Beyond Structured Settlements

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.

NASP 2012 Annual Conference - 1

The National Association of Settlement Purchasers (NASP) will host its 2012 Annual Conference October 16-19 in New Orleans. For the first time in NASP's history, conference registration will be open to persons who are not NASP members or affiliated attorneys.

Speakers and Topics

• Matt Bracy - Welcoming Remarks
• Jack Kelley - Legislative and Regulatory Developments at State and Federal Level
• Earl Nesbitt - Litigation Update
• Joseph Feltes - Privacy Issues in Structured Settlement Transactions
• Jan Schlictmann - Keynote Address
• Mark Wahlstrom - Executive Life of New York Rehabilitation and Other Issues Facing the Primary Structured Settlement Market
• Kira Brereton - Financing Structured Settlement Transactions
• Patricia LaBorde - Issues in Life Contingent Transactions
• Elizabeth L. Yingling - The Application of the Securities Laws to the Sale of Structured Settlement Purchasing Transactions
• The Judges' Panel - How Judges Interpret the Best Interest Standard and Other Concerns in Structured Settlement Transfers
  

  • Judge Patricia D. Wise, Chancery Court Judge, Hinds County Mississippi

  • Judge Dean S. Lum, Superior Court for King County, Washington

• Breakout Session One - Practical and Ethical Issues Facing Transfer in Obtaining Court Approval of Structured Settlement Transactions
• Breakout Session Two - Issues in Underwriting Structured Settlement Transactions

S2KM Reporting for Prior NASP Conferences

• 2011 NASP Conference
  
  • Part 1 - speakers and topics
  • Part 2 - S2KM's primary and secondary market perspective
• NSSTA and NASP 2010 Educational Conferences
  • Part 1 - industry issues
  • Part 2 - discussion topics
  • Part 3 - "protect and preserve" vs. "improve and grow"
  • Part 4 - strategic questions
• 2009 NASP Conference
  
  • Part 1 - a listing of educational issues and participants
  • Part 2 - a summary of the educational discussions
  • Part 3 - a closer look at the strategic discussions
• 2008 NASP Conference
  
  • Part 1 - Speakers and topics
  • Part 2 - Panel discussion: structured settlement industry issues
  • Part 3 - Panel discussion: how to improve and grow the structured settlement market
• 2007 NASP Conference - see related NASP 2007 educational wiki
• 2006 NASP Conference
  
  • Part 1 - Speakers and Highlights
  • Part 2 - Primary and Secondary Market Introductions
  • Overview of the Structured Settlement Market
  • How the Primary Market Views Factoring

NASP 2011 Annual Meeting

Highlighting a year during which the secondary structured settlement market is exceeding previous annual transfer totals, the National Association of Settlement Purchasers (NASP) cautiously celebrated its seventh Annual Meeting November 9-11, 2011 in Las Vegas with record conference attendance including member company representatives, affiliate attorneys and invited guests.

Recognizing its legislative successes, NASP honored its Executive Director Earl Nesbitt for his past lobbying efforts by awarding him with NASP's 2011 Alexander Hamilton Award. Nesbitt represented NASP in helping to enact Internal Revenue Code section 5891 and the Model State Structured Settlement Protection Act upon which are based most of the related state structured settlement protection statutes.

NASP President Matthew Bracy additionally praised NASP's founders stating: "Through their vision, guts and determination, we have not only persevered but flourished. Today NASP celebrates the fact that structured settlement recipients, in compliance with federal and state laws, have the right to sell their asset when needed."

NASP Educational Program

Maintaining its tradition of inviting judges representing different states to speak, NASP's 2011 educational program featured a panel discussion of judges from New York (Honorable Judith McMahon), Texas (Honorable Alexandra Smoots-Hogan) and Mississippi (Honorable Denise Owens) moderated by Patricia LaBorde. Among other issues, the judges discussed how they interpret the "best interest" standard as well as their expectations for transfer company counsel, transfer documentation, disclosure of prior transfers and levels of proof in transfer cases.

Another highlight of NASP's 2011 educational program was NASP's decision to organize smaller breakout group discussions consisting primarily of NASP member general counsel and affiliate NASP member attorneys to discuss:

• Issues in Obtaining Court Approval of the Transaction; and
• Issues in Underwriting Structured Settlement Transactions.

Other Speaker and Topics

Robin Shapiro - Shapiro, Chairman of NASP's Legal Committee, summarized historical and 2011 secondary structured settlement legislative and case law developments. Among the specific cases and issues:

• Symetra v. Rapid - This ongoing litigation appears likely to be completed in 2011 with injunctions prohibiting Rapid Settlement's prior business practices of using arbitration to by-pass state structured settlement protection statutes and taking security interests to gain rights of first refusal for future transfers.
• Conflicts between "incumbents" and "insurgents" in the secondary structured settlement market with a substantial portion of new transfers including individual investors not just institutional investors.
• Confusion between transfers of structured settlement payment rights and "settlement liquidity" businesses involving other asset classes such as the increasing sale of veterans' benefits.
• At least one (unnamed) annuity provider that refuses to release guaranteed payments to investors when a payee dies resulting in delays and legal costs for transfer companies.

Leonard Bernstein - Bernstein, a financial services regulatory attorney, presented separate discussions about how 1) Dodd-Frank and 2) advertising laws impact structured settlements. Although both discussions were directed toward a secondary market audience, each also contained valuable information for primary market participants.

• Dodd-Frank - Bernstein's Dodd-Frank update focused on the Consumer Financial Protection Bureau (CFPB), a new federal agency . CFPB's central mission is "to make markets for consumer financial products and services work for Americans ....." Among its core functions are to take consumer complaints and to restrict unfair, deceptive or abusive acts or practices under the Federal consumer financial laws. Dodd-Frank provides CFPB with authorities that go beyond the existing consumer protection statutes. CFPB has broad authority to ask questions and demand information including consumer complaints. Dodd-Frank also establishes the Federal Insurance Office (FIO) with the authority to monitor all aspects of the insurance industry.
• Advertising - Bernstein's advertising discussion referenced sections of the Better Business Bureau's Code of Advertising that could impact structured settlement purchasing transactions (or primary market transactions) by prohibiting advertisements which are untrue, misleading, deceptive, fraudulent, falsely disparaging of competitiors, or insincere offers including deception through omission. As one strategy to protect against false advertising, Bernstein recommended using disclaimers whose effectiveness depends upon their prominence and location.

Elizabeth Yingling - Yingling, a securities attorney, discussed how federal and state securities laws can impact structured settlements. In defining what constitutes a "security", Yingling focused on the meaning of an "investment contract" as that term was defined in SEC v. Howey, a 1946 U.S. Supreme Court decision. Yingling offered several practical tips for transfer companies to avoid the mine fields of the securities laws when marketing to individual investors and also emphasized the serious risks involved when dealing with unsophisticated investors.

Earl Nesbitt - Nesbitt discussed the concepts of "discount rate" and "discounted present value" both of which play an important role in court hearings to evaluate structured settlement transfer proposals. The Model State Structured Settlement Protection Act defines "discounted present value" to mean: "the present value of future payments determined by discounting such payments to the present using the most recently published Applicable Federal Rate for determining the present value of an annuity, as issued by the United States Internal Revenue Service." In addition to identifying many factors that can determine the discount rate for a specific case, Nesbitt summarized the results of a recent survey he conducted of the discount rates approved by judges in Harris County Texas. Results:

• The average discount rate: 15.8 percent;
• The weighted average (i.e. taking into consideration the relative case size): 12.96 percent;
• The lowest discount rate: 7.4 percent; and
• The highest discount rate ($3494 paid for $7282 due in less than one year): 61.3 percent.

Patrick Hindert - Hindert (author of S2KM's blog "Beyond Structured Settlements") provided a "Primary Market Report" addressing current industry challenges and issues. In addition to explaining why primary market annuity premium could fall below $5 billion for 2011, Hindert summarized the historical background and current status of Executive Life of New York (ELNY). The impact of the secondary structured settlement market on the ELNY liquidation has been underestimated in most ELNY reporting by primary market sources. According to reliable secondary market sources, however, payment rights from as many as 1000 of ELNY's remaining structured settlements are currently owned by secondary market companies and/or investors.

Joe Feltes - Feltes, an attorney whose clients include health care providers and whose legal expertise includes social media, e-mail and Internet use, spoke about privacy issues in structured settlement transactions. Based upon his research, Feltes expressed surprised at the paucity of information available about structured settlements and privacy issues. As one example, Feltes pointed out the Model State Structured Settlement Protection Act does not address privacy. Before seeking and transmitting private medical information about structured settlement candidates and/or recipients, Feltes recommended obtaining purpose-specific written authorization including a waiver and release. In addition to HIPAA, Feltes discussed the privacy provisions contain in Graham Leach Bliley.

Congratulations to NASP for continuing its high educational standards with an outstanding 2011 Annual Meeting. Conference Chairperson Patricia LaBorde prepared helpful and related handout summaries for several of the presentations.

For S2KM reporting about prior NASP annual meetings plus additional analysis about the ELNY liquidation, see the structured settlement wiki.