We submit that neither is necessary in the case of life insurance salesmen. The general accepted rule of law is that a life insurance salesman is in fact an agent of the company. This is particularly true in the District of Columbia where section 35-429 of the Life Insurance Act specifically provides that

An insurance agent, solicitor, or broker who acts in negotiating or renewing or continuing a contract of insurance for a company lawfully doing business in the District and who receives any money or substitute for money as a premium for such contract from the insured * * * shall be deemed to hold such premium in trust for the company making the contract.

No one questions the authority of the Insurance Department to regulate the financial condition of the insurance companies doing business in the District. Therefore, the public is well protected from any agent who may abscond with any moneys from a member of the public who may pay any premiums to him under a variable annuity.

Another important area which needs clarification is the past history of the treatment of the variable annuity by the Congress. The exact continuity of certain acts of the Congress and the Supreme Court case, I think, have to a certain extent, been confused in some of the present discussions. Litigation over the variable annuity began on June 19, 1956, and was finally heard and the decision rendered by the Supreme Court on March 23, 1956.

Later that same year, the Congress enacted the Life Insurance Company Income Tax Act and faced up to the question of the variable annuity. In this act which was enacted on June 25, 1959, under 801 (b) (2) (g) variable annuities are considered life insurance for the purposes of this act and life insurance companies issuing such contracts were to be treated as life insurance companies under the act.

It is important to remember this is an act of Congress which took place after the Supreme Court decision. Senate Report No. 291, 86th Congress, 1st session, provides this specific reference to variable annuities:

Variable annuities differ from the ordinary or fixed dollar annuities in that the annuity benefits payable under the variable annuity vary with the insurance company's overall investment experience. The fixed dollar annuity, on the other hand, guarantees the payment of a specified amount irrespective of the actual investment earnings. Both the fixed dollar annuities and the variable annuities, however, are based upon the principle of paying out either specified amounts, or specified units with values which vary with investment experience, over the life of each member of an annuitant group. Thus, in both cases the insuring company bears the mortality risk. In view of this your committee believes variable annuities should in general be treated like other annuities for tax purposes.

Also in the 86th Congress this Committee on the District of Columbia gave full and long consideration to the question of regulation of the variable annuity and gave specific reference to the Supreme Court case in connection with Public Law 86-620. By this act the Congress determined that the regulation of companies issuing variable annuity contracts was to be in the Insurance Department. Included in this act was a specific provision which gives to Superintendent Jordan the "authority to issue such reasonable rules and regulations as may be necessary to carry out the purposes of this section."

The treatment of variable annuities was again considered by the Committee on Finance of the Senate in 1962. Senate Report 2109, 87th Congress, 2d session, quoting from page 7 of this report, after a

comparison of the variable annuity with the fixed dollar annuity stated:

In view of this similarity, Congress in the Life Insurance Company Income Tax Act of 1959 treated variable annuities generally like other annuities for tax purposes.

It provided that variable annuity contracts using recognized mortality tables with annuity payments based on the investment experience of the company issuing the contracts were to be treated as regular annuity contracts for purposes of the Life Insurance Tax Act. These reserves therefore qualify as life insurance reserves and companies primarily issuing these policies qualify as life insurance companies.

With the enactment of this bill the treatment of variable annuities as insurance contracts, which was to have terminated on December 31, 1962, was made permanent. We believe this definitely gives congressional recognition to the variable annuity as insurance which in spite of the Supreme Court case, of which Congress was duly aware, gives justification for the exemption from the definition of security contained in this legislation. In addition to this, on several occasions the Congress has referred to variable annuity contracts as annuity contracts issued by insurance companies (see p. 18 of S. Rept. 992, 87th Cong., 1st sess.).

The most recent act of the Congress in differentiating the two situations of the variable annuity issued by life insurance companies as opposed to a combination of life insurance and mutual funds was in the treatment provided in the H.R. 10 legislation, commonly referred to as the Keogh-Smathers bill.

In the report and the law the Congress clearly permits variable annuities issued by life companies when used as a method of funding H.R. 10 plans to be purchased directly from the insurance company— whereas where you have a combination of life insurance and mutual funds, you must use a custodial account.

I point this out particularly because I think this is a very significant distinction which the Congress has given recognition to. I think several of the witnesses in the past have alluded to the fact that dual regulation should be permissible here because it was alleged that you were doing nothing other than selling a life insurance contract with a mutual fund. However, I think Congress has recognized where this is issued under one contract, it can be issued differently.

The representatives of the Investment Bankers Association would have you believe that the variable annuity is only an investment contract whereby the purchaser acquires units representing an interest in a diversified fund of common stocks. Fundamentally, they go on to allege it is an investment contract similar to an investment or mutual fund.

To the "investor" or purchaser, however, there is a very basic difference, in my opinion, in the two situations. In the case of mutual funds there is no comparable regulation of the types of investments as in the case of the insurance company. In the case of the mutual fund investments are subject to the recommendations of the investment. adviser, and the investment policies which the investment company may establish.

However, in the case of the insurance company, investments both as to quality and as to diversification are subject fully to the investment laws relating to insurance companies in the state of domicile. This, in my opinion, is a vast difference from the typical mutual fund organization.

Public interest is well protected insofar as investments of insurance companies are concerned and the public knows that in purchasing a variable annuity from the insurance company that it does have these inherent protections not only of the nature of the investments but in the financial stability of the company itself to pay any and all of its obligations.

It has been suggested by the representatives of IBA that variable. annuities were held to be securities by the U.S. Supreme Court. We submit that any annuity contract could be a "security" within the definition without an exemption, whether or not for the exemption which is therein contained.

We contend that the Supreme Court basically held that these contracts were not exempt securities under the 1933 Act or the Investment Company Act, both Federal acts. The decision has been interpreted in many ways but in no instance has an interpretation indicated that the Court found variable annuities were not insurance. I am submitting herewith for the committee's use, not necessarily to go on the record, some excerpts from opinions of attorneys general from various States who have had an opportunity to review this decision and these attorneys general have interpreted the variable annnuity contracts placed in the regulatory pattern in their particular States.

I think, however, most significant is a statement made by Allen Conwill before the National Association of Insurance Commissioners meeting in Montreal in June of 1962 when he discussed the variable annuity and its problems. He, as you know, is the head of the Division of the SEC which is directly concerned with variable annuities and mutual funds. To quote from this statement:

We fully accept his further observation that these contracts contain certain obvious elements of conventional insurance as well as plain elements of the traditional investment company. Furthermore, we believe-and our approach is premised upon the belief that the insurance and investment company elements can be segregated with sufficient precision so that the insurance elements may be regulated by State authorities with no intrusion by our Commission, and the investment company elements may be regulated by our Commission without interfering with the State regulatory functions.

May we examine for a moment the clear insurance elements. First and undeniable is the mortality guarantee. Here is a promise on which the insurance company alone is at risk. Here is a function where State regulation is vital, for the State commissioners have the experience and expertise necessary to control and evaluate the use of mortality tables, the computation of proper reserves and the propriety of the rates charged for this guarantee, to name a few. And may I here state unequivocally that we do not intend, nor do we have any desire, to intrude into state areas of insurance regulation. Not only do we know our limitations, not only is our workload sufficient to keep us active to a degree that one is tempted to recall wistfully those years before the variable annuity was invented, but I think you will also find that the Commission is and traditionally has been conservative. It well realizes and applauds the wisdom that long ago reposed the supervision of insurance functions within the States.

Other clear insurance elements are the disability waiver of premium insurance which is an integral part of the presently marketed variable annuities, insurance administration expense, and a portion of the selling expense. In each of these

instances the State authorities know precisely the nature and extent of regulation which public interest demands. It is not only sensible but mandatory that State commisisoners be given precedence in these matters.

What have some of the other neighboring jurisdictions done during the past 2 or 3 years on this general subject? One of the most recent considerations of the question of a "blue sky" law was in the State of Maryland. An extensive study of the need for the "blue sky" law in Maryland was made by a committee appointed by the Governor. The committee spent more than a year studying this law and on their recommendation when the law was enacted it specifically excluded the variable annuity. To quote the report:

Since the attorney general of Maryland has ruled that variable annuities are within the jurisdiction of the insurance commissioner-see opinion of November 2, 1960-and in the belief that dual regulation of the attorney general of Maryland is both unnecessary and undesirable, this committee recommends that variable annuities be left within the control of the insurance commissioner and not brought within the scope of the "blue sky" laws.

More recently the State of Tennessee in chapter 139 of Public Acts of 1963 amended the securities law of Tennessee to permit life insurance companies to issue variable annuity contracts under the regulation of the insurance department rather than under the regulation of the securities department.

And since I prepared this statement, I can also say that the State of Michigan has given consideration to the exact question which is at issue before this committee, and has amended their securities law to exclude the variable annuity from the definition of security. I just received that word yesterday from the Legislature of Michigan.

In summary, I would like to say, first, that it is again important to consider the real purpose of this legislation when it was introduced. There was no intention at that time to do anything other than provide regulation where no regulation existed.

Second, nothing has happened since the original hearing on this bill which changes the picture insofar as the regulation of variable annuities is concerned. In fact, there has been no demonstrated need for such regulation.

Third, the Insurance Department of the District of Columbia not only has adequate authority, but has established one of the most efficient regulatory patterns in the United States. Should further authority be needed, it should be vested in this Department which is experienced in this field and is now regulating the companies involved. Fourth, Congress has on several occasions, as I pointed out and as has been pointed out by others, recognized the distinctive nature of the variable annuity and its issuance and sale.

Fifth, the sale of a variable annuity to the public differs from the sale of a security.

Finally, even though this is, in a sense, a local bill which affects only activities within the District of Columbia, it is important to remember that an act of Congress in a situation like this, particularly where there has been no demonstrated need for regulation, would create unwarranted national precedent which would be used throughout these United States and would create an undue burden of dual regulation not only for the District of Columbia, but in other States where there exists adequate regulation on a local level, by your insurance departments.

We request and suggest that the committee amend H.R. 9419 to exclude the variable annuity from the definition of security. We would agree with the suggestion of Irving Bryan, counsel for the District Commissioners that this could be accomplished in the manner now provided in S. 1001.

Senator DOMINICK. Mr. Gilbertson, I just want to say that I compliment you on your very clear statement of your viewpoint. I have a few questions, and maybe you can help me on this.

On page 9 of your statement, toward the bottom, you say:

However in the case of the insurance company, investments both as to quality and as to diversification of subject fully to the investment laws relating to insurance companies in the State of domicile.

By that do you mean that the investments which an insurance company can make and which form a part of the variable annuity contract are similar to the type of investments that a trustee can make on a court order subject to this, an estate, or whatever type of regulations it is?

Mr. GILBERTSON. What I mean by this, sir, is that the separate account law in the District of Columbia is subject to the same investment restrictions that any other insurance company reserves or is subject to. In other words, we can invest no more than 3 percent, for example, in any one stock. There is also a regulation as to the quality of the types of investments which we may make. We may only invest in common stocks which have been paying dividends for not less than 5 years. In other words, what I mean to point out here is, we are not talking about an investment program which is in a sense completely open, as you may have in the case of a mutual fund, but you are talking about a company which is rather rigidly regulated insofar as its investments are concerned. And to answer more specifically your question, it is similar to a situation where a trustee is restricted as to investment.

Senator DOMINICK. It is similar, but not as restricted as to most trustees which are usually to debentures, preferred stock, or something of this kind?

Mr. GILBERTSON. Yes, right. I think there has been some misunderstanding as to the investment requirements under the Fifth Separate Accounts Act.

Senator DOMINICK. Let me ask just a few questions here to see if I have the context of this whole thing right. First of all, this is a bill designed to regulate brokers and dealers only, is that correct? Mr. GILBERTSON. Right.

Senator DOMINICK. Second, it does not attempt to regulate any socalled secondary offerings or to determine the legality of certain types of investments? It just deals with the people who are selling? Mr. GILBERTSON. This is correct.

Senator DOMINICK. And the District of Columbia presently has investment restrictions on insurance companies?

Mr. GILBERTSON. That's right.

Senator DOMINICK. Those investment restrictions and regulations are under the control of the Insurance Commissioner?

Mr. GILBERTSON. That's right.

Senator DOMINICK. You are, in effect, saying that we recognize the variable annuities come within the definition of a security, under the Securities Act?