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Broker, Agent Comp Concerns FINRA In Variable Life Settlement Deals

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Agents and brokers conducting life settlements involving variable products may find themselves facing questions over their compensation, according to a FINRA official.

The Financial Industry Regulatory Authority, created by the merger of the New York Stock Exchange and the National Association of Securities Dealers, may have issues with the compensation paid in life settlement transactions and how that compensation is calculated, according to Sharon Zackula, FINRA associate vice president and associate general counsel.

Speaking at the Life Insurance Settlement Association’s fall conference here, Zackula said FINRA has undertaken “senior initiative” efforts since last year, and that life settlements would be a part of those efforts.

“Obviously this is an area where seniors are the only audience,” she said.

The three areas of concern for FINRA regulators looking at life settlements, she said, would be suitability, “best execution” and “fair prices and commissions” rules.

While the first two are fairly straightforward, she said, the methods of determining compensation in life settlements differ from those used in other securities transactions and could run afoul of FINRA’s commission rules.

“The biggest issue is fee disclosure,” Zackula said.

Effectively, the issue revolves around how life settlement brokers determine the commissions that they, and the referring agent, will receive from a transaction. In many cases, the total commission is calculated based on the face value of the policy and disclosed to the seller, but Zackula said FINRA operates from a different perspective.

Commissions, in the view of FINRA, she said, are “not based on face value.” Instead, Zackula said regulators look at the price the investor, in this case the seller, is getting.

“Our view is you look at what the seller is told is the acquisition price,” she said. “We’re looking at actual money that goes into the pockets of the seller and the two brokers who have a duty to that seller.”

Using that basis, she said, the commissions paid in life settlement transactions may end up in the “unreasonable” category. Both FINRA and the Securities and Exchange Commission would raise issues with the level of compensation, although she noted that the SEC’s rules allow for more leeway.

Regardless of how high the commissions in a transaction are, she noted, the SEC would not have a concern provided that “clear, complete disclosures” are made to the seller as to how much and to whom compensation is being paid.

FINRA operates differently, however, Zackula noted, and “we would have questions.”

With high commissions, “there’s a very clear justification requirement,” she said, adding that regulators would look at the commission earned in relation to the product being sold, as well as “time and effort issues.”

Ultimately, she said, FINRA would be looking to see if a high commission is deserved and how it would be divided amongst the participants.

“The question is ‘what are you doing for the money?’” she said. “Are you doing it yourself or are you hiring someone else?”

While FINRA does not provide specific levels at which compensation is considered unreasonable, Zackula said the initial views of life settlement commissions have been unsettling.

In terms of the argument that life settlements are a different kind of transaction, that brokers are offering a service rather than selling a product, and require different rules for compensation, she said, “you have an uphill battle” arguing for special treatment.

When an audience member argued that life settlement brokers often have to account for the fact that most deals brought to them don’t pan out, Zackula responded that in the eyes of FINRA that would equate to charging one client for services rendered to another, which is not permitted.

“This area is unexplored,” she said with regard to life settlements. “There’s no floor I can give you, there’s no ceiling I can give you. But I can tell you there is concern.”

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