The Ontario Securities Commission is finally proceeding with five-year-old accusations against a company alleged to have engaged in marketing viatical settlements, which involve life insurance policies purchased from terminally ill patients.

For several years, the OSC and the province’s insurance regulator, the Financial Services Commission of Ontario, have struggled to impose their regulatory powers on viatical companies. If the OSC is successful against Waterloo, Ont.-based Universal Settlements International Inc. , it will establish that engaging in a secondary market for insurance policies is illegal under securities law.

The OSC has set Feb. 13 as the hearing date for its case. The commission will seek a cease-trade order against USI, as well as administrative costs for the investigation and hearing.

Along with the notice of hearing, released Jan. 16, the OSC released its statement of allegations. The OSC alleges that USI, while registered to do business in Ontario, was not registered in any capacity with the commission, and since 1999 “has carried on the business of selling viatical settlements in Ontario, other parts of Canada and abroad.”

The USI case dates back to 2001, when the Ontario Superintendent of Financial Services issued a notice of proposed cease-and-desist order against the company, alleging that Section 115 of the Insurance Act had been contravened.

Under the section, anyone other than an insurer or licensed agent who holds him- or herself out as a purchaser of life insurance policies or their benefits and “traffics or trades” in life policies to procure “the sale, surrender, transfer, assignment, pledge [to himself or any other person] is guilty of an offence.”

Despite the allegation that USI was engaged in the viatical industry in Ontario and, therefore, contravening the section, a FSCO tribunal ruled that USI’s viatical purchase program did not constitute “insurance undertaken in Ontario.” It found that USI markets viaticals originating in the U.S.: “USI neither markets, nor has it ever marketed, viatical settlement purchase programs that are based on Ontario life insurance policies or those of any other jurisdiction.”

The ruling left the OSC as the only regulatory body that might be able to regulate USI’s activities. The OSC moved forward based on the allegation that the sale of viaticals by USI in Ontario amounted to $1.5 million a year.

Right to investigate

USI has disputed the OSC’s ability to regulate its activities. In May 2003, however, the Ontario Superior Court gave the OSC the right to investigate USI’s practices, even though — as the court recognized in its decision — USI was not a reporting issuer or registrant under the act, and viatical settlements “are not distinctly described under the act.”

When questioned about the lack of progress in the case since the court’s decision, the OSC has steadfastly refused to comment.

Almost three years later, the OSC is finally moving forward.

Historically, regulatory concern about selling viaticals has been twofold: the vulnerability of the seller and fraud.

People selling their life insurance policies, usually seniors and the terminally ill, are vulnerable. Therefore, regulators are concerned that without proper regulation, the sellers will not be getting fair value for their policies.

In 2000, Ontario attempted to address the concern by amending its insurance statute and removing the anti-trafficking provisions for life insurance policies. The change was passed, but was subject to the introduction of new consumer-protection regulations. FSCO developed draft regulations, but they weren’t passed before the last Ontario election. The issue is not a project the current government is undertaking.

Insurance legislation in Nova Scotia, New Brunswick, Quebec and Saskatchewan does not prohibit trafficking in life policies, says Toronto insurance consultant Ed Rothberg. British Columbia, Alberta and Manitoba are now undergoing reviews of their insurance legislation.

Rothberg has been actively making submissions to the various provincial review panels. “My submission in each case is a single recommendation that the province do what Ontario did — drop the crude sledgehammer of total prohibition against ‘trafficking’ in issued life insurance policies in favour of allowing a ‘secondary market’ in life insurance policies, subject to regulation,” he says.

Of course, Rothberg adds, a regulatory “bottleneck” remains, as securities commissions would want to be part of regulating a secondary market in life policies. He notes that even if the proposed Ontario insurance regulations had been passed, the rules would still be subject to existing securities legislation. It’s almost certain, he adds, that viaticals will be defined as securities.

@page_break@The OSC is alleging exactly that in its case against USI. It’s also alleging that USI distributed securities without filing a prospectus or obtaining an exemption from the prospectus requirement. IE