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The Gramm-Leach-Bliley Act of 1999: New Insurance Opportunities for Banks. . .Subject to State Regulation

DECEMBER 10, 1999


The Gramm-Leach-Bliley Act of 1999: New Insurance Opportunities for Banks. . . Subject to State Regulation

Editor’s Note: This is the second in a series of articles on selected parts of the Gramm-Leach-Bliley Act of 1999. This article deals with insurance issues. For a more complete history of this Act, including a summary of the unitary thrift loophole issue, please see the December issue of Independent Banker magazine.

The Gramm-Leach-Bliley Act eliminates barriers that have stood for decades preventing banks from affiliating with insurance underwriting companies. Under the new law, Financial Holding Companies can engage in insurance-related activities after meeting certain pre-requisites prescribed in the Act. Under the Act, a Financial Holding Company can act a principal, agent or broker in underwriting insurance and annuities. In addition, a Financial Holding Company may acquire a company, or shares in a company, engaged in such insurance-related activities.

However, the compromise agreement reached between the Treasury Department and the Federal Reserve over the powers of operating subsidiaries of banks (called “financial subsidiaries” in the bill) may restrict the kinds of insurance activities that may be conducted in the bank itself or its financial subsidiaries.

Under the agreement, banks and their subsidiaries generally will be prohibited from underwriting insurance. However, national banks and their subsidiaries will be able to conduct insurance activities as agent. Since few community banks would be seeking to underwrite insurance, this opens up new opportunities for community banks to get into the insurance business as agent.

Fed-Treasury Agreement Defines Powers for Financial (Op) Subs

Under the much-discussed “op sub” compromise, negotiated by Federal Reserve Chairman Alan Greenspan and Treasury Secretary Larry Summers, activities that are “financial in nature, or incidental to a financial activity” may be conducted in a “financial subsidiary” of a bank. However, the bill states that insurance or annuity underwriting, insurance company portfolio investments, real estate development or investment, or merchant banking cannot be conducted in a bank subsidiary (although merchant banking may be conducted in a financial subsidiary in five years if both the Federal Reserve and the Treasury agree). These restricted activities, however, may be conducted in holding company affiliates, subject to certain limitations.

Insurance Sales in Banks

Even though the new law places restrictions on insurance underwriting activities in banks, the opportunities for insurance sales in banks are expanded. Banks located in “places under 5,000” may continue to sell insurance under the “place of 5,000” rule, which is kept intact under the new law. However, banks that were restricted from selling insurance because they did not qualify under the “place of 5,000” rule will now be able to sell insurance by establishing a “financial subsidiary” at either the holding company or national bank level. To take advantage of this new opportunity, the bank must be well managed and well capitalized, and have and maintain at least a satisfactory CRA rating.

Title Insurance

National banks and their subsidiaries are prohibited from selling title insurance, unless they are already selling title insurance (although the activity would have to move to a bank subsidiary if conducted in the bank itself), or are located in states that allow state banks to sell title insurance.

Regulation of Insurance Sales

Generally, the new law establishes the Federal Reserve as the “umbrella regulator” to oversee the activities of new Financial Holding Companies. However, the Act reaffirms the McCarran-Ferguson Act which gives states primacy in regulating insurance activities, including those conducted by banks. Thus, the operations of affiliates and subsidiaries would be subject to “functional regulation,” meaning insurance activities would be regulated by state insurance regulators, most securities activities would be regulated by the SEC, and bank activities in national banks would be regulated by the OCC.

The law includes a “non-discrimination” standard prohibiting states from regulating insurance activities of banks, subsidiaries or affiliates in a discriminatory manner.

The new law establishes preemption standards for insurance sales that fall into four categories. First, the law states that no state may “prevent or significantly interfere” with the ability of a depository institution, subsidiary or affiliate, to engage in insurance sales, solicitation or cross-marketing activities.

Second, the bill establishes 13 “safe harbors” from potential federal preemption. This essentially allows states to pass laws that discriminate against insurance sales in banks, or distinguish bank sales from other sales. Some of the areas covered by the safe harbors include bank limits on product advertising, commission payments or fees, and the release of certain customer information.

Third, the law states that any insurance sales, solicitation or cross-marketing regulations adopted prior to September 3, 1998, and outside the safe harbor exemptions, will be subject to preemption and judicial review under a “prevent or significantly interfere” test with judicial deference given to the OCC. Laws enacted after September 3, 1998, and not within the safe harbors, will be subject to preemption under the non-discrimination standards, but no deference will be given to the OCC.

Fourth, the law expressly preserves the Barnett standard, stating that nothing in the law shall be construed to “limit the applicability” of the Barnett decision.

Dispute Resolution

Under the new law, insurance products are defined as those products regulated by a state as insurance as of January 1, 1999 (including annuities). Future bank products would be subject to the state insurance regulator’s definition of insurance. Deposits, loans, trusts, loan guarantees and derivative products would be considered banking products, unless they are treated as insurance products by the IRS.

If a dispute arises between a state and Federal regulator over what is an insurance product vs. what is a banking product, a dispute resolution process is established that allows either the Federal or state regulator to file a petition directly with the U.S.Court of Appeals, which would have to render a decision within 60 days. As covered in the previous section, no deference would be accorded to the OCC, essentially resulting in a “jump ball” in the courts.

Uniform State Licensing

The new law calls on states to enact uniform state licensing standards that would provide reciprocity for licensed persons to operate in other states. However, if within a three year period, a majority of states fail to establish uniform licensing requirements, a new private entity called the National Association of Registered Agents and Brokers (NARAB) will be created to write such standards.

Redomestication of Mutual Insurance Companies

The new law allows mutual insurance companies to move to another state and reorganize as either a mutual holding company or stock company. This new “redomestication” authority would only apply in states that do not provide reasonable rules to permit such moves.

Consumer Protections

The law requires Federal banking regulators to establish consumer protection rules to govern insurance sales in banks. Such rules could not pre-empt more stringent state insurance consumer protection laws.