Beyond Structured Settlements

Structured Settlements in 2012 - 2

Settlement Planning

Compared with the structured settlement primary market, which was characterized by continuing sales declines in 2012, the related settlement planning market appears to have experienced growth and vitality in 2012.

The primary evidence of this growth and vitality consisted of the increasing number of educational conferences addressing settlement planning topics during 2012. These included:

• Society of Settlement Planners (SSP) Annual Meeting
• Risk Settlement Planning Practicum
• Academy of Special Needs Planners (ASNP) Annual Meeting
• Qualified Settlement Fund Symposium
• Various National Academy of Elder Law Attorney (NAELA) Conferences - of which S2KM attended the 2012 Ohio NAELA Unprogram.

One of the challenges for measuring the growth of the settlement planning market is the lack of market metrics. For example, despite continuing market inquiries, S2KM has been unable to identify reliable national market metrics for qualified settlement funds, special needs trusts, settlement trusts, or Medicare set-aside arrangements.

Towers Watson Studies

The most valuable market research for settlement planning S2KM has identified has been the Annual Studies of United States Tort Costs published by Towers Watson (formerly Towers Perrin) since 1985. These studies:

• Calculate tort costs resulting from five insured plus uninsured business lines: 1) commercial multi-peril; 2) medical malpractice; 3) product liability; 4) other liability; and 5) commercial auto.
• Exclude: 1) no-fault auto insurance; 2) property coverages; 3) workers compensation; 4) certain extraordinary (one time) costs.
• In 2002, Towers Watson also translated overall tort costs for 2001 into the following categories and percentages: 1) administrative costs (21%); 2) defense costs (14%); plaintiff attorneys (19%); economic loss (22%) and non-economic loss (24%). Towers Perrin discontinued this portion of its analysis in 2002. It was "devilishly difficult" according to Russ Sutter, a Towers Watson principal and actuary who directs their annual tort cost studies, "primarily because we lack reliable information from plaintiff attorneys". These percentages therefore represented Tower Watson's "best estimate" in 2002.

Based upon Towers Watson's most recent 2011 Annual Study and utilizing Tower Watson's 2002 "best estimate" of payout percentages, S2KM estimates, that at least since 2006, more than $160 billion of United States tort costs annually have represented payments to injury victims and their attorneys.

Settlement Planning Issues

Among many settlement planning issues, S2KM viewed the following as the most strategically important during 2012:

• The evolutionary relationship between structured settlements and settlement planning;
• Comparing these two business models;
• Improving settlement planning by expanding structured settlements;
• What we have learned about the settlement planning market;
• Settlement planning tax challenges - including stress-induced physical ailments;
• How the Affordable Care Act (ACA) impacts settlement planning;
• How states are reforming Medicaid programs to address budgetary shortfalls and the ACA;
• Whether a standard of practice exists for using Medicare set-aside arrangements in liability cases;
• The application of product suitability standards to settlement plans funded with structured settlements;
• The impact of Dodd-Frank's uniform fiduciary standard on settlement planning.

Additional post in S2KM's blog series: "Structured Settlements in 2012":

• Part 1 - Primary market

• Part 2 - Settlement planning

• Part 3 - Secondary market

• Part 4 - Executive Life of New York

Need for Reform?

In a companion article to the National Underwriter's recent comprehensive analysis of the Executive Life of New York (ELNY) Liquidation ("The Complete ELNY Saga"), writer Warren Hersch asks: "is the structured settlement process in need of reform"?

The Hersch article highlights a "potpourri" of structured settlement issues:

• Business practices - including disclosure and suitability issues
• Structured settlement regulation - or lack thereof
• Industry lobbying
• Industry education
• Broker compensation
• Structured settlement transfers
• IRC 468B qualified settlement funds
• Declining annuity sales
• Increasing case complexity - including annuity/trust blended products
• An evolving settlement planning profession
• Responsibilities of plaintiff attorneys
• Financial strength of annuity providers

In addition to industry criticism, the article features diverse individual perspectives demonstrating a foundation for industry consensus:

• Len Blonder
  • “No other option today can match the structure’s mix of tax-free income and guaranteed security.”
  • "A casualty company should ... be allowed to vet their own representatives of choice.”
  • "Plaintiffs are free to hire any financial professional from among the tens of thousands that are available to them."
• Joseph Dehner
  • "A personal injury attorney for claimants who isn’t even considering a structured settlement in high damage cases is bordering on malpractice."
  • “Structured settlements have become both more flexible and complicated because of the advanced planning that now accompanies these transactions.”
  • "Continuing low interest rates on the fixed annuities used to satisfy settlement claims [is] the key factor" in explaining the recent declines in structured settlement annuity sales.
• Jeremy Babener
  • “The qualified settlement fund (QSF) allows for a significant increase in the amount of time that payees have to make necessary determinations.”
  • "But for the single plaintiff, use of the vehicle comes with uncertainty. That’s because it is unclear whether a single plaintiff is treated for tax purposes as receiving funds deposited into a QSF."
• Timothy Morbach: “More should be done to recognize that the field of settlement planning is highly specialized and that [claimants] should make efforts to retain separate and qualified financial and legal counsel with respect to the strategies they wish to implement.”
• Charles Schell: “If the plaintiff's attorney engages a settlement planner, then .... , more likely than not, the product or plan recommended will be suitable.”
• Peter Gallanis: "The rate of insolvencies among life and health insurers, now at an all-time low, are but a fraction of the hundreds of failures within the commercial and investment banking and thrift sectors during the financial crisis."
• Eric Vaughn: "IRC Section 5891 has effectively prevented many abuses ... that commonly occurred in prior decades."

Perhaps this National Underwriter article will help motivate the structured settlement industry to undertake its own strategic analysis about whether and how to reform the structured settlement process. Immediate existential challenges certainly exist. In addition to the ELNY liquidation, these challenges include:

• Declining primary market annuity premium
• Historically low interest rates
• Potential reforms to the tax code and the tort system
• Implementation and impact of Dodd-Frank and the Affordable Care Act
• Transitioning business skills, relationships and processes to the Internet.

Assuming Charles Darwin was correct: It is not the strongest of the species that survives, nor the most intelligent, but the one most responsive to change.

The primary strategic issues for the structured settlement industry are whether, when, how and to what degree it will become "responsive to change"?

Can industry leaders:

• Be honest ? - Acknowledge the problems. Study the changes. Abandon political correctness. Question traditional assumptions, business models and business practices.
• Be inclusive ? - David Ringler, NSSTA's first president, re-stated NSSTA's original vision during NSSTA's 2011 annual conference: "I still believe having a place where everyone and anyone can sit down with each other and discuss the issues and viewpoints regardless of beliefs is the most important reason for NSSTA. ... If we can continue this tradition, there is no problem we cannot overcome."
• Be open ? - The late James Corman insisted promoters of structured settlements were "on the side of the angels". Does that statement remain true today? To regain public trust, empower stakeholders and expand the customer base, structured settlement strategic planning needs to re-emerge from behind closed doors. Important industry issues need to be articulated and discussed openly.
• Listen to customers ? - The profiles of ELNY structured settlement victims featured in "The Complete ELNY Saga" provide a valuable introduction. Prior market surveys should be re-visited, updated and expanded. The traditional "one and done" structured settlement customer model needs to be re-evaluated.
• Engage critics ? - and challenge/encourage critics to be part of an industry solution by incorporating their relevant issues and best ideas into a strategic thinking process? These critics include legal and financial professionals who view the structured settlement product and market as core components of a larger and more complex settlement planning industry.

For related S2KM reporting and analysis, see the structured settlement wiki:

• Re-thinking Structured Settlements
• Growing the Market
• Business Standards and Practices
• Settlement Planning
• Structured Settlements and Knowledge Management

NASP 2012 Annual Conference - 3

The National Association of Settlement Purchasers (NASP) hosted its 8th annual educational conference October 16-19, 2012 in New Orleans with a record number of attendees consisting of transfer company executives and staff, in-house and outside legal counsel, investors, service providers and, for the first time, primary market participants.

NASP President Matthew Bracy set the conference theme by challenging speakers and attendees to continue to improve the structured settlement secondary market: "We have some of the brightest minds in the country assembled here to discuss the status of this industry and how to improve what we do. And, as is our habit, we have invited people who might have critical things to say about how we are doing and what we can do better. Improvement can only come from the honest and sometimes harsh assessment of outside critics."

One of those critics was keynote speaker Jan Schlictmann who called out "cash now" advertizing as a "primitive denomination". Schlichtmann's broader message echoed Bracy's theme of bettering oneself through self-criticism and the need for higher industry goals. "It is not just who we serve that matters, but how we serve", Schlictmann stated. Schlictmann reviewed his client experience with structured settlements and acknowledged a personal paradigm shift resulting from recent industry developments including low interest rates and the ELNY liquidation.

The Judges Panel has become a regular and popular feature of NASP educational conferences. Moderator Earl Nesbitt encouraged this year's panel members, Judge Patricia Wise, Chancery Court Judge, Hinds County, Mississippi and Judge Dean Lum, Superior Court for King County, Washington, to share their concerns about structured settlement transfers and their advice for transfer company representatives and attorneys. Selected highlights:

• Judge Wise: "We (Mississippi judges) have a good relationship with transfer attorneys. I don't look at transfers as inherently good or bad. I don't have any preconceived notion whether to approve or disapprove."
• Judge Lum: "It is not my job to talk someone into or out of a transfer. Judges, however, think about the worst case scenario - a recipient who has just turned 18. The closer to this worst case scenario, the more scrutiny a person receives."
• Judge Wise: "What judges are looking for is credibility and what structured settlement payees say they will do with the funds. We do focus on whether prior transfers have occurred. Also, the older the payee, the more likely they have the ability to make a good decision."
• Judge Lum: "Attorneys should prepare the structured settlement payee for his or her court appearance - how to dress and behave; how the best interest test applies; what the impact will be on dependents."
• Judge Lum: "We have a saying in King County: 'there is no party like ex parte'. In unopposed cases, people try to run things by you. Its kind of like the wild west. In unopposed cases, it is important for attorneys to go the extra mile. Your reputation matters. There are two degrees of separation in the legal profession."

Another regular and popular feature of NASP educational conferences are the small group break out sessions. The individual breakout sessions S2KM attended addressed participants' state-specific experience with:

• Court Approval Issues - judicial negotiation of discount rates; the meaning of full disclosure; statutory history of the "best interest" test; independent professional advisor qualifications and fees; transfer application exhibits; and the importance of judicial education.
• Underwriting Issues - annuity provider transfer requirements; "applicable state laws" requirements; judgment creditor issues including bankruptcy and child support; annuity provider administrative fees; and problems related to incompetent payees, identity theft and relatives or friends coercing payees.

The NASP conference doubled down on underwriting issues with an informative presentation about "Life Contingent Transactions" by NASP President-elect Patricia LaBorde. LaBorde, who also served as Chairperson for the 2012 NASP conference and was credited with upgrading the NASP website, discussed the two paths for funding life contingent transactions:

• Purchasing a life insurance policy to hedge against the risk of an early annuitant death; or
• Evaluating the risk and pricing the risk into the transaction.

Jack Kelly, a federal lobbyist who assisted NASP in securing enactment of IRC 5891 in 2002, provided a Legislative Update. Kelly summarized NASP's 2012 involvement with legislative proposals in Vermont, Minnesota and New Hampshire. Vermont, in 2012, became the 48th state to enact a structured settlement protection statute. The new Vermont statute is generally based upon the NCOIL Model Act with some variations related to independent professional advisors, notice requirements for certain state agencies and the required court appearance by the structured settlement payee.

Earl Nesbitt, NASP's Executive Director and General Counsel, presented the 2012 Litigation Update. Among several important court decisions, Nesbitt highlighted the Stone Street v. McClendon case which he characterized as an "important victory" for NASP and the structured settlement industry in general. In McClendon, a Louisiana state court found that Travelers Insurance and MetLife had no grounds for withholding payments following a valid transfer of payment rights pursuant to the Louisiana structured settlement protection statute. The court ordered MetLife to pay interest from the date the payments were originally due. Note: S2KM will publish a more detailed review of the McClendon case in a subsequent blog post.

Attorney Joseph Feltes' 2012 NASP presentation titled "Privacy Issues in Structured Settlement Transactions (Part 2)" supplemented his 2011 NASP presentation on the use and disclosure of confidential information by transfer companies. This year, Feltes discussed privacy issues related to electronic and digital communications, especially Internet-based communications. Among other issues, Feltes highlighted: cyber-bullying; the increase in defamation cases; the blurred boundaries between public and private communications; FTC blog rules requiring disclosures of paid endorsements; social media policy and practices; limits on constitutional rights; cloud technology issues; and the importance of company Internet policies.

In his "Primary Market Update", Mark Wahlstrom emphasized why the primary and secondary structured settlement markets are part of the same business. He called the primary market "the secondary market's best friend" despite the primary market's criticism of, and "needless obstacles" for, the secondary market. As one example of "needless obstacles", Wahlstrom mentioned Chartis for aggressively promoting an anti-factoring pledge among its structured settlement brokers.

Wahlstrom described 2012 as "another bad year for the primary market". He characterized declines in primary market annuity premium as a "negative trend that will eventually impact the secondary market" and identified the following causes:

• The structured settlement is an insular, closed community with aging leadership and a shrinking sales force.
• Structured settlement annuity providers, and most brokers, lack marketing and innovation skills.
• Primary market participants are intimidated by the Internet.
• Instead of offering customer solutions, the primary market continues to sell a single product.
• With historically low interest rates, that product produces a zero return when you consider inflation.
• The primary market has not responded strategically to tort reform and increasing competition from other professionals.
• By continuing their "factoring wars", the primary market has missed opportunities to cooperate with the secondary market.
• The ELNY liquidation means the primary market can no longer claim all structured settlement recipients have received 100% of their payments.

Kira Brereton, an attorney who specializes in asset-backed securitizations, provided a comprehensive introduction to "Financing Structured Settlements". Her presentation: reviewed a typical transaction structure; provided a market overview including legal and regulatory developments; summarized rating agency considerations; discussed split payment issues; addressed the creditworthiness of insurers backing the collateral pools; considered bankruptcy and receivership issues; and highlighted relevant securities laws and regulations including the Investment Company Act of 1940, private placements, Dodd-Frank and Regulation AB 2.0.

Elizabeth Yingling, a securities law expert, discussed "Implications of Federal and States Securities Laws on Structured Settlements". She addressed fundamental issues such as: What statutes govern securities? What is a "security"? What is an "investment contract"? and How do promotional materials impact the analysis? In addition, Yingling offered a detailed analysis of the "Howey test" and provided practical tips.

Alexander Hamilton Award

NASP also named S2KM blog author, Patrick Hindert, as the 2012 recipient of its Alexander Hamilton Award. NASP has bestowed this award five times "to distinguished individuals who have supported and defended the right to free alienability of property rights. This right is the corner stone of NASP and the foundation of the structured settlement factoring business." Previous Alexander Hamilton Award recipients:

• State Senator Alan Sanborn of Michigan.
• U.S. Representative Eric Cantor of Virginia.
• State Representative Van Tran of California.
• Earl S. Nesbitt, Esq., of Texas.

In announcing the 2012 award, NASP President Matt Bracy stated: "Hindert was chosen to receive this award based upon his longstanding support of the factoring business and option. In particular, his position as a founder and leader in the primary structured settlement business, who early on recognized the legitimacy and value of the secondary market, led to this honor."

For complete S2KM reporting on NASP conferences plus other structured settlement and settlement planning conferences, see the structured settlement wiki.

AIG Bailout Paid Back

With the sale last week of 636.9 million shares of American International Group, Inc. (AIG) common stock for $20.7 billion, the U.S. Department of Treasury and the Federal Reserve have now recovered a combined total of $197.4 billion from their $182.3 billion bailout of the once-troubled insurer.

The sale reduces U.S. government ownership of AIG to about 15.9%, down from a high of 92%. And, according to Best's Insurance News, the U.S. government expects to gain another $8.1 billion when it sells its last remaining shares in AIG.

Now that the U.S. government is a minority shareholder, AIG could face additional regulation as a savings and loan holding company, Best's Insurance News adds in its September 14, 2012 article. Some of the new regulations are still being finalized as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

AIG, through its insurance subsidiaries, has been an important participant in the U.S. structured settlement market for many years both as a purchaser and as a provider of structured settlement annuities.

Industry estimates of structured settlement annuity premium sold by AIG subsidiaries during the past 10 years provide one perspective of AIG's significant role in the U.S. structured settlement market as well as the impact of the U.S. government bailout on AIG's structured settlement annuity production. AIG's estimated annual share of the U.S. structured settlement annuity market appears in parentheses. Source: annual compilation of U.S. structured settlement annuity premium compiled by Melissa Evola.

• 2002 - $1.179 billion (19%)
• 2003 - $1.195 billion (20%)
• 2004 - $1.221 billion (20%)
• 2005 - $1.316 billion (21%)
• 2006 - $1.463 billion (24%)
• 2007 - $1.468 billion (24%)
• 2008 - $1.454 billion (23%)
• 2009 - $0.429 billion (8%)
• 2010 - $0.499 billion (9%)
• 2011 - $0.395 billion (11%)

"Only Half the Story"

In an August 2, 2012 blog post titled "Uniform Fiduciary Standards Only Half the Story", John Darer offers the following critique of this earlier S2KM blog post: "It's a pity that an otherwise well written blog post by Patrick Hindert about Uniform Fiduciary Standards, unexplainably omits standards for the secondary market."

S2KM's blog post addressed the following issue: "What impact will a new uniform fiduciary standard, being developed by the Securities and Exchange Commission (SEC) as one result of the Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), have upon existing structured settlement and settlement planning business models and practices?"

Without any discussion of the secondary market, S2KM's blog post also highlighted certain traditional primary market structured settlement business practices that fail to meet any fiduciary standard:

• Misrepresentations or omission of material facts; and
• Conflicts of interest - without written, informed client and/or customer consent.

John's blog post makes two valid points. First, that S2KM's blog post ignored secondary market standards. Second, despite enactment of IRC section 5891 and state structured settlement protection statutes, bad business practices continue to exist in the secondary market. John's blog post identifies several such practices.

By "setting aside the good players", however, John's blog post spotlights existing bad business practices but does not identify or address secondary structured settlement market business standards. What are those secondary market standards - and how do (or should) these standards impact the primary market?

Looking specifically at the "uniform fiduciary standard" (the subject of the S2KM blog post in question), the related secondary market standard is the "best interest" test. There are three sources that establish and/or address this secondary market standard: 1) IRC section 5891; 2) the state structured settlement protection statutes; and 3) judicial interpretations of the "best interest" standard.

IRC Section 5891

IRC section 5891 imposes a 40 percent excise tax on any person who acquires structured settlement payment rights in a factoring transaction. The excise tax, however, does not apply if the transfer is approved in advance in a "qualified order" issued under an applicable state statute by an applicable state court.

IRC section 5891(b)(2) defines a qualified order as “a final order, judgment or decree” that satisfies two requirements: a qualified order must find the transfer of the structured settlement payment rights:

• does not contravene:
  • Any Federal or State statute or
  • The order of any court or responsible administrative authority; and
• Is in the best interest of the payee, taking into account the welfare and support of the payee’s dependents.

State Structured Settlement Protection Acts

Forty-seven states have enacted some form of structured settlement protection act. While the various state SSPAs lack uniformity, most adopt the same terminology and share the same basic legislative scheme as the Model SSPA. Echoing IRC section 5891, the state SSPAs provide that structured settlement payment rights transfers are not effective unless they receive advance court approval. Under each of the state SSPAs, key terms are defined, procedures for obtaining court approval are spelled out, and required notices, disclosures and findings are established.

Although all of the state SSPAs incorporate the "best interest" test, the California statute is the only SSPA that defines best interest. Section 10139.5 (b) of the California Insurance Code lists 15 factors that judges should consider "[w]hen determining whether the proposed transfer should be approved, including whether the transfer is fair, reasonable, and in the payee’s best interest, taking into account the welfare and support of the payee’s dependents" including:

“(1) The reasonable preference and desire of the payee to complete the proposed transaction, taking into account the payee’s age, mental capacity, legal knowledge, and apparent maturity level"; and

“(15) 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.”

Judicial Interpretations

In the absence of a state SSPA "best interest" standard, state courts have applied differing determination standards and have been reluctant to provide their own definitions. For example, here is a statement from a 2003 New York trial court opinion (In re Petition of Settlement Capital Corp.):

"Although the [New York] statute does not define the best interests of the Payee, developing case law and the intent of the statute suggest the Court should consider: (1) the Payee’s age, mental capacity, physical capacity, maturity level, independent income, and ability to support dependents; (2) purpose of the intended use of the funds; (3) potential need for future medical treatment; (4) the financial acumen of the Payee; (5) whether the Payee is in a hardship situation to the extent that he or she is in “dire straits”; (6) the ability of the payee to appreciate financial consequences based on independent legal and financial advice; [and] (7) the timing of the application."

Conclusion

What relevance, if any, therefore, does the secondary structured settlement market "best interest" standard have as primary market stakeholders contemplate the potential impact of a uniform fiduciary standard under the Dodd-Frank legislation?

Neither IRC 5891 nor any of state SSPAs apply their "best interest" test to primary market structured settlement sales. Only four of the state SSPAs (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 or fiduciary standard apply to the original structured settlement sale?

Thank you, John Darer, for pointing out the importance of this issue.

For additional discussion and analysis of secondary market business practices and the "best interest" test, see:

• Sections 16.02 ("History of Structured Settlement Transfers") and 16.05 ("Judicial Review of Transfer Applications") in "Structured Settlements and Periodic Payment Judgments" (S2P2J); and
• The structured settlement wiki:
  • Secondary market blog posts
  • S2KM reports about Professional Association Meetings including the National Association of Settlement Professionals (NASP).

For S2KM's 2006 analysis of "How the Primary Market Views Factoring", see this concept map. 

Uniform Fiduciary Standard

What impact will a new uniform fiduciary standard, being developed by the Securities and Exchange Commission (SEC) as one result of the Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), have upon existing structured settlement and settlement planning business models and practices?

Dodd-Frank

Among other reforms, Dodd-Frank created the Consumer Financial Protection Bureau  (CRPB) and the Federal Insurance Office (FIO). CFPB's central mission is "to make markets for consumer financial products and services work for Americans ....."

In addition to creating the CFPB and the FIO, Dodd-Frank directed the 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:

• Released its fiduciary standard study in January 2011.
• Concluded that a uniform standard of care “at least as stringent” as the fiduciary standard currently applied to investment advisors should extend to all brokers, dealers and investment advisors.
• Is expected to release its proposed regulation for a uniform fiduciary standard this year.

Historically, brokers, dealers and insurance producers have been held to a "product suitability" standard which is less stringent than a fiduciary standard. As defined at 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)

NAIC Annuity Suitability Regulation

For comparison purposes, the NAIC "Suitability in Annuity Transactions Model Regulation" (Suitability Regulation) provides: "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 ..." (emphasis added)

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.

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

Impact on Insurance Professionals

Although the SEC's anticipated uniform fiduciary standard has received limited publicity within the structured settlement and settlement planning industries, it has generated significant controversy and disagreement among financial planners, broker dealers and life insurance professionals.

A recent article by Brian Anderson titled "Impact of a Universal Fiduciary Standard" looks at the related issues from the perspective of "insurance producers". Part of a series of articles about threats to the independent life insurance distribution channel, Anderson's article includes the following summary of arguments for and against a universal fiduciary standard:

• "Proponents of a universal fiduciary standard — including many financial planner and consumer groups — claim consumers who rely on the financial advice of experts are confused by the different standards of care. These consumers are at an information disadvantage, they say, and vulnerable to exploitation by advisors who are not required to make recommendations in the best interest of the customer."
• "Opponents of a fiduciary standard — including many life insurance industry trade associations — say a universal fiduciary standard is unnecessary because the current suitability standard is effective. Opponents also say the imposition of a universal fiduciary standard would result in higher costs and reduced choices and service for consumers."

Some life insurance representatives have expressed concern, according to Anderson's article, that the anticipated SEC fiduciary standard could potentially ban commission-based compensation for insurance product sales and thereby destroy the traditional life insurance business model.

Others disagree. Anderson quotes Jill Hoffman, NAIFA assistant vice president of federal government relations, as stating: “The language of Dodd-Frank specifically says that a fiduciary standard can be met, and a person can still receive commissions, and a person can still sell proprietary products. In other words, the language says you cannot violate a fiduciary standard just because you sell proprietary products and get paid commission.”

Structured Settlements and Settlement Planning

Will the SEC uniform fiduciary standard impact settlement planners and structured settlement professionals? Here are some reasons why leading settlement planners and structured settlement professionals should study, and anticipate the need to adopt, whatever uniform fiduciary standard the SEC ultimately adopts:

• Blended products - Structured settlement annuities increasingly are paid into trusts that also include financial products.
• 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 including settlement planners, financial planners and trustees.
• 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.

What issues might a uniform fiduciary standard create for structured settlement and settlement planning professionals? At their worst, as S2KM has previously observed, certain traditional structured settlement business practices fail to meet any fiduciary standard. For example:

• 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 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.

For additional S2KM reporting about structured settlement business standards and practices, 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.

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.

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).