Life settlement companies are soliciting independent broker-dealers to sell private placements of securities (Reg D offerings) based on life insurance policies, according to a recent InvestNews article by Darla Mercado.
“We’re being approached on a regular basis to do these deals; we don’t believe they’re appropriate for consumers,” said Michael Leibowitz, president and chief executive of Invescor Ltd., which provides life-settlement-processing services to broker-dealers and insurance companies. “The people shopping them around don’t know the risks involved,” he added.
What is being shopped around are fixed-income securities collateralized by a life settlement, or an investment in a fund or limited partnership that owns settlements. Promoters are targeting so-called “accredited investors,” meaning with at least $1 million in net worth. By selling privately to high net worth investors, promoters avoid having to register the securities with the Securities and Exchange Commission, and the regulatory scrutiny that would come with registration.
The Securities and Exchange Commission and the Financial Industry Regulatory Authority Inc. take a dim view of private placements, which have received a lot of negative press recently. Among the criticisms is that the investments are highly illiquid – i.e., hard for an investor to sell.
In addition, “People are living longer, and sometimes [providers] use old tables,” said Carrie Wisniewski, president of B-D Compliance Associates Inc., which provides consulting services to broker-dealers. “You don’t even know who came up with the table for the offering unless it’s a rare deal where they had an actuary do it.”
The deals usually fail to include enough policies to provide a statistically valid prediction of mortality. According to a report from A.M. Best Co. Inc. on life settlement securitization, a portfolio of settlements should cover at least 300 lives to reduce volatility within the pool.
Finally, life settlement offerings offerings are unrated ? translation: they are junk.
So, why would brokers sell such junk? Many brokerage firms are wary and reluctant to sell them. But for those who are willing, once again, the answer is the high commissions. Broker-dealers receive commissions of up to 9%, according to the article.
Investors ? i.e., those who do not wish to gamble in a casino game ? should take a pass on securities issued by life settlement companies.
Page Perry is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 35 occasions. Page Perry’s attorneys are actively involved in representing investors in private placement (Reg D) securities cases. For further information, please contact us.