The ontario securities Commission’s decision to impose its regulatory regime on an Ontario company that sells interests in life insurance policy death benefits — known as “viatical settlements” — is being welcomed by insurance industry and advisor organizations alike.
“It’s a good thing,” says Frank Zinatelli, vice president and associate general counsel at the Canadian Life and Health Insurance Associ-ation in Toronto. “If you’re acting in this type of market, you should be subject to regulation.”
At the end of September, the OSC decided the viatical products offered by Universal Settlements Inc. are securities. The company, therefore, must comply with the registration and prospectus requirements of the Ontario Securities Act.
The OSC did not make allegations of improper conduct or fraud against USI. And, the OSC said in its decision, “There was no evidence that investors did not know what they were acquiring.”
As a result, USI was exempted from a cease-trade order, as well as the registration and prospectus requirements with regard to existing investors. However, any money that has not been invested in life policies must be returned to investors.
The Independent Financial Brokers of Canada supports the OSC’s decision, says its director of regulatory affairs, Susan Allemang: “The IFB has been involved in several consultations over the years that have looked at a regulatory structure for viatical settlements and has always supported regulation.”
Now that viaticals have been determined to be securities, advisors interested in participating in this market should note they would have to be licensed to sell securities, says Jim Bullock, registrar of the Peel Institute of Applied Finance in Toronto.
Viatical settlements are generally arranged through the purchase of life policies from the elderly and terminally ill. The sellers assign all the rights under their life insurance policies in exchange for payment from viatical brokers. Then, those brokers usually sell the rights to the eventual death benefit under the policies to inves-tors, who receive their payoff when the insured person dies. The brokers regularly promise high returns.
“Trafficking” in Canadian life policies is prohibited by most provincial insurance legislations, except those of Nova Scotia, New Brunswick, Quebec and Saskatchewan. While Ontario amended its insurance legislation to lift the prohibition in 2000, amendments designed to protect sellers and investors were not passed, so it remains illegal.
That doesn’t stop companies such as USI from selling interests in U.S. life policies. As a result, the Financial Services Commission of Ontario attempted in 2001 to impose a “cease and desist” order on USI. It failed. A FSCO panel determined that USI is not dealing in insurance “undertaken in Ontario.”
However, the Ontario Superior Court then gave the OSC the right to investigate USI’s practices. The investigation and subsequent hearing resulted in the Sept. 29 decision.
The OSC’s decision was foreshadowed in 1996, when it issued Notice 44, stating that viaticals “can take a variety of legal forms” that would be considered securities.
“Com-mission staff encourages all those considering engaging in the sale of viatical settlements to discuss regulatory issues with staff at an early stage,” the OSC said in Notice 44.
Critics of the viaticals industry refer to horror stories in the U.S., in which vulnerable insured sellers have turned over their policies for less than fair prices, or investors have been duped into giving money to fraudulent companies.
“Given the nature of viatical settlements and their murky his-tory in the U.S., the IFB believes such products should be regulated,” says Allemang.
Notice 44 will be amended to reflect the OSC’s recent decision, says Laurie Gillett, the OSC’s manager of public affairs. “The OSC will also be issuing an investor alert, outlining what viaticals are,” she adds.
Companies wishing to sell viaticals will now have to register prospectuses with the OSC. Registrant applications will be reviewed on a case-by-case basis, Gillett says. Other provincial securities commissions will have to decide whether to follow the OSC’s lead.
Niagara-on-the-Lake, Ont.-based Lifetime Legacies Inc. is encouraged by the decision.
Lifetime “has been on hold,” waiting for the OSC to make its decision, says CEO John MacKay. It was doing deals in the fall of 2005, but since the OSC issued a notice of hearing against USI in January, Lifetime “has been doing research.
“Now, we’ll see what develops,” he says.
USI was not sanctioned or accused of fraud, MacKay is quick to point out: “It was just told to conform to the rules and regulations.”
@page_break@Like USI, Lifetime sells interests in only U.S. policies. “I don’t know if the door will ever open for buying and selling Canadian policies,” says MacKay. “That will require more discussion.”
Lifetime’s viatical settlement structure usually involves three to five investors, says MacKay. They become the sole shareholders of a company that becomes the direct beneficiary of the policy that is purchased.
Lifetime makes its money up front, when it buys a policy, he adds. It also charges an administrative fee for setting up the corporation.
USI sells two products, the GLS-II and the GLS.
Under the GLS-II, an investor acquires a fractional interest from an insured seller in the death benefit of a specific life policy.
The GLS provides an extra benefit to the investor. If the insured seller has not passed away by a predetermined date — usually two years beyond the estimated date of death — the investor will be paid out by contingency insurance. The death benefit then goes to the insurance provider.
This product looks “very attractive,” says Bullock. That may be one of the reasons the OSC is concerned, he says. It may want to see what is behind the product guarantees.
Part of meeting the OSC’s registration requirements, Bullock notes, will undoubtedly be proof of solvency. “There is a very real chance that USI will not be able to meet the financing requirements,” he adds.
MacKay understands that concern. Lifetime plans to follow the USI decision and fall in line. It is going to work on a prospectus and apply for registration. “Then we’ll see where things go,” he says. IE
OSC deems viatical products to be securities
As a result, Universal Settlements Inc., an Ontario-based firm that offers viatical products, has to comply with OSC regulations
- By: Stewart Lewis
- November 1, 2006 November 1, 2006
- 11:18