Secretary Cox Applauds Enactment of HB 1220: Will Regulate the Sale of Viatical Investments to Protect Georgia Consumers from Misleading or Fraudulent Sales Practices

ATLANTA … Secretary of State Cathy Cox today applauded the signing by Governor Barnes of H.B.1220, creating specific statutory requirements for viatical investment products in Georgia.  H.B. 1220 amends existing securities laws to require viatical investment issuers to follow the same guidelines as other security salespeople operating in the state.  

The bill, introduced on behalf of Secretary Cox by Representative Tracy Stallings (D-Carrollton) and nine bipartisan co-sponsors, gives expanded authority to the Secretary of State’s Securities Division to regulate viatical issuers and take action against those who mislead or defraud Georgia consumers. The bill, which passed the House by a vote of 162-1 and the Senate by a vote of 48-0, was signed by the Governor last week.

A viatical investment is an arrangement in which a firm purchases, at a discount from its face value, the life insurance policy from the insured policy holder.  The firm then resells the policy in whole or in part to individual investors who are to receive money from the death benefit after the insured dies.

By requiring viatical issuers to file a statement and annual financial reports, HB 1220 expressly authorizes the Secretary of State’s office to keep records on viatical issuers and respond to concerns from investors.  This law requires viatical issuers to file financial statements, lists of broker-dealers and agents selling the investments, copies of escrow agreements and copies of advertising and sales materials.  To prevent consumers from falling prey to fraudulent investment schemes, the bill also limits the claims issuers can make for rates of return from investments and bars individuals from the industry who have been convicted or sanctioned for fraud, deceit or securities law violations. 

“I am extremely pleased that the General Assembly has once again stepped forward to strengthen consumer protection laws for Georgians by passing legislation regulating this type of investment product,” said Secretary of State Cathy Cox.  “Thanks to Representatives Stallings and Parrish and their co-sponsors, as well as Senators Carol Jackson (D-Cleveland) and Don Cheeks (D-Augusta) for their tireless efforts to secure passage of this bill.”

Joining Representative Stallings as co-sponsors of HB 1220 were: Rep. Butch Parrish (D-Swainsboro), Rep. Ben Harbin (R- Martinez), Rep. Jimmy Lord (D-Sandersville), Rep. Robert Ray (D-Fort Valley), Rep. Ralph Hudgens (R-Hull), Rep. Chuck Scheid (R-Woodstock), Rep. Lynmore James (D-Montezuma), Rep. Don Wix (D-Mableton) and Rep. Alan Powell (D-Hartwell).

Viatical Investments And Their Pitfalls – A Fact Sheet

Q: What is a viatical investment? 

A: A viatical investment is an arrangement in which a firm purchases, at a discount from its face value, the life insurance policy of an insurance policy owner.  The firm then re-sells the policy in whole or in part, or packages of several policies, to individual investors who are to receive money from the death benefit after the insured dies.

Q: Who currently regulates viatical investment products in Georgia? 

A: Because they are not considered insurance products viaticals are not regulated by the Georgia Commissioner of Insurance.  Viatical issuers also claimed that a United States Circuit Court decision that found that viaticals were not securities exempted them from state securities regulation.  Because the applicability of this federal court decision was subject to dispute, a state law was needed to make it clear that these products are, in fact, securities and fall within the regulatory authority of the Secretary of State, who serves as Georgia’s Commissioner of Securities.

Q: What are the problems and risks associated with viatical investments?

A: There are a host of problems that have arisen with some viatical programs.  They include –

Misleading Rates of Return:  Viatical issuers also advertise to potential investors rates of return that are based on the full term of the investment, which is based on a supposition about the insured’s life expectancy.  If the insured lives longer than expected, the investor’s return is diminished accordingly.  This significant caveat is not disclosed in advertisements.

Misleading and Deceptive Advertising Claims:  Recent ads placed by viatical issuers in Georgia newspapers promise investors returns of 36% to 90%.  Some issuers also falsely claim that their products are “100 % secured, fully insured and bonded.”  In most instances bonds don’t exist or are provided by “sham” bonding companies.

Policy Lapse: Viatical issuers typically set aside enough money to pay policy premiums for the life expectancy of the insured plus a short time more.  If the insured lives beyond this expectancy, the investor must make an additional and unexpected capital contribution or the policy will lapse.

Clean Sheeting: A practice in which a viatical issuer or its affiliate will induce terminally ill persons to obtain life insurance policies fraudulently (by lying on the application about their terminal illness). The viatical issuer then purchases the fraudulently obtained policy and resells it to investors.  When the insurer later determines that the policy was obtained by fraud, the insurer will not pay.  The investor loses their entire investment while the issuer, who has already made their profit, wins.

Q: How does HB 1220 address these problems?

A: The legislation adds needed clarity to the securities laws in Georgia by specifying expressly that viatical investments are subject to regulation by the Secretary of State’s Securities Division, thus enabling the agency to more effectively take action against those who defraud or mislead clients.  The bill requires that viatical issuers file a statement and annual financial reports.  Information required from viatical companies includes financial statements, lists of broker-dealers and agents selling the investments, copies of escrow agreements and copies of advertising and sales materials.  The bill also limits the claims that issuers can make for rates of return from the investments, and excludes from the industry those that have been convicted or sanctioned for fraud, deceit or securities law violations.