An SEC task force on Thursday recommended that life settlements be defined as ‘securities,’ thus making such transactions subject to federal securities laws.
Bringing life settlements under the definition of security would require market intermediaries, including settlement brokers and providers, to register with the Securities and Exchange Commission and the
Financial Industry Regulatory Authority Inc., according to a report by the task force.
The task force, which has been studying the issue since September, found that while there are two regulatory frameworks addressing life settlements — one from the National Association of Insurance Commissioners and the other from the National Conference of Insurance Legislators — there are numerous variations in how the states actually adopt those rules.
Meanwhile, some 48 states treat life settlements as securities under state laws, but some states exclude the original sale from the insured person or the sale from the policy owner to the provider.
Finra currently oversees life settlements involving variable life insurance, but federal courts have reached different conclusions as to whether fractional interests in life settlements are indeed securities, according to the SEC report.
The task force recommended that SEC staff members ensure that settlement brokers and providers are sticking to legal standards of conduct, and that the staff watches for the development of a life settlement securitization market. Thus far, no securitizations have been registered with the SEC and offered to the public.
The task force also called upon Congress and state legislators to weigh applying stronger regulation to life expectancy underwriters and asked the SEC to consider issuing an investor bulletin on investments in life settlements.
Another report released today by the Government Accountability Office also criticized the patchwork of life settlement regulation in the states. Disclosure requirements can vary across jurisdictions, and policy owners could sell their policy without knowing whether they received a fair price or how much their brokers made, the GAO said.
However, inconsistent laws have also hampered industry participants, as some brokers and providers have had to deal with the cost of complying with different rules in multiple states, the GAO said. The organization called for consistent legal protection for similar products and services, including disclosures, sales practice standards and suitability requirements.
