Too Soon to Tell

The American Council of Life Insurers (ACLI) has praised the analysis of the SEC. Frank Keating, president and CEO of ACLI said in statement on the Council’s website, “We acknowledge the SEC and its Life Settlements Task Force for its thorough and thoughtful analysis of the life settlement market and the regulatory gaps that could expose investors to a variety of risks, including the very real possibility that settlement packages would be infected with stranger-originated life insurance (STOLI) transactions.”

The reclassification of life settlements as securities would be able to put a clear and definitive stop to STOLI, a practice that, although not pervasive, is present in the industry and does not help the public image of life settlement professionals. The clearly accentuated and articulated guidelines that would stem from the new classification would offer a sense of transparency and organization to an industry that since its inception has been a target for critics as far as the propriety of some of its practices. For this reason, the report itself, and the question of reclassification, has garnered some support among life settlement industry professionals. This, despite a recently failed effort by the SEC to extend its jurisdiction over other sectors of the life insurance business, namely the fixed annuity industry.

The question now becomes what appetite, if any, Congress has to take this issue on. With midterm elections on the horizon, and a Congress wearied by protracted battles over healthcare reform and financial services reform, there is no answer at this point. The Dodd -Frank Wall Street Reform and Consumer Protection Act that was signed into law on July 21, 2010 did not classify life settlements as securities. Doug Head, Executive Director of the Life Insurance Settlement Association (LISA) contends that the issue was not addressed in the recent legislation because the life settlement industry would be highly unlikely to cause another economic collapse and was therefore considered to be a bit player on the scene. As such, resources were not devoted to the reclassification. He also conveyed that an expansionist philosophy under the current SEC leadership is not a surprising development.

Although consumer protection is always a position that is palatable to voters, especially when the consumers needing the protection in some cases are senior citizens, public concern regarding overregulation is alive and well and affecting Washington. It may outweigh the reclassification movement. At this point, it is simply too soon to tell.