Washington State Department of Financial Institutions

Sale of Viatical Investments as Securities

In 1999, Securities Administrator Deborah Bortner sent out a letter to insurance agents in the State of Washington regarding the applicability of the state securities laws to the offer and sale of viatical settlement contracts to investors. 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.

Promoters of these investments 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. This claim is generally based on a federal circuit court decision, commonly referred to as the Life Partners case. The Life Partners 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 appear to be securities under the Securities Act of Washington. If the viatical products are in fact securities, those individuals selling them may violate not only Washington's securities registration requirements, but also the prohibition against selling securities without a license to do so. Even those who are licensed to sell securities 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 they are employed. One must have the permission of one's broker-dealer to sell any security. Failure to do is a violation the securities regulations concerning dishonest and unethical business practices.

Another 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 the seller to liability.

As the sale of these investments becomes more widespread, certain problems associated with the investments have come to the attention of the Securities Division such as defaults on policy premium payments, medical developments that increase life expectancies of the terminally ill, incompetence of promoters, and even outright fraud.

This leads to a final concern 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.

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