August 22, 2011
Dear Mr. [---]:
In a March 29, 2011 email to the New York State Banking Department (the "Banking Department" or "Department"), you inquired regarding the circumstances, if any, under which your client, a Massachusetts state-chartered bank (the "Bank"), could solicit and sell insurance at its New York branches. Subsequently, in a May 26, 2011 letter, you offered your understanding of the views that Deputy Counsel Rosanne Notaro had expressed to you in a telephone conversation regarding this issue, and you requested that she either confirm your understanding or provide clarification. To ensure that various aspects of this issue are sufficiently addressed, the Department's Legal Division is not confirming your understanding as expressed in your May 26, 2011 letter. We are, instead, providing the present written opinion.Initially, we note that you represent, among other things, that the Bank is licensed as an insurance producer by the Massachusetts Division of Insurance; the Bank's plan of operation to sell insurance products has been approved by the Massachusetts Commissioner of Banks; Bank employees are individually licensed in Massachusetts as insurance producers and solicit and sell insurance at the Bank's Massachusetts branches; and the insurance is placed through a Massachusetts-licensed insurance agency (the "Insurance Agency") that is a subsidiary of the Bank's holding company.
- In what manner, if any, can insurance be solicited and sold at the Bank's New York branches?
- What authorization is required from the Banking Department for the solicitation and sale of insurance at the Bank's New York branches?
- With certain narrow, limited exceptions briefly discussed below, the Bank cannot directly solicit or sell insurance at its New York branches. However, the Bank's affiliated Insurance Agency can solicit and sell insurance using space leased from the Bank at the Bank's New York branches. In addition, Bank employees can also be employed by the Insurance Agency and can solicit and sell insurance as employees of the Insurance Agency.
- Specific authorization from the Banking Department is not required for the solicitation and sale of insurance by the Insurance Agency at the Bank's New York branches. However, it is important to note that the Insurance Agency and any employees engaging in the solicitation or sale of insurance at the Bank's New York branches must be licensed by the New York State Insurance Department (the "Insurance Department"). In addition, all insurance operations at the New York branches must be in compliance with the New York Insurance Law, the regulations promulgated thereunder, and all other applicable state and federal laws and regulations.
Before discussing the manner in which insurance may be solicited and sold from space leased in a bank branch, we briefly address the powers of out-of-state state banks; discuss the limited circumstances in which New York state-chartered banks can engage in the direct sale of insurance; and explain that those circumstances do not appear to be present in the instant case.
Powers of Out-of-State State Banks
Pursuant to New York Banking Law ("Banking Law" or "BL") § 226, an "out-of-state state bank that opens, occupies or maintains a branch in this state ... shall have in this state the same powers under the laws of this state as a like-type banking organization." Thus, under BL § 226, the powers that Massachusetts law apparently gives the Bank's Massachusetts branches to directly sell a wide range of insurance products would not extend to its New York branches. Rather, the Bank's powers to sell insurance at its New York branches are the same as the powers of New York state-chartered banks to sell insurance at their New York branches.
Direct Sale of Insurance by Banks
The sale of insurance is not included in the enumerated "general powers" of New York state chartered banks, as listed in BL § 96. Moreover, with certain limited, narrow exceptions not relevant to the present inquiry,1 the sale of insurance cannot be considered one of the "incidental powers ... necessary to carry on the business of banking" pursuant to BL § 96(1).
Separately, Part 6.3(c) of the General Regulations of the Banking Board ("GRBB") provides that a bank "located and doing business in any place the population of which does not exceed 5,000 inhabitants" may act "as the agent for any fire, life, or other insurance company authorized by the authorities of the state in which the bank is located to do business in such state, by soliciting and selling insurance...." However, it is the Department's understanding that the Bank is not located and doing business in a place of 5,000 or fewer inhabitants. Therefore, GRBB Part 6.3(c) cannot apply in this case.
It is further noted that the insurance agency activities authorized under GRBB Part 6.3(c) are authorized under the wild card provisions of BL § 12-a2 to allow New York state-chartered banks to directly engage in insurance agency activities from places of 5,000 or less to the same extent as is permitted for national banks. National banks and New York state-chartered banks are not authorized to directly engage in such insurance agency activities if those activities are conducted other than from a "place of 5,000." Thus, BL § 12-a does not provide a means through which the Bank could be authorized to directly solicit and sell the range of insurance products that it seeks to at its New York branches.
Insurance Sales from Space Leased at a Bank Branch
The Banking Law has been interpreted to permit a bank to lease excess office space to certain entities, including insurance companies. Further, the Department's September 30, 1996 "Guidelines for New York State Chartered Banks and Trust Companies Engaging in Insurance Sales Activities" (the "Guidelines") state that this "same authority will accommodate a bank leasing space to a corporate [non-operating] subsidiary that engages in the sale of insurance.”3
We are of the opinion that this authority of a bank to lease excess office space will also accommodate a bank leasing space to an insurance agency that is a subsidiary of the bank's holding company. Thus, the Bank may lease space at one or more of its New York branches to the Insurance Agency. In turn, the Insurance Agency may, if properly licensed by the Insurance Department, solicit and sell insurance at said branch or branches.
In addition, employees of the Bank may also be employed by the Insurance Agency; and, if properly licensed by the Insurance Department, they may, as employees of the Insurance Agency, solicit and sell insurance at one or more of the Bank's New York branches.
It is important to note that, if insurance is solicited or sold at the New York branches of the Bank, federal consumer protection laws and regulations applicable to insurance sales and solicitation at state-chartered banks must be adhered to.4 In addition, the Bank and the Insurance Agency should address the issues discussed in the above-mentioned Guidelines. It is noted that the Guidelines explicitly deal with insurance solicitation and sales by non-operating subsidiaries of banks,5 but the Guidelines are also, in nearly all respects, relevant to insurance solicitation and sales by the insurance-agency subsidiary of a bank's holding company.Some specific consumer-protection measures discussed in the Guidelines should be briefly noted here. Among other things:
- An appropriate distinction should be made between the Bank's activities and the activities of the Insurance Agency in order to minimize the potential for customer confusion. As noted in the Guidelines, such a distinction may be accomplished through a variety of means, such as, for example, clearly delineated platform space, prominent and distinctive signage, separate business cards and name tags, different advertising campaigns, and clearly distinguishable promotional literature.
- It must be clear to the customer that the Bank's performance of services is entirely divorced from the customer's election to accept or reject insurance coverage from the Insurance Agency.6
- The Bank's management should develop written disclosures to be provided to customers of the Insurance Agency, to the effect that insurance products are not deposits, are not insured by the FDIC, are not endorsed or guaranteed by the Bank, and (where applicable) may be subject to investment risk.
- With respect to employees of the Bank who are not also licensed employees of the Insurance Agency, it may be desirable to clearly disclose to customers that Bank policy forbids such employees from engaging in insurance sales-related activities, other than in a nominal capacity, such as providing customers with referrals to qualified employees of the Insurance Agency who can discuss insurance matters in detail.
- Particular care should be taken to craft employee compensation terms that are consistent with, for example, Insurance Law provisions prohibiting the churning of customer accounts and the sharing of commissions by licensed agents and brokers with non-licensees.
- Moreover, it is critical that any lease arrangement between the Bank and the Insurance Agency be structured so that the payments made thereunder constitute a form of rent and not commissions.
Lastly, we recommend that you contact the Insurance Department for further guidance. I trust that this is responsive to your inquiry. Should you have any additional questions, please contact me or Deputy Counsel Notaro at [---].
- Such exceptions primarily involve credit-related and title insurance.
- The wild card provisions regarding banks were formerly found in BL § 14-g.
- The Guidelines are available at the Department's website (http://www.banking.state.ny.us/i1960930.hbn).
- See. e.g., Subpart H of 12 C.F.R. Part 208, which addresses, inter alia, insurance sales and solicitations by, at, or on behalf of state banks that are members of the Federal Reserve System ("FRS"); and 12C.F.R.Part343, which applies to, inter alia, such sales and solicitations by, at, or on behalf of state-chartered banks that are not FRS members.
- The Department has opined that, pursuant to BL § 97(5), a bank may, inter alia, own a non-operating subsidiary organized to sell insurance.
- See generally the discussion of "tying arrangements" in the Guidelines. It should be noted that banks with insurance sales affiliates do not forfeit the right to require, to the extent permitted by law, that the customer obtain insurance in connection with a particular loan or extension of credit.