August 22, 2011

Should 'Life Settlements' be Defined as 'Securities?'

It was reported that on July 22, 2011, the Securities and Exchange Commission (SEC) released a report from its Life Settlements Task Force which recommended that the SEC urge Congress to amend the federal securities laws to include life settlements as securities. The SEC report also recommended that the SEC monitor brokers and providers to assure that legal standards of conduct are being met.

This report raises a key policy question about life settlements, in which a policyholder sells the policy to someone else, who then assumes responsibility for paying the premiums. In exchange, the insured person 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 SEC proposal to define life settlements as securities is both wise public policy and the only solution that would give all participants the confidence to create a sustainable secondary market for life policies.

This 43-page report and its 40 pages of exhibits are the product of a joint task force that conducted an extensive review of existing law, litigation and enforcement actions. The task force also interviewed all major market participants, making the study the most comprehensive look at this complex issue to date.

Securities Lawyer, Lars Soreide, feels that 'life settlements' should be considered 'securities.' Lars Soreide says, "It is a gray area when a financial advisor takes off his securities hat and puts on his insurance hat to sell you a life settlement, which can leave many customers confused as to whether they are dealing with  insurance products or securities. Furthermore, by not classifying life settlements as securities it makes it more difficult on investors, who were burned by their advisors, to pursue legal action. By not classifying life settlements as securities, investors may not be able to pursue these claims in the Financial Industry Regulatory Authority (FINRA) forum and have to sue in state or federal court which is a longer, more expensive process, unless all parties agree to arbitrate before FINRA."

The courts and regulators have found investments in life settlements to be securities. The SEC report, in fact, points to 25 SEC enforcement actions and 13 enforcement actions brought by the Financial Industry Regulatory Authority Inc. that rest on this conclusion, as well as numerous other cases.

If the definition of a security under the securities laws were amended specifically to include life settlements under the NASAA model the definition would preserve a place for state regulation of legitimate life settlements. At the same time, it would close the door to many abusive transactions, including almost all forms of stranger-originated life insurance.

If life settlements were defined as securities, many of the abusive practices that have spawned more than 300 lawsuits and loss of much personal wealth would have been avoided. Few of these litigated cases involved variable policies, which come under the purview of securities regulation and demonstrate the relative effectiveness of Finra regulation and enforcement.

The SEC proposal to define life settlements as securities may be just what is needed to boost investors' confidence and encourage them to buy, which would make the market more liquid.

Securities regulation would create full, fair and adequate disclosure of all material facts, and the discipline of Finra oversight would afford policyholders consistent protection in all U.S. jurisdictions. This would make it harder for abusers to sidestep the law.

If you or a family member have become alleged victims of life insurance fraud, contact an insurance fraud attorney for a free consultation on how to recover your investment losses.  To speak with an attorney, call 888-760-6552, or visit

We stand up and fight for the rights of consumers. Soreide Law Group, PLLC, representing Insurance Fraud Victims in Federal Court, State Court and before the Financial Industry Regulatory Authority (“FINRA”).

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