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Safeguarding Self-Regulation

Safeguarding Self-Regulation

By Brian Jackson

The actuarial profession has a unique body of knowledge and skills. As a result of many years of specialized education and years of responsible experience before being allowed to practice independently, actuaries are given the privilege of serving as the backbone of financial security for insurance and reinsurance companies, multinational corporations, government entities, and pension systems, including Social Security. This privilege places actuaries in the position where they are arguably the professionals most actively involved in helping regulators protect solvency.

As part of its pact with society, the actuarial profession is further rewarded with the challenging responsibility of regulating itself. As a profession, actuaries define the three principal tenets of self-regulation, all of which are housed and supported within the American Academy of Actuaries (Academy). First, the actuarial profession establishes the standards by which people may enter the profession and by which they then practice. Second, the actuarial profession is responsible for teaching the actuarial community how to exercise those standards on a day-to-day basis. Finally, the profession must enforce those standards and decide when and how those who violate them will be disciplined. Creating and enforcing the details of this contract is the profession’s duty to itself—and to the public it serves.

Industry Self-Regulatory Organizations

Self-regulation is a feature of many professions, but the degree of government involvement and oversight varies. Some self-regulation systems involve a formal government delegation of power to a nongovernmental entity to create and enforce rules, with powers of review and independent action retained by the government.

For example, the Securities and Exchange Commission (SEC) has primary responsibility for regulating securities markets in the U.S. The SEC, however, delegates significant regulatory authority to private securities industry organizations that are owned and operated by their members (called self-regulatory organizations or SROs).[1] This self-regulatory system is incorporated into federal securities laws, and broker-dealers are required to be members of a self-regulatory organization. Examples of SROs include the National Association of Securities Dealers and the New York Stock Exchange. Among the SROs’ tasks is to design rules governing their members’ practices. In addition, SROs are responsible for enforcing their own rules as well as federal securities laws. They conduct disciplinary proceedings and impose sanctions on members for violations.[2]

It is important to emphasize that unlike the actuarial profession, these SROs are subject to formal government oversight that is akin to professional self-regulation under law—membership is compulsory, and membership requirements are enforced through law under the authority of the state. Like other kinds of formal regulation, SROs are essentially regulatory bodies that can make legally binding determinations and take legally binding actions. It is the enabling legislation that makes this possible.

Other Self-Regulating Professions With Significant Government Control and Oversight

Other self-regulatory systems are overseen and licensed by the government and do not receive the kind of delegation of power that SROs do. These professions, where the government maintains sole licensing authority, adjudicates misconduct investigations, and imposes discipline—e.g., lawyers,[3] health professional standards in addition to the requirements of law.

For these professions, state licensing bodies are frequently established to protect the public by setting minimum standards of competency. Practitioners that meet the requirements are granted the right to practice in a given state. This level of government oversight and control does not, however, render this kind of self-regulation redundant. For example, private health professional organizations frequently administer or set up independent certifying bodies, which grant a certification or credential recognizing that individuals have successfully demonstrated knowledge of or competency in a particular specialty. Often the requirements for certification go beyond the competency requirements for licensing, which are set by statute to ensure a minimum level of competence. Though the process is usually voluntary, some states mandate certification as part of the licensure process for certain disciplines.

In these systems, the private standard-setting process seeks to support professionals in their efforts to practice in a way that is consistent with their peers’ legitimate expectations, enhancing practice beyond the minimum requirements set by law.

The U.S. Actuarial Profession

The U.S. actuarial profession is in a different situation. The actuarial profession has never received formally delegated power to regulate. And with the exception of enrolled actuaries (EAs) who are governed by the Joint Board for the Enrollment of Actuaries (JBEA), the profession is not supervised or overseen by any single government agency. While actuaries must comply with myriad regulations and laws governing the industry,[4] the actuarial profession has developed its own robust system of self-regulation that establishes professional credentialing requirements, a discipline process that can expel or otherwise discipline members, and binding standards of qualification, practice, and conduct.

This system allows professional standards to be developed and implemented by those who know the major issues facing the actuarial profession best, and it allows members to educate one another on complex problems. In many ways, this system is superior to enforced government regulation because it:

  • Produces more effective standards (superior knowledge compared to a government agency).
  • Allows for more diversity in methods of compliance with legal rules than is possible for a government agency to provide.
  • Involves less delay, red tape, inflexibility, and resistance to innovation than detailed government regulations.
  • Is far less costly than government regulation or oversight.
  • Provides a real service to government, the public, and individual members of the actuarial profession.

Of course, the actuarial profession’s privilege of professional autonomy carries with it the responsibilities of self-government.

Because significant governmental oversight is absent, the actuarial profession, as well as the individual actuary, is responsible to the public for the soundness of actuarial advice, because it is ultimately the profession, and not the individual actuary, that may be called upon to demonstrate that services provided by the members of the profession are being delivered with competence, integrity, and independence.

The Academy meets this responsibility by ensuring that the profession promulgates standards of professional conduct, practice, and qualification that appropriately fulfill the profession’s responsibility to the public, are broadly accepted by membership, and are enforced by appropriate disciplinary procedures.

The U.S. Actuarial Profession’s Standard-Setting and Discipline Process

From a legal standpoint, membership in a voluntary, membership-based, professional association like the Academy is a contractual relationship between the member and the organization. The terms of that “contract” are set forth in the articles of incorporation, bylaws, and other rules of the association. Breach of the rules provides a basis for the organization to either terminate the “contract” by expelling the member or maintain the “contract” while imposing whatever lesser discipline the organization’s governing documents authorize.

Thus, the actuarial profession’s self-regulating processes are established and maintained via a legally enforceable private agreement between the profession (as represented by the five U.S.-based actuarial organizations) and its individual members. In addition to contract law, these processes are of course subject to many federal and state laws of general applicability, such as antitrust laws, but there is no specific government regulation of private standard activities. Further, the legal duties imposed on self-regulating associations like the Academy when setting standards and disciplining members arise from the common law rather than from the Constitution; as such the “due process” concept is applicable only in its broadest, nonconstitutional connotation. Accordingly, courts generally refrain from using “due process” language and mostly refer instead to a requirement of a “fair procedure.” As such, our standards and our standard-setting processes must satisfy basic common law principles of common-sense fairness—that is, they must be substantively rational and procedurally fair.

Standard-setting

In 1988, the Actuarial Standards Board (ASB) was created as an autonomous entity within the Academy and supported by the Academy’s professionalism staff with the sole discretion to promulgate actuarial standards of practice (ASOPs) for practice in the United States. The ASOPs identify what the actuary should consider, document, and disclose when performing an actuarial assignment. The ASOPs also provide guidance as to how fundamental concepts and methodological principles should be applied in a variety of circumstances and take into account problems arising from limited information, time constraints, and other practical difficulties, as well as conflicts with regulatory or other restrictions. Given the highly technical nature of actuarial work, it is essential that the ASOPs be developed by actuaries who understand the principles of actuarial science and can describe appropriate actuarial practices in various settings. The ASB’s goal is to set standards for appropriate practice in the U.S. after providing members, who will be required to comply, notice and a meaningful opportunity to comment on them before adoption.

Given the highly technical nature of actuarial work, it is essential that the ASOPs be developed by actuaries who understand the principles of actuarial science and can describe appropriate actuarial practices in various settings.

Anyone may submit a proposal for a new standard of practice to the ASB. Proposed ASOPs for each area of practice are explored and formulated under the direction of one of the ASB’s six standing committees, or a task force is established to draft the standard. These committees are encouraged to seek a wide range of ideas and views, such as by consulting other committees within the profession. When the committee has developed a draft, it then must go through a well-defined process of review, approval, exposure, and revision, as set forth in the ASB Procedures Manual, before it can be considered for promulgation by the ASB. The proposed exposure draft is reviewed by Academy legal counsel and then submitted to the ASB, which carefully reviews the draft, edits it as needed, and then approves the draft for exposure.

Once the approved draft is released for exposure, members of the actuarial profession, other interested parties, and the public are encouraged to provide their comments. Comment letters play a vital role in the ASB’s formal deliberative process—the ASB considers every comment with open minds and is very much willing to change a proposed standard in response to persuasive comments. Occasionally, ASB representatives will present the exposure draft at actuarial meetings or discuss it with interested regulators to encourage commentary. If a proposed standard is believed to be particularly controversial, the ASB may hold a public hearing to give interested parties an opportunity to comment on the exposure draft.

The ASB typically exposes a proposed standard for comment for between 60 and 90 days. At the end of the exposure period, the drafting group considers all of the comments received and makes appropriate edits. The drafting group also prepares a written summary of the comments received and its responses, which is published as an appendix to the proposed standard. The revised document is then submitted to the ASB, again accompanied by a legal opinion, with a request that the proposed standard either be re-exposed or adopted. It is not uncommon for the ASB to edit and re-expose a proposed standard more than once to develop a final standard that reflects appropriate practice. Once the ASB is satisfied that the proposed standard is acceptable, it adopts the proposed standard, which is then posted online, included in the actuarial standards of practice, and communicated to members and other stakeholders.[5]

Code of Professional Conduct

Each of the five U.S.-based actuarial organizations has adopted common standards of conduct for their members that are centrally embodied in the U.S. Code of Professional Conduct (the Code). The Code is maintained by a joint committee composed of a representative from the Academy, the Casualty Actuarial Society (CAS), and the Society of Actuaries (SOA). This committee is housed in the Academy and supported by the Academy’s professionalism staff. When changes to the Code are under consideration, the joint committee works with staff to develop an exposure draft. The Academy, CAS, and SOA boards review the exposure draft and authorize its circulation for comments to all the members of their organizations. The joint committee will carefully consider all the comments received and make appropriate edits to the exposure draft, again working with legal and editorial staff. The joint committee will also prepare a written summary of the comments received on the exposure draft and its responses. The joint committee may then seek permission from the three boards to re-expose the proposed revisions to the Code, as occurred when the Code was last amended, effective January 1, 2001. Ultimately, all three boards must adopt the amended Code and distribute the amended Code to their members.[6]

U.S. Qualification Standards

The Code requires actuaries, when practicing in the United States, to satisfy the Qualification Standards for Actuaries Issuing Statements of Actuarial Opinion in the United States (USQS; U.S. Qualification Standards) promulgated by the Academy. The USQS is maintained by the Academy’s Committee on Qualifications, which periodically develops proposed revisions to the USQS (again working with the Academy’s legal and editorial staff) and submits them to the Academy Board for approval. As with the ASOPs and the Code, the draft revisions are exposed to the actuarial profession and other interested parties, comments are carefully considered, and revisions are made before the revised U.S. Qualification Standards are adopted by the Academy Board.[7]

Under U.S. law, any attempt to enforce an ethical code provision, standard of practice, or other similar standard must afford the member in question a “fair proceeding carried forward in an atmosphere of good faith and fair play.”

All these processes satisfy the fundamental requirements of due process. They all involve giving association members and interested parties fair notice that a standard is under consideration, ample opportunity to comment on the proposal, and open-minded review of those comments.[8]

Discipline Process

Under U.S. law, any attempt to enforce an ethical code provision, standard of practice, or other similar standard must afford the member in question a “fair proceeding carried forward in an atmosphere of good faith and fair play.”[9] While it is true that a private association’s disciplinary procedures need not comport precisely with constitutional due process guarantees or be equivalent to those necessary for criminal trials,[10] nevertheless, these procedures must be “fair and make for justice rather than form.”[11]

Consequently, our discipline process has an overriding focus on commonsense fairness: It provides the actuary who is potentially subject to discipline clear and fair notice of the standards to which the actuary will be held, the substance of any charge that the actuary failed to meet those standards, any factual allegations underlying the charge, and what procedures the disciplinary body will follow to resolve any question concerning the actuary’s compliance with the standards.[12]

The Academy and its four sister organizations enforce our standards via an investigative process administered by the Actuarial Board for Counseling and Discipline (ABCD). Like the ASB, the ABCD exists within the structure of the Academy, is supported by Academy staff, and operates pursuant to published procedures that were developed with considerable input from the U.S. actuarial profession. The ABCD acts on complaints from actuaries, clients, regulators, and the general public, and can also initiate action on its own if it becomes aware of instances in which the Code may have been violated.

When the ABCD receives a complaint, Academy staff contacts the actuary who is the subject of the complaint (the “subject actuary”) to advise that a complaint has been filed and offer an opportunity to provide an initial response. After the subject actuary provides their response, the ABCD chairperson and vice chairpersons (collectively known as “the chairs”) review the submitted information and decide on a course of action. If the chairs determine that, based on the materials they have reviewed, there is insufficient likelihood that a material violation occurred, they will dismiss the complaint. But if the chairs find sufficient reason to believe that a material violation may have occurred, they will decide to conduct further investigation.

When further inquiry is conducted, the chairperson typically appoints an investigator who gathers documentation and talks to the complainant and the subject actuary, and then prepares a written report of findings and conclusions. The investigator’s report is provided to the subject actuary, who is invited to submit a written response.

The entire ABCD then reviews the complaint and investigator’s report, as well as any material submitted by the subject actuary. The ABCD can decide to dismiss the complaint or offer counseling to the actuary (either of which ends the ABCD’s inquiry). If, however, the ABCD determines that it needs additional information or that the subject actuary’s conduct appears to warrant discipline, the ABCD schedules a fact-finding hearing.

ABCD hearings are usually conducted in person but can also take place virtually. The investigator is asked to attend, and the subject actuary is invited to attend and to have the advice of counsel. At the close of the hearing, the ABCD meets in executive session and considers the entire record. The ABCD can dismiss the case, counsel the subject actuary (either of which concludes the matter), or recommend[13] that the subject actuary be disciplined. If the ABCD votes to recommend disciplinary action, a set of formal findings and a recommendation is prepared. That document, the hearing transcript, and the case-­specific documents considered by the ABCD are forwarded to the executive director for each of the organizations of which the subject actuary is a member. At that point, each organization will—through its own disciplinary procedures—determine whether and how to act upon the ABCD’s recommendation and the extent to which such action should be publicized.

Self-Regulatory Process Challenges

The Academy and its four sister organizations are private, voluntary, membership-based associations that self-regulate without a direct delegation of power from government and without direct oversight or control from a government entity. This relative autonomy carries with it special responsibilities of self-government, including the responsibility to assure regulatory authorities that they can depend on the profession to act effectively, consistent with the public interest, and, more generally, to inform users of professional services of what they might reasonably expect by way of professional performance and conduct. Our established professionalism standards and conduct, coupled with established procedures for disciplining members, are evidence that the actuarial profession is in control of its governance and is appropriately sensitive to the public interest.

However, because our self-regulating system does not involve direct government oversight, power, or authority, the profession must rely on its individual members to monitor compliance not only for themselves but also to report any apparent violation of the Code of which they become aware. Neglect of these responsibilities compromises the independence of the profession and the public interest which it serves. It is concerning that in recent years, the ABCD has observed a decline in its receipt of ABCD complaints from actuaries. It takes only a few publicized cases of bad work to ruin the reputation of the profession as a whole and undermine public trust in the profession. This may be especially true if the case was not reported by someone within the profession but rather was uncovered by someone outside the profession, a legal investigation, or the media.

Conclusion

The Academy has built an enduring professionalism infrastructure and follows a continual process of defending the integrity, independence, and lawfulness of the standard-setting and enforcement activities housed within it. But we must never forget that self-regulation is a privilege intended to serve and protect the public interest. To preserve this privilege, it is essential for the members of a self-regulating profession to hold themselves to a higher standard than anyone else would, to always act in such a way that they are part of a compliance regime, and to report any misconduct promptly and voluntarily.

As a credentialed member of the Academy, you have become a special guardian of the public trust. The purpose of the actuarial profession’s standards is to aid you in protecting this public trust as you serve your principals. Ultimately, preserving the right of actuaries to self-regulate lies with you, the practicing actuary.

Endnotes

[1] “Rather than adopt a purely governmental approach, Congress determined that it was distinctly preferable to rely on cooperative regulation, in which the task will be largely performed by representative organizations of investment bankers, dealers, and brokers, with the Government exercising appropriate supervision in the public interest, and exercising supplementary powers of direct regulation.” Congress kept this regime in large part because of the “sheer ineffectiveness of attempting to assure [regulation] directly through the government on a wide scale … Experience appears to indicate that the [SEC], in its current form, does not have the resources to effectively carry out on its own the full panoply of duties for which the SROs are currently responsible.” Kim v. Fin. Indus. Regul. Auth.
[2] The Public Company Accounting Oversight Board (PCAOB) is another example of an industry self-regulatory organization. The PCOAB is a not-for-profit corporation established by the Sarbanes-Oxley Act to regulate the business of auditing public companies.
[3] Lawyers are licensed in each state and are governed by professional rules that are typically adopted and enforced by state supreme courts. Federal administrative agencies also establish and implement rules governing lawyers who practice before them.
[4] The formal role of the actuary is part of the implementation of many regulations. Other than EAs, the most obvious example of regulatory involvement for actuaries is the role of the appointed actuary. In this case, the actuarial role was codified to address several of the potential shortcomings encountered in achieving public confidence in regulation.
[5] Bloom, “Succeeding at Self-Regulation.”
[6] Id.
[7] Id.
[8] McCune v. Wilson, 237 So. 2d 169 (Fl.1970).
[9] “Requiring procedures equivalent to those necessary for trials would convert expulsion hearings into full-fledged adversary proceedings interfering with a private society’s fundamental right to manage its own affairs.” Davenport v. Soc’y of the Cincinnati, 46 Conn. Supp. 411, 411, 754 A.2d 225, 227 (1999)
[10] Id.
[11] Bloom, “Succeeding at Self-Regulation.”
[12] The ABCD does not have any authority to impose discipline; only the membership organizations can impose discipline.

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