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The only comment we have to make with reference to the bill is with respect to the bonding requirement incorporated in section 5(e).

This setcion is objectionable, as it purports to give the Public Service Commission the power to determine the condition of the bonds (for broker-dealers and agents) and then later provides, “Every bond shall provide for suit thereon by any person who has a cause of action under section 14 and, if the Commission by rule or order requires, by any person who has a cause of action not arising under this act."

The language quoted in the third paragraph of this statement is vague and would require a decision by the courts to clarify the meaning of the language in litigation after a loss occurs. This would probably make corporate sureties very circumspect about bonding licensees under this act.

It is preferable that the section state the condition of the bond with certainty. The usual condition for a license bond is that the licensee will comply with the act, and such rules and regulations as may be issued under the act.

It is to be noted that the suggested redraft of section 5(3) allows licensees under the act the option of depositing cash or security in lieu of a surety bond. Such a provision makes it possible for licensed broker-dealers and agents to satisfy the requirements of section 5(e) even though they may be unable to procure a surety bond.

Provision would also be made for cancellation of bonds upon 30 days' written notice to the licensee and to the Commission. The cancellation provision is based upon a similar provision now set forth in the second paragraph of section 1-244 (b) of the District of Columbia Code, 1961 edition.

It is to be noted that there are other provisions in paragraph (b) of section 1-244 which may be adaptable for inclusion in section 5(e). Since such provisions are, in the main, of a procedural nature, we defer to those to be charged with the administration of the act for comments thereon.

In order, therefore, to provide for normal underwriting conditions, we respectfully suggest that the attached redrafted language be substituted for section 5(e) as it appears in this bill.


(e) The Commission may by rule require licensed broker-dealers and agents to post surety bonds in amounts up to $50,000, conditioned that the licensee will comply with the provisions of this Act and the rules and regulations issued pursuant thereto. Such bond may be so drawn to cover the original registration and any renewals thereof. Any appropriate deposit of cash or security shall be accepted in lieu of any such bond. Every bond shall provide that no suit may be maintained to enforce any liability thereon unless brought within two years after the contract of sale or other act upon which such suit is based and shall also provide that the liability of the surety on each bond to all persons aggrieved shall in no event exceed in the aggregate the penal sum thereof. Every bond shall also contain a provision authorizing the surety thereon to cancel it upon thirty days' written notice to the licensee and to the Commission.

Mr. ABERNETHY. Now, I have called everyone on this list. I think I have. Is there anyone in the room who desires to be heard ?

I beg your pardon, Mr. Johnson.


Mr. JOHNSON. I submitted a letter which I request to be incorporated into the record.

Mr. ABERNETHY. That will be made a part of the record at this point. (The above mentioned letter with enclosure follows:)

CHEVY CHASE, MD., April 22, 1963. Re H.R. 4200. Hon. John L. McMILLAN, Chairman, District of Columbia Committee, Old House Office Building, Washington, D.C.

DEAR SIR: I hope there will be a hearing on H.R. 4200 and that I will have the opportunity to appear before the committee to speak on the following point.

I urge that the language italicized below be deleted from the last sentence of section 2(m), viz:

" Security' does not include any insurance or endowment policy or annuity contract under which an insurance company promises to pay a fixed sum of money either in a lump sum or periodically for life or some other specified period or any contract issued by an insurance company pursuant to Section 41 of Chapter III of the Life Insurance Act, as added by Public Law 86-520 (D.C. Code, Sec. 35-541)."

The italicized language refers to life insurance companies such as Variable Annuity Life Insurance Co. selling variable annuities based on common stock investments where the risks of common stock speculation are taken by the investor. If the italicized language is not deleted, then

(1) The public will lose the safeguards deemed necessary by the U.S. Supreme Court in the case of the S.E.C. v. Variable Annuity Life Insurance Company, et al., 359 U.S. 65 (1959); and

(2) The recommendation of the North American Securities Administrators will not be followed. I have been serving as a consultant in the variable annuities field for some years and have clients who are very much interested in this legislation. In the past I have been president of the two life insurance companies domiciled in the District of Columbia selling variable annuities. Presently I represent clients whose interests are adverse to these two companies.

Enclosed you will find a reprint from a law review article which I prepared several years ago for the Georgetown Law Journal. This article concludes that variable annuities are peculiarly amenable to regulation by State securities commissioners.

In the U.S. Supreme Court case mentioned above, the Court held that variable annuities sold by the very companies exempted from securities regulation by H.R. 4200 were selling securities and ought to be regulated by the SEC as investment companies. In his concurring opinion, Mr. Justice Brennan said, in part:

"The traditional State insurance department regulation of contract terms, reserves, solvency, and permissible investments simply does not touch the points of definition of investment policy and investment technique, and control over investment policy changes and over the interests of the men who shape the policies of investment and furnish investment advice that the 1940 Federal act provides. These controls may be largely irrelevant to traditional banks and insurance companies, which Congress clearly exempted; they were not investing heavily in equity securities and holding out the possibilities of capital gains through fund management; but where the investor is asked to put his money in a scheme for managing it on an equity basis, it is evident that the Federal act's controls become vital. * * * In this sort of operation, examination by State insurance officials to determine the adequacy of reserves and solvency becomes less and less meaningful. The disclosure policy of the Securities Act of 1933 becomes, by comparison, more and more relevant. And the detailed protections of the 1940 legislation-disclosure of investment policy, regulation of changes of that policy, of capital structure, conflicts of interest, investment advisers—all become relevant in an acute way here. These are the basic protections that Congress intended investors to have when they put their money into the hands of an investment trust; there is no adequate substitute for them in the traditional regulatory controls administered by State insurance departments, because these controls are not relevant to the specific regulatory problems of an investment trust."

The State securities commissioners have an association known as the North American Securities Administrators. The association has gone on record repeatedly as approving the recommendation of the subcommittee on variable annuities, as follows:

"The committee reaffirms the longstanding and basic position with respect to variable annuities which it has constantly sought to implement since the formation of the committee some 6 years ago; namely:

"1. That variable annuities are securities and should be regulated as such under appropriate State as well as Federal securities laws.

“2. That companies issuing such securities are investment companies and should be regulated as such under both State and Federal laws, in the same

manner and to the same extent as other investment companies." The insurance commissioners of the various States have an association known as the National Association of Insurance Commissioners. This association meets

twice a year and also has a subcommittee on variable annuities. The association has never taken the view that variable annuities are not securities or that a variable annuity issued by insurance companies should not be regulated by State securities commissioners.

Three leading trade associations in the securities field that have been concerned with variable annuities are the National Association of Securities Dealers, the National Association of Investment Companies (whose name was changed recently to the Investment Companies Association), and the Investment Banking Association. These associations have asserted vigorously the position of their membership that variable annuities of any type are securities and ought to be regulated as securities. The National Association of Securities Dealers intervented as a party in the Supreme Court case mentioned above, in order to better maintain its position.

The leading trade associations in the life insurance field are the American Life Convention, the Life Insurance Association of America, and the National Association of Life Underwriters. None of these associations has taken the view that variable annuities provided through life insurance companies are not securities.

If a hearing on H.R. 4200 is scheduled, as I truly hope there will be, I would appreciate receiving notice of it. Sincerely,


Reprinted from The GEORGETOWN LAW JOURNAL, Vol. XLVIII, No. 4, 641-682,

Summer 1960



The author surveys the widespread private and public use of the annuity, noting the traditional regulation of fixed-dollar annuities by state insurance departments. Mr. Johnson proposes that the distinctions and the differences between the fixed-dollar annuity and the variable annuity, the lack of insurance provisions and the predominant investment feature of the variableannuity contract give rise to the conclusion that the variable annuity is peculiarly amenable to regulation by the state securities commissions.

INTRODUCTION Unlike the miracle drug which has done so much to heighten the very problem of old-age security which the annuity is designed to alleviate, the annuity is not the invention of the twentieth-century mind. The modern preoccupation with the problem of security has made an ancient device, known to the Babylonians, Egyptians and Romans, a commonplace facet of modern living. Millions of Americans are counting on life annuities and annuities over a period of years to provide security for their old age, and billions of dollars have been set aside in reserves to support the payment of these annuities. One might expect this centuries-old, ready-made device to have grown to legal maturity, to have attained a well-settled legal status, and to have been blessed with such thorough analysis by the courts that problems arising due to its prevalence today would admit of easy solution. But this is by no means true. Judges have been content to speak to the case at hand in giving definition to the annuity and to rule regarding them with the specific facts of a case in mind. As a result, the decisions are impossible of reconciliation and provide no all-encompassing definition or analysis which is useful in coming to grips with the issues currently emerging.

The variable annuity, which has made its appearance in the last decade, has a natural appeal to those who deal in or own mutual-fund shares. One who accumulates a number of mutual-fund shares is quite likely as he approaches advanced age to become interested in receiving periodic payments. During a person's active and productive years a salary will pay the regularly recurring expenses such as food, rent, clothing and medical bills. Upon retirement those same expenses are

* Member of the Bar of the State of New York; formerly President and Chairman of the Boards of Variable Annuity Life Insurance Company and Equity Annuity Life Insurance Company of Washington, D.C.

also incurred to a large extent on a periodic basis. Food must be purchased daily, rent must be paid monthly and when we have asked and received credit we are usually billed monthly. It is understandable that the holder of mutual-fund shares might choose to have them liquidated to provide him with a monthly income. The length of time he will need this income is uncertain, depending upon how long he will live. Naturally he would prefer an assurance that he will receive these payments as long as he lives, whether that be for one month or thirty years, or longer. The duration of his need is a variable, depending upon his span of life. These desires have caused many persons to be interested in receiving life-annuity payments.

Following the decision of the Supreme Court in the case of SEC v. Variable Annuity Life Insurance Co.,' holding that the variable annuities sold by the companies involved therein were investments within the meaning of the Securities Act of 19332 and the Investment Company Act of 1940, it was inevitable that mutual funds would resort to the variable annuity as a means of distributing mutual-fund shares. Two different methods may be used, pension trusts and individual purchases.

The Keystone Retirement Equity Trust was established January 1, 1957, as an open-end multiple-employer pension trust. The pension trust is open to any employer approved by the trustee. The trustee invests exclusively in mutual-fund shares which in turn invest exclusively in common stocks. One of the options at retirement provides that the value of the employee's accumulation will be transferred to an "annuity fund” in which will also be deposited the accumulations of all other employees electing this option. Each employee who elects the annuity option at retirement is assigned a certain number of so-called annuity units. The employee receives monthly retirement payments for life based on the number of assigned annuity units and the dollar value of the units. The dollar value of the units will vary from time to time depending upon the value of the underlying shares, the combined mortality experience of all employees electing the option, the earnings on the shares held by the annuity fund, and the expenses charged to the annuity fund. There is no assurance that the amounts that the annuitants receive will exceed the amount in the annuity fund. Thus, the annuity is

1 359 U.S. 65 (1959).

2 48 Stat. 74, as amended, 15 U.S.C. $$ 77a-aa (1958), as amended, 15 U.S.C.A. 38 77b-u (Supp. 1959).

3 54 Stat. 789, as amended, 15 U.S.C. $$ 80a-1 to a-52 (1958), as amended, 15 U.S.C.A. $$ 80a-2 to a-45 (Supp. 1959).

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