Regulators and legislators clashed with members of the life settlements industry at a congressional hearing today that focused on the risks and merits of life settlements securitization.
Legislators, though intrigued by the concept of the pooled life settlements, were also interested in having regulation to deter abuse.
“The improper securitization of life settlements could ultimately leave countless seniors penniless and innumerable investors broke,” Rep. Paul E. Kanjorski, D-Pa., chairman of the House Financial Services Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises, said at the hearing.
Regulators and legislators appeared most sensitive to the possibility of a securitization market for packages of life settlements — bundles of life insurance policies that have been sold over the secondary market.
The Securities and Exchange Commission has already taken a step forward by creating a life settlements task force that will not only consider how federal securities laws apply to life settlements, but also the emerging role of securitization, concentrating on investors, intermediaries and sales practices. That task force will work with the
Financial Industry Regulatory Authority Inc., Paula Dubberly, associate director of the SEC’s division of corporation finance said in her testimony.
The SEC has already brought enforcement cases against life settlement sales as investment opportunities, including cases in which the settlement providers made misrepresentations of the underlying policies, she said.
“In the event that possible securities law violations are present in sales of securities through life settlement securitizations, we stand ready to pursue those cases vigorously,” Ms. Dubberly said.
However, members of the life settlements industry raised concerns that regulators were tilting at windmills.
For one thing, these financial products are nothing new, and the market that exists for them is limited, said Jack Kelly, director of government affairs for the Institutional Life Markets Association. Only two rated securitization transactions have occurred: a 2009 life settlements securitization that involved American International Group Inc. — the only pure life settlements transaction to date—and a 2004 securitization by Legacy Benefits Corp. that included life settlements and annuities.
“Since these are the only known transactions, it brings to question why suddenly there is such increased attention to the securitization of life settlements,” Mr. Kelly said.
Furthermore, representatives from
Credit Suisse Group AG and The
Goldman Sachs Group Inc. indicated that they have never securitized life settlements. However, while
Credit Suisse wouldn’t rule out participating in a “properly structured life settlement securitization,”
Goldman Sachs has no client mandates or plans to execute these transactions, according to testimony.
Still, both participate in life settlements, and Goldman owns a longevity index.
“We do not see the life settlement securitization market as a cause for concern for the financial system as a whole,” Goldman managing director Steven T. Strongin said in his testimony. “However, there does appear to be special issues in terms of consumer protection in life settlements in general that may be appropriate for Congress or a regulator appointed by Congress to address.”
