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When NAIC-Newco asserts the ability to set standards, it crosses a bright line between policy development and influencing public policy, which it does through the corporation's influence with state official. |
Public Policy Analysis & Opinion
A lobbyist by any other name
NAIC appears to lobby in multiple state jurisdictions
By Kevin P. Hennosy
The Delaware-based corporation doing business as the National Association of Insurance Commissioners (NAIC) appears to lobby at the state level. Nevertheless the corporation does not register or report its activities aimed at influencing the policy process.
This assessment follows a review of lobbying laws, regulations, and ethics opinions in diverse states, such as Illinois, Maryland, Michigan, Nebraska, Texas and others.
In order to differentiate between the association which has always used the name NAIC and the very different corporation it has become over the past 13 years, this column refers to the latter business entity as "NAIC-Newco."
Recent columns explored how NAIC-Newco changed from an unincorporated support association to a savvy technology vendor that leverages its relationships with its member public officials to make tens of millions of dollars a year in fees derived from state mandates and no-bid contracts.
In the April issue, we discussed a lawsuit filed against NAIC-Newco in U.S. District Court, in which the plaintiff, in effect, alleges that the corporation turned the respected National Insurance Producer Registry (NIPR) into its "alter ego."
The lawsuit unveiled a contract in which the NAIC-Newco appears to fix prices charged to insurance producers at artificially high levels. The contract concerns the NAIC-Newco's State Based Systems (SBS) product. In a provision of that contract, NAIC-Newco commits the NIPR to fix its prices at artificially high levels, despite an NAIC-NIPR service contract that forbade NAIC from speaking for NIPR.
In the May edition, we reviewed how SBS contracts with states as a vendor and how NAIC members force insurers to file rates and forms through NAIC's SERFF product. The two programs are worth over $10 million to NAIC-Newco.
The corporation thus appears to use state regulators as sales agents, who can grant NAIC-Newco products an anti-competitive advantage against other technology providers. The special treatment for NAIC-Newco from commissioners who serve on the corporation's board of directors strongly suggests violations of those state officials' ethics laws in several jurisdictions reviewed by this column.
In the June issue this column explained how NAIC-Newco expends hundreds of thousands of dollars each year on luxurious travel gifts in potential violation of gift-ban laws; this includes travel to the Caribbean every winter and to mainland resorts every summer for private commissioners' retreats.
This month, we will explore NAIC-Newco's use of state officials as agents of political influence without complying with the common requirements for lobbyist registration and disclosure required of such special interests.
Lobbying operations
Befitting its size and ambition, NAIC-Newco maintains a strategic outlook designed to marshal resources to shape public policy.
An NAIC-Newco news release dated May 4, 2007, which carried the headline "Executive Committee approves new model law framework; new streamlined process to help focus association's top priorities," explained the corporation's new approach to lobbying.
According to the release, the NAIC-Newco's "new Framework will inject enhanced discipline at all phases of the Model Law process, including identification, development, adoption and state implementation." The purpose was to shift NAIC from just a drafter of model laws to a systematic force for passage of bills in the states.
Good lobbying requires money and communications. As part of that framework, the NAIC-Newco promised to "devote significant resources to educate, communicate and support an adopted model with the goal of implementation by a majority of states within three years."
Beginning in late 2011, the corporation rejected its traditional support and services-oriented role, and deemed itself to be a "standards-setting organization" in Congressional testimony.
When NAIC-Newco asserts the ability to set standards, it crosses a bright line between policy development and influencing public policy, which it does through the corporation's influence with state officials.
Lone Star lobbying
NAIC recently met in Texas, where its agenda was dominated by developing new model laws and promoting enactment of existing ones, so let's see how NAIC-Newco's activity fits within Texas's framework for lobbying regulation.
One does not have to be the Ghost of Molly Ivins to observe that lobbying in Texas has never carried the burden of a moralistic political culture. But Texas does have lobbying rules, rules that on paper look a great deal like those found in other states: 1) Communications with officials, 2) Persuasion toward a policy end, 3) Registration and reporting, and 4) Restrictions upon and/or disclosure requirements with respect to lobbyists tendering gifts or reimbursements to officials.
The Texas State Code under Section 305.001 nicely articulates the purpose of lobbyist registration and reporting rules: "To preserve and maintain the integrity of the legislative and administrative processes, it is necessary to disclose publicly and regularly the identity, expenditures, and activities of certain persons who, by direct communication with government officers, engage in efforts to persuade members of the legislative or executive branch to take specific actions."
As NAIC-Newco has for six years "devote[d] significant resources to educate, communicate and support an adopted model with the goal of implementation by a majority of states," it is difficult to see such activity as anything but lobbying.
The Texas code (Sect. 305.006(b)) throws a wide net when it defines lobbying as "communicat[ing] directly with one or more members of the legislative branch to influence legislation or administrative action." The term "communicates directly with" is broadly defined as "contact in person or by telephone, telegraph, letter, facsimile, electronic mail, or other electronic means of communication."
That's the heart of NAIC's formal lobbying plan: "It will be a priority of the NAIC, through the collective efforts of the Members, to uniformly adopt the Model Law…. The NAIC staff will provide briefing materials, testimony, make state visits and answer questions. The Executive Committee shall provide quarterly updates to the NAIC Plenary on the status of adoption by states of the Model Law." This is backed up by "a team of NAIC staff … assigned to support the Model."
The Texas code establishes a total financial expenditure threshold, as a measure of whether the corporation should register as a lobbyist. Currently, "a person who expends more than $500 in a calendar quarter for certain purposes must register as a lobbyist." "Expenditure" is defined broadly: "a payment, distribution, loan, advance, reimbursement, deposit, or gift of money or anything of value."
As discussed in the June 2013 issue of Rough Notes, NAIC-Newco by its own account spends many thousands of dollars a year on each commissioner in travel-related gifts in order to communicate with those officials about the corporation's policy recommendations. The NAIC-Newco might call these expenditures membership services, but the smell test says lobbying.
In addition to state regulators, in 2012, NAIC-Newco budgeted hundreds of thousands of dollars to reimburse travel and lodging expenses for state legislators attending NAIC-Newco functions where its policy proposals are drafted and promoted. Such expenditures on legislators cannot be explained away as "membership services."
Texas Ethics Commission Advisory Opinions Numbers 4 and 89 interpret when statute categorizes travel costs as a lobbying expense under Texas statutes, and their instruction is not ambiguous. Such costs fall under the regulatory framework "even if the purpose of the trip is to influence agency action by the generation of goodwill and even if business is not discussed during the trip."
As the statute and advisory opinions clearly address the NAIC-Newco's expenditures for policy-oriented communications with Texas officials, it is difficult to make a rational argument as to why the corporation has not registered as a lobbyist in the Lone Star State. In addition, it is difficult to understand why some individual or organization has not filed a complaint.
Not a technicality
The NAIC-Newco's conflict with state lobbying laws is not limited to Texas. As noted before, laws, regulations and ethics opinions in state after state establish similar frameworks.
For example, according to the Maryland State Ethics Commission's "Lobbying Law Requirements" publication, the Maryland Public Ethics Law "allows the public to know which persons or entities are making a significant effort to influence public policy and governmental decisions and establishes standards of conduct to insure the integrity of the lobbying process."
Crucial to those standards is comprehensive state regulatory control over the expenditures that special interests—like the corporation doing business as "NAIC"—lavish upon public officials.
In Maryland, under Sections 15-703 and 704 of the lobbyist act, that means that registrants must file a report twice a year detailing "expenditures in connection with influencing executive or legislative action in … food, lodging, and scheduled entertainment for officials and employees." The reports must include "the date, location, and total expense … for each meal, reception, event, or meeting." The highest threshold in the categories is $200 expended.
Readers will remember from June's Rough Notes, that $200 would not appear to cover one night's lodging at the Virgin Islands resort that commissioners visited this February or "the only Forbes Five-Star mineral spa in the world" where NAIC-Newco hosted a "fly-in" in July 2010.
Anyone familiar with the rough-and-tumble world of American policymaking understands what the Maryland Ethics Commission means when it says the purpose of the ethics law is "to insure the integrity of the lobbying process." The system relies on public disclosure of who is lobbying in order to promote and maintain public confidence in government.
When a private corporation with a growing $80 million budget, foots the bill for multiple luxury trips a year for the very public officials who put forth that private corporation's draft bills as their own work product, this should set off alarm bells.
And yes, that is what commissioners do when they place NAIC models on their prized list of "agency bills" every year. Agency bills receive a political "leg up" in the competition of the legislative process because the proposals are wrapped in the "disinterested" robes of a public official.
In order to understand the difference between disinterested and special interest proposals, the public and their representatives in the legislature, as well as journalists are supposed to know that NAIC-Newco paid for private winter escapes to the Virgin Islands and Puerto Rico prior to the commissioner presenting the corporation's proposals as their own. That is why lobbyist registration and reporting requirements exist in Maryland; and Texas (Government Code Section 305.006); and Illinois (25 ILCS 170/6), and other jurisdictions.
And when that same corporation experiences material success in shaping public policy, to the point that it calls itself a "standards-setting" organization, and state laws and regulations tend to increase the corporation's influence, and thus revenue, people have a right to question whether "the fix is in." But they can't, because NAIC-Newco doesn't abide by the regulations designed to inform such public debate.
Hats off
Some may argue that NAIC-Newco is disinterested because it is a tax-exempt, nonprofit corporation. There are no exemptions for self-proclaimed "white hats" in the law. Whether one sees the world from the political left or right or middle, we would not want government deciding who is a good guy or bad guy through prior restraint of access to the policymaking process.
The whole point of the way the disclosure-based system of oversight works is that those who attempt to influence follow the rules, register, and disclose, and let the informed public figure out who the good guys are. If you do not abide by those rules, then you become the "bad guy."
State ethics opinions routinely apply to nonprofits. The official Michigan Lobby Manual explains that "Nonprofit organizations, with the exception of church-related organizations, are required to register and report under the Act if the organization meets the definition of a Lobbyist…."
The same goes for associations of government officials: A Michigan Secretary of State ethics opinion dated April 30, 1984, refused to exempt the Michigan Council on Governments, "comprised of 100% local elected officials," from registration.
This is not to say that NAIC-Newco should not be allowed to petition government. Such activity is protected by the Constitution.
Nevertheless, it appears that NAIC-Newco willfully disregards public interest-oriented legal frameworks enacted to preserve confidence in public offices and officials. The NAIC-Newco should simply follow the same rules that other lobbying interests and organizations must follow. n
The author
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.
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