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September 02, 2010 at 11:35 AM
Is the life settlement market in trouble?
According to National Underwriter, the Washington State Division of Securities has issued an alert stating that life settlement investments are securities, and as such can only be sold by licensed securities salespeople or broker-dealers.
The notice, “Considering Selling Life Settlement Investments?”, defines a life settlement investment as follows: “After a life settlement contract has been created, the contract, or an interest in it, may be sold as an investment. In the case of life settlements, an investor may purchase a whole life settlement contract or a fractional interest in a life settlement contract. In the case of fractional interests, investors typically rely on a provider or broker to administer the contract.”
And why might they be securities?
“Life settlement investments often fit the definition of a ‘security’ under the Securities Act of Washington, chapter 21.20 RCW. Among other things, the definition of ‘security’ includes an investment contract. Under the investment contract test, a security exists when there is an investment of money in a common enterprise with the expectation of profits to be derived primarily from the efforts of others. A life settlement investment often constitutes a ‘security’ under the investment contract test and may be deemed a security on an alternative basis.”
Some producers may believe this is 151A all over again. Is this the case?
Maybe.
One thing worth noting is that this alert wasn’t issued in a vacuum. In late July, MarketWatch reported that the U.S. Government Accountability Office had warned consumers to avoid life settlements because the lack of clear state regulation of the transactions.
And on July 22, 2010, the SEC issued a press release stating the recommendations of its Life Settlement Task Force: that life settlements are securities, and should be regulated as such.
