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Public Policy Analysis & Opinion The NAIC's peek-a-boo legal status Refusal to comply with open meeting requirements brings NCOIL’s ire By Kevin P. Hennosy The National Association of Insurance Commissioners (NAIC) has stumbled once again in its attempt to regain its pre-eminent role in insurance public policy formation. This spring, the regulators’ association suffered a public rebuke for ignoring open meeting statutes, sometimes referred to as “Sunshine Laws.” In a March 20, 2007 letter, State Rep. Brian Kennedy (D-R.I.) accused the NAIC of “abusing the use and purpose of Executive Session(s).” Kennedy serves as vice president of the National Conference of Insurance Legislators (NCOIL). In addition to secret meeting sessions, the state representative called attention to meetings run by NAIC staff, which at one time was a forbidden activity. The NAIC’s handling of meetings that concern the agent and broker compensation issue seems to have triggered the conflict with NCOIL. Since October 2004, when the New York Attorney General’s office announced an investigation into anticompetitive behavior by several insurance brokers, the NAIC has conducted most of its meetings on the subject in secret session. Furthermore, Kennedy called attention to his being ejected from an NAIC legislative strategy meeting in December 2006, as well as the association’s Executive Committee meeting. The Executive Committee acts as the NAIC’s steering committee. Traditionally, the committee conducted one closed meeting at each NAIC convention in order to discuss budget and personnel issues; however, many observers believe that this meeting is now used to discuss more policy-related issues. State Rep. Kennedy charged that an NAIC by-law that provides for secret meetings to discuss legislative matters runs counter to state sunshine laws. The representative asserts that state officers are sworn to uphold their state law and constitution and, therefore, cannot simply ignore open meeting laws under the veil of a private, voluntary organization. NAIC President and Alabama Insurance Commissioner Walter Bell responded to the state representative’s letter on April 9, 2007 (although the letter was posted to U.S. Congressman Patrick J. Kennedy (D-R.I.). The NAIC’s staff research abilities are not what they used to be). Commissioner Bell argued that the NAIC is not subject to state sunshine laws. The commissioner draped the association in the veil of a private, multi-state, nonprofit association. He stressed that the association made efforts to keep its deliberations open to the “public” but that certain strategic discussions were rightly held in secret. In addition to Commissioner Bell’s statement, the NAIC released a statement to the news media. In that statement the NAIC leadership closed ranks: “The NAIC appreciates the excellent working relationship we have with our colleagues in similar associations, such as the National Governors Association (NGA), the National Conference of State Legislatures (NCSL), the National Association of Attorneys General (NAAG), the North American Securities Administration Association (NASAA) and many other groups,” said Sandy Praeger, NAIC President-elect and Kansas insurance commissioner. “We are confident that our meeting policies are consistent with our counterparts. We also believe they have the right to hold meetings that are exclusive to their members.” To regular NAIC observers, the association’s defense did not come as a surprise. The association has no qualms about wrapping itself in the flag of government when profitable, and the cloak of a private entity when necessary. The NAIC declines to file a Form 990 with the IRS on the grounds that it works so closely with state government that such a submission would violate federalist tenets. Yet with regard to open meetings laws, the NAIC says it is not so close to state government that it needs to operate like a public entity. State Rep. Kennedy was having none of the NAIC’s peek-a-boo-I-see-you defense. His April 30 response to Commissioner Bell’s letter hammers home his argument concerning the commissioners’ oath of office: “Your oath of office and rules of conduct do not cease when you cross state geographical boundaries into another jurisdiction. No commissioner or supervisor has the right to ignore the laws of their respective state and conduct such clandestine meetings. While you may attempt to argue that the sunshine laws do not apply to the NAIC as an organization, those open meetings laws do apply to YOU as individual insurance commissioners or insurance supervisors.” However, the state representative did not completely cede whether the NAIC should comply with open meeting laws as an organization. Commissioner Bell had argued that the NAIC did not hold governmental authority, which could be used to explain its claimed exemption from open meetings laws. Kennedy argued that in many ways, including the accreditation program, the NAIC does seem to act on the behalf of states. He does not need to stop at the accreditation program for financial regulation. Most, if not all, state insurance codes delegate the creation of the annual financial statement form to the NAIC. State codes contain references to the NAIC Securities Valuation Office values for investment instruments. There are regulatory references to NAIC work products concerning examination practices, actuarial tables and other guidelines. The NAIC’s so-called “affiliate”—the National Insurance Producer Registry (NIPR)—contracts with the NAIC to provide technical services to the states related to producer licensing. More recently, the NAIC has engaged in the constitutionally dubious role as negotiator of trade treaties with foreign governments in the form of Memorandums of Understanding. The NAIC limits its membership, staff services and voting rights to the chief insurance regulatory official from each state, the District of Columbia and several U.S. territories—there are no private members. In the words of State Rep. Kennedy: “As an elected or appointed Insurance Commissioner or Insurance Supervisor, you sit in meetings by virtue of your oath of office. That oath includes abiding by state Open Meetings Laws, regardless of their scope, applicability, statute, rule or regulation. Without taking the oath of office for your respective state, you and every other Insurance Commissioner would not be provided a seat at the table during NAIC meetings and conferences.” It is not as if the NAIC and its members do not represent NAIC meetings as official business for other purposes. How many government attendees to the NAIC meetings submit their travel expenses to budgeting authorities as state business, and how many of those attendees receive per-diem expense payments? Let us not forget that the NAIC insists on negotiating a “regulator rate” with hotels that host NAIC functions—although that government rate is subsidized by room rates charged to “industry” attendees. State Rep. Kennedy summed up his criticism as follows: “I was hoping that perhaps you would embrace and reconsider present NAIC bylaw policy and adopt the necessary standards to promote the good government that we expect from our insurance commissioners and supervisors. Instead, it would appear that you will continue to operate the NAIC in a surreptitious manner behind closed doors. It is ironic that my letter to you sought a simple change to your meeting practices, but you have provided new fodder that would indicate that perhaps the conduct of an NAIC meeting is only the tip of the iceberg, and that the NAIC may be far exceeding their authority as an organization to collect fees or enforce regulations that they promulgate.” In this observer’s opinion, the NAIC just likes to pick and choose whether it is a public or private entity contingent upon profitability. In either case, the NAIC manages to avoid the public accountability usually applied to either public or private entities. The NAIC might not want this argument to advance too far because even a layperson’s review of guidelines governing whether or not sunshine laws apply to nonprofit entities produces a substantial list of considerations: • The manner in which the entity was created and the public or private character of the person(s) who created it • The manner in which the members of the governing body of the private entity are selected, the presence of members of a public body as members of the governing body of the private entity, and whether public members constitute a majority on the private governing body • The character of the powers exercised by the public entity in relation to traditional governmental powers • Whether the functions performed by the private entity would otherwise be performed by a public body, or were performed by the public body before the creation of the private entity • Whether the activities of the private entity are carried out on public property • The extent to which public entities may control the entity in question and the extent to which the entity is autonomous • Whether the entity is subject to government audits or otherwise has its business procedures supervised by a governmental body • Whether the entity is a nonprofit or a for-profit entity • Whether the entity is exempt from the obligation to pay taxes for reasons • Other than incorporation as a nonprofit corporation, the governmental and private sources of its funding, their character and amount, whether public and private funds are commingled, and the reason for the payment to the private entity • Whether the private entity would continue to exist and function if its relationship with the public body terminated • Whether the private entity would be deemed an arm of the state under the Eleventh Amendment or would be entitled to assert other governmental immunities • Whether a contract or statute specifically identifies the corporation or other private entity as subject to the law A combination of these factors should also be considered. In short, if the NAIC and its members truly wish to comply with proper statutory controls, the association needs to do a bit more analysis than that which was prepared for Commissioner Bell’s signature. The commissioner was ill-served, which has resulted in a major dust-up with NCOIL. If the NAIC senior staff really believes that all they need to do is deem the association one thing for one purpose and another thing for another purpose, the insurance commissioners face trouble ahead. Who knows where this discussion could end? For example, if the NAIC conventions are not “official state business,” then a good number of regulators will need to write refund checks for per-diem expenses they have been claiming. On the other hand, if the regulators are on state business when attending NAIC functions, then state ethics rules and gift bans should certainly apply to NAIC activities—including overseas travel. This debate once again calls attention to the ongoing problem with how the NAIC does business. Is the NAIC fish or fowl? In response to that question, the association management and its captive leadership continue to insist that the NAIC is a “Fowsh.” Well, people like State Rep. Kennedy are unwilling to do business with a Fowsh. Sooner or later, the NAIC will need to select a set of rules and obey them. If the association chooses to be a private nonprofit association, it needs to start filing a Form 990 with the IRS and quit seeking government rates and standing. If the association wants to be viewed as operating as an instrumentality of the states, it needs to submit to public oversight, including open meetings laws and ethics rules. Welcome to the real world. * The author |
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