ISSUES OF CONCERN
H.R. 1408, THE FINANCIAL SERVICES
ANTIFRAUD NETWORK ACT OF 2001,
AND MANAGERS’ AMENDMENT THERETO

 
1. The legislation is described as an antifraud bill; however, it may make it easier for individuals with criminal records to engage in the business of insurance.

Existing law [18 U.S.C. 1033(e)(1)(A) and (B)] prohibits any individual convicted of a criminal felony from engaging in the business of insurance; it also prohibits anyone from willfully permitting a convicted felon to engage in the business of insurance. However, subsection 110(g) of the legislation creates a major exception to the prohibition in existing law for individuals licensed by a regulator who does criminal background checks. Subsection 110(g) says that no one "engaged in the business of conducting financial activities" can be prosecuted for violating 18 U.S.C. 1033(e)(1), unless that person has "actual knowledge" that the individual he or she is hiring is in violation of 18 U.S.C. 1033(e)(1)(A) and that the financial regulator would not know about this violation. It may be difficult for anyone to have "actual knowledge" as to what a financial regulator does, or does not, know. As a result, holding anyone in the financial services industry accountable for hiring convicted felons could be difficult. Protection from accountability may lead to less rigorous efforts to keep convicted criminals from engaging in the business of insurance.

2. The legislation does not give State Insurance Commissioners and insurance companies the same access to the criminal history records of financial professionals as that enjoyed by banking agencies and banks, and securities regulators and securities firms.

Currently, a disparity exists in the antifraud tools available to insurance regulators and insurance companies, on the one hand, and other financial regulators and financial service companies, on the other. Securities firms, banks, and their regulators have access to the complete criminal history records of people seeking employment or licenses in those industries. Only a very few State insurance commissioners have the same access. While the legislation gives insurance commissioners access to information regarding felony convictions, it does not provide access concerning other serious wrongdoing and therefore fails to eliminate the disparate treatment of insurance commissioners and insurance companies.

The legislation provides no new authority for information sharing. Instead, the bill seems to rely on whatever authority currently exists under other state and federal laws for regulators and private entities to share information. Since the legislation gives the regulators no new authority to share information, its main purpose appears to create a new bureaucracy with potentially expansive powers.

4. The legislation does not give the Antifraud Subcommittee (hereinafter referred to as the Subcommittee) clearly defined powers needed to perform the duties and functions specified.

Subsection 105(a) of the bill gives the Subcommittee an undefined grant of authority, and says that "The Subcommittee shall have such powers as are necessary to carry out the purposes of the Subcommittee under this title." Such a statement of authority is nonspecific and potentially overbroad.

5. The legislation allows financial regulators to put unsubstantiated investigative and other information on the computer network the Subcommittee maintains, in addition to final disciplinary and formal enforcement actions, and licenses, registrations, approved applications, and affiliations.

Subparagraphs 102(b)(2)(A)(ii) and (iv) say a financial regulator may put information on the computer network concerning investigations and any other information a financial regulator may consider appropriate.

6. The legislation does not establish an effective prohibition on unauthorized disclosures of confidential personal information.

Although the legislation contains a prohibition against unauthorized disclosures of confidential information, the bill also contains numerous exceptions. For example, subsection 107(i) of the bill says a financial regulator may give access to confidential information to any one "for any appropriate governmental, law enforcement, or public purpose...". The meaning of the term "public" in this provision is not defined and could be interpreted broadly.

Although the Subcommittee is given authority to "coordinate development of guidelines" to ensure confidentiality and security of shared information, it is not required to enforce guidelines. The bill and the manager’s amendment create a new federal entity to operate a network, but then permit that entity to relinquish responsibility to the individual regulators for ensuring the security of the network and the confidentiality of the non-public information available through the network. The existence of criminal sanctions for improper disclosure is inadequate because it is hard to imagine that prosecutions of that nature would be a priority for overloaded Federal prosecutors’ offices.

7. The legislation would allow FBI criminal data to be maintained in data bases outside the FBI’s control.

Subparagraph 110(h)(2)(C) of the legislation says that the National Association of Insurance Commissioners (NAIC), a private trade association, should maintain a database to obtain FBI criminal records for use by state insurance commissioners. Presumably, these FBI criminal records would remain in the custody of the NAIC. The bill does not address how such criminal records are to be updated and secured after the initial purpose for which they were requested has been satisfied.

8. The legislation does not provide for input from industry and consumers in the operations of the Subcommittee and network.

The bill and manager’s amendment create a Federal entity that creates policies through guidelines, and not through a formal rulemaking process. This method of conducting Subcommittee business fails to give consumers and industry representatives a voice in the operation of the network and the content and security of the information on the network. Industry and consumer groups have an interest in ensuring that the Subcommittee adequately safeguards the privacy of citizens and that it operates efficiently.

9. The legislation gives the Subcommittee complicated and potentially costly technical and administrative responsibilities. Yet, the Subcommittee’s resources to accomplish the tasks identified are unspecified.

Section 102 of the bill says the Subcommittee’s purposes include facilitating development of a computer network of information and a tracking system. Subsection 102(g) of the legislation further states that the proposed computer network shall be established within two years following the date of enactment of the legislation, unless the Subcommittee determines it cannot be established within that period of time in a practicable and cost effective manner. This computer network is the means by which the legislation would have financial regulators and participating agencies share information.

The legislation authorizes no funds for the Subcommittee and provides an undefined funding system that relies on the negotiation of fees between the Subcommittee and individual regulators. This system could result in either inadequate funding for the Subcommittee or an inequitable funding system. While the bill provides that the Subcommittee cannot impose a fee on a regulator without its consent, there is a serious concern that a regulator may not be able to refuse to pay the fees proposed by Subcommittee out of concern that the regulator would be viewed as uncooperative.

10. The legislation is effectively an amendment to the Presidential Executive Order establishing the Working Group on Financial Markets.

The bill changes the structure and activities of the Working Group on Financial Markets which was established by the President in Executive Order 12631, by providing for the establishment of the Antifraud Subcommittee as a subcommittee of the Working Group and by giving the Subcommittee new powers and responsibilities that the Presidential Executive Order does not give the Working Group.

11. By putting the Subcommittee in the President’s Working Group on Financial Markets, the President could cause the Subcommittee to be established and to operate in ways that are different from those provided in the legislation.

Subsection 101(e) of the legislation says that the President shall provide for the continuation of the Subcommittee’s coordination functions, if he disbands the Working Group on Financial Markets. This language does not limit in any way the President’s ability to decide, on his own, how to provide for the continuation of the Subcommittee’s coordination functions, or even that the Subcommittee must continue to be the entity that performs the coordination functions.

12. The state insurance commissioners and private groups may be forced to participate as a member or liaison of the Subcommittee or in the antifraud computer network, even if they choose not to participate.

Subsection 101(d) of the bill effectively permits the President to "federalize" state insurance and securities agencies as well as "self regulatory organizations" and trade associations, such as the NAIC, to compel their participation in the Subcommittee and to give such state and private entities access to sensitive, unsubstantiated personal information that is shared by Subcommittee participants. Only if the President alters the structure or duties of the Subcommittee, may a member or liaison withdraw from the Subcommittee under the terms of the legislation.