State Preemption Of GLB Takes A Big Hit
On Jan. 10, 2005, the Federal District Court for the District of Massachusetts upheld the determination of the Office of the Comptroller of the Currency that the Gramm-Leach-Bliley Act of 1999 preempted the Massachusetts state statute restricting sales of insurance products through banks.
The significance of the case is that for the first time a federal court ruled that GLB forbids state laws that “prevent or significantly interfere with” the ability of banks to sell insurance.
The decisionMassachusetts Bankers Association, Inc. v. Bowlerrendered by Federal District Court Judge Rya W. Zobel, reviewed the Massachusetts Consumer Protection Act Relative to the Sale of Insurance by Banks.
In May 2000, the Massachusetts Bankers Association requested the opinion of the OCC, the primary regulator of federally chartered banks, about whether GLB preempted certain provisions of the Massachusetts insurance statute. The OCC issued its decision on March 18, 2002, that the law did, in fact, preempt the states law. The U.S. Court of Appeals for the First Circuit then dismissed the petition of the Massachusetts commissioners of banks and insurance for lack of jurisdiction.
Subsequently, the Massachusetts Bankers Association and some of its member banks filed suit in Federal District Court challenging four provisions of the Massachusetts Bank Insurance Statute. The lawsuit involved two counts. Count one, brought by federally chartered members of the MBA, claimed provisions of the Massachusetts Bank Insurance Statute were preempted for national banks and federal savings banks. Count two, brought by their state-chartered counterparts, claimed that enforcement of the contested provisions against them constitutes arbitrary, discriminatory action against them because the provisions do not apply to national banks and federal savings associations.
Four provisions of the Massachusetts Bank Insurance Statute were subject to the challenge.
1. The referral prohibition forbid bank employees who are not licensed to sell insurance from initiating a discussion of insurance. Referrals to licensed agents could be made only if the customer asked about insurance.
2. The referral fee prohibition forbid banks from paying nonlicensed employees for making referrals to licensed insurance agents.
3. The waiting period restriction prohibited a bank from soliciting loan applicants for insurance sales before the loan was approved, and the approval and certain disclosures communicated to the loan customer.
4. The separation restriction required insurance sales to be carried out in an area of the bank physically separate from the rest of the bank.