[Code of Federal Regulations]
[Title 12, Volume 3]
[Revised as of January 1, 2003]
From the U.S. Government Printing Office via GPO Access
[CITE: 12CFR250.411]

[Page 693-694]
 
                       TITLE 12--BANKS AND BANKING
 
                   CHAPTER II--FEDERAL RESERVE SYSTEM
 
PART 250--MISCELLANEOUS INTERPRETATIONS--Table of Contents
 
Sec. 250.411  Interlocking relationships between member bank and variable annuity insurance company.

    (a) The Board has recently been asked to consider whether section 32 
of the Banking Act of 1933 (12 U.S.C. 78) and this part prohibit 
interlocking service between member banks and (1) the board of managers 
of an accumulation fund, registered under the Investment Company Act of 
1940 (15 U.S.C. 80), that sells variable annuities and (2) the board of 
directors of the insurance company, of which the accumulation fund is a 
``separate account,'' but as to which the insurance company is the 
sponsor, investment advisor, underwriter, and distributor. Briefly, a 
variable annuity is one providing for annuity payment varying in 
accordance with the changing values of a portfolio of securities.

[[Page 694]]

    (b) Section 32 provides in relevant part that:

    No officer, director, or employee of any corporation or 
unincorporated association, no partner or employee of any partnership, 
and no individual, primarily engaged in the issue, flotation, 
underwriting, public sale, or distribution, at wholesale or retail, or 
through syndicate participation, of stocks, bonds, or other similar 
securities, shall serve [at] the same time as an officer, director, or 
employee of any member bank * * *.

    (c) For many years, the Board's position has been that an open-end 
investment company (or mutual fund) is ``primarily engaged in the issue 
* * * public sale, or distribution * * * of securities'' since the 
issuance and sale of its stock is essential to the maintenance of the 
company's size and to the continuance of its operations without 
substantial contraction, and that section 32 of the Banking Act of 1933 
prohibits an officer, director, or employee of any such company from 
serving at the same time as an officer, director, or employee of any 
member bank. (1951 Federal Reserve Bulletin 645; Sec. 218.101.)
    (d) For reasons similar to those stated by the U.S. Supreme Court in 
Securities and Exchange Commission v. Variable Annuity Life Insurance 
Company of America, 359 U.S. 65 (1959), the Board concluded that there 
is no meaningful basis for distinguishing a variable annuity interest 
from a mutual fund share for section 32 purposes and that, therefore, 
variable annuity interests should also be regarded as ``other similar 
securities'' within the prohibition of the statute and regulation.
    (e) The Board concluded also that, since the accumulation fund, like 
a mutual fund, must continually issue and sell its investment units in 
order to avoid the inevitable contraction of its activities as it makes 
annuity payments or redeems variable annuity units, the accumulation 
fund is ``primarily engaged'' for section 32 purposes. The Board further 
concluded that the insurance company was likewise ``primarily engaged'' 
for the purposes of the statute since it had no significant revenue 
producing operations other than as underwriter and distributor of the 
accumulation fund's units and investment advisor to the fund.
    (f) Although it was clear, therefore, that section 32 prohibits any 
officers, directors, and employees of member banks from serving in any 
such capacity with the insurance company or accumulation fund, the Board 
also considered whether members of the board of managers of the 
accumulation fund are ``officers, directors, or employees'' within such 
prohibition. The functions of the board of managers, who are elected by 
the variable annuity contract owners, are, with the approval of the 
variable annuity contract owners, to select annually an independent 
public accountant, execute annually an agreement providing for 
investment advisory services, and recommend any changes in the 
fundamental investment policy of the accumulation fund. In addition, the 
Board of managers has sole authority to execute an agreement providing 
for sales and administrative services and to authorize all investments 
of the assets of the accumulation fund in accordance with its 
fundamental investment policy. In the opinion of the Board of Governors, 
the board of managers of the accumulation fund performs functions 
essentially the same as those performed by classes of persons as to whom 
the prohibition of section 32 was specifically directed and, 
accordingly, are within the prohibitions of the statute.

(12 U.S.C. 248(i))

[33 FR 12886, Sept. 12, 1968. Redesignated at 61 FR 57289, Nov. 6, 1996]