Legislature(1999 - 2000)

10/21/1999 01:48 PM L&C

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
HB 190-VIATICAL SETTLEMENTS                                                                                                     
CHAIRMAN ROKEBERG announced that the only order of business before                                                              
the committee would be HOUSE BILL NO. 190, "An Act relating to                                                                  
viatical settlement contracts."                                                                                                 
CHAIRMAN ROKEBERG noted that HB 190 was before the committee last                                                               
spring.  Although there is not a committee substitute(CS), he                                                                   
acknowledged that the committee has received a letter from Mr.                                                                  
Elder, Director, Division of Banking, Securities & Corporations.                                                                
That letter recommends some amendments to HB 190.  Chairman                                                                     
Rokeberg informed the committee that he had asked, via a letter,                                                                
Mr. Elder and Mr. Lohr, Director of the Division of Insurance,                                                                  
whether the state should take a cross-jurisdictional solution with                                                              
regard to whether viatical settlements are securities or an                                                                     
insurance product.  He understood that viewing viatical settlements                                                             
as an insurance product would be consistent with the view of the                                                                
National Association of Insurance Commissioners (NAIC) Model Act.                                                               
The purpose of today's meeting is to receive some input from both                                                               
Mr. Elder and Mr. Lohr as well as the public.                                                                                   
CHAIRMAN ROKEBERG expressed concern that the division [Division of                                                              
Banking, Securities & Corporations] has undertaken the promulgation                                                             
of regulations prior to the enactment of statutes.  He was also                                                                 
concerned that the cease and desist orders on the individual                                                                    
sellers of these contracts would remain in place.  From his                                                                     
understanding, one lawsuit against the state has been filed by one                                                              
provider.  Subsequent to that, heavy fines were levied against the                                                              
provider by the Division of Banking, Securities & Corporations.                                                                 
Chairman Rokeberg wanted to receive some public testimony on that                                                               
subject as well.                                                                                                                
CHAIRMAN ROKEBERG announced his preference to hear public and                                                                   
technical testimony with regard to the concept of the                                                                           
cross-jurisdictional scheme.  He hoped the committee could come to                                                              
some conclusions in order that this legislation could be taken up                                                               
early in the session.                                                                                                           
Number 062                                                                                                                      
DOUG HEAD, President, Viatical Association of America (VAA),                                                                    
testified via teleconference.  He informed the committee that the                                                               
VAA has taken the general position that it is appropriate to                                                                    
regulate the viatical settlement industry and the emerging life                                                                 
settlement industry in a comprehensive manner.  He noted that the                                                               
committee should have a copy of the proposal which the VAA                                                                      
supports.  That proposal contemplates a comprehensive regulation                                                                
under the insurance code.  He explained that the thought is that                                                                
these are insurance products, and therefore insurance professionals                                                             
would be the most informed in dealing with them.  Mr. Head noted                                                                
that the process has been submitted to the NAIC, which adopted it.                                                              
Such a proposal has also been adopted in Florida.                                                                               
MR. HEAD explained that in the current NAIC product there is only                                                               
the stripped down viatical settlement model which looks to the                                                                  
protection of viators with certain requirements on providers,                                                                   
brokers, and other participants in the industry.  They [the NAIC]                                                               
are looking to expand their work and they [the NAIC] have formally                                                              
undertaken this in their charges for next year.  At the working                                                                 
group level, [NAIC] is recommending to their life committee that it                                                             
review life settlements and purchaser regulations under the                                                                     
insurance code.  At the same time, "we" [VAA] have been working                                                                 
with the North American Securities Administrators Association                                                                   
(NASAA) in order to develop an understanding as to how the viatical                                                             
industry can move forward in those states which wish to regulate                                                                
viatical settlement contract sales as securities.  Mr. Head                                                                     
understood that to be the position of Alaska's [Division of                                                                     
Banking, Securities & Corporations].  He expressed a willingness to                                                             
work with that division in determining whether the state wants to                                                               
go that route.  He noted that Mike McNerney, Chair, Committee on                                                                
Purchaser Relations, VAA, is on-line.  Mr. McNerney is prepared to                                                              
discuss in detail how the process can move forward and develop a                                                                
solution that may be agreeable to all sides.                                                                                    
MR. HEAD reiterated that his preference is to regulate this entire                                                              
industry in a comprehensive manner, under the insurance code.                                                                   
Still, he indicated that enough research has been done so that this                                                             
could also be performed in the securities arena.                                                                                
MR. HEAD, in response to Chairman Rokeberg, explained that the                                                                  
Viatical Association of America is the largest industry group and                                                               
the only group that is actively participating in the legislative                                                                
and regulatory arena.  Since VAA's founding, it has believed that                                                               
the viatical industry will survive as a regulated industry, and                                                                 
therefore the VAA has advocated for the appropriate regulation in                                                               
all states.  He pointed out that the committee packet should                                                                    
contain information regarding what the VAA has advocated for all                                                                
the states.  However, there is a mix of regulation around the                                                                   
state, which the VAA would prefer not to have.  If operations were                                                              
standardized, then many states could operate similarly.                                                                         
MR. HEAD, in further response to Chairman Rokeberg, acknowledged                                                                
that he has seen the draft regulations for the state.  He explained                                                             
that it is appropriate to review the regulations with regard to                                                                 
their workability because currently those regulations are not very                                                              
workable.  He noted that [the VAA] is in the process of preparing                                                               
a formal response to those regulations.                                                                                         
Number 134                                                                                                                      
MIKE McNERNEY, Attorney and Chair of the Committee on Purchaser                                                                 
Relations, VAA, testified via teleconference.  He informed the                                                                  
committee that about 30 states have adopted a viatical law in some                                                              
form.  Most of those states have adopted a version of the NAIC                                                                  
Model Act, which was first proposed six or seven years ago.  He                                                                 
recalled that in 1997/1998 the NAIC adopted a second generation                                                                 
NAIC model of viatical law.  Last year, the NAIC also adopted the                                                               
second generation of a set of model viatical regulations, which                                                                 
were written to be compatible with the proposed model act.  Mr.                                                                 
McNerney informed the committee that four states have started to                                                                
address purchaser issues by amending the security statutes to                                                                   
include a reference to a viatical transaction.  The four states are                                                             
North Dakota, South Dakota, Iowa, and Maine.  Maine has adopted                                                                 
regulations which include some of the same concepts proposed by the                                                             
department [Division of Insurance].  However, the regulations are                                                               
significantly different.  He explained that the concepts are a                                                                  
waiver of registration for the viatical policies and a requirement                                                              
of disclosure to the purchaser and an effort to have a recision                                                                 
period, which would be dramatically different from the proposed                                                                 
regulation before the committee.                                                                                                
MR. McNERNEY pointed out that Florida has been a leader in viatical                                                             
legislation.  Last year Florida, with the help of the legislature                                                               
and the industry, adopted some amendments to its viatical law.                                                                  
Those amendments could end purchaser-protection language,                                                                       
disclosure requirements, and licensing requirements.  Many states                                                               
have addressed the securities question.  However, the majority have                                                             
used a mixed-bag approach.  He explained that most states, which                                                                
have made a pronouncement, will say that some types of viatical                                                                 
transactions may be securities under that state's definition of a                                                               
security.  Such a statement leaves open the fact that one is                                                                    
reviewing these on a case-by-case basis based on the transaction's                                                              
structure.  Most states acknowledge that if there is one viator who                                                             
sells his policy to one purchaser, the one-to-one transaction does                                                              
not fit under the state's definition of a security no matter how                                                                
conservative an interpretation of the securities laws.  However,                                                                
there could be a transaction which is structured such that a group                                                              
of viatical transactions/policies are placed into a pool and                                                                    
someone sells an interest in the pool.  There are many different                                                                
types of transactions.  Furthermore, there are three or four                                                                    
different definitions of a viatical transaction.  The consensus of                                                              
a national definition, although it is not uniformly adopted, deals                                                              
with someone who is terminally or chronically ill and is selling                                                                
his/her life insurance policy.  That terminally or chronically ill                                                              
person usually has a two year or less life expectancy.                                                                          
MR. McNERNEY pointed out that there are plenty in the industry who                                                              
are terminally ill with a life expectancy of over two years.                                                                    
Furthermore, there is a developing industry for those who want to                                                               
sell their life insurance policy for which he/she no longer needs.                                                              
He stressed that these people are not terminally ill.  Such a                                                                   
scenario is identified as a life settlement.  There are various                                                                 
situations in which a person may want to sell a life insurance                                                                  
policy if there was an appropriate buyer and price.                                                                             
MR. McNERNEY echoed Mr. Head's comments that the VAA has said for                                                               
several years that regulation of the viatical industry is                                                                       
appropriate.  Furthermore, the VAA believes that one department of                                                              
state government should regulate the viatical industry.  Of the 30                                                              
states that have adopted viatical laws, those states have placed                                                                
jurisdiction for those laws in their insurance departments.  With                                                               
the exception of Florida, those laws don't deal with the purchaser                                                              
side of the transaction.  However, those laws do license viatical                                                               
settlement providers, brokers and in some cases, sales agents.                                                                  
Those laws do call for (indisc. - coughing) requirements on                                                                     
closings and there are rules to protect the viator.  Those laws                                                                 
also have recision language for viators.                                                                                        
MR. McNERNEY acknowledged that there can be a legitimate                                                                        
intellectual discussion regarding the view that some types of                                                                   
viatical transactions look like a security.  He compared such                                                                   
discussion with that surrounding long-term annuities, which in some                                                             
states are regulated as an insurance product and in others a                                                                    
security product and still others regulate long-term annuities as                                                               
both.  He reiterated that having one state agency to regulate                                                                   
viatical settlements would be the most appropriate.  Such a                                                                     
structure would allow rules that protect both sides of the                                                                      
transaction.  Furthermore, those rules could be consistent.  He                                                                 
stressed that consistency is a big issue.  For example, the NAIC                                                                
has been extremely concerned about the disclosure of certain                                                                    
information about a viator who is selling his/her policy.  That                                                                 
concern has led the NAIC to discuss with the industry how to avoid                                                              
the disclosure of the name of the insured.  Mr. McNerney said that                                                              
the VAA has said that such cannot be done because some knowledge of                                                             
that information has to be provided to the purchaser.                                                                           
MR. McNERNEY informed the committee that when Maine adopted its                                                                 
security regulation and disclosure statement, Maine mandated that                                                               
the companies disclose the name, address, and phone number of the                                                               
insured to the purchaser.  Although the state government can decide                                                             
such, the securities department cannot mandate that in order to                                                                 
comply with exemption language while the insurance department says                                                              
that such information of the viator cannot be disclosed.                                                                        
Similarly, most state laws have recision periods for viators.  He                                                               
pointed out that typically, viators receive the majority of the                                                                 
funds from any transaction.  If the viator changes his/her mind,                                                                
he/she can change his/her mind during a certain period of time, a                                                               
recision period.  If there is a recision period in place for the                                                                
purchaser also, then the purchaser could rescind and then the                                                                   
person/entity with the money would be the viator not the viatical                                                               
settlement company.  The viatical settlement company has a                                                                      
percentage of profit on the deal.  Therefore, if the purchaser                                                                  
rescinds and the recision is tied to the closing of the policy, how                                                             
is the money taken from the viator.  Moreover, many insurance                                                                   
companies will only change the beneficiaries or designation of                                                                  
owner on a periodic basis.  When a policy is closed, the name of                                                                
the owner and the beneficiaries of the policy changes.  If the                                                                  
purchaser wants to rescind within 15 days - which is the latest                                                                 
proposal here - then the insurance company may not change the name                                                              
back.  How would that be handled?                                                                                               
MR. McNERNEY specified that the aforementioned are examples which                                                               
point to the need for comprehensive legislation that addresses both                                                             
sides of the transaction.  From the industry's point of view, the                                                               
main issue is to have a set of rules that are understandable and                                                                
can be lived by.  Therefore, the VAA has added proposed language to                                                             
the NAIC Model Act which inserts purchaser protection via                                                                       
disclosures and licensures, and a section that regulates the life                                                               
settlement portion of this business.  Mr. McNerney recognized that                                                              
some states may decide to regulate some parts of this as a                                                                      
security.  Therefore, the VAA has worked with outside counsel and                                                               
drafted a proposed security regulation, which is conceptually                                                                   
similar to HB 190.  As pointed out by Chairman Rokeberg, the                                                                    
department [the Division of Banking, Securities & Corporations] has                                                             
proposed regulations which are similar to HB 190.                                                                               
MR. McNERNEY offered to work with the committee, to the extent that                                                             
the committee is interested in working towards a comprehensive                                                                  
approach to the viatical issue.  He also offered to work with the                                                               
Division of Banking, Securities & Corporations in order to craft a                                                              
proposed regulation, if only the security/purchaser side is to be                                                               
regulated as a security.  [The VAA] believes that the regulation                                                                
approach is better than the legislative approach, as proposed in HB
190.  He commented that the department would be suited to modify                                                                
the regulation as the market changes and/or new areas must be                                                                   
addressed.  Mr. McNerney suggested that some time be allowed so                                                                 
that they could work with the Division of Banking, Securities &                                                                 
Corporations in order to craft legislation that the industry and                                                                
the department can live with.  Then the committee can determine                                                                 
whether to move forward with enacting authority for that                                                                        
legislation or a comprehensive bill.                                                                                            
MR. McNERNEY informed the committee that he would be forwarding Mr.                                                             
Elder a copy of the [VAA's] proposed model regulation, which                                                                    
includes the same types of concepts as Mr. Elder's regulations and                                                              
HB 190.  The VAA is also prepared to respond to the regulations in                                                              
more detail by the October 29 deadline.  Therefore, he reiterated                                                               
his offer to work with the department to develop a product                                                                      
supported by the industry and the department.                                                                                   
Number 380                                                                                                                      
REPRESENTATIVE HALCRO recalled that Mr. McNerney mentioned that                                                                 
Florida has taken the lead in developing regulations - legislation                                                              
that has managed the viatical settlement industry.  Representative                                                              
Halcro inquired as to the level of consumer protection before those                                                             
regulations in Florida.                                                                                                         
MR. McNERNEY answered that before the regulations there was not any                                                             
consumer protection specific to the viatical industry other than                                                                
the viator protections in Florida's law.  He explained that before                                                              
Florida developed regulations, there were the standard laws with                                                                
regard to unfair and deceptive trade practices, fraud, et cetera.                                                               
MR. McNERNEY informed the committee that about two years ago the                                                                
VAA adopted disclosure requirements for its members.  In Florida,                                                               
the VAA approached Florida's legislature and said it would like to                                                              
work with the legislature to achieve more regulation in the                                                                     
viatical industry.  The VAA placed its proposal on the table, which                                                             
was wrapped up with the legislature's purchaser protections to form                                                             
a bill.  That was a successful process, which increased the level                                                               
of regulation.  Mr. McNerney expressed his pride in the                                                                         
accomplishment in Florida.  He discussed the need to have a                                                                     
reasonable regulatory plan that will, hopefully, be based on some                                                               
national models in order that there are compatible regulations.  He                                                             
explained that a typical viatical transaction is a multi-state                                                                  
transaction.  For example, a viator in Colorado may be represented                                                              
by a viatical broker in Kansas.  That viator may sign a contract                                                                
with a company in Georgia.  Furthermore, more than one person could                                                             
purchase a piece of the policy and those people could live in                                                                   
various states.  The deal attempts to comply with everyone's rules.                                                             
Therefore, the VAA has spent much time working with the national                                                                
MR. McNERNEY noted that NASAA has established a committee to review                                                             
a model securities regulation approach.  He hoped that committee                                                                
would have a recommendation by the spring.  The NAIC working group                                                              
is working on purchaser-protection language which would fit into                                                                
the NAIC Model Act.  The VAA is working with the NAIC.  He believed                                                             
both the VAA and the NAIC are supposed to meet with the National                                                                
Conference of Insurance Legislators (NCOIL), which is interested in                                                             
working on a model act that it could suggest to its members.                                                                    
REPRESENTATIVE HALCRO asked whether those states with legislation                                                               
regulating the viatical industry have included protections to                                                                   
maintain the confidentiality of the name of the viator.  Although                                                               
he agreed that it should be verifiable that the viator has a                                                                    
terminal illness, he indicated the need to keep the viator's name                                                               
MR. McNERNEY pointed out that the NAIC model has provisions which                                                               
address viator confidentiality.  Basically, the NAIC has left this                                                              
up to the viator.  The companies cannot disclose such information                                                               
without the viator's specific approval.  Still, this is a                                                                       
problematic issue.  For example, Alaska's proposed regulation                                                                   
attempts to proceed down the same path as Maine, in terms of                                                                    
disclosure.  Mr. McNerney said that most of the disclosure package                                                              
is good, although he had a few concerns.  He pointed out that there                                                             
is a provision regarding the policy number and the name of the                                                                  
insurance company, et cetera.  Although that seems reasonable in so                                                             
far as the investor can verify his purchase, Mr. McNerney explained                                                             
that from the name of the policy one can obtain the name of the                                                                 
insured.  He noted that the VAA is working with the NAIC in order                                                               
to develop a balance between viator protection and purchaser                                                                    
protection.  He informed the committee that some states such as                                                                 
California have determined that the only person who can talk with                                                               
a viator is a licensed viatical company, which basically requires                                                               
the viatical company to be part of the deal for the life of the                                                                 
policy.  If a viatical company is forced to do such, that looks                                                                 
more like a security because the viatical company is managing the                                                               
asset.  He indicated that Mr. Elder would agree.                                                                                
MR. McNERNEY mentioned that he had not seen the letter to the                                                                   
commissioners regarding concurrent jurisdiction.  However, he                                                                   
offered to work on that.  Although it is a bit difficult, there are                                                             
some examples with annuities.  He reiterated that the VAA is                                                                    
interested in developing a final product that everyone can live                                                                 
with, and is fair to the consumer.  He pointed out that there are                                                               
two sets of consumers one of which is the property owner of the                                                                 
life insurance policy and the other is the purchaser; both                                                                      
consumers need protection.                                                                                                      
REPRESENTATIVE HALCRO asked why an investor in a viatical policy                                                                
would need the name and address of the viator.                                                                                  
MR. McNERNEY said that there are two basic areas of interest.                                                                   
First, there needs to be some manner in which to confirm the                                                                    
investment.  Second, when the viator passes someone has to file the                                                             
death claim with the insurance company.                                                                                         
AN UNIDENTIFIED SPEAKER [MR. HEAD] informed the committee that                                                                  
there are two national problems connected with the industry which                                                               
have involved individuals who sought to raise money across the                                                                  
nation in order to purchase viatical settlements.  Those                                                                        
individuals told the investors that they were purchasing viatical                                                               
settlements, but for issues of privacy could not disclose what they                                                             
were purchasing.  In the end, it was a Ponzi scheme.                                                                            
TAPE 99-64, SIDE B                                                                                                              
MR. McNERNEY said he was sure that Mr. Elder had concerns regarding                                                             
how the purchaser knows what he/she is getting.  He shared that                                                                 
REPRESENTATIVE HALCRO asked if any life insurance companies                                                                     
currently write in their policy that the policy cannot be sold to                                                               
viatical companies.                                                                                                             
AN UNIDENTIFIED SPEAKER replied no.                                                                                             
Number 016                                                                                                                      
JOLENE FULLERTON, Attorney, Kelco; Vice President, VAA, expressed                                                               
her belief that there is a constitutional property right issue                                                                  
involved.  She requested that she be allowed to reserve her                                                                     
comments until the conclusion of everyone's testimony.                                                                          
MR. McNERNEY asked if Chairman Rokeberg had any other questions                                                                 
before hearing from the departments.                                                                                            
CHAIRMAN ROKEBERG replied yes.  He inquired as to the mention of                                                                
the NCOIL hearing.                                                                                                              
MR. HEAD informed the committee that NCOIL is meeting in Orlando,                                                               
Florida on November 19, 1999.  The Life Committee of NCOIL will                                                                 
consider a document which the VAA has forwarded them.  One of the                                                               
concerns was that the NAIC process produced a document with                                                                     
legislative language which needed to be fleshed out with rules.  He                                                             
explained that NCOIL has been concerned with the possibility of the                                                             
language being over-interpreted during the rules-making process.                                                                
Therefore, NCOIL wanted VAA to provide a model act, which was just                                                              
sent this evening.  Mr. Head noted that many states have rigid                                                                  
language with regard to the rules-making process.  For instance,                                                                
Arizona practically has no possibility for rules-making and thus                                                                
everything  has to be included in the act.  Mr. Head believed that                                                              
the proposal to NCOIL attempts to meet that need.                                                                               
CHAIRMAN ROKEBERG understood then that it [the language] is more                                                                
specific for statutory codification.                                                                                            
MR. HEAD agreed with Chairman Rokeberg's understanding.  He added                                                               
that the proposal also attempts to address the issues mentioned by                                                              
Mr. McNerney.                                                                                                                   
MR. McNERNEY pointed out that NCOIL has a committee to look at                                                                  
this.  Therefore, there will be three national organizations                                                                    
reviewing model legislation or revisions to model legislation in                                                                
order to address these issues.  He explained that proposals are                                                                 
being communicated amongst the organizations with the hope that it                                                              
would result in some uniformity in the approach.                                                                                
CHAIRMAN ROKEBERG asked if the minutes from the February 26, 1999,                                                              
NCOIL meeting were subsequently adopted.                                                                                        
MR. HEAD answered that those minutes were adopted at the meeting                                                                
held in Cincinnati.  The minutes from the meeting held in                                                                       
Cincinnati are now up for consideration.  He offered to send the                                                                
committee a copy.  Mr. Head informed the committee that basically,                                                              
NCOIL, because they are insurance legislators, has generally taken                                                              
the position of favoring comprehensive regulation in the insurance                                                              
arena.  The chairman of NCOIL strongly advocated the aforementioned                                                             
position.  The chairman of NCOIL, who is from Florida, was the                                                                  
sponsor of the Florida legislation.                                                                                             
Number 080                                                                                                                      
TERRY ELDER, Director, Division of Banking, Securities &                                                                        
Corporations, Department of Commerce & Economic Development,                                                                    
testified via teleconference from Juneau.  He said that he would                                                                
not address the document entitled, "Needed Amendments to HB 190"                                                                
unless there are questions.  With regards to the big picture, Mr.                                                               
Elder had not heard anything from the VAA that would be a problem.                                                              
He understood the VAA's position, which favors comprehensive                                                                    
coverage for viaticals under the Division of Insurance.  Although                                                               
Mr. Elder did not agree with the VAA's position, he was encouraged                                                              
that the VAA is willing to work with those states considering                                                                   
viaticals as securities.  He confirmed that he and Mr. McNerney had                                                             
a conversation.  Mr. Elder looked forward to receiving the VAA's                                                                
proposals and having substantive discussions with regard to the                                                                 
proposed regulations.  He informed the committee that he had                                                                    
expressed a willingness to extend the comment period in order to                                                                
extend the deadline.  With regard to the chairman's concern                                                                     
regarding the division's adoption of regulations, he pointed out                                                                
that the division has considered most viatical settlement contract                                                              
sales to fit under the securities definition as an investment                                                                   
contract.  He explained that, as a regulator, a general approach to                                                             
a certain class of issuers is required to be done via regulation.                                                               
Therefore, he identified the failing, if any, as the waiting to go                                                              
into the regulation-adopting process.                                                                                           
MR. ELDER commented that Mr. McNerney mentioned in his comments the                                                             
use of mostly regulations with something more general and simpler                                                               
in the statutes in order to provide clarity with respect to                                                                     
jurisdiction.  He indicated that to be appropriate, as such an                                                                  
approach is more flexible.  Therefore, he felt Mr. McNerney's                                                                   
suggestion had some merit and the division would consider it.  Mr.                                                              
Elder expressed the division's willingness to work towards a common                                                             
ground with the VAA.  With regard to the viator's privacy and                                                                   
investor disclosure, both issues need to be addressed.  He agreed                                                               
with Mr. McNerney that including the viatical settlement provider                                                               
throughout the process would make it more of a security under law.                                                              
If  the viatical settlement provider is involved throughout the                                                                 
entire process, there may be a time that the viator lives longer                                                                
than anticipated which would necessitate the need to continue the                                                               
enforcement of that policy.  Therefore, there are legitimate                                                                    
concerns for both viators and investors.  In conclusion, Mr. Elder                                                              
deferred comments regarding the relationship between the viators                                                                
and the viatical settlement providers and the protection of viators                                                             
to the Division of Insurance.  However, he suggested that if this                                                               
is split between the divisions, [the rules] should be kept in two                                                               
separate bills.  "Whether HB 190 goes forward sort of like it is                                                                
now with a lot of the details in it or if we, as a result of our                                                                
discussions with the VAA, come to you and suggest simplifying it to                                                             
more narrowly focus it to enabling legislation to protect our                                                                   
jurisdiction, that will have a zero fiscal note from our view                                                                   
point."  He explained that since viatical settlements have always                                                               
been considered investment contracts, the Division of Banking,                                                                  
Securities & Corporations is not performing anything new, and                                                                   
therefore would not propose any additional costs for that.                                                                      
However, he suspected the adoption of the NAIC model under the                                                                  
Division of Insurance, who would license a number of different                                                                  
participants on the viator side, would have a cost.  Therefore, he                                                              
preferred the securities bill to not be tied to another bill that                                                               
incurs a fiscal note.                                                                                                           
CHAIRMAN ROKEBERG appreciated Mr. Elder's concern regarding the                                                                 
fiscal note.  However, he indicated his preference to have only one                                                             
bill.  He further indicated that the Division of Insurance would                                                                
have to pursue placing this in its budget in order to minimize the                                                              
costs and avoid a fiscal note that would place this in jeopardy.                                                                
Chairman Rokeberg was pleased to hear that Mr. Elder is willing to                                                              
work with the VAA.  Chairman Rokeberg requested that either Mr.                                                                 
Elder or Mr. Usera provide the committee with a brief description                                                               
of the regulations in regards to whether the regulations go beyond                                                              
the scope of the bill and whether the regulations are consistent                                                                
with the bill.                                                                                                                  
Number 218                                                                                                                      
VINCE USERA, Senior Securities Examiner, Division of Banking,                                                                   
Securities & Corporations, Department of Commerce & Economic                                                                    
Development, testified via teleconference from Juneau.  He informed                                                             
the committee that he drafted the regulations by taking them                                                                    
directly from HB 190.  Therefore, he did not believe that any of                                                                
the regulations go beyond the scope of HB 190.                                                                                  
CHAIRMAN ROKEBERG inquired as to the Division of Banking,                                                                       
Securities, & Corporations' relationship with Future First                                                                      
Securities and the nature and timing of the lawsuit.                                                                            
MR. USERA explained that after a long process, the division has                                                                 
settled with Future First Securities, although there is no document                                                             
to evidence that.  In further response to Chairman Rokeberg, he                                                                 
specified that a total of about $15,000 has changed hands.  Of that                                                             
$15,000, $5,000 will go to the Department of Law and $10,000 to the                                                             
Division of Banking, Securities, & Corporations for expenses.                                                                   
Future First Securities is dropping the lawsuit and have agreed to                                                              
abide by any regulations as well as the division's jurisdiction in                                                              
this matter.  He noted that the order would be withdrawn.                                                                       
CHAIRMAN ROKEBERG inquired as to the impact that action would have                                                              
on the cease and desist orders issued by the division to sellers.                                                               
MR. USERA answered that there would not be any impact.  He                                                                      
commented that the division has not issued any cease and desist                                                                 
orders.  With regard to the voluntary cease and desist orders, Mr.                                                              
Usera said that he hoped people would abide by the spirit of if not                                                             
the letter of the regulations.  Future First has agreed to do so.                                                               
Number 233                                                                                                                      
MR. McNERNEY asked which regulation was the division requesting                                                                 
that people abide the spirit of.                                                                                                
MR. USERA specified that he was referring to the proposed                                                                       
CHAIRMAN ROKEBERG indicated frustration with this situation in                                                                  
which there is no statutory foundation or regulatory foundation                                                                 
other than an interpretation of what a security is.  He expressed                                                               
further frustration because the committee is working on legislation                                                             
to give authority while the division issues regulations before the                                                              
legislation.  Although Chairman Rokeberg was pleased that the issue                                                             
with Future First was settled, he believed the entire situation had                                                             
gotten out of hand.                                                                                                             
AN UNIDENTIFIED SPEAKER pointed out that the division is required                                                               
to adopt regulations when it handles certain participants in the                                                                
securities industry in a certain way.  He eluded to the possibility                                                             
of disputes and the need for regulations.                                                                                       
CHAIRMAN ROKEBERG indicated his disagreement.  He asked if the                                                                  
division is working on regulations for after-market securities                                                                  
exchanges in Alaska.                                                                                                            
MR. USERA replied no and noted that it is no different than the                                                                 
current regulations.  The division does not require registration of                                                             
exchanges.  Furthermore, most of the firms that trade                                                                           
electronically and do business with Alaskans are registered.  With                                                              
regard to the adoption of regulations, this is not unique.  He                                                                  
pointed out that the division adopted "D" regulations and "Score"                                                               
regulations some years ago under the same statutory authority as                                                                
proposed to adopt viatical regulations.  As Mr. McNerney mentioned,                                                             
that [adopting regulations within the division] may be a more                                                                   
appropriate and flexible path for the state to regulate these                                                                   
Number 277                                                                                                                      
REPRESENTATIVE HALCRO quoted the following from a September 16                                                                  
memorandum from Mr. Usera:  "The division finds that there is need                                                              
for regulation quickly."  He noted that there is no fiscal note.                                                                
Representative Halcro assumed that if the department implements                                                                 
regulations, that would result in minimal costs versus the                                                                      
legislature passing legislation to do the same thing.                                                                           
MR. ELDER explained that the division would have to adopt some                                                                  
regulations anyway in order to flesh out any statutory change.  If                                                              
the entire route through the regulation process is followed, then                                                               
there would not be more or less cost than going through the                                                                     
legislative process.  He reiterated that the division would have to                                                             
adopt regulations either way.                                                                                                   
REPRESENTATIVE HALCRO inquired as to why the division found the                                                                 
need for regulation.                                                                                                            
MR. ELDER pointed out that the proposal to adopt regulations was                                                                
done before there was a settlement [in the Future First lawsuit].                                                               
Therefore, the regulations had nothing to do with the settlement or                                                             
even Future First.  He explained that the regulations recognized                                                                
that there have been some [viatical settlement] sales in Alaska and                                                             
there have been indications that other companies want to do                                                                     
business here and thus are interested in the rules.                                                                             
Number 324                                                                                                                      
BOB LOHR, Director, Division of Insurance, Department of Commerce                                                               
& Economic Development, recalled the opening remarks regarding the                                                              
local jurisdictional skirmish and hoped those remarks were                                                                      
humorous.  He did not believe there is such a skirmish within the                                                               
department, which fully supports the Division of Banking,                                                                       
Securities & Corporations in its "stepping up to the plate" to                                                                  
regulate viaticals.  He noted the difference in the view of he and                                                              
his predecessor.  Therefore, he stated the following on the record:                                                             
"I think it is fair to argue that the sales transaction between the                                                             
viatical settlement provider and a viator is not classically the                                                                
business of insurance."  He understood that to be the finding of                                                                
the panel in the District of Columbia Court of Appeals.  He also                                                                
believed that panel found such a transaction to not be a securities                                                             
transaction.  Mr. Lohr could not imagine a worse possible outcome:                                                              
no regulation at all.  He understood the effect of the panel's                                                                  
decision, with respect to insurance, to be "that the preemption of                                                              
federal law found in the McCarran-Ferguson Act, that federal                                                                    
legislation, is not triggered by the particular viatical                                                                        
transaction that they reviewed."  He explained that if a state                                                                  
stepped into this area and the federal government found authority                                                               
or the need to step in, that state could be preempted by that                                                                   
federal agency's involvement.  However, he pointed out that 30                                                                  
states have "stepped up to the plate," which he felt Alaska should                                                              
do the same this session.                                                                                                       
MR. LOHR announced that the Division of Insurance will take on                                                                  
responsibility in this area if asked to do so.  He noted that the                                                               
division would also give the most economical fiscal note that it                                                                
could to implement such a responsibility.  Although the division                                                                
has not done a detailed review of the cost, he had the impression                                                               
that it would necessitate less than a half-time person in licensing                                                             
as well as some modest costs for outreach materials.  In closing,                                                               
Mr. Lohr offered to answer any questions.                                                                                       
Number 400                                                                                                                      
CHAIRMAN ROKEBERG turned to the distinction between the life                                                                    
settlement issue and the viator, "which has traditionally defined                                                               
in making a distinction of the two years of life expectancy."  He                                                               
inquired as to the result of making a definition that would include                                                             
both of those.                                                                                                                  
MR. McNERNEY said that [the VAA] does not think it is a good                                                                    
approach to lump it all together because the circumstances are                                                                  
different.  He pointed to the difference between a terminally ill                                                               
person selling his/her policy versus a person who is not in any                                                                 
particular duress due to his/her health selling his/her life                                                                    
insurance policy.  Mr. McNerney felt that defining these                                                                        
separately, but in the same piece of legislation affords the                                                                    
flexibility to tailor what should happen under either circumstance.                                                             
He explained that the VAA proposal provides for one license for                                                                 
people that are in this industry in various capacities.  Therefore,                                                             
if one is licensed to do viaticals then he/she is also licensed to                                                              
do life settlements.  However, there are some differences in terms                                                              
of the consumers.                                                                                                               
CHAIRMAN ROKEBERG commented that he could see some protection for                                                               
the viator as opposed to the life settlement individual.  However,                                                              
he was not sure with regard to the buying public.                                                                               
MR. McNERNEY clarified that the purchaser-protection provisions are                                                             
identical in the two sections.                                                                                                  
CHAIRMAN ROKEBERG asked then if categorizing it as security, it                                                                 
would be similar.                                                                                                               
MR. McNERNEY replied yes.  Mr. McNerney said that the VAA is not                                                                
opposed to suggestions with regard to how to consolidate this in a                                                              
reasonable way.  He explained that the information being sought by                                                              
a purchaser is similar whether with a short-term or long-term                                                                   
situation.  Therefore, it could possibly be consolidated in some                                                                
ways.  Mr. McNerney reiterated that the VAA has forwarded its                                                                   
proposal to the NAIC and NCOIL.  In further response to Chairman                                                                
Rokeberg, he explained that the VAA has had the NAIC model before                                                               
it.  He clarified that they took the NAIC model, the statute, and                                                               
inserted purchaser-protection language as well as life settlement                                                               
language.  The committee has the revised form that is red-lined so                                                              
that the amendments are apparent.  Now NCOIL has requested a                                                                    
similar, comprehensive bill.  However, NCOIL wanted the statute                                                                 
approach adopted by the NAIC to be combined with the regulations.                                                               
That has been done as well as including language regarding                                                                      
purchaser protection.  He pointed out that NCOIL has a different                                                                
approach from that of the NAIC with regards to whether the                                                                      
regulations are separated or included in the legislation.  The VAA                                                              
wants to stay out of that issue.                                                                                                
CHAIRMAN ROKEBERG inquired as to the VAA's relationship with NASAA.                                                             
MR. McNERNEY said that NASAA is roughly equivalent to the NAIC,                                                                 
although the organizations function a bit differently.  Mr.                                                                     
McNerney emphasized that the VAA is working with both NASAA and the                                                             
NAIC.  He noted that NASAA's committee is not looking for                                                                       
comprehensive legislation, but rather for a model security                                                                      
regulation.  The approach taken by NASAA is that it will obtain                                                                 
jurisdiction, but when it is obtained they want to be prepared to                                                               
regulate it.  He provided the following example.  Most securities                                                               
are required to be registered with the appropriate state agency.                                                                
If a person is selling an individual policy, each policy cannot be                                                              
effectively registered as that policy is sold.  Therefore, there                                                                
has to be an exemption from registration with some reasonable                                                                   
buyer-protection provisions such as disclosure.  Mr. McNerney                                                                   
pointed out that is the approach taken by your division [the                                                                    
Division of Banking, Securities & Corporations].  He mentioned that                                                             
the VAA does not agree with some of the details.  He also pointed                                                               
out that due to the inability to effectively register each life                                                                 
insurance policy, the fiscal note would become a book.  Therefore,                                                              
NASAA is reviewing what the requirements would be if exemption for                                                              
registration is allowed.                                                                                                        
Number 555                                                                                                                      
CHAIRMAN ROKEBERG noted that review of this area as an insurance                                                                
model, leaves state regulation.  He noted the growing impact and                                                                
importance of e-commerce in this area and the lack of regulation                                                                
due to the diffused state regulation.  He believed that this area                                                               
almost begs for federal regulation.  He recalled that Mr. McNerney                                                              
spoke to that in earlier testimony regarding the federal                                                                        
government's statutory authority to step in.                                                                                    
MR. McNERNEY commented that there is much "play" between the                                                                    
federal government and Congress regarding what it wants to regulate                                                             
and what will be left to the states to regulate.  Again, that is a                                                              
conflict that the VAA wants to stay out of.  He understood that the                                                             
Securities Exchange Commission (SEC) has basically withdrawn from                                                               
this area since the life partners decision, and therefore the                                                                   
states have their own jurisdictional rights in this area.  So, the                                                              
VAA's problem is to have a national (indisc. - coughing), which has                                                             
led the VAA to work with these national organizations in order to                                                               
obtain some consensus on a model law.  He acknowledged that                                                                     
approach not to be the easiest approach because at the same time                                                                
individual states may be adopting their own approach.  Mr. McNerney                                                             
commented that the VAA would appreciate one law that affected                                                                   
TAPE 99-65, SIDE A                                                                                                              
MR. LOHR noted that federal preemption of insurance regulation by                                                               
the state is a serious potential problem with the pending financial                                                             
modernization legislation.  In conferences, there have been                                                                     
problems that the administration and the conferees do not agree on,                                                             
but these are not problems related to insurance preemption.  He                                                                 
suggested that in partial response to that, the NAIC and individual                                                             
states are trying to review ways to simplify the intrastate                                                                     
elements of what they do.                                                                                                       
MR. McNERNEY agreed that the NAIC and the individual states are                                                                 
trying to review ways to simplify the intrastate elements of what                                                               
they do, which is very helpful.                                                                                                 
MR. LOHR informed the committee that regardless of the outcome of                                                               
S 900 and HR 10, he was committed to pursuing ways to simplify the                                                              
licensing procedures, the use of electronic formatting, et cetera.                                                              
This simplification could reduce the burden and idiosyncracies at                                                               
the state level, to the extent that can be performed                                                                            
administratively.  He indicated that the Division of Insurance may                                                              
come to the legislature with recommendations for legislative                                                                    
adjustments in order to conform to a national pattern.  He pointed                                                              
out that not only would this simplify things, but it would also                                                                 
increase the competitiveness of life insurance providers.                                                                       
Number 015                                                                                                                      
MR. ELDER pointed out that the statute as well as the division                                                                  
(Division of Banking, Securities & Corporations) itself try to have                                                             
uniform securities regulations to the extent possible.  The                                                                     
division understands that due to some states moving faster than                                                                 
others, there can be some differences.  In that vein, Mr. Elder was                                                             
happy that the division is working with the VAA and NASAA.                                                                      
CHAIRMAN ROKEBERG noted the peculiar fiscal position the                                                                        
legislature finds itself in.  He inquired as to the number of                                                                   
viatical settlement or life settlement providers that could be                                                                  
registered to generate revenue.  What kind of fees are charged?                                                                 
MR. HEAD said that there are 20 companies which could register,                                                                 
under favorable circumstances, as providers.  He estimated double                                                               
that amount could register as brokers along with (indisc. -                                                                     
fading).  He could not speak to the volume that could be expected                                                               
in Alaska.                                                                                                                      
MR. McNERNEY agreed with those numbers, however he did not believe                                                              
that Alaska would receive them all.                                                                                             
MR. LOHR commented that he believed the NAIC model legislation does                                                             
provide for fees by registrants in this area.  Therefore, it would                                                              
be a potential revenue source, which could easily offset and                                                                    
possibly exceed the fiscal note.                                                                                                
CHAIRMAN ROKEBERG requested that Mr. McNerney provide the committee                                                             
with the fee schedules for various states in order to be consistent                                                             
with those.                                                                                                                     
MR. ELDER echoed Mr. Usera's earlier comments that the regulations                                                              
were based on HB 190, which is preferable to nothing.  Without any                                                              
regulation, the only thing left is full registration.  He specified                                                             
that he was not proposing full registration, but rather an                                                                      
exemption from full registration.                                                                                               
CHAIRMAN ROKEBERG announced that the committee would like for the                                                               
Division of Banking, Securities & Corporations to work with the VAA                                                             
in developing and modifying the regulations to agreement.  This                                                                 
would allow formal promulgation of the regulations as soon as                                                                   
possible.  He mentioned the need for the regulations to be                                                                      
consistent with HB 190, even when amended.  He requested that Mr.                                                               
Lohr, Mr. Elder and those from the VAA work together to develop a                                                               
modification to HB 190, which would direct the Division of                                                                      
Insurance to fundamentally adopt the NAIC statute, predominantly in                                                             
the form of regulation.  He further requested that those same folks                                                             
work on setting up this type of cross-jurisdictional activity in                                                                
Alaska.  Chairman Rokeberg said that he wanted to maintain the area                                                             
that has been demarcated Banking & Securities in the existing HB
190 while adding the requirements for regulation of providers,                                                                  
viators, and settlement owners to the Division of Insurance.                                                                    
Number 100                                                                                                                      
MR. McNERNEY asked if Chairman Rokeberg was suggesting placing the                                                              
entire NAIC bill into HB 190 or was he discussing giving the                                                                    
departments authority to enact regulations.                                                                                     
CHAIRMAN ROKEBERG clarified that he wanted to add the authority of                                                              
the Division of Insurance in HB 190.  He only wanted one bill.  He                                                              
requested recommendations from all parties with regard to what                                                                  
policy issues need to be decided and addressed by the legislature.                                                              
Chairman Rokeberg expressed his desire to have the regulations                                                                  
promulgated before the end of the upcoming session.                                                                             
MR. LOHR noted that the division is very busy.  He felt it feasible                                                             
to utilize HB 190 as the guide for the regulations.  However, he                                                                
requested that a mandate to adopt regulations be included versus                                                                
general authority.                                                                                                              
CHAIRMAN ROKEBERG agreed.  He expressed the desire to move HB 190                                                               
MR. LOHR indicated his understanding of Chairman Rokeberg's                                                                     
directive.  With regard to the fiscal note, he believed he could                                                                
assure that the fiscal note would be self-supporting.  He further                                                               
indicated that they would not be seeking any unrestricted general                                                               
funds.  Furthermore, he believed that the fee structure they would                                                              
propose would adequately cover any cost of implementation and                                                                   
ongoing operation of the program.                                                                                               
CHAIRMAN ROKEBERG explained that is why he wanted the model act to                                                              
be used and minimized in order to keep business coming into the                                                                 
state.  He expressed the need to have a minimal amount of hurdles.                                                              
Chairman Rokeberg stated that Mr. Elder could use the $10,000                                                                   
settlement to create information regarding how people can qualify                                                               
for their license.                                                                                                              
Number 137                                                                                                                      
MR. ELDER said that Chairman Rokeberg's idea was good, however the                                                              
settlement goes to the general fund due to the division's current                                                               
MR. ELDER, in response to Chairman Rokeberg, said that he did not                                                               
have any problems with what the chair had outlined.  He echoed Mr.                                                              
Lohr's comments that there are no jurisdictional problems between                                                               
the Division of Insurance and the Division of Banking, Securities                                                               
& Corporations.                                                                                                                 
CHAIRMAN ROKEBERG informed everyone that he would be discussing                                                                 
this with the commissioner.                                                                                                     
MR. ELDER reiterated his interest in working with the VAA as                                                                    
quickly as possible in order to get regulations adopted as quickly                                                              
as possible as well as noting the modifications necessary to HB
CHAIRMAN ROKEBERG stated that he wanted to be informed immediately                                                              
if folks are not cooperating.                                                                                                   
MR. HEAD thanked the chair and noted that he looked forward to                                                                  
working with both divisions to develop regulations.                                                                             
MR. LOHR commented that it is an excellent approach.  He requested                                                              
that the national viatical association, which testified at the                                                                  
April hearing, also be in the loop of this process.                                                                             
MR. HEAD pointed out that the current policy position for the                                                                   
national association is to rely on [the VAA].                                                                                   
CHAIRMAN ROKEBERG indicated the need to verify that independently.                                                              
Number 190                                                                                                                      
REPRESENTATIVE BRICE commented that this is an issue that must be                                                               
dealt with and the sooner the better.                                                                                           
CHAIRMAN ROKEBERG said that he looked forward to having another                                                                 
draft of HB 190 before the upcoming session.  He noted that he                                                                  
would appreciate, as soon as possible, any recommendations with                                                                 
regard to the policy issues that the committee has to take up.                                                                  

Document Name Date/Time Subjects