Securities and Exchange Commission v. National Securities, Inc, No. 41

CourtUnited States Supreme Court
Writing for the CourtMARSHALL
Citation21 L.Ed.2d 668,393 U.S. 453,89 S.Ct. 564
Docket NumberNo. 41
Decision Date27 January 1969
PartiesSECURITIES AND EXCHANGE COMMISSION, Petitioner, v. NATIONAL SECURITIES, INC., et al

393 U.S. 453
89 S.Ct. 564
21 L.Ed.2d 668
SECURITIES AND EXCHANGE COMMISSION, Petitioner,

v.

NATIONAL SECURITIES, INC., et al.

No. 41.
Argued Nov. 18, 19, 1968.
Decided Jan. 27, 1969.

Page 454

Solicitor General Erwin N. Griswold, for petitioner.

John P. Frank, Phoenix, Ariz., for respondents.

Mr. Justice MARSHALL delivered the opinion of the Court.

This case raises some complex questions about the Securities and Exchange Commission's power to regulate

Page 455

the activities of insurance companies and of persons engaged in the insurance business. The Commission originally brought suit in the United States District Court for the District of Arizona, pursuant to § 21(e) of the Securities Exchange Act of 1934, 48 Stat. 900, as amended, 15 U.S.C. § 78u(e). It alleged violations of § 10(b) of the Act, 48 Stat. 891, 15 U.S.C. § 78j(b), and of the Commission's Rule 10b—5, 17 CFR § 240.10b—5 (1968). According to the amended complaint, National Securities and various persons associated with it had contrived a fraudulent scheme centering on a contemplated merger between National Life & Casualty Insurance Co. (National Life), a firm controlled by National Securities, and Producers Life Insurance Co. (Producers). The details of the alleged scheme are not important here. The Commission contended that National Securities purchased a controlling interest in Producers, partly from Producers' directors and partly in the form of treasury stock held by Producers. After taking control of Producers' board, respondents sought to obtain shareholder approval of the merger by sending communications to Producers' 14,000 stockholders. These communications, according to the Commission, contained misrepresentations of material facts and omitted to state material facts necessary to make the statements which were made not misleading. Among other things, respondents allegedly failed to disclose their plan for the surviving company to assume certain obligations which National Securities had undertaken as part of the consideration for its purchases of Producers' stock. In plain language, Producers' shareholders were not told that they were going to pay part of the cost of National Securities' acquisition of control in their company.

The Commission was denied temporary relief, and shortly thereafter Producers' shareholders and the Arizona Director of Insurance approved the merger. The

Page 456

two companies were formally consolidated into National Producers Life Insurance Co. on July 9, 1965. Thereafter, the Commission amended its complaint to seek additional relief; the previously sought injunction forbidding further violations of Rule 10b—5 was to be supplemented by court orders unwinding the merger and returning the situation to the status quo ante, requiring respondents to make an accounting of their unlawful gains, and readjusting the equities of the various respondents in whatever companies survived the decree. The Commission also requested whatever further relief the court might deem just, equitable, and necessary. Respondents moved for judgment on the pleadings, and the trial court dismissed the complaint for failure to state a claim upon which relief could be granted. The court ruled that the relief requested was either barred by § 2(b) of the McCarran-Ferguson Act, 59 Stat. 34 (1945), as amended, 15 U.S.C. § 1012(b),1 or was beyond the scope of § 21(e) of he Securities Exchange Act. 252 F.Supp. 623 (1966). The Ninth Circuit affirmed, relying on the McCarran-Ferguson Act. 387 F.2d 25 (1967). Upon application by the Commission, we granted certiorari because of the importance of the questions raised to the administration of the securities laws. 390 U.S. 1023, 88 S.Ct. 1416, 20 L.Ed.2d 280 (1968).

Page 457

I.

Insofar as it is relevant to this case, § 2(b) of the McCarran-Ferguson Act provides that '(n)o 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 * * * unless such Act specifically relates to the business of insurance * * *.' Respondents contend that this Act bars the present suit since the Arizona Director of Insurance found that the merger was not '(i)nequitable to the stockholders of any domestic insurer' and not otherwise 'contrary to law,' as he was required to do under the state insurance laws. Ariz.Rev.Stat.Ann. § 20—731 (Supp.1969). If the Securities Exchange Act were applied, respondents argue, these laws would be 'superseded.' The SEC sees no conflict between state and federal law; it contends that the applicable Arizona statutes did not give the State Insurance Director the power to determine whether respondents had made full disclosure in connection with the solicitation of proxies.2 Although respondents disagree, we do not find it necessary to inquire into this state-law dispute. The first question posed by this case is whether the relevant Arizona statute is a 'law enacted * * * for the purpose of regulating the business of insurance' within the meaning of the McCarran-Ferguson Act. Even accepting respondents' view of Arizona law, we do not believe that a state statute aimed at protecting the interests of those who own stock in insurance companies comes within the sweep of the McCarran-Ferguson Act. Such a statute is not a state attempt to regulate 'the business of insurance,' as that phrase was used in the Act.

Page 458

The McCarran-Ferguson Act was passed in reaction to this Court's decision in United States v. South-Eastern Underwriters Assn., 322 U.S. 533, 64 S.Ct. 1162, 88 L.Ed. 1440 (1944). Prior to that decision, it had been assumed, in the language of the leading case, that '(i)ssuing a policy of insurance is not a transaction of commerce.' Paul v. Virginia, 8 Wall. 168, 183, 19 L.Ed. 357 (1869). Consequently, regulation of insurance transactions was thought to rest exclusively with the States. In South-Eastern Underwriters, this Court held that insurance transactions were subject to federal regulation under the Commerce Clause, and that the antitrust laws in particular, were applicable to them. Congress reacted quickly. Even before the opinion was announced, the House had passed a bill exempting the insurance industry from the antitrust laws. 90 Cong.Rec. 6565 (1944). Objection in the Senate killed the bill, 90 Cong.Rec. 8054 (1944). but Congress clearly remained concerned about the inroads the Court's decision might make on the tradition of state regulation of insurance. The McCarran-Ferguson Act was the produc of this concern. Its purpose was stated quite clearly in its first section; Congress declared that 'the continued regulation and taxation by the several States of the business of insurance is in the public interest.' 59 Stat. 33 (1945), 15 U.S.C. § 1011. As this Court said shortly afterward, '(o)bviously Congress' purpose was broadly to give support to the existing and future state systems for regulating and taxing the business of insurance.' Prudential Insurance Co. v. Benjamin, 328 U.S. 408, 429, 66 S.Ct. 1142, 90 L.Ed. 1342 (1946).

The question here is whether state laws aimed at protecting the interests of those who own securities in insurance companies are the type of laws referred to in the 1945 enactment. The legislative history of the McCarran-Ferguson Act offers no real assistance. Congress was mainly concerned with the relationship be-

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tween insurance ratemaking and the antitrust laws, and with the power of the States to tax insurance companies. See, e.g., 91 Cong.Rec. 1087—1088 (remarks of Congressmen Hancock and Celler). The debates centered on these issues, and the Committee reports shed little light on the meaning of the words 'business of insurance.' See S.Rep. No. 20, 79th Cong., 1st Sess. (1945); H.R.Rep. No. 143, 79th Cong., 1st Sess. (1945). In context, however, it is relatively clear what problems Congress was dealing with. Under the regime of Paul v. Virginia, supra, States had a free hand in regulating the dealings between insurers and their policyholders. Their negotiations, and the contract which resulted, were not considered commerce and were, therefore, left to state regulation. The South-Eastern Underwriters decision threatened the continued supremacy of the States in this area. The McCarran-Ferguson Act was an attempt to turn back the clock, to assure that the activities of insurance companies in dealing with their policyholders would remain subject to state regulation. As the House Report makes clear, '(i)t (was) not the intention of Congress in the enactment of this legislation to clothe the States with any power to regulate or tax the business of insurance beyond that which they had been held to possess prior to the decision of the United States Supreme Court in the Southeastern Underwriters Association case.' H.R.Rep. No. 143, 79th Cong., 1st Sess., 3 (1945).

Given this history, the language of the statute takes on a different coloration. The statute did not purport to make the States supreme in regulating all the activities of insurance companies; its language refers not to the persons or companies who are subject to state regulation, but to laws 'regulating the business of insurance.' Insurance companies may do many things which are subject to paramount federal regulation; only when they

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are engaged in the 'business of insurance' does the statute apply. Certainly the fixing of rates is part of this business; that is what South-Eastern Underwriters was all about. The selling and advertising of policies, FTC v. National Casualty Co., 357 U.S. 560, 78 S.Ct. 1260, 2 L.Ed.2d 1540 (1958), and the licensing of companies and their agents, cf. Robertson v. People of State of California, 328 U.S. 440, 66 S.Ct. 1160, 90 L.Ed. 1366 (1946), are also within the scope of the statute. Congress was concerned with the type of state regulation that centers around the contract of insurance, the transaction which Paul v....

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585 practice notes
  • Securities and Exchange Commission,
    • United States
    • Federal Register May 18, 2001
    • May 18, 2001
    ...provisions of the Exchange Act. Gelles v. TDA Industries, 44 F.3d 102, 104 (2d Cir. 1994) (citing SEC v. National Securities, Inc., 393 U.S. 453 (1969)). Moreover, neither delivery nor the passing of title is required for the transaction to be considered a ``sale'' for these purposes. The p......
  • Crawford v. American Title Ins. Co., No. 74-2242
    • United States
    • United States Courts of Appeals. United States Court of Appeals (5th Circuit)
    • August 27, 1975
    ...§ 2(b) to determine the application of other federal statutes, most notably the federal securities laws, SEC v. National Securities, Inc., 393 U.S. 453, 89 S.Ct. 564, 21 L.Ed.2d 668 (1969), and to determine whether the federal securities laws cover certain annuity contracts issued by insura......
  • Duane v. Government Employees Ins. Co., Civ. No. HM-91-2654.
    • United States
    • U.S. District Court — District of Maryland
    • February 7, 1992
    ...Commerce Clause, and that the regulation of the insurance industry rested exclusively with the states. SEC v. National Securities, Inc., 393 U.S. 453, 458, 89 S.Ct. 564, 567, 21 L.Ed.2d 668 After Congress enacted the McCarran-Ferguson Act, the courts developed a four-step procedure for dete......
  • Hartford Fire Insurance Co v. California Merrett Underwriting Agency Management Limited v. California, Nos. 91-1111
    • United States
    • United States Supreme Court
    • June 28, 1993
    ...But that is precisely what Congress did not do." Id., at 233, 99 S.Ct., at 1084 (footnote omitted); see SEC v. National Securities, Inc., 393 U.S. 453, 459, 89 S.Ct. 564, 568, 21 L.Ed.2d 668 (1969) (the McCarran-Ferguson Act's "language refers not to the persons or companies who are subject......
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581 cases
  • Crawford v. American Title Ins. Co., No. 74-2242
    • United States
    • United States Courts of Appeals. United States Court of Appeals (5th Circuit)
    • August 27, 1975
    ...§ 2(b) to determine the application of other federal statutes, most notably the federal securities laws, SEC v. National Securities, Inc., 393 U.S. 453, 89 S.Ct. 564, 21 L.Ed.2d 668 (1969), and to determine whether the federal securities laws cover certain annuity contracts issued by insura......
  • Duane v. Government Employees Ins. Co., Civ. No. HM-91-2654.
    • United States
    • U.S. District Court — District of Maryland
    • February 7, 1992
    ...Commerce Clause, and that the regulation of the insurance industry rested exclusively with the states. SEC v. National Securities, Inc., 393 U.S. 453, 458, 89 S.Ct. 564, 567, 21 L.Ed.2d 668 After Congress enacted the McCarran-Ferguson Act, the courts developed a four-step procedure for dete......
  • Hartford Fire Insurance Co v. California Merrett Underwriting Agency Management Limited v. California, Nos. 91-1111
    • United States
    • United States Supreme Court
    • June 28, 1993
    ...But that is precisely what Congress did not do." Id., at 233, 99 S.Ct., at 1084 (footnote omitted); see SEC v. National Securities, Inc., 393 U.S. 453, 459, 89 S.Ct. 564, 568, 21 L.Ed.2d 668 (1969) (the McCarran-Ferguson Act's "language refers not to the persons or companies who are subject......
  • Ruefenacht v. O'Halloran, No. 83-5493
    • United States
    • United States Courts of Appeals. United States Court of Appeals (3rd Circuit)
    • June 11, 1984
    ...2 id. at 1696 n. 33. Moreover, the Supreme Court too has interpreted the clause in this fashion. See SEc v. National Securities, Inc., 393 U.S. 453, 89 S.Ct. 564, 21 L.Ed.2d 668 Congress itself has cautioned that the same words may take on a different coloration in different sections of the......
  • Request a trial to view additional results
1 books & journal articles
  • SECURITIES FRAUD
    • United States
    • American Criminal Law Review Nbr. 58-3, July 2021
    • July 1, 2021
    ...Collins & Aikman Corp. v. Stockman, No. 07-265-SLR-LPS, 2009 WL 3153633, at *3 (D. Del. Sept. 30, 2009)). 218. See SEC v. Nat’l Sec. Inc., 393 U.S. 453, 467 (1969) (holding that shareholders “purchase” shares in the new entity by exchanging them for their old stock when a merger occurs); Ma......

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