Act or is subject to regulation by the Securities Commission? The position you are taking, as I understand it, is that the companies do not have to, or should not have to because they are already taken care of under the regulations of the Insurance Commission, but that the variable annuities contracts themselves would have to be registered under the 1933 Securities Act. Mr. CONGLETON. Some of them, sir, the individual ones and certain types of group, but not the types of group of variable annuity contracts such as Argonne, which are excluded by SEC under these rules. Senator DOMINICK. It is your feeling that the type of program which is excluded gives the purchaser sufficient protection, and that the ones that are not excluded, the purchaser would have sufficient protection under the 1933 Securities Act? Mr. CONGLETON. Yes, sir; I think it would be better if I could paraphrase that by saying that is the Commission's position rather than our position. We think we could well protect the purchasers without a prospectus under the 1933 act. Senator DOMINICK. In any event, it results in the fact there are two agencies involved in at least some aspects of the variable annuity contracts? Mr. CONGLETON. Yes, sir; as far as Prudential is concernedFederal regulations and State regulations. Senator DOMINICK. But you have both the insurance commissioner under the proposed law Mr. CONGLETON. Yes. Senator DOMINICK (continuing). Regulating the company, and have the SEC regulating the issuing of some of the variable annuity contracts? Mr. CONGLETON. That's correct. If this bill were to be adopted in its present form-and at this point I would like to say, just to emphasize that we don't feel anybody can guarantee mortality, of course, except an insurance company, and every insurance company either has to be formed under the insurance laws of its home State, and when it goes into a foreign State, it has to comply with the laws there and automatically has to be under the jurisdiction of the insurance commission. Such a company cannot hire anyone to sell who is not licensed by the insurance commission. So, if you were to follow this bill and take Mr. Acheson's explanation of it, where he tried to point out that you could separate the man selling variable annuity contracts from the man selling life insurance, and if he is only selling variable annuity contracts, he need only be licensed by the Public Service Commission, he is in error, sir, because nobody can represent an insurance company who is not licensed as an insurance. agent, so, just automatically there would be dual regulation. I know you heard Superintendent Jordan testify as to the careful procedure had in the licensing of agents, particularly under the new legislation covering variable annuities. It might be well to point out, none of that was in effect at the time the record was made or the VALIC case argued in the U.S. Supreme Court, so when that Court speaks of conventional insurance regulation, they are referring to regulation prior to the adoption of such stringent rules by the departments in connection with variable annuities. An examination of one of these group variable annuity contracts readily demonstrates the need for the regulation by the insurance department rather than by the Securities Commission because of the insurance department's longstanding expertise in insurance matters. I can't leave with you, sir, a copy of one of these contracts because we consider it a little bit of a trade secret at this point, but I would certainly like you to have the opportunity to see it and see some of the things that are involved in it. I just think looking at the index will make you quite conscious of the fact that it is an insurance product. Senator HARTKE. Without including it as part of the record, we will make it available to the committee members as a reference. Mr. CONGLETON. One of the most important features of such a contract is the use of the proper annuity tables. There must be selection of a suitable mortality table so that part of the value may be retained during the certain period of an annuity to provide continuing payment to the survivor, if such an option for payment is elected. For example, a guaranteed 20-year-period plan with first payment at age 65, the survivors at age 85 on the basis of one annuity mortality table represent 19 percent of those alive at 65 and 36 percent according to another. And this is where the expertise of the actuaries of the insurance department come into play to satisfy themselves that proper mortality tables are being applied to such problems. I think all will agree as to the undesirability of dual regulation of those selling variable annuities in the District. Such contracts should be supervised by insurance regulatory authorities and be made to comply with the insurance laws of the District of Columbia. One of the basic functions of this regulatory framework is to protect the public against tragic economic loss because of unskilled or unqualified experimentation with a professional and scientific tool of the life insurance industry. Accordingly, we urge most strongly that in the adoption of a securities law for the District of Columbia, the regulation of variable annuities should remain under the supervision of the insurance department. I would just like to supplement for just a minute what I left out when I went off the record. In addition to the group variable annuities that I have described such as the Argonne, the SEC authorized last summer, in a no-action letter to the Prudential Insurance Co., the right to sell a group variable retirement contract geared to the Smathers-Keogh bill, without complying with the Investment Company Act of 1940; but that was a group contract in which they said we should comply with the 1933 act because the employees, as you know, of the self-employed must be parties to this plan and, therefore, they have to make their elections and the SEC felt they should have the necessary information. Accordingly, on November 27, 1963, we did file a prospectus covering our H.R. 10 plan. Of course, it is novel with the SEC and we are having just a slight delay in having the registration become effective, because it has not yet become effective, so these prospectuses that I will leave with you will be greatly modified, just as a matter of information. Senator HARTKE. They may also be made a part of the record by reference and be available to the committee for its examination. Mr. CONGLETON. There was some confusion at the previous hearings as to what was the law in the other States, the 50 States of the Union, on the question of this uniform securities law, and how the States were going to treat the sale of variable annuities. We had a study made of that at the Prudential. It's very hard to classify because there are so many distinctions, so accordingly I have here a study which contains the excerpts, State by State, of the pertinent securities statutes. We have attempted to give some summary in the front, but that, of course, is subject to interpretation. I would like to make that available to you, and I have already made a copy available to the committee staff. Senator HARTKE. I think that will be fine. We will include it by reference and certainly understand how it is being submitted in terms that they are subject to interpretation. Senator Dominick. Senator DOMINICK. No questions. Senator HARTKE. I have no further questions, sir. Thank you, sir. (The attachments A and B to Mr. Congleton's statement are as follows:) 9. Carnegie Institution of Washing- 29. Ohio Oil Co. ton, D.C. 10. Chemstrand Co. 11. Cornell Aeronautical Laboratory, Inc. 12. Cutter Laboratories 13. Dole Corp. 14. Equity Annuity Life Insurance Co. (for its employees) 15. First Pyramid Life Insurance Co. (for its employees) 16. General Mills 17. General Public Utilities 18. Grand Union 19. Interstate Engineering Corp. 20. Investor Diversified Services, Inc. 21. Jersey Central Power & Light 30. Oxford University Press, Inc. 31. Participating Annuity Life Insurance Co. (for its employees) 32. Post & Lester Co. 33. Rand Corp. 36. Sunkist Growers 37. Tennessee Valley Authority 38. Texas Eastern Transmission Corp. 39. Time, Inc. 40. Vitro Corp. of America 41. Warner-Lambert Pharmaceutical Senator HARTKE. The next witness is Mr. David M. Marsh, manager, Washington office, Association of Casualty & Surety Cos. STATEMENT OF DAVID M. MARSH, MANAGER, WASHINGTON OFFICE, ASSOCIATION OF CASUALTY & SURETY COS. Mr. MARSH. I am David M. Marsh, manager of the Washington office of the Association of Casualty & Surety Cos., a voluntary nonprofit organization with a membership of 126 capital stock insurance companies. 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 section is objectionable, as it purports to give the Public Service Commission the power to determine the condition of the bondsfor broker-dealers or agents of issuers-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 above 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 shall comply with the act, and such rules and regulations as may be issued under the act. It is to be noted that the attached suggested redraft of section 5(e) 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 thought 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-applicable to certain license bonds-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 precedural 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. Thank you for the opportunity to appear here today. Senator HARTKE. Mr. Dominick. Senator DOMINICK. Mr. Marsh, what you are in effect asking the committee to do is to revise the bond requirements so if they can't get a bond, they can put something else up; is that right? Mr. MARSH. Yes, sir. Senator DOMINICK. Why? Mr. MARSH. Well, this is allowed on bonds running to the U.S. Government under title 6 of the United States Code. We believe that nobody should be put out of business simply because he can't get a bond, if he can otherwise Senator DOMINICK. Under what circumstances would they be unable to get a bond? 32-278-649 Mr. MARSH. This would be a matter for the underwriting judgment of the individual company. Senator DOMINICK. If the underwriting company did not think they were sufficiently stable to have a bond, why should we permit them to go ahead and sell for something less than a bond? Mr. MARSH. It would appear that the alternate security would serve much of the same security of the bond. In other words, the funds would still be there for persons agrieved. Senator DOMINICK. If they can't put up enough to comply with these provisions, why shouldn't he be required to put up a bond? Mr. MARSH. We believe they should have this alternative. Some people may want to put up a bond; some people may want to put up a cashier's check or other securities as adopted by the Commission. Senator DOMINICK. It is my understanding that if you put up securities for example, and the securities happen to go down, and the suit was started for some improper act, the purchaser could be in trouble on that, but he would not be under a bond. Isn't this correct, as a rule? Mr. MARSH. That may be correct. I believe in some instances that regulatory authorities have required perhaps more securities or have, of course, certainly watched the value of these securities. Senator DOMINICK. Well, the purpose of the bill is for the protection of the buying public. In your opinion, will the buying public have as much protection under your setup as it would under the existing subsection (e)? Mr. MARSH. Yes, sir. Senator Dominick. Why? Mr. MARSH. Well, we believe that the proper security would give the public just as much protection. We believe this is up to the regulating authority. We are not advocating any particular type of securities. Presumably if they felt that the stocks were not appropriate they would not allow alternate security in that form. Senator DOMINICK. What additional requirements are made in order to obtain a bond that would not be applicable to other securities? Mr. MARSH. Well, of course, there is the underwriting judgment of the company involved. They would look at the broker-dealer to determine whether or not they would issue the bond. Senator DOMINICK. To what extent would the existing requirement restrict the number of existing people who are selling variable annuity contracts or stocks or other things? Mr. MARSH. I would have no opinion on that, sir. I just have no way of telling at this point. Senator DOMINICK. What induced you to suggest these changes? Mr. MARSH. Well, one thing, uniformity. I believe the last expression of the Congress on this point was with regard to home improvement contracts, and we believe that these changes will make for more normal underwriting practices within the surety business and will conform this particular bill to the normal licensing-bonding provisions. Senator DOMINICK. That's all, Mr. Chairman. Senator HARTKE. Your association, the members of your association would, under normal circumstances, be the people who would be writing these bonds; is that true? Mr. MARSH. In the main, sir. There are other companies. |