A move by the Securities and Exchange Commission could have the ultimate effect of blocking financial reporting changes adopted by state insurance regulators, according to an insurers' trade group representative.

That assessment came from Neil Alldredge, National Association of Mutual Insurance Companies senior director of state advocacy, after the SEC issued a concept paper for public comment focusing on internal control reporting requirements under the financial accounting requirements of the Sarbanes-Oxley Act of 2002.

The SEC release in his view could conceivably be used to make a case against adopting amended financial reporting changes adopted by the National Association of Insurance Commissioners, Kansas City, Mo.

The SEC concept release (No. 34-54122) was issued on July 11 to see if there is public support for additional guidance regarding compliance with Sarbanes-Oxley–in particular, Section 404 internal control reporting requirements.

The decision to issue the concept release was in part due to earlier comment from smaller companies requesting more guidance to cost-effectively meet these requirements.

The SEC noted that the concept release did not necessarily mean there was dissatisfaction with the current requirements but rather reflected a commitment to make requirements “scalable” for companies of all sizes.

Last month, the NAIC adopted amendments to the Model Regulation Requiring Annual Audited Financial Reports, commonly known as the Model Audit Rule (MAR). The NAIC adopted the changes during its summer national meeting.

The revisions reflected changes made after insurers complained that the cost of complying would have an undue effect on smaller insurers.

Publicly-traded insurers already have to comply with Sarbanes-Oxley. The new model, if adopted by states, will extend requirements such as internal control requirements to small mutual insurance companies as well.

Consequently, insurance companies with $500 million or more in direct and assumed premium will file a report with the state insurance department regarding its assessment of internal control over financial reporting effective Jan. 1, 2010. The internal reporting requirement reflects Section 404 requirements in Sarbanes-Oxley.

Most property-casualty and life trade groups decided not to oppose the adoption of the MAR amendments. However, Mr. Alldredge's group, based in Indianapolis, continues to oppose the model and has vowed to fight enactment in states.

NAMIC had recommended that the changes at the NAIC undergo a cost-benefit analysis.

And, after reviewing the SEC concept release, NAMIC could well make the decision to argue that the NAIC is moving in a different direction than the SEC, according to Mr. Alldredge, “We need to see where the SEC falls in relation to what the NAIC proposed.”

The SEC concept release could also be used in state legislatures to argue against adopting the NAIC-amended MAR, he said. And, it could be used to request that the issue be revisited at the NAIC, Mr. Alldredge added.

In fairness, according to Mr. Alldredge, the NAIC did recognize some problems with earlier drafts and made some changes including pushing back the implementation date. Companies complying with Sarbanes-Oxley had 18 months to meet requirements, while the amended MAR gives companies three-and-a-half years to comply, he noted.

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SEC Action Could Block NAIC Reporting Rule

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