|When Commissioner McCarty uses his hand to bind the FOIR to NAIC as a vendor and when he promotes NAIC model laws at home, he puts himself squarely on the turf where the ethics commission warns him not to tread.
Public Policy Analysis & Opinion
NAIC's contempt for ethics laws results in Florida "investigation"
By Kevin P. Hennosy
My ruminations concerning the Delaware-chartered-corporation doing-business-as the National Association of Insurance Commissioners (NAIC) operations in the Sunshine State reportedly raised blood pressures in certain sectors of Florida state government.
In the spring and summer of this year, I submitted a series of columns where I reviewed the relationship of the NAIC with state officials. The series examined whether NAIC's legal standing as a commercial vendor might place insurance commissioners in legal jeopardy.
Ethics codes in most, if not all, jurisdictions contain provisions governing officials' and employees' relationships with legal entities like the NAIC that hold state contracts, proffer gifts, lobby officials and other potential conflicts of interest.
The series mentioned the Commissioner Kevin McCarty and the Florida Office of Insurance Regulation (FOIR) but focused on the NAIC.
However, Rough Notes readers take great interest in the regulatory process and place great importance in their citizenship. Consistent with that assessment, a reader from Tallahassee read the series and asked Florida officials to review the FOIR's relationship with the NAIC, and cited the May 2013 edition of Rough Notes.
In response, our reader received the following communication from Virginia Christy, Assistant General Counsel for the FOIR, which reads, in part:
The Office of Insurance Regulation is familiar with the author of this article and other articles he has written. As noted in the article, the author is a former employee of the NAIC. The journalistic analysis of the cited statutes concerning the State of Florida and the presentation of the workings of the NAIC are duly noted as the opinion of the author. The Office does not agree with the opinions presented nor does the Office agree with the presentation of the facts within the article.
Any journalist or devotee of political history will recognize Ms. Christy's response as a "non-denial denial." The book and movie All The President's Men popularized the phrase.
For example, a line in the movie attributed to Washington Post editor Ben Bradley: "All non-denial denials. They doubt our ancestry, but they don't say the story isn't accurate."
Great Caesar's ghost, Virginia! Between 1989 and 1992, Kevin P. Hennosy worked for an association named NAIC, so anything that dirty-dog writes is suspect. (And, yes, Virginia, your boss was president of the NAIC in 2012.)
Ms. Christy makes a direct statement that the "Office does not agree with" the "opinions" or "facts" but she offered no countervailing facts or interpretation to back up her opinion. Ms. Christy delivers a non-denial denial worthy of John Mitchell and several other Nixon administration lawyers who went to prison despite their best attempts to make the Watergate scandal seem to be a bundle of inaccuracies.
Even worse is the impression that the "the fix is in." Ms. Christy explicitly asserts that she speaks for the office, even though that same office claims, as of this writing, to still be investigating a serious ethics inquiry. She copied the OIR's Inspector General—the supposed investigator—on her correspondence. It is bad enough that the investigator reports on paper to the same commissioner whom she is investigating, but when an attorney for that commissioner responds on behalf of that investigator that her ongoing investigation is a foregone conclusion, the so-called investigation looks shady.
Ms. Christy's non-denial denial led me to take a second and more focused look at the NAIC's relationship with Florida Insurance Commissioner Kevin McCarty and the Office of Insurance Regulation.
The statute establishes two bright lines defining criminal violations, and Commissioner McCarty appears to have crossed both. A review of the public record strongly suggests that Commissioner McCarty's relationship with the NAIC violates both provisions of Section 112.313(7)(a), which deserves investigation by Florida officials and journalists.
Commissioner McCarty' relationship with NAIC appears in violation of the first provision of Section 112.313(7)(a), which prohibits state officers or employees from entering contractual relationships with entities that do business with his or her agency.
"No public officer or employee of an agency shall have or hold any employment or contractual relationship with any business entity or any agency which is subject to the regulation of, or is doing business with, an agency of which he or she is an officer or employee."
In 2007, Commissioner McCarty affixed his signature to a contract with the NAIC, which made the company a service vendor for the FOIR, of which McCarty is the chief executive. McCarty's agency contracted with NAIC to provide the back-office management system, State-Based Systems (SBS).
The SBS licensing agreement converts state agencies into distribution agents for NAIC's products and services. As NAIC distribution agencies, the state offices compel regulated entities to use NAIC products and services and pay associated fees to the corporation. (Revenues to the NAIC are projected to exceed $5 million this year.)
According to NAIC Proceedings, the head of NAIC's vendor services program described this as a "critical, contractually binding decision" for insurance commissioners "that will impact their departments for years to come."
It is clear that NAIC, a private corporation with millions of dollars in service vendor revenues derived from its agreements with state insurance departments is a "business entity … doing business with … an agency of which" McCarty "is an officer or employee."
The relationship becomes a clear violation of law through the lens of Ethics Opinion 06-12 issued by the Florida Commission on Ethics:
"We have recognized that 'membership in a voluntary, unincorporated association rests on contract; the constitution and by-laws of a voluntary association become a contract between each member and the association….' … Although we [the commission] have not specifically addressed membership in a voluntary incorporated association in any of our opinions, we find that … the same principle applies…."
Based on Opinion Letter 06-12, it is reasonable to apply the language in the statute about a "contractual relationship with any business entity" to Mr. McCarty's relationship with the NAIC.
Yet, even if one charitably ignored the interpretation of association membership contained in Ethics Opinion 06-12, the prohibition on contractual relationships with agency vendors still presents legal jeopardy to Commissioner McCarty.
The commissioner has signed two contracts of a personal nature with the NAIC, which harken to the feudal concepts of homage and fealty to a medieval lord.
Showing what appears to be clear contempt for conflict of interest statutes in multiple state jurisdictions, the NAIC requires its "voluntary" members to sign a document, which establishes and acknowledges a fiduciary duty to the company.
In addition, the NAIC requires its elected leaders to sign a second document, which restates the existence of a fiduciary duty on the part of the state official to the company.
According to protected sources employed by the NAIC, the company holds two such documents signed by Commissioner McCarty.
These statements of fiduciary duty clearly satisfy a reasonable definition of a contract under Section 112.313(7)(a). For obvious reasons, this is the essence of a forbidden relationship under the statute.
The second provision of Section 112.313(7)(a) is an even greater threat to Kevin McCarty remaining a Florida state officer in good standing. His slavish devotion to the NAIC places him in clear and present jeopardy of violating the prohibition against:
an officer or employee of an agency hav[ing] or hold[ing] any … contractual relationship that will create … a continuing or frequently recurring conflict between his or her private interests and the performance of his or her public duties or that would impede the full and faithful discharge of his or her public duties.
The statute says that the public official cannot have a "continuing or frequently recurring conflict;" therefore, we need to understand whether the relationship with NAIC presents such a conflict for Commissioner McCarty.
Once again, it proves informative to consult Florida Ethics Commission Opinion 06-12, which involved a legislative candidate who was president-elect of the Florida Association of Realtors®, which is not burdened by the commercial interests carried by the NAIC.
The Commission opined that a public official's relationship with a non-profit, "voluntary" association violated the ethics statute if:
the subject matter of the association position "arises out of [the official's] public position and relates directly to issues that may be expected to come before [him/her] in [his/her] official capacity" and if the official's interactions with the association "will be derived from information gained by virtue of [his/her] public position and will relate to issues upon which [he/she] will be called to act."
Furthermore, drawing from Opinion 06-12, "the potential exists for doubt to arise in the minds of the public as to whether the member's position is espoused because of his or her true belief in its benefit, or because the member has a responsibility to promote and advocate for the organization's philosophy."
These phrases exactly describe the NAIC's relationship with Commissioner McCarty. One of NAIC's primary goals is to influence—and increasingly control—its members in their public service. The corporation uses the carrots of free-travel (June 2013, Rough Notes) and the stick of licensing agreements to this end.
The NAIC expects insurance commissioners to promote both the corporation's legislative aims and commercial products. For a decade Commissioner McCarty has held directorial positions with that private corporation, and yet entered his agency into a contract with that business, which he served as president in 2012.
Whether the FOIR's lawyer agrees or not, the fact is that the Commissioner entered into a contractual relationship with a business entity, called the NAIC, with which he signed "critical, contractually binding" licensing agreements "that will impact" his agency "for years to come."
When Commissioner McCarty uses his hand to bind the FOIR to NAIC as a vendor and when he promotes NAIC model laws at home, he puts himself squarely on the turf where the ethics commission warns him not to tread.
How can there not be public "doubt" concerning the line between his true belief in the merits and his responsibility to promote and "advocate for the organization's philosophy?" How fast would that public trust remain intact if the South Florida Sun Sentinel, Miami Herald, Tampa Bay Times or the Associated Press reported that a Florida official had signed two sworn pledges of FIDUCIARY duty to a vendor? Commissioner McCarty literally holds a legal "responsibility to promote … the organization;" therefore, McCarty appears to run afoul of the law.
There is no legal lifeline to throw Commissioner McCarty when it comes to the legal swamp created by NAIC. In a limited number of cases, state officials may hold "mere memberships" with voluntary associations, without triggering conflict of interest prohibitions. That lifeline does not extend to Commissioner McCarty's relationship with the NAIC.
As explained by the Florida Commission on Ethics in Ethics Opinion 82-14, service as an "officer, director, or administrator" of the association always constitutes a "contractual relationship," even when the "mere membership" rule is otherwise applicable.
In 2007 when Commissioner McCarty created this conflict under the first provision of Section 112.313(7)(a) by signing the NAIC SBS contract, Commissioner McCarty was already a member of the Executive Committee (board of directors) of the corporation. He was not a "mere member" anymore.
Furthermore, Commissioner McCarty is serving at least his 10th year as an NAIC board member, including four plus as a national officer and one as president. His continuing and recurring conflict under the second prong of Section 112.313(7)(a) puts the commissioner "waist deep in the big muddy."
Such is this fatal flaw in the NAIC's profit-driven business model, which places commissioners in legal jeopardy in state after state. A staff attorney's improper statements about a supposedly ongoing investigation cannot change these simple facts.
Kevin P. Hennosy is an insurance writer who specializes in the history and politics of insurance regulation. He began his insurance career in the regulatory compliance office of Nationwide Insurance Cos. and then served as public affairs manager for the National Association of Insurance Commissioners (NAIC). Since leaving the NAIC staff, he has written extensively on insurance regulation and testified before the NAIC as a consumer advocate.