Document Type

Article

Publication Title

Pace Law Review

Publication Date

1999

Abstract

Viatical settlements are a form of asset-backed security where a terminally-ill policyholder, known as a viator, sells the right to receive the proceeds of his or her life insurance policy to an investor. During his or her lifetime, the policyholder is paid an estimation of the present value of the death benefits under the policy. Viatical settlements are legal and serve a benevolent purpose. However, beyond the altruism of providing funds to the terminally ill, and the legalities of simply selling the right to receive life insurance proceeds to someone other than the insured, viatical settlements pose other legal and ethical issues. Because viatical settlements have not yet been classified as investment contracts, and thus securities for purposes of the federal securities laws, investors in viatical settlements must gather information themselves on which to base their investment decisions. Furthermore, investors are denied the protections and remedies provided by the federal securities laws, and have only a common law fraud remedy to redress misleading statements or omissions by viatical settlement firms. The specter of conflicts of interest, confidentiality problems, and the serious threat of fraud looms over the viatical settlement industry, and in the absence of appropriate regulation, threatens the very stability of this compassionate and increasingly popular financial innovation.

The sale of fractional interests in viatical settlements is currently not subject to meaningful regulation at either the state or federal level. The legislative intent of the federal securities laws was to prevent fraud through the disclosure of information necessary to make meaningful investment decisions. The potential for fraud in this developing industry is high, and there is no mandatory disclosure to investors. Because fractional interests in life insurance policies constitute investment contracts, investors therein should be granted the protection of the Securities Act of 1933, and the Securities Exchange Act of 1934.

Part I of this Article presents an overview of the evolution of the viatical settlement industry. Part II of this Article raises the ethical issues imbedded in viatical settlement transactions, including conflicts of interest, confidentiality concerns, and fraud, all of which should be disclosed as risk factors to investors in viatical settlements. Part III of this Article considers the classification of viatical settlements as securities for purposes of the Securities Laws. Part III examines the legislative history and case law interpreting the Securities Laws, critiquing the holding in Life Partners that fractional interests in pools of viatical settlements do not constitute securities as defined in the Securities Act and its interpretive case law. Part III concludes that fractional interests in viatical settlements fall within both the spirit and the letter of the Securities Laws, and thus should be considered securities in order to further the legislative goals of the Securities Laws.

Part IV of this Article explores the viatical settlement industry after Life Partners, focusing on the efforts of some states to classify certain forms of viatical settlements as securities, and the SEC's continued efforts to achieve the investor protection denied by the court in Life Partners.

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