Federal Appeals Court Classifies Fractional Life Insurance Policies as Securities
A recent ruling by the Ninth Circuit Court of Appeals has classified fractional interests in life insurance policies as securities, impacting wealth managers and investment advisors across the U.S. The case involved Pacific West Capital Group (PWCG), which sold portions of life insurance policies to investors who then paid premiums and received a share of the death benefits. PWCG's business model relied on selecting policies and managing reserves to cover premium payments, promising investors substantial returns.
However, the longevity of insured individuals caused financial strain on PWCG's reserves, leading to requests for additional investor contributions. Those unable to provide additional funds lost their investments, prompting a court-appointed receiver's intervention due to mismanagement and actuarial errors. The Securities and Exchange Commission (SEC) filed a lawsuit against PWCG, its founder Andrew B. Calhoun IV, and associated sales agents, with some parties settling while others contested the securities classification.
The court concluded that these fractional life settlements met the criteria of investment contracts under federal securities law. Crucially, investor returns were tied to the managerial efforts of PWCG, extending beyond the simple payout timeline. Both pre-sale and post-sale activities influenced the court's analysis, affirming that these offerings required federal registration due to interstate investment and integrated sales efforts.
Consequently, the court upheld penalties including the return of a portion of commissions and monetary fines against sales agents, along with injunctions against future violations. The decision underscores regulatory expectations for securities compliance in life insurance-linked investments and signals increased scrutiny for wealth managers dealing with similar financial products. This ruling has implications for how life settlements are structured, marketed, and regulated in the U.S. insurance and investment sectors.