July 22, 2010
SEC Staff Report Recommends Improved Regulation of Life Settlements
The 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 D.C. Circuit held, in SEC v. Life Partners, Inc., 87 F.3d 536 (D.C. Cir. 1996), that life settlements were not securities under the federal securities laws principally because the intermediary's efforts were largely completed before the purchase; a number of states, however, have found them securities under state law.
The staff report by the SEC's Life Settlements Task Force 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.
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