mittee on the District of Columbia and the conclusion of the committee was stated, at page 5 of House Report No. 1102, as follows:

"Your committee resolved the issue relating to variable annuity contracts by determining that under the present court decisions and law, agents or broker-dealers offering variable annuity insurance contracts to the public in the District of Columbia shall be required to secure licenses and will be subject to the provisions of this act. If the same party offers two products to the public-namely, variable annuity contracts and also standard annuity and life insurance contracts-he would be required to be licensed under both this act and the life insurance laws of the District of Columbia. Such an agent or broker-dealer would be on equal footing with the broker-dealer or agent offering to the public mutual fund shares and at the same time offering standard life insurance policies."

CONCLUSION

There would be a serious gap in the protection intended to be proposed to investors in the District of Columbia if transactions in variable annuities were exempted from the proposed act. Consequently, we urge that H.R. 9419 be approved promptly in exactly the form in which it passed the House, which would include variable annuities as "securities" subject to the provisions of the act.

Senator HARTKE. You made one statement, sir, that you did not feel that the mere fact that a person was qualified to be an insurance agent would not make him qualified to be a securities agent.

What about the other way around?

Mr. CALVERT. The converse I definitely subscribe to. If a man is engaged in the securities business and is licensed under the securities law and then wants also to get in the insurance business, he should also be licensed under the insurance law.

Senator HARTKE. Senator Dominick?

Senator DOMINICK. Thank you, Mr. Chairman.

I want to say I think the information which you have supplied has been most useful on the question of what States have taken which position on this. I hope that will make the work of the staff far easier in the request we have just made.

I am a little concerned with the overall problem that we are facing. There is no doubt in my mind that under any security definition, regardless of what State it is, legally speaking, a variable annuity would be considered as a security unless excluded or exempted in some

way.

But this is true of almost any certificate or paper representing an interest or an investment or a debt, because the definition of security is so broad.

This is the problem that we are having, for example, in the common trust funds of the banks. It is the problem that we are having with the question of who is going to regulate the Keogh fund as they start being organized and put together for investment purposes.

It is the problem that we have with the mutual fund situation. And on each occasion the NASD-my brother was formerly president as you probably know—

Mr. CALVERT. Yes, sir.

Senator DOMINICK (continuing). And other groups who are involved in the securities business have come in and said, "You have got to put them under the SEC."

And my conclusion from this is that it had very little to do with the public interest, but a great deal to do with the competitive situation in the respective groups.

My question still is whether or not it is necessary, on the dual regulation, to have dual regulation in order to avoid injury to the public.

I have difficulty in seeing why you should put variable annuities in the capacity of being regulated by two specific groups in the socalled public interest when there is no one who has testified yet that anyone has ever been hurt in any way whatsoever by regulation under the insurance act of the respective States.

Mr. CALVERT. Of course the easy answer to this latter point is, again, that there have been so few variable annuities sold up to this point, particularly on a broad basis. They have in some cases been sold to select groups, such as in New York State, where they probably were first sold in this country, where they were sold to a limited group of

teachers.

But variable annuities have not been sold on a broad distribution basis, such as you have with mutual funds, in this country up to this point. This may reflect partly the fact that there are still many State insurance commissions which have not accepted them as insurance. They think it is not a proper thing for any insurance company to get into.

Senator DOMINICK. But the problem has been faced by the State legislatures of at least 36 or 37 States. The majority of them up to date have either exempted or excluded variable annuities from security regulation.

Isn't this correct?

Mr. CALVERT. No; I don't think

Senator DOMINICK. I don't mean the majority of the whole amount. There have been more that have excluded or exempted them than there are that have included them.

Mr. CALVERT. By the study I have, only 13 States under their Securities Act have specifically seen fit to exclude them.

Senator DOMINICK. And only five or six States have specifically included them.

Mr. CALVERT. That is right.

These five States that have specifically included them are States which have adopted complete new securities acts within recent years: Alaska, Georgia, Hawaii, Kansas, and Kentucky.

Many of the States which are still continuing with the acts that have been in effect for many years feel that as a result of the Supreme Court decision it is clear under their present acts that variable annuities are securities under the existing definition without the need for further legislation.

Senator DOMINICK. Thank you.

Let me ask you this: Do you have information where the public has been injured by the sale of variable annuities under insurance regulation in any of the States where variable annuities are exempted?

Mr. CALVERT. No. And I think, again, this is accountable by the fact that there have been so few of them sold. The great danger is that if you adopt a strict Securities Act here but except variable annuities you may then find that the opening for variable annuities. is the gap for which many of the promoters will aim as a method of exemption from the Securities Act.

Senator DOMINICK. Are you also advocating that common trust funds be regulated by the Securities Act?

Mr. CALVERT. We are taking no position on that, Senator. I agree with the conclusion you expressed in discussing this with Mr. Acheson at the earlier hearing-that as the act now stands they would be a security under the act.

Senator DOMINICK. Let me ask you one more question.

Do you agree with the majority of the witnesses that regardless of the resolution of this problem, that this bill is important to the District?

Mr. CALVERT. Yes-but you will be leaving a big regulatory gap if you let variable annuities out from under it.

Senator DOMINICK. Thank you.

Senator HARTKE. Thank you, sir.

The next witness will be Mr. Allen C. Steere, vice president, Lincoln National Life Insurance Co., Fort Wayne, Ind., appearing for the Life Insurance Association of America.

STATEMENT OF ALLEN C. STEERE, VICE PRESIDENT, LINCOLN NATIONAL LIFE INSURANCE CO., FORT WAYNE, IND.

Mr. STEERE. My name is Allen C. Steere. I am vice president of the Lincoln National Life Insurance Co. I am appearing today on behalf of the Life Insurance Association of America, which has a membership of 127 life insurance companies having in force approximately 84 percent of the legal reserve life insurance in the United States.

I think, Senator, I could almost eliminate the reading of this first page of the statement in that we are addressing ourselves now only to those provisions of the bill, and that seems to be all that is being discussed today anyhow, which would require duplicate licensing of agents of life insurance companies who sell insurance, endowment or annuity contracts payable on other than a fixed-sum basis.

Senator HARTKE. The entire statement will become part of the record, without objection, as though it were read.

You may proceed to cover what parts of it you wish.
Mr. STEERE. Thank you, Senator.

Actually in point 1 I have really duplicated what the Commissioner of the District has said, in that we have made some detailed reference to the existing regulatory statutory provisions dealing with the licensing of life insurance agents. We think they are quite comprehensive. We think they have worked.

And the District pattern here actually is similar to the laws in the other States.

Now, starting on the top of page 2, a second reason for our position is that the Congress has already-and recently-decided that the sale of variable annuity contracts in the District by life insurance companies is to be regulated by the Insurance Department, and also that variable annuities are to be included along with regular annuities in the taxation of life insurance companies.

We refer to the Life Insurance Company Tax Act of 1959.
You referred to that earlier this morning.

Also, in 1960 Congress amended the District Insurance Code to give to the Superintendent of Insurance detailed authority to regulate the issuance of variable contracts by life insurance companies (D.C. Code, sec. 35-541). If the companies are to be regulated in this fash

ion, it would seem to follow that the agents of the companies should be regulated by the Superintendent of Insurance and not by anyone else.

On the third point, and particularly in light of the testimony that has preceded, we would like to offer the services of our staff people to make this list of States maybe a little more detailed, because, actually, our work does disagree with preceding statements. And you have indicated your staff has been asked to look into it, too.

Senator HARTKE. We would be more than happy to have you submit your information.

Mr. STEERE. We tried to put this briefly, Senator, but we have said this: In the States which have considered this question-and there are some that have not-the great majority support our position.

In 23 of these States the licensing of life insurance agents, whether they sell variable or regular annuities is by statute-now, that is by different types of statutes-specifically confined to the State insurance department. And we have listed 23 States.

I am absolutely certain of the State No. 8-Indiana-that is listed there.

Conversely, in only four States do the statutes seem to require specifically by statute I think you can add two more if you get an Attorney General interpretation-but specifically by statute four States seem to require the dual licensing of life insurance agents selling variable annuities. They are Georgia, Hawaii, Kansas, and Minnesota.

We then pointed out that the Commissioners on Uniform State Laws, when they developed this Uniform Sales of Securities Act, of which this present bill really is a modification, recognized that this problem might be raised. They did not do that initially but they did that a year or two subsequently. And they left the decision to the several States.

Incidentally, in my own home State, I think it was in the 1961 session of the Indiana General Assembly that we had this. We went through this very problem in a much less formal fashion, as you do in the States sometimes, you know. It seemed to me, as Senator Dominick said, it is the competitive problem that really is the worry. And the reason that Indiana was so alert here was that the president of the Indianapolis Bond & Share was either the then president or the immediate past president of the National Association of Security Dealers.

Now, we discussed this with all of our people, and with the Indiana Senate. When the problem was thoroughly considered, and when we faced up to it as a competitive problem-the legislature quickly granted the exemption, and took out of the Indiana act the words, "a fixed sum." That was in accord with this note accompanying the Uniform Act which said—

If it is desired to exclude variable annuities along with orthodox annuities on the ground that the former are specifically regulated by the insurance authorities in the particular State, the bracketed language should be deleted.

That is what we did in Indiana, and everybody has been pleased with it, and we have had no difficulty.

Now, in the fourth point, we are really trying to point out the difference between the present situation and the VALIC case. We are saying that the VALIC decision in our opinion has little to do with the

issue here. I think the questions of the two Senators have indicated that this morning.

The contract there involved was an individual variable annuity with a variable buildup and a variable payout.

Different contracts of this type have been and will be developed. Already there are two other cases in the Federal courts questioning whether under the different circumstances the VALIC decision applies. There will undoubtedly be other contracts developed with different combinations of fixed and variable ingredients. It is impossible to say which of these contracts will ultimately be held to come within the Federal securities statutes.

Now, the paragraph here at the top of page 4, I think, is new material at least it certainly has not been discussed here this morning. But I think it should be understood that in our country the principal use to date of the variable contract has been in the field of what we have called in life insurance the segregated account.

Now, I don't think that is really too good a term.

Senator HARTKE. In this day and age, I wouldn't think it would be, either.

Mr. STEERE. What we are talking about really are group annuity contracts. And it is in connection with the group mechanism that quite a little of this type of business has already been written in this country. And I think probably, taking the whole life insurance business, there are possibly more companies today that have had interest in writing the group variable annuity, the segregated accounts, than any other type.

Now, one such type of group contract involves a variable buildupyou have it variable during the accumulation period. But when the individual employee reaches the retirement age, his particular annuity comes out of the group and begins to get his payments, then those are fixed. In other words, during the duration of his life, based on the mortality element in the annuity tables, the group annuity tables, this is a fixed payout.

Now, the SEC has already by rule exempted this type of contract, with certain qualifications, from the Securities Act of 1933 and the Investment Company Act of 1940.

Undoubtedly, there will be other types of segregated account group annuity contracts that will be developed in the future.

We assume there is no intention that H.R. 9414 should apply to this type of contract—although the language of the bill-leaves some doubts in our mind even here.

We mention this to indicate the complications involved in attempting to require dual licensing of life insurance agents selling a particular kind of annuity contract when they are simultaneously selling many other types of insurance and annuity contracts.

We might finally add that whether the SEC does or does not assert jurisdiction over a specific type of variable contract has little to do with the issue here.

It seems to us that the issue is whether dual local regulation of life insurance agents is necessary to protect the public. We think it is not, and that it would in fact lead to confusion and conflict. And I was influenced by Commissioner Jordan pointing out where the Congress really is the author of both types of the local regulation that