# O

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| ## Comptroller of the Currency                                        |
|                                                                       |
| > Administrator of National Banks                                     |
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Washington, DC 20219

**Interpretive Letter #1021**

**March 2005**

February 17, 2005 **12 USC 24(7)**

Subject: **\[** ***Bank*** **\]**, **\[** ***City, State*** **\]**

> Investment in Fixed Rate Annuities

Dear **\[ \]**:

This is in response to your request for confirmation that **\[** **\]**
("Bank"), **\[** ***City, State*** **\]**, had authority to purchase,
for its own account, two fixed rate annuity contracts (Fixed Rate
Annuities" or "Annuities") issued by a specified insurance and annuity
company (the "Company"). Based on the information and the
representations you provided, we conclude that the Bank had authority to
acquire the Fixed Rate Annuities pursuant to its authority in 12 U.S.C.
§ 24(Seventh) to discount and negotiate evidences of debt, subject to
the conditions set forth below.

#### BACKGROUND

######  Fixed Rate Annuities Purchased by the Bank

The Bank purchased two Fixed Rate Annuity contracts on October 5, 2001
in the amounts of \$5,000,000 and \$20,000,000 respectively. A Bank
employee was named as annuitant on the policies.[^1] The Bank is the
sole owner and beneficiary of the Annuities.

The Annuities represent general obligations of the Company. Investments
in the fixed account are supported by the assets in the general account
of the Company and are subject to the claims of its general creditors.
Payment of the obligations is not tied to the performance of any other
instrument. The Annuities have a 3% minimum interest rate that is
guaranteed for one year.[^2] In addition, the Company may, in its sole
discretion, pay an additional "excess interest" at a rate it determines.

Under the policies purchased by the Bank, the Bank may surrender
(terminate) the policies at any time before the maturity date[^3]
(October 5, 2030) and receive immediate access[^4] to the full value of
the policies, including principal and accrued interest with no surrender
charges or penalties.[^5]

The Bank considers the Fixed Rate Annuities an attractive alternative to
similar investment options, including certificates of deposit and
corporate bonds. The Bank has noted that the Company's debt obligations
have been awarded an Aa1 rating by Moody's and a AA+ rating by Standard
and Poor's. The Bank believes its financial exposure on the Annuities it
purchased is substantially lower than that of similar financial
investment instruments purchased by the Bank. In addition, the interest
rate it receives on the Annuities is higher than the interest rate it
would receive from such investments. Thus, the Bank believes its
investment in the Annuities has more attractive returns than similar
investments relative to the risk.

#### B. Characteristics of Fixed Rate Annuities Generally

An annuity is a contract where the purchaser makes one or more payments
in exchange for a subsequent series of payments for a fixed term or for
life. The contract usually involves some combination of the following
features: (1) tax deferral; (2) a guaranteed rate of return; (3)
flexible investment features; (4) early withdrawal (surrender charges);
(5) death benefits; and (6) annual fees and compensation.[^6]

There are four parties to an annuity: the issuer, the contract owner,
the annuitant, and the beneficiary. The annuitant and the contract owner
are usually the same person, but they do not have to be. The beneficiary
is the person who receives a death benefit from the annuity upon the
death of the contract owner. The annuity contract sets forth the
obligations of the issuer and the specific terms of the contract.[^7]

Annuities are often classified as either "fixed" or "variable," although
the current marketplace offers numerous types of annuities and hybrid
products. Fixed rate annuities earn a guaranteed rate of interest for a
specific period of time. Funds invested in a fixed rate annuity are
placed in a fixed account of the insurance company and are supported by
the assets in the general account of the insurance company and subject
to the claim of general creditors.[^8] As such, they represent a general
obligation of the insurance company. Payment of the obligation depends
on the creditworthiness of the insurance company and is not tied to the
performance of any other instrument.

In contrast, variable rate annuities represent an interest in a
segregated portfolio of assets of the issuer and are not subject to the
claims of general creditors. Funds invested in a variable annuity are
placed in a "separate account" of the insurance company and invested in
common stocks or other securities, depending upon the investment
objective of that account.[^9] Unlike fixed rate annuities, variable
annuities do not have a set rate of interest or earnings. The
accumulated value of the annuity depends upon the performance of the
separate account as an investment fund and the investment management
ability of the issuing company. Principal and interest are not
guaranteed.

#### ANALYSIS

National banks may purchase debt obligations under their authority to
discount and negotiate evidences of debt. Fixed rate annuities are, in
substance, debt obligations of the issuing insurance company.
Accordingly, the Bank has authority to purchase fixed rate annuity
contracts, subject to prudential limits.

> **A. Fixed Rate Annuities Are Essentially Debt Obligations of the
> Issuer**

The Annuities purchased by the Bank are, in essence, debt obligations of
the Company.[^10] The Annuities are supported by the assets in the
general account of the Company and subject to the claims of its general
creditors. Payment of the obligations depends on the creditworthiness of
the Company and is not tied to the performance of any other instrument.
And like other debt instruments, such as corporate bonds, annuities
involve an obligation to make a stream of payment over time.[^11]

National banks have authority under the National Bank Act to purchase
and hold debt obligations. Section 24(Seventh) expressly authorizes
national banks to conduct the business of banking, including "by
discounting and negotiating promissory notes, drafts, bills of exchange
and other evidences of debt."[^12] This authority has long included the
power to invest in a variety of debt and debt-like financial investment
instruments.[^13]

For example, the OCC has concluded that a national bank could acquire
privately placed assets-backed securities under its authority to
negotiate evidences of debt.[^14] Similarly, the OCC recently concluded
that a national bank could acquire and hold certain preferred stock of
an unrelated company under its authority to discount and negotiate
evidences of debt.[^15]

These decisions demonstrate that the legal authority to purchase a
financial instrument does not depend upon the label that financial
instrument is given. Instead, the OCC looks to the nature of the
instrument and activity involved to determine permissibility. In this
case, it is clear that the Bank's annuity investment is essentially a
debt obligation of the Company to the Bank. National banks are
authorized to invest in debt obligations under the authority to discount
and negotiate evidences of debt. Accordingly, the Bank may invest in the
fixed rate annuities because they are essentially debt obligations of
the issuer.[^16]

#### B. Fixed Rate Annuities Are Not Insurance

Fixed rate annuities are primarily a vehicle for investment, not an
insurance product. Generally, investors who purchase annuities are not
seeking to pool a catastrophic risk such as death, injury or property
damage, but are instead seeking a guaranteed, long-term return on their
assets. The element of mortality risk, which is present in some
annuities, including the annuities purchased by the Bank, derives from
the investor's willingness to price a contractual arrangement based on
the length of the investor's life in order to increase the return the
investor will receive during the investor's lifetime. This risk is
essentially an investment risk, not an insurance risk.[^17]

The Supreme Court recognized the investment nature of annuities in
*VALIC:*

By making an initial payment in exchange for a future income stream, the
customer is deferring consumption, setting aside money for retirement,
future expenses, or a rainy day . . . an annuity is like putting money
in a bank account, a debt instrument, or a mutual fund . . . . In sum,
modern annuities, though more sophisticated than the standard savings
bank deposits of old, answer essentially the same need.[^18]

Indeed, the great weight of authority supports the position that
annuities are not insurance, because they do not incorporate the element
of indemnification against risk. Courts considering the status of
annuities as "insurance" have held that annuities are not insurance for
purposes of federal tax law, several state laws, bankruptcy law and
other laws.[^19] Legal encyclopedias also agree that, because annuities
do not involve indemnification against risk of loss, they are not
insurance.[^20] Thus, limitations on national banks purchasing life
insurance as an investment are not applicable here.[^21]

C. Purchasing Fixed Rate Annuities is not Prohibited by 12 U.S.C.
§ 24(Seventh)[^22]

Twelve U.S.C. § 24(Seventh) addresses the ability of a national bank to
purchase, underwrite or deal in securities. Specifically, section
24(Seventh) provides in relevant part:

. . . .The business of dealing in securities and stock by the
association shall be limited to purchasing and selling such securities
and stock without recourse, solely on the order, and for the account of,
customers, and in no case for its own account, and the association shall
not underwrite any issue of securities or stock: Provided, That the
association may purchase for its own account investment securities under
such limitations and restrictions as the Comptroller of the Currency may
by regulation prescribe. . . .

This provision does not restrict the Bank's purchase of fixed rate
annuities, however, because fixed rate annuities are not "securities"
for purposes of section 24(Seventh).[^23] Section 24(Seventh) does not
define the term "securities," nor does it mention annuities. And neither
the OCC nor the courts have directly concluded whether fixed rate
annuities are "securities" for purposes of section 24(Seventh).[^24] The
Securities Act of 1933 specifically exempts annuities from the
definition of "security, however." [^25] Although the treatment of fixed
rate annuities under the federal securities laws is not determinative of
whether those instruments are securities under section 24(Seventh), it
is relevant in assessing how Congress viewed fixed rate annuities at the
time section 24(Seventh) was enacted.[^26] As the Supreme Court has
explained, the meaning of a term in other legislation passed roughly at
the same time with the shared purpose of restoring confidence in the
nation's financial markets provides "considerable evidence' of the
'ordinary meaning' Congress attached to the same term in the
Glass-Steagall Act.[^27] The 1933 Act's exemption for fixed rate
annuities provides 'considerable evidence' that Congress did not view
fixed rate annuities as securities for purposes of the Glass-Steagall
Act.

Accordingly, the Bank is authorized to purchase and hold the Fixed Rate
Annuities pursuant to the authority in 12 U.S.C. § 24(Seventh) to
discount and negotiate evidences of debt. Banks using their authority to
discount and negotiate evidences of debt must make this election prior
to purchasing the fixed rate annuities. In addition, the Bank's purchase
will be subject to the legal and prudential limits discussed below.

#### 

#### D. Legal Limits and Prudential Requirements

The Bank's investment in the annuities will be subject to the
limitations applicable to loans and other debt obligations.[^28]
Accordingly, the Bank's purchase of the Fixed Rate Annuities may not
exceed 15% of the Bank's capital and surplus.[^29] The Bank also must
establish internal concentration limits for its combined holdings of
fixed rate annuities from all issuers.[^30]

In addition, the Bank must adhere to the prudential requirements in OCC
Bulletin 2002-19 and Banking Circular No. 181 (Rev.).[^31] In that
regard, prior to purchasing the annuities, the Bank must conduct an
independent analysis to determine that the fixed rate annuities will
meet the Bank's own internal underwriting standards. The Bank should
exercise the same credit due diligence as it would for other debt
obligations.[^32] At a minimum, this requires that the Bank:

1)  perform a full financial statement analysis on the obligor;

2)  assess the issuer's industry position, pricing power, management
    strength, etc;

3)  assess and evaluate the issuer's source of repayment and collateral
    value (if any);

4)  gain appropriate credit approvals (e.g., from a loan committee);

5)  assign a risk rating;

6)  ensure the lending policy addresses the type of exposure the bank
    plans to acquire;

7)  review the credit exposure on an ongoing basis and update the risk
    rating as appropriate.

The Bank must maintain its analysis on an ongoing basis and must have
continued access to appropriate credit and portfolio performance data as
long as it holds the fixed rate annuities.[^33]

#### 

#### CONCLUSION

Based on the information and the representations you provided and for
the reasons explained above, the Bank may invest in fixed rate annuities
for its own account, subject to the following conditions:

1.  The Bank is permitted to invest in only those annuity products with
    a fixed rate of interest that represent a general obligation of the
    issuing insurance company and that are not tied to the performance
    of any other instrument.

2.  The Bank may not exercise any option it may have to convert its
    Fixed Rate Annuities to a variable return status.

3.  Under the terms of the annuity contract, the Bank must be permitted
    to surrender (terminate) the policies at any time before the
    maturity date and receive immediate access to the full value of the
    policies, including principal and accrued interest with no surrender
    charges or penalties. The Bank may not invest in any annuity product
    that imposes surrender charges or penalties for early surrender of
    the policy.[^34]

4.  The Bank's investment in the annuity products will be subject to a
    legal lending limit of 15% of the Bank's capital and surplus per
    issuer. The Bank also should establish and comply with internal
    concentration limits on its combined holdings of fixed rate
    annuities from all issuers.

5.  The Bank must adhere to the prudential requirements in OCC Bulletin
    2002-19 and OCC Banking Circular No. 181 (Rev.) and conduct an
    independent analysis to determine that the purchase of the fixed
    rate annuities meets the Bank's own internal underwriting standards.

Please be advised that these conditions are deemed to be "conditions
imposed in writing by the agency in connection with the granting of any
application or other request" within the meaning of 12 U.S.C. § 1818. As
such, the conditions are enforceable under 12 U.S.C. § 1818.

If you have any questions, please contact Beth Kirby, Special Counsel,
Securities and Corporate Practices Division at 202-874-5210.

Sincerely,

/s/ Daniel P. Stipano

Daniel P. Stipano

Acting Chief Counsel

Comptroller of the Currency

[^1]: If the annuitant dies before the annuity commencement date (the
    date the first income payment is due (October 5, 2030)), the Company
    will pay the Bank the full value of the policies in the manner
    described in the contracts.

[^2]: Although the annuity contracts purchased by the Bank are referred
    to as variable annuities, the contracts give the owner of the
    policies the option of choosing whether the products it purchases
    will have a fixed rate or a variable rate of interest. The contract
    offers investors the right to elect a number of annuity options in
    return for a single or multiple premium/investment payment. The
    contract owner may, for example, be permitted to direct that
    payments accumulate solely in a variable account that invests in
    equities, a variable account that invests in corporate bonds, a
    fixed account, or in a combination of variable and fixed accounts.
    In this case, the Bank has elected to make a single premium payment
    into a fixed account and has committed it will not convert to a
    variable return status.

[^3]: The maturity date is referred to contractually as the "annuity
    commencement date."

[^4]: Under the policy, the Company may defer payment for up to six
    months (when permitted by law) in the event the New York Stock
    Exchange is closed for trading (other than for the usual business
    day) or the Securities Exchange Commission restricts trading or
    determines that an emergency exists.

[^5]: The full value of the policy represents the accumulation value of
    the policy and the sum of all premium payments. However, some states
    impose a state premium tax against either the accumulation value of
    the annuity policy or the premium payments. The insurance companies
    issuing the annuity policies deduct these taxes as incurred
    according to state regulations. We understand that the policies the
    Bank purchased in this case are not subject to any state premium
    taxes. National banks purchasing fixed rate annuities are advised to
    consult with the insurance company issuing the policy to determine
    whether state premium taxes apply.

[^6]: Sousa, *An Annuity Primer -- Setting the Context for Variable
    Annuities*, Bank Securities Journal 12 (Jan./Feb. 1995); H.
    Carstensen, *Tips for Marketing and Selling Variable Annuities*,
    Bank Securities Journal 31-32 (Jan./Feb. 1995).

[^7]: The annuitant is the person whose life governs the duration of the
    payments from the annuity instrument. When the annuitant reaches an
    established age, the issuer of the annuity pays out sums on terms
    set forth in the contract, either in a lump sum or at periodic
    intervals, generally for the remainder of the annuitant's life.
    Payments are made to the contract holder. If the annuitant dies
    before annuity payments begin, the issuer will pay the beneficiary
    the value of any premiums paid by the annuitant plus interest (less
    any withdrawals). The beneficiary may also be entitled to payments
    if the annuitant dies after annuity payments begin if the issuer has
    guaranteed that payments will continue for a set period of time. In
    that situation, if the annuitant dies after annuity payments have
    begun but before the guaranteed period of payments ends (in this
    case ten years), the issuer will make payments to the beneficiary
    for the remainder of the guaranteed income payment period.

[^8]: The general assets of the insurance company include all of the
    insurance company's assets other than those allocated to a separate
    account. Fixed rate annuities are not allocated to a separate
    account.

[^9]: Variable rate annuities typically offer a range of investment or
    funding options. These funding options may include stocks, bonds,
    and money markets.

[^10]: Many courts have held that an annuity contract creates a
    debtor-creditor relationship. *See John Hancock Mut. Life Ins. Co.
    v. Helvering*, 128 F.2d 745, 751 (D.C. Cir. 1942); *Hughes v. Sun
    Life Assurance Co. of Canada*, 159 F.2d 110, 113(7^th^ Cir. 1946);
    *Chatham v. City Hospital*, 325 F. Supp. 614 (S.D. Ga. 1971); *Moses
    v. Manufactures Life Ins. Co.*, 298 F.Supp. 321 (E.D. S.C. 1968);
    *Roth v. Kaptowsky*, 393 Ill. 484, 66 N.E.2d 664, 669 (1946);
    *Crossman Co. v. Rauch*, 263 N.Y. 264, 188 N.E. 748, 751 (1934).

[^11]: *See NationsBank of North Carolina, N.A. v. Variable Life Annuity
    Co.*, 115 S. Ct. 810, 814 n.2 (*VALIC)*, supra. Fixed rate annuities
    also functionally resemble certificates of deposit. A fixed annuity
    contract for a fixed term resembles a certificate of deposit that
    pays interest and automatically withdraws principal at a rate
    calculated to reduce the balance to zero at the end of the annuity
    term. An annuity with a life term resembles a life interest in a
    certificate of deposit. The owner of a life interest in a
    certificate of deposit has the right to receive income from the
    account for life, after which ownership of the account reverts to
    the owner of the remainder. See R. Cunningham, Law of Property
    § § 2.16, 4.11 (1984). This is precisely the same right that the
    owner of a life-term annuity has. National banks may purchase and
    hold certificates of deposit without limit based on the 12 U.S.C.
    24(Seventh) "incidental powers" provisions. OCC Interpretive Letter
    No. 384 (May 19, 1987).

[^12]: 12 U.S.C. § 24(Seventh). The courts have long held that the term
    "discount" includes purchases of notes and other evidences of debt.
    *See, e.g.*, *National Bank v. Johnson*, 104 U.S. 271 (1881);
    *Steward v. Atlantic National Bank*, 27 F.2d 224, 228 (9th Cir.
    1928); *Morris v. Third National Bank*, 142 F. 25 (8th Cir. 1905);
    *Danforth v. National State Bank of Elizabeth*, 48 F. 271 (3d Cir.
    1891). *See also* 12A *Words and Phrases* 285-95 (West 1954 and
    Supp. 1986). And negotiation is a form of transfer, disposition or
    sale. *Black's Law Dictionary* 934 (5th ed. 1979); 28 *Words and
    Phrases* 758-766 (West 1955 & Supp. 1986). Thus, the OCC has
    concluded that the authority to discount and negotiate evidences of
    debt includes the authority to purchase and sell debt and debt-like
    instruments. *See e.g.,* OCC Conditional Approval No. 262,
    *Interpretations and Actions*, Dec. 1997, Vol. 10, No. 12.

[^13]: *See* Interpretive Letter No. 833 (July 8, 1998), *reprinted in*
    \[1998 Transfer Binder\] Fed. Banking L. Rep. (CCH) ¶ 81-287;
    Interpretive Letter No. 834, (July 8, 1998), *reprinted in* \[1998
    Transfer Binder\] Fed. Banking L. Rep. (CCH) ¶ 81-288; Interpretive
    Letter No. 600 (July 31, 1992), *reprinted in* \[1992-1993 Transfer
    Binder\] Fed. Banking L. Rep. (CCH) ¶ 83,427; Interpretive Letter
    No. 182 (March 10, 1981), *reprinted in* \[1981-1982 Transfer
    Binder\] Fed. Banking L. Rep. (CCH) ¶ 85,263.

[^14]: Interpretive Letter No. 600, *supra*. The OCC determined that the
    asset-backed securities did not meet the marketability requirements
    for investment securities, but could be purchased under the
    authority to negotiate evidences of debt.

[^15]: *See* Interpretive Letter No. 941 (June 11, 2002), *OCC
    Interpretations and Actions, August 2002*. The OCC has also
    concluded that trust preferred securities are debt-like instruments
    that may be purchased as investment securities or under the
    authority to discount and negotiate evidences debt. *See*
    Interpretive Letter No. 777, *supra* and Interpretive Letter No.
    908, *supra*.

[^16]: The fixed rate annuities would not qualify as investment
    securities pursuant to 12 C.F.R. Part 1, however, because they are
    not transferable and therefore would not meet the marketability
    requirement for investment securities. The OCC has previously
    concluded that a debt instrument that does not qualify as an
    investment security, may qualify for purchase pursuant to a bank's
    authority to discount and negotiate evidence of debt. *See e.g.* OCC
    Interpretive Letter No. 908, *reprinted in* \[Current Transfer
    Binder\] Fed. Banking L. Rep. (CCH) ¶ 81-433 (April 23, 2001) (trust
    preferred securities that do not qualify as investment securities
    may be purchased under the authority in 12 U.S.C. § 24(Seventh) to
    discount and negotiate evidence of debt).

[^17]: *See Helvering v. Le Gierse*, 312 U.S. 531, 542 (1941) ("Any risk
    that the prepayment \[premium\] would earn less than the amount paid
    to the respondent as an annuity was an investment risk similar to
    the risk assumed by a bank; it was not an insurance risk . . . .").
    *In Re Howerton*, 21 Bankr. 621, 623 (1982) ("Both life insurance
    and annuity contracts may take various forms but the heart of the
    distinction between them is this: life insurance is a promise to pay
    a sum certain on the death of the insured and an annuity is
    essentially a form of investment which pays periodically during the
    life of the annuitant or during a term fixed by contract rather than
    on the occurrence of a future contingency."); *See e.g.*, *Daniel v.
    Life Ins. Co. of Virginia*, 102 S.W.2d 256, 260 (Tex Civ. Appl 1937)
    ("An annuity is essentially a form of investment, and uniformly held
    to be such, regardless of the fact that in its usual form payments
    are contingent upon continuity of the life of the grantee."); 1 J.
    Appleman, *Insurance Law and Practice*; § 84 (1981) ("annuity
    contracts must be recognized as investments rather than
    insurance."). *See also SEC v. United Benefit Life Ins. Co.*, 387
    U.S. 202-207-208 (1966) ("In fixing the necessary premium \[for a
    fixed annuity\] mortality experience is a subordinate factor and the
    planning problem is to decide what interest and expense rates may be
    expected. There is some shifting of risk from policyholder to
    insurer, but no pooling of risks among policyholders. In other
    words, the insurer is acting in a role similar to that of a savings
    institution . . .").

[^18]: *VALIC,* supra.

[^19]: *See e.g., New York State Association of Life Underwriters, Inc.
    v. New York State Banking Department*, 83 N.Y. 2d 353, 632 N.E. 2d
    876 (1994); *New Britain National Bank v. Life Insurance Co. of
    Connecticut*, 6 Conn. Cir. 674, 305 A.2d 296 (1972).

[^20]: *See* 44 C.J. S. § 2(b) ("Generally an annuity contract is not a
    contract of insurance); 43 Am Jur. 2d Insurance § 5 ("Contracts for
    annuities differ materially from ordinary life insurance policies,
    and are not generally regarded as such.).

[^21]: The OCC has taken the position that national banks are not
    authorized to purchase life insurance simply as an investment. *See*
    OCC Bulletin 2004-56 (December 7, 2004); Unpublished OCC
    Interpretive Letter from William Glidden (Oct. 28, 1987).

[^22]: Section 24(Seventh) codifies section 16 of the Glass-Steagall
    Act. The Glass-Steagall Act is the popular name for essentially four
    provisions in the Banking Act of 1933. Section 16 of the Act places
    limits on underwriting and dealing in securities and stock by
    national banks. Section 21 (12 U.S.C. § 378) prohibits organizations
    that are engaged in underwriting and other securities activities
    from simultaneously engaging in the business of receiving deposits.
    The two other provisions, section 20 (12 U.S.C. § 377) and Section
    32 (12 U.S.C. § 78) have been repealed.

[^23]: The annuity policies purchased by the Bank are called 'variable
    annuities' and are considered securities under the federal
    securities laws. As noted above, however, owners of these annuities
    have the option of choosing whether the annuities will have a fixed
    rate or variable rate of return. The Bank has chosen a fixed rate
    option and has committed that it will not convert to a variable
    rate. As a result, we treat these annuities as fixed rate annuities
    for purposes of the Glass-Steagall Act.

[^24]: The OCC has previously found it unnecessary to determine the
    status of fixed rate annuities under the Glass-Steagall Act, because
    national banks were engaged solely in brokering fixed rate
    annuities, a permissible activity for a national bank regardless of
    whether the annuities are Glass-Steagall Act securities. *See*
    *e.g.* Interpretive Letter No. 499 (Feb. 12 1990), *reprinted in*
    \[1989-90 Transfer Binder\] Fed. Banking L. Rep. ¶ 83,090. The
    Supreme Court, in *VALIC*, also did not address whether fixed rate
    annuities were securities for purposes of the Glass-Steagall Act.
    Instead, the Court accepted the OCC's conclusion that national banks
    had authority to broker fixed rate annuities because fixed rate
    annuities are the functional equivalent of other financial
    investment instruments national banks are permitted to broker.

[^25]: The Securities Act of 1933 exempted all annuities from the
    definition of "security." *See* 15 U.S.C. § 77c(a)(8). At the time
    the 1933 Act was enacted, however, insurance companies offered only
    fixed rate annuity contracts. As a result, only fixed rate annuities
    are regarded as exempt from the 1933 Act. *See SEC v. Variable Life
    Ins. Co.*, 359 U.S. 65 (1959). *See also*, SEC Rule 151, 17 C.F.R.
    § 230.151 ("safe harbor" that is intended to provide a clear
    exemption from the 1933 Act requirements for all fixed rate annuity
    products).

[^26]: *See* S. Rp. No. 85, 73d Cong., 1^st^ Sess. (May 3, 1933) 15,
    *reprinted in* Federal Bar Association, Securities Law Committee, I
    Federal Securities Laws; Legislative History 1933-1982, 138, 152
    (1983).

[^27]: *Securities Industry Association v. Board of Governors of the
    Federal Reserve System*, 468 U.S. 137, 159 n. 11.

[^28]: *See* 12 U.S.C. § 84 and 12 C.F.R. § 32.

[^29]: *See* 12 U.S.C. § 84(a)(1) and 12 C.F.R. § 32.3(a).

[^30]: Among other things, the Bank should consider the concentration of
    credit guidelines (OCC Bulletin 95-7 "Concentrations of Credit,"
    February 9, 1995) when establishing internal limits.

[^31]: *See* OCC Bulletin 2002-19 "Supplemental Guidance: Unsafe and
    Unsound Investment Portfolio Practices", May 22, 2002, and OCC
    Banking Circular 181 (Rev.) "Purchases of Loans in Whole or in
    Part-Participations", August 2, 1984, *reprinted in* \[1983-1984
    Transfer Binder\] Fed. Banking L. Rep. (CCH) ¶ 63-506.

[^32]: The OCC will be critical of bank practices that permit the bank
    to acquire assets pursuant to their authority to discount and
    negotiate, but fail to use prudent credit underwriting and ongoing
    monitoring practices. If a bank has not performed appropriate credit
    due diligence, the OCC may consider such transactions to be
    violations of 12 U.S.C. § 24(7), as well as unsafe and unsound
    practices.

[^33]: The Bank also should obtain the employees' informed consent to be
    named as annuitants. We understand that prior to consenting to be
    annuitants, the Bank's employees were advised that their consent was
    voluntary. In addition, the Bank advised the employees that the
    employees would not be the owner or beneficiary of the annuities.

[^34]: Investment in fixed rate annuities that impose penalties for, or
    other restrictions on, early termination may not be a prudent
    investment for a national bank. This opinion addresses only those
    fixed rate annuities contracts that permit termination of the
    annuity policy at any time with immediate access to the full value
    of the policies, with no surrender charges or penalties.