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Independent Insurance Agents of America Inc. v. Board of Governors of Federal Reserve System

decided: November 29, 1989.

INDEPENDENT INSURANCE AGENTS OF AMERICA, INC., INDEPENDENT INSURANCE AGENTS OF NEW YORK, INC., NEW YORK STATE ASSOC. OF LIFE UNDERWRITERS, AND PROFESSIONAL INSURANCE AGENTS OF NEW YORK, INC., PETITIONERS,
v.
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, RESPONDENT, MERCHANTS NATIONAL CORPORATION, THE NATIONAL ASSOCIATION OF CASUALTY AND SURETY AGENTS, THE NATIONAL ASSOCIATION OF LIFE UNDERWRITERS, THE NATIONAL ASSOCIATION OF PROFESSIONAL INSURANCE AGENTS, AND THE NATIONAL ASSOCIATION OF SURETY BOND PRODUCERS, INTERVENORS



Petition for review of an order of the Federal Reserve Board permitting two bank subsidiaries of a bank holding company to sell insurance.

Kaufman, Jon O. Newman, and Miner, Circuit Judges.

Author: Newman

JON O. NEWMAN, Circuit Judge

The extent to which banks should be permitted to engage in nonbanking activities is a major controversy in this country, attracting the increasing attention of Congress, administrative agencies, and courts. This petition for review of an order of the Board of Governors of the Federal Reserve System ("the Board" or "the Fed") brings before us one facet of that controversy. The issue is whether the Fed was entitled to conclude that section 4 of the Bank Holding Company Act of 1956 ("the Act" or "BHCA") does not restrict bank subsidiaries of a bank holding company from selling insurance. The issue arises on a petition filed by the Independent Insurance Agents of America ("IIAA") challenging the Board's March 3, 1989, order, which permitted two Indiana state banks acquired by the Merchants National Corporation, a bank holding company, to resume specified insurance activities permitted under Indiana law. Merchants National Corp., 75 Fed.Res.Bull. 388 (1989) (" Merchants II "). The Board's order rested upon a determination that the non-banking prohibitions of section 4 of the Act, as amended, 12 U.S.C. § 1843 (1988), do not apply to the activities of the bank subsidiaries of a bank holding company. Concluding that this construction of section 4 is within the range of reasonable interpretation that the pertinent administrative agency is entitled to make, we deny the petition for review and leave this long-simmering controversy for such further consideration as Congress cares to give it.

Background

Litigation history. This matter is before this Court for the second time. On the prior occasion, we granted IIAA's petition for review after concluding, contrary to the Board's prior decision in this matter, Merchants National Corp., 73 Fed.Res.Bull. 876 (1987) (" Merchants I "), that the Board's authority to permit insurance activities by the bank subsidiaries of Merchants National was temporarily precluded by the moratorium provisions of the Competitive Equality Banking Act of 1987 ("CEBA"), Pub.L. No. 100-86, 101 Stat. 552 (1987), reprinted in 12 U.S.C. § 1841 note (1988). See Independent Insurance Agents of America, Inc. v. Board of Governors, 838 F.2d 627, 633-34 (2d Cir. 1988). The moratorium, which was effective from March 6, 1987, to March 1, 1988, prohibited the Fed from issuing any order "that would have the effect of increasing the insurance powers" of a bank holding company or its banking or nonbanking subsidiaries. CEBA § 201(b)(3).

In anticipation of the expiration of the moratorium, Merchants National renewed its request that the Board authorize its Indiana banking subsidiaries to engage in insurance activities. After providing notice of this request, 52 Fed.Reg. 8966 (1987), and assessing the comments that were received, the Board issued the order that is the subject of the pending petition for review. This Court granted a stay of the order pending oral argument and continued the stay pending decision.

The statutory framework. Before introducing the facts, it will be helpful to outline briefly the pertinent statutory provisions of the Bank Holding Company Act. The principal regulatory powers of the Fed concerning bank holding companies are set forth in sections 3 and 4 of the Act. 12 U.S.C. §§ 1842, 1843. Section 3 requires Board approval of the acquisition of ownership or control of any bank by a bank holding company, with narrow exceptions not here relevant. Section 3 sets forth factors governing acquisition approval, focusing on the competitive effect of the proposed acquisition, the financial and managerial resources of both the holding company and the acquired bank, and the convenience and needs of the community served. 12 U.S.C. § 1842(c).

Section 4 of the Act, the focal point of the Board's order in this case, contains two sets of prohibitions. First, it specifies, in what might be called the "ownership clause," that a bank holding company may not "retain direct or indirect ownership or control of any voting shares of any company which is not a bank or bank holding company." 12 U.S.C. § 1843(a)(2). Second, it provides, in what might be called the "activities clause," that a bank holding company may not "engage in any activities other than (A) those of banking or of managing or controlling banks . . . and (B) those permitted under [section 4(c)(8) of the Act]. . . ." Id. Section 4(c)(8) sets forth the so-called "closely related to banking" exception to the nonbanking provision. Id. § 1843(c)(8). In relevant part, section 4(c)(8) states that the section 4(a) nonbanking prohibitions shall not bar ownership by a bank holding company of:

shares of any company the activities of which the Board after due notice and opportunity for hearing has determined (by order or regulation) to be so closely related to banking or managing or controlling banks as to be a proper incident thereto, but for purposes of this subsection it is not closely related to banking or managing or controlling banks for a bank holding company to provide insurance as a principal, agent or broker. . . .

Id.

Facts. A number of states, including Indiana,*fn1 historically have authorized state-chartered banks to provide insurance services to their customers. On July 1, 1986, Merchants National Corporation, a bank holding company within the meaning of the BHCA, 12 U.S.C. § 1841(a), sought permission from the Fed to acquire the stock of two banks chartered under the laws of the State of Indiana, the Anderson Banking Company ("Anderson Bank") and the Mid State Bank of Hendricks County ("Mid State Bank"). Both of these state banks had engaged in general insurance activities prior to the date of Merchants National's applications, Anderson Bank directly since its incorporation in 1916, and Mid State Bank since its purchase of an insurance agency in 1985. Merchants National subsequently made a commitment that Mid State Bank would transfer to itself all insurance activities from its insurance agency subsidiary and thereafter conduct all such activities directly in the bank.

The initial Merchants National applications were protested by various insurance industry trade groups, including the IIAA, on the ground that the provisions of section 4 of the Act apply to the insurance activities of state banks owned by bank holding companies and therefore that the acquisitions of Anderson Bank and Mid State Bank could not be approved without termination of their insurance activities to the extent required under section 4. In response to the protests, Merchants National committed that it would cause the banks to divest their insurance agency activities within two years unless, within that time, it received Board approval for the banks to retain their insurance activities. Merchants National agreed that, prior to such approval, the banks would limit their insurance activities to the renewal of existing policies. In light of these commitments, the Board approved the applications on October 29, 1986. 72 Fed.Res.Bull. 838 (1986).

On February 5, 1987, Merchants National filed an application seeking Board approval for Anderson Bank and Mid State Bank to resume the insurance activities that had just been suspended pursuant to the acquisition commitments. Merchants National sought permission on two alternative grounds. First, it contended that Anderson Bank and Mid State Bank were exempt from the insurance provisions of section 4 of the Act pursuant to the grandfather" provision of section 4(c)(8)(D), as amended, 12 U.S.C. § 1843(c)(8)(D), under which a bank holding company or any of its subsidiaries is permitted to engage in insurance agency activity in which the holding company or the subsidiary was engaged on May 1, 1982, subject to certain geographical and functional limitations. Second, Merchants National sought more broadly a determination that the nonbanking prohibitions of section 4 of the Act do not apply to activities conducted directly by banking subsidiaries of a bank holding company. ...


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