District 11 - Republican
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Session: State Capitol, Room 24 Juneau, AK 99801-1182 Toll Free: (800) 773-4968 Phone: (907) 465-4968 Fax: (907) 465-2040 Send E-Mail Interim: 716 W 4th, Suite 640 Anchorage, AK 99501-2133 Phone: (907) 269-0117 Fax: (907) 269-0119 |
Sponsor Statement for HB 190
Viatical Settlements
An Act relating to viatical settlement contracts.
Updated: January 28, 2000 Viatical settlement contracts, essentially, are agreements by investors
to purchase at a discount a life insurance policy. The viatical industry
has grown rapidly in the last decade and was originally limited to policyholders
that had terminal or life-threatening illnesses. The industry has now
expanded to include those who are not ill but just want to sell their
life insurance policy. Purchase of these policies provides an investment
alternative for investors. Much of the early growth of the industry was
fueled by the AIDS health crisis. As medical advances prolonged the life
expectancies of viators (or insured individuals), policies did not "mature"
as expected, and returns were sometimes less than expected or were even
negative. Sales abuses began to surface. It appears that investors often
had little idea of the risks along with the potential rewards of these
investments. Good public policy requires that we take a proactive position
to protect Alaska investors from sales abuses that have appeared elsewhere
in the country. This bill adds viatical settlements as items covered under state law
by the Division of Insurance before a contract of sale is signed and to
Division of Banking, Securities, and Corporations (DBSC) at the time a
viatical settlement provider begins to market this investment to others.
Currently these settlements are not specifically mentioned in law but
are considered to be a security for the purpose of Alaska's DBSC. The
industry, however, has no way of knowing this unless they ask the Department.
This means that unregistered securities sales may unintentionally take
place in Alaska. This legislation makes the status of these items explicit,
and provides for an exemption mechanism that is relatively easy for the
industry to meet, while also increasing the protection of Alaska investors
from sales abuses that have appeared in other parts of the country. The financial press in recent months has published articles describing
marketing abuses in the sale of viatical settlement contracts to investors.
The abuses often center on inadequate risk disclosure. Investors are lead
to believe the investment is a "sure thing." Then they discover these
investments, under certain circumstances, may be illiquid and may even
result in losses. One investor's story described how he invested his IRA
in a viatical settlement contract. When the viator did not die, the contract
became illiquid. Since the investor was reaching the age of 70 and one-half,
the IRS required him to make mandatory distributions from the IRA or suffer
a large penalty. But, he could not make the distributions due to the illiquid
investment. In the face of these abuses, regulatory agencies across the country have
begun to take action. In February 1999, the State of California issued
an order against three viatical settlement providers for viatical sales
without registration under the California securities act. In April 1999,
the State of Oklahoma took an enforcement action against two viatical
settlement providers for selling viatical settlement contracts without
registration and without making proper risk disclosures to investors.
Finally, in 1998, the SEC for the first time achieved full injunctive
and monetary relief in a viatical settlement case when a company agreed
to pay $950,000 to settle charges that viatical settlement contracts were
sold to investors without proper disclosures. The dual nature (having two divisions involved) of this bill is not unique.
Other states have a similar regulatory scheme where the "insurance" aspect
is regulated under insurance and the "investment/securities" aspect is
regulated by a securities regulatory office. Additionally, both Insurance
and DBSC also regulate other occupations. For example, a financial planner
could be regulated by both as to sales of insurance and sales of securities. In 1998, over $1.5 million of viatical contracts were sold in Alaska. This fast growing area of investment needs to be overseen so that Alaskan
consumers can have the full benefit of disclosure, recision rights, and
a regulatory body to complain to when things do not go as planned. The
DBSC has been working with industry representatives and others on developing
draft regulations. We urge your support of this legislation.