2097 Procedures for State and Nationally chartered banking institutions selling annuities or insurance

Title 31--INSURANCE

INSURANCE DEPARTMENT

[31 PA CODE CH. 38]

Procedures for State and Nationally Chartered Banking Institutions Selling Annuities or Insurance

[26 Pa.B. 5992]

   On January 18, 1995, the Supreme Court of the United States ruled in NationsBank of North Carolina v. Variable Annuity Life Insurance Company (VALIC), 115 S.Ct. 810 (1995), that the incidental powers of Nationally chartered banks in section 24(7) of the National Bank Act included the authority to engage in the sale of annuity products as agents of an insurance company. With respect to the sale of annuities, therefore, any state law prohibiting the sale of annuities by National banks is preempted. By decision dated April 16, 1996, Secretary of Banking, Richard C. Rishel (Secretary), determined that the sale of insurance company annuity products was also within the incidental powers of State chartered banks, under section 315 of the Banking Code of 1965 (7 P. S. § 315).

   On March 26, 1996, the Supreme Court of the United States ruled in Barnett Bank of Marion County, N. A. v. Bill Nelson, Florida Insurance Commissioner, 116 S.Ct. 1103 (1996), that section 92 of the National Bank Act preempts any state law that prevents National banks from exercising the insurance powers granted under that law. Section 92 of the National Bank Act gives National banks located in a place with a population not exceeding 5,000 the authority to act as an agent for any insurance company authorized to do business in the state where the bank is located. Under the Court's analysis, significant impairment of, or interference with a bank's authority under Federal law will be viewed the same as an outright prohibition.

   Because the Insurance Department (Department) must continue to carry out its responsibility to regulate the sale of insurance and annuities in this Commonwealth, it is in the public interest for the Insurance Commissioner to issue procedures for allowing either National banks to exercise the authority they are granted under Federal law or State banks to sell annuities under Secretary Rishel's April 16, 1996, letter decision, and insurance under the Secretary's December 3, 1996, letter decision and the Department of Banking's Statement of Policy at 10 Pa. Code § 21.61 (relating to insurance and annuities--statement of policy). Under the following procedures banks are subject, to the extent possible, to the same licensing and operating requirements as other insurance or annuities agents. These procedures will afford oversight of a bank's insurance business by the State agency which is best suited to this responsibility.

   The purpose of this policy statement is to set forth the Department's procedures for the sale of insurance and annuities by National and State banks in compliance with the preemption of state law as announced in VALIC and Barnett. This policy statement does not attempt to answer all questions that may arise as banks enter this arena because National banks remain within the regulatory jurisdiction of the Office of the Comptroller of the Currency (OCC). The OCC, however, has issued a final advisory letter dated October 8, 1996, which provides guidance to National banks to insure that they conduct insurance and annuities sales in a safe and sound manner that protects the interests of their customers. National banks as well as State banks should refer to the OCC Advisory Letter 96-8 for guidance regarding insurance activities.

   Neither the existence of, nor compliance with, these procedures confers any property or other rights on licensed entities other than the right to conduct the business of selling insurance or annuities in accordance with this policy statement unless it is superseded by other authority.

Contact Information

   To obtain agent license applications, or to notify the Department of a change in ownership of an agency, call or write to:

      Pennsylvania Insurance Department
Bureau of Producer Licensing
1300 Strawberry Square
Harrisburg, PA 17120
Phone: [phone]
Fax: [phone]

Effective Date

   This statement of policy shall take effect upon publication in the Pennsylvania Bulletin.

   (Editor's Note: The regulations of the Insurance Department, 31 Pa. Code, are amended by adding a statement of policy at §§ 38.1, 38.11, 38.21, 38.31--38.33 and 38.51--38.65 to read as set forth in Annex A. See 26 Pa. B. 5991 (December 14, 1996) for a Department of Banking document concerning the same subject.)

LINDA S. KAISER,   
Insurance Commissioner

   Fiscal Note: 11-145. No fiscal impact; (8) recommends adoption. Any administrative costs incurred by the Insurance Department to process new licenses will be offset by the revenue generated by the licensing fees.

Annex A

TITLE 31.  INSURANCE

PART I.  GENERAL PROVISIONS

Subpart C.  AGENTS AND BROKERS

CHAPTER 38.  PROCEDURES FOR STATE AND NATIONALLY CHARTERED BANKING INSTITUTIONS SELLING ANNUITIES OR INSURANCE--STATEMENT OF POLICY

Sec.

PURPOSE

38.1.

Purpose.

ACTIVITIES REQUIRING A LICENSE

38.11.

Activities requiring a license.

COMMISSIONS

38.21.

Commissions.

PROCEDURES FOR AUTHORITY TO SELL INSURANCE OR ANNUITIES

38.31.	Annuities.
38.32.	Insurance.
38.33.	Application.

CONSUMER PROTECTION

38.51.	Statutory requirements.
38.52.	Licensed personnel.
38.53.	Qualifications and training.
38.54.	Authorized or approved carriers.
38.55.	Tying of banking products with annuities or insurance products prohibited.
38.56.	Inducements or rebating.
38.57.	Discrimination against nonaffiliated companies or agents prohibited.
38.58.	Disclosures.
38.59.	Disclosures when insurance is required as a condition of obtaining a loan.
38.60.	Affirmative statement signed by insurance customer.
38.61.	Separation from deposit and loan activities.
38.62.	Distribution or revenue.
38.63.	Referral fees.
38.64.	Customer privacy.
38.65.	Compliance.

PURPOSE

§ 38.1.  Purpose.

   (a)  This chapter sets forth the Insurance Department's procedures for the sale of insurance and annuities by National and State banks in compliance with the preemption of State law as announced in NationsBank of North Carolina v. Variable Annuity Life Insurance Company, 115 S.Ct. 810 (1995) and Barnett Bank of Marion County, N. A. v. Bill Nelson, Florida Insurance Commissioner, 116 S.Ct. 1103 (1996). This chapter does not attempt to answer all questions that may arise as banks enter this arena because National banks remain within the regulatory jurisdiction of the Office of the Comptroller of the Currency (OCC). The OCC, however, has issued a final advisory letter dated October 8, 1996, which provides guidance to National banks to insure that they conduct insurance and annuities sales in a safe and sound manner that protects the interests of their customers. National banks as well as State banks should refer to the OCC Advisory Letter 96-8 for guidance regarding insurance activities.

   (b)  Neither the existence of, nor compliance with, these procedures confers any property or other rights on licensed entities other than the right to conduct the business of selling insurance or annuities in accordance with this chapter unless this chapter is superseded by other authority.

ACTIVITIES REQUIRING A LICENSE

§ 38.11.  Activities requiring a license.

   (a)  A bank or person shall be licensed to engage in one or more of the following:

   (1)  Soliciting individuals to purchase insurance or an annuity.

   (2)  Collecting premiums.

   (3)  Transmitting an application for an annuity or policy of insurance.

   (4)  Negotiating for, or placing risks.

   (5)  Delivering policies.

   (6)  Aiding in the transaction of the insurance or annuities business.

   (b)  If the individual performs exclusively clerical tasks, a license is not required.

   (c)  Organizations, such as corporations, that intend to act as insurance agencies and receive commissions shall also be licensed, and at least one officer of the organization shall also obtain an agent's license for the lines of authority in which the agency will transact business.

COMMISSIONS

§ 38.21.  Commissions.

   Commissions may not be paid to a person who is not licensed as an insurance agent or broker, and may not be paid to an insurance agency, bank subsidiary, or affiliate, third party administrator, or the bank itself unless the organization has obtained an agent's license. Commissions for the sale of variable annuities may be paid only in accordance with the rules of the National Association of Securities Dealers. An agent may not share commissions with a bank, unless the bank is also licensed as an agent.

PROCEDURES FOR AUTHORITY TO SELL INSURANCE OR ANNUITIES

§ 38.31.  Annuities.

   (a)  A State chartered banking institution or a National bank may sell annuities if the bank and employes actively engaged in the sale of annuities have complied with the licensing requirements of the Insurance Department.

   (b)  Like all other agents, a banking institution's licensed employes or agents must hold the appropriate license to sell the types of annuities which they are actively selling.

§ 38.32.  Insurance.

   (a)  A State chartered banking institution, a National bank or a subsidiary or affiliate of a State or National bank located and doing business in a place with a population not exceeding 5,000, as determined by the last decennial census, may sell insurance if the bank and employes actively engaged in the business of insurance have complied with all the licensing requirements of the Insurance Department.

   (b)  A State chartered banking institution or a National bank may directly employ a licensed insurance agent, or own a subsidiary, all or part of which is an insurance agency, or be affiliated with a licensed insurance agent located in a place with a population not exceeding 5,000. At this time, a branch of an insurance agency affiliated with a bank may not be located in a place with a population exceeding 5,000.

   (c)  The agency located in the place not exceeding 5,000 inhabitants (place of 5,000) must be bona fide. Agents should be managed from that location, and the place of 5,000 will be the agency's business location for licensing purposes. Each agency is responsible for collecting commissions from insurance carriers and paying commissions to its licensed sales staff. The agency is also responsible for processing insurance applications, delivering insurance policies and collecting premiums, where consistent with procedures of the relevant insurance carriers. In addition, business records of the agency, including copies of customer application and policy information, and licensing, customer complaint and other compliance records, should be available at the place of 5,000. In the alternative, the business records of the agency may be maintained and available at the agency in electronic form, with the original hard copy kept in offsite storage.

   (d)  The following principles should be applied by banks, bank affiliates or bank subsidiaries when acting as insurance agents (together, bank agencies) in determining the scope of solicitation and sales activities by bank agencies which are permissible outside the place of 5,000:

   (1)  Meetings with customers and solicitations and sales of insurance by agents of the bank agency may take place at locations inside or outside the place of 5,000, if the agents are managed and paid through the bank agency located in the place of 5,000 and use that bank agency location as their place of business for licensing purposes.

   (2)  Mailings to advertise and sell insurance may originate from inside or outside of the place of 5,000, and brochures, leaflets and other literature alerting potential customers to the bank's insurance activities may be distributed from locations both inside and outside of the place of 5,000, including other branches of the same bank.

   (3)  Personnel of bank branches outside of the place of 5,000 also may make referrals to the bank's insurance agency.

   (4)  Telephone and cybermarketing may be used and the calls and messages need not originate within the place of 5,000.

   (e)  The bank or bank agency may contract with third parties to assist the bank agency's sales activities.

   (f)  Like other agents, a banking institution's licensed employes or agents must hold the appropriate license for the lines of insurance which they are actively selling.

   (g)  An insurance agency in which a bank acquires any ownership interest must file a change of ownership notification with the Insurance Department. To advertise under the bank name or participate in the sales of insurance operation, other than by receiving dividends from the insurance business, the bank must hold an agent's license.

§ 38.33.  Application.

   A bank, or its subsidiary or affiliate must apply for a license on the Insurance Department's application form and must include the following:

   (1)  A certified copy of its charter.

   (2)  An officer's certification of a board resolution authorizing the bank to engage in the sale of insurance or annuities and to make appropriate application to the Department.

   (3)  A list of the bank officers as required on the application.

   (4)  If the application is one for selling insurance, an affidavit from a qualifying active bank officer that the State chartered bank or National bank, or subsidiary or affiliate thereof, is located in a place with a population not exceeding 5,000 as measured by the last decennial census and stating the actual population as recorded by the census.

   (5)  Other information required of applicants for a bank agency's license.

CONSUMER PROTECTION

§ 38.51.  Statutory requirements.

   Bank agencies selling insurance or annuities are subject to the consumer protection provisions of Pennsylvania law, including The Insurance Department Act of 1921 (40 P. S. §§ 341--991.1718), the Unfair Insurance Practices Act (40 P. S. §§ 1171.1--1171.15), and the regulations thereunder. Many of the measures required to protect against possible consumer abuses and unfair competition by a lender who is also selling insurance are included in the Federal antitying provisions of section 106(b) of the Bank Holding Company Act Amendments of 1970 (12 U.S.C.A. § 1972), and the disclosure provisions of the February 14, 1994 Interagency Statement on Retail Sales of Nondeposit Investment Products, issued jointly by Federal bank regulatory agencies. Adherence to these standards may help avoid violations of State law but will not exempt banks acting as agents from compliance with State laws and regulations applicable to insurance agents.

§ 38.52.  Licensed personnel.

   Insurance or annuities sales transactions must be conducted by individually licensed agents. The bank officer responsible for the bank's insurance or annuities sales activities must ensure that all employes are aware that the conduct of the business of insurance or the sale of annuities by unlicensed bank employes may subject the bank, the responsible officer and the employes who do insurance business or sell annuities, to liability for transacting unauthorized insurance or annuities business.

§ 38.53.  Qualifications and training.

   A bank should have knowledgeable, experienced and qualified personnel to ensure that the bank's sales program is carried out in a manner that provides customers with competitive products, sound advice and accurate information. Licensed employes shall satisfy the continuing education requirements in the insurance laws and regulations.

§ 38.54.  Authorized or approved carriers.

   Banking institutions may offer only insurance and annuity products of insurance companies authorized or approved to do business in this Commonwealth.

§ 38.55.  Tying of banking products with annuities or insurance products prohibited.

   Bank products may not be tied in with annuities or insurance products. Banks may not require the purchase of insurance or annuities from the bank or from a designated insurer or agent as a condition of other bank transactions. A bank should train its employes about the tying prohibitions and monitor incentives, such as fees, commissions and fee splitting arrangements, that may encourage tying. Banking institutions should consult the Federal Reserve Board's 1995 grant of a regulatory ''safe harbor'' and the Office of the Comptroller of the Currency Guidance On Tying Arrangements.

§ 38.56.  Inducements or rebating.

   A banking institution may not offer special benefits, such as rebates or discounts, as an inducement to purchase annuities or insurance from the bank, except that a bank may offer a discount or benefit which is specified in the insurance policy or annuity contract. A banking institution may offer incentives in the form of rebates or discounts on banking services which are offered in conjunction with the sale of annuities or insurance products, unless the rebates or discounts would violate Federal antitying provisions. In distributing revenue resulting from the sale of annuities or insurance, a banking institution must be careful to avoid violation of rebating or inducement prohibitions under The Insurance Department Act of 1921 (40 P. S. §§ 1--297.4).

§ 38.57.  Discrimination against nonaffiliated companies or agents prohibited.

   A banking institution may not do any of the following:

   (1)  Condition the provision or terms of any bank service upon acquisition of insurance or annuities through a particular insurer, agent or broker.

   (2)  Reject a required policy solely because the policy was sold by a person who is not associated with the bank.

   (3)  Impose a requirement on any agent or broker not associated with the bank that is not imposed on any agent who is associated with the bank.

§ 38.58.  Disclosures.

   (a)  To avoid customer confusion, in addition to the disclosures specifically required by the insurance laws of the Commonwealth and the regulations thereunder, advertising, promotional material and solicitation shall include prominent disclosure that a purchase of insurance or annuities:

   (1)  Is not a deposit.

   (2)  Is not protected by the Federal Deposit Insurance Corporation or another agency or instrumentality of the Federal government.

   (3)  Is not guaranteed by the banking institution.

   (4)  If applicable, is subject to investment risk, including possible loss of principal, unless the bank affirmatively determines, for specific products or otherwise, that customers would not reasonably benefit from, or might in fact be confused by, these disclosures.

   (b)  If a particular carrier's product is described in an advertisement, the name of the insurance company underwriting the product must be identified.

§ 38.59.  Disclosures when insurance is required as a condition of obtaining a loan.

   When a bank requires a customer to obtain insurance in connection with a loan and the insurance is available through the bank, sales personnel may inform customers that insurance is available from the bank, its subsidiary or an affiliate. To avoid the impression that a linkage exists between the bank's credit decision and the customer's choice of insurance seller, the customer should also be advised at the time of solicitation that the customer need not purchase insurance from the bank, a subsidiary or an affiliate, and that the purchase of insurance from an agent of the customer's choice will not affect current or future credit decisions.

§ 38.60.  Affirmative statement signed by insurance customer.

   To the extent practicable, at the time a bank customer determines to purchase insurance from the bank and prior to the actual purchase, the bank should obtain a written affirmative statement from the bank customer which acknowledges that the bank customer has been advised that the customer was not required to purchase the insurance through the bank and that the additional disclosures in this chapter were provided to the customer.

§ 38.61.  Separation from deposit and loan activities.

   Sales of insurance and annuities should, to the extent practicable, take place in a location that is distinct from the area where retail deposits are taken and loan applications are discussed and accepted. Signs or other means should be used to distinguish the insurance or annuities sales area from the retail deposit taking and lending areas. Policy documents and account statements for the annuity and insurance products should contain required disclosures. If a customer's periodic deposit account and loan statements include account information concerning the customer's insurance or annuities products, the information concerning these products should be clearly separate from the information concerning the deposit and loan accounts.

§ 38.62.  Distribution of revenue.

   A portion of the insurance business profits may flow to parent companies or holding companies, but not as a sharing of commissions. Nonlicensed entities may not be awarded a portion of the insurance business revenue as a reward for referrals.

§ 38.63.  Referral fees.

   Tellers and other employes, while located in the routine deposit taking area, may not make general or specific investment recommendations regarding insurance or annuities products, qualify a customer as eligible to purchase the products, accept orders for the products, even if unsolicited, or perform other activities that involve the sale of an insurance or annuity product. Employes who are not authorized to sell insurance or annuity products may refer customers to individuals who are specifically licensed to assist customers interested in the purchase of the products. Since insurance agents not affiliated with a bank are prohibited from paying referral fees to unlicensed persons, unlicensed employes of a bank may not receive a referral fee from the bank or its subsidiary or affiliated agency.

§ 38.64.  Customer privacy.

   In the course of providing banking and other services, banks will acquire various types of financial and personal information about their customers. Banking institutions should be sensitive to the privacy expectations of the bank's customers regarding this information. This includes taking appropriate internal measures to safeguard the security of customer information as well as determining the standards the bank will use to decide if and how it may use customer information. A banking institution must comply with applicable State laws regarding privacy and confidential information. Insurance and annuities sales and other activities may raise questions regarding the use and sharing of confidential information. Use of certain customer information such as a customer's credit standing in connection with the sale of annuities and insurance products may be regulated by law. The disclosure of this information to third parties, including bank subsidiaries or affiliates, may be restricted. Banks should consider especially whether any provisions of the Fair Credit Reporting Act (15 U.S.C.A. §§ 1681a--1681u) are applicable before using or disclosing customer information.

§ 38.65.  Compliance.

   Banking institutions should develop and implement policies and procedures to ensure that sales activities are conducted in compliance with applicable laws and regulations and in a manner consistent with this chapter. Compliance procedures should identify potential conflicts of interest and how conflicts should be addressed. The compliance procedures should also provide for a system to monitor customer complaints and their resolution. The compliance function should be conducted independently of insurance and annuity product sales and management activities.

[Pa.B. Doc. No. 96-2097. Filed for public inspection December 13, 1996, 9:00 a.m.]