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To date, there has been very little federal life settlement regulation, and only 8 states remain unregulated and have not adopted one of the two models – NAIC or NCOIL. The lack of federal licensing requirements and life settlement regulations may discourage owners of life insurance from considering life settlements as they are unsure as to which life settlement provider to trust.  Owners currently have to rely on brokers or their own research to protect themselves in determining which life settlement companies are legitimate or not.

Fortunately, it appears that the tide may be changing.  Brian Casey, attorney partner for Locke Lord LLP and co-leader of the regulatory and transactional insurance practice, has recently reported on new proposed anti-laundering rules.  On August 25, 2015, the Financial Crimes Enforcement Network bureau of the U.S. Treasury Department issued proposed federal regulations requiring that anti-money laundering programs be established and reporting for suspicious activity under the Bank Secrecy Act be implemented for investment advisors registered with the U.S. Securities and Exchange Commission (SEC).

What Would New Anti-Money Laundering Regulations Mean for Life Settlement Regulation?

Life Settlement Investment Fund Managers that are, or are required to be, registered with the SEC would be legally mandated to:

• Develop effective anti-money laundering programs similar to those already required for banks and other financial institutions, designed to prevent the facilitation of money laundering or the financing of terrorist activities
• Report all suspicious activity under the Bank Secrecy Act

Non-compliance of these requirements would result in the same civil and criminal penalties applicable to banks, including substantial fines and imprisonment.

How Would New Life Settlement Regulation Affect Life Insurance Owners?

The proposed anti-laundering rules target the investment side of the life settlement industry.  Once you decide to sell your life insurance for cash, life settlement providers purchase the policies utilizing funds secured from investors who ultimately benefit from future payouts.  The new regulations would therefore apply to the life settlement providers who purchase the policies and the investors who fund these transactions, requiring more stringent compliance measures to ensure good faith operations.

Although not directly impacting life insurance owners, the new anti-laundering rules would have the benefit of providing increased protection and confidence in the sale of policies to entities that would become highly regulated.

Are All Life Settlement Fund Managers Required to Register with the SEC?

No.

Non-exempted Life Settlement Fund Managers for funds that own any interests in a variable or non-variable life insurance policy are considered investment advisers who must register with the SEC.  This includes the scenario wherein there is a temporary investment of nominal amounts in securities being held for future premium payments.

Life Settlement Fund Managers for non-variable life insurance policies that do not ever buy, hold, or sell any securities are not considered investment advisers and are therefore not required to register with the SEC.  However, these Fund Managers may opt to register voluntarily for elevated marketing opportunities or brand credibility.  It is important to note that under the new proposed rules, all Fund Managers registered with the SEC are required to comply – even if they registered voluntarily.

When Would the Proposed Anti-Money Laundering Rules Go Into Effect?

The public comment period for the proposed anti-money laundering rules ends on November 2, 2015, at which time an effective date may be scheduled as appropriate.  If the rules are implemented, impacted Life Settlement Fund Managers will be required to comply within six months.  This means that anti-money laundering programs and suspicious activity reporting may need to be in effect as soon as May 2016.

These proposed rules highlight the national attention that the life settlement industry is receiving, potentially leading to additional future life settlement regulations designed to better protect consumer and national interests.  This is all good news for individuals who have considered life insurance settlements, yet have remained tentative due to a lack of federal regulation.