Senate Report 113-82 - NATIONAL ASSOCIATION OF REGISTERED AGENTS AND BROKERS REFORM ACT OF 2013

[Senate Report 113-82]
[From the U.S. Government Publishing Office]

Calendar No. 151
113th Congress Report
SENATE
1st Session 113-82

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NATIONAL ASSOCIATION OF REGISTERED AGENTS AND BROKERS REFORM ACT OF
2013

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July 29, 2013.--Ordered to be printed

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Mr. Johnson of South Dakota, from the Committee on Banking, Housing,
and Urban Affairs, submitted the following

R E P O R T

[To accompany S. 534]

The Committee on Banking, Housing, and Urban Affairs,
having had under consideration S. 534 a bill to reform the
National Association of Registered Agents and Brokers, and for
other purposes, having considered the same, reports favorably
thereon with an amendment and recommends that the bill, as
amended, do pass.

INTRODUCTION

On June 6, 2013, the Senate Committee on Banking, Housing,
and Urban Affairs considered S. 534, entitled `The National
Association of Registered Agents and Brokers Reform act of
2013,' a bill to reform the National Association of Registered
Agents and Brokers, and for other purposes. The Committee voted
to report the bill, as amended, to the Senate.

BACKGROUND

Beginning in the early 1800s, the business of insurance in
the United States had been regulated by the States. In 1943,
however, the Supreme Court ruled in United States v. South-
Eastern Underwriters Association, that the business of
insurance is subject to Congress's power to regulate interstate
commerce. Following that ruling, Congress passed the McCarran-
Ferguson Act and delegated the regulation and taxation of the
business of insurance to the States. However, Congress reserved
the right to regulate the business of insurance in instances
when it may be appropriate.
Since the passage of the McCarran-Ferguson Act, the States
have enacted and enforced a variety of insurance laws and
regulations specific to the needs and perils of each locality.
For an insurance company or agent operating nationally, this
can mean being regulated by up to 56 independent domestic
regulators (this includes the fifty States, the District of
Columbia and five U.S. territories). Currently, insurance
companies and agents operating in more than one State are
required to apply and maintain separate licenses in each State
in which they operate, even if the license requirements and
paperwork are similar.
In 1999, Congress passed the Gramm-Leach-Bliley Act that
included a provision, specifically Section 321, to encourage
States to pass uniform agent and producer licensing regulations
within three years of enactment. If a majority of the States
did not pass uniform rules in that time period, the National
Association of Registered Agents and Brokers (NARAB) would be
created to grant licenses authorizing its members to operate in
any State. The National Association of Insurance Commissioners
(NAIC) determined a sufficient number of States passed uniform
regulations, however, so NARAB was never created.
Despite the progress made by the States towards uniform
licensing requirements, concerns remain. In a 2009 report
(``Insurance Reciprocity and Uniformity: NAIC and State
Regulators Have Made Progress in Producer Licensing, Product
Approval, and Market Conduct Regulation, but Challenges
Remain,'' GAO-09-372), the Government Accountability Office
(GAO) highlighted several barriers to insurance producer
licensing uniformity and reciprocity, as well as uneven
insurance consumer protections. The GAO report noted that
licensing inefficiencies ``could result in higher costs for
insurers, which in turn could be passed on to consumer[s].''
In testimony before the Committee on March 19, 2013, Monica
J. Lindeen, Montana State Auditor and Commissioner of
Securities and Insurance and Vice-President of the National
Association of Insurance Commissioners, stated: ``Even with all
our progress, the NAIC agrees that further improvement is
needed. The states have made such significant progress in
reforming producer licensing that today's system is
unrecognizable from the system of 10-15 years ago. However, the
narrow, targeted area of the non-resident insurance producer
licensing process is one of the exceptionally rare instances
where we believe Federal legislation could be used.''
To address the concerns with the current insurance producer
licensing system highlighted by GAO, NAIC and others, Senators
Jon Tester and Mike Johanns introduced S. 534, the National
Association of Registered Agents and Brokers Reform Act of
2013. This Act would create a National Association of
Registered Agents and Brokers that will allow non-resident
insurance producers, after meeting and maintaining certain
eligibility criteria, to operate in States for which they pay a
State's licensing fee.

PURPOSE OF THE LEGISLATION

The National Association of Registered Agents and Brokers
Reform Act will streamline and improve the licensing process
for approved non-resident insurance producers, eliminating
duplicative licensing requirements for those businesses
operating in multiple States. This Act will improve the non-
resident insurance producer licensing process and strengthen
oversight by State insurance regulators.

HEARINGS

On March 19, 2013, the Subcommittee on Securities,
Insurance, and Investment held a hearing titled ``Streamlining
Regulation, Improving Consumer Protection and Increasing
Competition in Insurance Markets,'' where S. 534 was discussed.
The witnesses testifying were: The Honorable Monica J. Lindeen,
Commissioner of Securities and Insurance, Montana State
Auditor, on behalf of the National Association of Insurance
Commissioners; Mr. Jon A. Jensen, President, Correll Insurance
Group, on behalf of Independent Insurance Agents and Brokers of
America; Mr. Scott Trofholz, President and CEO, The Harry A.
Koch Company of Omaha, Nebraska, on behalf of the Council of
Insurance Agents and Brokers; and Mr. Baird Webel, Specialist
in Financial Economics, Congressional Research Service.

SECTION-BY-SECTION ANALYSIS OF THE LEGISLATION

Section 1. Short title

Section 2. Reestablishment of the National Association of Registered
Agents and Brokers

Amends Subtitle C of title III of the Gramm-Leach-Bliley
Act (15 U.S.C. 6751 et seq.). The section-by-section analysis
of the amended Subtitle is:

Section 321. National Association of Registered Agents and Brokers

Establishes the National Association of Registered Agents
and Brokers (``Association''), which would be an independent
non-government entity that would be incorporated as a nonprofit
in the District of Columbia.

Section 322. Purpose

Describes the purpose of the Association.

Section 323. Membership

Establishes minimum Association membership criteria for
insurance producers, authorizes the Association to create
additional criteria, and requires the Association to create
continuing education requirements. Allows the Association to
take certain actions against a member who fails to maintain the
membership criteria. This section also requires the Association
to notify the States that an insurance producer satisfied the
Association's membership criteria, and gives each State 10 days
to appeal. Membership is granted on a 2-year basis.
Establishes Association membership as the equivalent of a
nonresident insurance producer license and authorizes
Association members to conduct insurance business in any State
if the member pays the licensing fee.
The Association is authorized to share confidential
information with certain regulators, clearinghouses, and
databases. The Association must refer consumer complaints
against members to the appropriate State insurance regulator.

Section 324. Board of Directors

Establishes a bipartisan 13 member Board of Directors for
the Association composed of eight State insurance
commissioners, three individuals with demonstrated expertise
and experience with property and casualty insurance producer
licensing, and two individuals with demonstrated expertise and
experience with life or health insurance producers licensing.
The five experts could include industry representatives,
consumer advocates or academics, among others.
All 13 members will be appointed by the President of the
United States, with the advice and consent of the U.S. Senate
to staggered 2-year terms. The Senate will consider these
nominations on the privileged track established during the
112th Congress under Senate Resolution 116.

Section 325. Bylaws, standards, and disciplinary action

Outlines the process of enacting and amending the bylaws
and standards of the Association, as well as establishes the
process to handle disciplinary action against an Association
member.

Section 326. Powers

Enumerates the powers of the Association.

Section 327. Report by Association

Requires that the Association submit an annual report to
the States and the President of the United States on activities
of the Association that includes an audited financial
statement. Given that the U.S. Department of the Treasury has a
Federal Insurance Office, the Association's annual report to
the President must be delivered through the Treasury
Department.

Section 328. Liability of the Association and the board members,
officers, and employees of the Association

Exempts the Association from being treated by the States as
an insurance producer. This section also limits the personal
liability of the Board of Directors and other Association
employees for actions done in good faith within the scope of
their Association duties.

Section 329. Presidential oversight

Provides that the President of the United States may remove
a Board member, or the entire Board, for certain reasons. This
section also allows the President to suspend any bylaw,
standard, or action of the Association if the President
determines its implementation is contrary to the purpose of
this Subtitle.

Section 330. Relationship to State law

Preempts only State laws that relate to the licensing of
non-resident insurance producers, conflict with Association
membership requirements or discriminate against Association
members. Preserves the McCarran-Ferguson Act's State-based
regulatory authority to investigate and discipline insurance
producers doing business in their state.

Section 331. Coordination with regulators

Requires the Association to coordinate with the Financial
Industry Regulatory Authority (FINRA) to ease any unnecessary
administrative burdens for FINRA-regulated Association members.

Section 332. Right of action

Confers jurisdiction for any civil action taken against the
Association to an appropriate United States district court.

Section 333. Federal funding prohibited

Prohibits the Association from receiving, accepting, or
borrowing funds from the Federal Government to cover
establishment or operational costs.

Section 334. Definitions

COST OF LEGISLATION

CONGRESSIONAL BUDGET OFFICE COST ESTIMATE

Summary: S. 534 would establish the National Association of
Registered Agents and Brokers (NARAB) and authorize it to
license producers of insurance (mostly agents and brokers) to
operate in multiple states. Under current law, each state
establishes requirements for licensing insurance producers
within that state; producers must comply with the requirements
of each state where they are licensed to operate. Under the
bill, insurance producers that join the NARAB would be able to
obtain a license to act as a producer in any state other than
their home state by meeting the NARAB's eligibility
requirements and paying certain fees.
CBO estimates that enacting S. 534 would increase revenues
by $490 million and increase direct spending by $483 million;
taken together, those effects would reduce the deficit by $7
million over the 2014-2023 period. Pay-as-you-go procedures
apply because enacting the legislation would affect direct
spending and revenues. Implementing S. 534 would not have a
significant net effect on discretionary spending.
S. 534 contains intergovernmental mandates as defined in
the Unfunded Mandates Reform Act (UMRA). CBO estimates that the
costs to state, local, and tribal governments of complying with
the mandates would be less than $1 million in 2016 and each
year thereafter. Those costs would not exceed the annual
threshold for intergovernmental mandates established in UMRA
($75 million in 2013, adjusted annually for inflation). S. 534
contains no new private-sector mandates as defined in UMRA.
Estimated cost to the Federal Government: The estimated
budgetary impact of S. 534 is shown in the following table. The
costs of this legislation fall within budget function 370
(commerce and housing credit).

--------------------------------------------------------------------------------------------------------------------------------------------------------
By fiscal year, in millions of dollars--
----------------------------------------------------------------------------------------
2014-
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2014-2018 2023
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CHANGES IN DIRECT SPENDING

Estimated Budget Authority..................................... 1 2 53 56 57 59 61 64 67 70 169 490
Estimated Outlays.............................................. 1 2 47 55 57 59 61 64 67 70 162 483

CHANGES IN REVENUES

Estimated Revenues............................................. 0 0 56 56 57 59 61 64 67 70 169 490

NET DECREASE IN THE DEFICIT FROM CHANGES IN DIRECT SPENDING AND RECEIPTS

Impact on Deficit.............................................. 1 2 -9 -1 0 0 0 0 0 0 -7 -7
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Note: CBO estimates that implementing S. 534 would not have a significant net effect on discretionary spending.

Basis of estimate: CBO expects that cash flows related to
the NARAB would be recorded in the budget as revenues and
direct spending because the association's authority would exist
only through a preemption of states' power to regulate the
licensing of insurance producers. This preemption would stem
from an exercise of the sovereign power of the federal
government.
Under the current regime for licensing insurance producers,
a producer who wishes to operate in more than one state must
meet the licensing requirements in each of those states and pay
the appropriate licensing fees. The National Insurance Producer
Registry (NIPR), an affiliate of the National Association of
Insurance Commissioners (NAIC), facilitates that multi-state
licensing process by providing a single portal to submit
applications and pay licensing fees. Under S. 534, an insurance
producer who meets the eligibility requirements established by
the NARAB and becomes a member would be eligible to sell
insurance in any state where the member pays the appropriate
state licensing fee. In 2012, approximately 2.4 million active
insurance producers used the services of the NIPR; about 1.7
million of those producers were licensed in only one state. CBO
expects that the NARAB's membership base would be made up of
some, but not all, of the remaining active producers
(approximately 730,000) because we expect that some producers
operating in multiple states would find it cost-effective to
forgo membership in the NARAB and follow each state's licensing
procedures.
For this estimate, CBO assumes that S. 534 will be enacted
near the start of fiscal year 2014.

Direct spending

Under S. 534, the NARAB would be responsible for
establishing eligibility requirements for membership in the
association, evaluating applicants' eligibility for membership,
and managing licensing requirements for members. S. 534 would
direct the NARAB to establish separate classes of membership
for businesses and individuals and require members to meet
certain continuing education requirements.
The bill would authorize the NARAB to establish a system
that simplifies the process of notifying a state of a
producer's intent to operate there and paying the required
fees. Similarly, S. 534 would authorize the NARAB to create a
database to centralize information about regulatory actions
taken by states against insurance producers. Currently, the
NIPR offers services that streamline the process to apply for a
nonresident license. Similarly, the NAIC maintains a database
of state regulatory actions. The bill would allow the NARAB to
establish those capabilities or make use of the systems already
in place.
The bill would provide at least two years from the date of
enactment for the association to set up operations. During that
time, the NARAB would be authorized to borrow funds from the
public to cover start-up costs, which would be repaid from
membership fees.
Based on information about the cost to operate similar
professional organizations, CBO estimates that enacting S. 534
would increase direct spending by $483 million over the 2014-
2023 period to cover start-up, staffing, and operating costs of
the association.

Revenues

S. 534 would authorize the NARAB to charge members fees to
cover the cost of operating the organization. CBO assumes that
the NARAB would use its authority to borrow funds to organize
and begin its operations before membership fees could be
collected. CBO estimates that collecting those fees would
increase revenues by $490 million over the 2014-2023 period.

Spending subject to appropriation

Under S. 534, membership in the NARAB would be available to
insurance producers who have undergone a background check
conducted by the Attorney General. Applicants that have
undergone a similar background check within two years of
submitting an application to the NARAB would be exempt from
this requirement. Otherwise, the NARAB would be authorized to
request such background checks as part of its review of an
applicant's eligibility.
The bill would direct the Attorney General to establish
regulations to implement this new requirement and to collect
fees to carry out background checks. We expect that those fees
would be classified as offsetting collections and would be
credited to the salaries and expenses appropriation of the
Federal Bureau of Investigation (FBI). This is the same
budgetary treatment accorded to fees currently collected by the
FBI for similar purposes. CBO estimates that the collections
and spending of those fees would have no significant effect on
net discretionary spending in any year.
Pay-As-You-Go considerations: The Statutory Pay-As-You-Go
Act of 2010 establishes budget-reporting and enforcement
procedures for legislation affecting direct spending or
revenues. The net changes in outlays and revenues that are
subject to those pay-as-you-go procedures are shown in the
following table.

CBO ESTIMATE OF PAY-AS-YOU-GO EFFECTS FOR S. 534 AS ORDERED REPORTED BY THE SENATE COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS ON JUNE 6, 2013
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By fiscal year, in millions of dollars--
--------------------------------------------------------------------------------------------------
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2013-2018 2013-2023
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NET INCREASE OR DECREASE (-) IN THE DEFICIT

Statutory Pay-As-You-Go Impact....................... 0 1 2 -9 -1 0 0 0 0 0 0 -7 -7
Memorandum:
Changes in Outlays............................... 0 1 2 47 55 57 59 61 64 67 70 162 483
Changes in Revenues.............................. 0 0 0 56 56 57 59 61 64 67 70 169 490
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Estimated impact on state, local, and tribal governments:
S. 534 contains intergovernmental mandates as defined in UMRA
because it would preempt state laws and impose a notification
requirement on state insurance regulators. CBO estimates that
the aggregate cost of intergovernmental mandates in the bill
would be less than $1 million in 2016 and each year thereafter.
Those costs would not exceed the annual threshold for
intergovernmental mandates established in UMRA ($75 million in
2013, adjusted annually for inflation).

Registration with Secretaries of State

Under current law, about 10 states require nonresident
insurance producers to register with their respective
secretaries of state, and to pay fees. The bill would prohibit
states from imposing this requirement and from collecting those
fees. Based on the number of producers that are currently
registered in states that impose this requirement, CBO
estimates that the states would lose less than $1 million in
fee revenue in 2016 and each year thereafter.

Licensing requirements

Most states collect a fee from nonresident insurance
producers when they obtain a license. Under the bill, the NARAB
would collect those fees from their members and remit them to
the states.
Although states might receive those fees with some delay,
CBO estimates that the cost to states of the mandate would be
minimal.

Notification requirement

The bill would require state insurance regulators to notify
the NARAB of the results of complaint investigations. CBO
estimates that the cost to states of that notification
requirement would be minimal.

Education and bonding requirements

Finally, the bill would prohibit states from requiring
nonresident producers to be bonded and to complete education
requirements. States do not collect revenue in connection with
their education or bonding requirements; therefore, states
would not incur a cost to comply with this mandate.
Estimated impact on the private sector: S. 534 contains no
new private-sector mandates as defined in UMRA.
Estimate prepared by: Federal costs: Susan Willie; Impact
on state, local, and tribal governments: Elizabeth Cove
Delisle; Impact on the private sector: Paige Piper/Bach.
Estimate approved by: Theresa Gullo, Deputy Assistant
Director for Budget Analysis.

REGULATORY IMPACT STATEMENT

In accordance with paragraph 11(b), rule XXVI, of the
Standing Rules of the Senate, the Committee makes the following
statement concerning the regulatory impact of the bill.
This legislation seeks to address several deficiencies
within the current State-based regulation structure of the
insurance industry, specifically the licensing of non-resident
insurance producers.
Currently, insurance companies and agents operating in more
than one State are required to apply and maintain separate
licenses in each State in which they operate. This Act creates
a new, independent, non-profit association that is authorized
to grant membership to certain individuals and companies who
meet criteria established by this Act, and allows those members
to be licensed for the business of insurance in any State in
which the member pays a licensing fee. This will streamline the
licensing process for members, eliminating duplicative
application and licensing requirements. Because of this, this
Act will reduce unnecessary costs while strengthening
coordination and oversight by State insurance regulators.
Furthermore, while this Act streamlines the licensing
process for non-resident insurers, it does not alter or preempt
the State-based regulation of the business of insurance,
including market conduct and consumer protection. It does not
alter or preempt State investigative or disciplinary authority
over insurance producers and agents licensed in each State. It
is not expected that the reported bill will have any burdensome
impact on the individuals or companies being regulated.
Subsection (j) of the newly amended section 323 of the
Gramm-Leach-Bliley Act allows for the creation of a
clearinghouse and a database for the States and the
Association's members to use to share information regarding the
licensing status of its members, as well as other information
and data. The confidential or privileged information the
Association is authorized to share under this subsection must
remain confidential or privileged, and allows the Association
to limit the sharing of certain information to non-governmental
entities that they deem sensitive. Because of this, this Act
will protect the personal privacy of the Association's members.

JUSTIFICATION FOR NEW EXECUTIVE POSITIONS

In accordance with Section 4, of Senate Resolution 116 of
the 112th Congress, the Committee makes the following
evaluation and justification for the creation of new positions
requiring appointment by the President.
This legislation creates a 13 member Board of Director for
the National Association of Registered Agents and Brokers, with
staggered terms of two years, all of which require Presidential
appointment with the advice and consent of the Senate. As
reported by the Committee, all of the 13 nominations will be
considered under the privileged track established in Section 1
of Senate Resolution 116 of the 112th Congress.
In order for the Association to achieve the goals
established under this legislation, a Board of Directors
consisting of adequate representation of both the public and
private sectors is needed. Because of the power granted to the
Association and its Board of Directors, the Committee agrees
with the portion of the United States Department of Justice's
opinion, expressed in a 2008 letter from the Department to the
Senate, that the Members of the Board should be appointed by
the President, with the advice and consent of the Senate.

CHANGES IN EXISTING LAW (CORDON RULE)

On June 6, 2013, the Committee unanimously approved a
motion by Senator Johnson to waive the Cordon rule. Thus, in
the opinion of the Committee, it is necessary to dispense with
section 12 of rule XXVI of the Standing Rules of the Senate in
order to expedite the business of the Senate.