Beyond Structured Settlements

Spring 2012 Conferences

During the next four weeks, S2KM will attend and review three professional educational conferences addressing structured settlement and settlement planning issues:

• Richard B. Risk Jr. Settlement Planning Practicum
• National Structured Settlement Trade Association (NSSTA) Annual Meeting
• Society of Settlement Planners (SSP) Annual Meeting

Risk Practicum

A national authority on structured settlement law, Richard Risk has endowed a series of annual settlement planning "practicums" at his law school alma mater, The University of Tulsa College of Law. Risk believes the 2012 practicum, scheduled for April 13-14, will represent the first time any law school in the country has formally recognized settlement planning as a topic of legal education. Speakers: Joseph Tombs; Patrick Hindert; Mark Popolizio; Jeremy Babener; Jack Meligan; Carl Pierce.

NSSTA Annual Meeting

NSSTA's Annual Meeting, scheduled for April 25-27 in Washington, D.C., will feature a mixed agenda of business and political meetings; NSSTA "Takes the Hill" meetings with Members of Congress and senior Congressional Staffers; plus an educational program headlined by Senator Max Baucus, Congressman Richard Neal, NOLHGA Chairman Thomas Ronce and President Peter Gallanis, Mike Montemurro of the IRS, a Congressional Chiefs of Staff panel, plus various NSSTA leaders and property & casualty insurance representatives.

SSP Annual Meeting

SSP will host its Annual Meeting April 29-May 1 in Las Vegas. The SSP educational program will feature 27 speakers discussing strategies to improve and grow the settlement planning market. Some of the SSP presentation categories:

• Revitalizing and reinventing structured settlements
• New NAIC annuity regulations
• Insurance, investment and administrative options
• Tax developments, strategies and legislative proposals
• Medicare (MSA) and Medicaid (SNT) updates
• What ELNY means for settlement planners

In addition to these three 2012 conferences, S2KM previously attended and reviewed the Academy of Special Needs Planners (ASNP) 2012 Annual Meeting. For S2KM's complete reporting about professional associations whose members participate in structured settlements and settlement planning, 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 - 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 - 1

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

Should it matter:

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

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

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

Although Principle VI directs NSSTA members to:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Does this exemption encompass structured settlements?

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

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

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

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

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

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

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

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

Business Standards and Practices - 2

A prior S2KM blog post (Business Standards and Practices-1) asserted that structured settlement business standards and practices must improve before the industry can achieve its public policy and revenue potential. The prior post also highlighted historical events that help explain the development of traditional structured settlement business and professional models. This post continues S2KM analysis of traditional and transitioning structured settlement business and professional models and their related business standards and practices.

Before the structured settlement industry can improve and grow, the primary market must address these strategic issues:

• What are the traditional structured settlement business and professional models?
• What problems have traditional structured settlement models created that have restricted industry growth?
• What new business and professional models are competing with traditional structured settlement models?
• How will the business standards and practices of these new models differ from traditional structured settlement models?

The traditional primary market structured settlement business model is a "claim management model" including some or all of the following characteristics:

• IRC section 130 Qualified Assignments as the standard funding model;
• Single product (annuity) predominates;
• No requirement to define injury victim (customer) "best interests" or structured settlement product "suitability";
• Defendant "approved" structured settlement agents;
• Defendant "approved" structured settlement annuity providers;
• Defendant "right of last refusal" to match funding alternatives with affiliated annuity provider quotes;
• Defendant "right" to deny structured settlements to injury victims;
• Defendant strategies to appropriate the structured settlement tax benefit to save costs and/or generate profits;
• Opposition to single claimant 468B Qualified Settlement Funds;
• Failure to fully inform injury victims about IRC section 5891, settlement transfers or case-specific structured settlement protection statutes;
• Failure to promote "full disclosure" and "informed consent" of structured settlement compensation and/or conflicts of interest;
• Misrepresentations including (but not limited to) the "cost" and/or "value" of structured settlements.

The traditional structured settlement "professional" typically refers to himself (or herself) as a "structured settlement broker" or "structured settlement consultant". By background, he or she generally is a life insurance agent or insurance claims representative licensed to sell life insurance and typically sells one product: a single premium fixed payment life insurance annuity.

"Advanced training" for those structured settlement broker/consultant/agents who are members of NSSTA ("America's largest association of structured settlement professionals") may include a one-time one weekend "certification" program (CSSC) at the University of Notre Dame plus continuing education credits at NSSTA-sponsored education conferences. NSSTA's Code of Ethics (a Statement of Ethics and Professional Responsibility) was approved by NSSTA in 1997 "to provide guiding principles to its members and member organizations".

For many structured settlement stakeholders, including some NSSTA members and many structured settlement recipients, the problems with the traditional structured settlement business and professional models are apparent if not obvious:

• For example, NSSTA sponsored a Broker Relations Initiative beginning in 2006 to improve the reputation and public image of structured settlements by establishing more effective broker to broker communication and understanding. Despite many featured presentations and progress reports, however, the Broker Relations Initiative has not yet produced any final report or noticeable industry changes.
• During NSSTA's 2009 Winter Meeting, NSSTA member and speaker Joseph DiGangi addressed problems resulting from the structured settlement industry's traditional "annuity broker" business model. These problems, according to DiGangi, include a stagnant market, negative perceptions of structured settlement participant roles and value, a limited knowledge base and knowledge resources as well as a single product offering. DiGangi proposed an alternative "consultant" business model, which he termed "settlement consulting", with multiple products and services providing added value.
• During NSSTA's 2010 Annual Meeting, featured speaker Dan Clark highlighted NSSTA's stagnating revenue growth. As a remedy for structured settlement industry problems, Clark challenged NSSTA to change from within. According to Clark, "to improve industry performance, NSSTA must discuss both sides of every issue and do what is right."
• DiGangi's proposal and Clark's admonition create challenges that NSSTA historically has been unwilling to acknowledge or address. For example, during NSSTA's 2009 Winter Meeting, featured speaker Rev. Oliver Williams challenged the NSSTA audience to identify structured settlement business conduct that caused "shocked disbelief" among NSSTA members. Noone mentioned Macomber v. Travelers or Spencer v. Hartford or allegations by structured settlement recipients of fraud, Rico violations, misrepresentations, and rebating by primary market participants. Instead, the NSSTA members identified "structured settlement factoring" and how factoring companies have "stolen" the structured settlement brand.
• Staying focused on NSSTA, "shocked disbelief" and "structured settlement factoring", what should be surprising is how NSSTA has attempted to ignore (from their business practice and responsibility perspective) and simultaneously demonize the secondary structured settlement market. Consider, for example, the NSSTA website. If you want to "Learn More" about structured settlements:
  • NSSTA encourages you "to contact a structured settlement broker or life insurance company in your area".
  • However, if someone has offered to purchase your structured settlement payments, NSSTA advises you to contact someone else - "a trusted attorney" or "the office of your state's attorney general" - adding that "advocates for consumers and the disabled have publicly called attention to the practices of firms engaged in the purchase of structured settlement payments".
  • NSSTA's identification of structured settlement tax rules highlights IRC 104(a)(2) and 130 while omitting IRC 5891 - which includes the only Federal tax definition for a structured settlement.
• Consider also NSSTA's Code of Ethics and Professional Responsibility, which provides the following guiding principles for NSSTA member companies, their employees and individual members: integrity, fidelity, honesty, candor, competence, faithfulness, fairness, disclosure, due diligence, knowledge, skills, honesty, dignity, courtesy, professionalism and compliance with applicable federal and state laws.
• How do NSSTA's "guiding principles" square with:
  • Allegations of primary market illegal activities by structured settlement recipients in the Macomber v. Travelers and Spencer v. Hartford class action lawsuits;
  • A stagnant primary structured settlement market with negative stakeholder perceptions of participants' roles and value, a limited knowledge base and resources plus a single product offering; and/or
  • Peripheral markets such as special needs attorneys, life care planners, Medicare set-aside professionals and the structured settlement secondary market that are growing?
• The answer is they don't square. A fundamental mismatch exists between NSSTA's Code of Ethics and Professional Responsibility and traditional structured settlement business practices and standards. The reasons include:
  • NSSTA's Code of Ethics and Professional Responsibility does not contain any enforcement procedures and NSSTA has made no attempt to enforce its Code of Ethics and Professional Responsibility.
  • NSSTA adopted its Code of Ethics and Professional Responsibility in 1997. More recent structured settlement laws and related market developments have substantially changed the structured settlement market. NSSTA's Code is outdated and largely irrelevant for the transitioning structured settlement market.
  • The traditional structured settlement "claim management" business model and "annuity broker" professional model include flaws and conflicts as outlined above. Those flaws and conflicts are being exposed and punished in class action lawsuits.

For S2KM's continuing analysis of structured settlement business standards and practices, see S2KM's structured settlement wiki.

Business Standards and Practices - 1

For the structured settlement industry to achieve its public policy and revenue potential, business standards and practices must improve. This blog post, which begins a new S2KM series, highlights historical developments which help define the business standards and practices of the current structured settlement industry.

Periodic Payment Settlement Act of 1982 - This Federal legislation amended IRC section 104(a)(2) (clarifying an exclusion for "periodic payments") and added IRC section 130 (introducing and defining "qualified assignments" and "qualified funding assets").

NSSTA (1985) - A pioneering group of structured settlement agents and life companies formed the National Structured Settlement Trade Association (NSSTA) which became the first, and remains the largest, structured settlement professional association.

First Settlement Transfer (1986) - James Lokey completed the first transfer of structured settlement payment rights thereby launching the structured settlement secondary market. A number of companies subsequently responded to this market development to create a "gray market" allowing and encouraging structured settlement recipients to liquidate part or all of their future payment rights.

Revenue Procedure 93-34 (1993) - Regulations issued by the U.S. Treasury became effective defining a new type of IRC 468B fund ("Qualified Settlement Fund") providing an efficient dispute resolution technique for defendants and a safe harbor for plaintiffs who need time to resolve their own settlement planning issues prior to deciding upon any specific form of distribution including structured settlements.

NSSTA CSSC Program (1994) - NSSTA originated a training and certification program at the University of Notre Dame leading to a designation for qualifying persons as Certified Structured Settlement Consultants (CSSC).

Weil Settlement (1996) - The plaintiff in this lawsuit argued that, as a result of an anti-competitive conspiracy among certain structured settlement agents, annuity providers and NSSTA, structured settlement annuity providers marketed exclusively through agents who represented defendants and refused to appoint agents who represented plaintiffs or their attorneys. The confidential settlement of the Weil lawsuit coincided with a change in industry business practices whereby structured settlement annuity providers began to appoint agents representing plaintiffs and allowing agents representing defendants and plaintiffs to share commissions.

NASP (1996) - A group of companies specializing in structured settlement transfers created the National Association of Settlement Purchasers (NASP) which became the first and only trade association specializing in the structured settlement secondary market.

Structured Settlement Protection Statutes (1997-present) - Beginning with Illinois in 1997, nearly all states have enacted some form of structured settlement protection statute with many such statutes, since 2000, based upon the Model State Structured Settlement Protection Act which was also adopted by the National Conference of Insurance Legislators in 2004. These state laws require structured settlement transfers to receive advanced state court approval.

NSSTA Code of Ethics (1997) - NSSTA adopted and published its Statement of Ethics and Professional Responsibility "to provide guiding principles to its members and member organizations". Implicit in the acceptance of this Statement, according to NSSTA, "is an obligation to act in a professionally responsible and ethical manner when providing structured settlement services".

NY Attorney General Investigation (1999) - The New York Attorney General launched an investigation of J.G. Wentworth, a leading structured settlement transfer company, and entered into a settlement in 1999 limiting discounts on J.G. Wentworth's New York transactions to no more than 25%.

Victims of Terrorism Tax Relief Act of 2001 - Among other provisions, this legislation added IRC section 5891 ("Structured Settlement Factoring Transactions") to Subtitle E of the Internal Revenue Code and resulted from a political compromise between NSSTA and NASP.

SSP (2001) - Dissatisfied with what they considered NSSTA's continuing defense bias, a group of structured settlement agents formed the Society of Settlement Planners (SSP), a national non-profit education and public policy association for structured settlement professionals who advocate "the injury victim's right to choose settlement planning advisers and financial and guarantee providers".

Grillo case (2001) - A Texas district court entered a $1,600,000 judgment against plaintiff attorneys based upon allegations by their prior clients that a medical malpractice case settlement "contained no language which required at least one defendant or its liability insurer to promise a fixed and determinable periodic payment which would be tax free to the claimant".

California Attorney General's Study (2004) - Prepared for the California legislature, this study surveyed hundreds of California transfers between 2000 and 2003. For a summary of the results, see "Transfers of Structured Settlement Payment Rights - What Judges Should Know about Structured Settlement Protection Acts", by Daniel Hindert and Craig Ulman.

NAIC Compensation Disclosure (2004) - The National Association of Insurance Commissioners (NAIC) adopted a Compensation Disclosure Amendment to its Producer Licensing Model Act. The Disclosure Amendment neither mentions nor excludes structured settlements.

Saltzburg and Chemerinsky Opinion Letters (2006) - First presented at the ATLA 2006 Winter Meeting, two legal opinion letters written by law professors Stephen Saltzburg and Erwin Chemerinsky reach similar conclusions:

• Experts, including structured settlement experts, have a fiduciary duty to their clients.
• Plaintiff experts have a conflict of interest if they are paid by someone other than the plaintiff without disclosure to and consent by the plaintiff.
• Plaintiff attorneys have a duty to disclose this conflict of interest by structured settlement experts to their clients.

Macomber v. Travelers (2007) - Settled on undisclosed terms, this class action lawsuit alleged that Travelers lowered the cost of structured settlements by 2% without informing plaintiffs (shortchanging) by paying its approved structured settlement agents a 2% commission and retaining a 2% commission for itself (rebating). Coincidental with this settlement, Travelers changed its structured settlement business practices and its affiliated life company stopped selling structured settlement annuities.

SSP RSP program (2007) - SSP launched a Registered Settlement Planner (RSP) professional certification program in affiliation with Texas Tech University including an educational component; submission and review of a comprehensive personal injury settlement plan; experience requirements; continuing education; and a code of ethics.

NSSTA Broker Relations Initiative (2007) - Consultant Lynn Courier introduced the first draft of a proposed "Standards of Professional Conduct" for structured settlement consultants developed by the NSSTA-sponsored Broker Relations Initiative (BRI) during the NSSTA 2007 Fall Meeting. To date, NSSTA has not adopted any additional standards of professional conduct beyond its 1997 Code of Ethics.

Rapid Settlements (2007) - Rapid Settlements, a Texas factoring company, failed in a series of transfer cases to successfully utilize arbitration clauses in its attempt to bypass state structured settlement protection statutes.

Fresno County Factoring Cases (2009) - In Henderson v. Scioteco, a California appellate court ruled favorably for 321 Henderson Receivables, a J.G. Wentworth affiliate, reversing earlier opinions of a California superior court in 11 factoring cases consolidated for appeal. The appellate court ruling allowed Henderson to amend the transfer petitions at issue to correct any errors prior to any new hearing on the petitions and additionally held that public policy supports state court approved structured factoring transactions.

Suitability in Annuity Transactions Model Regulation (2010) - The NAIC adopted this Model Regulation "to require insurers to establish a system to supervise recommendations and to set forth standards and procedures for recommendations to consumers that result in transaction involving annuity products so that the insurance needs and financial objectives of consumers at the time of the transaction are appropriately addressed." Significantly for structured settlements, exemptions from the Model Regulation include: "settlements of or assumptions of liabilities associated with personal injury litigation or any dispute or claim resolution process."

Spencer v. Hartford (2010) - A U.S. district judge in Connecticut approved a $72.5 million class action settlement resulting from plaintiff allegations (denied by Hartford) that Hartford and its attorneys, brokers and agents violated the Racketeer Influenced and Corrupt Organizations Act (RICO) and committed common law fraud in structuring its settlements. Hartford's affiliated life company stopped selling structured settlement annuities in 2009.

For more detailed information about these structured settlement business standards and practices developments, see "Structured Settlements and Periodic Payment Judgments" co-authored by Daniel Hindert, Joseph Dehner and Patrick Hindert.

NSSTA and NASP 2010 Educational Conferences - 4

The National Association of Settlement Purchasers (NASP) just raised the standard for structured settlement strategic discussion and analysis during its 2010 educational conference in Las Vegas.

Previous standards: the 2008 Structured Settlement Thought Leadership Conference and NASP's 2009 Annual Meeting.

NASP 2010 strategic anlaysis participants: Earl Nesbitt (NASP Executive Director and moderator); Peter Vodola (Co-Chairman of the NSSTA Legal Committee); Matthew Bracy (President of NASP); Craig Lessner (General Counsel of Peachtree); John Darer and Patrick Hindert (NSSTA members and industry bloggers); Richard Risk (SSP member); and Jeremy Babener and Tim Morbach (industry analysts).

Strategic Questions: Nesbitt challenged the NASP panel and launched the industry discussion with these strategic structured settlement questions:

• What has caused the decline in the primary structured settlement market?
• What steps has the primary market taken to improve its product and sales?
• Is the structured settlement market transitioning to a settlement planning model?
• If yes, what impact will this transition have for the primary and secondary market?
• What issues and problems does the primary market see with the secondary market:
  • Operating and administering their current portfolio?
  • Originating new business?
  • Administrative costs?
  • Complying with transfer orders?
  • Potential liabilities?
  • Beneficiary issues?
• How can the secondary market help improve and grow the primary market?
• How can the primary market improve the secondary market?
• What are the risks of a continuing adversarial relationship between the primary and secondary markets?
• How does the primary market view the positive secondary market recovery from the 2008 financial market collapse?
• What are the primary market annuity provider concerns with the secondary markets?
• How can the secondary markets help improve and grow the primary market?
• How can the primary market improve the secondary market?
• What are the risks if the relationship between the primary and secondary markets remains adversarial?
• How did the 2008 collapse of the capital markets impact the primary structured settlement market?

This S2KM blog post continues S2KM's reporting and analysis of the NSSTA and NASP 2010 educational conferences.

Spencer v. Hartford - 7

What are the critical questions for defendants (and your insurers and your re-insurers and your attorneys) resulting from the proposed settlement of the Spencer v. Hartford class action lawsuit - assuming YOU, as a defendant, participate in funding structured settlements?

Question number 1: What are your risks for non-disclosure and/or lack of full disclosure?

Question number 2: What information do you need to disclose - and to whom and when?

Question number 3: Assuming you fully disclose, how do you save money using structured settlements?

For a valuable (pre - Spencer v. Hartford settlement) analysis about how defendants save money using structured settlements, see Section IV "Helping the Wrong Party" in Jeremy Babener's article titled: "Structured Settlements and Single-Claimant Qualified Settlement Funds: Regulating in Accordance with Structured Settlement History".

Spencer v. Hartford - 5

Hartford Financial Insurance Group announced today it has reached an agreement in principle to settle the Spencer v. Hartford class action structured settlement lawsuit resulting in a $47 million after-tax charge contingent upon court approval.

Addendum (published April 30, 2010): irrespective of Hartford's accounting results ($47 million of after-tax charges in 2010), a knowledgeable source has informed S2KM the amount of the Spencer v. Hartford settlement is $72.5 million, contingent on court approval.

The class action lawsuit was first filed in U.S. District Court in Bridgeport, CT October 31, 2005. The lawsuit alleges Hartford committed Civil RICO and state-law fraud violations as part of its structured settlement program. The lawsuit and settlement potentially involve thousands of structured settlement recipients. Hartford terminated its structured settlement program in 2009.

Hartford's announcement appears as part of the company's report of first quarter financial results for 2010.

Prior S2KM reporting about Spencer v. Hartford:

• Spencer v. Hartford - 1 - summarizes the case background plus developments up to April 6, 2009.
• Spencer v. Hartford - 2 - provides S2KM commentary about the plaintiffs' allegations, potential damages, NSSTA's Code of Ethics, and selected educational discussions from the NSSTA 2009 Winter Meeting.
• Spencer v. Hartford - 3 - identifies questions and lessons resulting from Spencer v. Hartford and offers a proposed solution to improve the structured settlement industry.
• Spencer v. Hartford - 4 - reports the October 14, 2009 denial by the United States Second Circuit Court of Appeals of Hartford's petition for appeal.

S2KM Reviews Jeremy Babener's QSF Paper - 2

While researching his paper "Structured Settlements and Single-Claimant Qualified Settlement Funds: Regulating in Accordance with Structured Settlement History" (QSF paper), Jeremy Babener interviewed many structured settlement industry leaders including Patrick Hindert, Managing Director of S2KM Limited.

This S2KM blog post features Jeremy Babener's research interview with Patrick Hindert - with emphasis (bold type) added subsequently by Patrick Hindert for this publication.

Prior S2KM blog posts about Babener's QSF paper:

• Single Claimant 468B QSF Update
• Jeremy Babener's QSF Paper
• S2KM Reviews Jeremy Babener's QSF Paper - 1

Secondary market

• Babener: How frequently do structured settlement consultants discuss the secondary market with injury victims?
• Hindert:
  
  • While some settlement planners may discuss the secondary market with their clients, most primary market structured settlement advisers do not.
  • Most structured settlement annuity providers and their agents are not qualified to advise anyone about "structured settlement transfers" (aka "factoring").

Anti-assignment clauses

• Babener: Do courts enforce anti-assignment clauses in structured settlement documents?
• Hindert:
  
  • Structured settlement anti-assignment clauses are generally enforceable but not self-executing.
  • A party to the related documents (eg. annuity provider) must act to enforce the clause.
  • Since IRC 5891 was enacted, relatively few annuity providers attempt to enforce structured settlement anti-assignment clauses except in unusual circumstances.

Annuity commissions

• Babener: What is the typical commission for structured settlement annuities?
• Hindert:
  
  • The "standard" structured settlement annuity commission is four (4%) percent of premium which is paid by the product provider to its agents (aka "consultants" or "brokers") .
  • Frequently, multiple agents share the four percent commission.
  • Such "commission sharing" creates conflicts of interests which are rarely disclosed to the structured settlement recipient or his/her attorneys.

Taxing structured settlement recipients

• Babener: Many structured settlement consultants believe the majority of structured settlement recipients pay taxes - or would otherwise pay taxes but for the structured settlement tax subsidy.
• Hindert: Where is the objective proof? Many structured settlement industry "beliefs" don't square with the facts or the law. Your dissipation and QSF papers help to prove this thesis.

Do defendants save money using structured settlements?

• Babener: Have defendants and their liability insurers historically saved money using structured settlements by negotiating based on nominal rather than present values?
• Hindert:
  • Many structured settlement agents and intermediaries proclaim defendants save money using structured settlements.
  • Where is the independent, objective proof?
  • If true, what are the reasons:
    
    • Misrepresentation?
    • Failure to disclose?
    • Unauthorized practice of law?
  • Most structured settlements are negotiated using lump sums which are subsequently transitioned into structured settlements.
  • Why would any informed plaintiff attorney ever knowingly accept a lower fee from his client for a structured settlement settlement costing defendants less than an alternative cash settlement?
  • Under current CMS rules for workers compensation Medicare set-aside agreements (WCMSA), annuities are valued more cost advantageously for defendants than lump sums because of the CMS required "set-off" method for calculating present value.
  • This CMS valuation method also means that annuities underfund WCMSAs because the annuities do not include any inflation provisions.

Defendant savings - 2

• Babener: How frequently would you estimate that defendants save money using structured settlements?
• Hindert:
  • If and when defendants save money today using structured settlements, the primary reasons are misrepresentations, failure to disclose, unauthorized practice of law and/or undue sales pressure to fund using affiliated companies and agents.
  • Plaintiff attorneys should be, and probably will become, more aggressive in discovery to elicit information from defendants about structured settlement compensation, conflicts of interest, and company policies as well as more accurate cost and present value calculations.
  • When calculating any cost savings from structured settlements, defendants should anticipate and factor in costs from potential lawsuits for bad business behavior resulting from their current structured settlement programs.

Defendant savings -3

• Babener: What is your estimate of the amount of money defendants save using structured settlements?
• Hindert:
  • I have never seen an independent study demonstrating or explaining whether, or more importantly why, defendants save money using structured settlements.
  • Any cost savings result primarily from:
    
    • Misrepresentations;
    • Failure to disclose; or
    • Negotiation pressure to direct annuity sales to affiliated companies.
  • One of the results of high pressure structured settlement sales in a claim management context is to increase the likelihood the recipient will subsequently attempt to sell their payment rights.
  • If you ignore profits from product sales and assume full disclosure of compensation and costs with no misrepresentations and no unauthorized practice of law (agents providing legal services to save defendants legal costs), how do defendants save money using structured settlements?

Approved lists

• Babener: Have defendants and their liability insurers historically saved money on structured settlement costs by insisting on purchasing annuities from affiliates and particular life insurance companies?
• Hindert:
  • For the best evidence of defendant savings from affiliated programs, and the best explanation for such savings, review the allegations of misrepresentation and non-disclosure in the Spencer v. Hartford case.
  • When calculating "defense savings", it is important to differentiate:
    • claim savings - if any;
    • profits from structured settlement annuity sales; and
    • future liabilities resulting from structured settlement annuity sales.

Qualified Settlement Funds

• Babener: Assuming there are no defendant savings, do you think that structuring a settlement with a QSF is superior to structuring directly with a defendant?
• Hindert:
  • Yes, I believe structuring a settlement with a QSF is inherently superior to structuring with a defendant in a claim management model.
  • The objectives, processes and knowledge resources are completely different in these two settings.
  • Both the plaintiff and defendant receive judicial protection and a trustee/administrator whose role is to develop settlement solutions for all QSF beneficiaries.
  • QSFs permit and require allocation among claimant beneficiaries and lien holders - including Medicare and Medicaid.
  • Claimants and their advisers can objectively consider needs, resources and best interests.
  • The primary (only) negative of QSFs for plaintiffs is the cost.
  • Key questions about QSFs are the costs - and how to substantial decrease those costs as well as the time necessary for QSF disbursements and termination.