Navigating Life Settlements: Compliance Considerations for Broker-Dealers

Life settlements, the sale of unwanted or unaffordable life insurance policies to institutional buyers, have gained traction as a wealth management strategy. However, their regulatory status and compliance implications have caused confusion among broker-dealers and registered representatives.

The NASD (National Association of Securities Dealers), a self-regulatory organization, has expressed concerns about life settlements, particularly regarding their potential classification as securities and the associated suitability and compensation issues.

The question of whether life settlements are securities is divided into two parts:

  1. Back-end sales activity: The distribution of interests in a policy or pool of policies.

  2. Front-end activity: The solicitation and facilitation of the sale of a policy to a life settlement company.

Once a policy is sold in the secondary market, the "transfer for value rule" may apply, potentially classifying the insurance contract as a security. However, the upfront transaction of a life settlement may not be subject to securities regulation.

Despite the regulatory ambiguity, the life settlement market is substantial, with an estimated $9.4 trillion of life insurance in-force on 167 million policies. As the Baby Boomer generation enters retirement, the market is poised for further growth.

Compliance Considerations for Broker-Dealers

Broker-dealers have adopted different approaches to life settlements:

  • Passive referral without compensation: Some firms treat life settlements as passive referrals and don't accept compensation, focusing instead on redeploying the proceeds into traditional products like stocks or bonds.

  • Active engagement with compensation: Other firms view life settlements as a new revenue stream and actively engage in the process, receiving compensation for their services.

Regardless of the approach, broker-dealers need to establish clear compliance procedures for handling life settlements. Key considerations include:

  • Suitability: Ensure that life settlements are suitable for the client's circumstances and investment objectives.

  • Disclosure: Provide clear and comprehensive disclosures about the risks and potential returns of life settlements.

  • Supervision: Implement supervisory procedures to monitor life settlement transactions and ensure compliance with applicable regulations.

Recommended NASD Procedures

While the NASD hasn't definitively declared itself as the regulator of life settlements, it has taken enforcement actions against registered representatives involved in these transactions. Therefore, broker-dealers should adopt written procedures regarding life settlements, addressing aspects such as:

  • Suitability determination: Establish a process for determining the suitability of life settlements for specific clients.

  • Disclosure requirements: Provide clients with clear and comprehensive disclosures about life settlements, including risks, fees, and potential returns.

  • Supervisory controls: Implement supervisory controls to monitor life settlement transactions and ensure compliance with NASD rules and regulations.


Life settlements offer an alternative wealth management strategy, but their regulatory status and compliance implications require careful consideration by broker-dealers. By establishing clear procedures and adhering to NASD guidelines, firms can navigate this emerging market while safeguarding the interests of their clients.

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