The Securities and Exchange Commission (SEC) has proposed to Congress to amend the definition of “security” under federal securities laws to include life settlements.

The SEC made this recommendations, along with other proposals, in a report it issued on the sector.

The report also noted that there is inconsistent regulation of participants in this market, including those who arrange for the buying and selling of policies as well as  and those who provide estimates of an insured’s life expectancy.

Additionally, the report said that investors in individual life settlement deals, or pools of life settlements would benefit from the application of baseline standards of conduct to market participants.

According to the  SEC clarifying the meaning of  “security” to cover life settlements would provide a more consistent treatment of the sector under both federal and state laws. It would also subject intermediaries to increased regulations meant to protect investors, and would help regulatory agencies in preventing fraud, the SEC’s report said.

The report also instructed the SEC staff to monitor the development of a life settlement securitization market and to make sure that legal standards of conduct are being met by brokers and providers.

Additionally, task force members encouraged Congress and state legislators to consider more substantial and consistent regulation of life expectancy underwriters, as the market has grown significantly in recent years.

Frank Keating, president and CEO of the American Council of Life Insurers (ACLI) issued a statement yesterday on the SEC’s report on life settlements. The ACLI is a Washington, D.C.-based trade association covering legal reserve life insurer and fraternal benefit society companies.

In his official statement, Keating applauded the SEC and its life settlement task force for a “thorough and thoughtful” analysis of the life settlement market.

He acknowledged a variety of regulatory gaps noted by the SEC that could potentially expose investors to certain risks, including the possibility that settlement packages could be infected with stranger-originated life insurance (STOLI) transactions. “The report addresses many of ACLI’s concerns with this market,” he said.

Keating elaborated on the threats posed by STOLI transactions, indicating that investors or middlemen target seniors and convince them to purchase life insurance policies that they otherwise would not buy solely to transfer the policies to the investors, who hope to profit by receiving the death benefits after the seniors die.

STOLI transactions violate state laws and policies may be rescinded if discovered, he continued, leaving unwary investors with a substantial risk of loss.

Keating promised that ACLI would study the SEC’s policy recommendations and would discuss them with its member companies, thanking the task force for what he called a major step forward.

“As the SEC Task Force report shows, there is a lack of transparency in life settlements and uncertainty over regulation of a market that has been awash in litigation. ACLI hopes that the report will add new momentum to efforts in the states and in Congress to protect investors, as well as senior citizens,” Keating added.

However, although the thorough analysis on the sector was enlightening to the market, the increased regulations proposed in the SEC’s report will hinder industry growth, according to attorneys with Stroock & Stroock & Lavan.

“This recommendation, if adopted, would represent a major shift in the life settlement industry, and impose significant costs and regulatory compliance obligations on industry participants, as they would be required to be licensed at the Federal level and be subject to SEC and [Financial Industry Regulatory Authority] oversight,” said Boris Ziser, a partner at Stroock.

“The SEC’s position will result in a significant realignment in the life settlement provider business, with those life settlement providers who have broker-dealer affiliates best positioned to realize gains,” added Thomas Weinberger, another partner at the firm.

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