Prudential Ins. Co. v. Securities & Exchange Comm.
Decision Date | 20 January 1964 |
Docket Number | No. 14370.,14370. |
Citation | 326 F.2d 383 |
Parties | The PRUDENTIAL INSURANCE COMPANY OF AMERICA, Petitioner, v. SECURITIES AND EXCHANGE COMMISSION, Respondent, Investment Company Institute, Intervenor, Commissioner of Banking and Insurance of the State of New Jersey, Intervenor. |
Court | U.S. Court of Appeals — Third Circuit |
Richard J. Congleton, Newark, N. J., for petitioner; Lawrence J. Latto and Shea & Gardner, Washington, D. C., of counsel.
Allan F. Conwill, Director Division of Corporate Regulation Securities and Exchange Commission, Washington, D. C., for respondent; Philip A. Loomis, Jr., Gen. Counsel, Walter P. North, Associate Gen. Counsel, George P. Michaely, Jr., Sp. Counsel, Robert L. McCloskey, Atty., Securities and Exchange Commission, Washington, D. C., on the brief.
Steven S. Radin, Deputy Atty. Gen., Trenton, N. J., for Commissioner of Banking and Insurance of the State of New Jersey; Arthur J. Sills, Atty. Gen. of New Jersey, Trenton, N. J., on the brief.
Robert L. Augenblick, New York City, for Investment Co. Institute; Joseph B. Levin, of Brown & Lund, Washington, D. C., of counsel, on the brief.
Harry Heller, Washington, D. C., amicus curiae; Marc A. White, Gen. Counsel National Association of Securities Dealers, Inc., Washington, D. C., on the brief.
Before STALEY and GANEY, Circuit Judges, and NEALON, District Judge.
The narrow but provocative question posed by this case is whether the Investment Company Act of 1940, 15 U.S.C. § 80a applies to the Investment Fund resulting from the sale of variable annuity contracts to members of the public by The Prudential Insurance Company of America. The Securities and Exchange Commission answered this question in the affirmative, rejecting the view of Prudential that the Act exempts such a program because the contracts are offered and sold by an insurance company. The case is before us on the petition of Prudential for review of the order of the Commission entered pursuant to that determination.
Though there are variations in the form of the variable annuities which Prudential proposes to sell,1 their salient characteristics are not disputed and their nature has been concisely summarized by the Commission in its opinion in this case:
Prudential concedes that such contracts have been held to be "securities" within the meaning of the Securities Act of 1933, Securities and Exchange Commission v. Variable Annuity Life Insurance Co. hereinafter called "VALIC", 359 U.S. 65, 79 S.Ct. 618, 3 L.Ed.2d 640 (1959), and it is willing to register them under that Act. Prudential argues, however, that the Investment Company Act of 1940 specifically excludes insurance companies from its scope.2 The Commission acknowledged that Prudential is excluded from the Act, but held that the fund created by the sale of the contracts, which is to be used for investment purposes, gives rise to a separate investment company within the coverage of the statute. The Commission concluded that Prudential is not itself an investment company but is the creator of one, and proposes to be its investment adviser and principal underwriter.3
In this court, Prudential, premising its argument on the insurance company exclusion, asserts that this construction of the statute is inordinately complicated, abstruse, and without basis in law. It asserts that the statute is plain and forecloses Commission jurisdiction in this case. However, since it is conceded that Prudential is excluded from the Act, the issue is narrowed to the question of whether the Commission made a permissible interpretation in concluding that the variable annuity program results in the creation of a separate, non-exempt investment company.
Of course, in resolving this issue we start with the premise that securities legislation must be broadly construed in order to insure the investing public a full measure of protection. Securities and Exchange Commission v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 84 S.Ct. 275, 11 L.Ed.2d 237 (Dec. 9, 1963); Securities and Exchange Commission v. Ralston Purina Co., 346 U.S. 119, 73 S.Ct. 981, 97 L.Ed. 1494 (1953); Securities and Exchange Commission v. W. J. Howey Co., 328 U.S. 293, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946). The parties agree that the statutory definitions contained in the Investment Company Act of 1940 are cast in broad terms. The critical term is "company", which, so far as relevant to our discussion, is defined as "a trust, a fund, or any organized group of persons whether incorporated or not." 15 U.S.C. § 80a-2(a) (8).
The Commission determined that the variable annuity contracts constitute the purchasers an "organized group of persons"; that they create a "trust" held by Prudential for these purchasers; and, more importantly, that the separate Investment Fund resulting from the sale of the variable annuity contracts is a "fund" within the statutory definition. Based upon this last decisive holding, the Commission then concluded that the Investment Fund is the "issuer" of the variable annuity securities, and that it is an "investment company" subject to the Act.4
On this score Prudential argues that the Act regulates only identifiable business entities with some sort of internal organization, and that it is the only such entity involved in this program. Thus, it is asserted that the purchasers cannot be described as an "organized group of persons"; that the plan has no elements of a common-law trust; and that the "fund" referred to in the Act means a mutual fund or any other similar entity, but not Prudential's Investment Fund. But, as Mr. Justice Brennan has cogently observed, the regulatory provisions of the Act "are of particular relevance to situations where the investor is committing his funds to the hands of others on...
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