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Fraternals Not Immune to Impact of Congressional Action

Each day we’re bombarded with news and opinion on Congress’s effort to bailout certain industries or stimulate the economy through massive spending programs, the likes of which haven’t been seen since the depths of the Great Depression.  While fraternals – viewed individually or as a group – won’t make anyone’s list of organizations deemed “too big to fail,” societies are likely to feel the impact of congressional action, especially when it comes to issues like life insurer access to federal bailout funds from the Troubled Asset Relief Program (TARP) or the pending debate over re-regulation of the financial services industry.

Who Wants to be Under the TARP?

Let’s talk about TARP funds first.  You’ve probably read more than a few stories about the Treasury Department’s recent change of heart that will allow certain life insurers – those that own federally charted banks – to apply for TARP funds.  You’ve no doubt also seen news coverage about some very large commercial life insurers scrambling to purchase seemingly small and obscure banks (that just happen to be federally chartered) in order to access the fed’s relief dollars.  And finally, you may be asking yourself, “if commercial life insurers can feed at the federal trough, why can't fraternals?”

When it comes to TARP funds, all that glitters is not gold.  For one thing, the federal government isn’t giving the money away.  It expects to be paid back – and handsomely.  Moreover, TARP funds come with some very large strings attached.  In addition to the less-than-attractive payback provisions, companies that accept such funds also agree to the federal government acting as their new partner – watching closely how they spend the TARP funds, keeping careful track of what they pay officers and directors, and reporting back to Congress on any transgressions.

When the TARP program was organized in late 2008, several NFCA members inquired about the possibility of including fraternals on the wish list of organizations that could access the funds.  After careful consideration, including an extensive survey of the members, the NFCA Board of Directors earlier this year adopted a public policy position that opposed association-sponsored efforts to petition the Treasury Department to expand the scope of the TARP to include fraternals.  The Board felt that having the association seek access to TARP funds was poor public policy that could result in severe and punitive “unintended consequences,” including increased state and federal regulatory scrutiny and a significant threat to the fraternal tax exemption.  Think about it: what would be the first thing Congress would require if it were to provide taxpayer funds to tax-exempt organizations?  Give yourself a gold star if your answer was “the repeal of the very exemption that allows fraternals to do the community service work that distinguishes us from commercial insurers.”

When it comes to TARP funds, fraternals are better off without them.

Optional Federal Charter

The other issue that Congress will soon address is the drastic overhaul of financial services regulation, spurred in large part by the meltdown of the banking sector by a whole new category of unregulated investment vehicles known as derivatives, credit default swaps, and others that most Americans have a hard time understanding.  For life insurers, the debate centers around the so-called “Optional Federal Charter” – legislation that would allow insurers to chose whether they would be regulated by the states or by a newly created federal insurance czar.

The question, of course, is does “optional” really mean “optional?”  The first OFC bill of the current congressional session, HR 1880 was introduced earlier this month.  While widely viewed as a placeholder for a future OFC bill to be introduced by House Financial Services Committee Chairman Barney Frank, HR 1880 nonetheless sets the tone for the debate.  You’ll note that the bill treats fraternals exactly the same as commercial insurers, with no mention of our tax-exempt status or exclusion from guaranty funds.  These are oversights we are working to correct, both on our own and through our allies at the American Council of Life Insurance, with whom we enjoy a positive and cooperative working relationship.

Even though the debate on this issue is just beginning, it’s important that fraternals be involved from the start.  In the legislative world, timidity and inertia are our greatest enemies.  Simply put, we can’t afford to sit on the sidelines; we must be aggressive.  This translates to saying what we mean, and meaning what we say.  We can’t afford to be vague.

NFCA staff and federal counsel will be communicating our messages to public policymakers over the course of the legislative session.  But we need every member society to be prepared to participate in this effort.  That means getting to know your representatives and senators and conveying to them a clear and consistent message about who we are and what we do.  NFCA is working on a new batch of materials for all members to use when communicating to legislators and their staff.  But all the materials in the world won’t do a thing if they sit on a shelf.  Are you willing to contact your legislators and educate them about the valuable contributions fraternals make to the American fabric?  If so, contact Elizabeth Snyder, Director of Advocacy and Public Policy, at esnyder@nfcanet.org.

I’d love to hear about ways your society is getting the fraternal message out to state and federal lawmakers.  Post your stories to this blog so everyone can read about them, by adding your comments below.

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