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NAIC Standard-Setting Rule Questioned

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The National Association of Insurance Commissioners (NAIC) is being asked to explain the legal reasoning behind its decision to describe itself as a “standard-setting organization” rather than a trade group.

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 today.

The NAIC was not available for comment but is expected to reply as the NAIC, not as individuals, according to a source.

Update: See the NAIC’s response to Rep. Royce

“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,” Rep. Ed Royce, R-Calif., said in the letter.

The letter was sent to Kevin McCarty, Florida insurance commissioner and president of the NAIC, and Dr. Terri Vaughan, NAIC president and CEO.

The letter was prompted by the NAIC’s decision on December 19 to have its membership approve the change in designation in a conference call of all commissioners.

In his letter, Royce said he “would appreciate your prompt attention to this matter and a substantive written reply.” 

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 following questions:

  • What is NAIC’s status?  Is it a trade association? 
  • Is it a formal part of “the national system of state-based insurance regulation in the U.S.”?  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”?
  • Does the NAIC agree 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?
  • As a 501(c)(3) non-profit corporation, does the NAIC not file a Form 990, a routine financial statement for non-profits, with the Internal Revenue Service (IRS)? 
  • If the NAIC has been formally exempted by the IRS from filling this information, please provide written documentation of this exemption, and explain why the NAIC feels it necessary to keep this disclosure from public scrutiny.

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 noted that, legally, the NAIC is a 501(c)(3) non-profit corporation.

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 since, under controlling law, no ‘private group or association [may] regulate in the field of interstate commerce’,” Royce said.

But, Royce added, “it would now appear this ‘traditional’ position is politically inconvenient given its attempts to posture itself in the new Dodd-Frank/FIO regime.”

Royce added that, “ Present circumstances call for an opposite spin, emphasizing NAIC’s key role in ‘form[ing] the national system of state-based insurance regulation in the U.S’.”

In his letter, Royce said that, “The NAIC’s about-face on its self-proclaimed status in a period of just ten days last summer may best illustrate what appears to be an untenable position.”

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.

Yet, Royce said, “on August 7, 2011, in what appears to be an effort to demonstrate its relevance in the Dodd-Frank/FIO world, the NAIC claimed it was integral to helping “form the national system of state-based insurance regulation in the U.S”  in an attempt to sell the importance of its pronouncement regarding the financial system.

“These positions seem, at the least, inconsistent,” Royce said.

As a footnote in the letter, Royce cited as a source earlier National Underwriter coverage on whether the NAIC was a mere trade group or an official standards-setting organization.


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