Regulators And Life Settlement Firms Are Pushing For Greater Disclosure

Gannon said that no specific incident or complaint led the NASD to issue the notice, but it felt “there really is no transparency in the secondary market” and wanted to ensure that investors and brokers are aware of the requirements.

The NASD’s position, as stated in the notice, is that any life settlement involving a variable policy should be treated as a securities transaction and conducted along NASD rules. Specifically, he said, that means following Rule 2320, the “best execution” rule, which outlines the requirements that ensure “reasonable diligence” has been taken to confirm the client is suitable for the transaction and receives the best deal. Gannon said that other factors beyond price also play a role that could be more significant in life settlements, such as the timing of the transaction and the “quality of the market participant.”

Cavoli cited the NASD’s notice as something that “got us thinking about this report” and the requirements the broker-dealers the company works with would have to meet. “We work with a lot of broker-dealers, and so we tried to build up our process” so it would meet the regulatory standards, he said.

Buerger said that Coventry had already assumed the NASD’s position, and it “wasn’t a really a new position, in my opinion.” In any transactions involving variable policies, he said, Coventry already ensures that it is working with a registered broker-dealer. Additionally, he said Coventry does disclose commission arrangements and will tell the policyholder how much commission is received if asked.

Cavoli said the rules imposed by the NASD on variable life settlements are “not that bad,” and disclosures can help combat some of the negative stereotypes of the life settlements industry by showing suitability and due diligence.

Both Cavoli and Buerger seemed open to the idea of more regulation on disclosure, in fact.

“This industry is moving very fast towards certainly more regulation, and probably better regulation,” Cavoli said. “To the extent that it requires people to raise their game, that’s a good way to go.”

That regulation could also help reduce the costs of a settlement transaction by bringing more certainty into the process and allowing for more efficiency. The high transaction costs, Cavoli said, are a “sign of inefficiency,” and efforts should be made to improve them.

“Once we get certainty in the regulation, then the efficiency will come,” he said. “Having a rule that everyone operates under–that’s a good thing.”

Additionally, Buerger said the policyholder should be told that some arrangements, such as a pre-arranged settlement or a front-end payment, are illegal, and a lender sharing in the death benefit to a greater extent than the indebtedness is usurious and possibly illegal as well.

“That should be required, because it should be true,” he said. “It should be clear in the law.”

However, he noted that life settlements “are just like life insurance” in that companies have to deal with 51 different regulators and 51 different disclosure requirements, some being more specific than others.

Cavoli said LSI has had some general conversations with regulators about more “proscribed” regulations on disclosure but did not broach anything specifically. LSI introduced its report, he said, because the firm has been “disappointed with the pace of change” in the industry and is hoping to guide what could otherwise be the heavy hand of regulation.

“They have a sledgehammer,” he said of the states, “and they use it on every problem, even if things are generally going in the right direction.”

Given that companies are seeing the value of disclosure, however, Dalton suggested that the market may resolve the problem before the states take their swing at it.

“Don’t discount the market,” he said. “More and more, companies are growing more aware, and the market might dictate that you’d better do it this way.”