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Legal Ease by Scott Sinder Perfectly Clear

Regulatory conflicts between big and small firms mean transparency is the only option.

By  Scott Sinder

The unsatisfying thing about the countersignature cases is that by the time the final resolution arrives with the denial of a final appeal—or more accurately, the expiration of the time to file the appeal—the victory seems anticlimactic.

I have long moved on to the next problem du jour. But in closing the book on the nation’s countersignature cases in July, I would like to note the following:

As much as we lawyers want to take all of the credit for these victories, there are two sets of folks who deserve all of the kudos: The Council and its members for making the decision to pursue the cases, and Rebecca Restrepo and Ted Joyce, who agreed to take the time and to risk potential regulatory exposure to participate as our individual plaintiffs in two of the key cases—Nevada and South Dakota.

Although it may not seem that monumental for The Council to pursue this legal battle, we were heavily criticized when we filed the first two cases in Nevada and Florida. While it is common to bring policy-oriented litigation in other industries, this rarely had been done in the insurance industry. We were condemned in some corners for going forward. The very-soon-to-be-retired Nevada commissioner even appeared to be evading service of the complaint, further fueling the concerns regarding regulatory backlash.

Fortunately, I don’t believe there has been any regulatory backlash to this point. In fact, in our West Virginia case, the insurance commissioner stood at the head of the line requesting the legislature repeal the requirement, which it did (depriving us of the opportunity for another litigation victory, although a victory nonetheless).

As a general matter, regulators have to enforce the statutes of their legislatures. In many cases, the statutes were enacted decades ago at a different time in our industry’s history. On many issues, such as countersignature, I believe regulators understand our grievances and—more often than not—agree with our perspective.

Primary opposition to our position comes from within our own intermediary ranks as smaller firms try to impose artificial barriers to entry in their markets. They wished to artificially constrain larger firms from offering services and freely negotiating terms on which they would provide services.

This last point also colors the future and raises the question: “Where do we go from here?”

On every core Council issue—from licensure reform, compensation disclosure, surplus lines regulatory reform, and compensation/service issues to the proper application of the anti-rebating laws and offering products on a net of commission basis—there is tension between the smaller agencies and larger ones. Small agencies are very comfortable with the status quo. Larger firms are desperate for harmonization of the needlessly duplicative and sometimes conflicting state-by-state requirements. Larger firms also want liberalization of antiquated regulatory constraints that are imposed on the relationship between intermediaries and business clients.

One interesting facet of this is that the line dividing smaller agencies from larger ones varies on an issue-by-issue basis, so many firms will—either actually or effectively—describe themselves as small for certain issues but large for others. The New York compensation hearings in mid-July introduced a third category—the demonized “mega-brokers” that the “small” firms love to hate. Some of you reading this are probably nodding in agreement with the “mega” category and its demonization. But many of you who are nodding your heads sit in firms that others consider mega class.

So what difference does it make? Maybe none. But on the other hand, maybe a lot. Mega changes could be afoot. It appears New York regulators are going to do something in the compensation and disclosure areas. Also, serious consideration of an optional federal chartering regime appears likely next year.

In confronting these potential baskets of threats and opportunities, I think The Council will be pure—supporting transparency and those proposals designed to help remove regulatory intrusions into the relationship between intermediary and business client, as well as efforts to streamline compliance burdens.

The loudest backlash will come from those within the agent/broker community. Smaller agencies fear the increased level of competition that each of these types of reforms can foster. Ken Crerar, The Council’s president, has promised that the countersignature victories are not the end but the beginning of The Council’s efforts to remove anti-competitive barriers in the marketplace. Unfortunately, the starting point of these redoubled efforts will be in the same litigation arena: challenging already new countersignature requirements, which recently have been imposed in North Carolina for surplus lines business and by several municipalities for bond-related work.

New challenges are now before us. We need to evaluate which to pursue next. We need to know what matters most to you and what most needs fixing. We need to know if you are ready to engage in the fight.

The lawyers’ part is easy.

Sinder, a partner at Steptoe & Johnson, is CIAB general counsel.

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