SEC Chairman Mary Schapiro. (Photo: AP)

The American Council of Life Insurers (ACLI) sent a letter to Securities and Exchange Commission Chairman Mary Schapiro on Friday urging the securities regulator to prohibit the securitization of life settlements and support changes to clarify the application of federal securities laws to viatical and life settlement transactions because the practice exposes senior citizens and investors to increased risk of fraud.

The ACLI said that these and other comments were included in a letter to the SEC responding to the recommendations made in the July 22, 2010, report by SEC staff on life settlements.

ACLI told Schapiro in the letter that the agency is concerned “securitization will increase occurrences of illegal stranger-originated life insurance (STOLI) transactions.” In STOLI transactions, ACLI explains, investors or middlemen approach seniors and encourage them to purchase life insurance policies they otherwise would not buy solely to sell the policies to investors.

“STOLI transactions have been outlawed in 28 states and most other states are considering anti-STOLI legislation. Seniors caught up in STOLI schemes face potential legal and tax liability,” ACLI says.

ACLI’s public policy position on life settlement securitization is included in an appendix to the SEC letter, which states, in part:

“Securitization of life settlements will exacerbate the STOLI problem. Securitization is a very effective means of market-making and encouraging rapid expansion of a ‘product’, in this case, life settlement contracts. Promoters will use capital generated from securitization to create larger inventories of life settlement contracts which, in turn, will fuel more securitizations and more STOLI.”