Was it the shame of being overshadowed by California (not to mention the other 36 states) that finally pushed the New York Legislature to get off the dime and pass comprehensive life settlement legislation? Or was it, in the words of an old friend and veteran of the legislature, just “soup yet”? For whatever reason, both houses of the New York State legislature passed comprehensive life settlements regulation legislation, bill numbers S.66009/A.40009, on November 16th. The bill now sits on the desk of Governor Paterson who, is expected (as if anything can be realistically “expected” in Albany these days) to sign the bill into law. These actions will end a five year effort on the part of the Insurance Department, life insurers, producers and the life settlement industry to bring a comprehensive set of regulatory controls to this sometimes troubled area. With the addition of New York to the list, over 90% of the population of the United States now resides in states that have life settlement regulation. There have been many versions of this legislation which have been introduced during that time, and each seemed to fail in the waning moments of the legislative session because one or another of the interested parties felt that it could not live with some provision or another. The New York Department’s first attempt at developing comprehensive regulatory piece in 2006 predated and, indeed was, radically different than both the NAIC and NCOIL models.

After those national models were finished and circulated among the states, the New York Department insisted on continuing to work off its original construct, which caused further consternation amongst the interested parties, each of whom worked hard for and favored one national model or the other. The enacted bill appears to be similar to the NCOIL model, which was generally more acceptable to the life settlement industry than the NAIC model or the organic New York piece. The Department’s approach to the regulation of life settlement -fginvestors and protection of confidential information never seemed to gain support in the capital markets sector of the life settlements industry. As the years and months passed and it became apparent that the legislature also could not warm up to the Department’s bill, previously supportive elements of the insurance industry gradually moved support from the Department’s version to the current construct. Reading the tea leaves (if albeit, a little late) the New York Department quietly removed its original proposal and favored the NCOILbased version with some important changes relating to disclosure and protection of confidential information.

This change in emphasis may have accounted for the bill’s near unanimous support amongst a wide variety of interested parties and its passage without a single no vote in both houses. What was a “super-charged” lobbying atmosphere at the beginning ended, not with a bang, but with a whimper, as all parties seemed relieved that the epic process was finally over.

As with many important pieces of insurance regulation in the past, the bill was introduced by the respective chairs of the legislative Insurance Committees, Senator Neil D. Breslin and Assemblyman Joseph D. Morelle at the request of Governor Paterson. Senator Breslin hailed the piece by saying, “This legislation contains numerous disclosure and consumer protection provisions which will help to ensure that an owner considering selling his or her policy makes an informed decision [T]he legislation will also protect the medical and other personal information of those who enter into a life settlement transaction. In addition, this legislation specifically outlaws improper and abusive practices currently happening in the life settlement industry.” The Senator then urged Governor Paterson to “immediately sign what will be one of the most comprehensive and effective laws in the country for the regulation of the life settlement industry.

Chairman Morelle said, “with the growth of the life settlements business, it’s crucial that we have safeguards in place to protect our most vulnerable citizens. By placing this market under the authority of the Insurance Department, we will be better able to monitor brokers and intermediaries, and increase transparency in this business.” As of my deadline I have not been able to find any statement by the Governor or the Insurance Department about the bill’s passage. This appears somewhat strange given the fact that the bill was introduced at the request of the Governor.

Various industry groups also hailed the legislation’s passage. In a combined statement, the American Council of Life Insurers (ACLI), the Life Insurance Council of New York (LICONY) and the National Association of Independent Financial Advisors (NAIFA), stated “Senior citizens in New York will have important new protections against a financial fraud called stranger-originated life insurance (STOLI) thanks to legislation approved yesterday by the state legislature…” While those organizations focused on the STOLI protections in the bill the Life Insurance Settlement Association (LISA) released a statement which said “We are happy New York State is joining the ranks of states that are regulated with laws based on the National Conference of Insurance Legislator’s model.” LISA also appeared pleased with the lesser two year prohibition against selling policies from the date of issuance instead of the five year prohibition contained in the NAIC model.

The life settlements industry was not supportive of the compensation related requirements and penalties contained in the bill. LISA stated, “The penalties are extraordinary; you have some draconian consequences, those kinds of issues trouble us. They’re punitive and designed to slow down the settlements industry or to scare people, but we have every confidence that our members are doing business properly.” The new legislation incorporates life settlement brokers, providers and companies into the Insurance Department’s existing framework of licensing, continuing education, reporting and consumer protection. The bill also provides for extensive disclosures for producers before, during and after the life settlement transaction. Also included are significant privacy provisions for medical and other personal information.

A summary of the key pieces of the legislation are as follows: • Inclusion of life settlement provider and life settlement intermediary into the list of entities subject to the Superintendent’s far reaching power to inquire, request information, investigate and subpoena contained in Section 308 of the Insurance Law.

• Makes the applicable requirements of Article 21 binding on life settlement brokers, including continuing education obligations.
• Life settlements are included within the category of insurance subject to the prohibitions of unfair methods of competition or unfair or deceptive acts or practices under Sec. 2401.
• No life settlement broker may receive compensation unless such compensation is based upon a written memorandum, signed by the party to be charged, which specifies the “amount or extent of such compensation.”
• No life settlement broker may receive compensation from any person for whom any licensee has performed any related consulting service within the preceding twelve months unless such compensation is in a written memorandum signed by the person to be charged.
• No life settlement broker may receive compensation from a life settlement provider if the broker has already received or will receive compensation from the owner with respect to the life settlement contract.
• The definition of “life settlement broker” expressly excludes a licensed life provider, attorney, public accountant or accredited financial planner who is retained in his or her professional capacity and does not advertise as being in the business of life settlements and is compensated without regard to whether a life settlement contract is effectuated. Sec. 7802(J)
• All life settlement contract forms, application forms and other such forms as may be designated by the Superintendent in a regulation must be filed with and approved by the Superintendent. Sec. 7806
• All licensed life settlement providers must file annual statements with the Superintendent on or before March 1st. The statement must specify the total number, face amount and proceeds of policies settled during the preceding calendar year. Individual transaction data shall not be included if there is a reasonable basis to believe the information could be used to identify the owner or the insured. Sec. 7807(A)(1)
• Sec. 7810 contains strict prohibitions against disclosure of an insured’s or owner’s identity, or any information that there is a reasonable basis to believe could be used to identify the insured or owner. Disclosure is authorized for legitimate purposes.
• Policy owner must be provided with a separate document with all required disclosures at a point no later than the signing of the settlement contract. The disclosures include the existence of possible alternatives to life settlement contracts, that some or all of the proceeds are taxable, that receipt of the proceeds may affect the eligibility of the owner for public assistance and the life settlement may limit the owner’s ability to purchase life insurance in the future.
• The policy owner has a right to rescind the life settlement contract from the time of execution until 15 days after the receipt of the life settlement proceeds.
• • The owner may be contacted in the future to determine his or her health status on a frequency scale that depends upon the owner’s life expectancy.
• Life insurers are authorized to inquire on life insurance applications whether or not the policy is being used as collateral for a premium loan.
• No person shall enter into a life settlement contract within two years of the date of the issuance of the policy of life insurance.
• Any act or practice designed to initiate or facilitate the issuance of a life insurance policy for the intended benefit of a person who, at the time of policy origination, has no insurable interest in the life of the insured is strictly prohibited as “strangeroriginated life insurance”. Sec. 7815
• Section 7816 contains a private right of legal action for damages (including attorney’s fees) suffered by any person who has been injured by reason of a violation of several provisions of that section.
• Any life settlement contract not in compliance with the provisions of the chapter shall be read as if it conformed to the requirements or prohibitions. Sec. 7818
• Amendment of Article 4 of the Insurance Law and the relevant provisions of the Penal Law to make a “Fraudulent Life Insurance Settlement Act” a crime in New York with significant criminal penalties.

The new law will take effect 180 days after it is signed by Governor Paterson. A person operating as a life settlement provider, broker or intermediary on a previously unregulated transaction may continue to do so after the 180 day effective period provided that the person files an application on later than 30 days after the Superintendent publishes the new application forms on the Department’s website and the person certifies that such person shall comply with all applicable provisions of the insurance law. In addition, if a person who complies with the provisions described in the previous sentence may file contract forms with the Department up to 30 days before the effective date and use the unapproved forms as long as that person certifies to the Superintendent that the forms are in compliance with the insurance law and regulations promulgated thereunder.

The next few months will be busy ones before the Department as the Superintendent must develop regulations to implement the new law.

Thus, in the near future, a stroke of the Governor’s pen will add an entire new industry into the regulatory jurisdiction of the Insurance Department. Thousands of entities who currently have no relationship with the Department will come to know the feeling of having the agency intimately involved in all aspects of that entity’s business. I’m sure that the various parties in the settlement industry are not looking forward to this development, and many will intensely dislike the compensation disclosure provisions. However, the life settlement industry should merely look on this legislation as the next step in the development of the secondary market. Any new industry grows because it provides a service or benefit that people are not able get anywhere else. The early growth period often is marked by the entrance of shady characters out to make a quick buck at the expense of consumers operating in the same space as principled and trustworthy market players. The shady elements then threaten to destroy the whole market. Regulatory oversight can bring order to the chaos, and chase out the undesirable players. The presence of the respected Insurance Department in this marketplace will add an air of legitimacy and normalcy to the market which will work to the long term economic advantage of those businesses who comply with the law.

The life settlement industry is coming of age.