SECURITIES & EXCH. COM'N v. Variable Annuity L. Ins. Co.

• Decision Date: 22 May 1958
• Docket Number: 14254.,No. 14253,14253
• Citation: 257 F.2d 201
• Parties: SECURITIES AND EXCHANGE COMMISSION, Appellant, v. VARIABLE ANNUITY LIFE INSURANCE COMPANY OF AMERICA, Inc., and Equity Annuity Life Insurance Company, Appellees. NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC., Appellant, v. VARIABLE ANNUITY LIFE INSURANCE COMPANY OF AMERICA, Inc., and Equity Annuity Life Insurance Company, Appellees.
• Court: U.S. Court of Appeals — District of Columbia Circuit

257 F.2d 201 (1958)

SECURITIES AND EXCHANGE COMMISSION, Appellant, v. VARIABLE ANNUITY LIFE INSURANCE COMPANY OF AMERICA, Inc., and Equity Annuity Life Insurance Company, Appellees.

NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC., Appellant, v. VARIABLE ANNUITY LIFE INSURANCE COMPANY OF AMERICA, Inc., and Equity Annuity Life Insurance Company, Appellees.

Nos. 14253, 14254.

United States Court of Appeals District of Columbia Circuit.

Argued April 30, 1958.

Decided May 22, 1958.

Certiorari Granted October 13, 1958.

Mr. Myer Feldman, Special Counsel, Securities and Exchange Commission, with whom Messrs. Thomas G. Meeker, General Counsel, Securities and Exchange Commission, and Pace Reich, Attorney, Securities and Exchange Commission, were on the brief, for appellant in No. 14,253.

Mr. John H. Dorsey, Washington, D. C., with whom Messrs. John W. Lindsey, Bolling R. Powell, Jr., and Edward G. Howard, Washington, D. C., were on the brief, for appellant in No. 14,254.

Messrs. James M. Earnest, Washington, D. C., and Roy W. McDonald, New York City, of the bar of the Court of Appeals of New York, pro hac vice, by special leave of court, for appellee Variable Annuity Life Ins. Co. of America, Inc.

Mr. Benjamin H. Dorsey, Washington, D. C., with whom Messrs. Smith W. Brookhart and Ralph E. Becker, Washington, D. C., were on the brief, for appellee Equity Annuity Life Ins. Co.

Before WILBUR K. MILLER and DANAHER, Circuit Judges, and MADDEN, Judge, United States Court of Claims.^*

Certiorari Granted October 13, 1958. See 79 S.Ct. 63.

MADDEN, Judge.

Securities and Exchange Commission, (SEC), brought suit in the District Court seeking an injunction restraining Variable Annuity Life Insurance Company of America, Inc., (VALIC), from selling or offering for sale certain contracts or policies unless and until the contracts or policies were registered with SEC in accordance with section 5 of the Securities Act of 1933, 48 Stat. 74, 77, 15 U.S.C.A. § 77e, and unless VALIC complied with section 7(a) of the Investment Company Act of 1940, 54 Stat. 789, 802, 15 U.S. C.A. § 80a-7(a). On their own motions the National Association of Securities Dealers, (NASD), and the Equity Annuity Life Insurance Company, (EALIC), intervened on the sides of the plaintiff and the defendant, respectively.

The District Court dismissed the complaint, and the plaintiffs have appealed from that judgment. The original defendant and the intervening defendant sell the same kinds of contracts or policies. Those of VALIC will be discussed in this opinion.

The appellees contend that the contracts which they sell and which are the subject of this controversy are annuity policies and are therefore covered by the law relating to insurance, and not by the law relating to securities. They point to section 3(a)(8) of the Securities Act of 1933, 15 U.S.C.A. § 77c(a)(8) which says:

"Sec. 3. (a) Except as hereinafter expressly provided, the provisions of this title shall not apply to any of the following classes of securities:

* * * * *

"(8) Any insurance or endowment policy or annuity contract or optional annuity contract, issued by a corporation subject to the supervision of the insurance commissioner, bank commissioner, or any agency or officer performing like functions, of any State or Territory of the United States or the District of Columbia."

They point to section 3(c)(3) of the Investment Company Act of 1940, 15 U.S. C.A. § 80a-3(c)(3), which says that an insurance company is not an investment company within the meaning of the Act, and to section 2(a)(17) of that Act, 15 U.S.C.A. § 80a-2(a)(17) which says:

"(a) When used in this title, unless the context otherwise requires —

* * * * *

"(17) `Insurance company\' means a company which is organized as an insurance company, whose primary and predominant business activity is the writing of insurance or the reinsuring of risks underwritten by insurance companies, and which is subject to supervision by the insurance commissioner or a similar official or agency of a State; or any receiver or similar official or any liquidating agent for such a company, in his capacity as such."

They point to the McCarran-Ferguson Insurance Regulation Act of March 9, 1945, 59 Stat. 33, 15 U.S.C.A. §§ 1011-1015, which says:

"* * * That the Congress hereby declares that the continued regulation and taxation by the several States of the business of insurance is in the public interest, and that silence on the part of the Congress shall not be construed to impose any barrier to the regulation or taxation of such business by the several States.

"Sec. 2. (a) The business of insurance, and every person engaged therein, shall be subject to the laws of the several States which relate to the regulation or taxation of such business.

"(b) No Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance, or which imposes a fee or tax upon such business, unless such Act specifically relates to the business of insurance: Provided, That after January 1, 1948, the Act of July 2, 1890, as amended, known as the Sherman Act, and the Act of October 15, 1914, as amended, known as the Clayton Act, and the Act of September 26, 1914, known as the Federal Trade Commission Act, as amended, shall be applicable to the business of insurance to the extent that such business is not regulated by State law.

* * * * *

"Sec. 5. As used in this Act, the term `State\' includes the several States, Alaska, Hawaii, Puerto Rico, and the District of Columbia."

Although VALIC sells what are undoubtedly life insurance contracts, they are tied in with its "annuity" contracts, and are a small part of its total business. If its "annuity" contracts are not annuity contracts within the meaning of the word annuity in the Securities Act of 1933, and within the contemplated business of insurance, as that word is used in the Investment Company Act and the McCarran-Ferguson Act, the "annuity" label which VALIC places upon its contracts will not avail it.

We lay aside the life insurance feature of the policies, and discuss the annuity feature. In fact, as we understand it, if the applicant for an annuity policy is insurable, for life insurance purposes, he must take at least a five year term life insurance policy. That seems to us to be irrelevant to the question of the nature of the predominant annuity feature of the policy. We will therefore discuss a naked deferred annuity policy such as would be issued by VALIC to one uninsurable for life insurance purposes.

The policy holder agrees to pay a fixed sum of money per year for each year until he reaches the age when his deferred annuity will begin to pay out. A considerable part of what he pays for the first year, and a smaller part of what he pays thereafter are taken by the company for selling and administrative expense and profit. The rest is invested, at the discretion of the company, in securities which, it is hoped, will produce an income or show a capital gain or both. The policy holder is given periodic statements showing what the company has bought with what he and the other policy holders have paid in. These are statements of his "accumulation units." If, for example, the common stocks which the company held at the time the policy holder paid his annual premium were cheap, he would acquire, for the dollars he paid in, a larger number of "accumulation units", since the price or value of the "accumulation units" would be determined by dividing the value of the company's holdings by the number of the units. If thereafter the value of the company's holdings increased, the policy holder would still have the same number of units, but the value of each...