SEC Staff Report Recommends Amending Definition of “Security” to Include Life Settlements

July 26, 2010

Life Settlement transactions are transactions in which an individual with a life insurance policy sells that policy to another person or entity, who then assumes responsibility for paying the policy premiums throughout the life of the insurance policy. The purchaser is thereafter entitled to receive the death benefit under such life insurance policy upon the death of the insured. In exchange, the insured 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.

Historically, each state has enacted legislation to regulate certain aspects of the life settlement market. Such regulations have been inconsistent and, accordingly, have created uncertainty in the life settlement industry. As a result of uncertainty under federal securities laws as to how to classify life settlements—specifically, as to whether a life settlement should be classified as a security—there has been little guidance on a federal level with respect to regulating life settlements.

On July 22, 2010 the Securities and Exchange Commission made an historic announcement by releasing a Staff Report recommending that life settlements be clearly defined as securities so that investors in life settlement transactions are protected under federal securities laws. Specifically, the Staff Report recommends that the SEC consider recommending to Congress that it amend the definition of “security” under the Securities Act of 1933, the Securities Exchange Act of 1934 and the Investment Company Act of 1940 to expressly include life settlements. Ultimately, the purpose of such an amendment would be to: (i) bring clarity to the status of life settlements under the federal securities laws and to provide a more consistent treatment for life settlements under both federal and state securities laws, (ii) bring intermediaries in the life settlement market within the regulatory framework of the SEC and the Financial Industry Regulatory Authority (FINRA), which 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, and (iii) give the SEC and FINRA clear authority to police the life settlements market, which could lead to early detection of abuses and help deter fraud.