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?
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.
Just as 05-50 eventually led to the SEC’s Rule 151A, the actions of certain states can lead to national measures taken against a wide swath of producers’ business. These recommendations, from the SEC task force release, certainly sound familiar:
- Consider recommending to Congress that it amend the definition of security under the federal securities laws to include life settlements as securities.
- Instruct the staff to continue to monitor that legal standards of conduct are being met by brokers and providers.
- Instruct the staff to monitor for the development of a life settlement securitization market.
- Encourage Congress and state legislators to consider more significant and consistent regulation of life expectancy underwriters.
What do you think? Do Washington state’s actions and the task force’s recommendation throw up a red flag? Or are the producers involved in life settlements already largely covered by securities licenses, seeing as how they’re involved in such a complex market? Is this cause for concern? Or is it merely a formality?
Share your thoughts below!
UPDATE: We reached out to Doug Head, executive director of the Life Insurance Settlement Association, for commentary. He had the following to add to clarify the issue:
“SEC called for regulation of the INVESTMENT in a settlement as a security, not the sale by the original owner. They do not want to make original owners ‘issuers’ of securities. They made error in their summary and press release in not clarifying this. Congress, in the recent financial reform package made it clear (in the record) that the ‘business of life settlements’ is the ‘business of insurance,’ not securities.
“[Robert] Powell [the author of the MarketWatch article linked above] finds the worst possible spin to the reports (starting with “slippery” and other perjorative adjectives. A good example is to say that “twelve states do NOT regulate.” That is remarkable progress from 2005, when about the same number did regulate. The rapid successful expansion of regulation (and the fact that today over 80 percent of the nation is fully regulated) says a lot about our effort to get good laws passed.
“As [Sen. Herb] Kohl said, “Life settlements can be a worthy alternative for seniors who are considering the sale of their life insurance policy, and offer a higher payment than the cash surrender value offered by the insurance company.
“There is little appetite in Congress to take over this regulatory process from the states who are doing a good and fast job of producing good regulation. By the end of the first quarter of next year, I’ll bet the number of states not regulating will be down to about eight. THAT is far faster than Congress can act.”
That clears that up! Look for more analysis by Head in the December edition of the Agent’s Sales Journal.