Legislature(1999 - 2000)
04/19/1999 03:23 PM House L&C
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HB 190 - VIATICAL SETTLEMENTS Number 0139 CHAIRMAN ROKEBERG announced the committee's next order of business would be HB 190, "An Act relating to viatical settlement contracts." REPRESENTATIVE HARRIS made a motion to adopt the proposed Version G committee substitute (CS) for HB 190, labeled 1-LS0576\G, Bannister, 4/14/99. There being no objection, it was so ordered. CHAIRMAN ROKEBERG explained that HB 190 was introduced as a committee bill when controversy arose regarding the nature of the regulation of viatical settlements as part of the Securities Act of 1999. Therefore, those provisions were removed from that Act and HB 190 was introduced. Chairman Rokeberg announced that he intended to take public testimony today and familiarize the committee with this area of the law, but not report the bill from committee. There is controversy regarding the proper regulatory home for viatical settlements; should it be located in the Division of Insurance or the Division of Banking, Securities, & Corporations in Alaska. He noted that he has had numerous discussions with the Department of Commerce and there seems to be the belief that the Division of Banking, Securities, & Corporations should take primacy in this area. However, many in the insurance industry disagree with that placement. Chairman Rokeberg requested that Mr. Elder come forward to explain the CS. Number 0238 TERRY ELDER, Director, Division of Banking, Securities, & Corporations, Department of Commerce & Economic Development, directed the committee to the committee packets which contain a six page packet entitled, "Viatical Settlements HB 190." He referred to page 2 of that packet regarding definitions. He explained that to "viaticate is the process in which a person sells the death benefit or ownership of a life insurance policy to a third party for less than its face value." The insured person who sells the policy is the "viator." Typically, there are many "viatical settlement providers" who are in the business of buying these death benefits and insurance policies from viators and then selling interest in those to third party investors. The contract entered into between the provider and the viator is called a "viatical settlement contract." MR. ELDER explained that HB 190 adds viatical settlement contracts to the definition of a security in the Alaska Security Act, Title 45.55. He said his current position is that most all viatical settlement contracts are investment contracts which are already part of the definition of a security. There are those who do not have knowledge of this position or disagree with this position. Therefore, it would beneficial to clarify in the Alaska Security Act that viatical settlement contracts are part of the definition of a security. At the same time, the bill would provide an exemption from registration making it fairly easy for the viatical settlement providers to comply with the law. The exemption would only require the filing of a notice and certain disclosures to investors. Number 0479 MR. ELDER stated that the primary objective of the bill is to protect Alaskan investors from sales abuses that have occurred across the country. He noted that the committee packet contained an article regarding viatical contracts from the March 1999 Kiplinger's Personal Finance Magazine. This legislation attempts to avoid such problems discussed in the article. He acknowledged that no one has yet come forward with problems as discussed in the article. He hoped that the next article in a major press group would not utilize Alaskans as the examples. Mr. Elder explained that avoiding this is accomplished primarily through disclosure, proper risk disclosure, to the public. This legislation would provide the department with a mechanism, if complaints or abuses are found, to take quick action. Most of the problems reported in the press revolve around abusive sales practices. He discussed some of the abuses cited in the aforementioned article. Mr. Elder stressed that he was not opposed to this business on any philosophical ground. However, if this is to be sold it is a security and there should be adequate disclosure to protect investors. He offered to walk through the CS by section. CHAIRMAN ROKEBERG agreed that would be helpful. MR. ELDER began with Section 1 of the CS which adds a reference to the new exemption, new subsection (g). That reference provides the division the ability to revoke or deny an exemption. Section 2 is the new exemption, subsection (g), which requires the filing of a notice and consent to service to the division before any sales are made. Included in Section 2 is also some basic information regarding the company doing the sales. CHAIRMAN ROKEBERG asked if this referred to each time a contract was sold to a member of the public. MR. ELDER explained that there would be a filing for each program. In further response to Chairman Rokeberg, Mr. Elder said that typically, the industry standard is a one year, two year, three year and a ten year program. If that continues, the provider would file a notice for each of those programs. CHAIRMAN ROKEBERG stated that the language was not clear to that point. He referred to page 2, line 7 of the CS which in part reads, "at least 10 days before any offers or sales are made...." He asked if that refers to the exempt registered individual. MR. ELDER clarified that it referred to the issuer, the viatical settlement provider. He noted that the agent is not filing anything, except to register as an agent. Number 0938 MR. ELDER continued with Section 2 which also provides for the registration of agents, paragraph (2). Paragraph (3) is the disclosure requirement to the investor. He pointed out that much of the language in subsection (g) is from the current exemption at (b)(5)(B). Paragraph (3) is the language which was passed in HB 83 related to the exemptions of (b)(5)(B). Paragraph (4) requires that the firm be in business for three years and have no defaults. Subsection (h) lists those things which would disqualify an issuer from utilizing this exemption, although it may not disqualify the issuer from a full registration. That language is taken from the accredited investor exemption in HB 83. Subsection (i) merely allows copies of advertising materials and such to be requested by the department. MR. ELDER moved on to Section 3 of the CS which is a new section to AS 45.55. This section would provide purchasers the right to rescind purchase within three days of receipt of the final disclosure document or paying the agreed upon amount, whichever is later. Subsection (b) of Section 3 simply specifies that notice would become effective. Section 4 changes the definition of "issuer" to include the person creating the fractional or pooled interest or the person who effected the transaction with the investor. He clarified that it would not include a broker, dealer, or agent. Section 5 includes the amendment to the definition to "security" which adds "viatical settlement contract" on line 14, page 5 of the CS. Mr. Elder referred to page 6, Section 6 which inserts three new definitions necessary in the Securities Act which are as follows: viatical settlement contract; viatical settlement provider; and viator. With regard to the definition of viatical settlement contract, he stressed that the language is not referring to the regulation of the viatical settlement provider's relationship with the viator. There is only the regulation of the sales of the securities by the viatical settlement provider. He pointed out that the definition of viatical settlement contract excludes four items, subparagraphs (A), (B), (C), and (D). Subparagraph (A) is essentially the sale of the contract by the viator to the viatical settlement provider. Subparagraph (B) excludes the transfer or sale between the viator and a friend or family member. Subparagraph (C) excludes the use of the life insurance policy when it is being used as collateral for a loan. Subparagraph (D) excludes the viator when that person utilizes the accelerated benefits under the terms of the life insurance policy. MR. ELDER commented that to the extent possible, the division is staying out of the insurance business. Only the security and investor protection side is being addressed. Mr. Elder noted that he had conversations with the Division of Insurance which agrees that these are securities and that it is in the Division of Securities, Banking & Corporations' purview and responsibility to regulate this part of the business. With regard to the possible suggestion that the NAIC Model Act should be adopted, he pointed out that deals with the viatical settlement provider and the viator. That provides protections for the viator which is a separate issue that is not addressed in this legislation. If that is addressed at some point, he suggested that be kept separate from the regulation of securities. Number 1296 CHAIRMAN ROKEBERG inquired as to the location of the language in the bill which addresses the agents making the sales. MR. ELDER directed the chairman to page 2, line 21 of the CS. In further response to Chairman Rokeberg, Mr. Elder clarified that agents register with the division. CHAIRMAN ROKEBERG inquired as to the procedures of AS 45.55.030(a), (c) and 45.55.040. Are they exempt agents also? MR. ELDER explained, "We already have in our Act the definition of agent. If they're exempt from that definition, then they would not register." CHAIRMAN ROKEBERG posed the situation in which the agent was an insurance person. MR. ELDER said the person would have to register with the division. He commented that many are already registered with the division. The registration is a simple procedure in which each company with agents would file a form with the division and pay the fee. In further response, Mr. Elder said that there is a requirement for agents who register under our chapter to take the Series 63 exam which covers state law. Number 1414 REPRESENTATIVE CISSNA referred to Section 3 and asked if it is standard to provide three business days for the right of rescission. MR. ELDER commented that there is nothing standard about viatical settlements which are so new. He noted that Maine is on the verge of passing a new law from which this language was taken. He pointed out that the committee should have information related to the legislative hearings in Maine. The director of securities in Maine decided to change the three days to 30 days due to the testimony of a sales agent and an investor who experienced problems. REPRESENTATIVE CISSNA seemed to agree with the change to 30 days. REPRESENTATIVE MURKOWSKI pointed out that the information in the committee packet indicates there is a split with regard to whether viatical settlements should be covered under the Division of Insurance or the Securities Act. She understood Mr. Elder's and Chairman Rokeberg's testimony to be that the Division of Insurance feels that securities should have primacy over this issue. She surmised that the division feels this way because this legislation regulates the sales of the securities. If the relationship between the viator and the viatical settlement provider was being regulated, it may be appropriate to be under the Division of Insurance. However, since the discussion here surrounds the sale of the investment contract, this is subject to securities. MR. ELDER added, "What we and what the Division of Insurance are both saying is that the relationship of the viator and the viatical settlement provider and everything that goes past that to the insurance company, that would - that the NAIC Model Act talks about, that would be properly discussed with the Division of Insurance. ... Let's say you passed a viatical settlement act that adopted that, they would agree that the sale of the securities forward to the investor should be something that would be regulated by our division." Number 1692 DANA CASHEN, Accelerated Benefits Corporation; Co-Chair, Legislative Committee, National Viatical Association (NVA), testified via teleconference from Florida. She informed the committee that the Accelerated Benefits Corporation is a licensed viatical settlement corporation in Orlando, Florida. Ms. Cashen said she was happy to see and in favor of Alaska taking interest in protecting its consumers. She noted that NVA and the Viatical Association of America have been working with the (National Association of Insurance Commissioners) NAIC Viatical Settlement Working Group to draft the Model Act and address some of the concerns with the industry. Ms. Cashen said that with her initial reading of the bill, there are some concerns with some of the language. Therefore, she expressed the need to have more time to sit down with the involved parties in Alaska in order to discuss some of the alternatives that she has worked on. Ms. Cashen informed the committee that she is in Tallahassee, Florida today watching "our House Bill" move from committee to the floor. The legislation is pretty interesting and addresses the scenario being addressed in HB 190, the portion of the transaction which deals with the purchaser and the viatical settlement provider. Florida already has laws regulating the viator and the viatical settlement provider. Florida is the first state to do such. MS. CASHEN noted that the NAIC Working Group has received a couple of charges to address for 1999. One of those charges is to review the relationship between the purchaser and the viatical settlement provider. This will be discussed at a meeting next week in Kansas City, Kansas. The discussions will begin with regard to how more protections can be provided to the purchaser. Ms. Cashen commented that her consensus from NVA is that it would like to work with Alaska to share information from the NAIC, Florida, and other states. CHAIRMAN ROKEBERG asked Ms. Cashen to explain what the NAIC is. MS. CASHEN clarified that the NAIC is the National Association of Insurance Commissioners. The association includes commissioners from around the country who meet on a quarterly basis. The association is fairly complex and covers many different insurance issues. CHAIRMAN ROKEBERG noted that the committee packet includes the April 15, 1999 "Draft NAIC Model Act With Wraparound." He asked if the Model Act refers to the transaction between the sales agent and the purchaser. Number 2066 MS. CASHEN explained that the current NAIC Model Act only deals with the relationship between the viator and the viatical settlement provider. The aforementioned information in the committee packet is the viatical settlement industry's attempt to take the current model and insert language within that model which addresses the purchaser to provider relationship. In addition to disclaimers and advertising regulations, the main concept in the NAIC Model Act With Wraparound is to have agents soliciting purchasers to buy these policies to be licensed as are life insurance agents. Ms. Cashen felt this is clearly an insurance product and those speaking with potential purchasers should have such knowledge. For example, in Florida where there are viatical settlement laws the Department of Insurance is able to regulate the entire transaction. CHAIRMAN ROKEBERG noted that his staff had a copy of Florida's SB 1242, but recalled that Ms. Cashen referred to a House Bill. MS. CASHEN specified that to be the Senate's companion bill. She informed the committee that the House Bill is HB 2235 which passed out of Florida's House Insurance Committee today. House Bill 2235 should be headed to the floor at least by early next week. The Senate Bill has passed out of Florida's Senate Insurance Committee and the Senate Judiciary Committee and is headed to the Senate floor. Therefore, both bills should be headed to both floors next week. In response to Chairman Rokeberg, Ms. Cashen explained that the two bills in Florida have some differing language. She explained that in Florida, each house has to pass the identical version. Ms. Cashen predicted that there would be discussion regarding the differences and whichever body passed its bill out first would be the vehicle. REPRESENTATIVE MURKOWSKI pointed out that the legislation before the committee would amend the Alaska Securities Act to include a viatical settlement contract. She surmised that is not the case with Florida's legislation. She inquired as to what other states have done with their Securities Act and whether viatical settlement contracts are included within the definition of a security. MS. CASHEN said that up until this legislative session there were not any states that included viatical settlement contracts in their Securities Act. This year about three to five states have introduced legislation similar to that being introduced in Alaska. To her knowledge, only two have passed this session. Ms. Cashen stated that the vast majority of states passing viatical settlement legislation seemed to follow the lead of the NAIC model. She commented that the issues being dealt with in Alaska are on the radar screen of the NAIC. TAPE 99-42, SIDE A Number 0001 DOUG HEAD, President, Viatical Association of America (VAA), testified via teleconference from Florida. Mr. Head noted that the committee should receive the wraparound document that is being proposed to the NAIC. The wraparound document was developed in negotiations with Florida's Department of Insurance which is largely reflected in Florida's Senate bill. However, there is one significant difference between Florida's House and Senate bills. Florida's Senate bill addressed the emerging Life Settlement Industry which involves transactions of policies of healthy persons such as high net worth executives who wish to dispose of their life insurance. The wraparound document sent to the committee should contain some language referencing the Life Settlement Industry. Mr. Head commented that he believed that the viatical settlement industry has been extensively reviewed from the viator's side by NAIC. Number 0166 MR. HEAD stated that the greatest concern with the legislation before the committee is the adequacy of the definitions. The discussion from committee members regarding how exactly this would function is also of concern for Mr. Head. He pointed out that VAA has a number of members that are large institutional purchasers. Mr. Head commented that the previous description of the typical viatical transaction is not necessarily identical from the many models of different methods for raising funds experienced by companies in VAA. Therefore, he expressed the need to have the opportunity to review the specifics of this law with all VAA members. He was concerned that the transaction does not always involve a one, two, three, or ten year package of policies. Sometimes the transaction involves single policies, multiple policies, and the registration process which may make it prohibitive to do business in Alaska. He noted that Maine is a state in which essentially, no one does business due to the passage of Maine's Viatical Act about a year ago. Mr. Head said that he would like to work with the committee to ensure that there are appropriate protections under the insurance umbrella for all aspects of that industry. CHAIRMAN ROKEBERG asked if there are two different viatical associations. MR. HEAD replied yes, but noted that at this point there is really no separation in policy. CHAIRMAN ROKEBERG asked if it would be correct to view Mr. Head as representing the viatical settlement providers. Number 0431 MR. HEAD informed the committee that he is employed by a viatical settlement broker, the Medical Escrow Society, the largest in the nation. He clarified that he works directly with viators. Under the NAIC model, a viator is a person who owns a policy on the life of a person that may not necessarily be terminally ill. In further response to Chairman Rokeberg, Mr. Head clarified that the owner of the policy may or may not be the person with the disease under the viator definition in the NAIC model. The terminally ill person is identified as the insured. Mr. Head noted that the NAIC Model Act contains many definitions which he urged the committee to review because the NAIC definitions may be improvements on those in HB 190. Mr. Head explained that to him a provider is a company, no matter how they are funded, that is engaged in purchasing viatical settlements. CHAIRMAN ROKEBERG noted that there has been testimony that very few states have regulations. Ms. Cashen testified that three to five states may have some type of security regulations. MR. HEAD said that there are a number of states and securities commissioners that have made rulings or are in negotiations. Depending upon the fund-raising model utilized by the provider, there are a range of possibilities. The funding models, the relationship with particular purchasers, the definitions of securities, commissioners and the legislatures vary from state to state. He believed that North Dakota, South Dakota, and Iowa are the only states that have engaged in legislation moving in this direction. North Dakota has effectively outlawed viatical settlements no matter who is the provider. South Dakota has no industry, that he was aware of. Iowa has a small industry. Larger states such as Texas, New York, California, and Florida have had successful experiences regulating the relationship between the provider and the (indisc.). "Florida is the first with a living, dynamic viatical settlement industry to begin to figure out how to structure the purchaser side regulation under the insurance umbrella." CHAIRMAN ROKEBERG inquired as to how many states have a regulatory scheme that is enforced by their Insurance Commission or their Division of Insurance. MR. HEAD said that he believed that every state which has a viatical settlement law, with the mentioned exceptions, places viatical settlements under the Division of Insurance. The last time he looked, he counted 27 such states. Number 0796 CHAIRMAN ROKEBERG informed Mr. Head that Alaska is problematic in that it does not have any law or regulations specifically drafted for the viatical settlement industry. Therefore, Mr. Elder and the Division of Securities, Banking & Corporations generated some cease and desist orders when advertisements guaranteed returns on investments of these contracts. MR. HEAD commented that may have been an appropriate step. He said that the VAA model suggests and agrees with NAIC that there should be extensive disclosure to purchasers. However, Mr. Head believed that regulating this under the securities umbrella seems to divide the process. Mr. Head indicated that it would be best to track the entire transaction due to the belief that the product from its beginning is an insurance product, a life insurance policy. Therefore, full regulation of the entire transaction should fall under life insurance regulators. CHAIRMAN ROKEBERG noted that the Alaska Division of Insurance does not agree with Mr. Head. He inquired as to the types of problems that occurred prior to any regulatory reform because there seems to be a plethora of abuse and misunderstanding surrounding the viatical industry. MR. HEAD stressed that the biggest problem, as with any new product, is that there are fraudulent actors. The most disastrous of those fraudulent scenarios occurred in the West and Northwest and may have entered Alaska. With regard to Kiplinger's article, Mr. Head believed it was not entirely accurate and that there was some poor and sensational reporting. Mr. Head acknowledged that there is fogginess surrounding this industry, but he hoped that this option will continue to be provided for those who have life insurance and wish to sell it. This is a property issue which everyone should keep under review. He stated, "We need to be concerned about whether there is a market for their policies and whether we properly regulate it. And we think we're moving, with the NAIC, in the right direction and that Alaska should - and we are more than anxious to work with you to develop appropriate regulation and we do believe very strongly that it belongs in the insurance department." CHAIRMAN ROKEBERG identified one of the current dilemmas as whether the Alaska Division of Banking, Securities, & Corporations should regulate until a statutory scheme is in place for this. Chairman Rokeberg did not believe it to be in the public's interest to cease marketing of these, if they can be done in a manner which does not harm the public. He did not believe it appropriate to shut down the viatical settlement industry, while Alaska "gets its act together legislatively." MR. HEAD agreed with that view. He cited one of the difficulties as the collateral issues associated with direct securities regulation which confuse the potential for people to make appropriate investments in this product. There are also problems created for the viator who wishes to sell his/her life insurance policy. For example, a terminally ill individual with two $20,000 policies who wanted to sell those policies to a brother-in-law would be required to file due to the single sale exemption. Number 1153 MR. HEAD commented that there are many technical issues with HB 190. The definitions need extensive review. He noted that he would like to work quickly and with the Department of Insurance to establish a complete regulatory scheme to protect the terminally ill viator as well as investors. With the emergence of life settlements, there is yet another emerging problem. Therefore, all of this regulatory phenomena should be placed in a central location. Mr. Head believed it would be difficult for the Division of Banking, Securities, & Corporations to regulate the other side of the industry, as the director commented earlier. CHAIRMAN ROKEBERG said that he had heard mention that many in the securities industry do not really have the understanding or patience to sell this product. Therefore, those with a life insurance background are better marketing sales agents for this type of product. Is that an appropriate assessment? MR. HEAD agreed that Chairman Rokeberg's assessment was appropriate. In further response to Chairman Rokeberg, Mr. Head explained that there are many variables in life insurance which are best known by life insurance agents. He did not know of any security that required premium payments which is unique to life insurance. Furthermore, there are issues regarding maintaining premiums on portions of the policies. Today it is possible to sell portions of a life insurance policy and that creates significant premium issues which are best handled by a life insurance agent. CHAIRMAN ROKEBERG asked whether that was due to the pre-paid dividends and the adjustments for annual premiums with an aged policy. Number 1301 MR. HEAD replied yes. For example, an individual with a life expectancy of two years who purchased a policy at 60 years of age has a much higher premium than an individual at the same age who purchased the same policy at 30 years of age. Therefore, these packages are part of what a good insurance person can explain to a purchaser. For securities sales people, the language associated with such a situation is not typically familiar language. In summary, Mr. Head stated that good disclosure to the investor is the objective. Good disclosure would best come from a sales person who has knowledge of the product he/she is selling. He agreed to be available to talk with staff and offered to provide the committee with additional written testimony to illustrate some of these problems. CHAIRMAN ROKEBERG announced that he would be talking with those in the industry in Alaska as well as the various departments. He also announced that he did not intend to report HB 190 out of committee today and will only do so when the legislation is ready. Number 1417 JACK GWALTNEY, General Agent, Future First Financial Group, Gwaltney & Gwaltney, Incorporated, testified via teleconference from Anchorage. With regard to the testimony from those in Florida, they are accurate in what it would take to do this right. Mr. Gwaltney agreed that there needs to be some legislation to accommodate all parties concerned. He noted that the testimony has made it apparent that there are many parties involved in one of these transactions. This is a complicated issue. Mr. Gwaltney offered to work with the committee on this issue. CHAIRMAN ROKEBERG announced that HB 190 would be held.
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