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Public Policy Analysis & Opinion

Special privilege and inconvenience

Consent agreements and the need to "Occupy NAIC"

By Kevin P. Hennosy

The American historian Albert Bushnell Hart once observed: "Everywhere among the English-speaking race criminal justice was rude, and punishments were barbarous; but the tendency was to do away with special privileges and legal exemptions."

When it comes to special privileges and legal exemptions, insurance regulators in the United States seem intent on proving Hart wrong. Insurance regulators use of consent agreements to address violations by insurers undermines the regulatory system.

The National Association of Insurance Commissioners (NAIC), despite all of its reams of model laws, model regulations and guidelines, remains guiltily silent on the topic of consent agreements. It is as if the practice does not exist.

If the NAIC wanted to take an action that inched it back toward the role of a public interest organization, it would use this year to develop recommendations setting limits on the use of consent agreements. Why this year? Why not?

Inconvenient judge

The problem of unfettered application of consent agreements plagues most sectors of business regulation; however, regulators in the financial services sector seem particularly susceptible to what may be called transactions rather than agreements or judgments.

The payment of a "fine" in conjunction with limitations being placed on civil and criminal enforcement conjures up visions of the type of transaction known as bribery. That is one reason why federal regulatory agencies submit consent agreements for judicial review. In the case of state insurance regulation, judicial review is not usually required unless the agreement follows litigation.

The application of consent agreements to financial crimes became a topic in the national news when U.S. District Court Judge Jed Rakoff rejected an agreement between the Securities and Exchange Commission (SEC) and Citigroup on the grounds that the agreement was "neither fair, nor reasonable, nor adequate, nor in the public interest."

The agreement would have excused Citigroup from accepting responsibility for wrongdoing. Nevertheless, the financial institution would have tendered the regulatory agency $285 million. In addition, Citigroup promised not to violate basic provisions of the criminal fraud laws.

As is common in such agreements, the one offered by the SEC did not require Citigroup to admit to wrongdoing. Judge Rakoff observed: "In the end, the Court concludes that it cannot approve it because the Court has not been provided with any proven or admitted facts upon which to exercise even a modest degree of independent judgment."

In a memorandum to the Court, the SEC made a stunning statement, "the public interest ... is not part of [the] applicable standard of judicial review." The memo asserts that the SEC's assessment of the public interest is sufficient. Judge Rakoff opined, "This is erroneous."

Public interest

In two previous rulings concerning the SEC and Bank of America Corp., Judge Rakoff established a four-part standard of judicial review for application to consent agreements, which consists of fairness, reasonableness, adequacy, and the public interest.

The key to understanding the ruling is accepting that both the regulatory agency and the court are charged with protecting the public interest. The actions of both parties must be assessed to serve the public interest.

Judge Rakoff provides the following description of how consent agreements may serve the public interest:

…when a public agency asks a court to become its partner in enforcement by imposing wide-ranging injunctive remedies on a defendant, enforced by the formidable judicial power of contempt, the court, and the public, need some knowledge of what the underlying facts are: for otherwise, the court becomes a mere handmaiden to a settlement privately negotiated on the basis of unknown facts, while the public is deprived of ever knowing the truth in a matter of obvious public importance.

In the area of financial regulation, too often consent agreements serve to withhold information from courts and the public—which includes both potential customers, customers, competitors and those who sell the products. As Judge Rakoff stated:

Finally, in any case like this that touches on the transparency of financial markets whose gyrations have so depressed our economy and debilitated our lives, there is an overriding public interest in knowing the truth. In much of the world, propaganda reigns, and truth is confined to secretive, fearful whispers. Even in our nation, apologists for suppressing or obscuring the truth may always be found. But the S.E.C., of all agencies, has a duty, inherent in its statutory mission, to see that the truth emerges; and if fails to do so, this Court must not, in the name of deference or convenience, grant judicial enforcement to the agency's contrivances.

Even before the repeal of the Glass-Steagall Act, which irresponsibly blurred the lines that separated securities insurance and banking, insurance regulators had a consent agreement problem. Insurance regulators sweep far too many unfair trade practices and other forbidden behaviors under the proverbial rug.


Regulators often reduce fines in return for entering into a consent agreement. The fines agreed to under insurance consent agreements represent a small percentage of the company revenue realized from the violating activity. Therefore, consent agreements convert punitive fines into nothing more than a business expense, which makes the punishment wholly inadequate to deter future violations.

State insurance regulators and the NAIC seem to prefer the realm of "secretive, fearful whispers." As noted above, perhaps a great majority of consent agreements signed by insurance commissioners do not receive judicial review. Many, if not most, remain secret through the inclusion of restrictive covenants, such as, "the existence of this agreement or the investigative findings that prompt this agreement to any other regulatory jurisdiction, the NAIC, the news media or the general public…"

The restrictive covenants on publicity impede the ability of damaged customers and producers to seek redress, either in the courts or the marketplace. In addition, regulators from other jurisdictions may never become aware of the violations occurring in their markets.

The covert nature makes it is difficult to gage the scale of the problem which consent agreements pose to effective insurance regulation. While many agreements become public documents, many others remain secret. The most embarrassing agreements to regulators and insurers are the most likely to be made secret.


For insurance regulators to make violations and punitive actions secret is particularly unreasonable, because other regulators, the public at large, and consumers in the market place need access to such information. Can we imagine the outcry from the insurance sector if states made driving records confidential?

For example, if a driver receives a ticket for speeding, he receives a fine and usually "points" on his license. The fine is punishment, and the points provide evidence of prior wrongdoing for consideration in sentencing in case the driver violates traffic laws again. In addition, this information lands in databases that officials share with other jurisdictions and even commercial vendors—such as insurance companies.

This information can result in fines or the loss of the privilege to drive in one or more jurisdictions. The loss of driving privileges is more likely if the violator repeats the transgression. In addition, this information can result in private sanctions, such as higher auto insurance rates.

Just as the SEC argued after Judge Rakoff published his eloquent dismemberment of the securities regulators' appeasement policies in the face of large-scale wrongdoing, insurance regulators say they need to cut amiable deals with violators because insurance regulators lack resources.

Insurance regulators argue that it is an expensive exercise to bring market conduct to hearing in order to apply the full weight of enforcement to bear on offending companies. Because most insurance departments lack both a cadre of lawyers and the budgets to hire outside counsel, where insurers do not face such constraints, state officials argue it is better to enter into consent agreements rather than prosecute enforcement actions. Presumably, the aim is to change future behavior without worrying about punishing past violations.

It is also important to note that not all regulators use consent agreements because they lack the resources to execute enforcement actions. Some regulators use consent agreements in order to cover up the ineptitude of their departments. Other regulators simply engage in a corrupt exchange because they view their role as in league with insurers.

From personal experience, I know of an insurer that entered into a consent agreement, only to commit the same violations again less than 10 years later in the same jurisdiction. The state offered the company another consent agreement.

It is also unreasonable to enter into public consent agreements where the company does not admit or deny the underlying allegations of regulatory violations. As Judge Rakoff noted in the SEC case:

Here, the S.E.C.'s long-standing policy—hallowed by history, but not by reason—of allowing defendants to enter into Consent Judgments without admitting or denying the underlying allegations, deprives the Court of even the most minimal assurance that the substantial injunctive relief it is being asked to impose has any basis in fact. There is little real doubt that Citigroup contests the factual allegations of the Complaint.

The same is true for such agreements drafted by insurance regulators.


Some observers in financial circles dismissed Judge Rakoff's ruling as an "extremist" opinion that will not have much influence in other jurisdictions. In addition, SEC lawyers could avoid future run-ins with Judge Rakoff through the time-honored practice of jurisdiction shopping: bringing a case to a court jurisdiction most amenable to the plaintiffs' perspective.

However, the court of public opinion welcomed Judge Rakoff's ruling. The use of consent agreements like the one brought to Judge Rakoff touches a nerve with people from the political left and right, who increasingly feel that citizens and "corporate citizens" operate in separate and unequal political and judicial systems. Furthermore, all corporations are equal, but financial services companies are what George Orwell termed "more-equal."

This kind of special treatment for corporate wrong-doers provides the impetus for public dissatisfaction with government and business. Whether one aligns his or her political philosophy with the original—pre-Dick Armey—TEA Party Movement, or the Occupy Wall Street Movement and reaching back in history to our Federalist founders, there existed disgust with "special privilege."

Edmund Cahn, the late legal philosopher identified this feeling as the sense of injustice. "Injustice is transmuted into assault; the sense of injustice is the implement by which assault is discerned and defense is prepared." Allowing insurers to bribe regulators with "fines" in order to avoid regulatory enforcement through secret arrangements provokes the sense of injustice.

It is time that the NAIC puts aside the three wise monkeys act.

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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