whether or not otherwise authorized under 12 U.S.C. 24 Seventh, are inde- pendently prohibited by 12 U.S.C. 92. Section 92 provides: In addition to the powers now vested by law in national banking associations * * *[,] any such association located and doing business in any place the population of which does not ex- ceed five thousand inhabitants * * * may, under such rules and regulations as may be prescribed by the Comptroller of the Currency, act as the agent for any fire, life, or other insurance com- pany * * * by soliciting and selling insurance and collecting premiums on policies issued by such company. The Comptroller, on the other hand, determined that annuities are not "insurance" within the meaning of Section 92 (Pet. App. 43a-47a) ; and that, even if they were, Section 92 should not be read to limit their sale, particularly if such sales would be incidental to the business of banking under Section 24 Seventh. Pet. App. 41a-43a. Section 92 itself neither defines the term "insur- ance" nor specifies whether its supplemental grant of authority is meant to limit the powers of national ---------------------------------------- Page Break ---------------------------------------- 25 banks not located in small communities. As the dis- trict court (and the dissenters from denial of rehear- ing en bane) recognized (Pet. App. 33a, 24a), those interpretive questions are for the Comptroller to an- swer, so long as his interpretations are reasonable. E.g., Chevron, 467 U.S. at 843; see also Clarke v. Securities Indus. Ass'n, 479 U.S. at 403-404. The Comptroller's conclusions in this case were reason- able, and the court of appeals erred in failing to defer to his construction of the statute. A. The Comptroller Reasonably Determined That Annuities Are Not "Insurance" For Purposes Of Section 92 1. As the Comptroller's approval in this case ex- plained, "[d]ictionary definitions of 'insurance' in- variably describe it as a contract for indemnification against risk of loss. " Pet. App. 43a-44a (citing ex- amples ). Black's Law Dictionary (6th ed. 1990), for example, defines "insurance" in part as "[a] contract whereby, for a stipulated consideration, one party undertakes to compensate the other for loss on a spec- ified subject by specified perils," or "undertakes to indemnify another against loss, damage, or liability arising from an unknown or contingent event. " Id. at 802. Webster's Third New International Diction- ary (1986) includes similar definitions: "a device for the elimination or reduction of an economic risk common to all members of a large group and employ- ing a system of equitable contributions out of which losses are paid"; "coverage by contract whereby for a stipulated consideration one party undertakes to indemnify or guarantee another against loss by a specified contingency or peril." Id. at 1173. ---------------------------------------- Page Break ---------------------------------------- 26 Definitions of the term "annuity," on the other hand, emphasize (as the term itself suggests) the periodicity of payments and their character as invest- ment returns. Thus, Black's Law Dictionary describes an annuity (at 90) as "[a] right to receive fixed, periodic payments, either for life or for a term of years" or "[a] fixed sum payable to a person at specified intervals for a specific period of time or for life," and notes specifically that "[p]ayments repre- sent a partial return of capital and a return (inter- est ) on the capital investment." According to Web- ster's (at 88), the term means "an amount payable yearly or at other regular intervals (as quarterly) for a certain or uncertain period (as for years, for life, or in perpetuity)," or "a contract or agreement under which one or more persons receive annuities in return for prior set payments made by themselves or another (as an employer)." 9. The difference in dictionary definitions reflects a difference in commercial and financial reality. In his decision in this case, the Comptroller first considered ___________________(footnotes) 9 The court of appeals cited (Pet. App. 10a) the reference to "annuity insurance" in the seven-page catalogue of descrip- tive "classifications" following the definition of "insurance" in Black's Law Dictionary (at 802). Although its meaning is not entirely clear, that reference appears to describe a particular type of insurance policy, the proceeds of which would be paid out as an annuity, rather than in a lump sum. That is, it seems likely that the description of "annuity insurance" is not meant to define the word "annuity," any more than the immediately following description of "assessment insurance" is intended to define the word "assessment." The definition of "annuity" (like the definition of "assessment") is located where one would expect it-under "A." See id. at 90; compare the de- scriptions of various types of annuities following the primary definition. ---------------------------------------- Page Break ---------------------------------------- 27 the functional nature of the annuity products in ques- tion, and concluded that they are "primarily financial investments." Pet. App. 38a. As the decision noted (ibid.), investors who purchase fixed annuities gen- erally "are not seeking to pool a catastrophic risk such as death, injury or property damage, but are in- stead seeking a guaranteed, long-term return on their assets." 10. Indeed, "[m]ost commonly, annuities are marketed as a tax-sheltered means of saving for re- tirement." Ibid. During the accumulation period, annuities bear a close functional resemblance to other investment products that banks would be allowed to purchase or sell on behalf of customers: mutual fund shares in the case of variable annuities (under which the pur- chaser retains significant investment control and risk), and conventional interest-bearing debt in the ease of fixed annuities. 11. See Pet. App. 39a-41a; see ___________________(footnotes) 10 The amount of the return (or of principal) that is "guar- anteed" may vary considerably from contract to contract. See generally pages 4-6, supra. 11 As explained above (see pages 7-8 & n.3, supra), the OCC'S legal staff some years ago reached the conclusion that national banks are permitted to broker variable annuities, on the ground that variable annuities resemble mutual fund shares and are "securities" for purposes of 12 U.S.C. 24 Seventh's explicit reference to banks' "business of dealing in securities." The Comptroller's decision in this case restated that conclusion as to variable annuities, and then proceeded to uphold the sale of fixed annuities on the broader ground that even if fixed annuities are not "securities" for purposes of Section 24 Seventh, they are "financial investment inter- ests" that banks may buy and sell on behalf of customers as part of their "traditional role as financial intermediaries." Pet. App. 38a. The judicial opinions below in this case do not distinguish in their analysis between fixed and variable an- ---------------------------------------- Page Break ---------------------------------------- 28 also New York State Ass'n of Life Underwriters v. New York State Banking Dep't, 632 N.E.2d at 882. Many modern annuity products provide for single or staged investments, an interest rate that is known or predictable at the beginning of each accumulation period, and lump-sum withdrawals during or at the end of each period or at maturity of the entire con- tract. Others provide for single investments, a known or predictable interest rate, and a guaranteed payout over a set term of years. Annuities with such fea- tures are virtually indistinguishable from certificates of deposit ( although without federal deposit insurance) or conventional debt. See generally, e.g., Annuities 19-22, 44-45. 12. At the same time, some modern ___________________(footnotes) nuity products. In our view, the Comptroller's rationale for approving the sale of fixed annuities applies a fortiori" to sales of variable annuities, which are even more clearly investment- oriented products; indeed, a primary rationale for the prior staff opinion was that variable annuities are primarily invest- ment instruments. See OCC Ltr. No. 331, at 77,774, 77,776. Alternatively, the Comptroller's decision in this case adopts the legal staff's prior conclusion concerning variable annuities. Pet. App. 35a, 37a-38a; OCC Ltr. No. 499; cf. SEC V. Chenery Corp., 318 U.S. 80, 95 (1943) (agency decision maybe upheld only on grounds relied upon by agency). That conclusion is also sound on its own terms (set out in OCC Ltr. No. 331), and the Comptroller's decision to adopt it is entitled to deference. 12 "As annuity providers became more sophisticated in their marketing efforts, they began to design products that more closely resembled those of the competition. As an annuity was a safe place to invest money at a fixed return, the bank cer- tificate of deposit became the target competition. These prod- ucts have become known as certificate or CD annuities. * * * [T] hese products have met with outstanding success [.] * * * A certificate annuity is any product where the initial interest rate guarantee period precisely parallels the surrender charge ---------------------------------------- Page Break ---------------------------------------- 29 debt instruments involve mortality risks or other con- tingencies that may significantly affect the interest rate, the time at which repayment is required, or the amount of principal that must be repaid. See generally, e.g., Note, Reverse Annuity Mortgages and the Due-on-Sale Clause, 32 Stan. L. Rev. 143, 145- 151 (1979 ) (discussing mortgages that incorporate mortality risk) ; David Hariton, The Taxation of Complex Financial Instruments, 43 Tax L. Rev. 731, 731-732 & nn.2-7 (1988). There is therefore ample support for the Comptroller's conclusion that annui- ties of the type that petitioner NationsBank sought to make available for purchase by its customers are correctly characterized as investment products, rather than "insurance." 2. The only feature that may lend some annuities a flavor of insurance is the mortality risk assumed by one or both parties under some annuity contracts. Under the terms of a classic single-premium, immedi- ate-payout fixed annuity (i.e., one that provides im- mediate income, with no accumulation period during which income is deferred), the issuer agrees to make level periodic payments throughout (but not beyond) the life of the purchaser, and the amount of each payment is calculated so as to amortize the amount paid by the purchaser, together with interest at an agreed rate, to zero as of the purchaser's actuarially expected date of death. If the purchaser dies before that date, he loses part of his principal investment, and the issuer realizes a mortality gain; if the pur- chaser lives beyond that date, he continues to receive ___________________(footnotes) (or lack of surrenderability) period. * * * It is not a coin- cidence that this design is almost identical to a bank certifi- cate of deposit." Annuities 44-45. ---------------------------------------- Page Break ---------------------------------------- 30 payments even though his principal has been ex- hausted, and the issuer realizes a mortality loss, The computations for and pricing of such a contract, like those of life insurance policies, depend on actuarial assumptions, and may reflect a single issuer's pooling of its mortality risks across a large group of pur- chasers. 13. As this Court pointed out in holding that variable annuities are securities for purposes of the Securities Act of 1933, however, it is necessary to look beyond the "aspect of insurance" imparted by the presence of some mortality risk, and to focus on the char- acteristics of a particular product as they relate to a particular federal statutory scheme. SEC v. Variable Annuity Life Ins. Co., 359 U.S. at 71. In that case, the relevant characteristic was the purchaser's as- sumption of substantial investment risk. Ibid. In this case, the relevant characteristic is the nature of the product, measured by its primary nature and pur- poses in the eyes of a prospective purchaser who is a customer of a national bank. From that perspective, the "insurance" aspect of any annuity contract is, as this Court said in an analogous context in SEC v. Variable Annuity Life, "apparent, not real; super- ficial, not substantial." Ibid. ___________________(footnotes) 13 Most annuity contracts provide for payment of the full accumulated account value to a designated beneficiary in the event that the purchaser dies during the accumulation period. The risk that a purchaser may die before the issuer has been able to recover its sales, administrative and investment ex- penses through the spread between its investment returns and the returns credited to the purchaser's annuity account may also be thought of as a "mortality risk" from the issuer's point of view. See Annuities 93. That risk is one that the issuer runs by reason of its pricing and marketing strategy, how- ever, and is at most a minor feature of the annuity contract. ---------------------------------------- Page Break ---------------------------------------- 31 While both life insurance contracts and some annuities involve actuarial assumptions and mortality risks, the two products are very different from the purchaser's point of view. The point of an actuarial mortality assumption is that it represents a fair esti- mate, at the time of contracting, of the expected life of the purchaser. The dominant character of a con- tract that involves such assumptions is therefore de- termined by the results, under the contract, if those expectations prove true. The purchaser of term life insurance pays a small amount in relation to the face amount of the policy, and expects to receive no pay- ment in return. The dominant characteristic of such a contract is therefore indemnification against the risk of an unexpected occurrence. The purchaser of a classic, immediate-payout fixed annuity, on the other hand, pays a comparatively large amount for his contract, and expects to receive it all back, with interest. The dominant characteristic of that con- tract is therefore investment for an expected future income stream. 14. ___________________(footnotes) 14 Under some life insurance policies a portion of each premium payment is invested and accumulates cash value over time. See, e.g., Black's Law Dictionary 805 (6th ed. 1990) (descriptions of "universal" and "whole life" insurance); com- pare id. at 806 (description of "term insurance"). An annuity contract that requires or permits periodic investments (as opposed to payment of a single purchase price) bears some resemblance to the investment component of such insurance policies, but offers no analogue to the term life insurance component. That observation is consistent with the Comp- troller's conclusion (Pet. App. 45a) that annuities are "pri- marily a vehicle for investment, not indemnification." Annui- ties and cash-value life insurance also both typically allow invested funds to compound on a federal income tax-deferred basis. The tax benefits accorded annuities do not, however, ---------------------------------------- Page Break ---------------------------------------- 32 Thus, even in the case of the classic immediate- payout, lifetime-based fixed annuity-the annuity con- tract with the most prominent "mortality risk" feature from the purchaser's point of view-the distinction between annuities and life insurance is quite apparent. As one court aptly put it, "annuities are not indemni- ties for death but are investments for life." Corpora- tion Comm'n v. Equitable Life Assur. Soc'y, 239 P.2d 360, 362 ( Ariz. 1951 ); see also Helvering v. Le Gierse, 312 U.S. 531, 541 (1941) (in terms of mor- tality risks, "annuity and insurance are opposites" ) ; Annuities 7. 15. Nor do immediate-payout fixed annui- ___________________(footnotes) depend on assimilating the annuity contract to insurance; annuities are treated as sui generi's for federal income tax purposes. See 26 U.S.C. 72. In fact, it is interesting to note that death benefits received by beneficiaries under life insur- ance contracts are generally excluded from gross income for federal income tax purposes, whereas amounts received by a beneficiary under an annuity contract by reason of the death of the purchaser are, like other annuity payments, exempt only to the extent that they represent a return of the pur- chaser's invested capital. See generally 26 U.S.C. 72(e), 101 (a); see also Rev. Rul. 79-335, 1979-2 C.B. 292, 294. 15 "[A]n annuity is a cash contract * * * whose orientation to the insurer is primarily investment or asset management, and secondly, mortality management. That single fact dif- ferentiates the annuity from the life insurance product. Un- like a life insurance policy, where the primary objective is to provide death protection or estate protection for a deceased's survivors, the primary objectives of the annuity are tax de- ferral, safety and a higher yield than what can typically be found in a certificate of deposit, money market or savings account. Those objectives are used by the contract-holder to accumulate funds for retirement, create income for retirement or both." Annuities 7. The same source explains that "An- nuities have very little mortality risk. * * * Instead, the annuity is an asset-management product, by which the insur- ---------------------------------------- Page Break ---------------------------------------- 33 ties-whether purchased on their own, or selected as a payout option after the accumulation period of a deferred fixed or variable annuity contract-represent the entire modern annuities market. Other types of annuity contract are much more common, and even less like insurance. 16. For example, many contempo- rary annuities (sometimes called "refund" annuities) ___________________(footnotes) ance company makes its profit from the difference between what it can earn on its investments, and what it then pays out to the contract-holder in the form of interest rates credited to the contract." Ibid. 16 Statistics compiled by the American Council of Life In- surance indicate that of 20,383,000 fixed annuity contracts issued by insurance companies and in force at the end of 1992, 89% were deferred annuities in the accumulation period. American Council of Life Insurance, 1993 Life Insurance Fact Book Update 18 (1993) (ACLI Update). Of the remaining 11%, just over half (55%) were individual contracts-that is, either single-payment immediate annuities, or deferred annuities in the payout phase under which the owner had selected annuitized payments (rather than a lump-sum or "systematic withdrawals," as described below). The remain- der were "supplementary contracts," providing annuitized payments of the death benefit on a life insurance policy, or of the accumulated value of a deferred annuity contract termi- nated by reason of the death of the purchaser. The figures for both individual and supplementary contracts include all types of annuitized payments-those payable for the life of the annuitant (and/or another beneficiary), those payable for life but with a guaranteed minimum term, and those pay- able for a specified term without regard to mortality. Thus, "classic" single-payment immediate annuities with a simple lifetime payout term would represent less than-and probably significantly less than-11% of the fixed annuities outstand- ing at the end of 1992. And those figures do not include an- other 6.6 million or more persons covered by individual or group variable annuity contracts issued by insurance compa- nies. Ibid. ---------------------------------------- Page Break ---------------------------------------- 34 guarantee the return of the purchaser's principal in- vestment (and perhaps a specified return), even if the purchaser dies during the payout phase but be- fore the actuarially predicted time. See, e.g., Annui- ties 20-22. Such provisions eliminate any mortality risk on the part of the purchaser, and severely limit the issuer's ability to pool positive and negative mor- tality experience over a broad group of annuities. In addition, most deferred annuities provide the purchaser with the option to take payment in a lump sum at the end of the accumulation period; as regular payments over a fixed term of years, without refer- ence to the life of the purchaser; or through "sys- tematic withdrawals" flexibly arranged to meet the purchaser's needs, with any remaining principal paid to a beneficiary on the purchaser's death. See, e.g., Annuities 4, 21-22, 24-26 & illus. 3.5, 122-123 (sample contract ). Under those options the contract involves no element of mortality risk whatsoever, and does not even vaguely resemble "insurance." Moreover, even in cases where both return of the original investment and continued payment over the life of the purchaser is guaranteed, the remain- ing "mortality" element-the risk of unexpected longevity-might be characterized variously as "in- surance" of a sort, as a contingent debt of the issuer, or as a contingent, post hoc adjustment in the guaranteed rate of return on the purchaser's invest- ment. See Annuities 23 illus. 3.3 (computing effective rates of return under various payout options and assumptions). The salient financial characteristics of annuities thus make clear that they are, as the Comptroller concluded, either wholly or overwhelmingly invest- ment products. It is therefore not surprising that, ---------------------------------------- Page Break ---------------------------------------- 35 as the New York Court of Appeals recently observed, "the great weight of authority supports the position that annuities are not insurance." New York State Ass'n of Life Underwriters v. New York State Bank- ing Dep't, 632 N.E.2d at 881. See also, e.g., Pet. App. 38a-39a, 44a-45a and authorities there cited; Annuities 7 (in contrast to life insurance, "[a]nnui- ties * * * are primarily investment products" ) ; 1 J. Appleman, Insurance Law & Practice 84, at 295 (1981 ) ("Annuity contracts must * * * be recog- nized as investments rather than as insurance.") ; In re Young, 806 F.2d 1303, 1306 (5th Cir. 1987). The Comptroller's opinion in this case marshaled (Pet. App. 45a) numerous court decisions holding that annuities are not "insurance" for a variety of tax, bankruptcy, and other federal and state law purposes. 17. ___________________(footnotes) 17 The Comptroller acknowledged (Pet. App. 46a) that cases construing the exemption for any "insurance or endow- ment policy or annuity contract or optional annuity contract" under Section 3(a) (8) of the Securities Act of 1933, 15 U.S.C. 77c (a) (8), "occasionally speak of fixed annuities as being 'insurance' rather than `securities.' " See, e.g., SEC v. United Benefit Life Ins. Co., 387 U.S. 202 (1966); SEC v. Variable Annuity Life Ins. Co., 359 U.S. 65 (1959); see also SEC Rule 151, 17 C.F.R. 230.151. However, as the Comptroller pointed out (Pet. App. 46a), the text of Section 3 (a) (8) itself refers to both "annuity contract [s]" and "insurance * * * polic[ies]," rather than merely subsuming the former under the latter heading. Compare 26 U.S.C. 816 (a) (defining "life insurance company" as "an insurance company which is engaged in the business of issuing life insurance and annuity contracts" (emphasis added) ). In any event, as the Comptroller noted (Pet. App. 46a-47a), cases under Section 3 (a) (8) interpret a different statute with different purposes, and do not control the analysis in the context of the banking statutes, ---------------------------------------- Page Break ---------------------------------------- 36 3. The court of appeals criticized the Comptroller's determination that annuities are not "insurance" for purposes of Section 92 on the ground that annuities are often issued by life insurance companies, and are typically regulated under state insurance laws. Pet. App. 10a-11a & n.2. But an annuity contract is not "insurance" simply because it has been issued by an insurance company, see In re Howerton, 21 B.R. 621, 623 (Bankr. N.D. Tex. 1982) ; and regu- lation of annuities under state insurance laws reflects little more than the fact that insurance companies have traditionally written a large proportion of an- nuity contracts. See Daniel v. Life Ins. Co. of Vu., 102 S.W.2d 256, 261 (Tex. Civ. App. 1937); compare Rishel v. Pacific Mutual Life Ins. Co. of Cal., 78 F.2d 881, 883-884 (10th Cir. 1935) (annuity not "policy of insurance" required to be filed with Colo- rado Insurance Commissioner) ; Chatham County Hosp. Auth. v. John Hancock Mut. Life Ins. Co., 325 F. Supp. 614, 619 (S.D. Ga. 1971) (annuities not regulated as "insurance" in Georgia in 1955). Both the court of appeals' observations beg the relevant question whether annuities are properly considered "insurance" or investment instruments for federal banking law purposes. 18. New York State Ass'n of ___________________(footnotes) 18 As this Court recognized in the context of determining the treatment of variable annuities under the federal securi- ties laws, what constitutes "insurance" within the meaning of a federal statute is a question of federal law. SEC v. Van-able Annuity Life Ins. Co., 359 U.S. at 69; cf., e.g., Dickerson v. New Banner Inst., 460 U.S. 103, 111-112 (1983) (meaning of "convicted" in federal statute was question of federal law,' although offense and punishment were defined by state law); United States v. Bess, 357 U.S. 51, 55-57 (1958) (whether contract rights defined by state law constitute "property" under federal tax lien statute is a matter of federal law). ---------------------------------------- Page Break ---------------------------------------- 37 Life Underwriters, 598 N.Y.S.2d 824, 828 (App. Div. 1993), aff'd, 632 N.E.2d 876 (N.Y. 1994). The court of appeals asked that question but reached the wrong conclusion. Pet. App. 12a-13a. The court recognized that, as discussed above (see pages 29-31, supra), annuities with lifetime payout terms may be thought of as the "inverse" or "mirror image" of term life insurance, in the sense that the mortality risk involved in one case is that the pur- chaser will live too long, while in the other case. it is that he will die prematurely. Pet. App. 12a. But to say that two things are the "inverse" of each other is not to say that they are the same. As ex- plained above, protecting against mortality risk is the primary functional and financial aspect of a life insurance contract. In the case of annuity contracts, on the other hand, protecting against such risk is typically no more than a supplemental consideration in an arrangement primarily concerned with the man- agement and staged repayment of invested funds. It therefore makes little sense to argue that the banking laws should treat the two products as identical. In all events, the court of appeals erred in ap- proaching the question whether annuities should be viewed as "insurance" for purposes of Section 92 essentially de novo. That court should, like the dis- trict court, have confined its review to inquiring whether the Comptroller's fundamental determina- tion that annuities are primarily investment vehicles, rather than contracts of indemnification, represented a permissible interpretation of the statute. See, e.g., Chevron, 467 U.S. at 843-845; Clarke v. Securities Indus. Ass'n, 479 U.S. at 403-404; Investment Co. Inst. v. Camp, 401 U.S. at 626-627. As the preceding discussion demonstrates, the Comptroller's interpre- ---------------------------------------- Page Break ---------------------------------------- 38 tation was at least a reasonable one. Having failed to impeach its reasonableness in light of the language and purposes of Section 92 and the remainder of the federal banking laws, the court of appeals erred in substituting its judgment for that of the Comp- troller on matters within his expertise and regulatory competence. 19. ___________________(footnotes) 19 In its opposition to the certiorari petitions in this case, respondent contended (Br. in Opp. 12) that the Comptroller's determination is not entitled to deference because its is in- consistent with positions taken in 1978 and 1982. Even revised administrative positions are, of course, entitled to deference. E.g., Good Samaritan Hosp. v. Shalala, 113 S. Ct. 2151, 2160-2161 (1993). The letters to which respondent re- fers, however, "hardly establis[h] an inconsistent policy." Thomas Jefferson Univ. v. Shalala, No. 93-120 (June 24, 1994), slip op. 11-12. As we pointed out in our reply brief at the petition stage (at 3-4), the 1978 letter represents informal advice by an agency lawyer, contains no analysis supporting the views expressed, and clearly identifies its conclusions as the personal opinion of its author. See Br. in Opp. la-2a. Such a letter would not bind the agency or the recipient or be subject to review by the courts. See New York Stock Exch. v. Bloom, 562 F.2d 736, 741 (D.C. Cir. 1977), cert. denied, 435 U.S. 942 (1978); American Land Title Ass'n v. Clarke, 743 F. Supp. 491, 494 (W.D, Tex, 1989). It there- fore cannot provide a basis for contending that the agency has changed course. Independent Ins. Agents v. Ludwig, 997 F.2d 958, 962 (D.C. Cir. 1993). The 1982 letter sets forth a similar informal opinion by a member of the OCC legal staff, See OCC Interpretive Letter No. 241, [1983-1984 Transfer Binder] Fed. Banking L. Rep. (CCH) "par" 85,405 (Mar. 26, 1982). Moreover, as explained in our reply brief (at 4-5), that letter's discussion of sales of term life insurance does not conflict with the Comptroller's decision in this case concern- ing annuities. ---------------------------------------- Page Break ---------------------------------------- 39 B. The Comptroller Reasonably Concluded That Sec- tion 92 Does Not Prohibit Agency Sales Of Special- ized "Insurance" Products Outside Small Towns If The Comptroller Has Determined That Such Sales Are Part Of Or Incidental To The Business Of Banking The court of appeals also erred in refusing to defer to the Comptroller's conclusion that even if annuities were to be considered "insurance" for purposes of 12 U.S.C. 92, the statute should not be construed to prohibit banks outside small towns from selling them (as agents ) once the Comptroller has concluded that such sales are incidental to the business of banking. Section 92 provides that "[i]n addition to the powers now vested by law in national banking asso- ciations," national banks in small towns may "act as the agent for any fire, life, or other insurance company" in selling insurance policies (emphasis added ). The introductory phrase "in addition to" shows that Section 92 is a grant of additional powers for a special situation. 20. It does not purport to define, or confine, the scope of the other lawful "powers" whose existence it assumes and supplements. Those ___________________(footnotes) 20 The statute's legislative history also indicates that Con- gress thought of Section 92 as a grant of additional powers, not a limitation on otherwise authorized activities. Senator Owen, Section 92's sponsor, described the provision as "giving some additional powers to the small banks to act as agents in insurance matters." 53 Cong. Rec. 11,002 (1916); see also id. at 11,001 ( Comptroller's letter explaining that proposal re- flected consideration of "how the powers of these small na- tional banks might be enlarged"). See also Independent Ins. Agents v. Board of Governors, 736 F.2d 468, 477 n.6 (8th Cir. 1984) ("Congress was concerned only with providing small-town banks with an additional profit source, not with prohibiting city banks from selling insurance."). ---------------------------------------- Page Break ---------------------------------------- 40 powers, which pre-date and survive Section 92, in- clude the general authority under Section 24 Seventh to "exercise * * * all such incidental powers as shall be necessary to carry on the business of banking." Even if annuities were "insurance" for purposes of Section 92, there would be no reason why the Comp- troller could not conclude that those incidental powers extend to acting as a sales agent for limited classes of such "insurance" products whose essential invest- ment character also brings them within the ambit of banks' traditional investment activities on behalf of their customers. 21. To be sure, Section 92 carries some negative impli- cation; Congress would have' had little reason to grant small-town banks the power to act as general ___________________(footnotes) 21 The court of appeals cited (Pet. App. 16a) documents written by the Comptroller and counsel to the Federal Re- serve, prior to Section 92's passage, to show that Congress believed national banks had no authority to act as insurance agents before Section 92 was enacted. See 53 Cong. Rec. 11,001 (1916) (letter from Comptroller Williams to Senator Owen); Right of a National Bank To Write Insurance Through Its Officers, 2 Fed. Res. Bull. 73, 74 (1916) (letter from Board Counsel Elliot to Board Governor Hamlin). Both documents refer to insurance in broad terms. See 53 Cong. Rec. 11,001 (1916) (referring to "fire, life, etc." insurance); 2 Fed. Res. Bull. at 73 (analyzing the power of national banks to write "fire, cyclone, liability or other kinds of insurance"). Neither suggests that specific kinds of insurance agency activity that are closely connected to banking would not fall within the incidental powers of national banks. In any event, slim intima- tions of possible administrative or congressional understand- ings in 1916 form at best a "hazardous basis" for determining the meaning of a statute (12 U.S.C. 24 Seventh) passed 75 years earlier, as applied to the banking and investment world of today. See Cippollone v. Liggett Group, 112 S. Ct. 2608, 2619 (1992); United States v. Price, 361 U.S. 304,313 (1960). ---------------------------------------- Page Break ---------------------------------------- 41 insurance agents if it had thought, in 1916, that any national bank could already do so under Section 24 Seventh. See Pet. App. 7a. But the court of appeals swept too broadly in concluding that Section 92's reference to some "insurance" sales necessarily implied that national banks could have no power, independent of Section 92, to sell any "insurance" product. Section 92 permits national banks in small communities to act as agents for any "fire, life, or other insurance company." Under the interpreta- tional principle of ejusdem generis, a general term in a statutory list should be understood in light of the specific terms that surround it. 22. E.g., Hughey v. United States; 495 U.S. 411, 419 (1990) ; see also Securities Indus. Ass'n v. Board of Governors, 468 U.S. 207, 218 (1984); Beecham v. United States, 114 S. Ct. 1669, 1671 (1994). In accordance with that principle, the Comptroller permissibly concluded that Section 92's grant of authority-and any con- comitant implication that authority was otherwise lacking-should be construed to refer only to the un- restricted operation of a general agency for fire, life, or other casualty insurance, and not to agency sales of particular "insurance" products when the Comp- troller has determined that such sales fall within or are incidental to the business of banking. 23. ___________________(footnotes) 22 Indeed, application of ejusdem generis is necessary to give significance to Congress's specification of "fire" and "life" insurance in Section 92. Under the court of appeals' reading of the statute those terms become unnecessary, because all types of insurance, including fire and life insurance, are en- compassed in the phrase "any * * * insurance company." 23 In its brief in opposition, respondent objected (at 9) to the Comptroller's reasoning on the ground that the words ---------------------------------------- Page Break ---------------------------------------- 42 The Comptroller's construction maintains an ap- propriate balance between Section 24 Seventh and section 92. The general grant of powers in Section Seventh permits banks to engage only in activi- ties (including insurance agency activities) that are "incidental" to the "business of banking." Section 92 by contrast, grants banks located in small towns the additional authority to act as agents for the sale of a broader range of insurance products, whether or not such sales are incidental to the business of banking. That grant of additional authority does not negate the possibility that the sale of annuities, even if properly denominated as "insurance," is suf- ficiently related to the business of banking to come within the existing incidental powers of national banks. And the question whether such products, or any others, are so related is one within the expertise and competence of the Comptroller, not the courts. * * * * * In sum, Section 24 Seventh provides that national banks may exercise "all such incidental powers as shall be necessary to carry on the business of bank- ing." It does not, however, define the "business of banking" or the powers that may be "incidental" thereto. Section 92 provides that national banks in small towns may act as the agent for "any fire, life, ___________________(footnotes) "fire, life, or other" in Section 92 describe only the type of company for which a covered bank may act as agent, not the types of insurance it may sell. The statute provides, however, that covered banks may "act as the agent for any fire, life, or other insurance company * * * by soliciting and selling insurance and collecting premiums on policies issued by such company." The Comptroller could fairly read that language to limit both the types of companies and the types of "insur- ance" to which Congress intended the statute to apply. ---------------------------------------- Page Break ---------------------------------------- 43 or other insurance company" in the sale of insurance. Similarly, however, it does not specify to what types of "insurance" it refers. And neither provision speaks directly to the issue of whether a national bank may sell fixed and variable annuities as agent. If "Congress has not directly addressed the pre- cise question at issue," then "the question for the court is whether the agency's answer is based on a permissible construction of the statute." Chevron, 467 U.S. at 843. That construction need not be the only one those responsible for administration of the statute could have adopted, "or even the reading the court would have reached if the question initially had arisen in a judicial proceeding"; it need only be rationally permissible under the governing statute. Id. at 843 n.11. As demonstrated above and in the Comptroller's thorough opinion approving the appli- cation at issue here, there is ample support for the Comptroller's statutory interpretations in this case. The regulation of banking is an area of prime importance, requiring a combination of special func- tional expertise and informed choices among some- times conflicting goals. Those goals include both the maintenance of a strong banking industry in light of modern developments in investment and finance, and the protection of banks and bank customers from the expansion of bank activities into inappropriate areas. It would be difficult to identify a regulatory context in which it is clearer that courts should defer, in matters of statutory interpretation, to `{reason- able accommodation [s] of conflicting policies that were committed to the agency's care by the statute." Chevron, 467 U.S. at 845 (quoting United States v. Shimer, 367 U.S. 374, 383 (1961)). The reasonable statutory interpretations adopted by the Comptroller ---------------------------------------- Page Break ---------------------------------------- 44 in this case were thoroughly discussed and well sup- ported in his decision, and they are entitled to deference. CONCLUSION The judgment of the court of appeals should be reversed. Respectfully submitted. DREW S. DAYS, III Solicitor General FRANK W. HUNGER Assistant Attorney General PAUL BENDER Deputy Solicitor General EDWARD C. DUMONT Assistant to the Solicitor General MARK B. STERN JACOB M. LEWIS Attorneys JULIE L. WILLIAMS Chief counsel L. ROBERT GRIFFIN ROSA M. KOPPEL YVONNE D. MCINTIRE Attorneys Office of the Comptroller of the Currency JULY 1994 ** U.S. GOVERNMENT PRINTING OFFICE; 1994 301157 86180 ---------------------------------------- Page Break ----------------------------------------