Law360, New York (March 13, 2013, 9:46 PM ET) — Texas state Sen. Juan Hinojosa introduced legislation Friday aiming to add more regulatory oversight to the secondary market for life settlements by more strictly governing sales of ownership in life insurance policies to third parties.

 

Designed as a consumer protection measure, Senate Bill 1581 would amend the Texas Insurance Code, allowing the state to have more oversight of the life settlement secondary market in which life settlements are sold or brokered as investments. The bill includes the creation of new application fees and penalties for fraudulent activity.

 

A life settlement is a financial transaction in which a policyholder sells a life insurance policy to a third party at a discount to its maturity value. The buyer pays all remaining premiums and receives the life insurance benefit when the policy matures.

The McAllen Democrat’s bill includes provisions banning unlicensed estimates for life expectancy and limiting transactions in the secondary market for life settlements only to accredited investors, among other things. The bill would require secondary market providers to file prospectuses, or annual statements, with the state insurance commissioner detailing how many policies are bought and the premium payments and proceeds paid out on those policies.

 

The bill also lays out penalties for secondary market brokers and sellers that do not comply with the provisions. For example, willfully failing to file the annual statements could incur fines of $250 for each day the filing is delayed, up to a maximum $25,000.

The bill also requires secondary providers to implement anti-fraud initiatives reasonably calculated to detect, prosecute and prevent fraudulent life settlement acts — a mandate that already applies to licensed insurance providers and brokers.

 

The legislation comes amid high-profile litigation involving life settlements in Texas mostly targeting Waco-based Life Partners Holdings Inc. and its subsidiaries. They include an August 2012 suit launched by state Attorney General Greg Abbott accusing Life Partners of fraudulently selling unregistered securities to investors in the form of life settlements.

 

However, a Travis County judge defeated Abbott’s attempt to get a preliminary injunction barring the company from further selling life settlement interests by ruling in September that life settlements are not securities covered under state law.

 

Additionally, the company has come under investigation by the U.S. Securities and Exchange Commission and has been hit with investor suits alleging it underestimated the life expectancies of people whose policies its customers invested in. By underestimating the life expectancies, the company purportedly was turning back the clock on the policies so they could price their transactions higher to investors.

 

Meanwhile, Life Partners has asserted that it does not defraud or deceive anyone in its business of offering financial options to seniors who want to sell their life policies and to accredited investors looking for alternative investments.

 

– Additional reporting by Jess Davis and Carolina Bolado. Editing by Jeremy Barker.