Securities and Exchange Commission v. Variable Annuity Life Insurance Company of America National Association of Securities Dealers, Inc v. Variable Annuity Life Insurance Company of America

• Citation: 3 L.Ed.2d 640,359 U.S. 65,79 S.Ct. 618
• Decision Date: 23 March 1959
• Docket Number: 237,Nos. 290,s. 290
• Parties: SECURITIES AND EXCHANGE COMMISSION, Petitioner, v. VARIABLE ANNUITY LIFE INSURANCE COMPANY OF AMERICA, and The Equity Annuity Life Insurance Company. NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC., Petitioner, v. VARIABLE ANNUITY LIFE INSURANCE COMPANY OF AMERICA, and The Equity Annuity Life Insurance Company
• Court: U.S. Supreme Court

359 U.S. 65

79 S.Ct. 618

3 L.Ed.2d 640

SECURITIES AND EXCHANGE COMMISSION, Petitioner,

v VARIABLE ANNUITY LIFE INSURANCE COMPANY OF AMERICA, and The Equity Annuity Life Insurance Company.

NATIONAL ASSOCIATION OF SECURITIES DEALERS,

INC., Petitioner,

v. VARIABLE ANNUITY LIFE INSURANCE COMPANY OF AMERICA, and The Equity Annuity Life Insurance Company.

Nos. 290, 237.

Argued Jan. 15 and 19, 1959.

Decided March 23, 1959.

Mr. Thomas G. Meeker, Washington, D.C., for petitioner S.E.C.

Mr. John H. Dorsey, Washington, D.C., for petitioner National Ass'n of Securities Dealers.

Mr. Benjamin H. Dorsey, Washington, D.C., for respondent Equity Annuity Life Ins. Co.

Messrs. Roy W. McDonald, New York City, and James M. Earnest, Washington, D.C., for respondent Variable Annuity Life Ins. Co. of America.

Mr. Justice DOUGLAS delivered the opinion of the Court.

This is an action instituted by the Securities and Exchange Commission¹ to enjoin respondents from offering their annuity contracts to the public without registering them under the Securities Act of 1933, 48 Stat. 74, 15 U.S.C. § 77a et seq., 15 U.S.C.A. § 77a et seq., and complying with the Investment Company Act of 1940, 54 Stat. 789, 15 U.S.C. § 80a—1 et seq., 15 U.S.C.A. § 80a—1 et seq. The District Court denied relief, 155 F.Supp. 521; and the Court of Appeals affirmed, 103 U.S.App.D.C. 197, 257 F.2d 201. The case is here on petitions for writs of certiorari which we granted, 358 U.S. 812, 79 S.Ct. 63, 3 L.Ed.2d 56, because of the importance of the question presented.

Respondents are regulated under the insurance laws of the District of Columbia and several other States. It is argued that that fact brings into play the provisions of the McCarran-Ferguson Act, 59 Stat. 33, 15 U.S.C. § 1011 et seq., 15 U.S.C.A. § 1011 et seq., § 2(b) of which provides that '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 * * *.' It is said that the conditions under which that law is applicable are satisfied here. The District of Columbia and some of the States are 'regulating' these annuity contracts and, if the Commission is right, the Federal Acts would at least to a degree 'supersede' the state regulations since the Federal Acts prescribe their own peculiar requirements.² Moreover, 'insurance' or 'annuity' contracts are exempt from the Securities Act when 'subject to the supervision of the insurance commissioner * * * of any State * * *.'³ Respondents are also exempt from the Investment Company Act if they are 'organized as an insurance company, whose primary and predominant business activity is the writing of insurance * * * and which is subject to supervision by the insurance commissioner * * * of a State * * *.'⁴ While the term 'security' as defined in the Securities Act⁵ is broad enough to include any 'annuity' contract, and the term 'investment company' as defined in the Investment Company Act⁶ would embrace an 'insurance company,' the scheme of the exemptions lifts pro tanto the requirements of those two Federal Acts to the extent that respondents are actually regulated by the States as insurance companies, if indeed they are such. The question common to the exemption provisions of the Securities Act and the Investment Company Act and to § 2(b) of the McCarran-Fergusion Act is whether respondents are issuing contracts of insurance.

We start with a reluctance to disturb the state regulatory schemes that are in actual effect, either by displacing them or by superimposing federal requirements on transactions that are tailored to meet state requirements. When the States speak in the field of 'insurance,' they speak with the authority of a long tradition. For the regulation of 'insurance,' though within the ambit of federal power (United States v. South-Eastern Underwriters' Ass'n, 322 U.S. 533, 64 S.Ct. 1162, 88 L.Ed. 1440), has traditionally been under the control of the States.

We deal, however, with federal statutes where the words 'insurance' and 'annuity' are federal terms. Congress was legislating concerning a concept which had taken on its coloration and meaning largely from state law, from state practice, from state usage. Some States deny these 'annuity' contracts any status as 'insurance.'⁷ Others accept them under their 'insurance' statutes.⁸ It is apparent that there is no uniformity in the rulings of the States on the nature of these 'annuity' contracts. In any event how the States may have ruled is not decisive. For, as we have said, the meaning of 'insurance' or 'annuity' under these Federal Acts is a federal question.

While all the States regulate 'annuities' under their 'insurance' laws, traditionally and customarily they have been fixed annuities, offering the annuitant specified and definite amounts beginning with a certain year of his or her life. The standards for investment of funds underlying these annuities have been conservative. The variable annuity introduced two new features. First, premiums collected are invested to a greater degree in common stocks and other equities. Second, benefit payments vary with the success of the investment policy. The first variable annuity apparently appeared in this country about 1952 when New York created the College Retirement Equities Fund⁹ to provide annuities for teachers. It came into existence as a result of a search for a device that would avoid paying annuitants in depreciated dollars.¹⁰ The theory was that returns from investments in common stocks would over the long run tend to compensate for the mounting inflation. The holder of a variable annuity cannot look forward to a fixed monthly or yearly amount in his advancing years. It may be greater or less, depending on the wisdom of the investment policy. In some respects the variable annuity has the characteristics of the fixed and conventional annuity: payments are made periodically; they continue until the annuitant's death or in case other options are chosen until the end of a fixed term or until the death of the last of two persons; payments are made both from principal and income; and the amounts vary according to the age and sex of the annuitant. Moreover, actuarially both the fixed-dollar annuity and the variable annuity are calculated by identical principles. Each issuer assumes the risk of mortality from the moment the contract is issued. That risk is an actuarial prognostication that a certain number of annuitants will survive to specified ages. Even if a substantial number live beyond their predicted demise, the company issuing the annuity—whether it be fixed or variable—is obligated to make the annuity payments on the basis of the mortality prediction reflected in the contract. This is the mortality risk assumed both by respondents and by those who issue fixed annuities. It is this feature, common to both, that respondents stress when they urge that this is basically an insurance device. ¹¹ The difficulty is that, absent some guarantee of fixed income, the variable annuity places all the investment risks on the annuitant, none on the company. ¹² The holder gets only a pro rata share of what the portfolio of equity interests reflects which may be a lot, a little, or nothing. We realize that life insurance is an evolving institution. Common knowledge tells us that the forms have greatly changed even in a generation. And we would not undertake to freeze the concepts of 'insurance' or 'annuity' into the mold they fitted when these Federal Acts were passed. But we conclude that the concept of 'insurance' involves some investment risk-taking on the part of the company. The risk of mortality, assumed here, gives these variable annuities an aspect of insurance. Yet it is apparent, not real; superficial, not substantial. In hard reality the issuer of a variable annuity that has no element of a fixed return assumes no true risk in the insurance sense. It is no answer to say that the risk of declining returns in times of depression is the reciprocal of the fixed-dollar annuitant's risk of loss of purchasing power when prices are high and gain of purchasing power when they are low. We deal with a more conventional concept of risk-bearing when we speak of 'insurance.' For in common understanding 'insurance' involves a guarantee that at least some fraction of the benefits will be payable in fixed amounts. See Spellacy v. American Life Ins. Ass'n, 144 Conn. 346, 354—355, 131 A.2d 834, 839; Couch, Cyclopedia of Insurance Law, Vol. 1, § 25; Richards, Law of Insurance, Vol. 1, § 27; Appleman, Insurance Law and Practice, Vol. 1, § 81. The companies that issue these annuities take the risk of failure. But they guarantee nothing to the annuitant except an interest in a portfolio of common stocks or other equities¹³—an interest that has a ceiling but no floor.¹⁴ There is no true underwriting of risks,¹⁵ the one earmark of insurance as it has commonly been conceived of in popular understanding and usage.

Reversed.

Mr. Justice BRENNAN, with whom Mr. Justice STEWART joins, concurring.

I join the opinion and judgment of the Court. However, there are additional reasons which lead me to the Court's result, and since the nature of this case lends it to rather extended treatment, I will express these reasons separately.

First. The facts of this case are quite complex, but the basic problem involved is much more simple. I will try to point it up before developing the details of the sort of contracts sold by the respondents. It is one of the coverage of two Acts of Congress which concentrated on applying specific forms of regulatory controls to the various ways in which organizations get and administer other people's money—the Securities Act of 1933¹ and the Investment Company Act of 1940.² These Acts were specifically drawn to exclude any 'insurance policy' and any 'annuity contract' (Securities Act § 3(a)(8)) and any 'insurance company'³ (Investment...