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.

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.

Meanwhile, a spokesperson for the National Association of Insurance Commissioners said it will respond in due course to a congressman who is seeking a clarification of the NAIC December decision to describe itself as a “standard-setting organization” rather than a trade group.

Kevin McKechnie, executive director of the American Bankers Insurance Association, said that NAIC commissioners “may bristle at the criticism Royce has leveled against them but in my opinion, the NAIC has brought this upon themselves.”

“If they want to be a national regulatory body, petition Congress to allow the NAIC staff to fill out the ranks of the Federal Insurance Office,’ McKechnie said. “If they want to be a private organization, the NAIC should fill out the appropriate tax forms and register their lobbyists.”

McKechnie did acknowledge that individually, the commissioners are smart and capable people. Collectively, however, he said, “the posturing they undertake to enhance the image of their association tarnishes their reputation, in my view, and undermines the credibility they and their staff work so hard to establish. Royce is right to call them out.”

A former insurance commissioner who asked not to be named, added that the Royce letter points out a “serious concern.”

The former commissioner said that NAIC’s new mission statement recognizes that the United States insurance industry needs a national regulatory system and that it needs a central overseer.

“But the NAIC has clearly stated that it won’t abide by the public accountability commensurate with such a role, even though it is now basically claiming that authority for itself,” the commissioner said.

“They’re putting themselves in a Catch 22,” the commissioner said. “The current situation demonstrates this perfectly, as the Congressman has nicely explained.”