Monday, March 31, 2014

No. 38: Weakening of Disclosure Requirements Imposed by State Regulators on Insurance Companies

The National Convention of Insurance Commissioners (Convention) was created in 1871 in the wake of the 1868 U.S. Supreme Court decision in Paul v. Virginia, which held that insurance was not commerce. An important reason for creation of the Convention was to prepare uniform annual financial statement blanks that insurance companies could file in all states. The Convention became the National Association of Insurance Commissioners (NAIC) in 1939, and to this day a major function of the NAIC is the promulgation of uniform annual statement blanks.

Removal of Schedules
Over the years the NAIC removed several important schedules from the life insurance company blanks. Among the schedules removed were Schedule G (executive compensation), Schedule J (legal expenses), Schedule K (lobbying expenses), and Schedule M (life insurance policy dividends).

The NAIC once thought the information in those schedules was important. However, the life insurance industry lobbied the NAIC to remove the schedules from the blank, and the NAIC did so. Although there was public interest in the information in those schedules, the NAIC said the schedules served no useful regulatory purpose.

Removal of Schedule G
Public interest in the executive compensation information in Schedule G always has been strong. In the January 1987 issue of The Insurance Forum, in an article entitled "More Secrecy from the NAIC," I said removal of Schedule G from the NAIC blank ended a long tradition of executive compensation disclosure in life insurance company annual statements dating from legislation enacted in 1906 after the Hughes-Armstrong investigation of 1905.

A New York law requires life insurance companies doing business in New York to disclose executive compensation information in annual statements filed in New York. For that reason, the New York Department of Insurance, which is now the New York Department of Financial Services (DFS), had to retain Schedule G in the New York Supplement to the NAIC blank.

Decimation of the New York Law
In the October 2008 issue of The Insurance Forum, in an article entitled "The Decimation of New York State's Century-Old Compensation Disclosure Law," I described how the life insurance industry lobbied the New York legislature to curtail sharply the amount of executive compensation information that had to be disclosed. The amendment passed easily with no hearings, no debate, and no media scrutiny.

Until I received a tip after the amendment had cleared the legislature, I was not aware of the amendment even though its purpose was to reduce the amount of information available for my annual tabulations of executive compensation. I immediately wrote to then New York Governor David A. Paterson asking him to veto the amendment, but he signed it.

Special Treatment of Schedule G
Even in its decimated form, Schedule G is subject to special treatment. The DFS instructs companies to file Schedule G separately from the rest of the New York Supplement. Then the DFS posts the New York Supplement, without Schedule G, on the DFS's public portal. Thus a person who wants one or more Schedule Gs must file a formal request pursuant to the New York Freedom of Information Law and experience the delays associated with such requests.

On March 13, 2014, I asked Michael Maffei, chief of the life bureau of the DFS, to explain why the DFS gives special treatment to Schedule G. He did not reply. I think the life insurance industry lobbied the DFS, and the DFS agreed, to prevent the public from gaining easy access to executive compensation information.

General Observations
The history of Schedule G with the NAIC and the DFS vividly illustrates the contrast between the strong disclosure requirements in federal securities laws and the weak disclosure requirements in state insurance laws. Public companies are required to include executive compensation information in filings with the Securities and Exchange Commission (SEC). Most of the companies include the information in proxy statements, and a few include it in 10-K annual reports.

Those documents are readily available to the public on the SEC's website with no restrictions, no delays, no expenses, and no questions asked. One can only imagine the furor that would arise if shareholders, other investors, reporters, and the public had to incur the long delays associated with formal requests pursuant to the federal Freedom of Information Act to obtain access to executive compensation information.