SEC Recommendations Could Hurt Settlement Brokers
Due to the unprecedented credit crunch, seniors interested in selling their life insurance were faced with sharply discounted policy valuations over the past two years. The lack of capital in the market reduced competition, consolidated demand and had a notably adverse effect on consumers. The recent SEC recommendation to treat all life settlements as securities may have the unintended consequence of creating a similarly negative environment for consumers.
The July 22, 2010 SEC Report of the Life Settlements Task Force suggested that congress classify life settlements as securities and create a regulatory structure at the national level. The report primarily focused on improving the environment for investors of life settlements. However, its recommendation broadly included all “market intermediaries”, suggesting life settlement brokers should be brought under FINRA jurisdiction.
Why add brokers? Most of the issues giving the industry a black eye have been related to life settlement investments and investors. This is quite obvious as the general theme of the SEC report focused on investments. The knocks against life settlement brokers have been largely limited to disclosure and transparency. These issues are now well addressed by the 38 states that regulate life settlements. Although there are 12 remaining unregulated states, it is an eventuality that they follow suit. Due to their small populations, places like Wyoming, South Dakota and other unregulated states, represent only a minute fraction of the overall life settlement market.
Unfortunately defining life settlements as securities has significant ramifications for brokers and ultimately consumers. If the SEC’s recommendations become law, life settlement brokers as parties that are involved with securities, must at the least become FINRA licensed Financial Services Representatives registered with broker-dealers. For the most part, existing broker-dealers are not interested in the life settlement business and will not register life settlement brokers with their firms. My firm has contacted almost one dozen broker-dealers and their response has been unanimous. They do not now and are not planning in the future to allow life settlement brokers to register with them.
Financial Services Representatives often split a portion of their earnings with a broker-dealer. Life settlements are a very small and narrow niche. The potential revenue for a broker-dealer involved with life settlement brokers would be limited and the administrative costs too high for the potential return.Continued on the next page