New Broker Dealer Focuses on Life Settlements Biz

One group of advisers last month opened up its own specialty broker-dealer specifically to make sure trades of life settlements are handled properly.
With NASD last month issuing a notice to members reminding.

- Advertisement -broker-dealers that some life settlement transactions are securities transactions, the timing of this group of advisers couldn’t be better, said Michael A. Leibowitz, chairman of Invescor Ltd. of Farmington Hills, Mich., a life insurance and life settlement firm.

“We realized that NASD is going to regulate life settlements,” he said, adding that Invescor first filed with NASD about a year and a half ago to open the firm.

“This was going to happen,” Mr. Leibowitz said. “It was just a question of when.”

The name of the new broker-dealer affiliate is Invescor Wholesale BD Inc. The firm also is a wholesaler of variable-life-insurance policies.

Washington-based NASD in-creasingly has asserted itself in the regulation of insurance products, and its notice to its broker-dealer members last year about selling non-registered equity index annuities stunned many in the securities industry.

So far, the new broker-dealer has nine brokerage firms as clients, Mr. Leibowitz said.

The move to open the firm, which is a limited-use broker-dealer, doesn’t affect Invescor’s affiliation with Royal Alliance Associates Inc. of New York, he said.

“They’re a fabulous broker-dealer,” Mr. Leibowitz said. “We have no reason to leave them.”

Meanwhile, NASD’s notice last month was a clear reminder to
broker-dealers and registered representatives that selling life settlements involving variable insurance policies are securities transactions.

Exponential growth

Life settlements are the sale of life insurance policies to third parties. In a typical scenario, an insurer sells a policy to a life settlement provider, which can either hold the policy to maturity and collect the death benefit or sell the policy or interests in multiple bundled policies to investors that include hedge funds, according to NASD.

The market has grown “exponentially” of late, according to the NASD notice. NASD generally places its regulatory spotlight on financial services products that are hot.

“The life settlement market has expanded rapidly in recent years,” NASD said. “One recent study estimates that existing policies with a collective face value of $5.5 billion were sold by policyholders to investors in 2005, while others suggest that the potential market exceeds $100 billion.”

Because a variable-life-insurance policy is a security, selling it in the secondary market is a securities transaction and must meet NASD rules, the self-regulator said in its notice.
Firms and brokers must meet the variety of obligations when selling a product, from suitability and due diligence to best execution, supervision and training, and compensation, NASD said.

“NASD is concerned that some of the marketing materials prepared by life settlement companies to encourage financial services providers, including broker-dealers, to recommend life settlements to their customers do not present a fair and balanced view of life settlements and may encourage broker-dealers to recommend unsuitable transactions,” NASD said in its notice.

“The unique nature of variable life settlements poses special concerns,” NASD said in the notice. The buyers of life settlements have to pay the premiums on the policy for the lifetime of the insured in order to collect the net death benefit when the insured dies, NASD said.

“Therefore, the sooner the insured dies, the more profitable the life settlement is to the purchaser,” NASD said. “In sum, the purchaser acquires a financial interest in the insured’s death.”

Source: Investmentnews.com