Let me note that this is very early in the process. No one really expects regulatory reform legislation to be enacted this year. Scores of questions will arise during the course of the debate over how the Oxley-Baker system will function. I suspect that whatever they propose this year will be adjusted many times as problems are identified.

But there are two major issues that stand out:

o The first is how will Reps. Oxley and Baker compel states to comply with the minimum standards.

o The second is what type of mechanism will be established to resolve disputes over the variations in interpretations that will certainly occur.

It will take some very imaginative thinking to address these issues in a way that does not create a federal regulator.

Looking first at compliance (which we inside-the-Beltway types like to call the “hammer”), the model everyone looks at is the National Association of Registered Agents and Brokers. Under NARAB, the “hammer” was the possibility that a federally-chartered, self-regulatory organization would come into existence if the states did not take sufficient steps to harmonize their producer licensing laws and regulations by a specified timetable.

In other words, the states risked losing some control over agent licensing unless they took the appropriate steps themselves. Possibly, some variation of NARAB could be adapted to force states to create uniformity in product approval, rating, market conduct and similar concerns.

But there is a problem. The constitutionality of NARAB was always subject to question, even though it was never tested. It was never entirely clear who in the federal government would oversee NARAB, should it come into existence.

Some government agency must oversee SROs, because it is unconstitutional for Congress to delegate power to an entity that is not answerable to the nation's elected representatives.

The National Association of Securities Dealers is a prime example of how an SRO works. NASD can issue rules, but it is subject to oversight by the Securities and Exchange Commission, which is itself subject to oversight by Congress.

Thus, if the “hammer” is the threat to create a NARAB type of organization, there will have to be some type of bureaucracy created to meet the constitutional requirements, should the organization come into existence.

Another possibility is withholding some federal funding to states that are not in compliance. This is also tricky. Which funds will be withheld? Highway safety funds? Is that really a good idea when we want to reduce accidents on the nation's roadways?

In any case, someone in the federal government will have to make a formal determination of whether the states are in compliance before the funds are withheld. That person will be, for lack of a better term, a regulator, unless Reps. Oxley and Baker can come up with an alternative that no one has yet envisioned.

Similarly, the dispute resolution mechanism is a troubling issue. Someone will have to decide whether a particular state's interpretation and enforcement of a given standard are valid, because inevitably, variations in interpretation will occur.

Who will decide? Reps. Oxley and Baker suggest there could be a federal-state advisory panel that will make recommendations on interpretations, and one personlet me repeat that, ONE personhoused somewhere in the government who would simply stamp yes or no on the panel's recommendations.

But it is not clear that this system would be legal. Federal law and administrative case law require the governmentincluding the ONE person noted aboveto follow certain procedures when issuing rulings and determinations.

It is not sufficient to simply rubber stamp the recommendations of an advisory panel. The person responsible for making the determination must engage in an evidence-based review. That person must create a record to demonstrate that the determination is not arbitrary and capricious. And, of course, the determination will be subject to court challenge.

This person, one suspects, will need some type of staffing in order to meet the responsibilities of the office. Another term for that staffing is “bureaucracy.”

There may be ways around all this. I don't want to suggest it cannot be done. But it will take a lot of creative thinking to avoid a fairly sizable federal bureaucracy responsible for insurance regulation under the Oxley-Baker approach. Maybe they can do it, but right now, I'm not placing any bets.

Reproduced from National Underwriter Edition, April 2, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.