Viatical Settlement Letter
May 17, 1999
Re: Viatical Settlement Contracts
We are sending you this letter in cooperation with the Washington State Insurance Commissioner's office. The Washington Securities Division ("Securities Division") is aware that insurance agents licensed and located in Washington are being solicited to sell viatical settlement contracts to their friends, relatives, and customers. Under such a contract, a terminally ill person sells the death benefit in his or her life insurance policy in return for cash that can be used for current expenses. While this arrangement may provide some real benefits to the terminally ill, it can create major problems for individuals who sell the contracts and for investors.
As the sale of these investments becomes more widespread, so do the problems associated with them. Defaults on policy premium payments, medical developments that increase life expectancies of the terminally ill, incompetence of promoters, and even outright fraud are but a few examples of the headaches you may be selling to your clients -- and taking on for yourself.
On the regulatory side, promoters of these investments (who solicit agents such as yourself to sell them) often claim that the investments are not securities and therefore that agents need not inform their broker-dealers of their activities or check with the Securities Division before selling the investments. They make that claim based on a federal circuit court decision (commonly referred to as the Life Partners case). You should know, however, that 1) the decision is not necessarily binding on the federal district courts in the State of Washington (only the federal circuit court for the District of Columbia has ruled on this issue); 2) many states and legal scholars disagree with the decision; and 3) the decision is not binding on state securities regulators.
It has been our experience that these investments often are securities under the Securities Act of Washington (and in selected instances, even under federal law as well). If the viatical products that you wish to sell, or are selling, are in fact securities, you may violate not only Washington's securities registration requirements, but also the prohibition against selling securities without a license to do so. Even if you are licensed to sell securities, you may violate the prohibition against "selling away" -- that is, the prohibition against selling securities that have not been approved for sale by the broker-dealer by which you are employed. You must have the permission of your broker-dealer to sell any security. Selling away, in effect, constitutes selling without a license.
Relying on the viatical company for whom you are selling such investments to determine whether they are securities is a mistake. Ultimately, you are responsible for knowing what you are selling and ensuring that any sales of securities are made in compliance with Washington law. Any of the violations described above could make you financially liable for rescinding the transactions and subject to regulatory sanctions by the Securities Division. You should also keep in mind that a knowing violation of the Securities Act of Washington may subject you to criminal prosecution for a felony.
Our second concern is that viatical settlement contracts are not suitable investments for many of the investors to whom they are being sold. As with any investment, you as the seller must take into consideration such factors as age, financial situation and investment objectives of your client. Failure to do so may subject you to liability.
Our third concern is that many of the viatical settlement contracts being sold in Washington are being sold in a way that is misleading with regard to the safety of the investment and the return that can be expected. Making misleading statements (as well as material omissions of fact) in the offer and sale of securities constitutes fraud. Again, a knowing violation of the Securities Act of Washington may subject you to criminal prosecution for a felony. Moreover, even if the viatical settlement contracts that you wish to sell or are selling are not securities, making misleading statements and material omissions in the offer and sale of those contracts would constitute a violation of the Washington State Consumer Protection Act.
We urge you to review the Securities Division website for more information on the registration requirements for securities and the licensing requirements for securities salespersons. Contact the Securities Division before you sell any viatical settlement contracts in or from Washington. The best way to avoid financial problems, embarrassment and regulatory sanctions is to check out any investment before you sell it. Do not hesitate to contact this office if you wish to discuss this matter, either generally or with respect to a particular viatical product. Inquiries may be directed to Martin Cordell, Securities Examiner, at 360-902-8766 or PO Box 9033, Olympia WA 98507-9033.
Lastly, we want to caution you about using terms similar to "financial planner" in describing your business. Use of such terms may trigger a requirement to either register as an investment adviser or provide the written disclosure set forth in WAC 460-24A-045 to your clients, so that they are clear on what services you are providing and how you are being compensated. The investment adviser rules can be found on the website, or a copy of the rules may be obtained by contacting Cheryl Pearson at 360-902-8760 option 1.
Director of Securities