Source: https://s2kmblog.typepad.com/rethinking_structured_set/model_structured_settlement_protection_act/
Timestamp: 2019-04-21 09:07:23+00:00

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In an August 2, 2012 blog post titled "Uniform Fiduciary Standards Only Half the Story", John Darer offers the following critique of this earlier S2KM blog post: "It's a pity that an otherwise well written blog post by Patrick Hindert about Uniform Fiduciary Standards, unexplainably omits standards for the secondary market."
S2KM's blog post addressed the following issue: "What impact will a new uniform fiduciary standard, being developed by the Securities and Exchange Commission (SEC) as one result of the Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), have upon existing structured settlement and settlement planning business models and practices?"
Conflicts of interest - without written, informed client and/or customer consent.
John's blog post makes two valid points. First, that S2KM's blog post ignored secondary market standards. Second, despite enactment of IRC section 5891 and state structured settlement protection statutes, bad business practices continue to exist in the secondary market. John's blog post identifies several such practices.
By "setting aside the good players", however, John's blog post spotlights existing bad business practices but does not identify or address secondary structured settlement market business standards. What are those secondary market standards - and how do (or should) these standards impact the primary market?
Looking specifically at the "uniform fiduciary standard" (the subject of the S2KM blog post in question), the related secondary market standard is the "best interest" test. There are three sources that establish and/or address this secondary market standard: 1) IRC section 5891; 2) the state structured settlement protection statutes; and 3) judicial interpretations of the "best interest" standard.
IRC section 5891 imposes a 40 percent excise tax on any person who acquires structured settlement payment rights in a factoring transaction. The excise tax, however, does not apply if the transfer is approved in advance in a "qualified order" issued under an applicable state statute by an applicable state court.
Is in the best interest of the payee, taking into account the welfare and support of the payee’s dependents.
Forty-seven states have enacted some form of structured settlement protection act. While the various state SSPAs lack uniformity, most adopt the same terminology and share the same basic legislative scheme as the Model SSPA. Echoing IRC section 5891, the state SSPAs provide that structured settlement payment rights transfers are not effective unless they receive advance court approval. Under each of the state SSPAs, key terms are defined, procedures for obtaining court approval are spelled out, and required notices, disclosures and findings are established.
"Although the [New York] statute does not define the best interests of the Payee, developing case law and the intent of the statute suggest the Court should consider: (1) the Payee’s age, mental capacity, physical capacity, maturity level, independent income, and ability to support dependents; (2) purpose of the intended use of the funds; (3) potential need for future medical treatment; (4) the financial acumen of the Payee; (5) whether the Payee is in a hardship situation to the extent that he or she is in “dire straits”; (6) the ability of the payee to appreciate financial consequences based on independent legal and financial advice; [and] (7) the timing of the application."
What relevance, if any, therefore, does the secondary structured settlement market "best interest" standard have as primary market stakeholders contemplate the potential impact of a uniform fiduciary standard under the Dodd-Frank legislation?
Neither IRC 5891 nor any of state SSPAs apply their "best interest" test to primary market structured settlement sales. Only four of the state SSPAs (New York, Florida, Massachusetts and Minnesota) establish any primary market sales standards, each requiring certain mandatory written disclosures.
The secondary market "best interest" test, however, does raise important issues for the primary structured settlement markets. Most importantly, If structured settlement transfers are required to be in "the best interest of the payee, taking into account the welfare and support of the payee's dependents", why shouldn't a "best interest" test or fiduciary standard apply to the original structured settlement sale?
Thank you, John Darer, for pointing out the importance of this issue.
S2KM reports about Professional Association Meetings including the National Association of Settlement Professionals (NASP).
For S2KM's 2006 analysis of "How the Primary Market Views Factoring", see this concept map.
Is the National Structured Settlement Trade Association (NSSTA) guilty of hypocrisy when it prohibits its members from "actively soliciting and promoting structured settlement factoring transactions to individuals who are receiving periodic payments under structured settlements?"
NSSTA repeated its prohibition this week in a letter to members which NSSTA first distributed in 2006. NSSTA justifies its prohibition because NSSTA's Board of Directors consider structured settlement factoring transactions incompatible with NSSTA's mission. The primary mission of NSSTA, which appears in the NSSTA bylaws but not on the NSSTA website, is "to promote the establishment and preservation of structured settlements in order to provide long-term financial security to personal injury claimants and their families through periodic payment of compensation."
How could NSSTA's prohibition against promoting structured settlement factoring transactions be considered hypocrisy?
NSSTA's letter to its members identifies some of the types of factoring-related activities its Board of Directors has identified as incompatible with its mission. Conspicuous by their absence are: 1) purchasing structured settlement payment rights; 2) lobbying to enact structured settlement factoring legislation; and 3) amending model industry documents to facilitate factoring transactions.
It is common knowledge within the industry that multiple structured settlement annuity providers (NSSTA members), or their affiliates, are active purchasers of structured settlement payment rights after those payment rights have been securitized by structured settlement factoring companies. NSSTA, however, has made no apparent attempt to investigate and/or punish members who promote structured settlement factoring as purchasers thereby helping to generate demand.
NSSTA itself helped to legitimize and promote the growth of the structured settlement secondary market when it collaborated with the National Association of Settlement Purchasers (NASP) to draft and lobby in favor of IRC section 5891 and the Model State Structured Settlement Protection Act. Coincidentally, both the primary structured settlement market and the secondary structured settlement factoring market experienced rapid growth following the 2001 enactment of these enabling laws.
ii. Sold, assigned, pledged, hypothecated or otherwise transferred or encumbered, either directly or indirectly unless such sale, assignment, pledge, hypothication or other transfer or encumbrance .... has been approved in advance in a "Qualified Order" as defined in Section 5891(b)(2) of the Code (a "Qualified Order") and otherwise complies with applicable state law, including without limitation any applicable state structured settlement protection statute."
Having recognized and facilitated an historic change in structured settlement law, that NSSTA itself helped to enact, by amending a key section of NSSTA's core model settlement document, NSSTA's Board of Directors consciously and strategically failed to take one more critical step. They failed to reconcile NSSTA's mission with a legislative change that fundamentally redefined the structured settlement business.
As a consequence of continuing to promote a mission no longer in sync with existing laws, NSSTA has trapped itself and its members in a strategic dilemma of its own creation. NSSTA should be encouraging its members to utilize the new laws to improve their products and grow their market. Instead, NSSTA selectively proscribes legal activities and restricts innovation that cross an artificial behavioral line of NSSTA's own design. And for what strategic purpose?
So, as primary structured settlement sales plummet and secondary market structured settlement sales soar, is the attitude of NSSTA's Board of Directors toward structured settlement factoring stubbornly hypocritical or strategically challenged or both?
Highlighting a year during which the secondary structured settlement market is exceeding previous annual transfer totals, the National Association of Settlement Purchasers (NASP) cautiously celebrated its seventh Annual Meeting November 9-11, 2011 in Las Vegas with record conference attendance including member company representatives, affiliate attorneys and invited guests.
Recognizing its legislative successes, NASP honored its Executive Director Earl Nesbitt for his past lobbying efforts by awarding him with NASP's 2011 Alexander Hamilton Award. Nesbitt represented NASP in helping to enact Internal Revenue Code section 5891 and the Model State Structured Settlement Protection Act upon which are based most of the related state structured settlement protection statutes.
NASP President Matthew Bracy additionally praised NASP's founders stating: "Through their vision, guts and determination, we have not only persevered but flourished. Today NASP celebrates the fact that structured settlement recipients, in compliance with federal and state laws, have the right to sell their asset when needed."
Maintaining its tradition of inviting judges representing different states to speak, NASP's 2011 educational program featured a panel discussion of judges from New York (Honorable Judith McMahon), Texas (Honorable Alexandra Smoots-Hogan) and Mississippi (Honorable Denise Owens) moderated by Patricia LaBorde. Among other issues, the judges discussed how they interpret the "best interest" standard as well as their expectations for transfer company counsel, transfer documentation, disclosure of prior transfers and levels of proof in transfer cases.
Issues in Underwriting Structured Settlement Transactions.
Symetra v. Rapid - This ongoing litigation appears likely to be completed in 2011 with injunctions prohibiting Rapid Settlement's prior business practices of using arbitration to by-pass state structured settlement protection statutes and taking security interests to gain rights of first refusal for future transfers.
Conflicts between "incumbents" and "insurgents" in the secondary structured settlement market with a substantial portion of new transfers including individual investors not just institutional investors.
Confusion between transfers of structured settlement payment rights and "settlement liquidity" businesses involving other asset classes such as the increasing sale of veterans' benefits.
At least one (unnamed) annuity provider that refuses to release guaranteed payments to investors when a payee dies resulting in delays and legal costs for transfer companies.
Leonard Bernstein - Bernstein, a financial services regulatory attorney, presented separate discussions about how 1) Dodd-Frank and 2) advertising laws impact structured settlements. Although both discussions were directed toward a secondary market audience, each also contained valuable information for primary market participants.
Dodd-Frank - Bernstein's Dodd-Frank update focused on the Consumer Financial Protection Bureau (CFPB), a new federal agency . CFPB's central mission is "to make markets for consumer financial products and services work for Americans ....." Among its core functions are to take consumer complaints and to restrict unfair, deceptive or abusive acts or practices under the Federal consumer financial laws. Dodd-Frank provides CFPB with authorities that go beyond the existing consumer protection statutes. CFPB has broad authority to ask questions and demand information including consumer complaints. Dodd-Frank also establishes the Federal Insurance Office (FIO) with the authority to monitor all aspects of the insurance industry.
Advertising - Bernstein's advertising discussion referenced sections of the Better Business Bureau's Code of Advertising that could impact structured settlement purchasing transactions (or primary market transactions) by prohibiting advertisements which are untrue, misleading, deceptive, fraudulent, falsely disparaging of competitiors, or insincere offers including deception through omission. As one strategy to protect against false advertising, Bernstein recommended using disclaimers whose effectiveness depends upon their prominence and location.
Elizabeth Yingling - Yingling, a securities attorney, discussed how federal and state securities laws can impact structured settlements. In defining what constitutes a "security", Yingling focused on the meaning of an "investment contract" as that term was defined in SEC v. Howey, a 1946 U.S. Supreme Court decision. Yingling offered several practical tips for transfer companies to avoid the mine fields of the securities laws when marketing to individual investors and also emphasized the serious risks involved when dealing with unsophisticated investors.
Patrick Hindert - Hindert (author of S2KM's blog "Beyond Structured Settlements") provided a "Primary Market Report" addressing current industry challenges and issues. In addition to explaining why primary market annuity premium could fall below $5 billion for 2011, Hindert summarized the historical background and current status of Executive Life of New York (ELNY). The impact of the secondary structured settlement market on the ELNY liquidation has been underestimated in most ELNY reporting by primary market sources. According to reliable secondary market sources, however, payment rights from as many as 1000 of ELNY's remaining structured settlements are currently owned by secondary market companies and/or investors.
Joe Feltes - Feltes, an attorney whose clients include health care providers and whose legal expertise includes social media, e-mail and Internet use, spoke about privacy issues in structured settlement transactions. Based upon his research, Feltes expressed surprised at the paucity of information available about structured settlements and privacy issues. As one example, Feltes pointed out the Model State Structured Settlement Protection Act does not address privacy. Before seeking and transmitting private medical information about structured settlement candidates and/or recipients, Feltes recommended obtaining purpose-specific written authorization including a waiver and release. In addition to HIPAA, Feltes discussed the privacy provisions contain in Graham Leach Bliley.
Congratulations to NASP for continuing its high educational standards with an outstanding 2011 Annual Meeting. Conference Chairperson Patricia LaBorde prepared helpful and related handout summaries for several of the presentations.
For S2KM reporting about prior NASP annual meetings plus additional analysis about the ELNY liquidation, see the structured settlement wiki.
Among statutory definitions, "structured settlement" is defined in IRC 5891 (c)(1) and Section 2(m) of the Model State Structured Settlement Protection Act. Wikipedia offers an additional definition for "structured settlement". Financing diagrams provide a visual perspective for understanding traditional structured settlement financing alternatives and methodologies.
This transaction diagram demonstrates how, as an integrated product, structured settlements have become increasingly complex legally and financially with multiple stakeholders and documents.
One result of this increased integration and complexity has been the evolution of structured settlements from a stand alone product into a core product for a more comprehensive profession called "settlement planning" - which some participants refer to alternatively as "settlement consulting" or "special needs settlement planning".
Although no statutory or standard definitions exist for settlement planning, leading practitioners and advocates, including Jack Meligan and Joseph DiGangi, have offered their own definitions and explanations. In addition, the Society of Settlement Planners (SSP) has adopted the "Standards of Professional Conduct for Settlement Planners" and offers a Registered Settlement Planner (RSP) certification program.
"Settlement Planning is the modern day [holistic] approach to assisting personal injury (and other types of) claimants with the personal, and highly unique, financial planning decisions surrounding the settlement of their claim.
"Settlement Planning starts from the premise that structured settlements are not the answer to everything that everyone needs or wants to do with their settlement dollars.
"Using that as a starting point, the first in a long line of questions for any personal injury claimant to answer is: 'What do you want this settlement to accomplish for you? What is the most important thing? Then, what is the, second most important, third most important, etc'.
"Only after you, as the claimant, answer the question above should you really begin to craft a plan to help you reach those goals."
DiGangi spoke about "settlement consulting" at the 2009 Winter Meeting of the National Structured Settlement Trade Association (NSSTA).
In what he termed "a wake up call for the industry", DiGangi criticized the traditional structured settlement business model and knowledge standards.
He also outlined his vision for industry transition, improvement and growth which he termed "comprehensive settlement consulting".
DiGangi characterized the current structured settlement industry as "a stagnant market" based upon an outdated "annuity broker" business model. Structured settlement clients and competitors, according to DiGangi, share negative perceptions about structured settlement consultants. As examples of negative perceptions, DiGangi cited the industry's single product offering and limited knowledge base.
As an alternative to the "annuity broker" structured settlement business model, DiGangi proposed a "consultant" model with multiple products and services providing added value for, and with, other settlement stakeholders.
Comprehensive skill sets and knowledge base.
During his 2009 NSSTA presentation, DiGangi also highlighted several transitional issues: licensing; conflicts of interest; collaboration models; and work process infrastructure.
S2KM will summarize and evaluate how SSP and NSSTA addressed "settlement planning" during their 2011 Annual Meeting educational conferences in a subsequent and related blog post.
Timothy Morbach of The Settlement Services Group (TSSG) developed the linked diagrams in this blog post. TSSG is an affiliate and strategic partner of S2KM Limited. Viewers can enlarge the diagrams to improve their visibility.
The Society of Settlement Planners (SSP) and the National Structured Settlement Trade Association (NSSTA) hosted sequential annual meetings the week of April 26 in Washington, D.C. This blog post begins S2KM's reporting about those meetings.
SSP's meeting (titled "Securing the Financial Needs of Injury Victims and their Families") was notable for the diversity of attendees, topics and viewpoints. Several NSSTA members were among the attendees as well as settlement planning and secondary market attorneys, annuity and trust providers, primary and secondary market intermediaries, authors, bloggers and law students.
A definitive history of structured settlement insolvencies - annuities and bond trusts.
An allegorical lesson about how to jump start structured settlement annuity sales.
Kevin Mack, former Director of Travelers' structured settlement program and former Chairman of NSSTA's legal committee, offered insights to "in-house" structured settlement programs. Mack made several recommendations for growing and improving the structured settlement industry including: more plaintiff intermediaries; improved education for judges and plaintiff attorneys; plus mandatory "disclosure" of structured settlement compensation and conflicts of interest.
Outlined current "state of the art" for settlement planning.
Richard Risk moderated SSP's settlement planning tax panel headlined by Sylvius von Saucken and Peter Wayne. von Saucken and Wayne responded to a series of Risk's questions addressing qualified settlement funds (QSFs), commutations, estate taxes, punitive damages, non-qualified assignments and sexual battery tax requirements among other issues.
Texas attorney Phillip McCrury surveyed state laws for judicial approval of minors' settlements. Common features in many states: "best interest" test; prohibitions against conflicts of interest; segregated accounts; guardian ad litems; and "reasonableness" of attorney fees.
Mark Popolizio reported on Section 111 of the Medicare, Medicaid and SCHIP Extension Act of 2007 (MMSEA). Popolizio summarized the new CMS NHGP User Guide and addressed reporting triggers, deadlines and issues for "responsible reporting entities" (RREs).
Eric Nordman, Research Director for the NAIC, discussed "life insurance insolvencies". Nordman summarized historic data and warned about future issues including systemic risks and the challenge of defining "transparency".
Christi Fried and David Eichenbaum spoke about settlement trusts and settlement planning software respectively. Tim Nay's presentation about "special needs trusts" outlined relevant laws and added practical advice and perspective.
Anthony Alfieri's "Litigation and Legislative Update" summarized Spencer v. Hartford; the PLR for non-qualified assignments; plus the Fresno County and Rapid Settlement factoring cases among other topics.
John Bowman, Director of Federal Relations for the American Association for Justice (AAJ), discussed how the 2008 elections have impacted AAJ's political priorities. One primary AAJ objective: keep medical malpractice out of anticipated health care reform.
Patrick Hindert, Managing Director of S2KM Limited, offered strategic analysis about the current settlement planning industry.
Congratulations to SSP, and especially Greg Maxwell, Joseph Tombs, Richard Risk and Rhonda Bentzen, for their continuing high education and annual meeting standards.
Analyze and compare the settlement planning and structured settlement industries.
Hartford has conducted a structured settlement program called "Secured Benefit Services" (SBS) since 1992 that violates the federal Racketeer Influenced and Corrupt Organizations Act (RICO) as well as state laws prohibiting fraud.
Hartford began a "Broker Assistance Program" (BAP) in 1997 using structured settlement brokers selected by Hartford, who are not named as defendants in the civil class action, to further the mission of the SBS program.
The case is currently on appeal to the U.S. Second Circuit Court of Appeals following a March 10, 2009 decision by the U.S. District Court in Bridgeport, Connecticut granting plaintiffs' Motion for Class Certification and Appointment of Class Counsel .
Spencer v. Hartford - 1 summarizes the case to date including chronology, participants, plaintiffs' allegations, District Court decision and defendants' Petition for Appeal.
Spencer v. Hartford - 2 provides S2KM commentary about the plaintiffs' allegations, potential damages, the NSSTA Code of Ethics, and selected educational discussions from the NSSTA 2009 Winter Meeting.
Will the plaintiffs' RICO and state fraud allegations in Spencer v. Hartford be adjudicated or settled?
How does Hartford, recognized as "one of the World's Most Ethical Companies" and honored for "its products, services, research, philanthropy, and programs supporting individuals with disabilities" justify its SBS and BAP structured settlement programs?
Did any Hartford employees or participating structured settlement intermediaries (incorrectly called "brokers') question the legality of the SBS and BAP programs?
Has any structured settlement intermediary, defendant or plaintiff, in any Hartford case ever refused to share or receive annuity commissions from Hartford on account of the SBS and BAP programs?
Will federal authorities initiate criminal RICO charges against Hartford and the structured settlement intermediaries who participated in Hartford's SBS and BAP programs?
Should federal officials consider Spencer v. Hartford if and when Hartford applies for TARP funds?
Should trial attorneys who originally represented Spencer v. Hartford plaintiffs in structured settlements with Hartford be held accountable for their incompetency, lack of due diligence, or poor advice?
How widespread among insurance companies and structured settlement intermediaries are Hartford's allegedly illegal structured settlement business practices?
Does Spencer v. Hartford reveal a continuing pattern of industry business behavior consistent with allegations in prior lawsuits such as Weil v. Manufacturers and Macomber v. Travelers?
What lessons, if any, will the structured settlement industry learn from Spencer v. Hartford?
What, if anything, about Spencer v. Hartford causes "shocked disbelief" among structured settlement stakeholders - to borrow a term and line of inquiry from Father Oliver Williams' Ethics Course at the NSSTA 2009 Winter Meeting.
Will Spencer v. Hartford promote the structured settlement industry "wake-up call" Joseph DiGangi recommended when he criticized the traditional business model during his "settlement consulting" discussion at the NSSTA 2009 Winter Meeting?
Structured settlements are complex and involve many federal and state laws and potential long-tail legal and financial liabilities.
If you are a structured settlement participant and/or stakeholder, you should understand, obey and help improve the laws.
The traditional structured settlement business model ("claim management") is inherently flawed and promotes conflicts of interests which are rarely identified, discussed or disclosed.
Structured settlement compensation arrangements and relationships generally are not disclosed.
Most plaintiff trial attorneys lack professional competence to advise their clients about settlement issues.
Structured settlement stakeholders are not capable of self-regulation.
The NAIC and state insurance regulators are not capable of regulating structured settlements or settlement planning under current laws, regulatory authority and budgets.
Better integrate structured settlement laws with Social Security, Medicare, Medicaid, Veterans' benefits; and Federal housing laws.
Defendants' first priority in structured settlement cases should be to obtain a full legal release.
Re-organize and re-focus their structured settlement business models, objectives, procedures and partners.
Secondary life and annuity markets.
Feature and promote structured settlements as a strategic component for settlement planning learning, certification, products and business standards.
Identify settlement planning knowledge experts and learn about their expertise, work product, professional associations, online communities, networks and learning resources.
Design new business models utilizing, and compatible with, existing and emerging Internet technologies as well as new settlement planning laws and products.
Organize, promote and participate in community service activities with and for disability associations.

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