May 16, 1997
Douglas J. McClintock, Esq.
Thacher Proffitt & Wood
Two World Trade Center
New York , NY 10048
Dear Mr. McClintock:
This responds to your correspondence, dated April 8, 1997, in which you seek the Department's confirmation that New York chartered savings banks have the authority under New York Banking Law to directly sell annuities as agents for insurance companies. Your request is on behalf of your client, Emigrant Bancorp, Inc. ("Bancorp."), the parent bank holding company of Emigrant Savings Bank ("Emigrant"). Emigrant currently acts as an agent in the sale of insurance and annuity products through its insurance agency subsidiary, Emigrant Agency, Inc. ("Emigrant Agency").
[ ] The Federal Reserve Board asserts its authority under the federal Bank Holding Company Act to regulate the activities of all nonbanking subsidiaries of bank holding companies, but the Federal Reserve Board permits a subsidiary of a bank to engage in the activities in which the parent bank is authorized to engage directly under state law. Accordingly, a determination that New York savings banks could act directly as agents for the sale of annuities, you believe, would render less likely a determination by the Federal Reserve Board that such activity would be impermissible for a nonbanking subsidiary of a savings bank.
In brief, your opinion that New York savings banks have the authority to sell annuities directly is based (a) on the incidental power of New York chartered commercial banks to sell annuities as agents for insurance companies, as initially confirmed by the Department in a letter dated January 24, 1991, from Angela Christmas, Esq. to Mr. Michael Smith, Executive Vice President of the New York State Bankers Association (the "Christmas Letter"), and reconfirmed in a letter dated May 17, 1991, from Michael Schussler, Esq. to Kimberly C. Lawrence, Esq., which letters were judicially confirmed by the New York Court of Appeals in New York State Ass'n of Life Underwriters v. New York State Banking Dept ., 83 N.Y.2d 353, 610 N.Y.S. 2d 470 (1994), aff'g. 190 A.D.2d 338, 598 N.Y.S. 2d 824 (3rd Dept. 1993); and (b) your belief that the incidental powers of New York chartered savings banks are comparable to those of New York chartered commercial banks in this regard, and include the power to sell annuities as agents for insurance companies.
While we believe that it is unnecessary at this time to find that the scope of the incidental powers of savings banks is in all cases the same as that of the incidental powers of commercial banks, as suggested in your correspondence, we concur in your opinion that New York savings banks have the authority directly to sell annuities as agents for insurance companies, as more fully discussed below.
Background - Bank Sales of Fixed and Variable Annuities
As you point out, the Department has taken the position that the sale of annuities as agent is within the scope of a commercial bank's incidental powers. It should be noted that the Christmas Letter, which you cite, dealt specifically with the question whether New York commercial banks had authority to sell fixed-rate annuities. However, the Department has generally determined, as has the Office of the Comptroller of the Currency ("OCC") for national banks, that the brokering of both fixed and variable rate annuities is a permissible "incidental" activity for commercial banks.
As discussed in detail in the OCC's Interpretive Letter No. 499 (Feb. 12, 1990), reprinted in Fed. Banking L. Rep. 1 83,090 ("OCC Letter 499"), an investor in a variable annuity purchases a share in an investment portfolio and then receives payments according to the performance of the portfolio. As such, variable annuity contracts are securities, functionally resembling shares in a mutual fund. Banks are authorized to buy and sell securities for the account of customers, and on this basis, banks can directly sell variable annuities to customers. (12 U.S.C. § 24(7); Banking Law § 96(1)). For New York banks, such authorization is not derived from the grant of authority to engage in any specified line of business described in Section 96 but from the grant of incidental powers contained therein.
The authority of banks to sell fixed annuities derives from a bank's traditional powers to broker financial instruments. In OCC Letter 499, the OCC noted that although annuities have historically been a product of insurance companies, they are primarily financial investments. Investors who purchase annuities are not seeking to pool a catastrophic risk, such as death, injury or property damage, but are instead seeking a guaranteed, long-term return on their assets. The element of mortality risk, which is present in some annuities, derives from an investor's willingness to price a contractual arrangement based on the length of his life in order to increase the return he will receive during his lifetime. This risk is essentially an investment risk, not an insurance risk. (OCC Letter 499). Any risk that the premium would earn less than the amount paid to an investor as an annuity is an investment risk similar to the risk assumed by a bank. ( Id. citing Helvering v. Le Gierse, 312 US 531 (1941)).
The OCC further illustrates in Letter 499 that fixed annuities resemble other financial investments that banks may sell as agent, such as debt instruments and certificates of deposit (CDs), and the OCC points out that a life interest in any instrument with a fixed return is, in effect, a fixed annuity. The OCC also concluded that, for purposes of banking law, annuities are not insurance products because they do not incorporate the element of indemnification against risk. The U.S. Supreme Court upheld the OCC's analysis in NationsBank of North Carolina, N.A. v. VALIC 115 S.Ct. 810 (1995). The New York Court of Appeals upheld a substantially similar analysis by this Department in New York State Ass'n of Life Underwriters v. New York State Banking Dept ., 83 N.Y.2d 353; 610 N.Y.S. 2d 470 (1994).
New York Savings Bank Powers
We believe that the analysis applied toward commercial banks applies with equal legitimacy to support the conclusion that the selling of annuities directly as agent is a permissible "incidental" power for savings banks organized under Article 6 of the Banking Law. Although savings banks do not have express power to sell annuities or other securities, they are permitted to exercise "all such other powers as are necessary or appropriate in conducting the business of the savings bank". (Banking Law § 234(23); see also § 234(1)).
Savings banks were historically chartered as thrift institutions for small depositors, and, as such, offered limited services and enjoyed limited investment powers. Over the years, however, the statutory powers of savings banks have increasingly been expanded to promote the competitiveness of these institutions, particularly vis-a-vis commercial banks. As you note in your correspondence, as early as 1975, the New York Court of Appeals noted that:
The demarcations between savings and commercial banks have been progressively blurred with respect to their different standards of investment liquidity, and required reserves, types of credit transactions they are authorized to provide, and the kinds of sources from which they draw their deposits. Each has progressively and competitively encroached upon the field of the other. Commercial banks now have savings accounts on which they pay interest, with a differential in rate less significant as general and bank interest rates have risen. Savings banks issue and "sell" money orders, as distinguished from officers' checks, payable to named payees, and charged against savings accounts. Both kinds of banks sell traveler's checks; both provide safe deposit boxes for rental to nondepositors; both provide specialized savings accounts for fiduciaries and corporations; and the list could be extended still more.
New York State Bankers Ass'n v. Albright , 38 N.Y.2d 430, 439, 381 N.Y.S.2d 17, 22 (1975).
Of particular significance is the similarity of products and services offered by savings and commercial banks. Both savings and commercial banks offer customers similar products such as checking and NOW accounts, CDs, savings accounts and individual retirement accounts ("IRAs"). Both commercial and savings banks may exercise trust powers available to banks and trust companies under the Banking Law. Both engage in the making of consumer, residential and commercial loans. In general, both types of institutions function as financial intermediaries by offering either directly or indirectly a wide array of financial products and services to consumers, and by channeling money and credit throughout the economy. Accordingly, as for commercial banks, the sale of annuities as agent is properly within the "incidental" powers of a New York savings bank to the same extent as in the case of commercial banks.
We note that the Office of Thrift Supervision ("OTS") also has concluded that the brokering of annuities by federal savings associations is within the "incidental" powers of such savings associations. ( See OTS General Counsel Opinion 94/CC-20 (Oct. 17, 1994 reprinted in Fed. Banking L. Rep. 82,854) ("OTS Opinion 94/CC-20"). The OTS noted that selling annuities conforms to a savings association's essential role of acting as a financial intermediary. This conclusion satisfied one part of a "four-part" test employed by the OTS to determine whether an activity is within the "incidental" powers authority of a savings association. (The OTS does not necessarily require that all four parts be satisfied, but it balances these factors).
The OTS also noted that the sale of annuities by savings associations is in line with the legislative purpose and function of savings institutions. That is to say, savings institutions primarily exist to offer consumers a place to deposit excess funds and invest in savings and retirement vehicles. Annuities constitute such an investment vehicle for such consumers, and they supplement deposit and savings accounts, CDs, IRAs, mutual funds and similar vehicles used for this purpose, which are also offered by savings institutions.
As a third basis for support, the OTS found that the brokering of annuities was similar to, or facilitated an express power of_savings associations. In their capacity as trustees, savings associations routinely give investment advice to customers regarding the purchase of annuities, and other securities or insurance products. Thus, the activities involved in the direct sale of annuities on an agency basis are both similar and complimentary to express powers savings associations may exercise as trustees.
Finally, in considering whether an activity falls within an institution's incidental powers, the OTS considers whether institutions need to engage in the activity in order to keep pace with changes in the modern economy. The OTS found that this was true in the case of savings associations offering annuities because consumers increasingly have come to expect access to a wide range of securities and insurance products at depository institutions and, to remain competitive, savings associations must be able to offer "one-stop" shopping for financial products, as is done by commercial banks and securities firms.
Although. the Department has not specifically adopted a similar four-part test for determining the incidental powers of savings banks, we agree with the points made in OTS Opinion 94/CC-20 regarding the incidentality of the sale of annuities to the business of a savings bank, without necessarily concluding that the authority to engage in trust activities is a necessary prerequisite to the sale of annuities.
Safety and Soundness Requirements
As with the offering of annuities by New York commercial banks, New York savings banks also would be required to abide by any statutory, regulatory and supervisory guidelines concerning a bank's sale of annuities. These include, but are not necessarily limited to, the requirements that the savings bank must offer annuity contracts solely as agent for the insurance companies issuing the annuities; that the annuity contract must clearly state that the insurance company is the issuer and not the bank; that the annuity contract must also conspicuously indicate that the invested funds are not insured by the FDIC, or not otherwise insured by any governmental agency; and that the savings bank must comply with the Insurance Laws of New York (and any other state in which it may be permitted to operate), and the applicable regulations thereunder regarding the sale of annuity contracts.
We trust that this letter is responsive to your inquiry.
Very truly yours,