ALTA® Letter Federal Reserve: Definition Of "Affiliate"
October 5, 2000
October 5, 2000
Ms. Jennifer J. Johnson
Secretary, Board of Governors
of the Federal Reserve System
20th and C Streets, N.W.
Washington, DC 20551
Re:Docket No. R-1079
Comments to Proposed Rules, 12 C.F.R. Part 208
Consumer Protections for Depository Institution Sales of Insurance
Dear Ms. Johnson:
On behalf of the Independent Insurance Agents of America ("IIAA"), the National Association of Insurance and Financial Advisors ("NAIFA") (formerly "NALU"), the National Association of Professional Insurance Agents ("PIA"), and the American Land Title Association ("ALTA") (collectively "Insurance Agents"), we submit these comments to the Board of Governors of the Federal Reserve System ("Board") in response to the proposed insurance consumer protection regulations issued jointly by the Board, the Office of the Comptroller of the Currency ("OCC"), the Federal Deposit Insurance Corporation ("FDIC") and the Office of Thrift Supervision ("OTS") (collectively the "Agencies"),/1 which implement § 305 of the Gramm-Leach-Bliley Act ("GLBA" or "Act") /2 (enacting section 47 of the Federal Deposit Insurance Act ("FDIA"))./3
IIAA, NAIFA, PIA and ALTA are non-profit trade associations that represent over one million (1,000,000) insurance agents and their employees throughout the United States. /4. Their members are agents who work at all levels of the insurance market and sell a full range of insurance products, including annuities. The Insurance Agents believe that the Proposed Rules generally adhere to the requirements set forth in the Act. As explained in more detail below, however, the Insurance Agents urge the Agencies to clarify the several aspects of the Proposed Rules to bring them into full compliance with the GLBA requirements and to remove a few isolated ambiguities. Specifically, the Insurance Agents urge the Agencies to make the following five revisions:
The definition of "affiliate" in Section 208.82(a) should be expanded by adding at the end "and any financial subsidiary in which the company or a company that controls, is controlled by, or is under common control with another company, owns an interest."
The "logo confusion" requirement in the definition of "you" in Section 208.82(i) should be expanded and electronic media disclosure procedures should be added to avoid "provider confusion."
In the Misrepresentation provisions in Section 208.83(b), the words "at any office of, or on behalf of" should be deleted and two minor revisions should be made to subsections (1) and (3) to remove two apparently unintended ambiguities.
The Section 208.85 separation of banking and insurance activities provision must be expanded to encompass each of the GLBA separation obligations.
The Proposed Rules should clarify that they do not modify or supercede any requirements or obligations imposed by the Real Estate Settlement Procedures Act ("RESPA").
Each of these suggested revisions is discussed below.
1.Expand The Definition Of "Affiliate" To Encompass All "Financial Subsidiaries.
Section 208.82(a) defines "affiliate" as "a company that controls, is controlled by, or is under common control with another company." Subsection (d) defines "control" as having the same meaning as in § 3(w)(5) of the FDIA./5 As the Agencies recognize in their Section-by-Section Analysis of the Proposed Rules, /6 § 3(w)(5) of the FDIA refers to the definition of "control in § 2 of the Bank Holding Company Act of 1956 ("BHCA"), 12 U.S.C. § 1841(a)(2). Under this definition, which is used to determine when companies are affiliates, one company has control over another if:
The company directly or indirectly controls 25 percent or more of any class of the company?s voting securities;
The company controls in any manner the election of a majority of the directors or trustees of the company; or
The Board determines that the company exercises, directly or indirectly, a controlling influence over the management or policies of the company.
12 U.S.C. § 1841(a)(2). For purposes of the definition of "control" in the Proposed Rules, the reference in subsection (2) to the "Board" means the "appropriate Federal banking agency," as defined in section 3(q) of the FDIA. /7
Section 208.83 of the Proposed Rules identifies certain practices in which covered persons under § 305 of the GLBA are prohibited from engaging, such as tying and coercion. /8 Section 208.83(a) provides that:
You may not engage in any practice that would lead a consumer to believe that an extension of credit . . . is conditional upon either:
The purchase of an insurance product or annuity from the state member bank or any of its affiliates; or
An agreement by the consumer to obtain, or a prohibition on the consumer from obtaining, an insurance product or annuity from an unaffiliated entity. /9
A landmark feature of the GLBA, however, is the mechanism enabling national banks to create "financial subsidiaries" for the purpose of underwriting insurance products. /10 Section 5136A(a)(1) provides that, subject to certain conditions and requirements, a national bank "may control a financial subsidiary, or hold an interest in a financial subsidiary." Subsection (g)(1) provides, inter alia, that the terms "affiliate" and "control" have the same meanings as given to them in § 2 of the BHCA ? i.e., as set forth above. "Financial subsidiary," however, is defined in subsection (g)(3) to mean "any company that is controlled by one or more depository institutions other than a subsidiary . . . ."
When one bank on its own creates a financial subsidiary for purposes of § 121, it clearly "controls" the financial subsidiary and, accordingly, the new entity is not only a subsidiary but also an "affiliate" of the original bank. Similarly, if two, three or even four banks establish a financial subsidiary, where each bank owns 25 percent of that subsidiary, the subsidiary is an affiliate of each owner-bank.
If, however, twelve banks establish a financial subsidiary for purposes of § 121, it is entirely possible ? if not likely ? that the financial subsidiary would be an affiliate of none of the twelve. Section 121 contemplates this sort of scenario, recognizing in the definition of "financial subsidiary" that a bank may "hold an interest" in such an entity without actually having control over it.
Under the anticoercion and antitying rules as they are presently phrased in the Proposed Rules, however, a covered person may not engage in any practice that would lead the consumer to believe that his extension of credit was dependent upon his purchasing an insurance product from that bank or any of its affiliates. The Proposed Rules say nothing at all about financial subsidiaries. Accordingly, the rules leave open the possibility for a bank to coerce its customers to purchase insurance from a financial subsidiary in which it holds an interest, just not an interest that rises to the level of "control."
In light of the differences discussed above between the requisite level of interest in an affiliate versus a financial subsidiary, the Insurance Agents request that § 208.83(a) be modified to include, in addition to a bank?s "affiliates" a reference to a financial subsidiary in which a bank holds an interest. Such language would reflect the definition of financial subsidiary in § 121 of the GLBA and, moreover, would be more consistent with the GLBA?s antitying and anticoercion prohibition generally /11 .
2.The "Logo Confusion" Provisions In The Definition of "You" Should Be Expanded And Electronic Media Disclosure Procedures Should Added To Avoid "Provider Confusion."
Section 208.82(i) defines "you" (or "covered person" in the OCC regulations) to include any person acting "on behalf of" a state member bank, and specifies that a person?s activities are on behalf of such a bank if, inter alia, "documents evidencing the sale, solicitation, advertising or offer of an insurance product or annuity identify or refer to the institution or use its corporate logo or corporate name," or "the sale, solicitation, advertising or offer of an insurance product or annuity takes place at an off-premises site, such as a kiosk, that identifies or refers to the bank or uses its corporate logo or corporate name." /12
The Agencies have specifically invited comments with respect to whether the use of the name or corporate logo of the holding company or other affiliate of the bank (as opposed to the name or corporate logo of the bank itself) in the same scenarios should also constitute an activity on behalf of an institution. /13
The Insurance Agents submit that extending the definition in the Proposed Rules to cover a bank holding company or bank affiliate ? or any other circumstance in which a consumer would be likely to believe that the insurance provider is affiliated with the bank ? is necessary and, moreover, consistent with the GLBA. The Insurance Agents propose that the above-quoted "on behalf of" requirement be modified to include the use of the corporate name or logo of the bank as well as the bank holding company, affiliate, financial subsidiary or in any other circumstance in which a consumer would be likely to believe that the insurance provider is affiliated with the bank.
The Agencies also have invited comments with respect to special disclosure requirements for sales or solicitations of insurance by electronic media. /14 The Insurance Agents agree with the Agencies? proposal to require mandatory disclosures for insurance sales or solicitations by electronic media that alleviate any potential confusion as to the identity or source of the insurance. /15
Such confusion is likely to arise where a consumer has accessed a depository institution?s website, and that website includes a link to an insurance provider. The institution itself may not be engaged in any way in the sale or solicitation of insurance and may not have a special relationship with the insurance provider for whom it provides a link, but the consumer may nevertheless logically assume that the insurance he or she purchases from that site is being offered on behalf of the depository institution.
As the Agencies have recognized, /16 one effective method of avoiding such confusion is the inclusion of a disclosure statement informing consumers when they are about to leave the institution?s website. Techniques such as this are employed effectively by many companies and also by government agencies such as the United States Department of Justice. When a user who has been accessing the Department of Justice?s website clicks on a link to access another site ? even the site of another federal agency ? a message appears informing the user that he or she is "now leaving the Department of Justice WWW server," and is about to access a site maintained by a server other than the Department of Justice?s. Included in the message is the disclaimer that "The Department of Justice takes no responsibility for, and exercises no control over, the organizations, views, accuracy, copyright or trademark compliance or legality of the material contained on this server." /17
The Insurance Agents propose that a disclosure similar to this be required for communications by electronic media, making it clear that the insurance products provided through such a link are not being provided on behalf of the depository institution.
3.Clarify Three Aspects Of The "Misrepresentations" Provision.
Three changes should be made to the Section 208.84(b) "Misrepresentations" provision. First, the language in the introductory paragraph to the Section requires clarification. Specifically, that Section provides that "you may not engage in any practice or use any advertisement at any office of, or on behalf of, the bank or a subsidiary of the bank that could mislead any person to otherwise cause a reasonable person to reach an erroneous belief with respect to . . . [certain enumerated facts]." The wording of this provision suggests that such misrepresentations or misleading practices are prohibited only at any office of, or on behalf of, the bank or bank subsidiary, but not otherwise. Both the letter and spirit of § 305 of the GLBA and of these Proposed Rules, however, indicate that persons covered by the consumer protection regulations (i.e., "you") are prohibited from making misrepresentations or engaging in misleading practices at all times.
Already included in the definition of the term "you" (or "covered person" /18 ) is the operative language "at any office of, or on behalf of, the bank." /19 Repetition of the same language in § 208.83(b) is unnecessary and, for the reason stated above, potentially confusing. Accordingly, the Insurance Agents request that the prefatory language in Section 208.83(b) be modified in the following way to eliminate that confusion.
"A covered person may not engage in any practice or use any advertisement that could mislead any person to otherwise cause a reasonable person to reach an erroneous belief with respect to. . . ."
Second, the Insurance Agents also believe that the words "by the bank" should be inserted between the words "you" and "or" in subparagraph (b) because the word "you" may not encompass the bank itself if an unaffiliated agent is selling insurance "on behalf of" the bank within the meaning of the Proposed Rules.
Third, the subsidiary reference in subparagraph (3) is too narrow and should be replaced with the word "affiliate" because insurance can be sold "on behalf of" the bank at the office of an affiliate.
4.Expand The Separation of Banking And Insurance Activities Provision To Encompass Each Of The GLBA Separation Obligations.
In its present form, Section 208.85(a) ? which governs where insurance activities may take place in a bank ? conflates the general obligation of § 47(d)(1) and the specific requirement of § 47(d)(2)(A), rendering the separation requirement meaningless overall.
Section § 47(d)(1) directs the Agencies to include provisions in their implementing regulations that the Agencies consider appropriate "to ensure that the routine acceptance of deposits is kept, to the extent practicable, physically segregated from insurance product activity" (emphasis added). One of the requirements the GLBA specifies that the Agencies must include ? i.e., in addition to those that the Agencies consider appropriate ? is the "separate setting" requirement, which requires, without qualification, a clear delineation of the setting in which, and the circumstances under which, transactions involving insurance products should be conducted in a location physically segregated from an area where retail deposits are routinely accepted. /20
In the Proposed Rules, the "to the extent practicable language" has been inserted to modify ? and thus significantly weaken ? the separate setting mandate. Section 208.85(a) provides that:
A state member bank must, to the extent practicable, keep the area where the bank conducts transactions involving insurance products or annuities physically separate from area where retail deposits are routinely accepted from the general public, identify the areas where insurance product or annuity sales activities occur, and clearly delineate and distinguish those areas from the areas where the state member bank?s retail deposit-taking activities occur. /21
The result is inconsistent with the clear intent of the GLBA drafters. Whereas § 47(d)(2)(A) requires a bank to keep these activities separate, § 208.85(a) indicates that this requirement only applies to the extent practicable. The effect is to render the requirement essentially meaningless.
It is clear from both the structure and the words of § 47(d) that, while the Agencies are also free to require other provisions ensuring the physical separation of banking and insurance activity, they must include the separate setting requirement identified in § 47(d)(2)(A). In its current form, § 208.85(a) does not satisfy the GLBA mandate. Accordingly, the Insurance Agents propose that the phrase "to the extent practicable" in § 208.85(a) be deleted.
Alternatively, the Proposed Rules should ? at a minimum ? provide guidance for the determination of the contexts that do (and do not) make separation "practical". In the absence of such guidance, the regulatory requirement is both meaningless and unenforceable.
5.Clarify That The Proposed Rules Do Not Modify Or Change Any Obligations Imposed By The Real Estate Settlement Procedures Act ("RESPA").
The Proposed Rules do not comment on the intersection between the requirements of the GLBA and existing requirements under the Real Estate Settlement Procedures Act ("RESPA"). /22 The Insurance Agents request simply that the Proposed Rules make clear that the GLBA and its implementing regulations do not supercede applicable requirements under RESPA but, rather, are in addition to such currently applicable requirements.
Section 208.85(b) of the Proposed Rules provides, for example, that persons who accept deposits from the public may refer a consumer who seeks to purchase insurance to a qualified person who sells the product only if the person making the referral receives no more than a one-time nominal fee of a fixed dollar amount for each referral that does not depend on whether the referral results in a transaction. In contrast, under RESPA, with respect to insurance sold in onnection with a residential real estate transaction, such as title insurance, only the referring person?s employer (i.e., the depository institution) is permitted to pay such a fee. /23 RESPA regulations also prohibit a title insurance agency in which a depository institution has an ownership interest from paying or reimbursing the institution when it pays such a referral fee. /24
The Proposed Rules should make clear that they do not alter or supercede such requirements or any other applicable provisions or requirements of RESPA. Such a statement is appropriate in light of the inclusion in GLBA § 305 of subsection (g), "Effect on other Authority." /25
We would be pleased to submit additional information or clarification as necessary.
Scott A. Sinder
Christy Hallam DeSanctis
Counsel for the Insurance Agents
1/ Citations herein are to the specific regulations proposed by the Board as amendments to part 208, chapter II, title 12 of the Code of Federal Regulations ("CFR"). These comments also apply fully to the substantively identical Proposed Rules promulgated by the OCC, FDIC and OTC and we have sent copies of these comments to each of those Agencies.
2/ Pub. L. 106-102, sec. 305, 113 Stat. 1338, 1410-15 (to be codified at 12 U.S.C. § 1831(x)).
3/ See 65 Fed. Reg. 50882 (Aug. 21, 2000).
4/ ALTA?s members also include title insurance companies.
5/ See 12 U.S.C. § 1813(w)(5).
6/ See 65 Fed. Reg. at 50883.
7/ See 12 U.S.C. § 1813(q).
8/ See GLBA § 305; FDIA § 47(b), (c), and (e).
9/ Id. (emphasis added).
10/ See generally § 121 of the GLBA (adding new section 5136A to 12 U.S.C. § 12, et seq.)
11/ Modifying the language of § 208.83(a) to cover financial subsidiaries would have immediate practical implications. The Insurance Agents are aware that a group of banks in Virginia are, under the provisions of § 121 of the GLBA, establishing a financial subsidiary for the purpose of offering insurance products.
12/ See 208.82(i)(3), (4).
13/ See 65 Fed. Reg. at 50884.
14/ See id.
15/ See id.
16/ See 65 Fed. Reg. at 50884.
17/ See www.usdoj.gov.
18/. See 12 C.F.R. §§ 14.20(e) and 343.20(f).
19/ See § 208.82(i).
20/ See § 47(d)(2)(A).
21/ Proposed Rules, § 208.85(a) (emphasis added).
22/ RESPA is codified at 12 U.S.C. §§ 2601-2617; see also 24 C.F.R. part 3500 (Regulation X).
23/ See 24 C.F.R. § 3500.14(g)(1)(vii).
4/ See 24 C.F.R. § 3500.14(b).
25/ See FDIA § 47(g) (specifically preserving the authority of certain agencies and commissions and explaining the coordination of insurer protection regulations with state law)