ACLI Urges SEC to Target Life Settlement Industry

Courts have weighed in on the life insurance policy settlement industry, most recently with PHL Variable vs. Price Dawe 2006 Insurance Trust Insurance Company, in which the court has affirmed the common law ability of a legally insured person or insurable trust to sell a policy on that person’s life for market value — provided that procurement of the policy is not part of a straw purchase pursuant to a prior agreement to resell to an investor, and that the procurement is not part of an illegal wager in which a third party directly or indirectly pays the premiums.

In its bid for more regulation of settlement producers, the primary life insurance industry does not want another overlay of regulation on insurance producers and settlement brokers, as proposed by the SEC in its July 2010 Task Force Report. Instead, it favors additional regulation solely on settlement providers.

The SEC Task Force report noted that any future life settlement securitizations faced significant obstacles. 

The ACLI is opposed to a federal license for insurance producers and settlement brokers and their regulation under the federal securities laws because a state license is enough: “With the producer and the settlement broker clearly responsible to insurance authorities with regard to their specific roles in any insurance policy origination or settlement on behalf of a policy owner, there is no apparent justification to visit securities licensing requirements upon the insurance producer or settlement broker,” the ACLI stated.

The DC-based organization noted that 29 states also have settlement laws in which the settlement broker has a fiduciary duty to the policy owner.

But not so fast, providers. At the same time, the ACLI stated, “it is appropriate to require that settlement providers obtain a federal securities license since the provider is representing investors and purchasers of life insurance policies for investment purposes.”

Moreover, the SEC should indeed instruct staff to monitor that legal standards of conduct are being met by settlement providers under the federal securities laws and FINRA rules, the ACLI said. The ACLI went so far as to recommend examination and enforcement efforts, consideration of whether existing licensing schemes should be expanded, as well as mandating investor education efforts.

The Life Insurance Settlement Association (LISA) initially responded to the ACLI’s bid for prohibiting securitization of life settlements back in February 2010 by stating the ACLI’s position is “not only an affront to the principal of free and open capital markets, but it cynically portrays them as a protector of consumers, when in fact, their objective is to deprive consumers of their right to receive a true market value from a financial asset: a life insurance policy which is no longer needed, wanted, or affordable; one for which they have paid good money, often for many years.”