359 U.S. 65 (1959)

SECURITIES AND EXCHANGE COMMISSION
v.
VARIABLE ANNUITY LIFE INSURANCE CO. OF AMERICA ET AL.

No. 290.

Supreme Court of United States.

Argued January 15, 19, 1959. Decided March 23, 1959.^[*] CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE DISTRICT OF COLUMBIA CIRCUIT.

*66 Thomas G. Meeker argued the cause for petitioner in No. 290. With him on the brief were Solicitor General Rankin, John F. Davis, David Ferber and Pace Reich.

John H. Dorsey argued the cause and filed a brief for petitioner in No. 237.

Roy W. McDonald and James M. Earnest argued the causes for the Variable Annuity Life Insurance Company of America, respondent. With them on the brief was Malcolm Fooshee.

Benjamin H. Dorsey argued the causes for the Equity Annuity Life Insurance Co., respondent. With him on the brief were Smith W. Brookhart and Ralph E. Becker.

Frank F. Roberson filed a brief in No. 290 for the Mutual Life Insurance Company of New York et al., as amici curiae, in support of respondents.

MR. JUSTICE DOUGLAS delivered the opinion of the Court.

This is an action instituted by the Securities and Exchange Commission^[1] to enjoin respondents from offering their annuity contracts to the public without registering them under the Securities Act of 1933, 48 Stat. 74, 15 U. S. C. § 77a, and complying with the Investment Company Act of 1940, 54 Stat. 789, 15 U. S. C. § 80a. The District Court denied relief, 155 F. Supp. 521; and the Court of Appeals affirmed, 103 U. S. App. D. C. 197, 257 F. 2d 201. The case is here on petitions for writs of certiorari which we granted, 358 U. S. 812, because of the importance of the question presented.

*67 Respondents are regulated under the insurance laws of the District of Columbia and several other States. It is argued that that fact brings into play the provisions of the McCarran-Ferguson Act, 59 Stat. 33, 15 U. S. C. § 1011, § 2 (b) of which provides that "No Act of Congress shall be construed to invalidate, impair or supersede any law enacted by any State for the purpose of regulating the business of insurance . . . ." It is said that the conditions under which that law is applicable are satisfied here. The District of Columbia and some of the States are "regulating" these annuity contracts and, if the Commission is right, the Federal Acts would at least to a degree "supersede" the state regulations since the Federal Acts prescribe their own peculiar requirements.^[2] Moreover, "insurance" or "annuity" contracts are exempt from the Securities Act when "subject to the supervision of the insurance commissioner . . . of any State . . . ."^[3] Respondents are also exempt from the Investment Company Act if they are "organized as an insurance company, whose primary and predominant business activity is the writing of insurance . . . and which is subject to supervision by the insurance commissioner . . . of a State . . . ."^[4] While the term "security" as defined in the Securities Act^[5] is broad enough to include any *68 "annuity" contract, and the term "investment company" as defined in the Investment Company Act^[6] would embrace an "insurance company," the scheme of the exemptions lifts pro tanto the requirements of those two Federal Acts to the extent that respondents are actually regulated by the States as insurance companies, if indeed they are such. The question common to the exemption provisions of the Securities Act and the Investment Company Act and to § 2 (b) of the McCarran-Ferguson Act is whether respondents are issuing contracts of insurance.

We start with a reluctance to disturb the state regulatory schemes that are in actual effect, either by displacing them or by superimposing federal requirements on transactions that are tailored to meet state requirements. When the States speak in the field of "insurance," they speak with the authority of a long tradition. For the *69 regulation of "insurance," though within the ambit of federal power (United States v. Underwriters Assn., 322 U. S. 533), has traditionally been under the control of the States.

We deal, however, with federal statutes where the words "insurance" and "annuity" are federal terms. Congress was legislating concerning a concept which had taken on its coloration and meaning largely from state law, from state practice, from state usage. Some States deny these "annuity" contracts any status as "insurance."^[7] Others accept them under their "insurance" statutes.^[8] It is apparent that there is no uniformity in the rulings of the States on the nature of these "annuity" contracts. In any event how the States may have ruled is not decisive. For, as we have said, the meaning of "insurance" or "annuity" under these Federal Acts is a federal question.

While all the States regulate "annuities" under their "insurance" laws, traditionally and customarily they have been fixed annuities, offering the annuitant specified and definite amounts beginning with a certain year of his or her life. The standards for investment of funds underlying these annuities have been conservative. The variable annuity introduced two new features. First, premiums collected are invested to a greater degree in common stocks and other equities. Second, benefit payments vary with the success of the investment policy. The first variable annuity apparently appeared in this country about 1952 when New York created the College Retirement Equities Fund^[9] to provide annuities for teachers. *70 It came into existence as a result of a search for a device that would avoid paying annuitants in depreciated dollars.^[10] The theory was that returns from investments in common stocks would over the long run tend to compensate for the mounting inflation. The holder of a variable annuity cannot look forward to a fixed monthly or yearly amount in his advancing years. It may be greater or less, depending on the wisdom of the investment policy. In some respects the variable annuity has the characteristics of the fixed and conventional annuity: payments are made periodically; they continue until the annuitant's death or in case other options are chosen until the end of a fixed term or until the death of the last of two persons; payments are made both from principal and income; and the amounts vary according to the age and sex of the annuitant. Moreover, actuarially both the fixed-dollar annuity and the variable annuity are calculated by identical principles. Each issuer assumes the risk of mortality from the moment the contract is issued. That risk is an actuarial prognostication that a certain number of annuitants will survive to specified ages. Even if a substantial number live beyond their predicted demise, the company issuing the annuity—whether it be fixed or variable—is obligated to make the annuity payments on the basis of the mortality prediction reflected in the contract. This is the mortality risk assumed both by respondents and by those who issue fixed annuities. It is this feature, common to both, that respondents stress when they urge that this is basically an insurance device.^[11]

*71 The difficulty is that, absent some guarantee of fixed income, the variable annuity places all the investment risks on the annuitant, none on the company.^[12] The holder gets only a pro rata share of what the portfolio of equity interests reflects—which may be a lot, a little, or nothing. We realize that life insurance is an evolving institution. Common knowledge tells us that the forms have greatly changed even in a generation. And we would not undertake to freeze the concepts of "insurance" or "annuity" into the mold they fitted when these Federal Acts were passed. But we conclude that the concept of "insurance" involves some investment risk-taking on the part of the company. The risk of mortality, assumed here, gives these variable annuities an aspect of insurance. Yet it is apparent, not real; superficial, not substantial. In hard reality the issuer of a variable annuity that has no element of a fixed return assumes no true risk in the insurance sense. It is no answer to say that the risk of declining returns in times of depression is the reciprocal of the fixed-dollar annuitant's risk of loss of purchasing power when prices are high and gain of purchasing power when they are low. We deal with a more conventional concept of risk-bearing when we speak of "insurance." For in common understanding "insurance" involves a guarantee that at least some fraction of the benefits will be payable in fixed amounts. See Spellacy v. American Life Ins. Assn., 144 Conn. 346, 354-355, 131 A. 2d 834, 839; Couch, Cyclopedia of Insurance Law, Vol. 1, § 25; Richards, Law of Insurance, Vol. 1, § 27; Appleman, Insurance Law and Practice, Vol. 1, § 81. The companies that issue these annuities take the risk of failure. *72 But they guarantee nothing to the annuitant except an interest in a portfolio of common stocks or other equities^[13]—an interest that has a ceiling but no floor.^[14]*73 There is no true underwriting of risks,^[15] the one earmark of insurance as it has commonly been conceived of in popular understanding and usage.

Reversed.

MR. JUSTICE BRENNAN, with whom MR. JUSTICE STEWART joins, concurring.

I join the opinion and judgment of the Court. However, there are additional reasons which lead me to the Court's result, and since the nature of this case lends it to rather extended treatment, I will express these reasons separately.

First. The facts of this case are quite complex, but the basic problem involved is much more simple. I will try to point it up before developing the details of the sort of contracts sold by the respondents. It is one of the coverage of two Acts of Congress which concentrated on applying specific forms of regulatory controls to the various ways in which organizations get and administer other people's money—the Securities Act of 1933^[1] and the Investment Company Act of 1940.^[2] These Acts were specifically drawn to exclude any "insurance policy" and any "annuity contract" (Securities Act § 3 (a) (8)) *74 and any "insurance company"^[3] (Investment Company Act § 3 (c) (3)) from their coverage. These exclusions were to take effect where the issuer of the policy or contract was subject to the supervision of the state "insurance commissioner, bank commissioner, or any agency or officer performing like functions" (Securities Act § 3 (a) (8)) or where a company classifiable as an "insurance company" was "subject to supervision by the insurance commissioner or a similar official or agency of a State" (Investment Company Act § 2 (a) (17)). The exclusions left these contracts and companies to the sole control of such state officials. Except for these exclusions, there is little doubt that these contracts and the companies issuing them would be subject to the Federal Acts.^[4]

*75 Why these exclusions? They could not have been made out of some general desire on the part of Congress to avoid any concurrent regulation by both the Federal Government and the States of investments or companies subject to the two Acts. On the contrary, § 18 of the Securities Act and § 50 of the Investment Company Act preserve generally the jurisdiction of state officials over their subject matter; the former in terms of "the jurisdiction of the securities commission (or any agency or office performing like functions) of any State" and the latter in terms of "the jurisdiction of any other commission, board, agency, or officer of . . . any State or political subdivision." Conversely, of course, however adequately State Securities Commissioners might regulate an investment, it was not for that reason to be freed from federal regulation. Concurrent regulation, then, was contemplated by the Acts as a quite generally prevailing matter. Nor is it rational to assume that Congress thought that any business whatsoever regulated by a specific class of officials, the State Insurance Commissioners, would be for that reason so perfectly conducted and regulated that all the protections of the Federal Acts would be unnecessary. This approach of personally selective deference to the state administrators is hardly to be attributed to Congress. The point must have been that there then was a form of "investment" known as insurance (including "annuity contracts") which did not present very squarely the sort of problems that the Securities Act and the Investment Company Act were devised to deal with, and which were, in many details, subject to a form of state regulation of a sort which made the federal regulation even less relevant.

At this time, of course, the sort of "variable annuity" contract with which we are concerned in this case did not exist. When Congress made the exclusions provided for in the Acts, it did not make them with the "variable *76 annuity" contract before it. Of course, the point is not that if the insurance industry seeks to retain its exemption, it must limit itself to the forms of policies and contracts in effect in 1933 and 1940. But if a brand-new form of investment arrangement emerges which is labeled "insurance" or "annuity" by its promoters, the functional distinction that Congress set up in 1933 and 1940 must be examined to test whether the contract falls within the sort of investment form that Congress was then willing to leave exclusively to the State Insurance Commissioners. In that inquiry, an analysis of the regulatory and protective purposes of the Federal Acts and of state insurance regulation as it then existed becomes relevant.^[5]

At the core of the 1933 Act are the requirements of a registration statement and prospectus to be used in connection with the issuance of "securities"—that term being very broadly defined.^[6] Detailed schedules, set forth *77 in the Act, list the material that the registration statement and the prospectus are to contain.^[7] The emphasis is on disclosure; the philosophy of the Act is that full disclosure of the details of the enterprise in which the investor is to put his money should be made so that he can intelligently appraise the risks involved.

The regulation of life insurance and annuities by the States proceeded, and still proceeds, on entirely different principles. It seems as paternalistic as the Securities Act of 1933 was keyed to free, informed choice. Prescribed contract clauses are ordained legislatively or administratively. Solvency and the adequacy of reserves to meet the company's obligations are supervised by the establishment of permissible categories of investments and through official examination.^[8] The system does not depend on disclosure to the public, and, once given this form of regulation and the nature of the "product," it might be difficult in the case of the traditional life insurance or annuity contract to see what the purpose of it would be.

This congressional division of regulatory functions is rational and purposeful in the case of a traditional life insurance or annuity policy, where the obligations of the company were measured in fixed-dollar terms and where the investor could not be said, in any meaningful sense, to be a sharer in the investment experience of the company. *78 In fact, one of the basic premises of state regulation would appear to be that in one sense the investor in an annuity or life insurance company not become a direct sharer in the company's investment experience; that his investment in the policy or contract be sufficiently protected to prevent this. But the situation changes where the coin of the company's obligation is not money but is rather the present condition of its investment portfolio. To this extent, the historic functions of state insurance regulation become meaningless. Prescribed limitations on investment and examination of solvency and reserves become perfectly circular to the extent that there is no obligation to pay except in terms measured by one's portfolio. But beyond controlling corporate solvency and the adequacy of reserves, and maintaining observance of the legal list of investments, the state plans of regulation do not go in regulating investment policy. Where the nature of the obligation assumed is such, the federally protected interests in disclosure to the investor of the nature of the corporation to whom he is asked to entrust his money and the purposes for which it is to be used become obvious and real. The contract between the investor and the organization no longer squares with the sort of contract in regard to which Congress in 1933 thought its "disclosure" statute was unnecessary.

The provisions of the Investment Company Act of 1940, which passes beyond a simple "disclosure" philosophy, also are informed by policies that are very relevant to the contracts involved in this case. While the Act does cover face-amount certificate companies whose obligations are specified in fixed-dollar amounts,^[9] the majority of its provisions are of greatest regulatory relevance in the case of the much more common sort of *79 investment company, where the investors (or at least certain categories of them) participate on an "equity" basis in the investment experience of the enterprise. Salient regulatory provisions call for registration and recital, by an investment company, of its investment policies and operating practices;^[10] regulate the relationships between the company and its investment adviser, including fees and provisions for termination of the contract;^[11] regulate trading practices,^[12] changes in investment policy,^[13] the issuance of senior securities,^[14] proxies and voting trusts,^[15] the terms of redemption by investors of their interests in the company;^[16] regulate, in the case of periodic investment plans (which were made subject to special regulation), the "sales load," or amount of the investor's payment that does not become part of his interest in the enterprise;^[17] and provide for detailed reports to investors.^[18] While these controls apply in many cases to fixed-dollar obligations, like face-amount certificates and the bonds of closed-end investment companies, they are of particular relevance to situations where the investor is committing his funds to the hands of others on an equity basis, with the view that the funds will be invested in securities and his fortunes will depend on the success of the investment. The traditional state insurance department regulation of contract terms, reserves, solvency, and permissible investments simply does not touch the points of definition of investment policy and investment technique, and control over investment policy changes and over the interests of the men who shape the policies of investment and furnish investment advice that the 1940 Federal Act provides. These controls may be largely irrelevant to traditional banks and insurance companies, which Congress clearly exempted; they were not investing *80 heavily in equity securities and holding out the possibilities of capital gains through fund management; but where the investor is asked to put his money in a scheme for managing it on an equity basis, it is evident that the Federal Act's controls become vital.

This is not to say that because subjection of the contracts in question here to federal regulation is desirable, it has in fact been accomplished; but one must apply a test in terms of the purposes of the Federal Acts as a guide to interpreting the scope of an exemption from their coverage for "insurance." Cf. Securities & Exchange Comm'n v. W. J. Howey Co., 328 U. S. 293, 299. When Congress passed the Securities Act of 1933 and the Investment Company Act of 1940, no State Insurance Commissioner was, incident to his duties in regulating insurance companies, engaged in the sort of regulation, outlined above as provided in the Federal Acts, that Congress thought would be appropriate for the protection of people entrusting their money to others to be invested on an equity basis. There is no reason to suppose that Congress intended to make an exemption of forms of investment to which its regulatory scheme was very relevant in favor of a form of state regulation which would not be relevant to them at all.

Second. Much bewilderment could be engendered by this case if the issue were whether the contracts in question were "really" insurance or "really" securities—one or the other. It is rather meaningless to view the problem as one of pigeonholing these contracts in one category or the other. Obviously they have elements of conventional insurance, even apart from the fixed-dollar term life insurance and the disability waiver of premium insurance sold with some of these contracts (both of which are quite incidental to the main undertaking). They patently contain a significant annuity feature (unless one defines an annuity as a contract necessarily providing fixed-sum payments),^[19]*81 and the granting of annuities has been considered part of the business of life insurance.^[20] Of course, some urge that even the traditional annuity has few "insurance" features and is basically a form of investment. 1 Appleman, Insurance Law and Practice, § 83; Prudential Ins. Co. v. Howell, 29 N. J. 116, 121-122, 148 A. 2d 145, 148. But the point is that, even though these contracts contain, for what they are worth, features of traditional annuity contracts, administering them also involves a very substantial and in fact predominant element of the business of an investment company, and that in a way totally foreign to the business of a traditional life insurance and annuity company, as traditionally regulated by state law. This is what leads to the conclusion that it is not within the intent of the 1933 and 1940 statutes to exempt them.

The individual deferred variable annuity contract of respondent Variable Annuity Life Insurance Company (VALIC) gives a basis for exploration of this. A sample *82 contract, given in evidence in the District Court, is one issued to a 35-year-old male, providing for his making 30 annual payments of $1,000 each. Of this, $39.60 is the consideration for an undertaking by the company by which payment of the annual $1,000 is waived in the event of disability. Of the remaining $960.40, designated the "basic annuity premium," specified percentages are used to credit to the account of the investor certain "accumulation units." Of the first year's "basic annuity premium," less than 45% is so used; for the next 4 years, the percentage is in the approximate range of 85% to 87%;^[21] for years 6 through 10, the figure is 89%, and for the remainder of the 30-year pay-in period it is 92%. Declining term life insurance in a fixed-dollar amount, beginning at five times the annual "basic annuity premium" the first year and declining through a period of 5 years to nil, is provided as a benefit over and above the "accumulation units" credited to the account of the investor.^[22] The contract is said to build up a "cash value" as the investor's payment "buys" further accumulation units, but while the value is one which can and would be finally settled by the payment of dollars, the obligation owed by the company to the investor is not one owed to him in dollar terms. It is one which is measured only in terms of "units"—the petitioners suggest a resemblance to "shares"—in a portfolio. The units are established by an *83 arbitrary computation which has the effect of dividing the company's investment assets as of a starting day into a number of units, and assigning to each unit its share of the over-all market value—though the division is not in fact made.^[23] Then monthly the value of the units is recomputed. This is done, broadly, by taking into account all interest and dividends paid on the company's portfolio and all realized capital gains and losses, with relevant income taxes, together with all unrealized capital shrinkage and increase, less a monthly surcharge of 0.15% (1.8% per annum) of asset value.^[24] New dollars from investors which "buy" units buy them at the new rate, thus preventing dilution, and those investors who draw down their accumulated units receive cash for them at such rate.^[25]

*84 The contract uses insurance terminology throughout and many of the common features of life insurance and annuity policies are operative in regard to it at this "pay-in" stage. There are "incontestability" and "suicide" clauses (which mainly relate to the term insurance); a "grace period" allowed for the payment of premiums; a provision for "policy loans" (the drawing down of accumulated units in cash, subject to replacement later to the extent that repayment of the amount of money received will then permit, the transaction bearing a resemblance to the liquidation by a common stock investor of his holdings in anticipation of a "bear market"); and provision for a "cash value" (that is, for the cashing in of the accumulated units, subject to a surrender charge in the early years). And very certainly the commitment of the *85 company eventually to disburse the accumulated values on a life annuity basis once the pay-in period is over is present throughout this period. But what the investor is participating in during this period, despite its acknowledged "insurance" features, is something quite similar to a conventional open-end management investment company, under a periodic investment plan. The investor's cash (less a charge analogous to a loading charge, which is, at least in the early years, very high, but which, it should be said, has to cover annuity premium taxes and some quite conventional mortality risks) goes to buy "units" in a portfolio managed by the persons in control of the corporation. His "units" fluctuate with the income and capital gain and loss experience of the management of the portfolio. He may cash them in, wholly or partially. The amount of his equity is subjected to a charge, on asset value, of 1.8% per annum. Except for the temporary term insurance and the waiver of premium coverage, the entire nature of the company's obligation to its investor during this period is not in dollars (though of course it will be converted into them, just as a commodity transaction can be), but solely in terms of the value of its portfolio. In this sort of operation, examination by state insurance officials to determine the adequacy of reserves and solvency becomes less and less meaningful. The disclosure policy of the Securities Act of 1933 becomes, by comparison, more and more relevant. And the detailed protections of the 1940 legislation—disclosure of investment policy, regulation of changes of that policy, of capital structure, conflicts of interest, investment advisers—all become relevant in an acute way here. These are the basic protections that Congress intended investors to have when they put their money into the hands of an investment trust; there is no adequate substitute for them in the traditional regulatory controls administered by state insurance departments, *86 because these controls are not relevant to the specific regulatory problems of an investment trust.^[26]

The same conclusions follow from a consideration of the next stage of this contract. Before the maturity date, when the schedule of payments in on the contract ceases and the payments out commence, the investor can draw down his "units" in cash, and dispense with all "annuity" features. Failing this, he is entitled to elect one of several annuity alternatives. These are, in the sample policy, a straight life annuity on the life of the investor, a straight life annuity with 10 years' payments certain, and a joint and survivor annuity on the life of the investor and another. Again, while the duration of the company's obligation to pay is independent of its investment experience, the amount of each payment is not a direct money obligation but a function of the status of the company's portfolio. The amounts of the payments are calculated in this fashion: The dollar value of the accumulated units credited to the investor throughout the years is *87 ascertained. A standard annuity table (including a 3 1/2% interest assumption) is used to determine the dollar amount of the first monthly pay-out, based on a capital contribution of the accumulated amount, under the option selected by the investor. The number of "annuity units" (which are functions of the fluctuating asset value of the portfolio of the company) that this amount would buy is computed, and this number of annuity units is paid (transmuted into a varying cash payment) to the investor every subsequent month for the duration of the company's commitment under the option selected. Like that of an "accumulation unit" during the pay-in period, the value in dollars of an "annuity unit" is readjusted monthly to give effect to the investment income of the securities in the company's portfolio for the period, as well as to capital gains and losses, realized and unrealized. Since the first payment (which forms the basis for measurement of the subsequent payments) contains an assumed interest factor, and since the monthly valuation change includes income items—interest and dividends—received in respect of the company's portfolio, to avoid paying double "interest" the 3 1/2% assumed interest factor is wrung out every month by multiplying the preceding month's valuation by 0.9971.^[27] And the 1.8% annual surcharge on asset value is applied also.^[28]

*88 The effect of this is that the investor, during the pay-out period, is in almost every way as much a participant in something equivalent to an investment trust as before. His monthly payment is not really a dollar payment, though it is converted into dollars before it is paid to him; it is a payment in terms of a portfolio of securities. It is true that the company has a fixed obligation to continue payments, and that the duration and the amount of the payments are not affected by collective longevity in excess of the company's assumptions; the company's obligation to continue payments is not limited in any way by reference to the number of units owned by all the investors *89 at the start of their annuity periods. If the lives of the group of investors exceed the longevity assumptions of the table, the proceeds of what might otherwise have been characterized as a very high "loading charge" (8% at its lowest application, with 11% the minimum for the first 10 years) and a substantial "annual management fee" (1.8% of asset value annually) will have to provide, with the company's other surplus and capital, enough to continue payments. But the individual payment is still a payment measured basically in the same way as one's interest in an investment trust is measured. And in a very real sense the investor is more vitally interested in the investment experience of the company at this period than he ever was in the pay-in period, and in a way more vitally than any holder of an open-end investment company certificate, or share in a publicly traded closed-end company ever is: he has become completely "locked in." He obviously cannot draw down the present value of his "units" once the option to receive annuity payments has been exercised; he cannot "cash in his chips" that he bought in the faith of the management of the fund; his rights are technically assignable, but practically unmarketable since they depend on his individual life span. The company can radically change investment policies, change advisers, do whatever it pleases (so long as it does not run afoul of the minimal investment regulations of the State), and there is nothing the contract holder can do about it. It is not rational to say that Congress abandoned the very appropriate protections of the Investment Company Act in this investor's case in favor of provisions of state regulation that are quite irrelevant to the basic problems of protecting him.

The respondents seek to equate this contract with a fixed-dollar "participating" annuity sold by a mutual company, or one sold by a stock company on a participating basis. This contention is not persuasive. While *90 investment experience in a "participating" contract can redound to the benefit of the policyholder, the contracts are sold as fixed-dollar obligations. The "dividends" are promoted as such. During the pay-in period, they might be thought of as a reduction of premium.^[29] They may very well represent favorable mortality risk experience, particularly where the company's investments are conservative. And the annuity-paying insurance company's investments are doubtless administered in the light of the fixed obligation of the company. The company is not committed by its literature to perform part of the job of a common-stock investment trust.^[30] No one has yet tried to follow the academic suggestion of respondent VALIC, and reduce the fixed guarantee of a traditional life annuity to the point of insignificance and make the rest of the return to the contract holder variable, by selling it on a "participating" basis.^[31] The comparison of the premium cost of such a contract to its fixed return might well make it unsalable to the public. Even more unpersuasive is the respondents' argument that even in a traditional annuity the policyholder bears the investment risk in the sense that he stands the risk of the company's insolvency. The prevention of insolvency *91 and the maintenance of "sound" financial condition in terms of fixed-dollar obligations is precisely what traditional state regulation is aimed at. The protection of share interests in a fluctuating, managed fund has received the attention of specific federal legislation. Both are "investment risks" in a sense, but they differ vastly in kind and lend themselves to different regulatory schemes.

Accordingly, while these contracts contain insurance features, they contain to a very substantial degree elements of investment contracts as administered by equity investment trusts. They contain these elements in a way different in kind from the way that insurance and annuity policies did when Congress wrote the exemptions for them in the 1933 Act and the 1940 Act. Since Congress was intending a broad coverage in both these remedial Acts and since these contracts present regulatory problems of the very sort that Congress was attempting to solve by them, I conclude that Congress did not intend to exclude contracts like these by reason of the "insurance" exemptions.

Third. The respondents contend that a reversal of the judgment will put them out of business. The reason given is that if the Investment Company Act of 1940 applies to them, they are probably categorizable under it as open-end management companies,^[32] and it is *92 declared unlawful by § 18 of the Act for an open-end company to have outstanding any "senior security," that is, any security senior to any other class of securities. These companies have capital stock, and the contracts in question would be securities senior to the stock.^[33] If one assumes that this is correct, there is of course the possibility that the SEC might use its broad dispensing powers in this regard, and in any event, the whole point would be of no concern at all if the contracts in question were issued by mutual companies.^[34] But in the final analysis, it is not decisive of the issues here that a holding that these contracts *93 are subject to the Federal Acts might require some modification in the business of issuing them. Since these contracts are in fact covered by the Acts, there can be no reason why their issuers should be able to carry on the investment business in a way which Congress has forbidden.

Similarly, it may be conceded freely that this form of investment contract may be one of great potential benefit to the public. So, of course, may be orthodox open-end investment trusts, and they clearly are regulated by federal law. In short, notions that this form of arrangement is a desirable one and that it might be well to allow it to exist for a while immune from federal regulation are not relevant to the matter for decision. Congress regulates by general statutes. The passage of a federal regulatory statute is a delicate balancing of many national legislative interests and political forces. Congress need not go through the initial travail of re-enacting its general regulatory scheme every time a new form of enterprise is introduced, if that new form falls within the scheme's coverage. If there is deemed wise any adjustment of the regulatory scheme in the light of new developments in the subject matter to which it extends, Congress may make it.

MR. JUSTICE HARLAN, whom MR. JUSTICE FRANKFURTER, MR. JUSTICE CLARK and MR. JUSTICE WHITTAKER join, dissenting.

The issue in these cases is whether Variable Annuity Life Insurance Company of America (VALIC) and The Equity Annuity Life Insurance Company (EALIC) are subject to regulation by the Securities and Exchange Commission under the Securities Act of 1933 and the Investment Company Act of 1940 with respect to their variable annuity business.

*94 Section 3 (a) (8) of the Securities Act, 48 Stat. 74, 76, 15 U. S. C. § 77c (a) (8), provides that the statute shall not apply to:

"Any insurance or endowment policy or annuity contract or optional annuity contract, issued by a corporation subject to the supervision of the insurance commissioner, bank commissioner, or any agency or officer performing like functions, of any State or Territory of the United States or the District of Columbia."

Section 3 (c) (3) of the Investment Company Act, 54 Stat. 789, 798, 15 U. S. C. § 80a-3 (c) (3), puts outside the coverage of the Act "[a]ny . . . insurance company," and § 2 (a) (17), 54 Stat. 789, 793, 15 U. S. C. § 80a-2 (a) (17), defines an insurance company as:

"a company which is organized as an insurance company, whose primary and predominant business activity is the writing of insurance or the reinsuring of risks underwritten by insurance companies, and which is subject to supervision by the insurance commissioner or a similar official or agency of a State; or any receiver or similar official or any liquidating agent for such a company, in his capacity as such."

These two insurance companies are organized under the Life Insurance Act of the District of Columbia, 35 D. C. Code, 1951, §§ 35-301 to 35-803, and are subject to regulation by the Superintendent of Insurance of the District of Columbia, who has approved the annuity policies written by them. At the time of trial VALIC had also qualified to do business in Arkansas, Kentucky, and West Virginia, and its annuity policies had likewise been approved by the insurance departments of those States.^[1] Both companies in the District of Columbia, *95 and VALIC in the other States, offer their policies to the public only through insurance agents duly licensed by the local insurance authority.

Variable annuity policies are a recent development in the insurance business designed to meet inflationary trends in the economy by substituting for annuity payments in fixed-dollar amounts payments in fluctuating amounts, measured ultimately by the company's success in investing the premium payments received from annuitants. One of the early pioneers in this field was Teachers Insurance and Annuity Association, a New York regulated life insurance organization engaged in selling annuities to college personnel. The Association in 1950 made exhaustive studies into the feasibility and soundness of variable annuities. Two years later, it incorporated College Retirement Equities Fund, a companion company under joint management with Teachers Insurance, which, subject to regulation under the New York Insurance Law, commenced offering such annuity contracts in the teaching profession.^[2] The first life insurance company to offer such contracts generally appears to have been the Participating Annuity Life Insurance Company, which since 1954 has been selling variable annuity policies under the supervision of the Arkansas insurance authorities. VALIC and EALIC entered the field in 1955 and 1956 respectively.

The characteristics of a typical variable annuity contract have been adumbrated by the majority. It is sufficient to note here that, as the majority concludes, as the two lower courts found, and as the SEC itself recognizes, it may fairly be said that variable annuity contracts contain both "insurance" and "securities" features. It is *96 certainly beyond question that the "mortality" aspect of these annuities—that is the assumption by the company of the entire risk of longevity—involves nothing other than classic insurance concepts and procedures, and I do not understand how that feature can be said to be "not substantial," determining as it does, apart from options, the commencement and duration of annuity payments to the policyholder. On the other hand it cannot be denied that the investment policies underlying these annuities, and the stake of the annuitants in their success or failure, place the insurance company in a position closely resembling that of a company issuing certificates in a periodic payment investment plan. Even so, analysis by fragmentization is at best a hazardous business, and in this instance has, in my opinion, led the Court to unsound legal conclusions. It is important to keep in mind that these are not cases where the label "annuity" has simply been attached to a securities scheme, or where the offering companies are traveling under false colors, in an effort to avoid federal regulation. The bona fides of this new development in the field of insurance is beyond dispute.

The Court's holding that these two companies are subject to SEC regulation stems from its preoccupation with a constricted "color matching" approach to the construction of the relevant federal statutes which fails to take adequate account of the historic congressional policy of leaving regulation of the business of insurance entirely to the States. It would be carrying coals to Newcastle to re-examine here the history of that policy which was fully canvassed in the several opinions of the Justices in United States v. South-Eastern Underwriters Assn., 322 U. S. 533, and which was again implicitly recognized by this Court as recently as last Term when, in Federal Trade Comm'n v. National Casualty Co., 357 U. S. 560, we declined to give a niggardly construction to the McCarran *97 Act. Suffice it to say that in consequence of this Court's decision 90 years ago in Paul v. Virginia, 8 Wall. 168, and the many cases following it,^[3] there had come to be "widespread doubt" prior to the time the Securities and Investment Company Acts were passed "that the Federal Government could enter the field [of insurance regulation] at all." Wilburn Boat Co. v. Fireman's Fund Ins. Co., 348 U. S. 310, 318; see also Prudential Ins. Co. v. Benjamin, 328 U. S. 408, 414.

I can find nothing in the history of the Securities Act of 1933 which savors in the slightest degree of a purpose to depart from or dilute this traditional federal "hands off" policy respecting insurance regulation. On the contrary, the exemption of insurance from that Act, which is couched in the broadest terms, reflected not merely adherence to tradition but also compliance with a supposed command of the Constitution. In a study of the proposed Act, the Department of Commerce concluded that the legislation could be bottomed on the federal power over commerce because securities did have the independent general commercial existence and value which the Paul decision had found lacking in insurance policies. See A Study of the Economic and Legal Aspects of the Proposed Federal Securities Act, reprinted in Hearings before Senate Committee on Banking and Currency on S. 875, 73d Cong., 1st Sess. 312, at 330, and in Hearings before House Committee on Interstate and Foreign Commerce on H. R. 4314, 73d Cong., 1st Sess. 87, at 105. This distinction between securities and insurance, mistaken or not, underlay the passage of the final bill. When the proposed act was considered by the Senate and House Committees, it did not contain an express exemption of *98 insurance. The House Committee explained that the exemption in the final bill (§ 3 (a) (8) of the Act):

"makes clear what is already implied in the act, namely, that insurance policies are not to be regarded as securities su