856 F.2d 282 (D.C. Cir. 1988), 87-1354, National Ass'n of Cas. and Sur. Agents v. Board of Governors of Federal Reserve System

Docket Nº:87-1354, 87-1355.
Citation:856 F.2d 282
Party Name:NATIONAL ASSOCIATION OF CASUALTY AND SURETY AGENTS, et al., Petitioners, v. BOARD OF GOVERNORS OF the FEDERAL RESERVE SYSTEM, Respondent, MNC Financial, Inc., Intervenor. NATIONAL ASSOCIATION OF PROFESSIONAL INSURANCE AGENTS, et al., Petitioners, v. BOARD OF GOVERNORS OF the FEDERAL RESERVE SYSTEM, Respondent, Sovran Financial Corp., Intervenor.
Case Date:September 09, 1988
Court:United States Courts of Appeals, Court of Appeals for the District of Columbia Circuit
 
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Page 282

856 F.2d 282 (D.C. Cir. 1988)

NATIONAL ASSOCIATION OF CASUALTY AND SURETY AGENTS, et al.,

Petitioners,

v.

BOARD OF GOVERNORS OF the FEDERAL RESERVE SYSTEM, Respondent,

MNC Financial, Inc., Intervenor.

NATIONAL ASSOCIATION OF PROFESSIONAL INSURANCE AGENTS, et

al., Petitioners,

v.

BOARD OF GOVERNORS OF the FEDERAL RESERVE SYSTEM, Respondent,

Sovran Financial Corp., Intervenor.

Nos. 87-1354, 87-1355.

United States Court of Appeals, District of Columbia Circuit.

September 9, 1988

Page 283

Rehearing En Banc Denied Dec. 2, 1988.

Argued April 15, 1988.

Jonathan B. Sallet, with whom Jamie S. Gorelick was on the brief, for petitioners. David G. Webbert, Washington, D.C., also entered an appearance, for petitioners.

Richard M. Ashton, Board of Governors of the Federal Reserve System, with whom John R. Bolton, Asst. Atty. Gen., Richard K. Willard, Asst. Atty. Gen., [*] J. Virgil Mattingly, Jr., and James A. Michaels, Board of Governors of the Federal Reserve System, Washington, D.C., were on the brief, for respondents.

John D. Hawke, Jr., Kenneth A. Letzler and Leigh McGuigan, Washington, D.C., were on the brief, for intervenor Sovran Financial Corp.

Kenneth C. Bass, III, Washington, D.C., was on the brief for intervenor MNC Financial, Inc.

Ernest Gellhorn and Robert C. Jones, Washington, D.C., for Conference of State Bank Supervisors, John J. Gill and Michael F. Crotty, Washington, D.C., for American Bankers Ass'n, and Richard Whiting, Washington, D.C., for Ass'n of Bank Holding Companies, were on the joint brief for amici curiae, Conference of State Bank Supervisors, et al., urging affirmance. James F. Bell, Washington, D.C., also entered an appearance for amicus curiae, Conference of State Bank Supervisors.

Before RUTH BADER GINSBURG, SILBERMAN and BUCKLEY, Circuit Judges.

Opinion for the Court filed by Circuit Judge SILBERMAN.

Dissenting opinion filed by Circuit Judge BUCKLEY.

SILBERMAN, Circuit Judge:

In June and July of 1987, the Board of Governors of the Federal Reserve System, which regulates bank holding companies, approved the applications of two bank holding companies, Sovran Financial Corporation ("Sovran") and Maryland National Corporation ("MNC"), to retain insurance agency operations of recently acquired bank holding companies. Each of the two acquired bank holding companies sold insurance pursuant to a grandfather clause in the Garn-St Germain Act of 1982. Petitioners, various insurance agency trade groups, object to the Board's actions, which allow Sovran and MNC to compete with their members for insurance business. Petitioners contend, in particular, that under the Bank Holding Company Act ("the Act") (as amended by the Garn-St Germain Act), grandfather rights to sell insurance expire when a grandfathered corporation is purchased by another bank holding company not itself eligible to engage in that business. Alternatively, petitioners claim that the bank holding company acquired by Sovran never legitimately acquired grandfather rights in the first place. We uphold the Board's interpretation of the Bank Holding Company Act, and we decide that the Board was justified in determining that the bank holding company acquired by Sovran possessed grandfather rights. The petitions for review are therefore denied.

I.

In 1985, Sovran Financial Corporation, a bank holding company, applied to the Board for permission to acquire Suburban Bancorp, also a bank holding company, and its subsidiary bank, Suburban Bank. Suburban, a state-chartered bank located in Maryland, in turn controlled a subsidiary corporation, Suburban Insurance, which operated as an insurance agency. Sovran's application to the Board for approval of

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this acquisition was opposed by various insurance industry trade groups, which argued that the acquisition of an insurance agency by a bank holding company was prohibited by section 4(c)(8) of the Bank Holding Company Act. See 12 U.S.C. Sec. 1843(c)(8). In order to avoid delay in its acquisition of Suburban Bancorp, Sovran agreed that Suburban Insurance would temporarily cease writing new policies, leaving to a later date resolution of the issue raised by the protestants. The acquisition was in that form approved by the Board. In November 1986 Sovran applied to the Board again, this time seeking leave to retain indirect control over Suburban Insurance (which would then resume selling insurance). Sovran claimed that the insurance activities of the subsidiary qualified for Exemption D grandfather rights and that its acquisition of Suburban Bancorp did not extinguish the exemption. 1 This application was again opposed by insurance industry trade groups, but was nevertheless ultimately approved by the Board. Sovran Financial Corp., 73 Fed.Res.Bull. 672 (1987).

The circumstances of Maryland National Corporation's application are similar. MNC, a bank holding company, acquired American Security Corporation, also a bank holding company. American Security Corporation engages in general insurance agency activities through both an unincorporated division and, in Maryland, through a separate subsidiary corporation. The Board approved MNC's acquisition on the condition that MNC either divest itself of American Security's insurance business or secure approval under section 4(c)(8). Maryland National Corp., 73 Fed.Res.Bull. 310, 314 (1987) ("MNC I "). The Board denied MNC permission to sell insurance pursuant to the separate grandfather privileges of section 4(a)(2) of the Act, determining that a bank holding company was not entitled to section 4(a)(2) grandfather privileges when it purchased a company that had itself previously qualified for these rights. Id. at 312. After the acquisition had been effected, MNC applied for Board approval to sell insurance under Exemption D, and the Board granted this request, again over the opposition of insurance agency trade groups. Maryland Financial, Inc., 73 Fed.Res.Bull. 740 (1987) ("MNC II ").

The Bank Holding Company Act prohibits a bank holding company from acquiring and retaining shares of any company that is not a bank or a bank holding company and from engaging in nonbanking activities unless the Board determines that such activities are "so closely related to banking ... as to be a proper incident thereto." 12 U.S.C. Sec. 1843(c)(8). See generally Independent Ins. Agents v. Board of Governors, 835 F.2d 1452 (D.C.Cir.1987). Section 4(a)(2) (as amended in 1970) contains a grandfather clause that exempts nonbank activities of any kind (including insurance agency activity) in which a bank holding company, directly or through a subsidiary, engaged on June 30, 1968. The Garn-St Germain Act, passed in 1982, declares that insurance activity is not closely related to banking, and thus effectively prohibits bank holding companies or their subsidiaries from engaging in that business. That act contains seven exemptions to its general prohibition, including two additional grandfather clauses, Exemption D and Exemption G.

Exemption D excludes "insurance agency activity which was engaged in by the bank

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holding company or any of its subsidiaries on May 1, 1982." 12 U.S.C. Sec. 1843(c)(8)(D). 2 Exemption D contains certain limitations on growth that play an important part in the Board's decisions under review here. A bank holding company that sells insurance under Exemption D may not expand its sales activity into states in which it had not sold insurance prior to 1982 (unless the state is adjacent to one in which it did sell insurance), and it may not expand its insurance business to cover types of risks different from those it covered in May 1982. Id. Exemption G excludes bank holding companies involved "directly or indirectly, in insurance agency activities as a consequence of approval by the Board prior to January 1, 1971." 12 U.S.C. Sec. 1843(c)(8)(G). Unlike Exemption D, neither Exemption G nor section 4(a)(2) contain any limitations on expansion into new geographical markets or into different lines of insurance and, based on this distinction, the Board has interpreted the Act to allow only Exemption D rights to survive acquisition.

A single bank holding company, for example, one that had been selling insurance prior to 1968, might conceivably qualify to engage in insurance agency activities under all three of these grandfather clauses. Yet if that company were acquired by another bank holding company, the Board would allow the acquiring company to continue selling insurance only pursuant to Exemption D, and any rights that flowed solely from section 4(a)(2) or Exemption G would expire upon the acquisition. Indeed, MNC, whose application is being challenged here, originally applied to the Board for authority to have American Security Corporation, the company it was purchasing, continue selling insurance under section 4(a)(2) and was denied. MNC I, 73 Fed.Res.Bull. 310. And, in an order subsequent to those under consideration here, the Board decided that Exemption G grandfather rights would also expire upon acquisition by a non-qualifying company. Trustcorp, Inc., 73 Fed.Res.Bull. 827 (1987) ("Trustcorp I "). But in a later decision, the Board allowed that same applicant to continue to engage in insurance activity pursuant to Exemption D. Trustcorp, Inc., 73 Fed.Res.Bull. 934 (1987) ("Trustcorp II ").

In its Sovran decision, the Board explained that the actual language of the statute does not specifically address the issue under consideration here--whether a bank holding company that qualifies for Exemption D rights may be acquired by another bank holding company without losing those rights. Sovran Financial Corp., 73 Fed.Res.Bull. at 676. The Board thought that both the legislative history and the terms of the statute itself suggested a...

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