More On Legal & Compliancefrom The Advisor's Professional Library
- Dealings With Qualified Clients and Accredited Investors Depending upon an RIAs business model and investment strategies, it may be important to identify “qualified clients” and “accredited investors.” The Dodd-Frank Act authorized the SEC to change which clients are defined by those terms.
- Scope of the Fiduciary Duty Owed by Investment Advisors A fiduciary obligation goes beyond the suitability standard typically owed by registered representatives of broker-dealer firms to clients. The relationship is built on the premise that the advisor will always do the right thing for the person or entity receiving advice.
Aviva Life and Annuity Co. sued six of its agents earlier this year, claiming the agents were involved in a fraudulent sale of life insurance to 119 church members. The agents recently responded, charging that Aviva was not only complicit in the charity-owned life insurance (CHOLI) scheme, but actively "directed, ordered, approved, and in all other respects, ratified the acts and performance of" the agents.
Aviva filed the lawsuit against the agents in March of this year in the U.S. District Court, Central District of California. According to the lawsuit, the six agents arranged for church parishioners to purchase life insurance that would be held in 119 individual life insurance trusts. Shortly after the policies were issued, beneficial interests in the life insurance trusts were transferred to Wilshire Coast Consultants, Inc. Aviva claims that the ultimate aim of the arrangement was to transfer ownership of the policies to third-party investors who did not have an insurable interest in the insureds’ lives.
The agents are accused of violating Aviva’s “producer guidelines” by participating in the sales. The scheme outlined by Aviva’s complaint is a variation on stranger-originated life insurance (STOLI), where church members were approached about participating in an endowment program under which life insurance death benefits would be split between the church, beneficiaries and a third party.
Members who allowed policies to be purchased on their lives have told Aviva that they either did not pay premiums on their life insurance policies or paid only the initial premium.
“CHOLI” exclusively refers to a variant of STOLI and not situations where a charity either purchases a life insurance policy or receives one as a gift. Instead of using an insured’s unlimited insurable interest in their own life to purchase a policy that will later be transferred to investors, a CHOLI scheme utilizes a charity’s insurable interest in the lives of its donors. The end result of CHOLI is the same as STOLI, except that the charity may receive part of the death benefit on the policy after the investors receive their share.
But the charities often aren’t guaranteed to receive any part of the death benefits. The charities’ share will depend on how long the insured lives. In nearly all cases, CHOLI benefits the for-profit investors far more than it benefits the charities.
The agents in the Aviva case have denied involvement in a CHOLI scheme and deny that the endowment program involved either premium finance or fraud. They also claim that Aviva’s producer guidelines don’t forbid the type of arrangement at issue in the case.
For additional coverage of this issue and similar ones, we invite you to sign up with AdvisorOne’s partner, AdvisorFX, for a free trial.
See also The Law Professor's blog at AdvisorFYI.