On July 22, the Securities and Exchange Commission made public a report conducted by its staff that suggests that life settlements be redefined by Congress as securities, thereby putting them under the purview of the SEC and subjecting them to regulation under federal securities laws.

The report comes on the heels of a July 9th Government Accountability Office report that drew similar conclusions.

In April of 2009, SEC Chairman Mary Shapiro, submitted a letter to Sen. Herb Kohl, D- Wis., chairman of the Senate Subcommittee on Aging, citing inconsistent jurisdictions over the sale of variable life insurance policies on the secondary market. By August of that year, the SEC had formed a task force to closely examine the life settlement industry.

Currently, life settlements are regulated on a state- by- state basis with only 38 states fully regulating the industry. In those states, industry professionals say, the state regulators only have the capacity to take policyholder interests into account and not investor interests. If life settlements were reclassified as securities, those selling the product would have to be FINRA- registered reps and comply with all full and fair disclosure laws. Intermediaries in the marketplace would have to register as broker-dealers or as registered investment advisors. Companies heavily involved in the life settlement industry also may be required to register as investment companies under the Investment Company Act of 1940 as amended.

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.