Many life settlement hedge fund managers which establish life settlement hedge funds come from the insurance industry (although we have dealt with managers who are also registered as investment advisors). Accordingly, many managers are surprised when we discuss the issue of potential investment advisory registration. The central question is whether life settlements are securities.
If life settlements are securities at the federal level, then the anti-fraud provisions of the Investment Advisors Act would apply to the manager* and the manager may also choose to register as an Investment Advisor if the manager has more than $30 million of assets under management. If life settlements are securities at the state level, then the manager would likely need to be registered as an investment adviser with the state securities commission. [Managers typically do not want to register as an investment adviser because such managers will generally need to take the Series 65 exam and will also be subject to certain books and records requirements.]
* other anti-fraud provisions would likely apply as well in this context under the 1933 act and the 1934 act
Are life settlements securities at the federal level?
It depends. The most recent federal case seems to indicate that they may be securities if there is more activity than simply buying an insurance policy and waiting for the policy to mature (case coming soon). With regard to hedge fund managers who simply buy life settlement policies and hold those policies until maturity, the life settlement contracts will probably not be considered to be securities.
However, please note that FINRA (formerly the NASD) actually has promulgated a notice which states that, at least for their purposes, life settlements involving variable insurance policies are securities. Accordingly, managers who buy life settlements involving variable insurance policies should be aware that such instruments are considered to be securities by FINRA.
Are life settlements securities at the state level?
It will depend on the particular laws of the manager’s state of residence. Many of the state securities acts define the term “security” extremely broadly so it is wise to seek further clarification on this issue from the state securities board and/ or insurance commission. Some states have gone even further and specifically provided guidance on viaticals/ life settlements (see Washington State on Viaticals). The life settlement attorney will be able to research this issue.
For up to date information on life settlement regulations please see Life Settlement Regulations.
Other related HFLB articles: