Document: 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 DEALERS, INC., Petitioner, v. VARIABLE Nos. 290, 237. Argued Jan. 15 19, 1959. Decided March 23, Mr. Thomas G. Meeker, Washington, D.C., for petitioner S.E.C. John H. Dorsey, National Ass'n of Securities Dealers. Benjamin respondent Ins. Co. Messrs. Roy W. McDonald, New York City, James M. Earnest, Variable America. Justice DOUGLAS delivered the opinion Court. 1 This is an action instituted by Exchange Commission1 to enjoin respondents from offering their annuity contracts public without registering them under Act 1933, 48 Stat. 74, U.S.C. § 77a et seq., U.S.C.A. complying with Investment Company 1940, 54 789, 80a—1 seq. District Court denied relief, 155 F.Supp. 521; Appeals affirmed, 103 U.S.App.D.C. 197, 257 F.2d 201. case here on petitions writs certiorari which we granted, 358 812, 63, 56, because importance question presented. 2 Respondents are regulated insurance laws Columbia several other States. It argued that fact brings into play provisions McCarran-Ferguson Act, 59 33, 1011 2(b) provides 'No Congress shall be construed invalidate, impair or supersede any law enacted State purpose regulating business * *.' said conditions applicable satisfied here. some States 'regulating' these and, if Commission right, Federal Acts would at least a degree 'supersede' state regulations since prescribe own peculiar requirements.2 Moreover, 'insurance' 'annuity' exempt when 'subject supervision commissioner *.'3 also they 'organized as company, whose primary predominant activity writing subject *.'4 While term 'security' defined in Act5 broad enough include contract, 'investment company' Act6 embrace 'insurance company,' scheme exemptions lifts pro tanto requirements those two extent actually companies, indeed such. common exemption McCarran-Fergusion whether issuing insurance. We start reluctance disturb regulatory schemes actual effect, either displacing superimposing federal transactions tailored meet requirements. When speak field 'insurance,' authority long tradition. For regulation though within ambit power (United South-Eastern Underwriters' Ass'n, 322 533, 64 1162, 88 L.Ed. 1440), has traditionally been control 4 deal, however, statutes where words terms. was legislating concerning concept had taken its coloration meaning largely law, practice, usage. Some deny status 'insurance.'7 Others accept statutes.8 apparent there no uniformity rulings nature contracts. In event how may have ruled not decisive. For, said, question. 5 all regulate 'annuities' laws, customarily fixed annuities, annuitant specified definite amounts beginning certain year his her life. standards investment funds underlying annuities conservative. variable introduced new features. First, premiums collected invested greater stocks equities. Second, benefit payments vary success policy. first apparently appeared this country about 1952 created College Retirement Equities Fund9 provide teachers. came existence result search device avoid paying annuitants depreciated dollars.10 theory returns investments over run tend compensate mounting inflation. holder cannot look forward monthly yearly amount advancing years. less, depending wisdom respects characteristics conventional annuity: made periodically; continue until annuitant's death options chosen end last persons; both principal income; according age sex annuitant. actuarially fixed-dollar calculated identical principles. Each issuer assumes risk mortality moment contract issued. That actuarial prognostication number will survive ages. Even substantial live beyond predicted demise, company annuity—whether it variable—is obligated make basis prediction reflected contract. assumed who issue annuities. feature, both, stress urge basically device.11 6 difficulty that, absent guarantee income, places risks annuitant, none company.12 gets only rata share what portfolio equity interests reflects lot, little, nothing. realize life evolving institution. Common knowledge tells us forms greatly changed even generation. And undertake freeze concepts mold fitted were passed. But conclude involves risk-taking part company. mortality, here, gives aspect Yet apparent, real; superficial, substantial. hard reality element return true sense. answer say declining times depression reciprocal loss purchasing prices high gain low. deal more risk-bearing 'insurance.' understanding fraction benefits payable amounts. See Spellacy American 144 Conn. 346, 354—355, 131 A.2d 834, 839; Couch, Cyclopedia Law, Vol. 1, 25; Richards, Law Insurance, 27; Appleman, Practice, 81. companies take failure. nothing except interest equities13—an ceiling but floor.14 There underwriting risks,15 one earmark commonly conceived popular 7 Reversed. 8 BRENNAN, whom STEWART joins, concurring. 9 I join judgment However, additional reasons lead me Court's result, lends rather extended treatment, express separately. 10 First. facts quite complex, basic problem involved much simple. try point up before developing details sort sold respondents. coverage concentrated applying specific controls various ways organizations get administer people's money—the 19331 1940.2 These specifically drawn exclude policy' 'annuity contract' (Securities 3(a)(8)) company'3 (Investment 3(a)(3)) coverage. exclusions effect policy commissioner, bank agency officer performing like functions' classifiable similar official State' 2(a) (17)). left sole such officials. Except exclusions, little doubt Acts.4 11 Why exclusions? They could out general desire concurrent Government Acts. On contrary, 18 50 preserve generally jurisdiction officials matter; former terms 'the securities commission (or office functions) latter commission, board, agency, political subdivision.' Conversely, course, however adequately Commissioners might investment, reason freed regulation. Concurrent regulation, then, contemplated prevailing matter. Nor rational assume thought whatsoever class officials, Commissioners, so perfectly conducted protections unnecessary. approach personally selective deference administrators hardly attributed Congress. must then form 'investment' known (including contracts') did present very squarely problems devised with, were, many details, less relevant. 12 At time, 'variable annuity' concerned exist. provided Acts, it. Of industry seeks retain exemption, limit itself policies 1933 1940. brand-new arrangement emerges labeled promoters, functional distinction set 1940 examined test falls willing leave exclusively Commissioners. inquiry, analysis protective purposes existed becomes relevant.5 13 core registration statement prospectus used connection issuance 'securities'—that being broadly defined.6 Detailed schedules, forth list material contain.7 emphasis disclosure; philosophy full disclosure enterprise investor put money should he can intelligently appraise involved. 14 proceeded, still proceeds, entirely different seems paternalistic keyed free, informed choice. Prescribed clauses ordained legislatively administratively. Solvency adequacy reserves company's obligations supervised establishment permissible categories through examination.8 system does depend public, once given 'product,' difficult traditional see be. congressional division functions purposeful policy, measured meaningful sense, sharer experience fact, premises appear sense become direct experience; sufficiently protected prevent this. situation changes coin obligation condition portfolio. To extent, historic meaningless. limitations examination solvency circular pay one's controlling corporate reserves, maintaining observance legal investments, plans do go Where such, federally corporation asked entrust obvious real. between organization longer squares regard 'disclosure' statute 16 passes simple philosophy, relevant case. cover face-amount certificate amounts,9 majority greatest relevance investors them) participate 'equity' enterprise. Salient call recital, operating practices;10 relationships adviser, including fees termination contract;11 trading practices,12 policy,13 senior securities,14 proxies voting trusts,15 redemption company;16 regulate, periodic (which special regulation), 'sales load,' investor's payment enterprise;17 detailed reports investors.18 apply cases obligations, certificates bonds closed-end particular situations committing hands others basis, view fortunes investment. department terms, solvency, simply touch points definition technique, men shape furnish advice provides. irrelevant banks clearly exempted; investing heavily holding possibilities capital gains fund management; managing evident Act's vital. 17 subjection desirable, accomplished; guide interpreting scope Cf. Comm. J. Howey Co., 328 293, 299, 66 1100, 1103, 90 1244. passed Commissioner was, incident duties engaged outlined above appropriate protection people entrusting basis. suppose intended favor all. Second. Much bewilderment engendered 'really' securities—one other. meaningless pigeonholing category Obviously elements insurance, apart disability waiver premium (both incidental main undertaking). patently contain significant feature (unless defines necessarily providing fixed-sum payments),19 granting considered insurance.20 few features 83; Prudential Howell, 29 N.J. 116, 121 122, 148 145, 148. contain, worth, contracts, administering way totally foreign law. leads conclusion intent them. 19 individual deferred (VAL IC) exploration A sample evidence Court, issued 35-year-old male, making 30 annual $1,000 each. this, $39.60 consideration undertaking waived disability. remaining $960.40, designated 'basic premium,' percentages credit account 'accumulation units.' year's than 45% used; next years, percentage approximate range 85% 87%;21 years 10, figure 89%, remainder 30-year pay-in period 92%. Declining amount, five premium' nil, units' credited investor.22 build 'cash value' 'buys' further accumulation units, while value finally settled dollars, owed him dollar 'units'—the petitioners suggest resemblance 'shares'—in units established arbitrary computation dividing assets starting day assigning each unit over-all market value—though made.23 Then recomputed. done, broadly, taking dividends paid realized losses, income taxes, together unrealized shrinkage increase, surcharge 0.15% (1.8% per annum) asset value.24 dollars 'buy' buy rate, thus preventing dilution, draw down accumulated receive cash rate.25 20 uses terminology throughout operative 'pay-in' stage. 'incontestability' 'suicide' mainly relate insurance); 'grace period' allowed premiums; provision 'policy loans' (the drawing cash, replacement later repayment received permit, transaction bearing liquidation stock holdings anticipation 'bear market'); (that, is, cashing surrender charge early years). certainly commitment eventually disburse values period. participating during period, despite acknowledged features, something open-end management plan. (less analogous loading charge, high, which, taxes risks) goes 'units' managed persons corporation. His fluctuate He in, wholly partially. subjected value, 1.8% annum. temporary coverage, entire (though course converted them, just commodity be), solely operation, determine meaningful. becomes, comparison, legislation—disclosure structure, conflicts interest, advisers—all acute trust; adequate substitute administered departments, trust.26 21 same conclusions follow stage Before maturity date, schedule ceases commence, dispense Failing entitled elect alternatives. straight investor, years' certain, joint survivor another. Again, duration independent experience, function fashion: ascertained. standard table 1/2% assumption) pay-out, based contribution option selected investor. fluctuating company) computed, (transmuted varying payment) every subsequent month selected. Like unit' readjusted give well unrealized. Since measurement payments) contains factor, valuation change includes items—interest dividends—received respect portfolio, double 'interest' factor wrung multiplying preceding month's 0.9971.27 applied also.28 22 pay-out almost participant equivalent trust before. really payment, him; securities. payments, affected collective longevity excess assumptions; limited reference owned periods. If lives group exceed assumptions table, proceeds otherwise characterized 'loading charge' (8% lowest application, 11% minimum years) 'annual fee' annually) provide, surplus capital, payments. measured. real vitally interested ever certificate, publicly traded is: completely 'locked in.' obviously exercised; chips' bought faith fund; rights technically assignable, practically unmarketable span. radically policies, advisers, whatever pleases (so afoul minimal State), abandoned protecting him. 23 seek equate 'participating' mutual contention persuasive. redound policyholder, obligations. 'dividends' promoted During reduction premium.29 represent favorable particularly annuity-paying doubtless light committed literature perform job common-stock trust.30 No yet tried academic suggestion VALIC, reduce insignificance rest variable, selling basis.31 comparison cost unsalable public. unpersuasive respondents' argument policyholder bears stands insolvency. prevention insolvency maintenance 'sound' financial precisely aimed at. fluctuating, attention legislation. Both risks' differ vastly kind lend themselves schemes. 24 Accordingly, trusts. wrote Act. intending remedial attempting solve intend exemptions. 25 Third. contend reversal business. applies probably categorizable companies,32 declared unlawful outstanding 'senior security,' security stock, stock.33 correct, possibility SEC use dispensing powers regard, event, whole concern companies.34 final analysis, decisive issues require modification covered why issuers able carry forbidden. 26 Similarly, conceded freely great potential So, orthodox trusts, short, notions desirable allow exist immune matter decision. regulates statutes. passage delicate balancing national legislative forces. need initial travail re-enacting time introduced, scheme's deemed wise adjustment developments extends, 27 HERLAN, FRANKFURTER, CLARK WHITTAKER join, dissenting. 28 America (VALIC) (EALIC) Section 3(a)(8) 76, 77c(a)(8), to: 'Any endowment optional functions, Territory United Columbia.' 31 3(c)(3) 798, 80a—3(c)(3), puts outside '(a)ny 2(a)(17), 793, 80a—2(a)(17), as: 32 'a organized reinsuring underwritten State; receiver liquidating agent capacity such.' 33 Columbia, Title 35 D.C.Code 1951, §§ 35—301 35—803, Superintendent approved written trial VALIC qualified Arkansas, Kentucky, West Virginia, likewise departments States.1 States, offer agents duly licensed local authority. 34 recent development designed inflationary trends economy substituting amounts, ultimately annuitants. One pioneers Teachers Association, college personnel. Association 1950 exhaustive studies feasibility soundness Two later, incorporate Fund, companion commenced teaching profession.2 appears Participating Company, 1954 Arkansas authorities. EALIC entered 1955 1956 respectively. typical adumbrated majority. sufficient note concludes, lower courts found, recognizes, fairly 'securities' 'mortality' annuities—that assumption longevity—involves classic procedures, understand 'not substantial,' determining does, options, commencement policyholder. hand stake failure, place position closely resembling so, fragmentization best hazardous business, instance has, my opinion, led unsound conclusions. important keep mind label attached scheme, traveling false colors, effort bona fides dispute. 36 stems preoccupation constricted 'color matching' construction fails leaving carrying coals Newcastle re-examine history fully canvassed opinions Justices Underwriters 1440, again implicitly recognized recently Term when, Trade Casualty 357 560, 78 1260, 1540, declined niggardly McCarran Suffice consequence decision ago Paul Wall. 168, 357, following it,3 come 'widespread doubt' prior 'that enter (of regulation) all.' Wilburn Boat Fireman's Fund 348 310, 318, 75 368, 373, 99 337; Benjamin, 408, 414, 1142, 1146, 1342. 37 find savors slightest depart dilute 'hands off' respecting couched broadest merely adherence tradition compliance supposed command Constitution. study proposed Department Commerce concluded legislation bottomed commerce commercial found lacking policies. Study Economic Legal Aspects Proposed reprinted Hearings Senate Committee Banking Currency S. 875, 73d Cong., 1st Sess. 312, 330, House Interstate Foreign H.R. 4314, 87, 105. mistaken not, underlay bill. act Committees, explained bill (§ Act): 38 'makes clear already implied act, namely, regarded act. world offered purposes. tenor lead, exclusion included misinterpretation impossible.' H.R.Rep. No. 85, 15. 39 stemmed feared implications debates. Sess., 77 Cong.Rec. 2936, 2937, 2938, 2946. days after began Senator Robinson resolution (S.J.Res. 51) calling constitutional amendment because, view, companies.' 3109. 40 score. Here tradition, perhaps doubt, explains hearings Committee, Healy discussed 'face-amount installment certificates' often 'sold savings deposits policies.' major appearing distinguish strict certificates. 10065, 76th 3d 61—62. Likewise, debates, preservation crucial distinguishing 86 10070. Stating companies,' Byrnes went say: 'The platforms parties urged Government.' Id., 10071. supra, pages 584, 591—592, 12, 1189, 1193 (dissenting opinion). 41 1944, removed holding, power. quick respond. forthwith 1011—1015, face demonstrates 'broadly support existing future systems taxing insurance,' page 429, 1155, 'to assure continue.' 319, 373. Thus, encouraging spurred reiteration undeviating abstention. 42 framework plain. decline admit domain. 43 Admittedly picture combining experiment accommodate contingencies economic climate.4 This, obscure intent, repeatedly expressed part, demands fide experiments field, aspects, classed securities.5 Certainly breathe notion serves reinforce another manifestation States.6 44 asserted passed, inadequate protect against inherent therefore orbit agreed 'freeze' existed. By token proceed thrust frozen. As develops adjust develop controls. innovation nevertheless desired, Congress, effect. 45 affirm. Dealers, Inc., 237, case, intervene. example, governing size 14; affiliations directors, officers, employees, 10; relation advisers underwriters 15; affiliates underwriters, 17; structure 18; dividend 19; loans, 21. 3(a)(8). 2(a)(17). 2(1) provides: 'When title, unless context requires— '(1) means note, treasury bond, debenture, indebtedness, participation profitsharing agreement, collateral-trust preorganization subscription, transferable share, voting-trust deposit security, fractional undivided oil, gas, mineral rights, or, general, instrument 'security,' interim for, receipt of, warrant right subscribe purchase, foregoing.' 77b(1), 77b(1). 3(a) part: which— holds primarily, proposes engage investing, reinvesting, securities; '(3) owning, securities, owns acquire having exceeding centum issuer's total (exclusive items) unconsolidated basis.' CCH, Blue Sky Reporter (1956) 4711; 834. re People Dineen (In Supreme Cosmopolitan Council Brotherhood Commonwealth) 193 Misc. 996, N.Y.S.2d 127. N.Y.Laws 1952, c. 124. Morrisey, Dispute Over Annuity, Harv.Bus.Rev. 75; Johnson, Annuity: What Needed, Ins.L.J., June 1956, p. 357; Day Melnikoff, Product, J.Am.Soc. Ch. L. Under. 45; Barrons, 36, 3. Day, Not 'Security,' Notre Dame Law. 642. Bellinger, Hagmann Martin, Meaning Usage Word 'Annuity,' J.Am.Soc.Ch.L.Under. 261; Haussermann, Security Annuities, 382. 298—299, 1102—1103, '* whereby person invests expect profits efforts promoter third party, immaterial shares evidenced formal nominal physical employed enterprise.' Loss Cowett, (1958), pp. 351, 356—357. net rate 1/2 percent annum calculation payment. percent, vary. reporting device, unit, informs variations percent. detail: depends held monetary (determined holds). determined tables, assuming buy. unit. remains constant payout follows: multiplied (adjusted neutralize table), sum plus rate. (after slight margin expenses, contingency addition surplus) ratio (minus) (losses) month. produces ancillary secondary feature. applicant insurable 60 under, decreasing amended, 77a—77aa, 77a—77aa. 80a—52, 80a—52. makes 1011—1015. Defined 'company consists Under ordinary confirmatory policy's noncoverage security. different. But, exclusion, possibly 'certificate profit-sharing agreement' 2(1). hand, 3(a)(1) 3(a)(3) exemption. Chief Counsel SEC's Trust testified necessary definition. Subcommittee s. 3580, 181. fortiori occurred better adapt trusts; patterns present-day (apart measures question) deferring 2(1), Schedules B. leading text outlines areas setting reserves; domestic admission insurers; rendition statements (frequently cooperative among States) examinations; overseeing equitable treatment policyholders prescribing checking misrepresentation, discrimination, rebating 'twisting'; licensing conduct agents; accord statutory permissive list. Huebner Black. Lefe (5th ed. 1958), 518—524. 3(a)(2). Specific 28. Reserve method 8. 12. 13. 18. 20. 22. 27. 30(d). Connecticut has. 355, 839. 'life annuities,' intervals human lives, representing contributed runs. Heubner Black, op. cit., 99—100. Vance, (3d 1951), 1020. appear, alternative settlement respondent's 'variable' arrangement. usual companies. See, e.g., Cal. Code 101; Conn.Gen.Stat.1949, 295, 6144; Smith-Hurd Ill.Ann.Stat. 73, 616; N. Y. McKinney's Consol. Laws, 46, 190. 92; Mehr Osler, Modern (rev. 1956), 69—70. precise are: year, 44.79%; second, 85.27%; third, 85.82%; fourth, 86.45%; fifth, 87.17%. pattern second fifth reflect diminishing separately, 2% 5-years' pay-ins. Longer 5-year available. 'uninsurable.' reinsured holders, 'unit' accordingly 'fund,' fluctuates fashion fund. accounted gross toward crediting units. analogy 'management trust. anyone fee purpose; made, portion charged investors. available satisfaction outlive tabular expectancy, stockholders. concrete example hypothetical illustrate workings described text. Assume $1 $1,000, charge,' buys 430 portfolio's performance; (realized unrealized) 15% 3% original taxes. average ends value. $1.16. $819 buying 706 Thus premium, 1,136 credit. market, 25% (29 cents unit) items 5% (about unit), 2.4 resulting $1.49 $824 553 $1.49. 1,689 bear 12% (3 2.5 adjustments $1.31 instead going 'cashed chips,' $2,212.59 $10 charge. least-subtle regarding lists minima; limits lists, discretion 612, changing difference correspondence essential needs underscoring. furnished prescribed primarily State, incorporation. York's 90, controls, 'in substance,' doing exception rule. 43. Other insist 1153. explicitly Ill.Ann.Stat., ch. 723(e). 1.000 useful. footnote kept accumulated, premium-payment 'purchases' 14,000 mounted $3 now $42,000 chooses. let healthy dependents, moved annuity. 65- year-old male $286 our fix $2. (While tends move direction differs 0.9971 'wring out' table. So current sorts drift apart, fluctuations portfolio). $2 143 sharp break (Actually, one-month lag computation, demonstration ignored.) Suppose shrinks 8% (16 unit). (0.5 cents). deduct omnipresent (0.3 $1.842; multiplier wring adjusted $1.8367. paid, $262.65. recomputation takes monthly, dollars. 583; cf. Fuller Metropolitan 70 647, 666, A. 4, 11. appreciation insurer's degrees, commentators emphasize diversification investment; industries, 505. aim insurer income. 507. VALIC's 110 According 5, "Open-end (i.e., 4) sale redeemable issuer.' redeemability argue pose 18(a). debt doubtful debts; is; outright debts priority companies' dealing most viewed protection, holders creation (as preventing, purchasers, 'senior' junior securities). analogs certificates, contrary 6(c), Commission, rules upon motion, order conditionally unconditionally person, transaction, classes persons, transactions, title rule thereunder, consistent title.' Alabama Mexico, North Dakota. 31,000 individuals, increased $18.51. 544, 18, 1168. Morrissey, (1957). worth observing stated 'and contracts' 97, 98, 635, 636. contrast, 77r, affect commissions, recognizing dual exemptive applicable. provision, 50. 846, 80a—49, 80a—49.

Category: 7