Regulation of Life Settlements

Last week US SEC released a staff report recommending that life settlements be clearly defined as securities so that the investors in these transactions are protected under the federal securities laws.

A life settlement is a transaction in which an individual with a life insurance policy sells that policy to another person, who then assumes responsibility for paying the premiums. Typically, the seller no longer wants the policy or can no longer afford to pay the premiums. In exchange, the insured party typically receives a lump sum payment that exceeds the policy's cash surrender value, but is less than the expected payout in the event of death.

The staff report by SEC's Life Settlements Task Force, which SEC Chairman Mary Schapiro established in August 2009, notes that the market for life settlements has grown over the past decade, raising questions about its regulation and oversight.

In particular, the report notes that there is inconsistent regulation of participants in the life settlements market, including those who arrange for the buying and selling of policies and those who provide estimates of an insured's life expectancy. In addition, the report notes that investors in individual life settlement transactions, or pools of life settlements, would benefit from the application of baseline standards of conduct to market participants.

In the report, the staff outlines the Task Force's findings about the life settlements market and recommends ways to improve market practices and regulatory oversight. It recommends that the Commission should:

• Consider recommending to Congress that it amend the definition of security under the federal securities laws to include life settlements as securities.
• Instruct the staff to continue to monitor that legal standards of conduct are being met by brokers and providers.
• Instruct the staff to monitor for the development of a life settlement securitization market.
• Encourage Congress and state legislators to consider more significant and consistent regulation of life expectancy underwriters.

SEC also issued an investor bulletin regarding investments in life settlements, consistent with one of the recommendations of the Task Force.

Amending the federal securities laws to define life settlements as securities could have several benefits:

• The amendment would clarify the status of life settlements under the federal securities laws and provide for a more consistent treatment of life settlements under both federal and state securities laws.
• The amendment would bring intermediaries in the life settlement market within the regulatory framework of SEC and FINRA. This would subject them to regulatory requirements designed to protect investors from abusive practices and to promote business conduct that facilitates fair, orderly and efficient markets.
• The amendment would give SEC and FINRA clear authority to police the life settlements market, which could lead to early detection of abuses and help deter fraud.

Jack's comment: It appears that life settlement is not regarded as securities under SFO, but would they be treated as regulated investment agreement, or structured product in future?