Mr. HOUSE. Mr. Chairman, before you recess I wonder if I could amplify my answer to Mr. Frelinghuysen's question because I do not want the record to be misconstrued. Mr. THOMPSON. Not to be rude to Mr. House, but let us dispose of the motion, Mr. Chairman, or is it not necessary? I think we had better, because there can be no question later about when we will meet. The motion is seconded. Chairman BARDEN. There is a motion made that at the conclusion of Mr. House's statement we will then recess until 9:30 tomorrow morning. Is that understood? What is the pleasure of the committee? All in favor let it be known by saying "Aye"; opposed, "No." The The "Ayes" have it. Proceed, Mr. House. Mr. HOUSE. I will be very brief. Your question was whether the issues as to amount of commissions did not present problems of business judgment. In my answer I picked a couple of grievous instances where at least in New York it was considered that they were obviously violations of existing regulations and fiduciary principles, but it is certainly true that when you get away from the very grievous instances you come into first an area which is suspicious but perhaps sound business judgment and beyond that an area which is perhaps clearly business judgment, and where to draw the line and what practical test to apply either in a statute or by the regulatory agency is the problem that will confront you. Mr. FRELINGHUYSEN. Thank you. Chairman BARDEN. Thank you very much, Mr. House. We will recess until tomorrow morning. (Whereupon, at 12:20 p. m., the committee recessed to reconvene at 9:30 a. m., on Thursday, June 13, 1957.) WELFARE AND PENSION FUND LEGISLATION THURSDAY, JUNE 13, 1957 HOUSE OF REPRESENTATIVES, Washington, D. C. The committee met at 9:40 a. m., pursuant to notice in room 429, Old House Office Building, Hon. Graham A. Barden (chairman) presiding. Present: Representatives Barden, Kelley, Perkins, Wier, Elliott, Landrum, Metcalf, Green, Roosevelt, Zelenko, Thompson, Teller, Gwinn, Kearns, Bosch, Holt, Rhodes, Wainwright, Frelinghuysen, Nicholson, and Griffin. Staff members present: Fred G. Hussey, Chief Clerk; John O. Graham, Minority Clerk; A. Regis Kelley, Clerk; Robert E. McCord, Clerk; Hartin S. House, Special Counsel on Welfare and Pension Legislation; Kennedy W. Ward, Assistant General Counsel; and Russell C. Derrickson, Chief Investigator. Chairman BARDEN. The committee will come to order. I believe we were to start off this morning with Mr. Holbrook from the State of Washington. For any of you who did not hear my statement yesterday the State of Washington and the State of New York, I believe, are the only two States in the Union that have actually started operating a type of welfare fund supervision or assistance. At any rate, it is the insurance commissioner's responsibility in those States to carry out the wishes of the legislature that passed the law. I thought we would be interested in knowing how it operated in the State of Washington and what was going on there. Mr. Holbrook is the man who has been the actual administrator of the program. Mr. Holbrook, will you identify yourself to the reporter and then proceed as you wish. STATEMENT OF A. M. HOLBROOK, JR., DEPUTY, HEALTH AND WELFARE DIVISION, OFFICE OF STATE INSURANCE COMMISSIONER, STATE OF WASHINGTON Mr. HOLBROOK. My name is A. M. Holbrook, Jr. I am deputy in charge of the health and welfare division, State of Washington insurance commissioner's office. Chairman BARDEN. Mr. Holbrook, I believe you said you had just recently written a letter to someone that pretty well covered this subject. Mr. HOLBROOK. Yes. I think that to begin this, gentlemen, if I may I would like to read a letter that I have recently written, act ually in May of this year, to the Library of Congress so that it is on public file here in Washington. It forms a good beginning to this discussion. Before I do that though I would like to express the regrets of Commissioner Sullivan that he is unable to attend here. He is at the National Association of Insurance Commissioners' meeting. They hold their meeting once a year. He is a member of several of their legislative committees and it is just impossible to be in two places at this time. I will go ahead with this letter. It starts: Whereas it is not a simple matter to describe the results of nearly 2 years' activity in this vast, new and complex field in one letter, we want to cooperate with you to the fullest extent possible. We have prepared this review of our procedures with the hope that it will be of some value to your present study. We shall begin with specific examples of our work and shall conclude with general opinions and comments. As an aid to this review, we are enclosing and shall make further reference to the following items: (a) R. C. W. 48.52.010 et. seq. Ex. Sess. Laws of 1955 (2). That represents the actual law of the State of Washington under which our division was established. (b) Annual statements-for trustees and/or administrators (2). These are the statements that we finally prepared to send out for these trustees and administrators to complete on an annual basis. (c) Annual statements-for Insurance Carrier or Health Care Contractors (2). I will explain these later but that represents the annual statement that the insurance companies and carriers have to prepare. It contains similar information but not in exactly the same manner. (d) An index from the examination report (1). Washington's employee welfare trust fund law, R. C. W. 48.52.010 et seq. Ex. Sess., Laws of 1955, became effective June 23, 1955. As of July 1, 1955, Commissioner Sullivan established a separate office here in Seattle in order to centralize the administration of all activities in connection therewith. 66 Our law is primarily one of disclosure. Several of the more important features should be brought to your attention as they especially relate to your review. Section I (2) defines the funds concerned to mean any fund established *** whether such benefits or services are to be paid directly from such fund or interest therefrom, or paid under contracts entered into with an insurer or health care service contractor * * *" There is no question as to whether or not a "self-insured" trust fund is included under the auspices of our jurisdiction. Section 2 of our act provides for the examination of the trust plans and further states that the costs and expenses of the Commissioner and examiners shall be paid by the examining authority. By far the greater majority of the trust plans cannot afford to stand the cost burden of a thorough and proper examination. Sections 3 and 4 refer to the filing of documents by the trust plans and by the underwriter of their benefits. Such reports and other financial data shall be open to inspection by the public in the Commissioner's office. This is the most important point of our law and certainly any Federal statute drawn shall incorporate this public-disclosure requirement. The exclusion of certain trust plans provided in section 7 is perhaps the only objectionable feature in our law. The beneficiaries of these plans so exempted are not receiving the kind of State-supervised protection granted all others. According to the comments made by the representatives of several banks that administer trust fund plans we have examined, there is no similarity in the balance sheet type audit presently being received by such plans and the study and review as shown in our examination reports. An accounting of the finan cial affairs represents only a small part of the many necessary considerations reviewed in our reports. Approximately 20 employee welfare trust funds have been examined under the provisions of our new law. The majority of these have constituted "pilot plans" as a test of our examination procedures and of the adequacy of our annual statement requirements. These have covered a cross section of types and locations of administrations, as follows: (a) Jointly administered in the office of the union. (b) Jointly administered in the office of the employer. (c) Unilaterally administered by the employer alone. (d) Unilaterally administered without employer representation. (e) Jointly administered in the office of the trust plan under the direction of the broker. We have received fine cooperation from the trustees and administrators of those plans examined and from all other persons responsible for the completion and filing of our required annual statements. Completed examination reports are on file in the Commissioner's office in Olympia as a public document and are readily available for review by any visiting or local member of your staff. This refers to this letter. I am writing it to the Library of Congress. Any references are to them but it would also apply to the members of the committee here. Mr. GWINN. Mr. Chairman, I did not hear any reference to where funds are managed exclusively by labor. Have you such funds? Mr. HOLBROOK. I just mentioned unilateral administered without employer representation. By that I mean by labor although usually these is a broker intermingled there in the State of Washington. Mr. GWINN. Thank you. Mr. HOLBROOK. Actually, I want to read the letter and then we will get into the discussion of the various points. To go on with the letter: In order that you may be appraised of the contents of a typical report, we are enclosing an index page taken therefrom. The annual statements required of the trust plans are filed with our office within 60 days of the close of their fiscal periods. Occasionally, a delay is caused by the fact that certain information requested therein relates to their insurance policy, the contract year end of which is often later than the fiscal year end of the trust plan. We also require a filing on an annual basis from the insurance carrier or health care contractor underwriting the benefits of the trust. Although different in form, the two statements overlap in the data requested and serve as an excellent spot check upon the financial and other information requested. Whereas financial data is of major importance, these statements are also directed toward a disclosure of those areas in particular where malpractices are most apt to occur. Although many of the following thoughts may not be considered to be official expressions from the Insurance Commissioner's office, we are endeavoring to briefly review some considerations that have become readily apparent in the pursuit of the administration of our law. We would be pleased to review our program at any time with you or any member of your staff in order to more closely familiarize you with our procedures. At the present time, the only guides established for employee welfare trust plans are those contained in the Taft-Hartley Act (NLRA of 1947), section 302, for those industries subject to the act. Many employers otherwise subject to the act have, on the advice of their counsel, attempted to establish trust plans that, according to their selected definitive terms, exempt the trust from compliance with the requirements set forth in section 302 of the act. This section of the act should be carefully and properly amended as a prerequisite to new Federal legislation. All existing doubt should be removed as regards such veils of definition in particular and section 302 should be amended to clearly deine its purpose and its terms; i. e., "representative of employees." One of our examination reports pointed out a possible violation of section 302 of the Taft-Hartley Act. Our local newspaper further publicized the fact. For lack of any Federal agency administering this section, no steps have been taken to review or remedy the situation. 94914-583 We feel that Senate bill 1122 introduced by Senator Paul H. Douglas has considerable merit. The principle of "public disclosure" is of paramount importance. However, it would be valueless unless provision is made for the promulgation of rules and regulations to be issued in conjunction with the administration of such an act. Sufficient penalties must be provided in order to prevent willful wrongdoing or neglect. The trustees must clearly be charged with their full responsibilities no matter by whom appointed and whether or not the plan is jointly administered. At the present time it is impossible to foresee the extent of the future influence of employee welfare plans upon the very economy of the United States as a whole. It would be unfortunate to pass legislation so restrictive that it would not permit proper changes in administrative practices. In addition, the great variety and complexity of the many trust plans clearly calls for legislation broad enough in scope and terms to allow them all to be able to properly continue their present benefit programs under the act. Certain individuals or groups have recommended that the expense of examinations be charged to the plan being examined. If it were a simple balance-sheet audit, this would be reasonable. However, we do not feel that a simple balancesheet audit is sufficient to protect the interests of the insureds and their beneficiaries. A number of the items comprising our examinations are as follows: The minutes of the board of trustees are reviewed to determine that all actions taken by trustees have been in compliance with the terms of the trust agreement; eligibility rules and lists of employees are traced back to the original employers' report; claim payments are checked to determine that only those eligible are recipients thereof; all employer contributions are confirmed; the underwriter of the insurance benefits confirms total premiums received, brokers' fees, etc.; the appointment of the administrator is reviewed along with his administrative expenses and/or fees; the competitive bids from insurance carriers and the reasons given for the selection of one carrier are reviewed; general office procedures and the business practices of the trust are reviewed; the trust agreement itself is discussed in the report; etc. It is readily apparent that twothirds or three-fourths of the trusts would not be able to bear the cost burden of such a proper, thorough examination. Certainly those States having an effective law of their own should be permitted to carry on without forcing the trust plan to be subjected to any duplication of regulatory or examination requirements. Such States should be encouraged and assisted. It is self-evident that this function can be performed much more directly and at a considerable saving in time and expense at the State level. It cannot be expected that all evils or neglect will cease automatically the day such a statute becomes effective. However, the effect of our law has been felt throughout the Northwest, and, of course, the State of Washington in particular. The interest displayed by the trustees and administrators in requesting suggestions to keep their plans in proper order, and the interest indicated by the increasing number of visits and telephone conversations with the individual participating members, is further evidence that these trusts are endeavoring to organize their procedures and follow good business practices. In addition, many States and members of the legislative committees have evidenced a considerable interest in our program. The public official charged with the supervision of any law, State or Federal, should consider how closely associated the affairs of these trust plans are with the insurance programs underlying each. Qualified personnel representing that official must be fully cognizant of the practices considered to be proper for the insurance carrier, health-care contractor, and broker and agents thereof. The responsibilities and duties of the trustees and the procedures expected of the administrator must be recognized and considered. As mentioned previously, the wide variety of trust plans require that the statute be drawn in language general enough to apply to all and not so restrictive or specific as to jeopardize the activities of any in the varied pursuits of their intended purposes. Legislation should be drawn to include whatever is determined necessary for the protection of the beneficiaries of these trust plans. Direct influence and subtle suggestions of either management groups or labor organizations or others must be avoided except when constructively offered. One of the most important hurdles is that of the general education of the concerned trustees, which will of itself tend to establish the cure and work toward the prevention of unethical or illegal acts. Ever since we began the administration of our new law, we have been extremely interested in this new field of endeavor. We recognize the great im |