Texas Supreme Court Rules that Life Settlement Contacts and Viaticals Are Subject to Texas Securities Act (with Lofchie Comment)

The Supreme Court of Texas issued a decision in Life Partners, Inc. v. Arnold, ruling that life settlement contacts and viaticals satisfy the definition of an investment contact under the Texas Securities Act (the "Act"), making them securities subject to the Act.

In response to the ruling, North American Securities Administrators Association ("NASAA") President William Beatty issued a statement in support of the decision and its implications throughout the United States. He explained that for "more than a decade," state securities regulators "have seen widespread abuses involved in the marketing and sale of viaticals and life settlement contacts, which have been the focus of numerous state enforcement actions."

Lofchie Comment: States often have a wider definition of what constitutes a "security" than the SEC. (See, e.g. "What Is a Security,"). This is particularly the case in regard to viatical contracts. A number of states, including for example, New Jersey, expressly define the term security under relevant state law to include viatical contracts, even though such contracts may not be securities under SEC interpretations of the Securities Exchange Act. This means that firms acting as agent or principal in the sale of such contracts should strongly consider registering as broker-dealers with the SEC, even though the SEC might not think that registration is required under federal law. (Attempting to register as a broker-dealer with various states, but not with the SEC, is simply more trouble than it is worth because the broker-dealer regulatory requirements of the various states assume that the firm is also registered under federal law.)

See: Texas Supreme Court Decision; Mr. Beatty's Statement.