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Public Policy Analysis & Opinion

Money does not satisfy greed; it stimulates it

The NAIC might put members in jeopardy of ethics violations

By Kevin P. Hennosy

It is important to note that in each of the following jurisdictions, the NAIC required the insurance commissioner to sign a Conflict of Interest Policy when they "joined" the organization. The document establishes "fiduciary duties" to the corporation.

In most jurisdictions, ethics laws provide a clear prohibition against officials or state agencies doing business with vendors where a conflict of interest exists. The existence of a competing fiduciary interest in a corporation is often cited as a conflict of interest in statutes, the Common Law, and state ethics opinions.

In addition to the general Conflict of Interest Policy, the commissioners from some of these jurisdictions served as members of the NAIC executive committee. The NAIC requires commissioners who serve on that committee to sign a second document entitled "Acknowledgment and Disclosure," which reiterates the commissioner's fiduciary duties to the corporation.

Furthermore, the insurance departments in each of these jurisdictions entered into licensing contracts with the NAIC to use SBS. The existence of a license agreement drafted with an eye toward protecting NAIC's property interests once again introduces the jeopardy of conflict of interest for state officials.

A fundamental conflict of interest exists because state insurance commissioners, who enter a license contract with NAIC for SBS, are fiduciaries on both sides of the same transaction.

The NAIC also realizes millions of dollars a year from financial gains through state mandates to use the SERFF. In many jurisdictions, commissioners who use their official capacity to create financial benefits for entities where they are associated or have a fiduciary relationship could be interpreted as an ethics violation.

Defenders of the NAIC may argue that because the NAIC is a nonprofit corporation, state conflict of interest prohibitions do not apply. This argument falls apart quickly when one reviews state ethics codes where nonprofit entities are very clearly treated in the same way as for-profit operations. "Interest" includes financial investment and equity positions, but interest is not limited to financial relationships.

The NAIC's insatiable thirst for revenues appears to place insurance regulators from multiple jurisdictions in jeopardy of running afoul of state ethics laws, regulations and opinions.

New Hampshire

New Hampshire state officials and employees must comply with a stringent ethics code (Section 21, Chapter 21 G). The primary jeopardy placed before New Hampshire regulators by the NAIC concerns Chapter 21 G 23 of the state ethics code, which prohibits executive branch members from "using his or her position with the state to secure privileges and advantages which are not generally available to government employees or advantages to others to which they are not otherwise entitled. [Emphasis added]

And yet, on multiple occasions the New Hampshire Insurance Commissioner has awarded what a reasonable person would understand as "privileges and advantages" to the NAIC. For example, the commissioner of insurance promulgated Bulletin INS 07-063AB, which deems the NAIC's SERFF service as the only conduit for submitting insurers' pricing and products for regulatory oversight, which also allows NAIC to compel insurers to pay a fee.

The bulletin creates a relationship where the NAIC carries a government imprimatur. The transaction cannot be confused with a government agency hiring a private janitorial firm to clean state offices. The bulletin orders insurers to transact with the NAIC, which establishes SERFF's policies and technical specifications that execute a regulatory activity. Furthermore, the NAIC uses the state's power to levy taxes to compel insurers to tender fees to the corporation, thus awarding privileges and advantages to the state.

Like most states, the New Hampshire Ethics Commission provides advisory opinions that include guidance in interpreting the ethics code. Advisory Opinion 2008-2 speaks to the application of conflict of interest prohibitions. The opinion warns that "in accepting public office, and the opportunity to shape public policy," public representatives agree to comply with a higher standard for conflict of interest.

As such, the commission opined that a prohibited conflict of interest exists "when a board member has a direct financial or fiduciary relationship with an organization that submits a proposal or RFP."

Chapter 21 G 22 of the state's ethics code prohibits executive branch members from "having" a private interest which may directly affect or influence the performance of their duties. The NAIC's insistence that state regulators sign a document that establishes that all members hold "fiduciary duties" to the corporation raises ethics concerns for prudent observers.

Rhode Island

As noted in this year's April edition of Rough Notes, the NAIC placed a promotional video on YouTube, where Rhode Island Commissioner Joseph Torti III gleefully expresses that he awarded NAIC a contract without requesting proposals from other competitors, because he knew the corporation.

Well, actually, Torti seems to be describing something more troublesome in the light of ethics law. If Torti's boast on the NAIC video accurately reflects his actions, he awarded an un-bid contract to a corporation where he owes fiduciary duties, through a license agreement written to protect the interest of the NAIC.

Like most other states, under "Little Rhodie" law, the NAIC's nonprofit status does not appear to shield commissioners from legal jeopardy when it comes to contracting with that corporation. At Chapter 36-14-7, the statute holds that with regard to state officials "no business associate, or any business … which the person represents will derive a direct monetary gain or suffer direct monetary loss ... by reason of his or her official activity."

Acting in his official capacity, Commissioner Torti issued Insurance Bulletin 2007-3, which mandated the use of the NAIC's SERFF technology "rate, rule and form" filings. This action generated large sums of fee revenue for a business entity where he sat on the board, and served as a representative by hosting events for the NAIC, such as the SBS Licensing Summit in 2006.

Defenders of the NAIC corporate enterprise might argue that the NAIC provides Rhode Island with efficient and effective service; however, the Rhode Island Ethics Commission opined in Advisory Letter 85-25 that "economic thrift" does not provide an economic shield from the application of conflict of interest prohibitions.


The Sunshine State also provides for protections for the public interest in the face of private interest. Florida Insurance Commissioner Kevin McCarty has owed the NAIC fiduciary duties for quite some time now.

The Florida Ethics Code contains a provision (Chapter 112-313-3) that bans officers or employees who serve as directors or officers of a business entity from doing business with their state agency. In addition, Chapter 112-313-7 establishes a similar ban against contracting with those businesses where a conflict of interest exists. Once again, the state code throws a wide net when defining the term business entity, and NAIC is easily entangled in that net (Chapter 112-312-5). Florida is a licensed user of SBS and generates income for the NAIC by using the Opt-Ins service to conduct premium tax audits.


Kansas ethics law also establishes a very inclusive definition of conflict of interest and the class of legal entity, which place jeopardy in the path of state officials. Like most, if not all, jurisdictions, Kansas has a law that extends ethics oversight to officials' participation in nonprofit organizations and associations. In addition, the question of compensation is not germane to the application of ethics law. Furthermore, like most states, officials and employees or their spouses who act as officers and/or directors of outside entities—for-profit or nonprofit—face the jeopardy of ethics violations.

Kansas uses distinctive terms for defining conflicts of interest, such as, "substantial interest," which is defined by the same tenets as "client" or "customer." Again, the participation in a business or "special interest" as an officer and/or director establishes a substantial interest.

Kansas law, at 46-233, appears to prohibit any "state officer, employee or legislator" from making a contract with an entity where they hold a substantial interest, or even being "involved in the preparation" of such a contract.

Once again, by entering into the SBS licensing agreement with the NAIC and taking steps to achieve compliance with NAIC initiatives, Kansas Insurance Commissioner Sandy Praeger—former NAIC president and long-time member of the executive committee—is reasonably seen as in violation of the ethics provisions noted above.


The Montana Insurance Department is a licensed participant in the NAIC SBS program, which imbues its commissioner with the usual fiduciary duties in the corporation, which reasonably appears to introduce a conflict of interest, as in other jurisdictions.

Montana Commissioner of Securities and Insurance Monica J. Lindeen, who is now an NAIC officer, might want to drop a friendly letter to her ethics commission to seek a friendly review of her relationship with the Delaware-chartered corporation, rather than relying on NAIC legal advice. The NAIC lawyers have a history of providing highly misleading information to the officers and members at the order of the corporation's management.

In Montana, public officials must comply with a statutory prohibition (Chapter 2-2-106) from taking actions detrimental to any competitor of a business with which they are associated; therefore, a Montana Insurance Commissioner could not establish any rule that favors NAIC's products and services over those of any possible competitor without appearing to violate this prohibition.

Furthermore, another provision (Chapter 2-2-205) prohibits official acts to benefit "a business or other undertaking in which an officer or employee has a substantial financial interest or is engaged as a counsel, representative or consultant." Since a reasonable person might assume that signing a document that acknowledges fiduciary duties in the NAIC and becoming an officer of that corporation might be interpreted as serving as its representative, it also is reasonable to ask the question whether promulgating rules that result in financial benefits to the NAIC might violate this provision of the Montana ethics code.

The empire

The preceding focused on several jurisdictions where commissioners served as NAIC officers, which means they also served on the executive committee for the corporation. The term "executive committee" most easily equates with the generic term "board of directors," which ends up in most ethics statutes; however, rank and file NAIC members should not breathe easy.

That is because when the NAIC legal staff filed incorporation papers in Delaware, that described the corporation as having one level of membership, which can be interpreted as the board of directors consisting of the entire membership—a committee of the whole—or plenary. Compliance with NAIC initiatives might put every member in jeopardy. No commissioner should quench his or her thirst for career advancement by drinking from the NAIC's cup of Kool Aid.

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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