Advisors dealing with high-end clients are constantly pitched by U.S. viatical companies, but they should beware. The risk of fraud is great, and advising clients to invest in viaticals could be career-ending, says Ed Rothberg, a Toronto consultant, in a new paper prepared for Ottawa-based Conference for Advanced Life Underwriting.

Rothberg was approached by CALU to update its members on the insurance and securities issues surrounding viatical investing. His paper, entitled Viatical and Life Settlements: Investing without a safety net, can be seen on the CALU Web site: www.calu.ca/caluca/publicationDetails.asp?i=308&x=1&p=False.

The market for viatical settlements — the sale of life insurance policies by terminally ill policyholders — exists mainly in the U.S. Legislation in several provinces prohibits “trafficking” of life insurance policies and Canada’s health system provides support to the terminally ill.

Rothberg offers strong warnings to Canadian advisors considering U.S. viatical investments for clients:

> If you recommend a viatical investment to a client, disclose all risks and still be prepared to be sued.

> If you sell a viatical investment, be prepared to be charged with selling a security without securities registration if you are not a registrant, or with selling an unqualified security if you are.

> If you are a securities registrant, be prepared to have your dealer charged or sued, and then be prepared to have your dealer sue you.

Meanwhile, the small Canadian market in viaticals offers its own challenges to advisors.

Rothberg notes the insurance legislation of Nova Scotia, New Brunswick, Quebec and Saskatchewan do not prohibit trafficking life policies. In 2000, Ontario amended its insurance statute and removed the anti-trafficking provisions for life insurance policies, subject to the introduction of new rules to regulate trading in policies. The Financial Services Commission of Ontario developed draft regulations but they weren’t passed before the most recent Ontario election.

The new provincial government does not appear inclined to pick up where the former government left off, FSCO officials say.

“Even if the proposed Ontario insurance [regulations] were passed,” Rothberg says, “they only address the primary viatical business — the ability to engage in the business of buying second-hand policies from their owners in Ontario, and to act as an intermediary in that business.

“They would have no effect on promoting investments in viatical products, whether sourced in Ontario or Florida. [That] would still be subject to existing securities legislation, which says these are securities — almost certainly.”

The advisor needs appropriate registration, or exemptions to sell or advise on viaticals, Rothberg says. And the products need an approved prospectus or equivalent, or exemption, to be sold.

“Disregard these requirements and you are in breach of securities law,” he adds. “The only question is how likely you are to be busted.” IE