Agent fingerprinting seen as gap in state insurance regulation

The lack of a uniform fingerprinting requirement for insurance agents and brokers may serve as new ammunition in the battle over federal regulation of the insurance industry.

A recent report, “Insurance Reciprocity and Uniformity,” drafted by the Washington-based Government Accountability Office, shows that just 17 states fingerprint their prospective agents.

Checking an applicant’s fingerprints against law enforcement databases is a way to prevent criminals from becoming insurance representatives and possibly harming individual investors or gaining access to private records.

According to the GAO’s report, a sample of data from California, which fingerprints, turned up a wealth of information that would-be agents didn’t reveal on their applications, including felony-theft charges, driving under the influence and battery.

Insurance agents’ advocacy groups and regulators’ varying interpretations of the severity of certain crimes have kept 33 states from adopting fingerprinting as part of their background-check regimen when assessing licensees.

The gaps in oversight, which can lead to states’ missing applications that were filed by convicts, make a stronger case for federal regulation, observers said.

“I’m not really understanding why this is an area where the states can’t get together,” said Birny Birnbaum, a consumer advocate and executive director of the Center for Economic Justice in Austin, Texas.

“My expectation is that if there were a federal system of producer licensing, it would be one set of requirements: Fingerprinting for all or for none, and until you get a federal system, there is no guarantee on what you’ll get,” he said.

The chief roadblocks for states in fingerprinting agents are their lack of statutory authority to access the FBI’s database and push-back from local producer groups that say fingerprinting demeans them, said Linda Hall, insurance director in Alaska and chairman of the Kansas City, Mo.-based National Association of Insurance Commissioners’ producer-licensing task force.

Fingerprinting legislation has been proposed in four states this year, she said.

Producers complain that being fingerprinted for each state in which they are licensed is onerous. They would prefer to be fingerprinted once and have the record on file in a federal database, said William R. Anderson, senior vice president of state government relations at the National Association of Insurance and Financial Advisors.

The Falls Church, Va.-based group supports fingerprint background checks in all states.

If insurance fell under federal oversight, the NAIC would like to see states granted clearance to access the FBI database, Ms. Hall said.

Of course, a federal precedent on fingerprinting exists in the securities industry.

“Finra collects fingerprints on registered representatives and investment adviser representatives, and does this on a registration basis and on a wide scale,” said Eric A. Arnold, a partner at Sutherland Asbill & Brennan LLP of Washington. The Financial Industry Regulatory Authority Inc. is based in that city and New York.

Although the state regulators make a compelling case for uniformity, they then do “tweaks here and there” that frustrates their intent, Mr. Arnold said. “Then you end up with a map that says that 17 states do it, and the rest don’t.”

State insurance commissioners recognize the weaknesses of the patchwork system in which an individual denied a license in one state, due to a felony conviction revealed in a fingerprint background check, may be approved for a license in a neighboring state.

“If they struck out in Pennsylvania and came to New York to be a resident producer, we could ask that person to indicate whether they have a prior history,” said Steve Nachman, deputy superintendent for fraud and consumer services in the New York State Insurance Department.

“Because of a lack of fingerprinting, the application could fall be-tween the cracks” and go through, he said, since any red-flag warnings on the would-be agent’s record might never be detected.

States can post information on those who were denied licenses on the NAIC’s Regulatory Information Retrieval System, where other regulators can perform queries on applicants.

But whether a state regulator searched for that information would depend on the depth of its background checks.

New York doesn’t fingerprint its producers, but it has proposed state legislation to allow it to do so.

Similar actions are taking place in Louisiana.

Still, change is around the corner, and many hope that Congress and federal powers can move it along.

“The history is clear on the progress NAIC and state regulators have made on criminal-history checks, including fingerprinting, producer licensing and product approval,” said Peter Ludgin, executive director of Agents for Change in Washington. “Only because of federal pressure has the NAIC acted.”

E-mail Darla Mercado at [email protected].