Though Finra and the SEC have spent some time examining the world of life settlements, representatives from these agencies said they still have a ways to go before fully defining the depth of their jurisdiction in that growing industry.
“In terms of where the commission stands, there's a large gap because it hasn't really focused on life settlements as a product in the regulatory sense,” said Eric Werner, a Fort Worth, Texas-based branch chief of the Securities and Exchange Commission.
He was a featured panelist on a session entitled “Securities and Life Settlements” at the Life Insurance Settlement Association's 15th annual conference in New York this week.
“At this point, the commission understands that there are lots of state and insurance regulators involved in the product,” Mr. Werner added. “I think one problem that the SEC has had is that it hadn't differentiated between the initial sale of the policy to the buyer and then the pooling of policies. Now that the SEC and the staff get the difference, it allows us to better assess when to get involved.”
Fellow panelist Larry Kosciulek, director of investment company regulation at the
Financial Industry Regulatory Authority Inc., noted that while states regulate insurance and securities products differently, Finra is still trying to figure out where its member firms stand on other aspects of life settlements.
“There's lots of hype on the securitization side,” Mr. Kosciulek said. “We're still trying to determine the extent of our members' involvement.”
Part of the difficulty in understanding regulators' roles in life settlements stems from the difficulty of determining when a transaction is technically deemed to be a securities transaction.
Panelist Fred Joseph, Colorado's securities commissioner, detailed the case of the SEC v. W. J. Howey Co. to highlight this issue. The case determined that if someone invests in a common enterprise and expects to profit from the efforts of others, that enterprise is considered an investment contract and thus a security.
Though regulators use the case as precedent for determining when an investment is a securities transaction, there are still some gray areas. “I think the difficulty facing the SEC now is the pooling of settlements,” Mr. Werner explained. “It's fairly understandable as a security, but what is the sale by the policyholder? Does that constitute an investment contract?”
The SEC recently established a task force for life settlements and has been in talks with industry members to get a better idea of how they do business.
Finra has tried to address that issue through Regulatory Notice 09-42, which was released in July. The notice said that Finra members who try to add a variable-life-settlement business to their practice need to obtain approval for a material change in business. Suitability rules, supervisory procedures and best-execution rules apply.
“We recognize there's a market for this product, but we recognize that our rules apply and that suitability is a keystone,” Mr. Kosciulek explained.
