A panel discussing the securities regulation of life settlements advised caution for broker-dealers with registered reps who work on these transactions.
Panelists offered their views during the 12th annual fall conference of the Life Insurance Settlements Association here.
If a broker-dealer is in doubt about whether securities laws apply to a life settlement transaction, then there are general guidelines it should keep in mind, according to Cecilia Jordana, senior regulation specialist with the NASD.
She said the b-d should be mindful of execution, supervision and compensation.
If a registered rep is involved in a transaction in which a life settlement is sold and then a security is purchased, that transaction would fall under the purview of securities regulators, she explained. So, a b-d would need to be directly involved in the oversight of such a transaction rather than just receiving notification as an outside transaction, Jordana said.
When asked how a b-d can be comfortable about whether it is or needs to be in compliance with securities law, Jordana replied that on-site visits can be helpful in getting a better sense of how involved a b-d needs to be with a registered rep’s activities.
When asked whether a registered rep who helped with a life settlement transaction but did not actually help with the subsequent purchase of a security would be subject to securities law, Jordana urged care. She said it really depends on the role of the registered rep. “A good rule to stick to,” she noted, is to think about the registered rep’s role in the purchase, sale or exchange of a transaction.
Michael Brennan, chief compliance officer with Woodbury Financial Services, Woodbury, Minn., a unit of The Hartford, Simsbury, Conn., said his firm takes the conservative approach.
He said life settlements are treated internally as a security and are subject to all the compliance requirements of a security even if in name, as demonstrated by a letter of council from a provider, they are not deemed to be a security.
Among the requirements that these transactions are subject to at Woodbury, he continued, are: due diligence of life settlement providers and brokers; compensation being paid to the b-d and then through the b-d to the rep; E&O coverage through the reps themselves; and a description of the ongoing insurance needs and a review by both the rep and the client that the insurance is not needed any more.
Brennan said it is difficult for b-ds to make distinctions between when a life settlement is and is not a security. If the registered rep does not follow compliance procedures, it would be considered a violation of Woodbury’s procedures and a disciplinary measure would result, he said.