‘A classic case’

The federal preemption of Massachusetts laws regarding bank sales of insurance, heralded in some circles as an oxymoronic piece of legislative common sense, is once again under attack.

State Attorney General Tom Reilly’s office recently filed a lawsuit challenging the federal Office of the Comptroller of the Currency’s authority to preempt state law regarding banks’ sales of insurance. The suit was filed by the office of the Attorney General’s Office on behalf of the state Division of Banks and the Division of Insurance at the request of Gov. Jane Swift.

The result, some bankers fear, is that they may need to take out of mothballs the boxes of lapel stickers reading “ask me about bank insurance” and other paraphernalia created to circumvent the state law, which prohibits bank employees from initiating conversation about insurance products offered by the bank.

“This action is based on the right of Massachusetts and every other state to not have an un-elected federal bureaucracy overturn provisions designed to protect consumers,” said Swift.

The precedent-setting suit will be the first brought under the expedited procedures allowed under the Gramm-Leach-Bliley Act when a conflict develops between state and federal regulators, according to Thomas A. Barnico, assistant attorney general. Oral arguments are scheduled for Aug. 2 at the U.S. Court of Appeals. A three-judge panel will hear testimony inside the Moakley Federal Courthouse in South Boston.

The case is important on a number of levels, including the fact that no other state has yet brought a suit under the provision allowed under GLB. It also is the first circuit court case to tackle the question of whether the OCC has power to issue that kind of determination under GLB, said Barnico. “And then it will have a precedential effect on the meaning of a term in Gramm-Leach that says state laws that significantly interfere with the ability of a bank to sell insurance are preempted,” he said.

Supreme Decision

Dean DeBuck, spokesman for the OCC, declined comment but said the OCC soon will be filing a brief in conjunction with the suit. Steven L. Antonakes, senior deputy commissioner of administration and policy at the DOB, also declined to comment, saying only that the suit “speaks for itself.”

“It’s definitely precedent-setting,” said Kevin J. Handly, an attorney at Boston-based Goulston & Storrs and former attorney for the Board of Governors of the Federal Reserve System. “I don’t know of any similar suit that’s been filed and I just marvel at the complexity.”

Some of that complexity revolves around the issue of deference. In a 1984 Supreme Court case, Chevron vs. Natural Resources Defense Council, the court established a precedent in such cases that favors regulatory agencies.

“There’s this doctrine that the Supreme Court laid down in the Chevron case that basically says when a court reviews an action taken by a regulatory agency, the court is supposed to give great deference to the construction of the statute adopted by the agency responsible for administering it on a day-to-day basis,” said Handly.

In a subsequent case in 1996, Barnett Bank of Marion County N.A. vs. Nelson, federal courts again gave great deference to the OCC against Florida regulators. In the current case, the administering agency is the OCC, a factor that weighs in its favor.

However, GLB contains a provision stipulating that while reviewing disputes between federal banking agencies and state regulators, a court is not supposed to give unequal deference to one side or the other, said Handly. “It kind of tips the balance away from the federal bank regulator and back toward the middle,” he said.

And there’s another facet to the GLB that adds to the case’s complexity. A provision in GLB states that if a state statute was in place before Sept. 3, 1998, then the court is not obligated to give equal deference. “The Mass[achusetts] law that we’re talking about here that was preempted by the OCC was adopted on May 22, 1998 – before Sept. 3,” said Handly. It remains to be seen which standard will be applied by the court in the current case.

Yet another consideration that the court must consider is the protection of consumers, an issue that is at the heart of the reasoning for both state and federal regulators. Kiley said preventing more competition for insurance sales is ultimately hurting the consumer while others say the laws preventing such sales prevents consumers from feeling undue pressure to purchase insurance from their bank.

Prompted by a request from the Massachusetts Bankers Association, the OCC issued an opinion in March that preempts the state law as it pertains to insurance sales at nationally chartered banks in the state, a ruling it said is permitted under the provisions of the federal Gramm-Leach-Bliley Act. The MBA has made seeking parity in that ability for state-chartered banks a priority. The passage of the GLB financial modernization bill gave nationally chartered institutions even broader powers. The federal act puts state-chartered banks at a competitive disadvantage, according to MBA officials, because state law places limits on referrals by requiring a customer inquiry, prohibits the payment of referral fees and requires a waiting period during loan applications.

Kevin F. Kiley, chief operating officer of the Massachusetts Bankers Association, said MBA officials were disappointed when they learned of the petition and impending lawsuit filed by the commonwealth. “We think that ultimately we’ll be successful and that the decision of the OCC will be upheld. It will provide some finality to what has been a long process. We think that the OCC, on the merits, had a well-reasoned decision and we’re optimistic that ultimately we’ll prevail,” he said.

While the MBA will file an amicus, or friend of the court, brief, Kiley said its role in the case would be largely limited to that of a spectator.

The final decision should come quickly. Under expedited review, the court must act within 60 days, said Handly. But that ruling may not be the end of the issue. “I would not be surprised to see this go to the Supreme Court. This is a classic case for the Supreme Court to exercise discretionary jurisdiction,” said Handly. Oftentimes when a new statute is considered in a court, the Supreme Court reaches out to give its interpretation of the statue and set the framework for future cases, he said.

In any event, the state is prepared to take the case all the way, according to Swift. “The bedrock principle of states’ rights is as important an ingredient in this action as the consumer protection measures that we are attempting to preserve. States’ laws should not be overturned by a federal bureaucracy unless there is a clearly articulated Congressional intent to do so, which in this case, there is not,” she said.

“The ruling of the circuit court would apply to the First Federal Circuit, which is Massachusetts, New Hampshire, Rhode Island and Puerto Rico,” said Barnico. “It wouldn’t bind the rest of the country.”

State, Federal Regulators to Battle in Court

by Banker & Tradesman time to read: 5 min