incidental power necessary to carry on the business of banking. U.S. at , 115 S. Ct. at 815. The Court stated that the judgment of an administrator--such as the OCC--that defines a term in a way that is reasonable in light of the legislature's revealed design is entitled to controlling weight. Id. at , 115 S. Ct. at 813-14. After examining the OCC's conclusions in light of the Bank Act, the Court found the OCC's approval to be reasonable. Id. at , 115 S. Ct. at 815. For three reasons, however, we are not persuaded by the plaintiff's citation to NationsBank.
First, it is important to distinguish the activity at issue in NationsBank with that at issue here. In NationsBank, the Court and the OCC were concerned with a bank's authority to act as a broker for annuities issued by insurance companies, to offer an additional service to its customers. Id. at , 115 S. Ct. at 812. While banks can act as broker for securities, as an example, they cannot underwrite the issue of securities or stock. 12 U.S.C. § 24 (Seventh) cited in NationsBank, U.S. at , 115 S. Ct. at 813. Banks in towns of 5,000 or less in population can also broker, as oppose to underwrite, insurance. 12 U.S.C. § 92. Here, conversely, we are not concerned with a bank's authority to act as a broker for the Retirement CD, we are concerned with the risks attendant to underwriting such a product. Schacht's threatened action against Blackfeet was prompted by his perception that those risks should be subject to state regulation; that is what this case is about. The question of state regulation of insurance did not arise in NationsBank; presumably, the insurance companies that actually issued and underwrote the annuities in that case had already been subjected to the type of regulatory framework Schacht seeks to impose here.
Second, the OCC in NationsBank issued an approval letter in response to the bank's application for same. Variable Annuity Life Ins. Co. v. Clarke, 998 F.2d 1295, 1297 (5th Cir. 1993); Variable Annuity Life Ins. Co. v. Clarke, 786 F. Supp. 639, 640-41 (S.D.Tex. 1991). Here, by comparison, Blackfeet did not seek approval or permission from the OCC to issue the Retirement CD, and the OCC issued "no-objection" letter as opposed to a formal approval. (Memorandum of Law of ACLI, Ex. 8 at 1-2). While the parties do not address this distinction, the OCC's own language, we feel, reduces the weight we need accord the "no-objection" letter herein. The OCC's primary concern regarding the Retirement CD was that the bank mitigate the risk of lifetime payments even in situations where the maturity balance is exhausted, and suggested the bank purchase annuities from insurance companies to fund such an obligation. In its letter to Congressman Dingell, the OCC reserved judgment on whether a bank could underwrite annuities and whether the Bank Act preempted state insurance law, but conceded that state officials might deem the Retirement CD subject to insurance regulation and that Blackfeet would have to comply with all applicable state laws. (Id. at 2-4). As we intimated at the outset of this discussion, this case is not so much concerned with the proper anointment of the Retirement CD as deposit or insurance, but with the nature of the product itself. The OCC does not really address these concerns but, indeed, appears to suggest that, deposit or not, the Retirement CD might be within the regulatory ambit of state insurance laws. Accordingly, we do not feel constrained to hold that the product is a deposit and therefore beyond the reach of the Insurance Code on the basis of the OCC's "no-objection" letter.
Third, and finally, even if we were to apply NationsBank to the OCC "no-objection" position that the Retirement CD is a "deposit" and determine the deference to be accorded that position, we would have to stop short of giving it controlling weight. We return to the salient feature of the product: the guaranteed, lifetime monthly payment. Noting that there was the possibility that such payments would go on beyond the exhaustion of the maturity balance, the OCC characterized them as "additional interest." We are troubled by this rationale. Interest is ordinarily earned while there is a principal at work--the two go hand and hand--and is definable at a certain rate. Black's Law Dictionary, 812-13 (6th ed. 1990). Neither can be said of the lifetime monthly payments that are the salient feature of the Retirement CD. While we do not reach a NationsBank examination of the OCC's "no-objection" letter, we would be extremely reluctant to accept the attribution of the lifetime, monthly payments after the exhaustion of principal and interest as "additional interest." This integral part of the Retirement CD was also cause for concern to the FDIC, upon whose opinion plaintiffs also rely.
The FDIC's opinion regarding the insurability of the Retirement CD lends more comfort to Schacht than to the plaintiffs. Based on the FDI Act's definition of a "deposit," the FDIC limited the insurable amount of the Retirement CD to the principal and interest. "Under no circumstances" would the FDIC insure the banks commitment to make lifetime monthly payments. (Pl.MSJ, Ex. 2 at 4). According to the FDIC, such an arrangement was not contemplated by the FDI Act's definition of "deposit." In an effort to reduce the significance of this limitation on FDIC insurance, plaintiffs can only point out that "FDIC insurance on all bank deposits is limited to $ 100,000 dollars, but a deposit of $ 101,000 or $ 1,000,000 remains a deposit" under federal banking law . . ." (Pl.Reply at 6). This argument, however, confuses a limitation on the amount the FDIC will insure with the nature of things it will insure. Suppose a Retirement CD customer has a maturity balance at age 65 of $ 14,400. He withdraws 2/3--$ 9,600--leaving a balance of $ 4,800. Ignoring for the moment the applicable interest rate, and assuming his life expectancy was another ten years--120 months--the bank would, under the terms of the Retirement CD, guarantee him a lifetime monthly payment of $ 40. Despite the fact that the customer would have to another 188 years before the total return would reach the FDIC's $ 100,000 insurance limit, there would be no FDIC insurance on any payments beyond the $ 4,800. There is simply no basis whatsoever to analogize the FDIC's refusal to insure lifetime monthly payments over and above principal and interest with its insurance limit of $ 100,000 on deposits. The FDIC's refusal to extend insurance to the salient feature of the Retirement CD is not based on an amount of deposit, but on the nature of the product. It is the nature of the product, not whether it can be called a "deposit" in certain contexts, that is at issue here.
2. Retirement CD as Insurance Product
We turn now to consider Schacht's position: that the Retirement CD is an annuity and, therefore, is subject to regulation under the Insurance Code. Schacht's argument, to an extent, is similar to that of the plaintiffs: because the Retirement CD is an annuity and the Insurance Code lists annuities as subject to insurance regulation, the Retirement CD should be subject to insurance regulation. Granted, it would appear that all fifty states regulate annuities under their insurance laws. See Variable Annuity Life Ins. Co. v. Clarke, 998 F.2d 1295, 1300 n.2 (5th Cir. 1993) rev'd on other grounds, NationsBank (collected state statutes). The association of the term "annuity" with a state's insurance laws is no more dispositive of the issue before us, however, than the reference to the Retirement CD as a deposit already discussed. Instead, it is the nature of the Retirement CD that is at issue here, especially the risks inherent in the product. Whether the Retirement CD is called a "deposit," an "annuity," or an "insurance product," the risk involved, correctly identified by Schacht, is a "mortality risk." It is this element of "mortality risk" that, in large part, we believe, renders the Retirement CD an appropriate subject for state insurance regulation.
The fundamental characteristic of insurance is the spreading and underwriting of risk; the risk to be insured against is shifted or distributed. Group Life & Health Ins. v. Royal Drug Co., 440 U.S. 205, 211, 99 S. Ct. 1067, 1073, 59 L. Ed. 2d 261 (1979); Barnes v. United States, 801 F.2d 984, 985 (7th Cir. 1986). In the life insurance context, the Seventh Circuit has explained that:
the insured and the insurer are both betting on the longevity of the insured. The risk to the insurer is that death will come before the value for premiums paid exceeds the death benefit. The insured risks that the value of his or her payments will surpass the promised payment before death. If the contract operates to insure a risk-free system for either party, it is not a life insurance contract.
Barnes, 801 F.2d at 985 (citations omitted). Thus, a longevity or "mortality risk" is a necessary, although perhaps not a sufficient, element of insurance. Insurance also requires, in combination with the mortality risk, a guarantee of a fixed return. Securities & Exch. Com'n v. Variable Ann. Ins. Co., 359 U.S. 65, 71, 79 S. Ct. 618, 622, 3 L. Ed. 2d 640 (1959), cited in Royal Drug, 440 U.S. at 212, 99 S. Ct. at 1073-74; Otto v. Variable Annuity Life Ins., 814 F.2d 1127, 1131 (7th Cir. 1986). In Securities & Exch., the Court considered a mortality risk without the element of a fixed return to be a "superficial" mortality risk. 359 U.S. at 71, 79 S. Ct. at 622. While it is not clear whether mortality risk and guaranteed fixed return are separate elements of insurance, or whether a guaranteed fixed return is essential to a "true" mortality risk, the insurance encompasses both features in some fashion.
An annuity can perhaps best be described as the mirror image of life insurance. Clarke, 998 F.2d at 1301. The annuitant and the issuer of the annuity are, again, both betting on the longevity of the annuitant. In the case of an annuity, however, the annuitant risks that death will come before he or she receives annuity payments in the amount he or expended to purchase the annuity. The issuer risks that the annuitant will live so long that the annuity payments will exceed the value of the price received for the annuity. See, generally, Id.; and Associates in Adolescent Psychiatry v. Home Life, 941 F.2d 561, 565 (7th Cir. 1991). Just as in the case of the insurance policy, the fundamental risk of an annuity is a mortality risk.
Like the life insurance context, the presence of a mortality risk is not alone sufficient to render an annuity "insurance" or an "insurance product." An annuity contract that does not guarantee a fixed return does not place a true mortality risk on the issuer, a true insurance underwriting risk. Securities & Exch., 359 U.S. at 71-73, 79 S. Ct. at 622-23; Otto, 814 F.2d at 1131. Plaintiffs take this idea a step too far, however, citing NationsBank for the proposition that a mortality risk has little or no influence on the nature of a product. (Pl.MSJ at 20; Pl.Opp. at 8). In NationsBank, the Court's holding was simply that the OCC could reasonably find the selling, as opposed to the underwriting, of annuities was an incidental power of banking. Id. at , 115 S. Ct. at 815. While the Court also accepted as reasonable the OCC's point that a mortality risk was not a necessary feature of many modern annuities, this point was based on the fact that many such products do not feature a life term--as opposed to the Retirement CD. U.S. at , 115 S. Ct. at 816. In addition, as we already noted, the NationsBank Court was dealing with a national bank brokering, as opposed to underwriting, annuities. Even in the context of a fixed annuity with a life term, then, as between purchaser and bank, only the purchaser would be assuming a mortality risk. Id. at , 115 S. Ct. at 816. NationsBank did not address the notion of a guaranteed, fixed return that, as we have seen, must be coupled with a mortality risk to render an annuity an insurance product. Thus, as we have already intimated earlier in our discussion, the NationsBank holding does not address the concerns we have with the case before us. In any event, it is not inconsistent with the notion that an annuity can be called an insurance product when it involves not only a mortality risk to annuitant and issuer, but includes a guaranteed fixed return. Securities & Exch. Com'n, 359 U.S. at 71-73, 79 S. Ct. at 622; Otto, 814 F.2d at 1131. When the terms of the Retirement CD are examined, it becomes clear that by its nature it is the type of annuity that qualifies as an insurance product in this context.
The Retirement CD customer places a lump sum with Blackfeet in exchange for a lifetime monthly payment. Whether that sum is called a "deposit" or the purchase price of the annuity does not affect the nature of the product. Clearly, there is a traditional, insurance-product mortality risk to both the customer and Blackfeet. The customer hopes to lives long enough that the monthly lifetime payments exceed the value of the lump sum or, more specifically, the maturity balance. Blackfeet calculates the amount of the monthly payments based, in substantial part, on the actuarial prediction of how long the customer will live; it wagers that the customer will not live so long as to exhaust the maturity balance. This gamble is a true insurance risk under Securities & Exch.: the lifetime monthly payments are guaranteed. Thus, there is a mortality risk to both parties and a guaranteed return. Whether it is called a "deposit," an "annuity," or something else, the nature of the Retirement CD makes it an appropriate subject for regulation as an insurance product because it entails an insurance or mortality risk and a guaranteed return.
Plaintiffs disagree with the characterization of the risk to Blackfeet and its customers as an insurance risk. While they do not retreat from their position that the Retirement CD is a "deposit," they submit that, to the extent it can be considered an annuity, it involves an "investment risk" as opposed to an insurance risk. (Pl.MSJ at 20; Pl.Opp. at 6-8). In fact, plaintiffs contend that annuities and insurance are opposites, citing Helvering v. Le Gierse, 312 U.S. 531, 61 S. Ct. 646, 85 L. Ed. 996 (1941) and Keller v. Commissioner of Internal Revenue, 312 U.S. 543, 61 S. Ct. 651, 85 L. Ed. 1032 (1941). These companion cases dealt with the tax consequences of two similar, single transactions that combined an annuity and a life insurance policy. Helvering, 312 U.S. at 536-37, 61 S. Ct. at 648; Keller, 312 U.S. at 543-44, 61 S. Ct. at 652. Neither holding undermines the conclusion that the Retirement CD, by any other name, involves a mortality risk that is a proper focus of state insurance regulation. In Helvering, the Court stated that:
annuity and insurance are opposites; in combination the one neutralizes the risk customarily inherent in the other. From the [issuing] company's viewpoint, insurance looks to longevity, annuity to transiency.
312 U.S. at 541, 61 S. Ct. at 650.
Either risk--longevity or transiency--is a mortality risk. The annuitant gambles that he or she will live long enough that annuity payments will exceed the price of the annuity; the company issuing the annuity takes the opposite position. In the context of a life insurance policy, the positions are reversed, with the issuing company hoping the policyholder will live long enough that the earnings on the premiums he or she pays will eclipse the amount of the agree upon death benefit. The element of risk, in either case, is the same. Thus, in both Helvering and Keller, the Court found that the issuance of annuity and insurance policy in combination "countervailed a risk otherwise assumed in [the issuance of an] "insurance" policy." Keller, 312 U.S. at 545, 61 S. Ct. at 652. Neither case undermines the conclusion that the Retirement CD is an appropriate subject for regulation as an insurance product.
C. The Bank Act and the Insurance Code
Having determined the Retirement CD meets the definition of an insurance product that is an appropriate subject for regulation, we need only briefly consider two additional points: federal preemption and the McCarran-Ferguson Act. The plaintiffs argue that the Bank Act preempts the Insurance Code insofar as the state regulation of a national bank is inconsistent with, or conflicts with, federal law. According to Schacht, however, there is no real conflict between state and federal law here. To the extent that there may be, Schacht contends that state regulation of the Retirement CD is saved from preemption by the McCarran-Ferguson Act.
The Supremacy Clause of Article VI of the Constitution provides Congress with the power to preempt state law. Preemption occurs when Congress, in enacting a federal statute, expresses a clear intent to preempt state law; when there is outright or actual conflict between federal and state law; where compliance with both federal and state law is in effect physically impossible; where there is implicit in federal law a barrier to state regulation; where Congress has legislated comprehensively, thus occupying an entire field of regulation and leaving no room for the States to supplement federal law; or where the state law stands as an obstacle to the accomplishment and execution of the full objectives of Congress. Louisiana Public Service Com'n v. F.C.C., 476 U.S. 355, 360-61, 106 S. Ct. 1890, 1898, 90 L. Ed. 2d 369 (1986). Preemption may result not only from action taken by Congress itself; a federal agency acting within the scope of its congressionally delegated authority may preempt state regulation. Id. at 369, 106 S. Ct. at 1898-99. Here, the plaintiffs submit that the Bank Act--specifically 12 U.S.C. § 24 (Seventh)--preempts the Insurance Code, essentially by authorizing banks to receive deposits. We cannot agree with the plaintiffs' line of reasoning.
The portion of the Bank Act authorizing national banks to receive deposits has nothing to do with a bank's power to underwrite annuities or insurance risks. Quite simply, there is no conflict between the Bank Act and the Insurance Code's regulation of insurance products in this context; the issue of the Bank Act's preemption of the Insurance Code in this case is illusionary. The only real conflict in this case is between the Insurance Code and the OCC's "no-objection" letter finding the Retirement CD could be considered a "deposit" under the Bank Act. As we stated above, a federal agency acting within its delegated authority can preempt state regulation, but that is not what the OCC did here. In order to preempt state authority, the OCC must establish rules with the force of law, such as a regulation adopted after notice and comment rulemaking. Wabash Valley Power v. Rural Electrification Admin., 903 F.2d 445, 453-54 (7th Cir. 1990) (citing Fidelity Federal Savings & Loan Ass'n v. de la Cuesta, 458 U.S. 141, 153, 102 S. Ct. 3014, 3022, 73 L. Ed. 2d 664 (1982)). The OCC's "no-objection" letter to Blackfeet simply cannot be accorded preemptive effect.
Wabash Valley, 903 F.2d at 453-54. Thus, the Bank Act, or more accurately for the purposes of this case, the OCC's "no-objection" letter does not preempt the state of Illinois' regulatory authority over the Retirement CD.
2. McCarran-Ferguson Act
Even if § 24 of the Bank Act or the "no-objection" letter could be considered to preempt the Insurance Code in terms of regulation of the Retirement CD, the Insurance Code would be "immunized" by the McCarran-Ferguson Act. The relevant portion of the McCarran-Ferguson Act Provides:
(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 . . .