Compliance Notice to the Viatical Industry
[30 Pa.B. 6670]
Purpose of Notice
The purpose of this notice is to advise persons involved in the viatical industry of the need, under certain circumstances, to comply with the Pennsylvania Securities Act of 1972 (1972 Act). This notice is being issued because the Pennsylvania Securities Commission (PSC) has identified an increase in the number of enforcement cases involving the sale of ''interests'' in viatical settlement contracts to Pennsylvania residents. In these cases, PSC has alleged that the ''interests'' are securities under the 1972 Act. These ''interests'' were not registered under the 1972 Act, were sold in a fraudulent manner, or were offered and sold by persons who were not registered under the 1972 Act.
The Viatical Industry
A viatical settlement contract is an agreement under which a person will receive compensation in return for an assignment, transfer, sale, devise or bequest of the death benefit or ownership of any portion of a life insurance policy or certificate of insurance. The person receiving compensation in return for assignment of the benefits of the life insurance is known as the viator. The person making the offer of compensation generally is known as a viatical settlement broker. The amount of compensation received by the viator will be less than the expected amount of the death benefit.
The viatical industry grew primarily as a result of the AIDS disease. Many individuals who were diagnosed with a potentially terminal illness and owned life insurance policies sought to unlock the value of the death benefit of these policies. Thus, the viatical industry met and continues to meet a consumer need by persons who are diagnosed as terminally ill.
When Viatical Interests are Securities under the 1972 Act
Viatical settlement contracts and viatical settlement brokers generally are regulated by state insurance authorities. However, persons in the viatical industry that seek to raise money from investors to fund viatical settlement contracts and those involved in raising such funds also are subject to State and Federal securities laws, including the 1972 Act.
PSC asserts jurisdiction through the 1972 Act in situations where Pennsylvania residents are being solicited to provide funds for the purchase of numerous viatical settlement contracts because what is being sold are securities and existing provisions of the 1972 Act apply. Often the security being sold is an ''investment contract'' which is included in the definition of security in Section 102(t) of the 1972 Act.
An ''investment contract'' is defined by the U.S. Supreme Court to include any investment of money by persons in a common enterprise (funding the purchase of viatical settlement contracts) who expect a profit through the efforts of others (promoter of the investment) (SEC v. Howey, 328 U.S. 293 (1946)). Pennsylvania courts have approved use of the Howey test for purposes of the 1972 Act (Leon M. Martin v. ITM/International Trading & Marketing Ltd., William M. Erbe and David F. Dunn, 494 A.2d 451 (Pa.Super. 1985)). Often promoters refer to the investment contract as an ''interest'' in a viatical settlement contract (Viatical Interests). Pennsylvania is in accord with the vast majority of states that use the investment contract analysis to determine if funding schemes for viatical settlement contracts are securities under state securities laws.
SEC v. Life Partners
In its investigation of the sale of Viatical Interests to Pennsylvania residents, some persons have cited SEC v. Life Partners (87 F.3d 536 (DC Cir. 1996)) for the proposition that the Viatical Interests they are selling are not securities. PSC advises that this case was determined on very narrow issues which generally are not present in the PSC's enforcement cases. Further, this is a Federal case which is not automatically binding on Pennsylvania Courts. To PSC's knowledge, no Pennsylvania Court to date has ruled on the applicability of Life Partners to Section 102(t) of the 1972 Act.
Securities Registration Requirement
Because Viatical Interests are securities, they are subject to the securities registration requirements of Section 201 of the 1972 Act. Sections 202 and 203 provide certain exemptions from securities registration, some of which require a notice filing with PSC, and Section 211 requires a notice filing with PSC if the Viatical Interests are being sold in accord with Rule 506 adopted under Regulation D of the U.S. Securities and Exchange Commission (SEC). If the exemptions or notice filing provisions are unavailable, the securities must be registered with PSC. This means that they cannot be sold until the PSC affirmatively registers the Viatical Interests.
PSC recently has received some notice filings and at least one registered offering under Section 205 of the 1972 Act involving the offer and sale of securities to Pennsylvania residents, the proceeds of which were to be used to fund the purchase of viatical settlement contracts.
Requirement to Comply with Anti-Fraud Provision of Securities Laws
The issuer of the Viatical Interests is responsible for compliance with the securities registration requirements of the 1972 Act and the anti-fraud provisions of Section 401. Unlike insurance regulation, the issuer is not required to make specific mandated disclosures to purchasers but is under a legal obligation to disclose all information material to the transaction. Pursuant to case law ((TSC, Inc. v. Northway Industries, Inc., 426 U.S. 438 (1976)), this information is that which a reasonable person would believe important in order to make an informed investment decision.
Requirement to Register as a Broker-Dealer or Agent
Persons selling Viatical Interests, usually for a sales commission and very often without the knowledge of their firm (whether it be an insurance company or broker or a securities broker-dealer), are engaged in offering and selling securities and should be registered as a broker-dealer or agent of a broker-dealer under Section 301 of the 1972 Act.
Persons involved in the viatical industry who are engaged in activities that may fall under PSC jurisdiction also should consult SEC and Federal securities laws to identify any SEC requirements.
Typical PSC Viatical Interests Enforcement Case
In a typical PSC enforcement case involving Viatical Interests, the Viatical Interests are not registered under the 1972 Act nor is there an exemption available; theperson selling the Viatical Interests is not registered as a broker-dealer or agent under Section 301 of the 1972 Act; and the issuer and persons effecting the transactions have omitted to disclose material information relating to the transaction or have made materially misleading statements thereby contravening the anti-fraud provisions of Section 401 of the 1972 Act.
This notice to the viatical industry was prepared in cooperation with the Pennsylvania Department of Insurance.
The PSC contact person for any inquiries concerning this notice is Scott A. Lane, Assistant Director, Division of Enforcement and Litigation, 806 Pittsburgh State Office Building, Pittsburgh, PA 15222, (412) 565-5083.
M. JOANNA CUMMINGS,
[Pa.B. Doc. No. 00-2248. Filed for public inspection December 22, 2000, 9:00 a.m.]
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