Life Settlements 

Task Force 

Staff Report to the 

United States Securities and Exchange Commission 

July 22, 2010 

This is a report by the Staff of the U.S. Securities and Exchange Commission. The 

Commission has expressed no view regarding the analysis, findings, or conclusions 

contained herein. 
Table of Contents 

I. Introduction ................................................................................................................... 1

II. Life Settlements ............................................................................................................ 3

A. What is a Life Settlement ........................................................................................ 3

B. Size of the Life Settlements Market ........................................................................ 4

III. Current Practices in the Life Settlements Market ......................................................... 6

A. Market Intermediaries ............................................................................................. 7

1. Brokers and Providers ....................................................................................... 7

2. Life Expectancy Underwriters .......................................................................... 8

3. Trading Platforms ........................................................................................... 10

4. Secondary Market Companies ........................................................................ 10

B. Stranger-Originated Life Insurance (STOLI) ....................................................... 11

C. Securitization of Life Settlements ......................................................................... 14

D. Role of Rating Agencies ....................................................................................... 17

E. Effect of Life Settlements on Life Insurers ........................................................... 19

IV. Regulation of the Life Settlements Market ................................................................. 21

A. Application of the Federal Securities Laws .......................................................... 21

1. The Securities Act of 1933 ............................................................................. 21

2. The Securities Exchange Act of 1934 ............................................................. 24

3. Enforcement Actions ...................................................................................... 30

B. Application of State Insurance and Securities Laws ............................................. 33

1. State Insurance Laws ...................................................................................... 33

2. State Securities Laws ...................................................................................... 36

V. Recommendations ....................................................................................................... 39

A. The Commission Should Consider Recommending to Congress that It Amend the 

Definition of Security under the Federal Securities Laws to Include Life 

Settlements ............................................................................................................ 39

B. The Commission Should Instruct the Staff to Continue to Monitor that Legal 

Standards of Conduct Are Being Met by Brokers and Providers ......................... 42

ii 
C. The Commission Should Instruct the Staff to Monitor for the Development of a 

Life Settlement Securitization Market .................................................................. 42

D. The Commission Should Encourage Congress and State Legislators to Consider 

More Significant and Consistent Regulation of Life Expectancy Underwriters ..... 43

E. The Commission Should Instruct the Staff to Consider Issuing an Investor Bulletin 

Regarding Investments in Life Settlements ........................................................... 43

Appendix A: Task Force Membership ........................................................................... A-1

Appendix B: Groups and Individuals Who Met with the Task Force ............................. B-1

Appendix C: SEC Enforcement Actions ........................................................................ C-1

Appendix D: FINRA Enforcement Actions ................................................................... D-1

Appendix E: Charts Comparing the NAIC and NCOIL Model Acts ............................... E-1

iii 
Executive Summary

Chairman Schapiro established the Life Settlements Task Force in August 2009 to 

examine emerging issues in the life settlements market and to advise the Commission 

whether market practices and regulatory oversight could be improved. A life settlement 

is a transaction in which an insurance policy owner sells a life insurance policy to a third 

party for an amount that exceeds the policy’s cash surrender value, but is less than the 

expected death benefit of the policy. Reports indicate that the life settlements market had 

experienced robust growth up until 2007 when it was estimated that $12 billion in face 

amount, or stated benefit amount, of life insurance was sold in life settlement 

transactions. More recently, the amount sold has declined. Based on a recent estimate, 

$7.01 billion of face amount in life insurance was sold in life settlement transactions in 

2009.1 

The Task Force was set up as a cross-Divisional SEC Staff task force to bring a 

multi-disciplinary approach to the review. The Task Force reviewed articles and other 

resources related to life settlements, and met with 23 outside groups knowledgeable about 

the life settlements market, its regulation, its participants and its impact on policy owners 

and investors. In addition to meeting with industry participants, the Task Force also met 

with the Financial Industry Regulatory Authority (“FINRA”), the U.K.’s Financial 

Services Authority (“FSA”), the U.S. Government Accountability Office (“GAO”), and 

state insurance commissioners and securities regulators and their representatives. 

This Report outlines the Task Force’s findings about the life settlements market 

and recommends that the Commission consider certain actions to improve market 

practices and regulatory oversight in the life settlements market. The views expressed in 

this Report are those of the Task Force and do not necessarily reflect the views of the 

Commission or the individual Commissioners. 

Characteristics of the Life Settlements Market 

A life settlement is usually accomplished through the efforts of a number of 

market intermediaries, each of them dealing with a specific aspect of the settlement of a 

life insurance policy. Participants in a life settlement transaction generally include an 

insured individual or the owner of the policy, a producer who may be a financial advisor 

or an insurance agent, one or more settlement brokers who may also be insurance agents, 

one or more life expectancy underwriters, one or more providers who typically represent 

the party acquiring the policy, and one or more investors. 

 

1 See U.S. Government Accountability Office, GAO-10-775, Life Insurance Settlements: 

Regulatory Inconsistencies May Pose a Number of Challenges (2010). 

iv 
Most insured individuals participating in today’s life settlement market are seniors 

with a life expectancy of more than two years.2

 Often, insured individuals or policy 

owners first discuss a life settlement with a producer, who may be the policy owner’s 

financial advisor or the insurance agent who sold the insurance policy to the policy 

owner. A settlement broker will generally gather the information necessary to sell a life 

insurance policy to a provider, known as settling the policy, including medical 

information. Providers will review and bid on settlement applications prepared by 

settlement brokers. Life expectancy underwriters are responsible for preparing a life 

expectancy assessment that evaluates the risk of mortality of the insured. Providers may 

hold but typically resell life settlements or interests in life settlements to investors. The 

majority of investors in today’s life settlement market are large institutional investors 

seeking to acquire large pools of policies. Retail investors also participate in the life 

settlements market, generally by purchasing fractional interests in settled policies. 

Some companies, in addition to being providers, specialize in the secondary 

market of life settlements and their activities range from buying life insurance policies to 

selling those policies, either as whole policies or fractional interests in policies, or using 

those policies as collateral for other investment instruments. 

Stranger-Originated Life Insurance

Stranger-originated life insurance (“STOLI”) is a transaction in which an investor 

or its representative induces an individual, typically a senior, to purchase a life insurance 

policy that he likely would not otherwise have purchased. The individual applies for the 

policy with a prior understanding to cede control of the policy to the investor. The 

applicant and the investor agree that, at the end of a given period, ownership of the policy 

will be transferred to the investor, or some other third party, who would expect to receive 

the death benefit when the insured dies. 

Critics of STOLI, including state insurance regulators, argue that STOLI is 

inconsistent with state “insurable interest” laws and the historical social policy of 

insurance, which is to protect families and businesses from potential economic hardship 

caused by untimely death of the insured. Other concerns cited about STOLI include that 

it may encourage insurance fraud; it may result in an insured incurring a tax liability 

resulting from forgiveness of premium loans or receipt of incentives from the investor for 

obtaining the life insurance policy; it may make the insured unable to obtain life 

insurance legitimately needed in the future; and it could make life insurance more 

expensive and less available for other consumers. From the standpoint of an investor in 

life settlements, STOLI policies may introduce additional risks, given that insurers may 

contest them on grounds such as fraud or violations of state insurable interest laws. 

 

2 The market refers to the settlement of a life insurance policy by an individual with a life 

expectancy of less than two years as a viatical settlement. If the life expectancy of the insured is 

greater than two years, then the market refers to that settlement as a life settlement. 

 

v 
Securitization of Life Settlements and the Role of Rating Agencies

To date, there have been no securitizations of life settlements registered with the 

SEC, although there have been some privately offered life settlement securitizations. 

Market participants believe a rating from a rating agency would be essential in order to 

be able to sell a securitization of life settlements. There have been only a very limited 

number of securitizations of life settlements that have ever received a rating. The Task 

Force was told by groups representing a wide array of market participants that it is 

unlikely that there will be an increase in securitizations of life settlements in the near 

future. Some rating agencies have also publicly highlighted multiple obstacles that 

would make it difficult to rate a life settlement securitization. Among those obstacles 

are: legal uncertainty surrounding the existence and transferability of insurable interests; 

the lack of experience and reputation of the prospective issuers of the securitization; the 

large number of policies needed for life settlements securitizations; questions regarding 

the reliability of medical reviews of the insured individuals; and the potential timing 

mismatch of cash flows. These are many of the same risks and challenges presented to 

anyone seeking to invest in life settlements generally. 

Application of the Federal Securities Laws to Life Settlements

A variable life insurance contract is a security under the federal securities laws, so 

the sale of such a contract by its owner would involve a securities transaction subject to 

the federal securities laws and the SEC’s jurisdiction. In the context of non-variable life 

insurance contracts, which constitute the vast majority of settled contracts, in two 

instances federal courts have considered whether fractional interests in viatical 

settlements are securities. The courts reached different conclusions and thus this issue 

remains unresolved. 

In instances where life settlements constitute a security under the federal 

securities laws, market intermediaries engaging in transactions in those securities must be 

registered as broker-dealers and are subject to regulations designed to promote business 

conduct that facilitates fair, orderly and efficient markets and protects investors from 

abusive practices. 

Trading platforms that facilitate transactions in life settlements that are securities 

under the federal securities laws must register as national securities exchanges pursuant 

to Sections 5 and 6 of the Securities Exchange Act of 1934 (“Exchange Act”), or register 

as a broker-dealer. 

The SEC has brought a number of enforcement actions alleging fraud in 

connection with life settlement investments. Those enforcement actions have typically 

involved misrepresentations to investors about the profitability and safety of the 

underlying life insurance policies, including the life expectancies of the insured persons, 

and Ponzi schemes whereby investor funds have been used to pay promised investment 

returns or simply misappropriated. The schemes in these cases ranged from tens of 

millions of dollars to at least one billion dollars. FINRA has also brought enforcement 

vi 
actions concerning life settlement investments. FINRA cases involved violations of 

FINRA rules by either engaging in an outside business or engaging in private securities 

transactions without complying with the relevant FINRA rules for such conduct. 

Application of State Insurance and Securities Laws to Life Settlements

With respect to state insurance laws, both the National Association of Insurance 

Commissioners (“NAIC”) and the National Conference of Insurance Legislators 

(“NCOIL”) have adopted model state statutes addressing life settlements. Both model 

acts include provisions addressing licensing of life settlement brokers and providers, 

disclosure to policy owners in connection with entering into life settlement contracts, 

regulators’ examination and enforcement powers, and deterrence of STOLI transactions. 

However, there are many variations of these two model acts due to the different ways 

states enact them. A total of 45 states have adopted some form of legislation relating to 

life settlements under state insurance laws. Unlike other market participants, life 

expectancy underwriters are not subject to significant regulation at the state level. 

With respect to state securities laws, 48 states treat life settlements as securities 

under state laws, although some states exclude from the definition of security the original 

sale from the insured or the policy owner to the provider. A majority of states include 

life settlements in their statutory definition of security, either directly in that definition, or 

as part of the definition of investment contract. In a number of other states that do not 

include life settlements in their statutory definition of security or investment contract, 

state courts or state regulators have found life settlements to be a security under an 

investment contract analysis. 

Recommendations

A. The Commission Should Consider Recommending to Congress that It Amend 

the Definition of Security under the Federal Securities Laws to Include Life 

Settlements

The Task Force recommends that the Commission 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 include 

life settlements. The amendment would clarify the status of life settlements under the 

federal securities laws and provide for a more consistent treatment of life settlements 

under both federal and state securities laws. 

Under the Securities Exchange Act of 1934, the amendment of the definition of 

“security” would bring market intermediaries in the life settlements market within the 

regulatory framework of the SEC and FINRA. The market intermediaries would be 

required to register with the SEC and a self-regulatory organization (“SRO”), such as 

FINRA, and would become subject to a comprehensive set of SEC and SRO 

requirements that are designed to protect investors from abusive practices and to promote 

business conduct that facilitates fair, orderly and efficient markets. Among these 

vii 
requirements are a duty to deal fairly with customers, a duty to seek to obtain best 

execution of customer orders, suitability requirements, and a requirement that 

compensation for services be fair and reasonable. In addition, the amendment would give 

the SEC and FINRA clear authority to police the life settlements market for compliance 

with the federal securities laws and SRO requirements, which could lead to early 

detection of abuses and help deter fraud. 

Under the Securities Act of 1933, the amendment of the definition of “security” 

would mean that all offers and sales of life settlements, whether single life settlements or 

fractional interests in life settlements, would need to be registered with the SEC, unless 

an exemption from such registration requirement is available. In addition, any 

misstatement in the offers and sales of life settlements, whether registered or offered 

pursuant to an exemption, would be covered by the antifraud provisions in the Securities 

Act. 

Under the Investment Company Act of 1940, the amendment of the definition of 

“security” would mean that a pool of life settlements issuing interests in the pool would 

be an investment company under the Investment Company Act, unless it falls within an 

exemption. Investors in the pool would benefit from the comprehensive federal 

regulatory framework the Investment Company Act establishes for investment 

companies. 

B. The Commission Should Instruct the Staff to Continue to Monitor that Legal 

Standards of Conduct Are Being Met by Brokers and Providers

The Commission should instruct the Staff to help ensure that settlement brokers 

and providers, as well as other participants in the settlement transaction, are adequately 

discharging their obligations under the federal securities laws and FINRA rules. Action 

by FINRA and the SEC could include examination and enforcement efforts, 

consideration of whether existing licensing schemes should be expanded, as well as 

investor education efforts. 

C. The Commission Should Instruct the Staff to Monitor for the Development of 

a Life Settlement Securitization Market

The Commission should instruct the Staff to monitor for developments related to 

life settlements and the securitization market. To date, no securitizations of life 

settlements have been registered with the SEC and offered to the public. Since life 

settlement securitizations or pools of life settlements to date have been offered and sold 

in reliance on exemptions from registration with the SEC, information about those 

transactions is not generally available. However, the SEC and the market would benefit 

from having access to more information about the sales of these securities in the private 

markets. The SEC has proposed revisions to its rules to require issuers of structured 

finance products, which would include securitizations backed by life settlements, that sell 

securities without registration under the Securities Act in reliance on Regulation D or that 

rely on Rule 144A for resales of the securities to make a notice filing describing the 

viii 
ix 

offering.3

 The Staff would be in a better position to monitor developments in the market 

for life settlement securitizations if this or a similar proposal were adopted. 

D. The Commission Should Encourage Congress and State Legislators to 

Consider More Significant and Consistent Regulation of Life Expectancy 

Underwriters

The Commission should consider highlighting to Congress that the life settlement 

market could benefit from more significant and consistent regulation of life expectancy 

underwriters. The estimated life expectancy of the insured constitutes a critical 

component of the life settlement transaction, which affects the amount paid to the policy 

owner, the expected timing of the payment to the investor, and the value of any 

securitization. 

E. The Commission Should Instruct the Staff to Consider Issuing an Investor 

Bulletin Regarding Investments in Life Settlements

The Commission should instruct the Staff to consider issuing an Investor Bulletin 

regarding investments in life settlements. 

 

3 See Asset-Backed Securities, Securities Act Release No. 9117 (Apr. 7, 2010) [75 FR 23328] 

(“Asset-Backed Securities Release”). 
I. Introduction

Chairman Schapiro established the Life Settlements Task Force in August 2009, 

in light of concerns about the developing life settlements market and the prospect of 

securitization of life settlements. The goals of the Task Force were to examine emerging 

issues in the life settlements market and to advise the Commission whether market 

practices and regulatory oversight can be improved. 

Given the array of issues presented by the life settlements market, including 

issues related to sales practices, market intermediaries, investor disclosures, trading 

platforms, and the prospect of securitization, the Task Force was formed as a crossDivisional SEC Staff task force to bring a multi-disciplinary approach to the review (see

Appendix A). Task Force participants include senior representatives from the following 

Divisions and Offices: 

• Division of Corporation Finance; 

• Division of Enforcement; 

• Division of Investment Management; 

• Division of Risk, Strategy, and Financial Innovation; 

• Division of Trading and Markets; 

• Office of the Chief Accountant; 

• Office of Compliance Inspections and Examinations; 

• Office of the General Counsel; and 

• Office of Investor Education and Advocacy. 

Following a review of articles and other resources related to life settlements, the 

Task Force began meeting with outside representatives knowledgeable about the life 

settlements market in September 2009. The Task Force met with 23 outside groups with 

first-hand knowledge of the life settlements market, its regulation, its participants and its 

impact on policy owners and investors (see Appendix B). In addition to industry 

participants, the Task Force met with the Financial Industry Regulatory Authority 

(“FINRA”), the U.K.’s Financial Services Authority (“FSA”), the U.S. Government 

Accountability Office (“GAO”), and state insurance commissioners and securities 

regulators and their representatives. 

In preparing recommendations, the Task Force focused on ways to better inform 

and protect individuals participating in the life settlements market. The Task Force notes 

that “[s]ome investors may feel uncomfortable with an asset where profits relate to 

deaths.”4

 However, policy owners also benefit from the sale of life insurance policies 

that are no longer needed because “[l]ife settlements pay policyholders more than they 

could get from their insurers by cashing in their policies” and “policyholders might 

decide that taking a portion of the death benefit now makes more sense than passing the 

 

4 Richard Morris, Asset Allocator: Life Settlements, Citywire, May 28, 2009. 

1 
entire benefit on after their death.”5

 The Task Force takes no position on the ethical 

issues surrounding this foundational concept of a life settlement transaction. 

As a result, the goal of the Task Force was to consider whether changes in 

regulatory oversight are appropriate to help assure that those who choose to participate in 

the life settlements market have the benefit of appropriate disclosure, marketplace 

protections and fair dealing practices. This report provides an overview of the life 

settlements market and makes a series of recommendations to improve the transparency, 

oversight, and investor protections in that market. 

 

5 Rob Curran, Wealth Advisor (A Special Report) – The Pros and Cons of Betting on Death: What 

You Need to Know before you Buy Someone Else’s Life-Insurance Policy, Wall St. J., Apr. 12, 

2010, at R7. 

2 
II. Life Settlements

A. What is a Life Settlement 

A life settlement is a transaction in which an insurance policy owner sells a life 

insurance policy to a third party for an amount that exceeds the policy’s cash surrender 

value, but is less than the expected death benefit of the policy. The life insurance policies 

used in these transactions typically involve amounts larger than $1 million.6 The Life 

Settlements Model Act adopted by the National Conference of Insurance Legislators (the 

“NCOIL model act”) provides that a life settlement transaction may be structured in 

many ways, including: (1) an assignment, transfer, sale, devise or bequest of the benefit 

in a life insurance policy for value; (2) a loan or other lending transaction, secured by one 

or more life insurance policies; (3) certain premium finance loans made for a life 

insurance policy on or before the date of issuance of the life insurance policy; and (4) the 

transfer for compensation or value of the “interest in a trust or other entity that owns a 

life insurance policy if the trust or other entity was formed or availed of for the principal 

purpose of acquiring one or more life insurance contracts . . ..”7

Insured individuals or policy owners sell their policies in the secondary market 

rather than allowing them to lapse or surrendering them to the insurance company for 

cash value to maximize their asset. The right of conveyance stems from a 1911 Supreme 

Court decision, Grigsby v. Russell.

8

 The Supreme Court noted that it was desirable to 

give life insurance the characteristics of property.9 

Many point to the AIDS crisis in the 1980’s as the triggering event that resulted in 

the creation of a secondary market for life insurance policies.10 AIDS patients needed to 

pay for the high cost of medical care and had, as one of their assets, a life insurance 

policy. Investors were willing to pay those AIDS patients an advanced portion of their 

life insurance benefit in exchange for the rights to the expected death benefit of the life 

insurance policy.11 In 1993, the National Association of Insurance Commissioners 

(“NAIC”)12 adopted the first Viatical Settlement Model Act (the “NAIC model act”) to 

encourage the promulgation of rules that would regulate the sale or transfer of a benefit 

 

6 Reap the Benefit of Lives in Your Hands, Financial Advisor, June 29, 2006. 

7 LIFE SETTLEMENTS MODEL ACT § 2(L) (National Conference of Insurance Legislators 2007) 

(“NCOIL model act”). 

8 222 U.S. 149 (1911). 

9 Id. at 156. 

10 Life Partners, Inc. v. Morrison, 484 F.3d 284, 287 (4th Cir. 2007). Michael Lovendusky, Illicit 

Life Insurance Settlements, New Appleman on Ins.: Current Critical Issues in Ins. Law, 1-2 (Oct. 

2008), available at http://www.lexisnexis.com/documents/pdf/20081022093920_large.pdf 

(“Lovendusky”). 

11 Miriam R. Albert, The Future of Death Futures: Why Viatical Settlements Must Be Classified as 

Securities, 19 Pace L. Rev. 345, 349 (1999). 

12 The National Association of Insurance Commissioners is a voluntary organization of the chief 

insurance regulatory officials of the 50 states, the District of Columbia, and the five U.S. 

territories. 

3 
under a life insurance policy.13 The adoption of the Viatical Settlement Model Act by 

several states in the 1990s contributed to the development of a secondary market for life 

insurance policies, which became known as the viatical settlement market.14 As medical 

advancements in the treatment of AIDS prolonged the life expectancy of AIDS patients, 

the viatical settlement market started looking for policy owners with other terminal 

illnesses and, subsequently, seniors who wanted to sell their life insurance policies.15 

The settlement of the life insurance policies of these seniors became known as 

settlements, while the term viatical settlements continues to be used by the market to 

refer to the settlement of policies of individuals with a life expectancy of less than two 

years.

life 

 

16 For the sake of simplicity, unless otherwise indicated, this Report will refer to 

both life settlements and viatical settlements as “life settlements.” 

B. Size of the Life Settlements Market 

When life settlements began in the United States, the market experienced relatively 

robust growth in its early years. Conning Research and Consulting, an insurance industry 

observer, reports on the life settlements industry and produces an annual study. In 2007, 

Conning estimated that the market, then estimated at $12 billion in face amount of life 

insurance settled, would grow to $90-$140 billion in face amount settled by 2016. Conning 

estimates that $11.7 billion of face amount in life insurance was settled in 2008,17 putting 

growth in the market from 2007 to 2008 at slightly below zero. Business Week estimated 

the market for unwanted life insurance policies at $15 billion in face amount during 2008.18 

More recently, the amount settled has declined. Based on a recent estimate, $7.01 billion 

of face amount in life insurance settled in 2009.19

According to Conning, “the economic crisis was the major impediment to growth in 

the United States life settlements market in 2008.”20 Press reports citing industry 

commentators are mixed about growth prospects after Goldman Sachs’ exit from the 

market in early 201021 and Deutsche Bank’s earlier downsizing of its life settlement 

operations.22 

Several firms involved in the life settlements market, when speaking with the Task 

Force, cited the “wasting asset” nature of life settlements as an impediment to increased 

business. Life settlements require significant up-front capital to “pay premiums of 5 to 

10% of face per year”23 and it may take three years or more before any “maturities” occur 

13 Lovendusky, supra note 10, at 1. 

14 Id. at 2. 

15 Albert, supra note 11, at 357. 

16 Charles Delafuente, When Life Insurance Is More Valuable as Cash, N.Y. Times, Mar. 3, 2010, at 

F2. 

17 Conning Research and Consulting, Inc., Life Settlements: A Buyers’ Market for Now, Oct. 8, 2009 

(“Conning”). 

18 Matthew Goldstein, Why Death Bonds Look so Frail, Bus. Wk., Feb. 25, 2008. 

19 GAO, supra note 1. 

20 Conning, supra note 17. 

21 Darla Mercado, Goldman Sachs abandoning life settlements market, InvestmentNews, Jan. 29, 

2010.

22 Matthew Goldstein, Deutsche Kicks the Grim Reaper, Bus. Wk., Jan 30, 2010. 

23 Telephone Interview with a participant in the life settlements market (Oct. 2009). 

4 
(i.e. before any death benefits are paid). In the current capital-constrained environment, 

there has not been sufficient capital for buyers of insurance policies in the secondary 

market to grow their businesses. 

There appears, however, to be some interest from investors.24 Institutional 

investors reportedly view life settlements as an alternative asset class25 that is not 

correlated to traditional asset classes because returns principally are based on the death 

rates of the insured individuals rather than the performance of financial instruments or the 

overall economy. Diversification to uncorrelated assets is especially attractive to investors 

during periods of unfavorable economic conditions. 

 

The Task Force was told that hedge funds, and offshore funds, in particular, have 

been buyers of pools of life settlements. The pools are typically packaged by an 

intermediary, which could be a large investment bank or a smaller, lesser known market 

participant. The pools may be created for a specific investor, or policies may have been 

purchased on a principal basis by a life settlements provider, who distributes its risk 

through “physical” portfolio sales or through derivatives – for instance, an investment 

product based on a longevity index.26 Interests in the pool are offered as unregistered 

securities in private placements. 

In spite of predictions that life settlements would become the new product of rapid 

growth on Wall Street,27 to date, there have not been any securitizations of life settlement 

pools, the offer and sale of which have been registered with the SEC. However, there have 

been a limited number of privately offered life settlement securitizations. 

24 We have not attempted to measure demand, nor have we found an estimate of investor demand. 

25 Sam Rosenfeld, Life Settlements: Signposts to a Principal Asset Class, (Wharton Fin. Institutions 

Centre, Working Paper No. 09-20, 2009). 

26 This report does not cover the broader “longevity markets” of which life settlements are a part. 

Market participants interviewed by the Task Force estimate the longevity derivatives markets are 

roughly ten times the size of the life settlements markets. However, the estimate included both the 

United States and United Kingdom, with the U.K. longevity market currently several times as 

large as the U.S. market. 

27 Matthew Goldstein, A Hedge Fund Gambles on Death, Bus. Wk., Feb. 4, 2009; Jenny Anderson, 

Wall Street Pursues Profit in Bundles of Life Insurance, N.Y. Times, Sept. 5, 2009, at A1. 

5 
III. Current Practices in the Life Settlements Market

Although life settlement transactions may be structured in different ways, they 

typically involve an insured individual or the owner of the policy, a producer who may be 

a financial advisor or an insurance agent, one or more settlement brokers who may also 

be insurance agents, one or more life expectancy underwriters, one or more providers 

who typically represent the party acquiring the policy, and one or more investors. When 

multiple settlement brokers, providers or investors are consulted, it is generally to obtain 

and compare multiple offers for the same life insurance policy. 

Investor(s) 

Provider(s) 

Life 

Expectancy 

Underwriter(s) 

Settlement 

Broker(s) 

Financial 

Advisor/ 

Producer 

 Insured/ 

Policy Owner 

According to information provided to the Task Force, the majority of investors in 

today’s life settlements market are large institutional investors looking to acquire pools of 

policies. Some providers, who we refer to as secondary market companies, not only 

serve as purchasers on behalf of investors, but also develop investment instruments 

derived from life settlements. Some providers sell life settlements, or investment 

instruments derived from life settlements, in a manner they believe reduces the risk that 

the life settlements or the investment instruments will be treated as securities under state 

and federal laws.28 The Task Force was also told about offerings of bonds or notes 

 

28 See, e.g., Life Partners Holdings, Inc., Annual Report on Form 10-K for the Fiscal Year Ended 

Feb. 28, 2010 (filed May 12, 2010) (“Life Partners Annual Report”), available at

6 
backed or secured by pools of life settlements, which are offered, apparently, in reliance 

on the private placement exemption in Section 4(2) of the Securities Act and the 

Regulation D safe harbor thereunder. A number of groups that met with the Task Force 

indicated that they do not think life settlements are an appropriate investment for retail 

investors due to their complexity. 

Currently, the majority of states have no requirement that an insurance company 

disclose to an insured that there is a life settlement option prior to permitting the lapse or 

surrender of a life insurance policy. The Task Force is aware of six states29 that require 

insurance companies to inform senior citizens or the chronically ill who are about to 

surrender life insurance policies for cash value, or let them lapse entirely, about the 

option of privately selling that asset to a third party in a life settlement transaction. 

A. Market Intermediaries 

1. Brokers and Providers

Often, a policy owner considering a life settlement transaction will work with a 

producer and/or a life settlement broker, who will negotiate the sale of the life insurance 

policy with the provider. A settlement broker may solicit policy owners directly, or may 

work with others, such as financial professionals, to obtain prospects. For example, the 

settlement broker in some instances may be the same insurance agent who sold the policy 

to the policy owner. In other cases, a broker may work with a variety of insurance agents 

or other financial professionals to solicit interest from policy owners. In any event, the 

settlement broker and any financial professional making the referral are usually paid a 

commission based on some percentage of the transaction amount. 

Typically, a settlement broker will gather the information necessary for providers 

to consider the transaction. This includes the insured’s application and authorization to 

release health and medical information. Once the application materials are complete, the 

settlement broker will offer or “bid” the contract to a number of providers to obtain a 

range of provider offers. 

On the buy side, providers typically represent a financing entity with an interest in 

acquiring policies, or providers may purchase policies for their own portfolio. Providers 

review and bid on settlement applications. This will often involve either a review of the 

insured’s life expectancy information provided as part of the application file, or in many 

cases the use of a life expectancy underwriter to generate an additional life expectancy 

 http://www.sec.gov/Archives/edgar/data/49534/000114420410026557/v184217_10k.htm. Life 

Partners discloses in its Annual Report on Form 10-K that: 

Some states and the Securities and Exchange Commission have attempted to treat life 

settlements as securities under federal or state securities laws. We have structured our 

settlement transactions to reduce the risk that they would be treated as securities under 

state or Federal securities law, and the Federal Circuit Court for the District of Columbia 

has ruled that our settlement transactions are not securities under the Federal securities 

laws. 

29 The six states are California, Kentucky, Maine, Oregon, Washington and Wisconsin. 

7 
estimate on the provider’s behalf. Other factors will include the financial strength of the 

issuing insurance company, as well as any factors that could indicate the issuing insurer 

may choose to challenge the validity of the insurance contract’s issuance, such as a 

possible challenge by the insurer based on a claim that the beneficiary had no insurable 

interest in the insured’s life. 

Providers also typically arrange for or directly provide the servicing necessary for 

purchased policies. Tracking agents provide information to investors regarding the 

whereabouts and mortality status of each insured person who has settled a life insurance 

policy. Tracking agents use a variety of methods to collect this type of information such 

as phone, email, mail, and the Social Security database. Most tracking agents also 

provide premium management, death claim processing (collecting the death benefit from 

the insurance company once the insured has died) and reporting services. Upon the death 

of the named insured, the life insurance company pays the death claim to the provider or 

to the financing entity that paid the insurance premiums during the life of the insured. 

2. Life Expectancy Underwriters

Life expectancy underwriters evaluate the risk and exposures of insured 

individuals so that they or the policy owners may sell their insurance policies to life 

settlement providers. More specifically, a life expectancy underwriter conducts a risk 

analysis of mortality for the insured so that he can sell his insurance to a provider for 

more than the cash surrender value but less than the expected death benefit amount. The 

role of the life expectancy underwriter is to provide an accurate assessment of the risk of 

mortality of the insured based on his characteristics. This life expectancy assessment is 

then relied upon by investors who purchase the life policy for investment purposes. 

Life expectancy underwriters work for settlement brokers who represent policy 

owners and providers who are evaluating whether to settle a life policy. The Task Force 

was informed that life expectancy underwriters use methodologies that differ from more 

formulaic methodologies used by underwriters of life insurance or life settlements 

involving policies with death benefits of under $1 million.30 Different methodologies are 

used because life insurance underwriting is generally limited to a younger population 

with limited medical impairments whereas life expectancy underwriting is used with an 

older population who may have multiple and significant impairments. 

 

30 A life expectancy underwriter told the Task Force that the lower value policies are subject to the 

debit methodology (described in text above at note 32) by providers, and the higher value policies 

are referred to life settlement underwriters, who are specialists. See, e.g., Milestone Managers & 

Providers, Underwriting, http://www.milestonesettlements.com/process/underwriting.php. 

Accordingly, modified debit methodology and research-based clinical judgment appear to be 

conducted only by life settlement underwriters. For details on the more specialized 

methodologies, see Michael Fasano, Chapter 6 Underwriting, in Life Markets: Trading Mortality 

and Longevity Risk with Life Settlements and Linked Securities 25-31 (Vishaal Bhuyan ed., 

2009), available at

http://books.google.com/books?id=UkuzHLKPOW8C&pg=PA25&lpg=PA25&dq=debit+method

ology&source=bl&ots=rdiU8mJ072&sig=GAxBEE2tyjnq1QHXIOB75i9xCh0&hl=en&ei=YgehS

4nGI4aBlAfq6NCbDg&sa=X&oi=book_result&ct=result&resnum=9&ved=0CDMQ6AEwCA#v

=onepage&q=debit%20methodology&f=false (pre-release form). 

8 
Life insurance underwriters use the debit methodology, which uses medical 

records and paramedical31 examinations to identify medical risks and compares those 

risks to underwriting debit manuals issued by insurance companies.32 The underwriter 

will also refer to the Medical Information Bureau, an insurance industry information 

cooperative, for undisclosed conditions that may factor in the individual’s mortality. Life 

expectancy underwriters use a modified debit methodology or research-based clinical 

judgment. The modified debit methodology adjusts the debit methodology to the life 

settlement demographic. There are three common adjustments: (1) diseases that move 

slowly; (2) impairments that do not have time to become life threatening; and (3) diseases 

that present less relative risk because of increasing overall mortality. These adjustments 

compensate for mortality in an older population that accelerates at a significantly faster 

rate than in a younger population, and diseases that often move at different speeds in an 

older population than in a younger one. For example, prostate cancer moves more slowly 

in an older population than a younger one and results in reduced debits. Research-based 

clinical judgment is used when severe impairments, such as metastasized cancers, would 

cause unsatisfactory life expectancy estimates from debit or modified debit 

methodologies. The life expectancy underwriter will identify the proper mortality curves 

based on the senior’s risk profile and then measure the disease’s progression along the 

relevant mortality curve based on the onset of symptoms. An underwriter using this 

methodology must have significant medical and analytic experience. 

 

To develop an evaluation, a life expectancy underwriter will generally have a 

physician review the individual’s entire medical record history, and the physician will 

provide a recommendation. A second physician may conduct a peer review of the file 

and provide a recommendation. The underwriter may also conduct a review of the file. 

If a peer review is used and there is a variance between the recommendations, the 

underwriter may seek to reconcile the recommendations. 

Once the analysis of the life expectancy underwriter is given to the provider, the 

provider may seek an analysis from other life expectancy underwriters. The provider will 

then make a value determination on the policy and may extend an offer to the policy 

owner for the settlement of the policy.33

A life settlement underwriter may provide an accuracy report to a purchaser of a 

life settlement investment upon request. Such a report could be an ongoing analysis of 

actual to expected performance to assess the accuracy of the life settlement underwriter’s 

mortality estimates to a mortality distribution. 

 

31 Paramedical is a person trained to assist medical professionals to give emergency medical 

treatment. 

32 The term “debit” refers to excess mortality above standard mortality for a condition. 

33 See Milestone Managers & Providers, Pricing, 

http://www.milestonesettlements.com/process/pricing.php. 

9 
3. Trading Platforms

In an effort to help make the bidding process more efficient and to facilitate 

trading of policies after the initial settlement occurs, some intermediaries have considered 

or instituted a trading platform for life settlements. 

For example, one entity created a life settlements group to bring together 

intermediaries and others involved in the life settlements business.34 This group set up a 

trading platform for institutional customers, with the goal of providing uniformity and 

predictability, as well as price transparency, efficiency, and liquidity. The sponsors 

believed that, in turn, could reduce intermediary costs and commissions for individual 

insurance policy sales. It also could enhance insured individuals’ privacy protection by 

centralizing and controlling access to medical information. However, the Task Force has 

been informed by several market participants that trading platforms are not widely used 

in the life settlements market. 

4. Secondary Market Companies

Some companies specialize in the secondary market of life settlements. The 

activities of these companies range from buying life insurance policies to selling those 

policies, either as whole policies or fractional interests in policies, or using those policies 

as collateral for other investment instruments. 

One large participant purchases life insurance policies mostly from trusts, 

corporate entities, and high net worth individuals.35 Generally, the funding to purchase 

the life insurance policies comes from institutional investors. This participant also has a 

program called SWAPP (Settlement with a Paid-up Policy) that allows policy owners to 

transfer the value in an existing life insurance policy into a new paid-up policy with a 

smaller face amount. Unlike a traditional exchange, which is based on the life insurance 

policy’s cash surrender value, in a SWAPP the value of the policy is determined based on 

the policy’s secondary market value, similarly to how it would be done if the policy were 

to be sold.36 

Another large participant acts as a purchasing agent of life insurance policies. 

This participant’s customers are primarily retail investors37 who generally buy fractional 

interests in one or more policies.38 This participant earns revenues from fees it charges to 

 

34 Cantor Insurance Group operates LexNet, an electronic marketplace for trading life settlements. 

See Cantor Fitzgerald, Cantor Insurance Group, 

http://www.cantor.com/brokerage_services/life_markets. 

35 Betting on Death in the Life Settlement Market – What’s at Stake for Seniors: Hearing Before the 

Senate Special Committee on Aging, 111th Cong. (2009) (statement of Michael Freedman, Senior 

Vice President of Coventry First LLC). 

36 Coventry, Coventry First: SWAPP (2010), http://www.coventry.com/coventryfirst/swapp/coventry-swapp.asp. 

37 Life Partners Annual Report, supra note 28, at 4. Life Partners reported that institutional 

purchasers accounted for only 1%, 8% and 7% of the company’s total revenues in fiscal years 

2010, 2009 and 2008, respectively. 

38 Id. at 5. 

10 
identify, qualify and purchase policies on behalf of the company’s investor customers. 

Recently, it also began purchasing policies for the company’s own investment.39 

The Task Force was also told about a movement to develop financial instruments 

that derive their returns from pools of life settlements. Some companies facilitate the 

formation of trusts that invest in life settlements and, in some cases, guarantee a 

minimum annual return for each life settlement included in the trust. Other companies 

have sold notes that are backed by a portfolio of life insurance policies. Each of these 

vehicles is offered on a private placement basis. 

B. Stranger-Originated Life Insurance (STOLI) 

“Stranger-originated life insurance” (“STOLI”) is a type of transaction which we 

understand has emerged during the past decade. In a STOLI transaction, an investor or 

its representative induces an individual, typically a senior, to purchase a life insurance 

policy that he likely would not otherwise have purchased. The individual applies for the 

policy with a prior understanding to cede control of the policy to the investor. The 

applicant and the investor agree that, at the end of a given period, ownership of the policy 

will be transferred to the investor, or some other third party, who would expect to receive 

the death benefit when the insured dies.40 

The investor may arrange financing of the premiums during the time the insured 

owns the policy by means of non-recourse premium financing; that is, the only collateral 

for the loan is the insurance policy itself.41 When the policy is transferred the loan may 

be forgiven in return for the policy. Indeed, STOLI arrangements may be marketed as 

“free insurance,” because during the period prior to transfer of the policy, the insured has 

life insurance protection, paid for with a loan that will not have to be repaid if the policy 

is ultimately transferred.42 Premium financing is considered one indicator of a STOLI 

 

39 Id. at 22. 

40 See generally, Recent Innovations in Securitization: Hearing Before the House Financial Services 

Committee, Subcommittee on Capital Markets, Insurance, and Government Sponsored 

Enterprises, 111th Cong. (2009) (“House Capital Markets Subcommittee Hearing”) (statement of 

Susan E. Voss, Commissioner, Iowa Insurance Commission and Vice President, National 

Association of Insurance Commissioners) (“Voss statement”); Betting on Death in the Life 

Settlement Market – What’s at Stake for Seniors: Hearing Before the Senate Special Committee 

on Aging, 111th Cong. (2009) (“Senate Special Committee Hearing”) (statement of Stephan R. 

Leimberg, Esq., CEO, Leimberg Information Services, Inc., Creator/Editor: Tools and Techniques 

of Life Settlement Planning) (“Leimberg statement”); Senate Special Committee Hearing 

(statement of Mary Beth Senkewicz, Deputy Insurance Commissioner, Florida Office of Insurance 

Regulation) (“Senkewicz statement”); Senate Special Committee Hearing (statement of James J. 

Avery, Jr., FSA, President, Individual Life Insurance, Prudential Financial, and Chairman of the 

ACLI Life Insurance Committee) (“Avery statement”). 

41 The insured may have the option to retain the policy by repaying the loan with interest, but the 

cost of doing so may make that option economically infeasible. See Avery statement, supra note 

40. 

42 See ACLI, Statement of the ACLI Regarding Securitization of Life Settlements (Feb. 3, 2010) 

(“ACLI Statement”), available at http://www.acli.com/NR/rdonlyres/972B2B38-89F0-4683-B236-

A01360544A9F/23344/STOLI_SecuritizationPolicyFinal_020310.pdf; Senkewicz statement, 

supra note 40. 

11 
transaction, although not all premium financing is STOLI-related.43 In some cases, the 

insured may receive an upfront cash payment, or other incentives, for agreeing to 

purchase the policy. 

The understanding between the investor and the insured may call for the transfer 

of ownership at the end of a two-year period.44 Two years is the common life insurance 

policy contestability limitation under state law.45 At the end of that two year period the 

insurer is prohibited from contesting the policy based on misrepresentations by the 

insured.46 

Critics of STOLI have expressed the view that it is inconsistent with the historical 

social policy of insurance, which is to protect families and businesses from potential 

economic hardship caused by untimely death of the insured. In contrast, STOLI is 

viewed, not as a means of protecting families and businesses, but rather a means of 

making a profit for investors.47 

In this regard, state regulators and others have expressed the view that STOLI is 

inconsistent with state “insurable interest” laws.48 These laws provide that a person who 

purchases a life insurance policy must have an insurable interest in the continued life of 

the insured. In general, an insurable interest exists where the owner of the policy is 

closely related to the insured or otherwise has a financial interest in the continued life of 

the insured.49 In addition, state law commonly recognizes that a person has an insurable 

interest in his own life.50 However, one cannot take out a life insurance policy on a 

perfect stranger.51 Critics of STOLI argue that it is inconsistent with state insurable 

interest laws, because of the prior understanding to cede control of the policy and the

 

43 See Senkewicz statement, supra note 40; Cory Chmelka, Premium Financing: The Time Is Now, 

The CPA Journal, Sept. 2009. 

44 Under recently enacted anti-STOLI legislation, some states now require a five-year waiting period 

for settlement of a life insurance policy and thus would preclude an agreement to settle after two 

years. See discussion infra Section IV.B.1. 

45 17 Couch on Ins. § 240:1 (2009) (“Couch”); 2-5 Harnett & Lesnick, The Law of Life and Health 

Insurance §5.07 (Matthew Bender, Rev. Ed.) (“Harnett & Lesnick”); Senkewicz statement, supra

note 40. 

46 Couch, supra note 45; Harnett & Lesnick, supra note 45. There is authority that certain defenses 

other than misrepresentation – such as lack of insurable interest – may not be barred by state 

incontestability laws. See infra note 59. 

47 Avery statement, supra note 40; California Department of Insurance, Seniors: Senior Advisory on 

STOLI or SPINLIFE Life Insurance Schemes, http://www.insurance.ca.gov/0150-

seniors/0100alerts/strangerownedlifeins.cfm (2010) (“California Senior Advisory”); Ohio 

Department of Insurance, Seniors: Be Aware of Stranger Originated Life Insurance (STOLI) 

Transactions (September 11, 2008), 

http://www.insurance.ohio.gov/Newsroom/Pages/09112008SeniorsBeAware.aspx (“Ohio News 

Release”). 

48 Voss statement, supra note 40; Avery statement, supra note 40; Life Insurance Settlement 

Association, “What Is Stoli?”, 

http://www.thevoiceoftheindustry.com/files/content/docs/Brochures/STOLI.pdf. 

49 1-2 Harnett & Lesnick, supra note 45, at §2.02. 

50 Id.

51 California Senior Advisory, supra note 47. 

12 
ultimate goal of the transaction, which is to transfer the policy to a party who does not 

have an insurable interest in the continued life of the insured.52 

Other concerns cited about STOLI include that it may encourage insurance fraud. 

An insurance industry representative has cited cases where the insured’s net worth was 

fraudulently stated to be much higher than it was, presumably to secure a higher death 

benefit.53 One state regulator has testified that some STOLI investors encourage seniors 

to overstate their net worth on the life insurance application to obtain higher value life 

insurance and that they coach seniors how to answer specific questions on the application 

to avoid detection by insurance companies of their intent to resell the policy.54 

In addition, an insured may incur tax liability resulting from forgiveness of 

premium loans or receipt of incentives from the investor for obtaining the life insurance 

policy.55 Another concern is that the insured may be unable to obtain life insurance 

legitimately needed in the future because he may reach the limit of his insurability as a 

result of the STOLI transaction.56

STOLI critics have also voiced concern that the practice could make life 

insurance more expensive and less available for consumers. 57 Insurers base their 

premium rates on certain assumptions, including assumptions of policy lapse rates. That 

is, insurers assume that a certain number of insured persons will allow their policies to 

lapse if, for example, they determine that they no longer need the insurance, and the 

insurer will therefore not be obligated to pay a death benefit under these policies. There 

is concern that STOLI distorts these assumptions. STOLI policies are specifically 

initiated for the purpose of profiting from the death benefit, and are therefore less likely 

to lapse than conventional policies. In addition, STOLI transactions are generally entered 

into with seniors, who otherwise might not have purchased insurance, and this number of 

senior buyers may cause life insurance to become more expensive by changing the risk 

pool.58 

As investments, STOLI policies may introduce particular risks for investors who 

purchase the policies, given the risk that insurers may contest them on grounds such as 

fraud (at least prior to the end of the contestability period) or violations of state insurable 

interest laws. There is some authority that the two-year contestability limitation does not 

bar an insurer from challenging a policy for lack of insurable interest.59 We understand 

that this risk may be compounded, because whether a settled policy is the result of a 

 

52 E.g., California Senior Advisory, supra note 47; Ohio News Release, supra note 47. 

53 Avery statement, supra note 40. 

54 Senkewicz statement, supra note 40 . 

55 Senkewicz statement, supra note 40; Avery statement, supra note 40; Ohio News Release, supra

note 47. 

56 Id. 

57 Leimberg statement, supra note 40 (STOLI has already resulted in higher life insurance rates for 

seniors and stopped some companies from selling insurance to those over 75); Avery statement, 

supra note 40. 

58 Ohio News Release, supra note 47; see also Senkewicz statement, supra note 40. 

59 2-5 Harnett and Lesnick, supra note 45, at § 5.07[5][g]; 44 C.J.S. Insurance § 352 (2007). 

13 
STOLI transaction may be very difficult for investors to determine.60 Attorneys involved 

in litigation of STOLI cases indicated to the Task Force that they were aware of 

approximately 300 STOLI cases in active litigation.61 These cases are brought by 

insurance companies, investors, and parties such as family members, who might 

otherwise have been beneficiaries under the policies. 

Insurance industry representatives told us that insurers make efforts to stop 

STOLI transactions in the underwriting process. Insurers may make inquires during the 

underwriting process to determine whether premium financing, which is a marker of a 

STOLI transaction, is involved. In addition, because investors may establish trusts to 

purchase life insurance policies in order to conceal STOLI transactions, insurers may 

make inquiries regarding policies being purchased on behalf of trusts. However, the 

insurance industry representatives also told us that, despite their efforts, STOLI 

transactions can be difficult to detect, in part because investors continue to devise new 

ways of concealing the nature of these types of transactions. There is a concern that 

STOLI policies, which typically have high face amounts, therefore provide for high 

premium payments for insurance companies and therefore high commissions to agents. 

Thus, in some cases, there may not be an incentive to question them until a death claim is 

made. 

The American Council of Life Insurers (the “ACLI”), a trade association that 

represents life insurance companies, has stated that it believes that an increased interest in 

securitization of life settlements may encourage more STOLI transactions, and 

exacerbate any problems or concerns to which these transactions give rise. Securitization 

may require increased numbers of settled policies. There may not be sufficient numbers 

of conventional life insurance policies available for settlement, and this could result in the 

need to “manufacture” additional policies through STOLI transactions.62 

Regulators, insurers, and life settlements market participants expressed concerns 

to the Task Force regarding STOLI transactions and in general appeared to support 

addressing STOLI by state insurance regulation. 

C. Securitization of Life Settlements 

Securitization is a financing technique in which financial assets, in many cases 

themselves relatively illiquid, are pooled and converted into instruments that may be 

offered and sold in the capital markets. In a typical securitization, a sponsor initiates a 

securitization transaction by selling to a specially created issuing entity, such as a trust, a 

group of financial assets that the sponsor either has originated itself or has purchased. 

 

60 See ACLI Statement, supra note 42. 

61 E.g., American General Life Insurance Company v. Salamon et al., No. CV 09-5428 (E.D.N.Y. 

filed Dec. 11, 2009) (action by insurer for rescission and other relief, alleging fraud in applying for 

life insurance policy and lack of insurable interest); The John Hancock Life Insurance Company v. 

Fein et al., CV 09-5606 (E.D.N.Y. filed Dec. 22, 2009) (action by insurer for declaratory judgment 

that life policies are void based on fraud in application for the policies and lack of insurable 

interest). 

62 ACLI Statement, supra note 42. 

14 
The trust or other issuing entity sells securities. The money from the sale of the securities 

is used to purchase the financial assets from the sponsor, which in the case of a 

securitization of life settlements would be a pool of life settlements. In a securitization of 

life settlements, arrangements must also be made to pay the upcoming premiums for the 

life insurance policies. The securities issued by the trust or other issuing entity pay a 

return based on the future proceeds from the death benefits of the life insurance policies. 

To date, there have been no securitizations of life settlements registered with the 

SEC, although there have been some privately offered life settlement securitizations. 

Only a very limited number of those privately offered life settlement securitizations have 

ever received a rating from a rating agency.63 The Task Force was informed that many 

market participants believe that a rating would be necessary to sell a securitization of life 

settlements. The first rated securitization of life settlements took place in 1995 and was 

originated by Dignity Partners Inc.64 It involved a pool of life insurance policies with a 

face amount of $35 million and was rated by Standard & Poor’s. Based on this pool, a 

Dignity Partners Inc. special purpose subsidiary issued senior notes to two institutional 

investors.65 The notes were sold in reliance on exemptions from registration with the 

SEC. 

The next rated life settlement structured deal took place in March 2004 and was 

originated by Legacy Benefits Corporation. While it was not a true securitization 

because it had an annuity tied to it that functioned as a hedge and insurance against 

default,66 it involved a pool of life insurance policies with a face amount of $70.3 million 

and was rated by Moody’s Investors Service.67 Merrill Lynch served as the underwriter 

 

63 While there have been only a few rated securitizations of life settlements, other types of structured 

financing in the life insurance industry are more common. House Capital Markets Subcommittee 

Hearing, supra note 40 (statement of Kurt Gearhart, Head of Regulatory & Execution Risk, Life 

Finance Group, Credit Suisse). Mr. Gearhart’s statement notes “closed block securitizations”, 

which are large transactions that involve the securitization of millions of life insurance policies 

and have been done in connection with the demutualization of large insurance carriers, including 

Prudential, MetLife, and Axa, to facilitate the initial public offering or acquisition of the insurance 

carriers. Other life insurance structured finance transactions may be done for insurers and 

reinsurers to transfer their regulatory reserve requirements, which are in excess of their economic 

reserves, to investors. “Embedded value securitizations” allow insurance companies to transfer 

the risk in a block of policies to investors and to monetize the value of that block of business. 

“Extreme mortality securitizations” allow insurance companies to transfer to investors the risk, 

and resulting losses, of a catastrophic event that would cause a significant reduction in the length 

of time that people are living. 

64 The securitization involved policies purchased from individuals with terminal illnesses, so it was 

technically a securitization of viatical settlements. 

65 Ironwood Capital and Dignity Partners completes the first ever asset securitization of viatical 

settlements in the amount of $35 million, Bus. Wire, Mar. 2, 1995. 

66 John D’Antona Jr., Securitization Poised to Bring Life to Death Bonds, Pensions & Investments, 

Sept. 15, 2008. 

67 Moody’s Rates Legacy Life Settlement Securitization A1 and Baa2, Moody’s Investors Service 

(Mar. 16, 2004), http://www.legacybenefits.com/images/doc/Moodys_20Press_20Release031604.pdf. The approximate weighted average age of the insured individuals was 77 years old. 

15 
and sold notes to institutional investors in a private placement in reliance on exemptions 

from registration with the SEC.68 

In 2006, a partnership formed by Coventry First (“Coventry”) and Ritchie Capital 

attempted to complete a securitization of a pool of life insurance policies with a face 

amount of $1.16 billion, rated by Moody’s.69 On October 26, 2006, the New York 

attorney general sued Coventry alleging that Coventry made secret payments to life 

settlement brokers in exchange for convincing insured individuals to sell their policies at 

lower prices, and to entice other buyers to withdraw rival bids.70 After the filing of the 

suit by the New York attorney general, Moody’s withdrew its rating and the 

securitization transaction was not completed.71

The only other rated securitization of life settlements we are aware of took place 

in early 2009 and was an entirely internal transaction by a subsidiary of American 

International Group, Inc. that was not sold to any outside investors. Reports indicate that 

the securitization, which was rated by A.M. Best, involved life insurance policies with a 

face amount of $8.4 billion.72

The Task Force was told by groups representing a wide array of market 

participants that it is unlikely that there will be an increase in securitizations of life 

settlements.73 Any future securitization of life settlements would face a number of 

obstacles, including pooling together a sufficiently large number of life insurance 

policies, which in turn would require a large investment of capital to pay the continued 

premiums, obtaining a favorable rating from a rating agency to generate investor interest, 

addressing concerns about protecting the privacy of the individuals who sold the 

insurance policies, addressing concerns about insurable interest, addressing concerns 

about the possibility that there may be a wide range of life expectancy opinions, 

 

68 Legacy Benefits: Life Settlement Securitization, 

http://www.legacybenefits.com/life_settlement_viatical/life_insurance_settlements/life_settlement

_securitization.htm. 

69 Matthew Goldstein, Profiting from Mortality: Death Bonds May Be the Most Macabre 

Investment Scheme Ever Devised by Wall Street, Bus. Wk., July 30, 2007. 

70 Charles Duhigg and Joseph B. Treaster, Spitzer Suit Accuses Company of Abuses in Insurance for 

Elderly and Ill, N.Y. Times, Oct. 27, 2006, at C3. In October 2009, Coventry agreed to pay $12 

million to settle the suit. Joan E. Solsman, Life Insurer To Pay $12 Million In Settling Cuomo 

Lawsuit, Dow Jones Newswires, Oct. 2, 2009. 

71 Goldstein, supra note 69. 

72 Meg Green, AIG Files First Rated Life Settlement Securitization, BestWeek, Apr. 16, 2009. 

73 The life settlement market in Germany appears to provide a case in point. From 2003 to 2005, 

German investors invested approximately $2.87 billion in life settlement securitizations in 2004 

and 2005. See Boris Ziser & Craig Seitel, Securitization of Life Settlements: A Pivotal Phase in 

the Product Life Cycle, National Underwriter, Feb. 21, 2005; Christoph Pauly & Anne Seith, 

Betting on US Life Expectancy Proves Risky, Spiegel Online, Sept. 1, 2009. However, German 

investor interest in life settlement securitizations has waned in recent years due to changes in tax 

laws, which made returns from life settlement funds taxable in Germany for the first time, and 

changes to methodologies used by major life expectancy underwriters, which decreased the value 

of life settlements acquired before the changes to the methodology. See Pauly & Seith, supra; 

Ronald J. Panko, Despite Slow Market, Vida Capital Acquires Life Settlement Broker, BestWire, 

Jan. 27, 2010. 

16 
addressing questions about the ability to conduct due diligence, and addressing questions 

about the ability to service the policies after the securitization is completed.74 The ACLI 

recently urged policymakers to ban the securitization of life settlements.75 Several 

market participants, however, sharply disagreed with the ACLI’s position.76

D. Role of Rating Agencies 

For several years rating agencies77 have received sporadic inquiries from 

prospective issuers of “life settlement securitizations” regarding the possibility of 

obtaining ratings for these products. Rating agencies have highlighted multiple issues as 

problematic with respect to issuing ratings on life settlement securitizations, and, as noted 

above, only a handful of ratings have been issued on this type of product, although none 

in public offerings. The issues raised by the rating agencies include legal uncertainty 

surrounding the existence and transferability of insurable interests, the lack of experience 

and reputation of the prospective issuers, the limited number of policies in each life 

settlement securitization, questions regarding the reliability of medical reviews of the 

insured individuals, and the potential timing mismatch of cash flows.78 

 

74 Some rating agencies have expressed concerns about rating securitizations of life settlements. See

discussion infra Section III.D. 

75 ACLI Statement, supra note 42. 

76 Press Release, Institutional Life Markets Association, ACLI Mixes “Apples and Oranges” to 

Mislead Customers (Feb. 4, 2010), available at

http://www.lifemarketsassociation.org/documents/PR-%20ACLI%20misleads.pdf; Press Release, 

Life Insurance Settlement Association, Life Insurance Settlement Association Responds to 

Misleading ACLI Position on Life Settlements (Feb. 5, 2010), available at

http://www.marketwire.com/press-release/Life-Insurance-Settlement-Association-RespondsMisleading-ACLI-Position-on-Life-Settlements-1113175.htm. 

77 The Credit Rating Agency Reform Act of 2006 (the “Rating Agency Act”) defined the term 

“nationally recognized statistical rating organization” (“NRSRO”) and provided the SEC with 

authority to implement registration, recordkeeping, financial reporting, and oversight rules with 

respect to registered credit rating agencies. See Pub. L. No. 109-291 (2006). On June 5, 2007, the 

SEC adopted Exchange Act Rules 17g-1 through 17g-6 (17 CFR 240.17g-1 to 240.17g-6) to 

implement the Rating Agency Act, as mandated. Oversight of Credit Rating Agencies Registered 

as Nationally Recognized Statistical Ratings Organizations, Exchange Act Release No. 55857 

(June 5, 2007) [72 FR 33564]. Those rules have since been amended. See Amendments to Rules 

for Nationally Recognized Statistical Rating Organizations, Exchange Act Release No. 59342 

(Feb. 2, 2009) [74 FR 6456] (increasing the transparency of the NRSROs’ rating methodologies, 

strengthen the NRSROs’ disclosure of ratings performance, prohibit the NRSROs from engaging 

in certain practices that create conflicts of interest, and enhance the NRSROs’ recordkeeping and 

reporting obligations to assist the SEC in performing its regulatory and oversight functions). In 

addition, the SEC has taken action to eliminate certain references to credit ratings issued by 

NRSROs in rules and forms under the Exchange Act and in rules under the Investment Company 

Act of 1940. References to Ratings of Nationally Recognized Statistical Rating Organizations, 

Exchange Act Release No. 60789 (Oct. 5, 2009) [74 FR 52358]. At present, the SEC oversees ten 

registered NRSROs. 

78 Standard and Poor’s and DBRS have both publicly expressed concerns regarding these issues. 

Winston Chang & Gary Martucci, Credit FAQ: Uncovering the Challenges in Rating Life 

Settlement Securitizations, Standard & Poor’s (Global Credit Portal, RatingsDirect), Oct. 13, 

2009; Methodology – Rating U.S. Life Settlement Securitizations, DBRS, Inc., Feb. 2008. 

17 
As noted above, state law generally requires that an insurable interest exist when 

life insurance is purchased. Determining whether an insurable interest existed when the 

policy was purchased requires a review of each policy, which can be costly and uncertain. 

Further, while the courts in some states have held that an investor also must have an 

insurable interest in the deceased to claim the death benefit of a life insurance policy, not 

all states have ruled on this issue and those that have are not in agreement. This legal 

uncertainty limits a rating agency’s ability to forecast whether a life settlement 

securitization trust will be able to receive death benefits on all of its underlying life 

insurance policies. 

Few firms have experience packaging and issuing life settlement securitizations, 

and those that have packaged non-securitized pools of life settlements and issued life 

settlement securities may not be large financial institutions with widely known 

reputations. Further, those firms may have borrowed funds to purchase the life insurance 

policies underlying a life settlement securitization, which ratings agencies believe 

increases the risks associated with the product. 

In general, many policies must be included in a life settlement securitization to 

assure the statistical integrity and diversify risk. If an insufficient number of policies are 

included, incorrect assumptions can have a relatively larger impact on the projected 

performance of the security. Further, life settlement securitizations with smaller pools of 

policies may contain statistically significant characteristics that may be missed (such as 

living in a rural vs. urban environment or working in a blue collar vs. white collar 

occupation) and that could impact the security’s profitability. Ratings agencies believe 

these factors hamper their ability to accurately rate the security.79

Little data exists regarding the historical accuracy of medical reviews of 

individuals who purchase life insurance. The limited number of policies underlying a life 

settlement securitization increases the importance that the medical reviews for those 

policies be correct. In some cases, the medical review is based only on a review of the 

insured’s medical file and the life expectancy underwriters receive a flat fee, both of 

which may increase the possibility of errors. This potential for inaccuracy may also 

hinder a rating agency’s ability to rate life settlement securitizations. 

While the rating agencies have developed methods to address some of these 

issues, those methods are costly and can dramatically affect a firm’s ability to package 

and issue life settlement securitizations in a cost effective manner. For instance, the 

rating agencies could get comfort regarding the legal uncertainties surrounding the 

insurable interest issue by requiring that the firm packaging the deal provide an opinion 

from its outside counsel to the effect that the state law applicable to each of the policies 

backing a particular life settlement securitization would allow payment to the trust. In 

addition, the rating agencies could require that the firm packaging the deal itself be 

highly rated, and provide assurances or guaranties that it will assume any policies that 

prove not to have met the criteria to be included in the pool. However, the Task Force 

was told that these methods could impose significant additional costs on the firm 

packaging the securitization. Many of the issues that make a securitized pool of life 

 

79 Id.

18 
settlements difficult to rate also could make a pool of life settlements a difficult 

investment for investors to evaluate. 

E. Effect of Life Settlements on Life Insurers 

The impact of life settlements on the primary insurance market has been debated 

since insured individuals began selling their policies. Academic research suggests that 

there are two principal points of view.80 First, a secondary market for life insurance will 

enhance liquidity for policy owners, which may increase the number of individuals 

purchasing policies and help the primary market grow by making life insurance more 

attractive to buyers in the long term, while increasing consumer welfare.81 Second, life 

settlements will increase the cost of insurance in the primary market.82 Currently, 

insurers may experience economic gains associated with lapsed policies because insurers 

will have received premiums for these policies but will not be liable for payment of death 

claims associated with these policies.83 These economic gains may be used to subsidize 

remaining policy owners. Since life settlements provide policy owners with an 

alternative to allowing their policies to lapse, they may cause lapse rates to decline and 

reduce the subsidies available to the remaining policy owners. 

Life insurance premiums are based on models that include many assumptions 

affecting the policy. They include mortality (how many people of a given age group die at 

a particular age); persistency (what percentage of a pool of insured individuals continue to 

pay premiums on their policies x years into the policy’s life), or lapse rates (what 

percentage of a pool of insured individuals stop paying premiums on their policies x years 

into the policy’s life); and expected profits (the rate of return expected by the insurer). 

They may also include additional assumptions such as longevity improvements, which 

refer to how many additional months or years an insured person may live based on medical 

improvements and improving health. All policies with an investment component also rely 

on investment return assumptions. 

Since assumptions relating to lapse rates impact pricing of life insurance premiums, 

lapse rates may impact an insurer’s profitability.84 Life insurers typically base assumed 

 

80 Hanming Fang & Edward Kung, How Does Life Settlement Affect the Primary Life Insurance 

Market? (NBER, Working Paper No. 15761, 2010), available at http://econwww.mit.edu/files/5329

81 Neil A. Doherty & Hal J. Singer, The Benefits of a Secondary Market for Life Insurance Policies, 

38 Real Prop. Prob. & Tr. J. 449 (2003), available at http://ssrn.com/abstract=387321

82 Fang, supra note 80 (“[L]ife insurance companies, as represented by the Deloitte Report (2005), 

claim that the life settlement market, by denying them the return on lapsing or surrendered 

policies, increases the costs of providing policies in the primary market. They allege that these 

costs will have to be passed on to consumers, which would ultimately make the consumers worse 

off.”).

83 Mutual insurers may share the economic gain with insured individuals through dividends, and 

stock insurers may use the economic gains to subsidize the cost of insurance for the remaining 

insured individuals. 

84 Dominique LeBel & Towers Perrin Tillinghast, Pricing Lapse-Supported Products/LapseSensitive Products (Society of Actuaries – Annual Meeting, Oct. 16, 2006) (A lapse-supported 

product is “a product where there would be a material decrease in profitability if, in the pricing 

19 
lapse rates on experience. Future changes are difficult to predict and may or may not be 

included in the lapse rate assumptions used by pricing models. Therefore, differences 

between assumed and actual lapse rates due to declining lapse rates may impact the 

insurer’s financial condition. Insurers experiencing lower-than-assumed lapse rates due to 

declining lapse rates or overly optimistic assumptions may be able to raise premiums to 

cover shortfalls, depending on the policy. If they cannot raise premiums (e.g., premiums 

are guaranteed), the insurer may fail to meet profit objectives on a group of policies, or, 

depending upon investment conditions, may have insufficient cash to pay claims if reserves 

are insufficient. However, numerous articles in the trade press refer to “prudent” pricing as 

pricing with conservative (lower) lapse rate assumptions.85

While life settlements may impact an insurer’s profitability and financial condition 

by leading to declining lapse rates, the Task Force was told that the extent of this impact is 

likely to be small. Industry observers have predicted that life settlements will have an 

insignificant impact on the insurance industry in the aggregate, given the very small 

percentage of in-force policies that have been settled.86 They advise that the impact on 

specific individual insurers could be more significant, depending on the insurer’s mix of 

lapse-sensitive products in the overall portfolio. Conversely, according to another industry 

analysis, “a life settlements transaction generally has minimal or no impact on the 

anticipated profitability of a life insurance contract because the persistency of an unhealthy 

policyholder is precisely what is assumed at the time of original pricing.”87 

 calculation, the ultimate lapse rates were set to zero (assuming all other pricing parameters remain 

the same).”). 

85 See, e.g., Christian Kendrick, Transamerica Special Report: Return of Premium Products (Jul. 13, 

2007), available at

http://www.transamericareinsurance.com/Media/media_associateArticle.aspx?id=295. 

86 Telephone Interview with Scott Hawkins, Conning Research & Consulting (Mar. 30, 2010). 

Conning Research has produced several reports about the life settlements market. See also

Michael Shumrak, Life Settlements—A Window Of Opportunity For The Life Insurance 

Industry?, Reinsurance News, Feb. 2010 (only about 1% of life policies have been settled). 

87 Deloitte Consulting LLP & The University of Connecticut, The Life Settlement Market: An 

Actuarial Perspective on Consumer Economic Value (2005), available at

http://www.quatloos.com/uconn_deloitte_life_settlements.pdf. 

20 
IV. Regulation of the Life Settlements Market

A. Application of the Federal Securities Laws 

1. The Securities Act of 1933

Every offer and sale of a security must be registered or exempt from registration 

under the Securities Act of 1933. Section 3(a)(8) of the Securities Act provides an 

exemption for any “insurance . . . policy” or “annuity contract” issued by a corporation 

that is subject to the supervision of the insurance commissioner, bank commissioner, or 

similar state regulatory authority.88 Insurance policies that fall within this exemption – 

for example, term life insurance policies – are subject to regulation by state insurance 

commissions, but are not subject to regulation under the federal securities laws. 

The exemption, however, is not available to all contracts that are considered 

insurance or annuities under state insurance law. Variable life insurance policies89 and 

variable annuities, which pass through to the purchaser the investment performance of a 

pool of assets, are not exempt under Section 3(a)(8). 

The United States Supreme Court has addressed the insurance exemption on two 

occasions with respect to variable annuities.90 Under these cases, factors that are 

important to a determination of an annuity’s status under Section 3(a)(8) include: (1) the 

allocation of investment risk between insurer and purchaser, and (2) the manner in which 

the annuity is marketed. With regard to investment risk, the Court has considered 

whether the risk is borne by the purchaser, which tends to indicate that the product is not 

an exempt “annuity contract”, or by the insurer, which tends to indicate that the product 

falls within the Section 3(a)(8) exemption. In VALIC, the Court determined that variable 

annuities, under which payments varied with the performance of particular investments 

 

88 The SEC has previously stated its view that Congress intended any insurance contract falling 

within Section 3(a)(8) to be excluded from all provisions of the Securities Act notwithstanding the 

language of the Act indicating that Section 3(a)(8) is an exemption from the registration but not 

the antifraud provisions. Securities Act Release No. 6558 (Nov. 21, 1984) [49 FR 46750, 46753]. 

See also Tcherepnin v. Knight, 389 U.S. 332, 342 n.30 (1967) (Congress specifically stated that 

“insurance policies are not to be regarded as securities subject to the provisions of the [Securities] 

act,” (quoting H.R. Rep. No. 73-85, at 15 (1933)). 

89 In a variable life insurance policy, the cash value and/or death benefit vary based on the 

investment performance of the assets in which the premium payments are invested. Under a 

traditional life insurance policy, premium payments are allocated to an insurer's general account 

and invested, consistent with state law requirements, to enable the insurer to meet its death benefit 

and cash value guarantees. The investment return on assets in the general account has little or no 

direct effect on the cash value or the death benefit received. Premium payments under a variable 

life policy, in contrast, are invested in an insurance company separate account, which generally is 

not subject to state law investment restrictions. A variable life policy owner typically is offered a 

variety of investment options (e.g., equity, bond, and money market mutual funds). Death benefits 

and cash values are directly related to performance of the separate account, although typically 

there is a guaranteed minimum death benefit. 

90 SEC v. Variable Annuity Life Ins. Co., 359 U.S. 65 (1959) (“VALIC”); SEC v. United Benefit 

Life Ins. Co., 387 U.S. 202 (1967) (“United Benefit”). 

21 
and which provided no guarantee of fixed income, were not entitled to the Section 3(a)(8) 

exemption. 91 With regard to marketing, the Supreme Court, in holding an annuity to be 

outside the scope of Section 3(a)(8), found significant the fact that the contract was 

“considered to appeal to the purchaser not on the usual insurance basis of stability and 

security but on the prospect of ‘growth’ through sound investment management.” 92 

In 1973, the SEC determined that variable life insurance is a security and not 

entitled to the exemption set forth in Section 3(a)(8) of the Securities Act.93 The SEC 

acknowledged that a variable life insurance contract “would involve important elements 

of insurance,” in that such a contract “would provide immediate insurance equal to the 

initial face amount many times the amount of premiums paid . . . .” However, the SEC 

stated that, unlike traditional life insurance, a variable life insurance contract provides a 

variable death benefit and a variable cash value. The SEC further stated that these are 

important features and likely to be emphasized in sales of variable life insurance. “As to 

these critical features,” the SEC concluded, “the contractholder participates directly in the 

investment experience of the separate account and bears an investment risk.” 

Variable Life Settlements 

Because a variable life insurance contract is a security, the sale of such a contract 

by its owner would involve a securities transaction subject to the federal securities laws 

and the SEC’s jurisdiction. In addition, the purchase of a variable life insurance contract 

by an investor, whether or not it is pooled with other contracts, would also be a securities 

transaction. Accordingly, both the seller of a variable life insurance contract and the 

investor purchasing the contract are entitled to the full protection of the federal securities 

laws. These include required disclosures, suitability requirements applicable to brokerdealers, and antifraud protections. 

In August 2006 and in July 2009, FINRA issued Notices to Members reminding 

firms that variable life settlements are securities transactions that are subject to the 

federal securities laws and all applicable FINRA rules.94 In particular, the 2009 Notice to 

Members reminded firms participating in the business of life settlements that they must 

present balanced and fair information in their advertising and other communications with 

the public and customers and that they must adhere to applicable suitability obligations, 

as well as applicable FINRA rules relating to fair and reasonable commissions, and fair 

fees and disclosure of fees.95 

 

91 VALIC, supra note 90, 359 U.S. at 71-73. 

92 United Benefit, supra note 90, 387 U.S. at 211. 

93 Securities Act Release No. 5360 (Jan. 31, 1973). 

94 FINRA Notice to Members 09-42 (July 2009) (“NTM 09-42”); NASD Notice to Members 06-38 

(August 2006). FINRA is the primary self-regulatory organization for registered broker-dealer 

firms doing business in the United States. FINRA was created in July 2007 through the 

consolidation of NASD and the member regulation, enforcement, and arbitration functions of the 

New York Stock Exchange. 

95 NTM 09-42, supra note 94. 

22 
While life settlements of variable life insurance contracts fall within the scope of 

the federal securities laws, the Task Force, in the course of its meetings with outside 

groups, was told that those settlements account for a small part of the life settlements 

market. 

Non-Variable Life Settlements 

The federal courts have considered whether fractional interests in non-variable 

life insurance contracts are securities under the Securities Act.96 The two primary cases 

in this area involved viatical settlements. In both cases viatical settlement providers 

purchased life insurance policies from terminally ill patients and sold fractional interests 

in the policies (viatical settlement contracts) to investors. The courts took different views 

regarding the status of the viatical settlement contracts as securities. Both courts 

considered whether a viatical settlement contract is an investment contract and therefore a 

security under the three-part test prescribed in the Supreme Court’s decision in SEC v. 

W.J. Howey Co.

97 Under Howey, an investment contract is a security if the following 

three requirements are satisfied: (1) an investment of money; (2) in a common enterprise; 

with (3) the expectation of profits derived from the efforts of others. In SEC v. Life 

Partners, Inc.,

98 the D.C. Circuit concluded that the first two elements of Howey were 

satisfied, but that the third was not because the promoters’ efforts after the purchase were 

primarily “ministerial” in nature.99 

Life Partners has been criticized and other courts have rejected Life Partners’ 

distinction between pre- and post-purchase efforts and its conclusion that the success of 

the investment depends principally on the death of the viator.100 In 2004, after the SEC 

obtained emergency relief to stop an ongoing fraudulent securities offering by Mutual 

Benefits Corporation, the district court declined to follow Life Partners and held that the 

viatical settlement contracts offered by Mutual Benefits Corp. were securities.101 In 

2005, the case went to the Eleventh Circuit,102 where the court observed that under 

Howey and the more recent Supreme Court decision of SEC v. Edwards,

103 courts must 

construe the term “investment contract” broadly to “encompass virtually any instrument 

that might be sold as an investment.”104 The Eleventh Circuit rejected the pre- and post-

 

96 An interest in a pool of life settlements or a securitization of life settlements would be a security 

under the Securities Act. 

97 328 U.S. 293, 298-99 (1946). 

98 87 F.3d 536 (D.C. Cir. 1996), reh’g denied, 102 F.3d 587 (D.C. Cir. 1996). 

99 Id. at 545-546. The D.C. Circuit later clarified its decision and stated that they were not adopting 

an “artificial bright-line rule,” but the court went on to discount the pre-purchase efforts, noting 

that the dispositive factor was the death of the viator, which was not in the promoter’s control. 

SEC v. Life Partners, Inc., 102 F.3d 587 (D.C. Cir. 1996). 

100 See Wuliger v. Christie, 310 F. Supp. 2d 897, 904 (N.D. Ohio 2004) (declining to follow Life 

Partners and observing that the decision has “not altogether been embraced by other circuits”). 

101 SEC v. Mutual Benefits Corp., 323 F. Supp. 2d 1337 (S.D. Fla. 2004). 

102 SEC v. Mutual Benefits Corp., 408 F.3d 737 (11th Cir. 2005). 

103 540 U.S. 389 (2004). 

104 Mutual Benefits, supra note 102, 408 F.3d at 742. 

23 
purchase approach used by the D.C. Circuit in Life Partners, and noted that investors 

“relied heavily” on Mutual Benefits’ pre- and post-purchase activities.105 

Since the cases brought by the SEC to date involved the sales of fractional 

interests in life insurance policies or groups of policies, it is unclear whether a federal 

court would hold that the sale of a single insurance policy wholly to one investor would 

constitute an offer or sale of a security under the Securities Act. A security is created by 

pooling a group of life settlements and issuing interests in the pool or by forming a 

partnership or other investment vehicle to invest in life settlements. While no such 

transaction has been registered with the SEC and publicly sold, the Task Force is aware 

of interests that have been sold privately in reliance on an exemption from the Securities 

Act. 

2. The Securities Exchange Act of 1934

Registration Requirements 

The Exchange Act generally requires brokers or dealers106 that effect securities 

transactions, or that induce or attempt to induce the purchase or sale of securities, to 

register with the SEC.107 In addition, broker-dealers are required to become members of 

at least one self-regulatory organization (“SRO”),108 and (with few exceptions) the 

Securities Investor Protection Corporation (“SIPC”). Generally, all registered brokerdealers that deal with the public must become members of FINRA and may also choose 

to become exchange members.109 Broker-dealers must also comply with applicable state 

registration and qualification requirements.110 

In addition, a broker-dealer generally must register each natural person who is 

engaged in the securities business as an associated person,111 with one or more SROs.112 

An associated person who effects or participates in effecting securities transactions also 

 

105 Id. at 744. 

106 The Exchange Act generally defines a “broker” as “any person engaged in the business of 

effecting transactions in securities for the account of others,” and a “dealer” as “any person 

engaged in the business of buying and selling securities for such person’s own account through a 

broker or otherwise.” Exchange Act Section (3)(a)(4)(A) and Section (3)(a)(5)(A), 15 U.S.C. 

78c(a)(4)(A) and (a)(5)(A). 

107 See Exchange Act Section 15(a), 15 U.S.C. 78o. 

108 Exchange Act Section 15(b)(8), 15 U.S.C. 78o(b)(8), and Exchange Act Rule 15b9-1, 17 CFR 

240.15b9-1. 

109 Exchange Act Section 15(b)(8), 15 U.S.C. 78o(b)(8), and Exchange Act Rule 15b9-1, 17 CFR 

240.15b9-1. Exchanges may also require FINRA membership. For example, all New York Stock 

Exchange members must be members of FINRA. See NYSE Rule 2(b). 

110 Every state has its own requirements for a person conducting business as a broker-dealer. 

111 The Exchange Act defines an “associated person” of a broker-dealer as any partner, officer, 

director, or branch manager or employee of a broker-dealer, any person performing similar 

functions, or any person controlling, or controlled by, or under common control with, the brokerdealer. See Section 3(a)(18), 15 U.S.C. 78c(a)(3)(18). However, an “associated person” does not 

include any such person whose functions are solely clerical or ministerial. Id. 

112 See NASD Rule 1021 (“Registration Requirements”); NASD Rule 1031 (“Registration 

Requirements”). 

24 
must meet qualification requirements, which may include passing a securities 

qualification exam.113

Business Conduct Obligations 

Broker-dealers are subject to a comprehensive set of SEC and SRO requirements 

that are designed to promote business conduct that would facilitate fair, orderly and 

efficient markets and protect investors from abusive practices. Some of these 

requirements are discussed in more detail below. Because of the uncertain status of life 

settlements under the federal securities laws, the application of these requirements is 

generally limited to variable life insurance policies and products that are a derivative of 

or based on life settlements. 

Duty of Fair Dealing 

Broker-dealers are required to deal fairly with their customers.114 This duty is 

derived from the anti-fraud provisions of the federal securities laws.115 Under the socalled “shingle” theory, by virtue of engaging in the brokerage profession, a brokerdealer makes an implicit representation to those persons with whom it transacts business 

that it will deal fairly with them, consistent with the standards of the profession.116 This 

essential representation proscribes certain conduct, which has been articulated by the 

Commission and courts over time through interpretive statements and enforcement 

actions.117

 

113 See Exchange Act Rule 15b-7-1, 17 CFR 240.15b7-1; NASD Rule 1021 (“Registration 

Requirements”); NASD Rule 1031 (“Registration Requirements”); NASD Rule 1041 

(“Registration Requirements for Assistant Representatives”).

114 See also Dodd-Frank Wall Street Reform and Consumer Protection Act, H.R. 4173, 111th Cong. 

(2010) (requiring an SEC study of the standards of conduct applicable to broker-dealers and 

investment advisers and authorizing the SEC to establish a uniform fiduciary standard of conduct 

for broker-dealers and investment advisers providing personalized investment advice to retail 

customers). 

115 See SEC, Report of the Special Study of Securities Markets of the Securities and Exchange 

Commission, H.R. Doc. No. 88-95, at 238 (1st Sess. 1963) (“Report of Special Study”); Richard 

N. Cea, 44 S.E.C. 8, 18 (1969) (involving excessive trading and recommendations of speculative 

securities without a reasonable basis); Mac Robbins & Co., 41 S.E.C. 116 (1962) (involving 

“boiler-room” sales tactics of speculative securities). See also NASD IM-2310-2 (“Fair Dealing 

with Customers”) (“Implicit in all member and registered representative relationships with 

customers and others is the fundamental responsibility for fair dealing. Sales efforts must 

therefore be undertaken only on a basis that can be judged as being within the ethical standards of 

the Association’s Rules, with particular emphasis on the requirement to deal fairly with the 

public.”). 

116 Charles Hughes & Co. v. SEC, 139 F.2d 434 (2d Cir. 1943), cert. denied, 321 U.S. 786 (1944) 

(although not expressly referencing the “shingle theory,” held that broker-dealer was under a 

“special duty, in view of its expert knowledge and proffered advice, not to take advantage of its 

customers’ ignorance of market conditions”; failure to disclose substantial mark-ups on OTC 

securities sold to unsophisticated customers thus constituted fraud). 

117 See supra note 115. 

25 
Broker-dealers are also required under SRO rules to observe high standards of 

commercial honor and just and equitable principles of trade.118 This includes, among 

other things, having a reasonable basis for recommendations in light of customer 

financial situation to the extent known to the broker (suitability), engaging in fair and 

balanced communications with the public, providing timely and adequate confirmation of 

transactions, providing account statement disclosures, disclosing conflicts of interest, 

receiving fair compensation both in agency and principal transactions, and giving 

customers the opportunity for redress of disputes through arbitration.119 

Duty of Best Execution 

Broker-dealers also have a legal duty to seek to obtain best execution of customer 

orders.120 This duty derives from common law, and is incorporated in SRO rules and, 

through judicial and Commission decisions, the anti-fraud provisions of the federal 

securities laws.121 The duty of best execution requires broker-dealers to execute 

customers’ trades at the most favorable terms reasonably available under the 

circumstances.122

Suitability Requirements 

As noted above, a central aspect of a broker-dealer’s duty of fair dealing is the 

suitability obligation. The concept of suitability appears in specific SRO rules123 and has 

 

118 See FINRA Rule 2010 (“Standards of Commercial Honor and Principles of Trade”). 

119 See, e.g., NASD Rule 2310 (“Recommendations to Customers (Suitability)”); NASD Rule 

2110(d) (“Communications with the Public”); Exchange Act Rule 10b-10 (“Confirmation of 

Transactions”); MSRB Rule G-15 (confirmation of transactions); NASD Rule 2230 

(“Confirmations”); Exchange Act Rule 15c3-2 (account statements); NASD Rules 2340 

(“Customer Account Statements”); NASD Rule 2720 (“Public Offerings of Securities With 

Conflicts of Interest”); NASD Rule 3040 (“Private Securities Transactions of an Associated 

Person”); NASD Rule 2440 (“Fair Prices and Commissions”); FINRA Rule 5110(c) (“Corporate 

Financing Rule – Underwriting Terms and Arrangements”); FINRA IM 12000 (“Failure to Act 

Under Provisions of Code of Arbitration Procedure for Customer Disputes”). 

120 See, e.g., Newton v. Merrill, Lynch, Pierce, Fenner & Smith, Inc., 135 F.3d 266, 269-270 (3d Cir. 

1998), cert. denied, 525 U.S. 811 (1998); Certain Market Making Activities on Nasdaq, Exchange 

Act Release No. 40900 (Jan. 11, 1999) (settled case) (citing Sinclair v. SEC, 444 F.2d 399 (2d. 

Cir. 1971), In re Arleen Hughes, 27 S.E.C 629, 636 (1948), aff’d sub nom., Hughes v. SEC, 174 

F.2d 969 (D.C. Cir. 1949)). See also Order Execution Obligations, Exchange Act Release No. 

37619A (Sept. 6, 1996) [61 FR 48290] (“Order Handling Rules Release”). See also Regulation 

NMS, Exchange Act Release No. 51808 (June 9, 2005) [70 FR 37496] (“Regulation NMS 

Release”). 

121 See Regulation NMS Release, supra note 120; see also NASD Rule 2320 (“Best Execution and 

Interpositioning”). 

122 See Regulation NMS Release, supra note 120. 

123 FINRA members’ suitability obligations are set out in NASD Rule 2310 (“Recommendations to 

Customers (Suitability)”) and NASD Interpretive Materials (“IMs”), specifically, IM 2310-1 

(“Possible Application of SEC Rules 15g-1 through 15g-9”), IM-2310-2 (“Fair Dealing with 

Customers”), and IM-2310-3 (“Suitability Obligations to Institutional Customers”), as applicable. 

Aside from the area of options (where there is a specific suitability requirement under NYSE Rule 

723), the exchanges address suitability violations under rules imposing a duty of due diligence 

(e.g., Incorporated NYSE Rule 405 (“Diligence as to Accounts”, also known as the “Know Your 

Customer Rule”)). 

26 
also been interpreted as an obligation under the anti-fraud provisions of the federal 

securities laws.124 In contrast to the concept of suitability under the federal securities 

laws, which is based in fraud, the SRO rules are grounded in concepts of professionalism, 

fair dealing, and just and equitable principles of trade. 

The anti-fraud provisions of the federal securities laws and the implied obligation 

of fair dealing thereunder prohibit broker-dealers from, among other things, making 

unsuitable recommendations and require broker-dealers to investigate an issuer before 

recommending the issuer’s securities to a customer.125 The fair dealing obligation also 

requires the broker-dealer to reasonably believe that its securities recommendations are 

suitable for its customer in light of the customer’s financial needs, objectives and 

circumstances (customer-specific suitability).126

Like all other actions for violating anti-fraud provisions, the SEC must establish 

that the broker’s unsuitable recommendation was made with scienter (i.e. with a mental 

state embracing intent to deceive, manipulate or defraud). Scienter can be knowing 

misconduct as well as reckless misconduct: conduct that is “at the least, conduct which is 

‘highly unreasonable’ and which represents ‘an extreme departure from the standards of 

ordinary care...to the extent that the danger was either known to the defendant or so 

obvious that the defendant must have been aware of it.’”127 In contrast to the federal antifraud provisions, FINRA and other SRO rules do not require proof of scienter to establish 

a suitability violation primarily enforced by the SROs.128 As noted above, while the 

concept of suitability under the federal securities laws is grounded in fraud, the SRO 

rules are grounded in concepts of professionalism, fair dealing, and just and equitable 

principles of trade, which gives SROs greater latitude in dealing with suitability issues.129

A violation of the suitability requirements as interpreted under the anti-fraud provisions 

can also give rise to a private cause of action and civil liability under Section 10(b) of the 

Securities Exchange Act and Rule 10b-5 thereunder.130 Although the SROs’ suitability 

rules do not similarly give rise to a private cause of action, violations of the rules can be 

addressed through arbitration proceedings. 

 

124 See Hanly v. SEC, 415 F.2d 589, 596 (2d Cir. 1969); see also Exchange Act Release No. 26100, at 

n. 75 (Sept. 22, 1988) [53 FR 37778]. 

125 Id. 

126 See Richard N. Cea, Securities Exchange Act Release No. 8662 (Aug. 6, 1969); F.J. Kaufman and 

Co., Securities Exchange Act Release No. 27535 (Dec. 13, 1989). 

127 See Ernst & Ernst v. Hochfelder, 425 US 185 (1976) and Rolf v. Blyth, Eastman Dillon & Co., 

Inc., 570 F.2d 38, 47 (2d Cir. 1978) (holding that scienter can be reckless conduct). 

128 See, e.g., In re Jack H. Stein, Securities Exchange Act Release No. 47335 (Feb. 10, 2003) 

(“Scienter is not an element for finding a violation of the NASD suitability rule.”); In re John M. 

Reynolds, Securities Exchange Act Release No. 30036 (Dec. 4, 1991) (scienter unnecessary to 

establish excessive trading under NASD rules). 

129 When adopted, the SRO rules, particularly the NASD rule, were regarded primarily as ethical 

rules, stemming from concepts of “fair dealing” and notions of ‘‘just and equitable principles of 

trade.” Robert Mundheim, Professional Responsibilities of Broker-Dealers: The Suitability 

Doctrine, 1965 Duke L.J. 445-47; Stuart D. Root, Suitability—The Sophisticated Investor—and 

Modern Portfolio Management, 1991 Colum. Bus. L. Rev. 287, 290-300. 

130 See, e.g., Brown v. E.F. Hutton Group, Inc., 991 F.2d 1020, 1031 (2d Cir. 1993); O’Connor v.

R.F. Lafferty & Co., 965 F.2d 893 (10th Cir. 1992); Vucinich v. Paine Webber, Jackson & Curtis, 

Inc., 803 F.2d 454 (9th Cir. 1986). 

27 
In general, there are two approaches to suitability that have developed under both 

federal case law and FINRA and SEC enforcement actions – “reasonable basis” 

suitability and “customer-specific” suitability. Under reasonable basis suitability, a 

broker-dealer has an affirmative duty to have an “adequate and reasonable basis” for any 

recommendation that it makes.131 A broker-dealer, therefore, has the obligation to 

investigate and have adequate information about the security it is recommending. Under 

customer-specific suitability, a broker-dealer must make recommendations based on a 

customer’s financial situation and needs as well as other security holdings, to the extent 

known.132 This requirement has been construed to impose a duty of inquiry on brokerdealers to obtain relevant information from customers relating to their financial 

situations133 and to keep such information current.134 

Specifically, NASD Rule 2310135 requires that members “have reasonable 

grounds for believing that the recommendation is suitable for such customer upon the 

basis of the facts, if any, disclosed by such customer as to his other security holdings and 

as to his financial situation and needs.”136 In addition, before executing a recommended 

transaction for a non-institutional customer, members must “make reasonable efforts to 

obtain information concerning: (1) the customer’s financial status; (2) the customer’s tax 

status; (3) the customer’s investment objectives; and (4) such other information used or 

considered to be reasonable by such member or registered representative in making 

recommendations to the customer.”137

A broker-dealer’s suitability obligations are different for institutional customers 

than for non-institutional customers. NASD (FINRA) IM-2310-3 sets out factors that are 

relevant to the scope of a broker-dealer’s suitability obligations in making 

recommendations to an institutional customer.138 A broker-dealer fulfills its obligation to 

 

131 See Kaufman, supra note 126 (finding that the broker’s recommendations violated suitability 

requirements because the broker did not have a reasonable basis for the strategy he recommended, 

wholly apart from any considerations relating to the particular customer’s portfolio). 

132 See Cea and Kaufman, supra note 126. 

133 See NASD Rule 2310. See also Gerald M. Greenberg, 40 S.E.C. 133 (1960) (holding that a 

broker cannot avoid the duty to make suitable recommendations simply by avoiding knowledge of 

the customer’s financial situation entirely). 

134 Exchange Act Rule 17a-3(a)(17)(i) requires, subject to certain exceptions, broker-dealers to update 

customer records, including investment objectives, at least every 36 months. 

135 The current FINRA rulebook consists of (1) FINRA Rules; (2) NASD Rules; and (3) rules 

incorporated from NYSE (“Incorporated NYSE Rules”) (together, the NASD Rules and 

Incorporated NYSE Rules are referred to as the “Transitional Rulebook”). While the NASD Rules 

generally apply to all FINRA members, the Incorporated NYSE Rules apply only to those 

members of FINRA that are also members of the NYSE (“Dual Members”). The FINRA Rules 

apply to all FINRA members, unless such rules have a more limited application by their terms.

136 NASD Rule 2310. 

137 Id. 

138 IM-2310-3 states that “for purposes of this interpretation, an institutional customer shall be any 

entity other than a natural person.” Furthermore, while the interpretation is potentially applicable 

to any institutional customer, the guidance is more appropriately applied to an institutional 

customer with at least $10 million invested in securities in the aggregate in its portfolio and/or 

under management. 

28 
determine that a recommendation is suitable for an institutional customer if it has 

reasonable grounds for concluding that the institutional customer is making independent 

investment decisions and is capable of independently evaluating investment risk. 

Fair Prices, Commissions and Charges 

Commissions paid in connection with life settlements have been typically high – 

up to 30% or more of the purchase price of the life settlement.139 SRO rules generally 

require broker-dealer compensation for services to be fair and reasonable taking into 

consideration all relevant circumstances.140 Broker-dealers are also prohibited from 

charging unfair or unreasonable underwriting compensation in connection with the 

distribution of securities.141 Similarly, a broker-dealer’s charges and fees for services 

performed must be “reasonable” and “not unfairly discriminatory between customers.”142 

Charging an unfair commission would also violate a broker-dealer’s obligation to observe 

just and equitable principles of trade.143 

NASD Rule 2440 provides that, in determining what is a “fair commission or 

service charge,” a broker-dealer should consider all relevant circumstances, including the 

market conditions with respect to such security at the time of the transaction, the expense 

of executing the transaction and the value of any service rendered by the broker-dealer 

due to the broker-dealer’s experience in and knowledge of the security and the market 

therefor.144 NASD IM-2440-1 also sets out some factors that should be considered in 

determining the fairness of a commission.145 

Trading Platforms 

Section 3(a)(1) of the Exchange Act146 defines the term “exchange.” Section 5 of 

the Exchange Act generally requires that exchanges register with the SEC (or be 

exempted from registration). In 1998 as a response to the development of new 

technologies and trading systems, the SEC adopted a new framework for the regulation of 

exchange and exchange-like entities. A fundamental component of the new framework 

 

139 Investor Alert, Seniors Beware: What You Should Know About Life Settlements, Financial 

Industry Regulatory Authority, Inc. (Jul. 30, 2009), available at

http://www.finra.org/investors/protectyourself/investoralerts/annuitiesandinsurance/p018469; 

NASD Notice to Members 06-38, Member Obligations with Respect to the Sale of Existing 

Variable Life Insurance Policies to Third Parties, Financial Industry Regulatory Authority, Inc. 

(Aug. 2006), available at http://www.finra.org/Industry/Regulation/Notices/2006/p017133. 

140 See NASD Rule 2440 and IM-2440-1. 

141 See FINRA Rule 5110(c). 

142 NASD Rule 2430. 

143 See NASD Rule 2010 and IM-2440-1. 

144 NASD Rule 2440. 

145 IM-2440-1 identifies the following factors that should be considered: the type of security; the 

availability of the security in the market; the price of the security; the amount of money involved 

in a transaction; disclosure of the commission; the broker-dealer’s pattern of mark-ups, and the 

nature of the broker-dealer’s business. 

146 15 U.S.C. 78c(a)(1). 

29 
was Rule 3b-16 under the Exchange Act, which interprets key provisions of the statutory 

term “exchange.” 

An “exchange” under Section 3(a)(1) includes a “market place or facilities for 

bringing together purchasers and sellers of securities or for otherwise performing with 

respect to securities the functions commonly performed by a stock exchange.”147 Rule 

3b–16 defines these terms to mean “any organization, association, or group of persons 

that: (1) brings together the orders of multiple buyers and sellers; and (2) uses 

established, non-discretionary methods (whether by providing a trading facility or by 

setting rules) under which such orders interact with each other, and the buyers and sellers 

entering such orders agree to the terms of a trade.”148 Rule 3b–16 explicitly excludes 

those systems that the SEC believes perform only traditional broker-dealer activities, 

including: (1) systems that merely route orders to other facilities for execution; (2) 

systems operated by a single registered market maker to display its own bids and offers 

and the limit orders of its customers, and to execute trades against such orders; and (3) 

systems that allow persons to enter orders for execution against the bids and offers of a 

single dealer.149

As the SEC noted at the time of the rule’s adoption, Rule 3b-16 addresses the 

blurring of traditional classifications between exchanges and broker-dealers and the 

increase in the number of “alternative trading systems.” An entity that meets the criteria 

of Rule 3b-16 is offered a choice. It may either register as a national securities exchange 

pursuant to Sections 5 and 6 of the Exchange Act, or register as a broker-dealer. 

3. Enforcement Actions

In recent years, the SEC has brought a number of successful actions alleging fraud 

in connection with life settlement securities. Those enforcement actions have typically 

involved misrepresentations to investors about the profitability and safety of the 

underlying life insurance policies, including the life expectancies of the insured persons. 

Many of the cases have also been Ponzi schemes whereby investor funds have been used 

to pay promised investment returns or simply misappropriated. The cases have also 

generally involved a significant amount of investor harm in that the schemes have ranged 

from tens of millions of dollars to at least one billion dollars in the case of Mutual 

Benefits.

150 In addition, many of the investor victims in these cases were senior citizens. 

The SEC’s successful actions in connection with life settlement securities have 

come despite an early setback in the Life Partners151 case. 

The Mutual Benefits case, which is the largest SEC life settlement securities case 

to date, involved the sale of $1 billion dollars in fractionalized interests in life settlements 

to approximately 30,000 investors. The SEC brought an emergency action against 

 

147 15 U.S.C. 78c(a)(1). 

148 17 CFR 240.3b-16(a). 

149 17 CFR 240.3b-16(b). 

150 Mutual Benefits, supra note 102. 

151 Life Partners, supra note 98. 

30 
Mutual Benefits, charging that it promised investors fixed returns ranging from 12% to 

72%, while falsely representing life expectancy figures as having been verified by an 

independent physician. In reality, more than 90% of Mutual Benefits’ policies had 

surpassed their life expectancies. In order to deal with shortfall resulting from these 

maturing policies, Mutual Benefits effectuated a premium payment scheme, similar to a 

traditional Ponzi scheme, paying premium obligations of specific investors with monies 

escrowed for future obligations of other investors. The SEC also charged that at least $26 

million in funds collected by Mutual Benefits was misappropriated by company insiders 

and their relatives. 

The SEC obtained settled orders totaling more than $30 million from the 

defendants in Mutual Benefits, along with the appointment of a receiver who took control 

of the company and liquidated its assets for the benefit of investors. Several individuals 

involved in the scheme, including several of the company’s principals, were subsequently 

charged criminally. As previously discussed, the Mutual Benefits case was also 

significant because, following a preliminary injunction hearing, the district court, in a 

decision later affirmed by the U.S. Court of Appeals for the Eleventh Circuit, declined to 

follow Life Partners and held that the life settlement contracts sold by Mutual Benefits 

were securities. 

In addition to Mutual Benefits, the SEC has brought a number of other 

enforcement actions involving the sales of life settlement securities. In addition to the 

description below of some of those cases, a list of those cases is attached to this report as 

Appendix C. 

The SEC filed a life settlement case in May 2000 involving a Ponzi scheme which 

defrauded over 5,000 investors nationwide out of between $80 million to $130 million in 

investor funds.152 The SEC charged Federick C. Brandau, principal of Financial 

Federated Title & Trust, Inc. (“Financial Federated”), Ray Levy, principal of American 

Benefits Services, Inc. (“ABS”) and Jeffrey Paine, an attorney who acted as escrow agent 

to ABS. Levy, through ABS and a network of independent sales agents, offered and sold 

life settlement investments on behalf of Brandau and Financial Federated, who purported 

to purchase life insurance policies at a discount from terminally ill individuals 

(“viators”). The life settlement investments were touted to be, among other things, fully 

secured, non-speculative financial investments which paid a 42% return on a 36-month 

investment. However, unbeknownst to the investors, Brandau and Financial Federated 

only purchased approximately $6.5 million worth of insurance policies and 

misappropriated the remaining funds. 

In 2002, the SEC brought an emergency action against Larry W. Tyler and his 

company Advanced Financial Services (“AFS”), charging that they fraudulently enticed 

480 mostly elderly investors into purchasing at least $30 million in investments backed 

by life settlements.153 Tyler personally reaped over $5.2 million in undisclosed 

commissions in connection with the fraud. Tyler and AFS deceived investors with false 

 

152 SEC v. Frederick C. Brandau, et.al., Litigation Release No. 16546 (May 9, 2000). 

153 SEC v. Larry W. Tyler, et.al., Litigation Release No. 17376 (February 25, 2002). 

31 
guarantees about the investment’s liquidity, above-market returns and fixed maturity 

dates. In 2004, Tyler was also indicted criminally and, after pleading guilty to the 

charges in the indictment, was sentenced to eight years in federal prison.154

After the Mutual Benefits case, the SEC brought three cases in 2006 and 2007 

involving life settlements. The 2006 case against ABC Viaticals involved the sale of at 

least $100 million in life settlements to over 4,000 investors worldwide.155 ABC 

Viaticals and its principals falsely promised guaranteed returns ranging from 27% to 

150%. The SEC charged that the company and its principals never fully funded escrow 

accounts to pay premiums on the policies, misappropriated millions of dollars in investor 

funds, and used a bonding company they knew would not perform when the bonds came 

due. ABC Viaticals’ principals were convicted in 2007 on various criminal charges, 

including mail and wire fraud, for their roles in another life settlement investment fraud. 

 

In April 2007, the SEC charged Lydia Capital, a registered investment adviser, 

and its two principals in a scheme to defraud more than 60 investors who invested 

approximately $34 million in an unregistered offering of a hedge fund they managed.156 

The investments in the hedge fund were intended to be used to acquire a portfolio of life 

insurance policies in the life settlements market. While the fund did acquire interests in 

some policies, Lydia Capital and its principals misled investors about, among other 

things, the fund’s performance and they misappropriated at least $2 million of investor 

funds. 

Later that year, in August 2007, the SEC filed an emergency action against Secure 

Investment Services, Inc. and its principals in a $25 million scheme involving hundreds 

of senior and other investors who bought fractional ownership interests in life insurance 

policies.157 The SEC charged that Secure Investment Services and its principals 

orchestrated a Ponzi scheme that falsely promised safe, secure and profitable interests in 

life settlements. They promised returns up to 125% when the person insured by the 

policy died. Instead, the principals used investors’ money for their own personal use and 

to cover the premiums on other insurance policies owned by other groups of investors. 

The investors were further misled by life expectancy estimates supposedly certified by a 

physician who was, in reality, a convicted felon falsely holding himself out as a 

physician. 

Most recently, in March 2010, the SEC brought a case against American 

Settlement Associates and its principals for raising over $3.5 million in fractional 

ownership interests in a life settlement policy.158 Instead of reserving investor funds to 

pay future policy premiums, the SEC’s complaint alleged that the funds were 

misappropriated for business and personal use by the company’s principals. The SEC 

154 Id.

155 SEC v. ABC Viaticals et. al., Litigation Release No. 20035 (March 9, 2007). 

156 SEC v. Lydia Capital et. al., Litigation Release No. 20102 (May 3, 2007). 

157 SEC v. Secure Investment Services, et. al., Litigation Release No. 20252 (August 23, 2007). 

158 SEC v. American Settlement Associates, LLC, et. al., Litigation Release No. 21458 (March 22, 

2010). 

32 
complaint also alleged that the investments were falsely touted as being protected by a 

bonding company. 

The SEC continues to investigate possible securities laws violations involving life 

settlements. 

FINRA has also brought actions concerning life settlement investments. FINRA 

has brought approximately 13 actions against registered representatives who were selling 

life settlement investments. All of FINRA’s actions were for violating FINRA rules by 

either engaging in an outside business or engaging in private securities transactions 

without complying with the relevant FINRA rules for such conduct. A list of FINRA 

actions is attached as Appendix D. 

B. Application of State Insurance and Securities Laws 

1. State Insurance Laws 

NAIC and NCOIL have each adopted model state statutes addressing life 

settlements.159 The model acts have a number of provisions in common. Charts 

comparing the NAIC and NCOIL model acts and describing the differences between 

them are attached as Appendix E. In particular, both model acts: 

• require that life settlement brokers and providers operating within a 

state be licensed by the state insurance regulator;160 

 

• require that the state insurance regulator investigate applicants for 

licenses and set forth criteria for the regulator to consider in 

determining whether to grant a license; 

• require that life settlement contract forms and disclosure forms be filed 

with and approved by the state insurance regulator; 

• contain reporting requirements applicable to life settlement providers 

and provisions to protect the privacy of the insured; 

• provide the regulator with examination powers with respect to life 

settlement providers and brokers as well as remedial powers, including 

authority to revoke provider or broker licenses, to issue cease-anddesist orders, and to seek injunctive relief; 

 

159 VIATICAL SETTLEMENTS MODEL ACT (National Association of Insurance Commissioners 2007) 

(“NAIC model act”); NCOIL model act, supra note 7. 

160 A life settlement broker is defined in both model acts as a person who, on behalf of the policy 

owner, negotiates a life settlement contract between the owner and the life settlement provider. A 

life settlement provider is defined as one who enters into or effectuates a life settlement contract 

with the policy owner. 

33 
• set forth certain disclosures that a life settlement provider or broker 

must make to the owner of a life insurance policy in connection with 

entering into a life settlement contract, including disclosures regarding 

possible alternatives to life settlement contracts, such as accelerated 

death benefits, possible tax consequences for proceeds of the life 

settlement contract, and the insured’s rescission rights following 

execution of the contract; and 

• require that a life settlement broker provide the owner of a policy with 

a description of all offers relating to a proposed life settlement 

contract, as well as the amount of the broker’s compensation. 

Both model acts have provisions designed to deter STOLI. In certain respects, the 

NAIC model act and the NCOIL model act differ in their approaches, particularly in that 

the NCOIL model expressly defines and prohibits STOLI as a fraudulent practice, while 

the NAIC model addresses STOLI by placing limitations on how soon a policy may be 

settled after purchase. The NAIC model act imposes a five-year waiting period between 

the time of issuance of a life insurance policy and the time of entering into a life 

settlement contract. The NAIC model act provides certain exceptions that would permit 

earlier settlement of the contract, such as in cases where the policy owner is terminally or 

chronically ill. The NAIC model act also permits life settlements after two years of 

issuance of a policy where certain conditions are met during the two-year period. These 

conditions, which are aimed at excluding STOLI transactions, include provisions relating 

to lack of premium financing, absence of an understanding that another person will 

purchase the policy, and that neither the insured nor the policy are evaluated for life 

settlement (i.e., no life expectancy evaluation within the two-year period in connection 

with a planned life settlement). 

Unlike the NAIC model act, the NCOIL model act contains a definition of 

STOLI, and provides that STOLI is a prohibited practice and a “fraudulent life settlement 

act,” and as such, could subject a provider, broker, or other person to criminal penalties 

or other sanctions.161 The NCOIL model act states that it is a prohibited practice and a 

“fraudulent life settlement act” to issue, solicit, market or otherwise promote the purchase 

of an insurance policy for the purpose of or with an emphasis on settling the policy.162 

Like the NAIC model act, the NCOIL model act also imposes a waiting period 

from the issuance of a life insurance policy to the time of entering into a life settlement 

 

161 The NCOIL model act defines STOLI as a 

practice or plan to initiate a life insurance policy for the benefit of a third party investor 

who, at the time of policy origination, has no insurable interest in the insured. STOLI 

practices include but are not limited to cases in which life insurance is purchased with 

resources or guarantees from or through a person, or entity, who, at the time of policy 

inception, could not lawfully initiate the policy himself or itself, and where, at the time of 

inception, there is an arrangement or agreement, whether verbal or written, to directly or 

indirectly transfer the ownership of the policy and/or the policy benefits to a third party. 

 NCOIL model act, supra note 7, at §2.Y. 

162 NCOIL model act, supra note 7, at §13.A.4. 

34 
contract, but instead of five years, it imposes a two-year waiting period, subject to certain 

exceptions such as terminal or chronic illness of the policy owner. 

The NAIC model act also requires that the provider or investment agent 

(investment agent defined as an agent of the provider who solicits or arranges funding for 

the purchase of a life settlement) make certain disclosures to life settlement purchasers; 

i.e. investors. These include disclosures that return depends on accurate projection of the 

insured’s life expectancy, that the contract should not be considered liquid, and that the 

purchaser may lose benefits if the insurer goes out of business. In addition, the provider 

or investment agent must disclose risks associated with policy contestability. 

 Five states have adopted the NAIC model act in a uniform and substantially 

similar manner, according to a state adoption table prepared by NAIC. 163 The NAIC 

adoption table cites 13 states as having adopted portions of the NAIC model act.164 The 

NAIC adoption table also cites states that have undertaken “related state activity” in the 

area of life settlements.165 In all, 44 states are identified as having adopted legislation 

relating to life settlements under state insurance law.166 Among states that have recently 

enacted life-settlement related legislation, the majority have followed the NCOIL model 

act or have combined elements of the NAIC and NCOIL model acts. 167 The NAIC 

identifies approximately 30 states where life settlement legislation, including anti-STOLI 

legislation, has been enacted since spring of 2008.168 Of these, 14 tracked the NCOIL 

model act provisions,169 and 12 states enacted hybrid legislation, combining elements of 

the NAIC and NCOIL model acts.170 

 Unlike other market participants, life expectancy underwriters are not subject to 

significant regulation at the state level. As noted above, life expectancy underwriters are 

specialized independent companies that issue life expectancy reports that estimate the life 

expectancy of an individual (typically the insured individual on whose life a life 

 

163 NAIC, Viatical Settlements Model Act (Apr. 2010). States listed in the table as having adopted 

the NAIC model act in a uniform and substantially similar manner are Nebraska, North Dakota, 

Oregon, Vermont, and West Virginia. 

164 States listed in the table as having adopted portions of the NAIC model act are Hawaii, Idaho, 

Illinois, Iowa, Kansas, Kentucky, Minnesota, Nevada, Ohio, Oklahoma, Rhode Island, Tennessee, 

and Washington. 

165 The NAIC adoption table cites examples of “related state activity” as including an older version of 

the NAIC model, legislation or regulation derived from other sources, bulletins, and administrative 

rulings. 

166 A few of the states identified regulate only viaticals (sale of a life insurance policy by a person 

who is terminally or chronically ill) and not all life settlements. After the date of the currently 

available NAIC adoption table, New Hampshire’s Governor signed legislation regulating life 

settlements. 2009 N.H. House Bill 660 (June 14, 2010); see N.H. Governor Signs STOLI Ban, 

Life Settlements Bill Into Law, BestWire (June 21, 2010). Thus, a total of 45 states have adopted 

some form of legislation under state insurance law relating to life settlements. 

167 NAIC, Viatical Settlements/STOLI, 2010 Legislation (June 4, 2010). 

168 Id.

169 Id. Those states are Arizona, Arkansas, California, Connecticut, Georgia, Hawaii, Idaho, Indiana, 

Kansas, Kentucky, Maine, Rhode Island, Utah, and Washington. 

170 Id. Those states are Illinois, Iowa, Minnesota, Montana, North Dakota, Ohio, Oklahoma, Oregon, 

Tennessee, Vermont, West Virginia, and Wisconsin. 

35 
insurance policy involved in a life settlement is based). Only two states, Florida171 and 

Texas,172 regulate life expectancy underwriters by requiring them to register with state 

insurance regulators and provide information about their business. Any reports filed by a 

life expectancy underwriter are public information and can be obtained from the state’s 

insurance department. The majority of states, however, do not regulate life expectancy 

underwriters. 

2. State Securities Laws

Almost all states treat life settlements as securities under state laws. Some states, 

however, exclude from the definition of security the original sale from the insured or 

policy owner to the provider.173 A majority of states include life settlements in their 

statutory definition of “security,” either directly in that definition, or as part of the 

definition of “investment contract.” 174 In a number of other states that do not include life 

settlements in their statutory definition of security or investment contract, courts or state 

regulators found life settlements to be a security under an investment contract analysis.175 

A few other states have concluded that life settlements are securities pursuant to a 

statement of policy issued by state securities regulators.176 Only two states have not 

made a determination as to whether life settlements are securities under state law.177 

 

171 Fla. Stat. ch. 626.992 (2009). 

172 28 Tex. Admin. Code § 3.1703 (2009). 

173 Ky. Rev. Stat. Ann. § 292.310(20) (2010) (“‘Life settlement investment’ does not include: (a) 

[a]ny transaction between an owner and a life settlement provider as defined by [Sections 304.15-

020 and 304.15-700 to 304.15-720 of the Kentucky Revised Statute]...”). See also, Iowa Code § 

502.102(31A) (2009); Me. Rev. Stat. Ann. 32, § 16102(32) (2009); Neb. Rev. Stat. § 8-1101(17) 

(2010); N.J. Stat. Ann. § 49:3-49(w) (2010); N.C. Gen. Stat. § 78A-2(13) (2009); N.D. Cent. Code 

§ 10-04-02(21) (2009); Ohio Rev. Code Ann. § 1707.01(HH) (2010); Utah Code Ann. § 61-1-

13(1)(v) (2009); Wis. Stat. § 551.102(32) (2009); North American Securities Administrators 

Association, Guidelines Regarding Viatical Investments (Oct. 1, 2002), available at

http://www.nasaa.org/content/Files/NASAA_Guidelines_Regarding_Viatical_Investments.pdf. 

174 The states that include life settlements in the statutory definition of “security” are Alaska, Arizona, 

Arkansas, California, Colorado, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, 

Kentucky, Maine, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New 

Jersey, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, South Carolina, South 

Dakota, Tennessee, Utah, Vermont, West Virginia and Wisconsin. 

175 The states in which life settlements were found to be securities under an investment contract 

analysis are Delaware, Louisiana, Maryland, Massachusetts, New Hampshire, New York, Oregon, 

Virginia, and Washington. A Texas state court concluded that life settlements are not investment 

contracts and, therefore, not securities under Texas securities laws. Griffitts v. Life Partners, Inc., 

No. 10-01-00271-CV, 2004 Tex. App. LEXIS 4844 (Tex. Ct. App. May 26, 2004). However, the 

Texas Securities Board evaluates whether life settlements are a security on a case-by-case basis 

and recently issued a cease and desist order in which it found life settlements to be a security 

under Texas securities laws. In the Matter of Retirement Value, LLC, ENF-10-CDO-1686 (Tex. 

St. Sec. Board Mar. 29, 2010). 

176 Through their state securities regulators, Alabama, Pennsylvania, and Rhode Island issued policy 

statements concluding that life settlements are securities under an investment contract analysis. 

177 Connecticut and Wyoming have not made a determination as to whether life settlements are 

securities under state law and no courts in those states have addressed the issue. 

36 
Statutory Definition 

The 2002 revision to the Uniform Securities Act, a model statute designed to 

guide each state in drafting its state securities law, defined life settlements as a security 

by including life settlements within the definition of an investment contract.178 The 

Drafting Committee responsible for the most recent revisions to the Uniform Securities 

Act indicated that the addition of life settlements to the definition of an investment 

contract was intended to “make unequivocally clear that viatical settlements and similar 

agreements, which otherwise satisfy the definition of an investment contract, are 

securities” and was intended as a rejection of the holding in SEC v. Life Partners Inc..

179 

The Uniform Securities Act of 2002 has been enacted in whole or in part in a number of 

states, including Georgia, Hawaii, Idaho, Indiana, Iowa, Kansas, Maine, Michigan, 

Minnesota, Mississippi, Missouri, New Mexico, Oklahoma, South Carolina, South 

Dakota, Vermont and Wisconsin. A number of other states that have not adopted the 

Uniform Securities Act of 2002 also include life settlements in the definition of security. 

California, for example, defines “security” to mean, among other things, any “...viatical 

settlement contract or a fractionalized or pooled interest therein; life settlement contract 

or a fractionalized or pooled interest therein . . . .”180 

In general, statutes that define life settlements as securities do not make a 

distinction between life settlements of entire life insurance policies or fractional interests 

in life insurance policies.181 In the few instances where statutory definitions reference a 

life settlement of both an entire life insurance policy and a fractional interest in a life 

insurance policy, both types are included in the definition of security.182 

Investment Contract Analysis 

Life settlements have been found to be securities by state courts or securities 

regulators in states in which the statutory definition of security or investment contract 

does not explicitly include life settlements. In Maryland, for example, a court found that 

life settlements constitute an investment contract, and thus a security, under Section 11-

101(r) of the Maryland Securities Act.183 

 

178 UNIF. SEC. ACT § 102(28)(E) (amended 2002) (“includes as an ‘investment contract,’ among other 

contracts, an interest in a limited partnership and a limited liability company and an investment in 

a viatical settlement or similar agreement.”). 

179 Id. at § 102(28)(E), cmt. n.28. 

180 Cal. Corp. Code § 25019 (2009). 

181 See Colo. Rev. Stat. Ann. § 11-51-201(17) (2009) (“‘Security’ means any ... viatical settlement 

investment...”). 

182 See, e.g., Cal. Corp. Code § 25019, supra note 180. See also Guidelines Regarding Viatical 

Investments, supra note 173 (describing that life settlements involve the purchase by an investor of 

“a whole or fractional interest in the policy” and concludes that life settlements are securities). 

183 Melanie Senter Lubin v. Beneficial Assurance, Ltd., et al., No. 24-C-02-006515, 2006 Md. Cir. Ct. 

LEXIS 25, at *12-21(Md. Cir. Ct. July 21, 2006). 

37 
Statement of Policy 

The state securities regulators in three states have concluded, in either bulletins or 

other guidance, that life settlements are securities. In Alabama, the Alabama Securities 

Commission issued a policy statement in which it concluded that “viatical settlements are 

securities as that term is defined under the Alabama law and that it is appropriate for the 

Commission to assert its regulatory jurisdiction.”184 In Pennsylvania, the Pennsylvania 

Securities Commission issued a “Compliance Notice to the Viatical Industry,” which 

found that life settlements are investment contracts and thus securities under 

Section 102(t) of the Pennsylvania Securities Act of 1972.185 The Compliance Notice 

was subsequently affirmed by the Commonwealth Court of Pennsylvania.186 Similarly, 

the Rhode Island Department of Business Regulation, Securities Division, issued a 

“Policy Statement on Viatical Settlement Contracts” that found that life settlements are 

securities under Rhode Island law.187

 

184 Alabama Securities Commission, Policy Statement on Viatical Settlement Contracts (May 27, 

1999), available at http://www.asc.state.al.us/Policies/Viaticals.htm. 

185 Pennsylvania Securities Commission, Compliance Notice to the Viatical Industry (Dec. 22, 2000), 

available at http://www.pabulletin.com/secure/data/vol30/30-52/2248.html. 

186 Mark A. Steller v. Pennsylvania Securities Commission, 877 A.2d 518 (Pa. Commw. Ct. 2005). 

187 Rhode Island Department of Business Regulation, Securities Division, Policy Statement on 

Viatical Settlement Contracts (Feb. 14, 2001). 

38 
V. Recommendations

A. The Commission Should Consider Recommending to Congress that It 

Amend the Definition of Security under the Federal Securities Laws to 

Include Life Settlements 

The Task Force recommends that the Commission 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 include 

life settlements. The D.C. Circuit188 and the Eleventh Circuit189 are split regarding the 

status of fractional interests in life settlements as securities under the federal securities 

laws. In addition, no court has made a determination regarding the status of a single life 

settlement as a security, as opposed to a fractional interest, under the federal securities 

laws. On the other hand, almost all states have taken action to clarify that life 

settlements, whether single life settlements or fractional interests in life settlements, are 

securities under state securities laws.190 The Task Force believes that this amendment to 

the definition of “security” would bring clarity to the status of life settlements under the 

federal securities laws and provide a more consistent treatment for life settlements under 

both federal and state securities laws.191 

The Task Force believes that any amendment of the definition of “security” under 

the Securities Act, the Exchange Act and the Investment Company Act should cover both 

viatical settlements and life settlements since there is little difference between the two 

types of settlements, other than the life expectancy of the insured.192 The Task Force also 

believes that any amendment of the definition of “security” should be broad enough to 

cover both single life settlements and fractional interests in life settlements.193 Finally, 

the Task Force recommends that any amendment to the definition of “security” 

specifically exclude from the federal securities laws the sale of the policy by the insured 

or original policy owner as we do not believe the entire statutory and regulatory 

framework should apply to an individual who decides to settle his life insurance 

 

188 Life Partners, supra note 98. 

189 Mutual Benefits, supra note 102. 

190 See discussion supra Section IV.B.2. 

191 The Task Force understands that defining life settlements as securities would bring life settlements 

under the Securities Investor Protection Act (“SIPA”) and believes that some consideration should 

be given to whether life settlements should be carved out of SIPA’s definition of security.

192 California law defines “security” to include both a “viatical settlement contract” and a “life 

settlement contract.” Cal. Corp. Code § 25019 (2009). Kentucky’s definition of “life settlement 

investment,” which is a security under Kentucky law, does not make a distinction based on the life 

expectancy of the insured. Ky. Rev. Stat. Ann. § 292.310(20) (2010) (“‘Life settlement 

investment’ means the contractual right to receive any portion of the death benefit or ownership of 

a life insurance policy or certificate, for consideration that is less than the expected death benefit 

of the life insurance policy or certificate.”). 

193 See, e.g., Cal. Corp. Code § 25019 (2009) (“viatical settlement contract or a fractionalized or 

pooled interest therein; life settlement contract or a fractionalized or pooled interest therein”). See 

also Guidelines Regarding Viatical Investments, supra note 173 (describing that life settlements 

involve the purchase by an investor of “a whole or fractional interest in the policy”). 

39 
policy.194 However, the Task Force does believe that investors seeking to invest in life 

settlements and policy owners seeking to settle their insurance policies would benefit by 

having all producers, settlement brokers and providers, including those producers and 

settlement brokers representing the insured or policy owner, regulated under the federa

securities laws. Alternatively, any legislative action could provide authority for, and 

direct the SEC to, exempt the policy owner who is selling the policy from the federal 

securities laws to the extent consistent with investor protection and the public policy 

purposes of the federal securities laws.

l 

nder 

tion 

ith respect to the Securities Exchange Act of 1934, the amendment of the 

definiti rket 

t of 

that 

er 

he uncertain status of life settlements under the federal securities laws has 

resulted life 

le 

 

195 While the SEC has exemptive authority u

the federal securities laws, the Task Force recognizes that legislative action and direc

may be appropriate given the unique nature of this product. 

W

on of “security” would bring market intermediaries in the life settlements ma

within the regulatory framework of the SEC and FINRA. There are several benefits to 

this approach. Market intermediaries, including producers, settlement brokers and 

providers would be required to register with the SEC and an SRO, such as FINRA. 

These registered market intermediaries would become subject to a comprehensive se

SEC and SRO requirements that are designed to protect investors from abusive practices 

and to promote business conduct that facilitates fair, orderly and efficient markets. 

Among these requirements are a duty to deal fairly with customers, a duty to seek to

obtain best execution of customer orders, suitability requirements, and a requirement 

compensation for services be fair and reasonable.196 These requirements would apply to 

market intermediaries involved in a life settlement and would benefit not only the 

investor acquiring the life settlement, but also the insured individual or policy own

seeking to settle his policy. 

T

 in FINRA limiting the application of its guidance to settlements of variable 

insurance policies and products that are a derivative of or based on life settlements.197 

That limitation leaves participants in the majority of the life settlements market without 

federal law protections against excessive commissions, unsuitable recommendation, or 

failures by settlement brokers or providers to obtain the best price for a policyholder 

settling a contract. The uncertain status has also led some market participants to be ab

to structure transactions in a way that arguably falls outside of the federal securities laws 

placing them beyond the reach of registration, remedies under the securities laws, and fair

dealing and investor protections standards.198 In addition, securities regulators at both 

the federal and state level often face challenges from defendants who argue, pointing to 

194 This exclusion could also apply to the sale of a variable life insurance policy by the insured or 

original policy owner. 

195 A number of states currently exempt the initial sale by the insured to the life settlement provider 

from the definition of security. See supra note 173. The approach the Task Force recommends is 

for the insured or policy owner to be exempt from the federal securities laws, but require all 

producers, life settlement brokers and providers to comply with those laws. 

196 See discussion supra Section IV.A.2. for a description of the duties of registered broker-dealers 

under the federal securities laws. 

197 See discussion supra Section IV.A.2. 

198 See Life Partners Annual Report, supra note 28. 

40 
the Life Partners decision in the D.C. Circuit, that life settlements or fractional interests 

in life settlements are not securities.199 

An amendment to the definition of “security” under the Securities Act of 1933 

would r 

ed 

ies 

g 

s 

ith respect to the Investment Company Act, Section 3(a)(1) of the Act defines 

“invest

• Prevent insiders from managing the company to their benefit and to the 

securities having inequitable or discriminatory 

anagement of investment companies by irresponsible 

 

mean that all offers and sales of life settlements, whether single life settlements o

fractional interests in life settlements, would need to be registered with the SEC, unless 

an exemption from such registration requirement is available.200 In addition, any 

misstatement in the offers and sales of life settlements, whether registered or offer

pursuant to an exemption, would be covered by the antifraud provisions in the Securit

Act. Similarly, such an amendment to the Securities Exchange Act would extend the 

protections of Rule 10b-5 to purchasers and sellers of life settlements. In addition, 

amending the definition of “security” to include life settlements would require tradin

platforms that facilitate transactions in life settlements to register as a national securitie

exchange pursuant to Sections 5 and 6 of the Exchange Act, or register as a brokerdealer.201 

W

ment company” in part as any issuer which “is or holds itself out as being engaged

primarily, or proposes to engage primarily, in the business of investing, reinvesting, or 

trading in securities.” Thus, if the definition of “security” in the Investment Company 

Act is amended to include life settlements, a pool of life settlements issuing interests in 

the pool would be an investment company under the Investment Company Act, unless it

falls within an exemption.202 Investors in the pool would benefit from the comprehensive

federal regulatory framework the Act establishes for investment companies. This 

framework is designed to: 

detriment of investors; 

• Prevent the issuance of 

provisions; 

• Prevent the m

persons; 

199 See e.g., Mutual Benefits, supra note 102; Steller, supra note 186. 

200 There would also be a private right of action for material misstatements or omissions in 

registration statements relating to life settlements, as well as a private right of action against a 

person who offers or sells a life settlement in violation of the registration requirements, or a person 

who offers or sells a life settlement by means of a prospectus that includes an untrue statement of a 

material fact or omits to state a material fact necessary in order to make the statement, in light of 

the circumstances under which they were made, not misleading. 

201 See discussion supra Section IV.A.2. for a description of the requirements that would apply to 

trading platforms facilitating transactions in life settlements. 

202 Exemptions could include Section 3(c)(1) of the Act (issuer whose outstanding securities (other 

than short-term paper) are beneficially owned by not more than one hundred persons and which is 

not making and does not presently propose to make a public offering of its securities) or Section 

3(c)(7) of the Act (issuer, the outstanding securities of which are owned exclusively by persons 

who, at the time of acquisition of such securities, are qualified purchasers, and which is not 

making and does not at that time propose to make a public offering of such securities.). 

41 
• Prevent the use of unsound or misleading methods of computing earnings 

and asset value; 

• Prevent changes in the character of investment companies without the 

consent of investors; 

• Prevent investment companies from engaging in excessive leveraging; 

and; 

• Ensure the disclosure of full and accurate information about the companies 

and their sponsors.203 

To accomplish these ends, the Investment Company Act requires the safekeeping and 

proper valuation of funds assets, restricts greatly transactions with affiliates, limits 

leveraging, and imposes governance requirements as a check on fund management. 

B. The Commission Should Instruct the Staff to Continue to Monitor that 

Legal Standards of Conduct Are Being Met by Brokers and Providers 

The Task Force recommends that the Commission consider how best to leverage 

and build upon FINRA’s important work with respect to life settlements. In particular, 

with regard to life settlement transactions involving a securities transaction, the 

Commission should instruct the Staff to help ensure that settlement brokers and 

providers, as well as other participants in the settlement transaction, are adequately 

discharging their obligations under the federal securities laws and FINRA rules. These 

obligations would include any suitability duties owed both to the individual settling the 

insurance policy and to any investors in subsequent transactions associated with that 

settlement. Action by FINRA and the SEC could include examination and enforcement 

efforts, consideration of whether existing licensing requirements should be expanded, and 

investor education efforts. 

C. The Commission Should Instruct the Staff to Monitor for the 

Development of a Life Settlement Securitization Market 

Although no securitizations of life settlements have been registered with the SEC 

and offered to the public, a limited number of privately offered life settlement 

securitizations have been completed. 204 Market participants meeting with the Task Force 

uniformly indicated that for a life settlement securitization market to develop, pools 

containing large numbers of life insurance policies to diversify risk will be required. 

Some market participants indicated a concern that an increased demand for life settlement 

securitizations would lead to a rise in STOLI transactions. Since the payment by the 

issuing insurance company of the death claim underlying a life settlement is perhaps the 

key component of this investment, the increased use of STOLI in life settlement 

securitizations could dramatically impact the investment’s value. 

Since life settlement securitizations to date have been offered and sold in reliance 

on exemptions from registration, information about those transactions is not generally 

 

203 See Section 1(b) of the Investment Company Act. 

204 See discussion supra Section III.C. 

42 
43 

 

available. Nevertheless, the SEC and the market would benefit from having access to 

more information about the sales of these securities in the private markets. The SEC has 

proposed revisions to its rules to require issuers of structured finance products, which 

would include securitizations backed by life settlements, that sell securities without 

registration under the Securities Act in reliance on Regulation D or that rely on Rule 

144A for resales of the securities to make a notice filing describing the offering.205 The 

notice would include information regarding major participants in the securitization, the 

date of the offering and initial sale, the type of securities being offered, the basic structure 

of the securitization, the assets in the underlying pool, and the principal amount of 

securities being offered. The Staff would be in a better position to monitor developments 

in the market for life settlement securitizations if this or a similar proposal were 

adopted.206

D. The Commission Should Encourage Congress and State Legislators to 

Consider More Significant and Consistent Regulation of Life Expectancy 

Underwriters 

The estimated life expectancy of the insured constitutes a critical component of 

the life settlement transaction. Among other things, the estimate affects the amount paid 

to the policy owner, the expected timing of the payment to the investor, and the value of 

any securitization. Misestimating life expectancy, unintentionally or otherwise, would 

have a significant, negative effect on the entire transaction. In light of the crucial role 

that life expectancy underwriters play in the settlement process, the Commission 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 customer information, and physician review standards. The need for a federal 

agency to play a role in this regulation would depend on whether the definition of 

“securities” under the federal securities law is amended to include life settlements, and on 

the further development of the market for life settlement securitizations. 

E. The Commission Should Instruct the Staff to Consider Issuing an Investor 

Bulletin Regarding Investments in Life Settlements 

The Task Force recommends that the Commission instruct the Staff to consider 

issuing an Investor Bulletin regarding investments in life settlements. In the course of its 

work, the Task Force has learned important information about life settlements from a 

variety of sources. The Task Force believes that investors or potential investors in life 

settlements would benefit from this information and recommends that the Commission 

consider issuing an Investor Bulletin on the subject. In addition to providing background 

on the life settlement process, the Bulletin could describe the parties involved in life 

settlements and highlight some of the considerations and risks that investors in life 

settlements should keep in mind. 

205 See Asset-Backed Securities Release, supra note 3. 

206 Under the proposal, a notice would only be required to be filed if the issuer relies on Rule 506 or 

Rule 144A under the Securities Act. Therefore, the SEC would not receive a notice from all 

privately issued life settlement securitization issuers. 
Appendix A: Task Force Membership

Office of the Chairman

Jennifer McHugh, Senior Advisor to the Chairman 

Division of Corporation Finance

Paul Belvin, Associate Director 

Paula Dubberly, Associate Director 

Sebastian Gomez Abero, Attorney-Advisor 

Jessica Kane, Attorney-Advisor 

Division of Enforcement

Joan McKown, Chief Counsel 

Glenn Gordon, Associate Regional Director, Miami Regional Office 

Division of Investment Management

Susan Nash, Associate Director 

Keith Carpenter, Senior Special Counsel 

Division of Risk, Strategy, and Financial Innovation

Jonathan Sokobin, Deputy Director 

Division of Trading and Markets

Paula Jenson, Deputy Chief Counsel 

John Fahey, Branch Chief 

Office of the Chief Accountant

Paul Beswick, Deputy Chief Accountant 

Office of Compliance Inspections and Examinations

Suzanne McGovern, Assistant Director 

Office of the General Counsel

David Fredrickson, Assistant General Counsel 

Sarah Buescher, Attorney 

Office of Investor Education and Advocacy

Mary Head, Deputy Director 

A-1 
Appendix B: 

Groups and Individuals Who Met with the Task Force

• AARP 

• American Council of Life Insurers (ACLI) 

• Drinker Biddle & Reath LLP 

• Cantor Fitzgerald, L.P. 

• Coventry First LLC 

• DBRS, Inc. 

• Fasano Associates, Inc. 

• Financial Industry Regulatory Authority (FINRA) 

• Group of Outside Counsels (Clifford Chance LLP, Greenberg Traurig, LLP, 

Mayer Brown LLP, Locke Lord Bissell & Liddell LLP, Stroock & Stroock & 

Lavan LLP, O’Melveny & Myers LLP, Katten Muchin Rosenman LLP, Sidley 

Austin LLP) 

• Institutional Life Markets Association (ILMA) 

• Invescor, Ltd. 

• Life Insurance Settlement Association (LISA) 

• Life Settlement Financial, LLC 

• Life Settlement Institute 

• Minnesota Insurance and Securities Regulator (Department of Commerce) 

• National Association of Insurance Commissioners (NAIC) and State Insurance 

Regulators (Ohio, Connecticut, Iowa) 

• North American Securities Administrators Association, Inc. (NASAA) 

• Prudential Financial, Inc. 

• Standard & Poor's Financial Services LLC 

• The Insurance Forum 

• Transamerica Life Solutions, LLC 

• U.K. Financial Services Authority (FSA) 

• U.S. Government Accountability Office (GAO) 

B-1 
Appendix C: SEC Enforcement Actions

1. SEC v. American Settlement Associates, LLC, et al., Litigation Release No. 

21458 (March 22, 2010). 

• Commission alleges American Settlement Associates, Charles C. Jordan and 

Kelly T. Gipson sold fractional ownership interests in a life settlement policy 

to certain investors, raising almost $3.5 million, and failed to use investor 

money as promised to cover future premium payments, but instead used 

investor money to pay defendants’ business and personal expenses. 

2. SEC v. Secure Investment Services, Inc., American Financial Services, Inc., 

Lyndon Group, Inc., Donald F. Neuhaus, and Kimberly A. Snowden, 

Litigation Release No. 20362 (November 13, 2007). 

• Commission charges against defendants Neuhaus, his daughter Snowden, and 

their company Secure Investment Services, Inc., based on allegations that they 

orchestrated a Ponzi scheme that falsely promised safe and profitable viatical 

investments in life insurance policies while failing to disclose the dire 

financial condition of the investment venture. Many investors were elderly 

and invested their retirement savings. Neuhaus and Snowden misled investors 

by providing them with life expectancy estimates certified by a convicted 

felon who falsely held himself out as a physician. 

3. SEC v. Lydia Capital, LLC et al., Litigation Release No. 20102 (May 3, 2007). 

• Commission charges against defendants Manterfield and Andersen alleging 

that they engaged in a scheme to defraud more than 60 investors who invested 

approximately $34 million in Lydia Capital Alternative Investment Fund LP, 

a hedge fund. Defendants told investors that they intended to use the hedge 

fund's assets to acquire a portfolio of life insurance policies in the life 

settlement market. 

4. SEC v. ABC Viaticals, Inc., C. Keith LaMonda and Jesse W. LaMonda Jr., 

defendants, and LaMonda Management Family Limited Partnership, 

Structured Life Settlements, Inc., Blue Water Trust and Destiny Trust, relief 

defendants, Litigation Release No. 20035 (March 9, 2007). 

• ABC Viaticals, Inc. (ABC), and its former President, Keith LaMonda and his 

brother, Jesse LaMonda, allegedly conducted fraudulent and unregistered 

offers and sales of fractionalized interests in life settlements. 

• ABC raised at least $100 million from over 4,000 investors worldwide from 

the sale of life settlements with “guaranteed” returns from 27% to 150%. ABC 

claimed that investor funds were controlled by an independent escrow agent, 

however, the LaMondas exercised de facto control over all funds held and 

C-1 
siphoned millions of dollars of investor funds into their own pockets or 

entities they controlled. 

5. SEC v. Larry W. Tyler, Advanced Financial Services, Inc., et al., Litigation 

Release No. 19398 (September 28, 2005). 

• The Commission alleged that Tyler raised at least $30 million from investors 

and personally realized over $5.2 million in undisclosed commissions, by 

fraudulently enticing more than 480 elderly investors into purchasing 

investments issued by his company. Tyler used investors' funds to buy 

viaticals and hid the fact that the viaticals could not fulfill the promises and 

guarantees that he had made to investors. 

6. SEC v. Mutual Benefits Corp., et al., Litigation Release No. 18698 (May 6, 

2004). 

• The SEC filed an emergency federal civil action seeking to halt an alleged 

billion dollar fraudulent securities offering affecting 29,000 investors 

worldwide. 

• The defendants raised over $1 billion from more than 29,000 investors 

through a fraudulent, unregistered offering of securities in the form 

fractionalized interests in viatical and life settlements. In raising money, 

MBC falsely represented to investors that its life expectancy figures were the 

product of a review by an independent physician, failed to disclose that about 

65% of its outstanding life insurance policies were sold to investors using 

fraudulent life expectancy figures generated by MBC, and omitted to tell 

investors that more than 90% of its policies have already surpassed their 

assigned life expectancy. 

Related Actions/Events

SEC v. Mutual Benefits Corp., et al., Litigation Release No. 19274 (June 20, 

2005). 

• The SEC filed an Amended Complaint in its pending civil injunctive action 

against Mutual Benefits Corp. (“MBC”) and its principals, adding Steven 

Steiner as an additional defendant. 

• Steiner touted the safety and humanitarian nature of viatical settlement 

investments, assured investors that life expectancies are determined by doctors 

prior to their being placed on policies, and made glowing remarks about MBC 

as the leader in the viatical industry. Steiner also wrote articles in newspapers 

and business journals (provided in investor packets) touting viatical settlement 

investments, new regulations designed to protect investors, and specifically 

referring to MBC as a superior operation and clean company with "thousands" 

of satisfied customers. Steiner failed to disclose, among other things, that 

over 90% of the viatical settlements were beyond their projected life 

C-2 
expectancies, that his brothers (defendants Joel and Leslie Steinger) were the 

de facto principals of MBC, his brothers’ prior disciplinary history, or that 

cease-and-desist orders had been issued against MBC. 

7. SEC v. Ameer Khan 

8. SEC v. Raquel Kohler 

9. SEC v. Stephen Ziegler 

(All described in Litigation Release No. 20459 (February 15, 2008)). 

• Defendants were charged with violations of the federal securities laws arising 

from their involvement in Mutual Benefits Corp.’s offering fraud which raised 

more than $1 billion from approximately 30,000 investors. Khan served as 

president and sole shareholder of Viatical Services, Inc., a purportedly 

independent company that claimed to track policies sold to Mutual Benefits’ 

investors. Kohler was the former chief financial officer of Mutual Benefits 

and a licensed certified public accountant. Ziegler served as Mutual Benefits’ 

regulatory counsel. 

10. In the Matter of Raquel Kohler, CPA, AP File No. 3-12958 (February 15, 

2008). 

• On September 24, 2007, Defendant Kohler, the Chief Financial Officer of 

Mutual Benefits Corporation, was found guilty of one count of conspiracy to 

commit securities fraud. 

• Kohler was sentenced to 60 months imprisonment and ordered to pay 

restitution in the amount of $471,000,000. The Commission, finding Kohler 

convicted of a felony within the meaning of Rule 102(e)(2) ordered that 

Kohler be suspended from appearing or practicing before the Commission.

11. In the Matter of Stephen Ziegler, AP File No. 3-12959 (February 15, 2008). 

• On September 24, 2007, Defendant Ziegler was found guilty of one count of 

conspiracy to commit securities fraud.

• Ziegler was sentenced to 60 months imprisonment and ordered to pay 

restitution in the amount of $826,839,642. The Commission, finding Ziegler 

convicted of a felony within the meaning of Rule 102(e)(2) ordered that 

Ziegler be suspended from appearing or practicing before the Commission.

12. SEC v. Wellness Technologies, Inc. and Jesse Dean Bogdonoff, Litigation 

Release No. 18375 (September 29, 2003). 

• Bogdonoff recommended that the Tonga Trust Fund (a trust fund established 

by the government of Tonga) invest $20 million with a newly established 

C-3 
company that sold investments in viatical contracts. Bogdonoff falsely told 

the trustees that this investment carried “no market risk,” despite the risk that 

the Tonga Trust Fund could lose all of its investment. 

13. SEC v. Viatical Capital, Inc., d/b/a Life Settlement Network, Life Investment 

Funding Enterprises, Inc., Charles Douglas York, and Robert Kingston 

Coyne, Litigation Release No. 18346 (September 11, 2003). 

• Defendants engaged in a scheme to solicit investments in various limited 

liability companies that invested in viatical settlements. Many of the viatical 

settlements in Viatical Capital’s portfolio were fraudulently obtained and were 

acquired from an unlicensed viatical settlement provider. 

14. SEC v. Frederick C. Brandau, Raphael “Ray” Levy and Jeffrey Paine, 

Litigation Release No. 16546 (May 9, 2000). 

• The SEC sought permanent injunctions, civil penalties and disgorgement from 

defendants who engaged in a massive Ponzi scheme defrauding over 5000 

investors nationwide of between $80 million to $130 million. Levy offered 

and sold viatical investments on behalf of Brandau and Financial Federated, 

who purported to purchase life insurance policies from terminally-ill viators at 

a discount. The viatical investments were touted to be, among other things, 

fully secured, non-speculative financial investments which paid a 42% return 

on a 36-month investment. However, unbeknownst to the investors, Brandau 

and Financial Federated only purchased approximately $6.5 million worth of 

insurance policies and misappropriated the remaining funds. 

15. In the Matter of Philip A. Lehman and Tower Equities, Inc., Securities Act of 

1933 Release No. 7889 (September 7, 2000), AP File No. 3-10024. 

• The Commission instituted public administrative proceedings and cease and 

desist proceedings against Defendants Philip A. Lehman and Towers Equities 

for making various misrepresentations of material facts including that Tower 

Venture would invest loan proceeds in viatical insurance policies for which 

investors could expect to earn a return of approximately 33% after one year. 

Since the defendants had no agreements with any viatical companies to 

purchase viatical insurance policies, they had no reasonable basis for this 

representation. 

16. SEC v. Thomas J. Kearns, individually and doing business as Financial 

Associated Service, and Kearns Financial Services, Inc., Litigation Release 

No. 16610 (June 26, 2000). 

• TRO, asset freeze and other expedited action against Kearns individually and 

doing business as Financial Associated Service, and Kearns Financial 

Services. Kearns sold insurance and insurance-related products to seniors, 

C-4 
C-5 

establishing a relationship of trust with them and gaining access to 

information regarding their assets and financial condition. He then solicited 

them to invest in promissory notes, annuities, viatical settlements and other 

investments. 

17. SEC v. David W. Laing and PCO, Inc., d/b/a Personal Choice Opportunities, 

Litigation Release No. 15558 (November 13, 1997). 

• The SEC charged defendants with fraudulently obtaining approximately $95 

million from investors nationwide by promising them substantial profits 

through the company’s purchases of viatical settlements. Rather than 

investing in the viatical settlements, however, the defendants misappropriated 

the investors’ funds. 

18. In the Matter of Michael D. Gibson, Gregory C. Moore, Jay D. Liebowitz 

and David McClure, Respondents, Securities Exchange Act Release No. 38539 

(April 22, 1997), AP File No. 3-9124. 

• Defendant David McClure, a registered principal and vice president of the 

O.N. Equities Sales Company settled to charges that he failed reasonably to 

supervise Michael D. Gibson who was misrepresenting his involvement with 

viatical settlements. 

19. SEC v. Life Partners, Litigation Release No. 14209 (August 25, 1994). 

• SEC alleged that the defendants violated the antifraud and securities 

registration and reporting requirements in the sale of viatical securities. On 

appeal, the DC Circuit held that the investments were not securities. 
Appendix D: FINRA Enforcement Actions

1. Patrick Allen Thomas (CRD #1668667, Registered Representative, Huntington 

Beach, California) submitted a Letter of Acceptance, Waiver, and Consent in 

which he was barred from association with any NASD member in any capacity. 

Without admitting or denying the allegations, Thomas consented to the described 

sanction and to the entry of findings that he participated in private securities 

transactions without providing prior written or oral notification to, and receiving 

approval from, his member firm. (NASD Case #C02020058) 

http://www.finra.org/web/groups/industry/@ip/@enf/@da/documents/disciplinary

actions/p007451.pdf

2. Gary Allen Hanson (CRD #1909594, Registered Representative, Colorado 

Springs, Colorado) submitted a Letter of Acceptance, Waiver and Consent in 

which he was suspended from association with any FINRA member in any 

capacity for nine months. In light of Hanson’s financial status, no monetary 

sanctions have been imposed. Without admitting or denying the findings, Hanson 

consented to the described sanction and to the entry of findings that, while 

associated with a member firm, he participated in outside business activities, for 

commissions and compensation, and failed to provide the firm with prompt 

written notice. The suspension is in effect from February 17, 2009, through 

November 16, 2009. (FINRA Case #2007010999601) 

http://www.finra.org/web/groups/industry/@ip/@enf/@da/documents/disciplinary

actions/p118481.pdf

3. Steven Ernest Henley (CRD #4262164, Registered Representative, Caldwell, 

Idaho) submitted a Letter of Acceptance, Waiver and Consent in which he was 

suspended from association with any NASD member in any capacity for three 

months. Without admitting or denying the allegations, Henley consented to the 

described sanction and to the entry of findings that he participated in an outside 

business activity for compensation without giving his member firm prompt 

written notice. Henley’s suspension began November 21, 2005, and will conclude 

at close of business February 20, 2006. (NASD Case #E3B20030307-01) 

http://www.finra.org/web/groups/industry/@ip/@enf/@da/documents/disciplinary

actions/p015733.pdf

4. Leonard Levite Daigle (CRD #2722527, Registered Representative, Grand 

Rapids, Minnesota) submitted a Letter of Acceptance, Waiver and Consent in 

which he was suspended from association with any NASD member in any 

capacity for six months. In light of Daigle’s financial status, no monetary sanction 

was imposed. Without admitting or denying the findings, Daigle consented to the 

described sanction and to the entry of findings that he engaged in private 

securities transactions and failed to provide his member firm with detailed written 

D-1 
notice of the transactions and his proposed role therein, and without receiving 

prior written approval from his member firm to engage in the transactions. The 

suspension in any capacity is in effect from September 5, 2006 through March 4, 

2007. (NASD Case #20050001401-01) 

http://www.finra.org/web/groups/industry/@ip/@enf/@da/documents/disciplinary

actions/p017398.pdf

5. Dennis Scott Comerford (CRD #51684, Registered Representative, Fort Worth, 

Texas) submitted a Letter of Acceptance, Waiver and Consent in which he was 

barred from association with any NASD member in any capacity. Without 

admitting or denying the findings, Comerford consented to the described sanction 

and to the entry of findings that he participated in private securities transactions, 

for compensation, without providing prior written notice to, and obtaining 

approval from, his member firm. The findings also stated that Comerford failed to 

timely respond to NASD requests for information. (NASD Case 

#2005001351601) 

http://www.finra.org/web/groups/industry/@ip/@enf/@da/documents/disciplinary

actions/p018298.pdf

6. Berri Grove Powers (CRD #366851, Registered Representative, McMurray, 

Pennsylvania) submitted a Letter of Acceptance, Waiver, and Consent in which 

he was barred from association with any NASD member in any capacity. Without 

admitting or denying the allegations, Powers consented to the described sanction 

and to the entry of findings that he engaged in business activities, for 

compensation, outside the scope of his employment with a member firm and 

failed to provide prompt written notice to the firm. The findings also stated that 

Powers failed to respond to NASD requests for information. (NASD Case 

#C9A010030) 

http://www.finra.org/web/groups/industry/@ip/@enf/@da/documents/disciplinary

actions/p007517.pdf

7. David Lloyd Garver (CRD #1027088, Registered Representative, Lebanon, 

Pennsylvania) submitted a Letter of Acceptance, Waiver, and Consent in which 

he was suspended from association with any NASD member in any capacity for 

three months. In light of the financial status of Garver, no monetary sanction has 

been imposed. Without admitting or denying the allegations, Garver consented to 

the described sanction and to the entry of findings that he engaged in an outside 

business activity, for compensation, without providing prompt written notice to 

his member firm. Garver’s suspension began April 5, 2004, and will conclude 

July 4, 2004. (NASD Case #C9A040004) 

http://www.finra.org/web/groups/industry/@ip/@enf/@da/documents/disciplinary

actions/p007434.pdf

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8. Steven John Balog (CRD #857771, Registered Principal, Woodbine, Maryland) 

submitted a Letter of Acceptance, Waiver and Consent in which he was barred 

from association with any NASD member in any capacity. Without admitting or 

denying the findings, Balong consented to the described sanction and to the entry 

of findings that he engaged in outside business activities, for compensation, 

without providing prompt written notice to his member firm. (NASD Case 

#E9A2004049802) 

http://www.finra.org/web/groups/industry/@ip/@enf/@da/documents/disciplinary

actions/p017184.pdf

9. Kevin John White (CRD #2219143, Registered Principal, Hudson, New York) 

submitted a Letter of Acceptance, Waiver and Consent in which he was fined 

$5,000, suspended from association with any NASD member in any capacity for 

six months and ordered to disgorge $32,000 in commissions in partial restitution 

to public customers. The fine and restitution amounts must be paid before White 

reassociates with any NASD member firm following the suspension, or before 

requesting relief from any statutory disqualification. Without admitting or 

denying the findings, White consented to the described sanctions and to the entry 

of findings that he participated in private securities transactions without providing 

prior written notice to, or obtaining prior written approval from, his member firm. 

The suspension in any capacity will be in effect from September 5, 2006 through 

March 4, 2007. (NASD Case #2005003211201) 

http://www.finra.org/web/groups/industry/@ip/@enf/@da/documents/disciplinary

actions/p017654.pdf

10. DOE v. Fergus, Blake and Devine, Complaint No. C8A990025, 2001 NASD 

Discip. LEXIS 3 (NAC 2001) – NAC Decision 

• Registered representatives engaged in private securities transactions without 

providing prior written notice to and obtaining prior written approval from the 

NASD member firm with which they were associated. Held, findings affirmed 

and sanctions modified. 

• We called this matter pursuant to NASD Rule 9312 to review the findings and 

sanctions of the June 13, 2000 decision of an NASD Regulation, Inc. ("NASD 

Regulation") Hearing Panel against respondents Timothy James Fergus 

("Fergus"), Frank Thomas Devine ("Devine"), and Richard Alan Blake 

("Blake"). We affirm the Hearing Panel's findings that Fergus, Devine, and 

Blake engaged in private securities transactions without providing prior 

written notification to and obtaining approval from their employer, in 

violation of Conduct Rules 3040 and 2110. We modify the Hearing Panel's 

sanctions by increasing the suspension period for each respondent and 

otherwise affirm the remaining sanctions. Accordingly, we order that Fergus 

D-3 
pay an $8,000 fine, be suspended for 60 days in any capacity, and requalify by 

examination as an investment company and variable contracts products 

representative; that Devine pay a $34,825.42 fine ($25,000 plus disgorgement 

of $9,825.42 in commissions), be suspended for 90 days in any capacity, and 

requalify by examination as an investment company and variable contracts 

products representative; and that Blake pay a $35,000 fine, be suspended for 

180 days in any capacity, and requalify by examination as an investment 

company and variable contracts products representative. We also order the 

respondents each to pay $1,414.28 in costs imposed by the Hearing Panel.

http://www.finra.org/web/groups/industry/@ip/@enf/@adj/documents/nacdecisio

ns/p007026.pdf

11. DOE v. Avery, Complaint No. C8A020032, 2003 NASD Discip. LEXIS 7 

(Office of Hearing Officers Decision 2003) 

• Respondent is suspended from association with any member firm in any 

capacity for 90 days and ordered to disgorge commissions in the amount of 

$28,559 for participating in private securities transactions and outside 

business activities, for compensation, without giving prior written notice to 

the NASD member firm with which he was associated, in violation of NASD 

Conduct Rules 2110, 3030, and 3040. 

http://www.finra.org/web/groups/industry/@ip/@enf/@adj/documents/ohodecisio

ns/p006543.pdf

12. DOE v. Thomas Gorter, Complaint No. C8A040014. 

• Thomas Joseph Gorter (CRD #1008601, Registered Representative, 

Brandenburg, Kentucky) submitted an Offer of Settlement in which he was 

fined $5,000 and suspended from association with any NASD member in any 

capacity for two months. Without admitting or denying the allegations, Gorter 

consented to the described sanctions and to the entry of findings that he 

participated in private securities transactions in which he neglected to give 

written notice to his employing NASD member firm, and failed to receive 

written approval from his firm prior to engaging in such activity. Gorter’s 

suspension began December 19, 2005, and will conclude at the close of 

business on February 18, 2006. (NASD Case #C8A040114/E8A2002095903) 

http://www.finra.org/web/groups/industry/@ip/@enf/@da/documents/disciplinary

actions/p015857.pdf

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D-5 

13. DOE v. Donald Kiley, Complaint No. 20050033124. 

• Donald Walter Kiley (CRD #2630201, Registered Representative, De 

Pere, Wisconsin) submitted an Offer of Settlement in which he was fined 

$5,000 and suspended from association with any FINRA member in any 

capacity for three months. Without admitting or denying the allegations, Kiley 

consented to the described sanctions and to the entry of findings that he 

received $20,382.07 in compensation for participating in the sale of life 

settlements totaling $160,601.24, and failed to give prior written notice to, or 

receive prior written approval from, his member firm. The findings stated that 

the compliance manual for Kiley’s member firm explicitly prohibited the sale 

of viatical and life settlements. The suspension is in effect from February 2, 

2009, through May 1, 2009. (FINRA Case #2005003312401)

http://www.finra.org/web/groups/industry/@ip/@enf/@da/documents/disciplinaryacti

ons/p118153.pdf
Appendix E: Charts Comparing the NAIC and NCOIL Model Acts

 

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