Federal Regulation of Life Settlements?

Just as the SEC’s assertion of jurisdiction over the regulation of indexed annuities seems resolved, an SEC Life Settlements Task Force Report published yesterday recommends life settlements be defined as securities so that “the investors in these transactions are protected under federal securities laws.”  Like a GAO report issued earlier this month, the SEC’s Life Settlements Task Force focuses on inconsistent regulation at the state level as a major basis for recommending the assertion of federal regulatory jurisdiction.

The task force made the following recommendations in yesterday’s report:

1) The SEC should consider recommending to Congress that life settlements be included in the federal definition of securities.  The recommendation is to amend the Securities Act of 1933, the Securities Exchange Act of 1934 and the Investment Company Act of 1940 so each would include life settlements.

2) The SEC staff should continue to monitor broker/provider compliance with FINRA rules and federal securities laws.

3) The SEC staff should monitor developments in the securitization of life settlements and should seek access to additional information about the sale of these products in private markets.

4) The SEC should “consider highlighting to Congress and state legislators that investors and market participants could benefit from more significant and consistent regulation. Such regulation could cover areas including licensing and qualifications of underwriters, privacy of consumer information, and physician review standards.” The task force further states that the “need for a federal agency to play a role in this regulation would depend on whether the definition of “securities” under federal securities law is amended to include life settlements, and on the further development of the market for life settlement securitizations.”

5) An Investor Bulletin on investing in life settlements should be issued so that investors or potential investors in life settlements could receive background on the life settlement process and the parties involved in life settlements as well as key considerations and risks that investors in life settlements should keep in mind when investing.

I have to say that while reading this report I had a decidedly uncomfortable feeling. I think it was because there was so much emphasis on protecting investors and so little on the fact the “life” in life settlement is a human being. I recognize that the human life component of these transactions doesn’t necessarily mean that the life settlement is or is not a security. And the securitization of life settlements may only be different from a single life settlement in degree, but not in the underlying premise. But in what other investments that the SEC regulates is life expectancy a key component. While life expectancy underwriters may not be regulated the way they should, would the SEC be the best regulator of those underwriters? Don’t state insurance departments have more relevant experience in looking at those regulatory issues than the SEC?

In my opinion, insureds may be the most in need of protection when life settlements are bundled and securitized. I doubt many really understand what is happening when they settle their life insurance policy.  Clearly the product could be a security and still have protections for insureds, but that didn’t come through to me as a focus in the task force report.

I’m all for protecting investors as a mom and apple pie goal, but I think it is important not to lose sight of the real lives of the insureds here and making sure that they are protected too. And when it comes down to that protection, I think state insurance regulators are more in touch with the need to balance sometimes competing demands of protecting all the parties involved in these life settlements than is the SEC, whose focus is exclusively on the investors.