Beyond Structured Settlements

SSP 2012 Annual Meeting - 2

Charles Schell, incoming President of the Society of Settlement Planners (SSP), concluded the SSP 2012 Annual Meeting by communicating his thoughts for improving the settlement planning market and expanding its core structured settlement annuity product. In his remarks, Schell addressed alternative business models and challenged participants in both models to collaborate to improve business standards and practices.

What follows is a summary of Schell's SSP comments.

Alternative business models

"Structure brokers under the traditional Claims Management model have the advantage of access to claims adjusters. However, their single-product sale is frequently dismissed by injury victims and their families for many reasons including low interest rates, lack of liquidity and the defense brokers' ties to the defendant. As a result, many injury victims and their families make uninformed decisions or resent the limited financial options presented at the time of settlement.

"In contrast, injury victims and their families generally welcome Settlement Planners into their homes as trusted advisers because they are recommended by plaintiffs' attorneys. By introducing a menu of insurance and financial products and providers, Settlement Planners promote education and information sharing. They encourage the injury victim and his/her family to actively participate in the planning process. From my personal experience, more information equals more structured settlement annuities because the product is generally right in every case at some level of participation as one asset class.

"The Claims Management model benefits the settlement planning industry and Settlement Planners should acknowledge the benefits which include product marketing and continued protection of IRC sections 104(a)(2) and 130. Concurrently, defense brokers should recognize the benefits of collaborating, rather than competing, with Settlement Planners. These benefits include access to and trust of the customer, an awareness of financial needs and family issues plus multi-product financial solutions that feature structured settlements and enhance their sale.

Business standards and practices

"To grow the structured settlement market, both Settlement Planners and traditional Claim Management structured settlement practitioners must improve their business standards and practices. To do so, we must understand, embrace and promote full disclosure, product suitability standards and written, informed consent. Our disclosure practices should include compensation and conflicts of interest. Our product suitability standards should satisfy a fiduciary and/or "best interest" test. We should insist that our customers understand, and acknowledge their understanding of, our proposed products and settlement plans by signing a written informed consent form.

"Rather than complain about secondary market business practices, primary market stakeholders should take direct actions to improve the secondary market. First, by adopting our own "best interest" or fiduciary suitability standards, the primary structured settlement market can improve settlement planning. The result will be fewer cases that are "over-structured" and subsequently require structured settlement recipients to sell payment rights to obtain needed liquidity.

"Second, we can improve the secondary market by promoting one simple, best practice from the primary market - multiple quotes. Unfortunately, single quote transfers remain a common practice within the structured settlement secondary market resulting in unnecessarily high discount rates. By educating and encouraging judges to require multiple quotes as a necessary condition for meeting the "best interest" test, the primary market can help produce an important and immediate secondary market improvement.

"To summarize: my proposed strategy to improve and grow both the structured settlement and settlement planning markets:

• "Study and improve our business standards and practices.
• "Develop "customer centric" solutions that help injury victims.
• "Build collaborative business models by focusing on shared interests."

Acknowledgement: In addition to serving as SSP's President, Charles Schell is a founding partner of Forge Consulting. Forge is also an owner of The Settlement Service Group (TSSG) for which Patrick Hindert, S2KM's blog author, serves as Managing Director.

For additional S2KM reporting about the Society of Settlement Planners, see the structured settlement wiki.

SSP 2012 Annual Meeting - 1

The French author and poet Victor Hugo has been translated and quoted as saying: "There is nothing more powerful than an idea whose time has come."

Has the time come for "settlement planning" to be recognized as a powerful idea deserving professional study and status in the United States? Recent conferences, including the Society of Settlement Planners (SSP) 2012 Annual Meeting, suggest that settlement planning is becoming both an important profession and an alternative business model for the structured settlement industry.

As a foundation for professional status, SSP has previously developed the Registered Settlement Planner (RSP) Program and adopted Standards of Professional Conduct. The 2012 Annual Meeting, held April 30 - May 1 in Las Vegas, featured presentations by leading settlement planning practitioners and subject matters experts. In addition, several product providers introduced insurance and financial products to complement the traditional structured settlement annuity.

What is settlement planning? Joseph Tombs, a former SSP President and co-founder of the RSP program, defines settlement planning as "... a profession helping recipients of settlement proceeds use those proceeds to achieve post-loss goals and transition successfully to post-settlement financial life."

What is a settlement planner? The SSP Standards of Professional Conduct define "settlement planner" as "... a representative who provides advice and other services to a person participating in the design, negotiation or implementation of a settlement or satisfaction of judgment for the benefit of a person claiming a legal entitlement to an award of damages or other compensation."

SSP conference Keynote Speaker Michael Ellsberg, author of "The Power of Eye Contact" and "The Education of Millionaires", discussed how to "Invest in Your Own Human Capital".

Settlement Planning Practitioners and Subject Matter Experts and Topics:

• 2011 SSP President Jack Meligan - SSP Accomplishments
• 2012 SSP President Charles Schell - SSP Goals
• Joseph DiGangi - Reinventing the Settlement Industry
• Douglas Shaw - Medicare Liens
• Robert Wood - Tax Update
• Jeremy Babener - Settlement Agreements and IRS Challenges
• Karen Meyers - Suitability Standards
• Patrick Hindert - Settlement Planning Business Models
• David Higgins - Litigation Rollover Accounts
• Jason Lazurus - Liability MSAs
• Frank Maguire - Overcoming Stalled Markets
• Mark Wahlstrom - Market Trends and Challenges
• Daniel Hindert - The ELNY Liquidation
• Richard Risk - History of Settlement Planning
• Dan Alverez - Lien Resolution
• Joseph Tombs - The RSP Program

Settlement Planning Product Providers

• Wesley Cosgriff - Secured Futures Trust
• John Woolway - Vantage Investment Partners
• Robert Noack - Aequitas Capital Management
• Christi Fried - Continental Trust Services
• Paul Hansen - Morgan Stanley Smith Barney
• Major General James W. Comstock (ret.) - Alternative Design Insurance Services
• Anthony Prieto - Synergy Settlement Services
• James Creel - First Capital Surety & Trust Co.
• Robert Burney - Integrity Financial, Inc.
• Mal Deener - Symetra Life Insurance Company (on behalf of Berkshire Hathaway Life Insurance and National Indemnity)

In subsequent blog posts, S2KM will review selected SSP conference topics. For S2KM reporting of prior SSP meetings, see the structured settlement wiki.

S2P2J Release 51

Publisher Law Journal Press anticipates an April 2012 distribution date for hardcopy supplements for Release 51 of "Structured Settlements and Periodic Payment Judgments" (S2P2J). Online S2P2J will also be updated April 2012 to include Release 51 materials. First published in 1986, S2P2J is co-authored and updated semi-annually by Daniel W. Hindert, Joseph J. Dehner and Patrick J. Hindert. Both the National Structured Settlement Trade Association (NSSTA) and the Society of Settlement Planners (SSP) utilize S2P2J as an educational resource for their certification programs.

Release 51 Highlights

Release 51 for "Structured Settlements and Periodic Payment Judgments" features a comprehensive Executive Life update including expanded and updated coverage for the Executive Life of New York (ELNY) liquidation proceedings now in progress. In related reporting, Release 51 also:

• Expands and updates prior reporting for life insurance insolvency procedures and state guaranty association laws;
• Offers advice to plaintiff attorneys about how to address the risk of non-payment by annuity providers; and
• Summarizes recent case developments impacting Aurora, the successor company to Executive Life Insurance Company of California (ELIC),

Release 51 also updates Medicare Secondary Payer (MSP) developments and conditional Medicare payment requirements. Contributing author Peter H. Wayne IV provides current analysis and advice about Medicare Set-Aside (MSA) arrangements in liability cases discussing new and related case law, new CMS pronouncements and new CMS field office guidance with practice tips for structured settlement and settlement planning consultants, attorneys and claim supervisors.

Release 51 expands existing coverage of structured settlement business standards and practices including analysis of the following legislation impacting settlement planners:

• The NAIC Suitability in Annuity Transactions Model Regulation;
• The NAIC Annuity Disclosure Model Regulation;
• Dodd-Frank's impact on fiduciary and suitability standards; and
• The Uniform Prudent Investor Act.

Other topics addressed in Release 51:

• Structured settlement metrics for defendants and liability insurers.
• The Treasury's final regulations for IRC section 104(a)(2) incorporating amendments resulting from the Small Business Job Protection Act of 1996.
• The new IRS Lawsuits, Awards and Settlements Audit Techniques Guide.

"Structured Settlements and Periodic Payment Judgments" is now available in both hardcopy and online versions. For summaries of prior Release Highlights, see the structured settlement wiki.

SNTs and Structured Settlements

With declining annuity premium and historically low interest rates, structured settlement stakeholders should be discussing how to improve and grow their business. By substantially expanding Medicaid, Federal health care reform potentially increases the market for structured settlement annuities used to fund special needs trusts (SNTs).

Congress created special needs trusts (self-settled; pooled; and third party) as part of the Omnibus Budget Reconciliation Act of 1993. When properly designed and administered, special needs trusts can receive settlement proceeds, including structured settlement payments, without disqualifying the trust beneficiary from SSI or Medicaid.

Whether a special needs trust is advisable in a specific case requires analysis of many factors including the extent of disability, the availability of government benefits, as well as the nature and amount of available personal and family assets. One complicating factor is shared regulatory authority. Medicaid is a joint federal state program. In addition to two federal agencies (SSA and CMS), state Medicaid agencies and state Medicaid plans also provide state-specific rules for special needs trusts. State and county Medicaid case workers interpret and apply federal and state Medicaid laws to individual cases.

The growth of special needs trusts has coincided with a corresponding increase in the number of special needs attorneys. Three national professional associations (ASNP, SNA and NAELA) now exist for special needs attorneys and several legal textbooks have been written about special needs trusts. Most of these textbooks, however, are generic and do not provide detailed state-specific analysis. One exception is a two volume treatise published in 2008 (with updates) by the California CEB titled "Special Needs Trusts: Planning, Drafting and Administration" (CEB SNT). Edited by Kevin Urbatsch, CEB SNT features 17 chapters separately written by leading California special needs attorneys plus detailed appendices with applicable legal forms plus federal and state statutes, regulations, case citations and other references.

Because California represents a large and strategically important state for both structured settlements and special needs trusts, S2KM recently reviewed CEB SNT to evaluate how this legal treatise addresses structured settlements and what opportunities it suggests for improving and growing the national structured settlement market. Most of the structured settlement discussion in CEB SNT appears under a Chapter 8 section titled "Use of Structured Settlements with First Party SNTs" authored by Donna Bradshaw and Leslie Ann Barnett.

Settlement Planning Team

For personal injury cases involving a special needs trust, Bradshaw and Barnett propose a collaborative settlement planning team consisting of a special needs attorney, a structured settlement broker, a SNT trustee, an independent financial planner and a life care planner. Neither Bradshaw and Barnett, nor other CEB SNT authors discuss this proposed planning team in detail. Arguably, such a discussion goes beyond the scope of this CEB SNT treatise.

The concept of a collaborative professional team, however, is critical for settlement planning and the future of structured settlements. Unfortunately, with only a few exceptions (most notably the ASNP 2009 and the SSP 2011 Annual Conferences both of which featured CEB SNT editor Kevin Urbatsch as a speaker), the following issues have to date received insufficient industry discussion:

• What is a settlement plan?
• Who are the necessary team members and what issues should they address?
• What is the settlement planning role, if any, for the plaintiff trial attorney? for the defense structured settlement broker?
• What work product(s) do each of the team members contribute?
• How are the various work products consolidated and by whom?
• How are conflicting recommendations reconciled and by whom?
• What does a settlement plan cost?
• How are the team members compensated and by whom?
• What disclosures should be made to the injury victim?
• What metrics are needed to evaluate the effectiveness of a settlement plan?
• How important are 468B qualified settlement funds for settlement planning?
• Who is liable, and how are damages apportioned, for settlement planning errors and omissions?

Structured Settlements

In the two volume CEB SNT treatise, structured settlements are the only SNT "funding product" that receives detailed coverage. Chapter 8 authors Bradshaw and Barnett justify devoting 12 CEB SNT subsections to "structured settlements" by stating: "special needs planners need to understand how structured settlements work with first party SNTs to best advise personal injury attorneys, persons with disabilities, and their families."

Acknowledging the need to understand how structured settlements work, however, does not mean Bradshaw and Barnett fully endorse structured settlements. To the contrary, they provide several warnings and cautionary notes:

• "Plaintiff's trial attorney may mistakenly believe (or be misled into believing) that a structured settlement annuity is the only effective tool for the major part of the settlement funds."
• "At times a structured settlement is funded for a person with a disability without consideration of the unique needs to that individual."
• "The most common issue is too much cash in the structured settlement and not enough cash outside the structure."
• "It is insufficient to retain just enough cash to purchase a home and a van; there also must be a financial plan to maintain the home and van and consider replacement costs"
• "When a settlement has been funded primarily in a structured settlement annuity, there is little protection from inflation."
• "Annuities purchased in a time of low interest rates are likely to grossly under perform when compared to a well-balanced portfolio of stocks and bonds."
• "If the SNT beneficiary has an emergency or needs cash quickly, the settlement annuity will not advance payments."
• "It is imperative that practitioners insist on a commutation rider whenever there is a possible estate tax situation."
• "Once the structure is funded, [the structured settlement broker's] job is done. It is then left to the SNT trustee and special needs practitioner to work with the structured settlement for the rest of the person with the disability's life."

Without explicitly criticizing structured settlement business standards and practices, these warnings and cautionary notes highlight structured settlement issues S2KM discussed in a recent blog series about "product suitability standards" including the need for full disclosure and informed consent.

Despite 12 CEB SNT subsections discussing structured settlements, Bradshaw and Barnett barely mention three structured settlement-related topics that are important for special needs attorneys:

• Periodic Payment of Judgments - California was the first state to make periodic payment mandatory in certain (medical malpractice) judgments "at the request of either party". Because California's medical malpractice periodic payment statute also influences settlements that include special needs trusts, California special needs attorneys should be familiar with its provisions.
• Structured Settlement Transfers - Structured settlement transfers represent a strategy option for SNT trustees and special needs attorneys to consider if and when they confront some of the potential structured settlement problems Bradshaw and Barnett identify above. California amended its state structured settlement protection statute in 2010 adding factors for the court to consider when determining whether a proposed transfer is fair, reasonable and in the payee's best interest.
• Qualified Settlement Funds (QFS) - Similar to structured settlement transfers, QSFs are controversial within the structured settlement industry. Arguably underused in single event cases, QSFs provide a valuable settlement planning tool that all special needs attorneys should understand and promote.

Conclusion

For a regressive structured settlement industry, first party special needs trusts represent a growing market segment and special needs attorneys provide expanding networks of potential professional allies. Although CEB SNT focuses on California special needs trusts, the subsections discussing structured settlements offer a useful learning resource for all structured settlement stakeholders. Bottom line: the structured settlement industry needs to expand its strategic dialogue with special needs attorneys. The objectives should include better marketing and product feedback plus improved educational programs, business models and business practices.

For additional information about special needs trusts and structured settlements, see the structured settlement wiki and Section 15.04[7] of "Structured Settlements and Periodic Payment Judgments" (S2P2J).

Product Suitability Standards - 4

With declining annuity premium and historically low interest rates, structured settlement stakeholders should be discussing how to improve and grow their business. To help promote this discussion, S2KM's current blog series about "product suitability standards" highlights two fundamental issues rarely addressed during industry educational conferences:

• When is a structured settlement annuity appropriate for a specific physical personal injury claimant?
• What standards exist to help judges, guardians, trustees, mediators, attorneys, settlement planners, structured settlement consultants and other structured settlement stakeholders make this determination?

Potential sources for structured settlement product suitability standards discussed in prior S2KM blog posts:

• Part 1 - NSSTA's Code of Ethics; SSP's Standards of Professional Conduct; and the NAIC's Suitability in Annuity Transactions Model Regulation.
• Part 2 - State minors' statutes and state structured settlement protection statutes.
• Part 3 - The Uniform Prudent Investor Act (UPIA) and the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank)

Fiduciary Standard

Among other findings, S2KM's prior review points out a general legislative trend to protect investors and consumers with a more uniform fiduciary, and/or "best interest", standard of care. In general, a fiduciary standard is viewed as the highest legal standard of customer care requiring both a duty of care and a duty of loyalty. A fiduciary is required to act in the best interest of the investor and/or customer and to fully disclose all material facts plus any conflicts of interest. Trustees and investment advisers currently are held to a fiduciary standard which may soon also apply to financial planners and broker dealers. Many state minors' statutes and all state structured settlement protection statutes incorporate "best interest" standards.

Model Annuity Regulations

For some but not all annuity products, the National Association of Insurance Commissioners (NAIC) has created a "Suitability in Annuity Transactions Model Regulation". Significantly, the NAIC Model Suitability Regulation exempts structured settlements and provides less consumer protection than the fiduciary, and/or "best interest" standard. The NAIC has also promulgated an "Annuity Disclosure Model Regulation" "to provide standards for the disclosure of certain minimum information about annuity contracts to protect consumers and foster consumer education." It also exempts structured settlements. The legislative history of the NAIC Model Disclosure Regulation indicates that "[i]nterested parties spoke in favor of an exemption for sophisticated transactions such as ..... structured settlements."

A Hall Pass?

Do these NAIC exemptions mean that structured settlements have been given a "hall pass" for purposes of product suitability requirements? No. If structured structured stakeholders want to improve and grow their business, there are many reasons why they should: 1) understand the meaning and requirements of all three standards (fiduciary duty, best interest, and suitability); and 2) adopt better business practices that address and incorporate one or more of these product standards. Reasons include:

• Blended products - Structured settlement annuities increasingly are paid into trusts (UPIA standard) that also include financial products (Dodd-Frank standard).
• Multiple licenses - In addition to structured settlement annuities, settlement planners increasingly sell securities as well as multiple life insurance and annuity products.
• Competition - To successfully compete in today's economic and legal environment, structured settlement sales persons must adjust upward to match the higher product suitability standards and best business practices of their competitors.
• Clients and Stakeholders - As a matter of self-protection as well as consumer protection, many structured settlement clients (defendants; plaintiff attorneys) and stakeholders ( judges; mediators) will increasingly demand higher product and sales standards for injury victims.
• Lawsuits - In this era of accountability and compliance, all structured settlement participants are likely to be held to higher legal standards.

Three-Card Monte

Why do product suitability standards create issues for the structured settlement industry? At their worst, especially from the perspective of an unrepresented injury victim, some traditional structured settlement business practices not only fall far short of the fiduciary standard - they can resemble a game of "Three-card Monte" .

Misrepresentations or omission of material facts

• Cost or Value - From a claimant's perspective, a core strategy for traditional structured settlements often appears "to make a little money look like a lot of money". The Spencer v. Hartford class action allegations outline one "sophisticated" variation of this strategy which often depends on hiding or misrepresenting annuity "cost" and/or settlement "value".
• Guaranteed payments - Many structured settlement sales brochures continue to promise "guaranteed payments" without specifying who guarantees what if and when an annuity provider like Executive Life of New York (ELNY) becomes insolvent.
• Managed account - Many structured settlement recipients do not understand important product details when their case is settled including how structured settlements differ from managed accounts and why they cannot access funds without court approval pursuant to state structured settlement protection acts.
• Structured settlement myths- historically used to promote sales such as:
  • Studies show that nine out of 10 lump sum recipients squander the entire amount within five years.
  • Structured settlements enable injury victims to live free of reliance on government assistance.

Conflicts of interest - without written, informed client and/or customer consent

• Single product - The danger of single product structured settlement sales persons is not limited to whether his or her product is "suitable" or in the "best interest" of a particular claimant/customer. The danger is also that single product sales persons are inherently conflicted in recommending how much of any settlement should be allocated to their product.
• Multiple roles - A structured settlement sales person introduced into a case by a defendant or liability insurer frequently plays four separate roles each of which potentially conflicts with the other roles: agent for the annuity provider; broker for the defendant; broker for the plaintiff; and agent for the defendant in helping to negotiate and settle the case.
• Compensation sharing - Unless all parties to a settlement are informed about whether and how structured settlement annuity commissions are shared, a structured settlement creates a variety of potential conflicts of interest.
• Funding alternatives - Based upon traditional structured settlement business and compensation models, the potential availability and applicability of 468B qualified settlement funds for "appropriate cases" creates inherent conflicts of interest between defendants and their structured settlement brokers.

Recommendations

• Education - Both the National Structured Settlement Trade Association (NSSTA) and the Society of Settlement Planners (SSP) should devote more educational resources to understanding product suitability standards applicable directly and indirectly to structured settlements including standards applicable to their clients and competitors.
• Business standards - SSP's "Standards of Professional Conduct for Settlement Planners" represents an important industry document that has received less attention among structured settlement stakeholders than it deserves. As a result of Dodd-Frank, SSP should review and re-consider the product suitability standards proposed in its current Standards of Conduct.
• Business model - Without violating anti-trust laws, both NSSTA and SSP should encourage their members to continue studying and discussing how transitional settlement planning business models impact traditional structured settlement broker roles, compensation models and business standards.
• Documentation - In the context of transitional business models and standards, structured settlement stakeholders should review and improve core case documents including client requests for proposals, sales materials, settlement agreements, broker of record letters, and commission sharing agreements.

For additional S2KM reporting and commentary about structured settlement business standards and practices, see the structured settlement wiki.

Structured Settlement Sales Decline

Compared with prior years, total United States structured settlement annuity premium dropped sharply in 2011 to $4,974,710,838 according to a newly released report by Melissa Evola. Evola, President of Structured Financial Associates, Inc., has tracked structured settlement industry sales since 2002 based upon input from life insurance companies that participate in the structured settlement market.

The 2011 structured settlement annuity premium total represents an approximate 10 percent decline from 2010 and an approximate 20 percent decline from 2008. Evola's report further indicates 28,811 structured settlement annuities were sold during 2011 for an average per case premium of $172,667.

Based upon Evola's report, MetLife and Prudential Life were the leading structured settlement annuity providers in 2011. Their combined structured settlement premium of $2,119,300,000 represented approximately 43 percent of total 2011 U.S. structured settlement sales. According to Evola's report, 12 life insurance companies comprised the U.S. structured settlement market in 2011 compared with 22 companies in 2002.

Evola's report also tracks "non-qualified" structured settlement sales which are included in her total structured settlement premium figures. Structured settlements that are non-qualified [under IRC sections 130 and 104(a)(2)] are utilized to defer future payments from immediate income tax. Only two annuity providers currently offer this product. Total non-qualified structured settlement annuity premium in 2011 was $119,513,424, according to Evola's report, compared with $123,532,247 in 2010 and an historic high of $192,501,540 in 2008.

Historic annual U.S. structured settlement annuity premium - as reported by Evola:

• 2011 - $4,974,710,838
• 2010 - $5,524,359,408
• 2009 - $5,383,998,395
• 2008 - $6,226,578,725
• 2007 - $5,998,277,764
• 2006 - $6,111,583,112
• 2005 - $6,125,251,601
• 2004 - $6,135,000,000
• 2003 - $5,965,000,000
• 2002 - $6,142,000,000

For estimated structured settlement annuity sales estimates from 1975-2011, see the structured settlement wiki which features estimates from the authors of "Structured Settlements and Periodic Payment Judgments" (S2P2J) based upon historical input from industry sources including Evola since 2002.

Many structured settlement industry participants attribute declining sales to low interest rates including future forecasts by the Federal Reserve. Market yields on U.S. Treasury securities at 30 year constant maturity peaked at 13.45 percent in 1981 according to reports published by the Board of Governors of the Federal Reserve System. Here are several historic average annual rates for 30 year Treasury securities based upon the same information source:

• 2011 - 3.91%
• 2010 - 4.25%
• 2009 - 4.08%
• 2008 - 4.28%
• 2007 - 4.84%
• 2000 - 5.94%
• 1990 - 8.61%
• 1980 - 11.27%

Although interest rates represent an important investment consideration, they impact all investment products not just structured settlement annuities. Regardless of interest rates, many other factors, such as mortality risk transfer and relative financial security, favor structured settlement annuities as the core settlement planning product for many personal physical injury victims. For additional information about structured settlement product suitability standards, see the structured settlement wiki.

Product Suitability Standards - 3

When is a structured settlement annuity appropriate for a specific physical personal injury claimant? And what standards exist to help judges, guardians, trustees, mediators, attorneys, settlement planners, structured settlement consultants and other structured settlement stakeholders make this determination?

In two prior blog posts, S2KM has addressed these issues in the context of:

• Part 1 - NSSTA's Code of Ethics; SSP's Standards of Professional Conduct; and the NAIC's Suitability in Annuity Transactions Model Regulation.
• Part 2 - Minors' statutes and state structured settlement protection statutes.

This blog post discusses product suitability standards created by the Uniform Prudent Investor Act (UPIA) and the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) and highlights a general trend to create a more uniform fiduciary, and/or "best interest", standard of care to protect investors.

UPIA

When investing and managing assets (including settlement proceeds and structured settlement annuity payments), trustees historically have been held to a fiduciary standard. According to uslegal.com, "[A] fiduciary duty is an obligation to act in the best interest of another party..... A person acting in a fiduciary capacity is held to a high standard of honesty and full disclosure in regard to the client and must not obtain a personal benefit at the expense of the client." (emphasis added)

More recently and comprehensively, a trustee's investment responsibilities have been re-defined legislatively by the UPIA which was adopted by the National Conference of Commissioners on Uniform State Laws (NCCUSL) in 1994 and approved by the American Bar Association in 1995. The UPIA now serves as the most important reference, external to the trust document itself, for trustees to determine what fiduciary duties their position requires. With some state-specific modifications, 41 states, U.S. Virgin Island, and the District of Columbia have adopted the UPIA.

Prior to the UPIA, courts applied the "prudent man rule" when evaluating trustee investment performance. The prudent man rule required trustees “to observe how men of prudence, discretion and intelligence manage their own affairs, not in regard to speculation, but in regard to the permanent disposition of their funds, considering probable income, as well as the probable safety of the capital to be invested.”

The UPIA, by contrast, adopts "modern portfolio theory" as a different and more appropriate standard for trustees. Compared with the prudent man rule, modern portfolio theory promotes a holistic view of trust assets by focusing on the total return generated by a trust as opposed to viewing a trust's income and principal separately. By viewing all investments comprehensively, modern portfolio theory and the UPIA hold that a trustee (or other investor) can achieve a positive overall investment return despite the poor performance of specific investments. This new standard allows for greater investment diversification so long as the risk/reward ratio matches the purposes and terms of the trust instrument.

Section 2(c) of the UPIA identifies eight factors a trustee should consider when making any investment:

• General economic conditions;
• The possible effect of inflation or deflation;
• The expected tax consequences of investment decisions or strategies;
• The role that each investment or course of action plays within the overall trust portfolio;
• The expected total return from income and appreciation of capital;
• Other resources of the beneficiaries;
• Needs for liquidity, regularity of income, and preservation or appreciation of capital; and
• An asset’s relationship of special value, if any, to the purposes of the trust or to one or more of the beneficiaries.

Significant for structured settlement annuities, the UPIA's list of investment considerations fails to mention mental or physical disabilities of a trust beneficiary. From a settlement planning and/or special needs perspective, injuries or diseases that reduce an individual's normal life expectancy arguably should receive important consideration when a trustee makes investment decisions.

Dodd-Frank

President Obama signed Dodd-Frank into law on July 21, 2010. Among other reforms, this sweeping legislation created the Consumer Financial Protection Bureau (CFPB) and the Federal Insurance Office (FIO). CFPB's central mission is "to make markets for consumer financial products and services work for Americans ....." Among its core functions are addressing consumer complaints and restricting unfair, deceptive or abusive acts or practices under the Federal consumer financial laws. Dodd-Frank provides the CFPB with significant authority that goes beyond existing consumer protection statutes. CFPB has broad authority to ask questions and demand information including consumer complaints. The FIO is part of the U.S. Department of Treasury and has authority to monitor all aspects of the insurance industry.

In addition to creating the CFPB and the FIO, Dodd-Frank directed the Securities and Exchange Commission (SEC) to study the need for a new, uniform, federal fiduciary standard of care for broker-dealers and investment advisers and to apply such a uniform standard if it deemed necessary. The SEC's assignment also required determining the existence of any gaps, shortcomings, or overlaps in legal or regulatory standards for the protection of retail customers.

Historically, investment advisers and broker-dealers have been subject to differing standards of care. Investment advisers are defined under Federal law as persons who “engage in the business of advising others. . .as to the value of securities or as to the advisability of investing in, purchasing, or selling securities. . .” [15 U.S.C. § 80b-2] They are regulated under the Investment Advisers Act of 1940 and owe a fiduciary duty to their clients.

Broker-dealers are defined under Federal law as persons who engage in “the business of offering, buying, selling, or otherwise dealing or trading in securities. . .” [15 U.S.C. § 78b(12)] and may provide a variety of related services. Broker-dealers generally are not subject to any fiduciary duty under the federal securities laws. They do, however, have a duty of fair dealing which includes a “suitability” standard - i.e. broker-dealers must make recommendations that are consistent with the interests of their customers.

Adding further uncertainty for investors, the existing legislative and regulatory system, according to the Securities Industry and Financial Markets Association (SIFMA), also "leaves states free to develop their own often conflicting definitions of fiduciary standards. This can confuse investors and lead to inconsistent definitions and interpretations under existing state law." SIFMA has recommended adoption of a uniform definition of "fiduciary duty" applicable to broker-dealers and investment advisers that includes both a duty of care and a duty of loyalty. These duties, according to SIFMA, should require both broker-dealers and investment advisers "to act in the best interest of the customer, and to provide full and fair disclosure of material facts and conflicts of interest."

In January 2011, the SEC submitted its "fiduciary standard" study to Congress recommending the adoption of a uniform fiduciary standard for investment advisers and broker-dealers when providing investment advice to retail customers. The SEC's proposed standard would be “no less stringent” than the standard currently applicable to investment advisers, and would include the duty to act in the "best interest" of the customer.

Structured Settlement Annuities

Why are the UPIA and Dodd-Frank relevant and important for structured settlement stakeholders?

• Structured settlement annuities increasingly are paid into trusts (UPIA) that also include financial securities (Dodd-Frank).
• Settlement planners, as opposed to traditional structured settlement sales persons, are increasingly licensed to sell financial securities as well as insurance products.
• The UPIA (settlement trustees) and Dodd-Frank (financial planners; investment advisers; broker-dealers) directly impact structured settlement competitors.
• To be successful in the changing financial and insurance environment, anyone selling structured settlement annuities must understand and compete against the highest product suitability standards and best business practices.

Given the diversity, uncertainty and transition of various product suitability standards, how should structured settlement stakeholders address the issue of whether a structured settlement is appropriate for individual physical personal injury claimants? S2KM will offer practical case-specific advice and strategic industry advice in its next blog post.

For additional information about structured settlement business standards and practices, see the structured settlement wiki and Section 6.02 of "Structured Settlements and Periodic Payment Judgments" (S2P2J).

Product Suitability Standards - 2

Should structured settlement "consultants" be held to some "product suitability standard" when they recommend structured settlement annuities to resolve personal injury lawsuits? If the answer is "yes", to what standard should they be held accountable and by whom?

A prior S2KM blog post discussed these issues in the context of the Code of Ethics of the National Structured Settlement Trade Association (NSSTA), the Standards of Professional Conduct of the Society of Settlement Planners (SSP) and the Suitability in Annuity Transaction Model Regulation promulgated by the National Association of Insurance Commissioners (NAIC).

NSSTA's Code of Ethics does not directly address product suitability standards. It does, however, direct NSSTA members to: "…comply with all material federal and state laws and regulations applicable to the structured settlement services that are provided."

SSP's Standards of Professional Conduct utilizes the words "appropriate" and "informed consent". In the event of a conflict between SSP's Standards of Professional Conduct and any "laws, court rules, licensure requirements or other standards imposed on any regulated profession", SSP's members are directed to "abide by the laws or professional standards imposed on the members discipline."

Although the NAIC Suitability Regulation applies "to any recommendation to purchase, exchange or replace an annuity made to a consumer by an insurance producer, or an insurer ...", the Model Regulation exempts "settlements of or assumptions of liabilities associated with personal injury litigation or any dispute or claim resolution process" which presumably encompass structured settlement annuities.

What other legislation or regulations could impact whether a structured settlement annuity is suitable for a specific personal physical injury claimant - and why should it matter?

Several additional laws and regulations could be relevant to these questions including:

• Minors' Statutes
• State Structured Settlement Protection Statutes
• The Uniform Prudent Investors Act
• Dodd Frank Legislation

This blog post considers minor statutes and state protection statutes. A subsequent S2KM blog post will discuss the Prudent Investors Act and Dodd Frank.

Texas attorney Phillip McCrury addressed the topic "What Judges Look for When Approving a Minor's Settlement" during the SSP 2009 Annual Meeting. McCrury surveyed existing state legislation and concluded that most state minors' statutes require court approval but few, if any, specifically address structured settlements. Various states have adopted two alternative standards for judicial approval of minors' settlements: the "best interest" standard and the "fair and reasonable" standard. McCrury, however, did not identify a single state minors' statute that defined either "best interest" or "fair and reasonable".

Both McCrury's SSP presentation and the 2011 Hancock v. Share case highlight the potential for conflicting judicial interpretations when structured settlement annuities are part of a proposed minor's settlement. Assuming a structured settlement "binds the assets" of a minor beyond the age of majority:

• Under what circumstances is a structured settlement in a minor's best interest - or fair and reasonable under some state minors' statutes?
• Should it matter whether or not a minor has a debilitating injury?
• What justification should be required from a guardian who recommends a structured settlement for a minor?
• When a judge evaluates whether a proposed structured settlement transfer meets the "best interest" test, what importance should be given to the fact that a proposed transferor was a minor when he/she received the structured settlement and therefore never personally approved or consented to the structured settlement?

In addition to minors' statutes, the state structured settlement protection statutes provide an application of the "best interest" and "fair and reasonable" standards with which structured settlement consultants and settlement planners should be familiar. Both IRC section 5891 and the Model State Structured Settlement Protection Act (Model Protection Act) require a transfer to be in "the best interest of the payee, taking into account the welfare and support of the payee's dependents" as a condition for judicial approval.

Some state protection statutes require that structured settlement transfers also meet an additional "fair and reasonable" test. For example, under New York's structured settlement protection act, a judge must "determine whether the transaction, including the discount rate used to determine the gross advance amount and the fees and expenses used to determine the net advance amount, are fair and reasonable" (emphasis added) in addition to meeting the "best interest" test.

Neither IRC 5891 nor the Model Protection Act, however, define "best interest". California's revised structured settlement protection act, however, includes the following list of factors that California judges "shall consider" when deciding whether to approve a proposed transfer:

• The payee's age, mental capacity, legal knowledge, and apparent maturity level;
• The stated purpose for the proposed transfer;
• The payee's financial and economic situation;
• The terms of the proposed transfer, including the discount rate and transaction fees;
• Whether the payments are intended to pay for future medical care related to the payee's original injuries;
• Whether the payments are intended to pay for necessary living expenses;
• Whether the payee is likely to require future medical care for the payee's original injuries, and, if yes, whether the payee has other resources, including insurance, to pay for those expenses;
• Whether the payee has other income to meet his/her obligations to support dependents;
• Whether the payee has any court-ordered child support obligations;
• Whether the payee has attempted or completed prior transfers;
• Whether the payee or his/her family is facing any financial hardship;
• Whether the payee has received or should receive independent professional advice about the transfer; plus
• "Any other factors or facts that the payee, the transferee, or any other interested party calls to the attention of the reviewing court or that the court determines should be considered in reviewing the transfer."

Various courts have also identified factors to be considered when determining whether a proposed structured settlement transfer meets the "best interest" test. For example, a New York Supreme Court considered the following factors before denying a proposed 2003 transfer: the payee’s age; mental and physical capacity; maturity level; ability to show sufficient income that is independent of the payments sought for transfer; capacity to provide for the welfare and support of the payee’s dependents; the need for medical treatment; the stated purpose for the transfer; and the demonstrated ability of the payee to appreciate the financial terms and consequences of the proposed transfer based upon truly independent legal and financial advice. (In re Settlement Capital Corp.)

What relevance, if any, do state structured settlement protection statutes have for primary structured settlement product suitability standards?

Neither IRC 5891 nor any of state structured settlement protection statutes apply their "best interest" test to primary market structured settlement sales. Only four of the state statutes (New York, Florida, Massachusetts and Minnesota) establish any primary market sales standards, each requiring certain mandatory written disclosures.

The secondary market "best interest" test, however, does raise important issues for the primary structured settlement markets. Most importantly, If structured settlement transfers are required to be in "the best interest of the payee, taking into account the welfare and support of the payee's dependents", why shouldn't a "best interest" test apply to the original structured settlement sale? And, what impact would a "best interest" test have on primary market business standards and practices?

In a subsequent blog post, S2KM will consider whether, when and how the Uniform Prudent Investors Act and Dodd Frank require primary structured settlement sales to meet a "best interest" test and/or otherwise impact structured settlement business standards and practices.

For additional commentary and analysis of structured settlement business standards and practices, see the structured settlement wiki and Section 6.02 of "Structured Settlements and Periodic Payment Judgments" (S2P2J).

Product Suitability Standards - 1

To what professional "product suitability standards", if any, should structured settlement "consultants" be held responsible when they recommend structured settlement annuities for claimants in the context of personal injury settlements? And where should they look for guidance?

Should it matter:

• Whether the structured settlement consultant is working on behalf of the defendant or the plaintiff?
• Whether the structured settlement consultant is also a:
  • Registered Settlement Planner (RSP); or a,
  • Certified Structured Settlement Consultant (CSSC); or a,
  • Registered Representative (RR); or a,
  • Certified Financial Planner (CFP); or a,
  • Registered Investment Adviser (RIA)?
• Whether the proposed structured settlement annuity will be paid into a trust set up for the claimant as opposed to the claimant directly?

The National Structured Settlement Trade Association (NSSTA) is the largest national structured settlement professional association in the United States.  NSSTA has adopted a "Statement of Ethics and Professional Responsibility" (Code of Ethics) to provide "guiding principles" to its members and member organizations.  The Preamble to NSSTA's Code of Ethics provides:

"Implicit in the acceptance of this Statement is an obligation to act in a professionally responsible and ethical manner when providing structured settlement services."

Although Principle VI directs NSSTA members to:

"…comply with all material federal and state laws and regulations applicable to the structured settlement services that are provided",

NSSTA's Code of Ethics does not directly address product suitability standards. Nor does NSSTA's Code of Ethics include any penalties or enforcement procedures for member violations.

By comparison, the Society of Settlement Planners (SSP), whose members also sell structured settlement annuities, has adopted the "Standards of Professional Conduct For Settlement Planners" (Standards of Conduct).  Related to product suitability, Rule 5 (Conflict of Interest and Loyalty) of SSP's Standards of Conduct states in part:

"A settlement planner shall make and implement only recommendations that are appropriate for the client and consistent with the client’s objectives" (emphasis added).

In the event of a conflict between SSP's Standards of Conduct and any:

"laws, court rules, licensure requirements or other standards imposed on any regulated profession such as law, accounting, financial planning, securities trading or insurance", the SSP's members "should abide by the laws or professional standards imposed on the members discipline (emphasis added) ..."

Rule 5 also requires SSP members to obtain their client's "informed consent" which their Standards of Conduct define as:

"…agreement by a person to a proposed course of conduct after the settlement planner has communicated adequate information and explanation about the material risks of and reasonably available alternatives to the proposed course of conduct."

The Preamble to SSP's Standards of Conduct addresses enforcement, stating in part:

"Compliance with these Rules depends upon voluntary adherence and, secondarily, upon reinforcement by peer and public opinion.....Although it is not intended that a violation of these Rules will, in itself, subject a settlement planner to civil liability to a person injured by such a violation, it is expected that these rules may be used as evidence of the conduct expected of reasonable settlement planners."

What does "appropriate" mean under the SSP Standards of Conduct? And what "laws or professional standards" could impact whether a structured settlement is appropriate for a particular injury victim?

One potential source for answers is the "Suitability in Annuity Transactions Model Regulation" (Suitability Regulation) promulgated and most recently revised in 2010 by the National Association of Insurance Commissioners (NAIC) and subsequently enacted by several states.  The purpose of the NAIC Suitability Regulation is:

“…to require insurers to establish a system to supervise recommendations and to set forth standards and procedures for recommendations to consumers that result in transactions involving annuity products so that the insurance needs and financial objectives of consumers at the time of the transaction are appropriately addressed."  However, the NAIC Suitability Regulation adds:  "Nothing herein shall be construed to create or imply a private cause of action for a violation of this regulation."

Section 6A of the NAIC Suitability Regulation provides in part:

"In recommending to a consumer the purchase of an annuity or the exchange of an annuity that results in another insurance transaction or series of insurance transactions, the insurance producer, or the insurer where no producer is involved, shall have reasonable grounds for believing that the recommendation is suitable for the consumer on the basis of the facts disclosed by the consumer as to his or her investments or other insurance products and as to his or her financial situation and needs, including the consumer's suitability information ..."

The NAIC Suitability Regulation defines "suitability information" to include: age; annual income; financial situation and needs, including financial resources used for the funding of the annuity; financial experience; financial objectives; intended use of the annuity; financial time horizon; existing assets, including investment and life insurance holdings; liquidity needs; liquid net worth; risk tolerance; and tax status; prescribes duties and penalties for insurers and insurance producers.

The NAIC Suitability Regulation applies "to any recommendation to purchase, exchange or replace an annuity made to a consumer by an insurance producer, or an insurer where no producer is involved, that results in the purchase, exchange or replacement recommended."

Significantly for structured settlements, however, Section 4 of the NAIC Suitability Regulation exempts "settlements of or assumptions of liabilities associated with personal injury litigation or any dispute or claim resolution process".

Does this exemption encompass structured settlements?

By way of explanation, the legislative history of the NAIC Suitability Regulation specifically references "structured settlements" and adds:

"A regulator pointed out that this type of contract did not generally result from a recommendation by an insurer or producer but agreed that it did not hurt to have the exemption there."

If the NAIC Suitability Regulation exempts structured settlements, why is it relevant to structured settlement consultants and/or settlement planners?

• First, some structured settlement consultants and most settlement planners also sell annuity products (example SPIAs) that are covered by the NAIC Suitability Regulation.
• Second, some states now require all licensed insurance agents to complete a one-time annuity suitability training program as a condition for selling any annuity products. NSSTA already offers qualifying training programs for its members.

• Third, some structured settlement consultants may also be licensed to sell financial securities in addition to annuity products and may therefore be held to a higher product suitability standard by their broker-dealer.

• Fourth, some structured settlement consultants and/or annuity providers may proactively decide to adopt product suitability standards regardless of legal requirements. See, for example, the SSP "appropriate" standard highlighted above. Also note: under Section 8 of the NAIC Suitability Regulation, insurers are responsible for compliance and subject to penalties for non-compliance.
• Fifth, many structured settlement competitors (examples: financial planners and settlement trustees) are held to higher, more specific product suitability standards. To improve their sales success, structured settlement consultants should understand their competitors' product suitability standards including "fiduciary" and "best interest" standards in addition to, and in contrast with, the NAIC annuity suitability standard.

In subsequent blog posts, S2KM will identify and discuss product suitability legislation and regulations, in addition to the NAIC Suitability Regulation, that could impact structured settlement consultants and settlement planners.

For additional S2KM blog posts concerning structured settlement business standards and practices, see the structured settlement wiki and Section 6.02 of "Structured Settlements and Periodic Payment Judgments" (S2P2J).

Structured Settlements in 2011 - 3

Prior S2KM 2011 year-end structured settlement blog posts have highlighted the historic significance of the ELNY liquidation and provided a strategic 2011 industry retrospective . This blog post summarizes additional important 2011 structured settlement developments and information.

Taxation

• IRS Audit Guides - The Internal Revenue Service published an Audit Guide in 2011 to assist its examiners in determining the tax treatment of proceeds from lawsuits, settlements and awards received after August 21, 1996. That date marked the enactment of the Small Business Job Protection Act of 1996 which added a "physical" requirement to IRC § 104(a)(2). The IRS had previously published an Audit Guide to assist its examiners in determining whether the IRC §5891 excise tax applies to specific structured settlement factoring transactions.
• JTC Structured Settlement Estimate - The Joint Committee on Taxation (JCT) in 2011 released its Estimates of Federal Tax Expenditures for Fiscal Years 2010-2014 (JCT Report). For the first time, the JCT Report calculated an estimated tax revenue loss for the "exclusion of investment income from structured settlement arrangements". The JCT estimate projected structured settlement tax revenue loss to be "de minimis" - meaning less that $50 million for Fiscal Years 2010-2014 or less than $12.5 million per year.

Government Benefits

• Medicare Secondary Payer Protocol - Although no statutory or regulatory authority requires Medicare set-aside arrangements (MSAs) in third party liability settlements, confusion continues as to whether and when MSAs are necessary and/or appropriate for such cases. On May 6, 2011, the United States Attorney's Office for the Western District of New York (USAOWDNY) released a one page "Medicare Secondary Payer Protocol" (MSP Protocol) establishing a voluntary process by which that U.S. Attorney's Office will review MSA proposals for liability cases provided certain conditions are met.

• U.S. v. Stricker - In this case involving periodic payments and the MSP Act, a U.S. District Court in Alabama denied a motion by the U.S. Government to reconsider the court's earlier dismissal based upon its finding that the applicable statutes of limitations barred the Government's complaint. The Government had argued on appeal that the court erred in granting its motions to dismiss without considering the Government's theory of continuing accrual argument.

• WCMSA portal - The Centers for Medicare and Medicaid Services (CMS) announced the creation of an Internet portal for submission of workers compensation MSA (WCMSA) proposals. The new web-based application:
  • Enables WCMSA proposals to be submitted electronically for CMS review;
  • Accepts submission documents and supplemental information CMS may request;
  • Provides online status updates for MSA applications;
  • Generates email alerts when approval letters are issued.
• Conditional payment guidelines - CMS released guidelines during 2011 to provide certainty and finality for conditional Medicare payments. This "self-calculated final conditional payment amount" option, will be initiated in February 2012 for claims with a total settlement value of $25,000 or less allowing attorneys and/or claimants to receive a final amount owed number from CMS prior to settlements. For additional information see the Medicare Secondary Payer Recovery Contractor (MSPRC) website.

Minors Settlements - Whether a structured settlement annuity that extends beyond the age of majority is "suitable" for, or in the "best interests" of, a minor (especially a minor without a debilitating injury) represents an important industry issue. In his 2009 presentation to the Society of Settlement Planners (SSP) titled "What Judges Look for When Approving a Minor's Settlement", Texas attorney Phillip McCrury surveyed state minors' statutes and concluded many states require judges to consider the "best interest" of a minor even though very few states directly address structured settlement annuities. Two 2011 cases (only one involving a structured settlement) highlight the potential for conflicting judicial interpretations when annuities are part of a proposed minor's settlement.

• Hancock v. Share - A Florida Appellate Court reversed a Florida Trial Court ruling that denied approval of a proposed structured settlement for a minor. Although the trial court had found that the proposed structured settlement was in the "best interests" of the minor, it refused to approve the structured settlement citing a Florida statute that prohibits a guardian "to bind the assets" of a minor beyond the age of majority.
• In the Matter of Sandra McDuffie - A New York trial court ruled against an estate administrator who proposed to purchase an annuity for a minor child of the decedent stating "the Court cannot authorize the administrator to restrict funds due to an infant after the infant has reached the age of [majority]".

Executive Life Insurance Company of California - In a legal dispute (Aurora S.A. v. Poizner) which it characterized as "another aspect of the dizzyingly complex and heavily litigated failure of the Executive Life Insurance Company", a California Court of Appeals on August 8, 2011 upheld a trial court decision that California's Insurance Commissioner correctly declined to approve the proposed sale of Aurora National Life Assurance Company (Aurora) by Aurora S.A. to Reassure America Life Insurance Company (REALIC), a Swiss Reinsurance subsidiary.

Structured Settlement Annuity Sales - S2KM acknowledges and appreciates receiving market recap reports highlighting quarterly structured settlement annuity sales (Melissa Evola) and weekly financial market data (Richard Nahill).

• Annuity sales - Evola's most recent quarterly compilation of 2011 structured settlement annuity sales (thru September 30) indicates 21,846 cases have been structured for a total premium of $3,633,489,474. These numbers represent a significant decrease from 2010 (also thru September 30) of 23,578 cases and $4,140,704,642 of premium.
• Interest rates - Nahill's most recent 2011 financial market recap (for week ending December 16) shows interest rates of 1.86 percent for 10-year U.S. Treasury bonds compared with 3.30 percent as of December 31, 2010.

For prior S2KM annual reports summaring structured settlement industry developments, see the structured settlement wiki.