Supreme Court Will Hear Bank Appeal on Annuities

WASHINGTON —  The U.S. Supreme Court said Monday that it will hear an appeal by the Clinton Administration and NationsBank Corp., the nation’s third-largest bank, of a ruling that sharply limits banks’ ability to sell annuities.

The decision will be important for banks wanting to expand into a new type of products that generate fees, experts said. “If the court upholds the decision, it could shut down a very important area for banks,” banking consultant Karen Shaw said.

The justices agreed to review a ruling last year by a U.S. Court of Appeals in New Orleans that NationsBank can sell annuities only in towns of 5,000 or fewer people.

Annuities, which are generally sold by insurance agents, pay a stream of benefits in exchange for a lump-sum payment. They are often used as a source of retirement income.

Many banks are selling annuities and other products such as mutual funds to collect fees and retain customers. Finance companies, brokerages and other businesses have been siphoning away bank income generated through making loans and taking deposits.

In 1992, banks sold $12.2 billion in fixed and variable annuities, representing 17% of all individual annuities and 22% of fixed annuities sold nationwide. Annuities accounted for 7% of all bank brokerage sales.

NationsBank, which is based in Charlotte, N.C., in 1989 asked the office of comptroller of the currency, which regulates about 3,400 national banks, for permission to sell annuities. It won approval on grounds that annuities are primarily financial investment products that banks could sell.

Variable Annuity Life Insurance Co. of Houston, a unit of American General Corp., which underwrites and sells annuities, challenged the decision in court.

A federal judge in Houston upheld the comptroller’s decision, but the appeals court reversed the ruling, saying annuities have historically been considered insurance products and that banks by law cannot sell insurance except in towns of fewer than 5,000 people. (A 1916 law upheld by the high court permits banks to sell insurance only in small towns.)

Having the justices uphold the appeals court ruling would “severely restrict the participation of banks in the sale of annuity products,” said David Roderer, a lawyer with Winston & Strawn.

Appealing to the Supreme Court were NationsBank and the Justice Department, which acted on behalf of the comptroller. Supporting them were a number of bank trade associations.

“The enhanced competition resulting from permitting national banks to sell annuities, although feared by the insurance industry, is an important benefit to consumers looking for the best deal on a retirement vehicle,” Comptroller of the Currency Eugene Ludwig said.

Justice Department attorneys noted that New York’s highest court recently upheld a state regulatory decision allowing state-chartered banks to sell annuities. They said the U.S. Supreme Court should rule that federal law permits national banks, wherever they are, to act as agents in selling annuities.

Phil Anderson of Independent Insurance Agents of America said his group “continues to stand behind the wisdom” of the appeals court ruling.

The high court will schedule oral arguments in the case during the term that starts in October. A decision is expected early next year.