Time to fill the void in regulation of structured settlement brokers

Unfortunately, when the NAIC established its suitability standard, it saw fit to carve out an exception for structured settlement brokers and planners. Patrick Hindert, an attorney and managing director of The Settlement Services Group, Loveland, Ohio, labels the carve-out a “disservice” to injury victims—a claim that clearly is at odds with the NAIC’s charge to protect consumers.

But I concur with Hindert’s assessment. Think about it: The NAIC is effectively saying that structured settlement brokers and consultants are free to regulate themselves—this at a time when the Securities and Exchange Commission and the Department of Labor are weighing proposed fiduciary standards for, respectively, broker-dealers and advisors who sell retirement investment products. The proposals aim to harmonize these professionals’ regulatory requirements with those of registered investment advisors governed by an existing fiduciary standard under the Investment Advisors Act of 1940.

Indeed, structured settlement brokers who become securities licensed (as many have) are beholden to a fiduciary standard when offering investment advice to injury victims. Yet, when they consult on the suitability of a structured settlement annuity—a product that can impact the lives of hundreds of injury victims in mass tort cases—no standard applies.

This regulatory void must be filled. Ditto regarding the lack of state regulatory requirements for informed consent of plaintiffs and brokers’ disclosure of compensation and conflicts of interest. But I’m not sure the NAIC is prepared to exercise leadership on this front.

As I noted in a feature article of NU’s cover story on the NAIC in the magazine’s November 22, 2010 edition, questions remain as to whether the non-profit organization is itself free of conflicts of interest. How, critics ask, can the NAIC be expected to uphold the public interest when so much of its revenue is generated through fees paid by member companies whose objectives may be at odd with consumers’?

The real issue for industry players, I suspect, is cost. The imposition of state regulatory requirements will likely demand of structured settlement professionals greater investments in information technology, staff training and errors and omissions insurance to guarantee compliance with, and legal protection against, the new standards.

Weighing the positives

But there is an upside as well: state regulation mandating recommended industry practices elevates the profession, insuring that structured settlement consultants and planners are acting in their clients’ best interests. The beneficiaries of a strengthened regulatory regime—injury victims, many of them weakened physically, mentally or financially by their ill fortunes—should expect nothing less.