Client Alert: Notice From NASD: Life Settlements Of Variable Insurance Policies Are Securities

In August, 2006, the National Association of Securities Dealers (“NASD”) issued Notice to Members 06-38 (the “Notice”) addressing “Member Obligations with Respect to the Sale of Existing Variable Life Insurance Policies to Third Parties.” The stated purpose of the Notice is to remind NASD members and associated persons (registered representatives) that life settlements involving the sale of variable life insurance policies are sales of securities, and NASD members and associated persons involved in such sales are subject to applicable NASD rules. The Notice points out the rapid expansion in the life settlement market, noting a potential market which “exceeds $100 billion.”

The Notice defines a life settlement as the sale of an existing life insurance policy to a third party for less than its net death benefit but more than its cash surrender value. The Notice begins with a discussion of the background of life settlement transactions and the value and risks they pose to sellers and purchasers of existing life insurance policies.

Obligations of Associated Persons

The Notice is primarily focused on the duties and obligations of the NASD members and associated persons to their customers when recommending the sale by such customer of an existing variable life insurance policy. While the Notice reminds NASD members and associated persons of their duties to their customers under NASD regulations related to sales to such customers of variable life insurance policies (i.e., suitability, due diligence, training, supervision, best execution and compensation), the Notice also provides that the NASD “is also concerned” about life settlement transactions involving non-variable life insurance polices. more...