Legislature(1999 - 2000)
10/21/1999 01:48 PM L&C
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
HOUSE LABOR AND COMMERCE STANDING COMMITTEE Anchorage, Alaska October 21,1999 1:48 p.m. MEMBERS PRESENT Representative Norman Rokeberg, Chairman Representative Andrew Halcro, Vice Chairman Representative Tom Brice (via teleconference) Representative Sharon Cissna MEMBERS ABSENT Representative Jerry Sanders Representative Lisa Murkowski Representative John Harris COMMITTEE CALENDAR HOUSE BILL NO. 190 "An Act relating to viatical settlement contracts." - HEARD AND HELD (* First public hearing) PREVIOUS ACTION BILL: HB 190 SHORT TITLE: VIATICAL SETTLEMENTS SPONSOR(S): LABOR & COMMERCE Jrn-Date Jrn-Page Action 4/13/99 794 (H) READ THE FIRST TIME - REFERRAL(S) 4/13/99 794 (H) L&C, JUD 4/19/99 (H) L&C AT 3:15 PM CAPITOL 17 4/19/99 (H) HEARD AND HELD 4/19/99 (H) MINUTE(L&C) 10/21/99 (H) L&C AT 1:30 PM ANCHORAGE LIO WITNESS REGISTER DOUG HEAD, President Viatical Association of America 1200 19th Street Northwest, Suite 300 Washington, D.C. 20036 Telephone: (407) 898-4203 POSITION STATEMENT: Discussed concerns with HB 190. MIKE McNERNEY, Attorney Brinkley, McNerney, Morgan, Solomon & Tatum Chair, Committee on Purchaser Relations Viatical Association of America PO Box 522 Ft. Lauderdale, Florida 33302 Telephone: (954) 522-2200 POSITION STATEMENT: Discussed viatical settlements. JOLENE FULLERTON, Attorney Kelco Vice President, VAA 269 West Main Lexington, KY 40507 Telephone: (606) 225-1015 POSITION STATEMENT: Mentioned her belief that there is a constitutional property right issue involved. TERRY ELDER, Director Division of Banking, Securities & Corporations Department of Commerce & Economic Development PO Box 110807 Juneau, Alaska 99801-0807 POSITION STATEMENT: Discussed the division's position. VINCE USERA, Senior Securities Examiner Division of Banking, Securities & Corporations Department of Commerce & Economic Development PO Box 110807 Juneau, Alaska 99801-0807 POSITION STATEMENT: Discussed the division's position. BOB LOHR, Director Division of Insurance Department of Commerce & Economic Development PO Box 110805 Juneau, Alaska 99811-0805 POSITION STATEMENT: Discussed the division's position. ACTION NARRATIVE TAPE 99-64, SIDE A Number 0001 CHAIRMAN NORMAN ROKEBERG called the House Labor and Commerce Standing Committee meeting to order at 1:48 p.m. Members present at the call to order were Representatives Rokeberg, Halcro and Brice. Representative Cissna arrived as the meeting was in progress. Representatives Sanders, Murkowski and Harris were not in attendance. 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 organization. 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 confidential. 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 concern. 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 regulations. 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 securities. 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 everything. 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 along. 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 budget. 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 190. 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. ADJOURNMENT There being no further business before the committee, the House Labor & Commerce Standing Committee meeting was adjourned at 3:40 p.m.