The National Association of Insurance Commissioners (NAIC) is being asked to explain the legal reasoning behind its Dec. 19, 2011 decision to describe itself as a "standard-setting organization" rather than a trade group.
Rep. Ed Royce (R-Calif.), a senior member of the House Financial Services Committee made the request in a letter obtained by National Underwriter that was sent to the NAIC on Feb. 28.
"Given the impending Federal Insurance Office report to Congress on the state of the U.S. [insurance] regulatory system, understanding precisely what the NAIC is and how it is governed—and reconciling the NAIC's own inherently inconsistent statements about itself—is timely and relevant," Royce said in the letter.
The decision to change its designation and to ask for approval of all commissioners was made soon after a public hearing on insurance modernization and regulation convened by the Treasury Department where several of those testifying referred to the NAIC as a "trade group," which by its legal definition, it is.
In his letter, Royce asked the NAIC a host of questions, starting with the obvious: is it a trade association?
"Is it a formal part of 'the national system of state-based insurance regulation in the U.S.'?" Royce asked. "If so, why did it (a) testify to Congress, when asked specifically about its status, that it does not "hold ourselves out as some kind of … national regulatory system"; and (b) insist to NCOIL that it is "not considered a … public body" and "does not have any regulatory authority"?
Royce asked if NAIC agreed that as a self-described "private group," it may not "regulate in the field of interstate commerce. "Do its activities—including but not limited to the Securities Valuation Office, System for Electronic Rate and Form Filing, Financial Standards and Accreditation Program, Market Analysis Procedures Working Group, and National Insurance Producer Registry—amount to regulating interstate commerce and/or exercising governmental authority under color of law?" Royce asked.
Royce questioned if, as a 501(c)(3) non-profit corporation, the NAIC files a Form 990, a routine financial statement for non-profits, with the Internal Revenue Service (IRS). He further asked that if the NAIC had been formally exempted by the IRS from filling this information, if it could provide written documentation of this exemption, and explain the need to keep this disclosure from public scrutiny. (Royce noted that, legally, the NAIC is a 501(c)(3) non-profit corporation.)
A long-time industry trade group official, when asked for a response to the Royce letter, said, "These are the questions that we have been asking for a long time.
Royce said he is writing the letter, because, "It appears, when it suits its purposes, the NAIC fends off questions about its accountability and transparency by arguing that it is 'a private group' that 'does not have any regulatory authority'." This position is legally essential, Royce noted, since, under controlling law, no private group or association may regulate in the field of interstate commerce.
He said that on July 28, 2011 before the House Financial Services Committee, NAIC president, Susan Voss, stated that the NAIC was not part of "some kind of … national regulatory system" in response to a question regarding its perceived status as a regulatory body lacking traditional accountability.
