A recommendation by an SEC task force that life settlements be treated and regulated as securities has raised concerns that another turf battle may be brewing between state insurance regulators and federal securities cops.
“We generally have concerns when the federal government pre-empts state authority, and this would be no exception to that, but we’ll reserve judgment until we see what action the federal government will take,” said Connecticut’s insurance commissioner, Thomas R. Sullivan, who is also chairman of the National Association of Insurance Commissioners’ Life Insurance and Annuities Committee.
The Securities and Exchange Commission’s Life Settlements Task Force last week released a report recommending that the regulator push Congress to expand the federal definition of “security” to apply to life settlements. Under such a setup, all market intermediaries — including the providers buying up the insurance policies, as well as life settlement brokers — would be required to register with the SEC and the
Financial Industry Regulatory Authority Inc., as well as subscribe to best-execution and suitability rules.
Currently, the life settlements industry is the domain of the state insurance regulators, and about 40 states have regulations in place which follow model rules from either the NAIC or the National Conference of Insurance Legislators. The regulations vary from state to state and across models. For instance, the NAIC model rule on life settlements bars the sale of a life insurance policy over the secondary market within five years of its being issued. That period is only two years under the rules from NCOIL.
Some observers fear that if the suggestions are enacted, they will apply to the primary market for life settlements — when a policyholder decides to sell his or her own life insurance policy to an investor — and step on the toes of state regulators.
Mr. Sullivan acknowledged that there’s currently a regulatory “mosaic” in place, where some jurisdictions have tougher laws than others. But he is loath to support uniformity if it means weakening rules for all states.
“I’m not going to accept uniformity blindly in the hopes of getting a weaker standard,” he added.
“What we don’t want is the creation of regulatory arbitrage in states with strong prohibitions where the SEC might promulgate weaker rules and where they might pre-empt the state by setting a floor that’s weaker than what currently exists,” he said. Mr. Sullivan said he’s waiting to see how federal regulators follow through on the recommendations.
“The central issue is whether the SEC has the authority to go after Congress,” said Doug Head, executive director of the Life Insurance Settlement Association. He said his group will approach the NAIC on the topic next month.
Mr. Head questioned whether making the life settlement itself a security would subject consumers — who would be the “issuer” of the life settlement — to the same rules that other securities issuers need to follow.
“If the SEC will assert that the primary-market sale is a securities transaction, then you’re forcing people to comply with securities law,” he said. “If the issuer is a consumer, they can’t file with the SEC just because they’re selling their policy. This is property, not a security.”
“We are the business of insurance,” Mr. Head said. “If it’s a turf battle, then we’re the football.”
