SEC and GAO Issue Reports Regarding Life Settlements

- Life settlement pools would be subject to potential investment company registration and regulation. Noting that the Investment Company Act defines an "investment company" to include any issuer which "is or holds itself out as" being, or proposing to be engaged primarily "in the business of investing, reinvesting, or trading in securities," the Task Force Report concludes that, if a life settlement is a "security" for Investment Company Act purposes, a pool of life settlements in which interests are issued would become subject to registration and regulation as an investment company, absent an available exemption. The report further notes that investors in the pool would benefit from the comprehensive regulatory framework to which investment companies are subject, including prohibitions and protections regarding the management of the investment company and full and accurate disclosure about the company and its sponsors.

o Second, the Task Force Report recommends that the SEC take additional measures to oversee and ensure that market intermediaries are complying with their current obligations under the federal securities laws and FINRA rules, to the extent the life settlement involves a securities transaction (e.g., suitability obligations owed not only to the individual settling the life insurance policy, but also to "any investors in subsequent transactions associated with that settlement"). The Task Force Report

goes on to note that such SEC and FINRA measures could include examination and enforcement efforts, potential additional or expanded licensing requirements for firm personnel involved in life settlement transactions and investor education efforts.

o Third, the Task Force Report recommends that the SEC monitor the development of the life settlement

securitization market for the purpose of obtaining access to more information about these transactions in the private market. In particular, the report notes that this could be accomplished through requiring that a notice describing any life settlement securitization be filed with the SEC.

o Fourth, the report recommends that the SEC consider encouraging Congress and state legislatures to regulate life expectancy underwriters more consistently, as the underwriters' work affects each transaction's timing and value.

o Fifth, the report states that the SEC should consider instructing its staff to issue a bulletin to investors explaining important information learned by the Task Force in the course of its work (concurrent with the issuance of the Task Force Report, we note that the SEC staff did issue a brief investor bulletin explaining what a life settlement is, the role different market intermediaries generally play, and certain considerations to be considered in determining whether to sell a life insurance policy).

GAO's Response to the Inconsistent Regulation of Life Settlements

The GAO Report provides two main proposals for modernizing the life settlement regulatory system: consistent consumer and investor protection and consistent financial oversight. The GAO concluded that the life settlement market has not achieved these goals to date, as market participants lack useful information and legal protections such as disclosures and sales practice standards. Policy owners receive different protections depending on whether the policy being sold is a variable or non-variable life policy. The GAO Report suggests several solutions, including that the Federal Insurance Office help monitor the insurance industry and bridge gaps in state regulation. The report also encourages measures to be taken to ensure consistent implementation of insurance regulations among state regulators, as the GAO has recommended over the past decade. Finally, the report suggests that Congress consider taking steps to ensure consistent protection of policy owners involved in life settlement transactions, as such transactions currently may lack a clear and comprehensive regulatory scheme.

Action Steps

According to Sidley Austin, in light of the two reports, purchasers and sellers of life insurance policies and other life settlement market participants, especially in the secondary market, should (i) consider whether the securities laws affect their transactions and whether broker/dealer compliance may be necessary and (ii) monitor the federal securities laws and any actions of the SEC, FINRA and other SROs, as well as the Federal Insurance Office, for changes in the regulation of life settlements and life insurance policy investments.