Beyond Structured Settlements

PFAC 2016 Annual Conference

Fiduciary standards, as they relate to product suitability specifically, and to business practices generally, can be expected to become more significant factors in product sales for the traditional structured settlement market as it continues to expand into, and interact with, the larger, more complex personal injury settlement planning market.

Multiple developments support this prediction. They include the expanding role of fiduciaries as settlement planning stakeholders and decision makers. In that context, fiduciaries most often serve as trustees, but also as guardians, conservators and/or executors.

Any person acting in a fiduciary capacity has an obligation to act in the "best interest" of another party. A fiduciary duty requires a high standard of honesty and full disclosure including any potential conflicts of interests. A fiduciary must not obtain a personal benefit at the expense of his or her client.

Regardless of who sells/provides a financial or insurance product to a settlement trust, and what independent duties that product provider might have to a trust beneficiary (i.e. injury victim), the settlement trustee's own fiduciary duties arguably should require the settlement trustee to evaluate specific trust products, trust product providers and their related business conduct utilizing that same fiduciary standard which requires honesty, full disclosure, and best interest.

In personal injury settlement planning, several types of trusts are utilized - any of which may be funded with, or utilized to fund, structured settlements: qualified government bond trusts; reversionary grantor trusts; settlement preservation trusts; special needs trusts including pooled trusts; Medicare set-aside trusts; and IRC 468B Settlement Funds.

As one related result of the expanding use of settlement trusts, a unique settlement trust market is evolving in the United States characterized by:

• Specialized knowledge about government benefits required to serve "special needs" beneficiaries and their families.
• Willingness to consider structured settlements as trust assets and knowledge related thereto.
• Willingness to accept corpus amounts less than minimum requirements of traditional corporate trustees.
• Professional individual trustees as well as corporate trustees.

To S2KM's knowledge there does not yet exist any national association of settlement trustees. Instead, settlement trustees participate as members, speakers, sponsors and/or exhibitors at various structured settlement, settlement planning and special needs national conferences such as: NSSTA, SSP, NAMSAP, NAELA, ASNP, SN Alliance, Stetson SNT, University of Texas SNT among others.

PFAC Conference

There exist, however, state fiduciary associations the largest of which is the Professional Fiduciary Association of California (PFAC). To learn more about fiduciaries and fiduciary standards, from a structured settlement perspective, S2KM attended the 21st Annual PFAC Conference, which occurred June 1-4, 2016 in Indian Wells, California and featured 74 exhibitors, more than 600 attendees plus four days of speakers and breakout sessions covering a multitude of topics.

PFAC is an affiliate of the National Guardianship Association (NGA). California Court Rules define education and qualification requirements to serve as guardian, conservator or trustee in California. Attorneys and CPAs with current, active licenses to practice in California automatically qualify. To retain their license, professional fiduciaries must also meet continuing education requirements. Approximately 680 professional fiduciaries are currently licensed in California.

Not all professional fiduciaries, of course, work in personal injury settlement planning. In fact, relatively few of the PFAC Conference presentations and/or exhibits were even relevant to structured settlement and/or settlement planning professionals.

Uniform Prudent Investor Act

Perhaps the most important and relevant lessons S2KM learned during the PFAC conference concerned the duties of care and the investment considerations imposed upon trustees by the Uniform Prudent Investor Act (UPIA). Understanding these UPIA trustee duties and investment considerations will almost certainly help structured settlement and settlement planning professionals improve their sales success when personal injury cases include settlement trusts.

The UPIA , which was adopted by the National Conference of Commissioners on Uniform State Laws (NCCUSL) in 1994, has been enacted, with some state-specific modifications, by 44 states and the District of Columbia. In those states, the UPIA, external to the trust document itself, serves as the most important reference defining a trustee's investment responsibilities.

Prior to the UPIA, courts applied the "prudent man rule" when evaluating trustee investment performance. 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. This newer standard allows for greater investment diversification so long as the risk/reward ratio matches the purposes and terms of the trust instrument.

In his PFAC conference presentation titled "A Trustee's Duty of Care Under the UPIA", Josh Yager addressed how a trustee can demonstrate prudence and good faith, and thereby avoid a lawsuit, by fulfilling six trustee duties required under the UPIA:

• Duty to have a plan.
• Duty to monitor risk/return.
• Duty to diversify.
• Duty to pay only fair fees.
• Duty to prudently delegate.
• Duty to monitor agent's activities.

Yager never mentioned structured settlements or personal injury settlement planning during his discussion. Within the context of his presentation, however, here are some follow-up questions worth considering at future educational conferences:

• How should life contingent structured settlements be compared with other investment alternatives when trustees calculate rates of return needed to accomplish trust objectives?
• How can structured settlement and settlement planning professionals better anticipate and address trustee risk objections that many structured settlements include too much concentration, as well as a lack of liquidity?
• What are "asset classes" - and should structured settlements be promoted/evaluated as a distinct and necessary "asset class" within settlement trusts?
• Assuming trustees have a duty to evaluate compensation arrangements related to trust assets, should structured settlement professionals be required to disclose their case-specific compensation, including compensation sharing agreements? To whom? When?
• How do "industry standard" four (4%) percent structured settlement commissions compare with commissions and fees charged by other financial product providers? Are these commissions "fair" or "excessive"?
• Why was a given structured settlement design and/or settlement professional selected in a specific case? Does he/she possess appropriate licenses and credentials? Is he/she subject to any undisclosed conflicts of interest? Has he/she been the subject of any prior lawsuits or client complaints? Does he/she understand the trustee's duties under the UPIA? Has he/she accomplished what they promised?
• What legal options does a trustee have when confronted with a structured settlement or structured settlement consultant that the trustee believes violates a fiduciary standard or duty for a specific settlement trust under the UPIA?

Although not specifically discussed in any of the PFAC presentations S2KM attended, Section 2(c) of the UPIA identifies eight additional 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.

When settlement trusts play a role in a personal injury settlement, structured settlement and settlement planning professionals should be prepared to address these factors as part of their sales strategy. Significant for structured settlements, the UPIA's list of investment considerations fails to mention mental or physical disabilities of a trust beneficiary. From a settlement planning perspective, injuries or diseases that create special needs or reduce an individual's normal life expectancy arguably should receive important consideration when a trustee makes investment decisions.

Comparative Business Standards

How do current business standards of structured settlement and settlement planning professionals measure up to the "best interest" standards required of trustees and other fiduciaries? Although various members of both the National Structured Settlement Trade Association (NSSTA) and the Society of Settlement Planners (SSP) are appointed as independent agents representing many of the same structured settlement annuity providers, the two associations address the issue of product suitability differently.

NSSTA, whose members include defense and plaintiff brokers, has adopted a "Statement of Ethics and Professional Responsibility" (Code of Ethics) with "guiding principles" for its members and member organizations. The Preamble 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 specifically address either fiduciary or product suitability standards.

By comparison with NSSTA, SSP's Mission Statement provides, in relevant part, that "[m]embership is open to all individuals with a genuine interest in the profession of settlement planning." However, "[c]andidates for membership must attest to their .......striving to ensure plans are consummated to a fiduciary standard." (emphasis added). Unlike NSSTA, almost all of SSP's members represent injury victims and their families and attorneys as opposed to defendants and liability insurers. Many SSP members also sell financial products as well as structured settlement annuities.

Plaintiff structured settlement brokers generally, and SSP members more specifically, regularly face direct competition from non-structured settlement financial advisors. Currently some financial advisors (Certified Financial Planners and Investment Advisors) are held to a fiduciary ("best interest") standard while other financial advisors (broker-dealers) provide services under a “suitability standard” which requires only a reasonable belief that any recommended product is suitable for a client.

Consumer protection concerns appear to be favoring broader application of the fiduciary standard. Acting under authority of Dodd-Frank, the SEC submitted a "fiduciary standard" study to Congress in 2011 recommending the adoption of a uniform fiduciary standard for investment advisers and broker-dealers when providing investment advice to retail customers. Congress has not yet adopted this uniform standard. More recently the U.S. Department of Labor has proposed a rule requiring fiduciary accountability for all investment advice related to retirement assets.

CONCLUSION

For most of its history, the primary structured settlement market has developed its business standards and practices based upon a "claim management" model which limits the scope of its representatives' duties of care toward injury victims - the ultimate customers for its products. Within the larger "settlement planning" market, which encompasses structured settlements, fiduciaries and other participating professionals are superimposing a more demanding "best interest" duty of care. To successfully compete in the settlement planning market place, therefore, structured settlement professionals need to acquire a better understanding of fiduciary and UPIA duties and requirements - and learn to re-shape their product sales accordingly.

NASP 2015 Annual Conference

Patricia LaBorde, President of the National Association of Settlement Purchasers (NASP), opened her association's 2015 Annual Conference last week in Las Vegas with a provocative description of its prior 12 months: "a year of unimaginable successes and challenges".

Founded in 2004, NASP identifies itself as "a leader in setting standards and implementing best practices for the structured settlement purchasing industry. Our association safeguards the rights of settlement recipients to readily access their funds through an efficient, fair and transparent judicial process."

NASP Presidential Panel

Subsequent conference presentations detailed NASP's successes and challenges including an historic President's Panel, moderated by Robin Shapiro, and featuring LaBorde and Michael Goodman, the first sitting President of the National Structured Settlement Trade Association (NSSTA) to attend a NASP conference.

Goodman has identified "growth opportunities for the structured settlement industry" as his number one goal as NSSTA President. He also characterized his remarks and opinions as personal and not representative of official NSSTA policy or positions.

Goodman highlighted the need for "responsible factoring" and mentioned the consumer protections that have been put in place in Wisconsin, Maryland and Illinois. Based upon his own professional experience, Goodman gave multiple examples of what he considered appropriate and inappropriate transfer activities.

Among Goodman's other noteworthy comments:

• "Factoring is not a zero sum game. What is bad for the secondary market is not necessarily good for the primary market."
• "Both NSSTA and NASP need to improve/correct the branding of "structured settlements". Confusing the primary and secondary markets is not beneficial for either association."
• "I am proud we have been able to create more consumer protections for injured annuitants. I am hopeful that by the end of this year, we will have improved the Structured Settlement Protections Acts (SSPAs) in five states.”

Both LaBorde and Goodman acknowledged business practices within their own markets that have created problems for the structured settlement brand. Some of the worst of the secondary market business practices were publicized nationally in an August 25, 2015 Washington Post front page article (featuring a non-NASP company) which more than one industry observer called "a perfect storm" for the factoring industry.

Legislative Collaboration

Even before the Washington Post article, however, and as a direct result of the 2013 Brenston case, which temporarily shut down the secondary market in Illinois, NASP and NSSTA initiated a proactive and collaborative legislative strategy to add five consumer protection amendments to targeted state structured settlement protection statutes:

• No forum shopping.
• Payee required to attend hearing.
• Stricter application of approval requirements.
• Advanced notice of transfer.
• Required disclosure of prior transfers.

The first success of NSSTA and NASP's legislative collaboration resulted in amendments to the Illinois statute. The Brentson case propelled the two organizations to negotiate and work a compromise that improved the Illinois SSPA. From the perspective of LaBorde and NASP, the result in Illinois represented "the biggest victory since the Model Act".

To memorialize the success in Illinois, NASP honored Illinois State Representative Michael Zalewski as recipient of its 2015 Alexander Hamilton Award. Representative Zaleweski, who sponsored the new Illinois structured settlement legislation, praised its "clarity and protection" compared with the "ambiguity" of the prior law.

NASP has bestowed its Alexander Hamilton Award eight times "to distinguished individuals who have supported and defended the right to free alienability of property rights." NASP considers this right to be its own cornerstone and the foundation of the structured settlement factoring business.

Further highlighting the success of NSSTA and NASP's legislative collaboration, LaBorde and Goodman jointly announced that Governor Scott Walker had signed, just prior to their panel discussion, Wisconsin's first Structured Settlement Protection Act - thereby becoming the 49th state (all except New Hampshire) to have enacted such protective legislation.

During his Legislative and Regulatory Update, NASP lobbyist Jack Kelly, who serves as point person for the NSSTA / NASP collaborative state legislative strategy, provided additional details concerning both the political aftermath of the Washington Post article and the collaborative state legislative strategy.

Without dismissing the negative public relations impact of the Post article, Kelly does not see any immediate Congressional threat despite letters making headlines. "NASP's primary federal concern is the tax bill," Kelly stated, "and it's not on the calendar."

As for state legislation, "good planning has made the difference", according to Kelly. He spoke about "mutual respect" for NSSTA and identified Florida, Maryland and Virginia among priority states for joint future lobbying to improve consumer protection.

Additional Conference Highlights

In his Litigation Update, NASP Executive Director Earl Nesbitt summarized recent court decisions addressing statutory "no-split" payment provisions, judicial "best interest" standards and various lawsuits involving Rapid Settlements.

Nesbitt allocated significant time to In re: Rains, a Texas case in which the appellate court determined the trial court: 1) could not force MetLife into a contract with the transfer company, directly or indirectly, by imposing a servicing arrangement on account of the Texas statutory "no-split" provision; and 2) abused its discretion in approving the transfer citing a "severe discount rate" among other factors.

The Rains case featured an extensive "best interest" analysis establishing a new judicial precedent in Texas. This analysis requires a judge to consider a "penumbra" of information including "future yet foreseeable liabilities; domestic, economic, physical, medical and educational needs of payee and dependents." Also at issue: how much and what type of evidence is required to place into the court record to justify a transfer.

Matt Bracy reprised his role as moderator of NASP's popular Judicial Panel - this year featuring Judges Daniel Buckley (California); Laura Inveen (Washington); and Jeremy Warren (Texas). The two hour program included questions to and from the judges addressing such transfer topics as:

• Interpreting the best interest standard;
• Common mistakes at transfer hearings by attorneys, factoring companies and sellers;
• How to best present a transfer;
• How judges consider objections to transfers;
• What documentation judges want to see at transfer hearings;
• How to best protect the seller's privacy;
• Information judges are not seeing presented that should be;
• Significance of the origin (type of personal injury) to the judge's analysis;
• Impact of prior transfers on assessments.

Two separate NASP presentations addressed unprecedented and changing perspectives of risk. Discussing Privacy Issues in Structured Settlement Transfers, Shawn Tuma spoke about risks due to cyber attacks. Citing the FBI, Tuma divided corporate America into two company types: those that have been hacked and those that will be - including many that have but don't realize it.

Health records, according to Tuma, are more valuable than financial records because they are rarely modified. Regardless of how you obtain health information, Tuma emphasized, you are obligated to protect it. These obligations include: stewardship, legal and public relations.

Tuma reported that both the SEC and the FTC have developed legal requirements that encompass prevention, detection, response, training, and third party access - and companies cannot insulate officers and directors from personal liability for related damages.

The lessons to be learned, according to Tuma: 1) document a record of compliance; 2) you will be breached; 3) Its not the breach, its your diligence, that matters most. Steven Fox supplemented Tuma's presentation with a discussion of ID Theft and Domicile Determination.

As secondary market transfers have expanded to include life contingent annuity components, mortality underwriting has become a critical skill set. Michael Fasano focused his presentation about Mortality Review / Process in Life Contingent Underwriting on unhedged life contingent secondary market structured settlement transactions.

Fasano emphasized that traditional medical underwriting practices utilized for life settlements or normal life insurance and/or annuities won't work for this class of individuals. Reasons include a high frequency of:

• Low income demographics. Most are unemployed.
• Rx and illicit drug issues.
• Incarceration and other behavior issues.
• Anti-selection and/or lying.

Fasano approximates that, as a class, mortality impairment of life contingent structured settlements results from: accident and behavioral (55%) vs. medical (45%). In addition to medical reports, Fasano utilizes targeted questionnaires to obtain underwriting information and makes adjustments for lack of candor and non-disclosure.

Completing NASP educational program: Jason Sutherland moderated a Servicing Panel featuring Melissa Bolling and John Enyart. Additional Breakout Sessions offered the following topics and speakers:

• Successfully Managing Difficult Payee Issues - Brian Dear; Duane West.
• Strategies for Securing Approval From Tough Judges - Samuel Cortes; Abagail Adams.
• Primer on Special Needs Trusts and Medicare Set-Asides - Patrick Hindert.
• Spousal Consent Issues in Transfers - Elyse Strickland; Shannon Harvey.

Congratulations to NASP, especially Conference Chairman Doyle Chisholm and Association Administrator Susan Barnes, for organizing such an informative and well-attended conference.

For additional, related S2KM reporting, see the structured settlement wiki plus these prior S2KM blog posts, see:

• Structured Settlements 2014 - Secondary Market
• NASP 2014 Annual Conference
• Michael Goodman Interview

S2P2J Release 54

Publisher Law Journal Press anticipates an October 2013 distribution date for hardcopy supplements for Release 54 of "Structured Settlements and Periodic Payment Judgments" (S2P2J) with online S2P2J subscribers receiving their update simultaneously at no additional charge.

Online S2P2J includes a search feature and download capability as well as link features to access individual book sections, appendices, footnotes, cases and statutes.

First published in 1986 and updated semi-annually, S2P2J is co-authored 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) have utilized S2P2J as an educational resource for their certification programs. 

Release 54 Highlights - Release 54 will feature new, updated and/or expanded sections addressing the following structured settlement topics:

• Negotiating structured settlements vs. cashing out
• Defendant disclosure issues
• Business practices of consultants
• Insurance company insolvencies
• Medicare set-aside arrangements
• Re-cycled structured settlement payment rights
• Securitization of structured settlement payment rights
• Australia structured settlement update

Negotiating Structured Settlements vs. Cashing Out - Why and when should defendants agree to structured settlements as opposed to lump sum settlements? Do defendants save money using structured settlements and, if yes, why and how? Do structured settlements result in additional costs and risks for defendants and, if yes, how do defendants reduce these costs and risks? Release 54 examines these questions in the context of existing state statutes and case law and offers recommendations for defendants when they review their traditional structured settlement policies and business practices. The recommendations include new sample structured settlement Mission and Disclosure Statements for liability insurers.

Defendant Disclosure Issues - Release 54 substantially expands and re-organizes S2P2J's existing coverage of defendant structured settlement disclosure issues. Topics addressed:

• State structured settlement protection act requirements
• Product disclosures and representations
  • Cost or Value
  • NAIC Annuity Disclosure Model Regulation
  • NAIC Suitability in Annuity Transactions Model Regulation
  • Compensation disclosure
  • "Guaranteed" payments
  • Dissipation studies
  • Public assistance
  • Annuity ownership and rights
  • Taxation
  • Financial condition of funding entities
• Conflicts of interest
• Medicaid/Medicare disclosures
• Securities issues
• Class action lawsuits vs. defendants
• Meeting professional responsibilities

Structured Settlement Consultants - Release 54 expands and updates S2P2J's coverage of structured settlement consultants to address: consultant selection criteria; structured settlement product suitability; and consultant business practice issues including laws and regulations, industry standards, commission disputes, privacy rules, and disclosure and representation requirements.

Insurance Company Insolvencies - Release 54 expands and updates S2P2J's already extensive coverage of insurance company insolvencies including state insurance guaranty associations and the most recent developments impacting Executive Life of New York [ELNY] and Reliance Insurance Company. Following ELNY's 22 years of New York State supervised "rehabilitation", S2P2J's Release 54 identifies lessons that potential structured settlement recipients and their attorneys and advisers can and should learn from the ELNY debacle.

Medicare Set-Aside Arrangements - Release 54 re-organizes and promotes S2P2J's coverage of Medicare set-aside arrangements (MSAs) with updated materials for both workers compensation (WC) MSAs and liability MSAs. These updates include an extensive summary and analysis of the structured settlement provisions in the new CMS WCMSA Reference Guide as well as conclusions and recommendations for utilizing MSAs in personal injury liability cases.

Re-cycled Structured Settlement Payment Rights - As low interest rates continue to negatively impact the primary structured settlement market, new products featuring re-cycled structured settlement payment rights have begun to proliferate as funding alternatives for personal injury periodic payment settlements. Release 54 features a new section with detailed diagrams and charts (designed by Timothy Morbach) to explain the several variations of these products. In addition, this new section compares the features of these products with traditional structured settlements and summarizes recent investor warnings about these products issued by the SEC and FINRA.

Securitization of Structured Settlement Payment Rights - S2P2J already includes a detailed Chapter 16 titled "Transfers of Structured Settlement Payment Rights" which provides comprehensive coverage of most structured settlement secondary market issues. This coverage includes: the history of the secondary market; summary and analysis of IRC section 5891 and the state structured settlement protection acts; and how judges review (or should review) transfer applications. Release 54 adds a new section, with detailed diagrams and charts (designed by Timothy Morbach), explaining how securitization of structured settlement payment rights works.

Australia Structured Settlement Update - S2P2J continues to track structured settlement developments in countries outside the United States including Canada, the United Kingdom, Continental Europe, Australia and New Zealand. Release 54 highlights a recent legislative development in Australia called “The Lifetime Care and Support Scheme” which provides treatment, rehabilitation and attendant care services to people severely injured in automobile accidents. At least one Australian structured settlement expert believes this legislative development could prevent an annuity-funded structured settlement market from developing in Australia anytime soon.

"Structured Settlements and Periodic Payment Judgments" is a complete reference work for attorneys, settlement planners, structured settlement consultants, risk managers, liability insurers, annuity providers and secondary market participants. It is available in both hardcopy and online versions which are updated semi-annually. For highlights from previous S2P2J updates, see the structured settlement wiki.

Uniform Fiduciary Standard

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

Dodd-Frank

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

In addition to creating the CFPB and the FIO, Dodd-Frank directed the SEC to study the need for a new, uniform, federal fiduciary standard of care for broker-dealers and investment advisers and to apply such a uniform standard if it deemed necessary. The SEC:

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

Historically, brokers, dealers and insurance producers have been held to a "product suitability" standard which is less stringent than a fiduciary standard. As defined at uslegal.com, "[A] fiduciary duty is an obligation to act in the best interest of another party..... A person acting in a fiduciary capacity is held to a high standard of honesty and full disclosure in regard to the client and must not obtain a personal benefit at the expense of the client." (emphasis added)

NAIC Annuity Suitability Regulation

For comparison purposes, the NAIC "Suitability in Annuity Transactions Model Regulation" (Suitability Regulation) provides: "In recommending to a consumer the purchase of an annuity or the exchange of an annuity that results in another insurance transaction or series of insurance transactions, the insurance producer, or the insurer where no producer is involved, shall have reasonable grounds for believing that the recommendation is suitable for the consumer on the basis of the facts disclosed by the consumer as to his or her investments or other insurance products and as to his or her financial situation and needs, including the consumer's suitability information ..." (emphasis added)

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

Significantly for structured settlements, however, the NAIC Suitability Regulation exempts "settlements of or assumptions of liabilities associated with personal injury litigation or any dispute or claim resolution process". By way of explanation, the legislative history of the NAIC Suitability Regulation specifically references "structured settlements" and adds: "[a] regulator pointed out that this type of contract did not generally result from a recommendation by an insurer or producer but agreed that it did not hurt to have the exemption there."

Impact on Insurance Professionals

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

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

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

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

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

Structured Settlements and Settlement Planning

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

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

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

• Misrepresentations or omission of material facts
  • Cost or Value - From a claimant's perspective, a core strategy for traditional structured settlements often appears "to make a little money look like a lot of money". The Spencer v. Hartford class action allegations outline one "sophisticated" variation of this strategy which often depends on hiding or misrepresenting annuity "cost" and/or settlement "value".
  • Guaranteed payments - Many structured settlement sales brochures continue to promise "guaranteed payments" without specifying who guarantees what if and when an annuity provider like Executive Life of New York (ELNY) becomes insolvent.
  • Managed account - Many structured settlement recipients do not understand important product details when their case is settled including how structured settlements differ from managed accounts and why they cannot access funds without court approval pursuant to state structured settlement protection acts.
  • Structured settlement myths- historically used to promote sales such as:
    • Studies show that nine out of 10 lump sum recipients squander the entire amount within five years.
    • Structured settlements enable injury victims to live free of reliance on government assistance.
• Conflicts of interest - without written, informed client and/or customer consent
  • Single product - The danger of single product structured settlement sales persons is not limited to whether his or her product is in the "best interest" of a particular claimant/customer. The danger is also that single product sales persons are inherently conflicted in recommending how much of any settlement should be allocated to their product.
  • Multiple roles - A structured settlement sales person introduced into a case by a defendant or liability insurer frequently plays four separate roles each of which potentially conflicts with the other roles: agent for the annuity provider; broker for the defendant; broker for the plaintiff; and agent for the defendant in helping to negotiate and settle the case.
  • Compensation sharing - Unless all parties to a settlement are informed about whether and how structured settlement annuity commissions are shared, a structured settlement creates a variety of potential conflicts of interest.
  • Funding alternatives - Based upon traditional structured settlement business and compensation models, the potential availability and applicability of 468B qualified settlement funds for "appropriate cases" creates inherent conflicts of interest between defendants and their structured settlement brokers.

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