Beyond Structured Settlements

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).

MSAs and Liability Cases

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.

Although their objectives and target audiences are different, the National Academy of Elder Law Attorneys (NAELA) and the American Bar Association (ABA) have each recently issued recommendations addressing MSAs and liability cases.

MSAs are administrative and funding mechanisms utilized in certain categories of settlements to protect Medicare's interests as "secondary payer" under the Medicare Secondary Payer (MSP) statute. MSA objectives include:

• Protecting Medicare from erroneous billings;
• Releasing settlement participants from Medicare liability;
• Providing a settlement-funding vehicle;
• Utilizing Medicare properly to limit settlement costs.

Although Federal law does no define MSAs, or mandate specific types of MSA funding mechanisms, CMS (the responsible federal agency) has established certain basic requirements for workers compensation MSAs (WCMSA) in a series of memoranda beginning in 2001:

• Maintain an interest-bearing account;
• Reimburse Medicare provider bills at appropriate fee schedules for Medicare allowable services;
• Submit an annual accounting of expenses to the lead CMS contractor.

In addition, the CMS WCMSA memoranda create both an advantage and a problem for using structured settlements to fund WCMSAs:

• October 15, 2004 Memorandum - CMS sets forth a "set-off" method for calculating present value that establishes an inherent cost advantage for annuity funding as opposed to lump sum funding for many WCMSAs.
• August 20, 2008 Memorandum - CMS encourages the submission of annuity quotes with rated ages to establish life expectancy with requirements that have proven burdensome for both structured settlement consultants and annuity providers.

Meanwhile, the Medicare, Medicaid and SCHIP Extension Act of 2007 (MMSEA) requires liability insurers to determine the Medicare status for all claimants and to report all claims involving a Medicare beneficiary to CMS when those claims are resolved - or face a civil penalty of $1000 per day per unreported claim.

• On November 9, 2010, CMS delayed the submission deadline for liability insurance claim reports from the first calendar quarter of 2011 to the first quarter of 2012.
• MMSEA does not address the need for MSAs in liability cases and CMS has not offered any related uniform or formal guidance.

Within this confusing legal environment, where liability insurers and attorneys must still decide how best to comply with the MSP act in liability cases without over-reacting and establishing an MSA unnecessarily, NAELA and the ABA have each issued recent recommendations.

NAELA published its recommendations on October 27, 2010 as part of a Medicare Set-Aside Task Force Report approved by NAELA's Board of Directors. In addition to recommendations, the NAELA Task Force Report includes findings and legal resources. NAELA's recommendations are intended for special needs and elder law attorneys handling personal injury settlements involving the MSP program and include two caveats:

• "The requirement for future medical expenses set-asides in tort cases is not as clear as it is in WC cases"; and
• "Some Medicare regional offices will not consider MSP set-asides in tort cases. Cases in which the above advice should be communicated to clients should be limited to those cases with large settlement/awards based on specific estimates and evidence of the costs of future medical services."

S2KM summary of NAELA's recommendations:

• Document any advice and counseling about the appropriateness of MSAs for specific cases.
• Advise personal injury (PI) clients to set-aside an equivalent amount of funds for future Medicare-related medical expenses in a self administered MSA.
• Warn PI clients that the Medicare Secondary Payer Act (MSP) applies to all tort settlements and that CMS considers PI plaintiffs to have an obligation to protect Medicare's interests in coordinating future benefits.
• Advise PI clients to consider MSAs with applications for approval to CMS in cases with large settlement/awards based on specific estimates and evidence of the costs of future medical services.
• Be mindful under state law of an attorney's duty to protect a client’s liability recovery from incorrect claims and unnecessary charges.
• The NAELA Public Policy Committee and Medicare Task Force should continue:
  • Dialogue about MSAs with appropriate CMS officials;
  • Educating NAELA members about MSAs through NAELA publications; and
  • Communicating NAELA’s position on MSAs to appropriate PI lawyer trade associations.

Unlike NAELA, the ABA recommendations, approved during the ABA's 2011 Midyear Meeting, are addressed to the United States Congress and urge Congress to amend the MSP Act. The ABA recommendations resulted from resolutions adopted by the ABA's Tort Trial and Insurance Practice Section (TIPS) which also included a list of historical findings:

• "RESOLVED, That the American Bar Association urges Congress to acknowledge that there is no regulatory or statutory basis for Medical Set Asides for third party liability settlements, judgments or awards under the Medicare Secondary Payer Act and provide clear, predictable, and consistent procedures for the submission, uniform determination, and timely approval of any third party medical set aside settlement proposals (MSASP) voluntarily submitted to the Centers for Medicare & Medicaid Services (CMS) in response to the non-binding recommendations of CMS.
• "FURTHER RESOLVED, that legislation to accomplish these goals should incorporate the following principles:
  1. Acknowledge that there are not statutory and regulatory requirements for determining Medical Set Aside payments and the process for approving claims subject to the Medicare Secondary Payer Act for third party liability claims.
  2. Exempt from review by CMS all settlements in which there are no legal obligations to pay medical benefits.
  3. Establish an appeals process that must be completed by CMS within 690 days of request by the claimant, insurer, or their representative.
  4. Prohibit CMS from seeking additional moneys from the settlement proceeds after review and/or appeals processes have been concluded.
  5. Prohibit recovery thresholds for MSASP that are linked to predetermined economic indices.
  6. Prohibit recovery thresholds for MSASP that are linked to predetermined economic indices.
  7. Establish a 30 day deadline by which CMS must respond in writing of its acceptance of the proposed MSASP.
  8. Require CMS to timely (“timely” means within 60 days the information must be delivered to the patient and patient’s lawyers) and reasonably provide a detailed list of any payments it made and/or may make a claim for set aside for, and if it does not, cannot collect or require a set aside for that patient.
  9. Prohibit the “certification” or claim of specialization by any private individual or person or government entity of a process, practice or individual in the determination of MSASP.
  10. Prohibit the use of Social Security numbers and Health Card Numbers in the MSASP reporting process."

For additional analysis of MSAs, MMSEA and the MSP Act, see Chapter 15 in "Structured Settlements and Periodic Payment Judgments".

ASNP 2011 Annual Meeting

The Academy of Special Needs Planners (ASNP) hosted its Fifth Annual Conference March 11-12, 2011 in San Francisco. Co-chaired by Kevin Urbatsch and Michael Gilfix, the 2011 ASNP conference highlighted a growing knowledge gap between traditional structured settlement consultants (many of whom aspire to be settlement planners) and special needs attorneys (whose professional focus increasing includes settlement planning).

ASNP is one of three national associations of attorneys, the others being the Special Needs Alliance (SNA) and the National Academy of Elder Law Attorneys (NAELA), whose members engage in special needs planning. The primary difference between special needs planning and settlement planning is that special needs planning includes clients whose disabilities result from many causes including but not limited to personal injury or workers compensation accidents.

Beyond the quality of speakers and value of topics, ASNP conferences provide exceptional educational experiences for three additional reasons:

• Handout materials - Whereas most speakers at structured settlement conferences provide attendees with a power point handout or no written handout, most ASNP speakers provide attendees with original, topic-specific professional papers (in addition to outlines and/or power points) captured on a digital thumb drive.
• Sponsors and Exhibitors - Among the several national conferences S2KM attends, ASNP and NAMSAP provide the best interaction among sponsors, exhibitors and attendees. ASNP's interaction includes designated breaks when attendees are encouraged to meet with sponsors and exhibitors as well as designated tables for sponsors and exhibitors during lunch to promote extended and focused discussions.
• Knowledge of Attendees - Because ASNP conference attendees are special needs attorneys who already share a relatively high level of common professional knowledge, ASNP speakers have the freedom to expand the collective knowledge domain of attendees rather than merely reinforce existing shared knowledge.

ASNP's 2011 Speakers and Highlights

• Vincent Russo - Alternatives to Special Needs Trusts - Russo, one of ASNP's founders, highlighted planning uncertainties that justify consideration of alternative special needs strategies. In the context of such uncertainties, including life expectancies plus changes in Medicaid and estate tax laws, Russo utilized videotaped case examples to discuss several alternatives to SNTs.
• Robert Wood - Qualified Settlement Funds - Wood is a frequent speaker at structured settlement and settlement planning events. His ASNP presentation addressed single claimant QSFs and attorney fee QSFs including bad fact patterns, abusive cases and alternative definitions for "multiple claimants". Wood also discussed practical QSF issues such as the termination process, what to do with left-over assets and QSF administrative costs. Except for abusive cases, Wood believes the IRS actually likes QSFs.
• Rafael Gonzales - MSAs and Special Needs Planning - Gonzales' presentation addressed mandatory insurer reporting, conditional payments and Medicare set-aside arrangements. MSA's have become a frequent topic at almost every structured settlement and settlement planning conference - and with good reason given the many and frequent new developments. Gonzales' presentation featured summaries of the most recent case law, regulatory developments and legislative proposals.
• David Lillesand - SSI Update - Lillesand's annual Social Security Income summary for ASNP included detailed analysis of Social Security Regional Chief Counsel precedents for 2009 and 2010 some of which impact structured settlements used to fund SNTs. Lillesand also highlighted three new POMs for SNTs. Based upon his review of recent Social Security rulings, Lillesand identified a potential new issue for attorneys - expanded circumstances when legal fees are subject to Social Security approval.
• Patricia Dudek - Creative Housing Solutions - Although disabled persons historically have had few options for home ownership, home ownership is now a more realistic possibility according to Dudek. Her presentation summarized existing federal housing programs as well as financial and legal strategies for achieving home ownership for persons with disabilities.
• Cynthia Barrett - How Health Care Reform Impacts Persons with Disabilities - Barrett's discussion summarized the new Federal health care legislation and advised ASNP attendees about how to adjust their professional practice. Of special interest to structured settlement and settlement planning professionals, Barrett highlighted and discussed the questions plaintiff attorneys are most likely to ask about health care reform.
• David Foster Koth and Gregory Finn - Selecting Corporate Trustees - Among the many issues discussed during this presentation, the portion addressing structured settlement issues was among the best and most interesting. In the context of allocating trust investments among different financial vehicles, the co-presenters provided a balanced perspective on the advantages and disadvantages of structured settlements as well as the role of the secondary structured settlement market.
• Ruth Phelps - Community Funded SNTs - When a community establishes a special needs trust, several important planning considerations exist. Phelps used a case example to discuss these issues and offer a model planning solution.
• Professor Hank Greely - Diagnostic Genetic Testing - Greely, a leading expert on health law and the biosciences, summarized recent genetic testing developments including the impact of genetic testing for civil litigation (future medical costs) and insurance (age ratings).
• Michelle Ward - IRA Tax Planning - Ward provided a detailed analysis of IRA taxation focusing on distribution options and existing Federal regulations under IRC § 401(A)(9)..

Congratulations to ASNP for another outstanding educational program.

For S2KM reporting about past ASNP conferences and other settlement planning and structured settlement professional associations, see S2KM's structured settlement wiki.

NSSTA and NASP 2010 Educational Conferences - 2

The National Structured Settlement Trade Association ( NSSTA ) and the National Association of Settlement Purchasers ( NASP ) have announced agendas and speakers for their 2010 educational conferences scheduled concurrently and coincidentially next week (November 10-12, 2010) in Las Vegas.

S2KM has published an introductory report for these conferences plus historical reporting about past NSSTA and NASP educational conferences. S2KM's Managing Director, Patrick Hindert, will attend portions of the NSSTA conference (as a member) and participate at the NASP conference (as a moderator and speaker).

S2KM recommends both the NSSTA and NASP educational conferences to all structured settlement stakeholders and offers this preliminary comparative analysis.

Topics

NSSTA and NASP will both address several similar issues:

• Ethics - NSSTA and NASP could enhance their discussions by addressing "business practices" including the "Standards of Professional Conduct" adopted by the Society of Settlement Planners (SSP) on March 7, 2008.
• Legal update - NSSTA's legal committee represents a strategically important structured settlement industry knowledge resource. That said, NASP's structured settlement legal updates are equally diverse and valuable - especially when you include NASP's related "Industry Updates".
• Legislative update - Eric Vaughn is NSSTA's Executive Director, federal lobbyist and legislative guru. NSSTA lobbying weaknesses (especially state lobbying) play to NASP lobbying strengths and suggest collaborative opportunities.
• Marketing - Try a Google search for "structured settlement". Where are NSSTA, SSP and other primary market  participants?

With some important differences:

• NSSTA
  • Medicare/Medicaid - NASP is expected to address these issues as part of NASP's "Industry Analysis".
  • Certification - NASP does not have a certification program.
  • Life care planners - NSSTA, NASP (and SSP) educational programs historically have ignored this important settlement consulting professional community.
  • In force structured settlements - a strange attempt by NSSTA to educate its members about secondary market issues.
  • Wrongful imprisonment - a narrow focus compared with NASP's anticipated tax analysis.
  • Life expectancy - hopefully, NSSTA will link this discussion with related Medicare and Medicaid issues. Whatever happened to the structured settlement industry's life expectancy study initiated by Roger Harbin and Steve Smith?
• NASP
  • Industry analysis - NSSTA's educational programs typically provide limited strategic analysis with only one perspective and no outside critics. NASP features more open discussion of strategic industry issues featuring critics and alternative perspectives.
  • Taxation life cycle - Both NASP and SSP have previously featured Jeremy Babener as a speaker. Why not NSSTA? Babener's NASP presentation promises to be one of the highlights of these two structured settlement educational conferences.
  • Capital markets - NSSTA's educational programs historically lack analysis of the financial markets. NASP's annual panel sets the industry standard.
  • Dodd Frank legislation - a good example of NASP analysis of federal legislation that impacts both the primary and secondary structured settlement markets.

Speakers

NSSTA and NASP speakers both include a mix of association members and non-members. Both associations typically feature judges, attorneys and legislators as speakers. NSSTA's legislative speakers are generally federal while NASP's legislative speakers are generally state.

NSSTA speakers do not include SSP or NASP members. NASP speakers include both NSSTA and SSP members and thereby generate more comprehensive and valuable strategic discussions.

NASP 2010 featured speakers who are members of NSSTA and/or SSP:

• NSSTA
  • Peter Vodola
  • John Darer
  • Patrick Hindert
• SSP
  • Richard Risk

Previous NASP speakers who are members of NSSTA and/or SSP

• NSSTA
  • Stephen Harris
  • Michael Upchurch
  • Patrick Hindert
• SSP
  • Jack Meligan
  • Richard Risk

For more comprehensive S2KM reporting about  NSSTA, NASP and SSP, see S2KM's structured settlement wiki.