State insurance regulators are responsible for enforcing state insurance laws and regulations. They oversee the insurance industry through the licensing of agents, approval of insurance products and their rates, and examination of insurers’ financial solvency and market conduct. The National Association of Insurance Commissioners (NAIC) assists state regulators with various oversight functions, including maintaining databases and coordinating regulatory efforts by providing guidance, model laws and regulations, and information-sharing tools. Federal and state securities regulators oversee the securities markets, in part to protect investors. The U.S. securities markets are subject to a combination of industry self-regulation (with the Securities and Exchange Commission’s (SEC) oversight) and direct SEC regulation. This regulatory scheme was intended to relieve resource burdens on SEC by giving self- regulatory organizations, such as the Financial Industry Regulatory Authority (FINRA), responsibility for most of the daily oversight of the securities markets and broker-dealers under their jurisdiction. In addition, state securities regulators administer state securities laws and regulations, which include registering nonexempt and noncovered securities before they are marketed to investors; licensing broker-dealers, investment advisers, and their agents; and taking anti-fraud and other enforcement actions. Over the years, we have made a number of recommendations to encourage state regulators to implement a consistent set of insurance regulations. Given the difficulties of harmonizing insurance regulation across states through the NAIC-based structure, we reported that Congress could consider the advantages and disadvantages of providing a federal charter option for insurance and creating a federal insurance regulatory entity. We also recently developed a framework comprised of nine elements to help Congress and others evaluate proposals for financial regulatory reform. One of these elements is consistent consumer and investor protection: market participants should receive consistent, useful information, as well as legal protections for similar financial products and services, including disclosures, sales practice standards, and suitability requirements. Another element is consistent financial oversight: the regulatory structure should ensure that similar institutions and products are subject to consistent regulation, oversight, and transparency, in part to help minimize negative competitive outcomes. The life settlement market is organized largely as an informal network of specialized intermediaries that facilitate the sale of existing life insurance policies by their owners to third-party investors. Policy owners may sell their policies directly to investors in some cases, but owners and investors commonly use intermediaries to assist them with their life settlement transactions. Life settlement brokers represent policy owners for a fee or commission and may solicit bids for policies from multiple life settlement providers with the goal of obtaining the best price. Life settlement providers buy life insurance policies on behalf of investors for a fee or commission or for their own account. The number of brokers and providers varies widely from state to state. No comprehensive data exist on the size of the life settlement market, but estimates and other data indicate that the market grew rapidly from its inception around 1998 until the recent financial crisis. Industry estimates of the total face value of policies settled in 2008 ranged from around $9 billion to $12 billion. Life settlement providers responding to our survey reported purchasing policies with a total face value of around $5.50 billion, $9.03 billion, $12.95 billion, and $7.01 billion in 2006, 2007, 2008, and 2009, respectively. Life settlements traditionally have involved high-dollar- amount policies insuring older Americans. Individuals and financial institutions, including some banks, hedge funds, and life insurance companies, have invested in life settlements by buying individual policies, fractionalized interests in individual policies, interests in pools of policies, or other products. State insurance and securities regulators and federal securities regulators oversee various aspects of the life settlement market. Life settlements typically comprise two transactions: (1) the sale of a policy by its owner to a provider, which itself is the life settlement contract, and (2) the sale of a policy by the provider to an investor. The majority of states regulate the first transaction, called the front-end transaction, under their insurance laws. The second transaction, called the back-end transaction, is regulated under state and federal securities laws in certain circumstances. NAIC and the National Conference of Insurance Legislators have developed model acts to help states craft legislation to regulate viatical and life settlements. As of February 2010, 38 states had enacted insurance laws and regulations specifically to regulate life settlements—many based on one or both of the model acts. State insurance regulators generally focus on regulating the front-end transaction to protect policy owners, such as by imposing licensing, disclosure, reporting, and other requirements on brokers and providers. Although state insurance laws regulating life settlements generally share basic elements, we identified differences between state laws through our survey of state insurance regulators. State securities regulators and, in certain circumstances, SEC regulate investments in life settlements (the back-end transaction) to protect investors. Variable life policies are securities; thus, settlements involving these policies are securities subject to SEC’s and FINRA’s sales practice rules. SEC also has asserted jurisdiction over certain types of investments in life settlements of nonvariable, or traditional, life insurance policies, but their status as securities is unclear because of conflicting decisions from the U.S. Courts of Appeals for the District of Columbia and the Eleventh Circuit. In 2002, the North American Securities Administrators Association (NASAA) issued guidelines for states to regulate viatical and life settlement investments under their securities laws. According to NASAA and our independent research, all but two states regulate investments in life settlements as securities under their securities laws. Inconsistencies in the regulation of life settlements may pose a number of challenges. First, life settlements can provide policy owners with a valuable option, but policy owners in some states may be afforded less protection than policy owners in other states due to regulatory inconsistencies. Consequently, such policy owners may face greater challenges obtaining information needed to protect their interests. Twelve states and the District of Columbia have not enacted laws specifically governing life settlements, and disclosure requirements can differ among the states that have such laws. Based on our survey of state insurance regulators, state regulators have conducted a limited number of broker or provider examinations. For example, 24 of the 34 state regulators that had the authority to examine brokers licensed in their state had not done any such examinations in the past 5 years. Similarly, 22 of the 33 state regulators that had the authority to examine providers licensed in their state had not done so in the past 5 years. In addition to the lack of uniformity, policy owners in some states could complete a life settlement without knowing how much they paid their brokers or whether they received a fair price for their policies, unless such information voluntarily was provided to them. Second, some individual investors may face challenges obtaining adequate information about life settlement investments, including the risks associated with such investments. Because of the conflicting court decisions (noted previously) on whether investments in life settlements are securities and differences in state securities laws, individuals in different states investing in the same life settlement investment may be afforded different regulatory protections and receive different disclosures about their investments. Third, some life settlement brokers and providers may face challenges because of inconsistencies in laws across states. For example, two brokers and four providers told us that regulatory differences between states were burdensome or increased their compliance costs. Also, brokers and providers told us that some states have adopted laws that impede their ability to do business in those states. Because life settlements and related investments can have characteristics of both insurance and securities, their regulatory structure involves multiple state and federal regulators. State insurance regulators have played the primary role in protecting policy owners by regulating the sale of in-force policies by their owners to life settlement providers. In turn, state and federal securities regulators have played the primary role in protecting investors by regulating the sale of life settlement investments. We recently developed a framework for assessing proposals for modernizing the financial regulatory system. One element of that framework is consistent consumer and investor protection: market participants should receive consistent, useful information and legal protection for similar financial products and services, including disclosures, sales practice standards, and suitability requirements. Another element is consistent financial oversight: the regulatory structure should ensure that similar institutions and products are subject to consistent regulation, oversight, and transparency, in part to help minimize negative competitive outcomes. These two elements have not been fully achieved under the current regulatory structure of the life settlement market. First, not all states have enacted life settlement laws to provide policy owners with a minimum level of protection. Second, licensing, disclosure, and other requirements differ among some states with life settlement laws, resulting in different protections for different policy owners. Third, policy owners also can be afforded different protections, depending on whether the policy being sold is a variable policy subject to FINRA and federal sales practice rules or a nonvariable policy. Although variable policies, unlike nonvariable policies, expose their policy owners to investment risk, life settlements involving both types of policies generally raise the same potential risks for policy owners. A potential federal role in the regulation of insurance has been the subject of debate, which the current financial crisis has renewed. For example, the financial regulation reform legislation currently under consideration by Congress would, among other things, create a Federal Insurance Office, in part to monitor the insurance industry (other than health and crop insurance). The bill contains a provision directing the office to consult with states on matters of national importance and conduct a study on how to modernize and improve insurance regulation, including gaps in state regulation. In the last decade, we have made a number of recommendations to encourage state regulators to implement a consistent set of insurance regulations. In providing a framework for assessing proposals to modernize the financial regulatory system, we recently reported that Congress could consider the advantages and disadvantages of providing a federal charter option for insurance and creating a federal insurance regulatory entity because of the difficulties in harmonizing insurance regulation across states through the NAIC-based structure. As Congress continues to consider how best to reform the regulatory structure of the financial services sector, life settlements offer another example of products that may lack clear comprehensive regulation. Therefore, Congress may wish to consider taking steps to help ensure that policy owners involved in life settlement transactions are provided a consistent and minimum level of protection.