(The news featured below is a selection from the news covered in the Federal Securities Report Letter, which is distributed to subscribers of the Federal Securities Law Reports.)

District Court: Investments in Viatical Settlements are Securities

Investments in viatical settlements were investment contracts and were securities as defined in the federal securities laws. According to the U.S. District Court for the Southern District of Florida, the expectation of profits from these investments was derived predominately from the efforts of others. A flexible reading of the investment contract definition would also further the remedial purposes of the securities laws, concluded the court.

In a viatical settlement, a person sells the benefits of a life insurance policy for a lump-sum payment of a stated percentage of the policy's face value. The purchaser then becomes the beneficiary, and often sells fractional interests in these policies to investors. A viatical settlement provider charged in a civil action by the SEC claimed that these interests were not securities under theHoweytest and were not subject to the federal securities laws.

Initially, the court found that the settlements satisfied the " commonality" requirement of the Howey test. The court rejected the defendants' assertion that the Howey test requires a finding of "horizontal commonality," such as a pooling of interests and a pro rata distribution of profits. A"vertical commonality" standard was appropriate in this case, however, as the court stated that all that is required is for the success of the investors to be dependent on the success of the investment promoters' efforts to secure a return.

The interests also satisfied the requirement that the expectation of profits is derived predominantly from the efforts of others. While the timing of the deaths of the individual viators' deaths was a significant factor in any investor return, the court found that the expectation of profits flowed from " the entrepreneurial and managerial efforts involved in locating, negotiating and performing life expectancy evaluations".

The court also declined to follow the bright-line test used by the U.S. Circuit Court of Appeals for the District of Columbia Circuit in its 1996 decision (1996-97 CCH Dec. ¶99,256), SEC v. Life Partners, Inc. In this case, the court found that fractional interests in viatical settlement contracts were not securities subject to the federal securities laws because the profits from their purchase did not primarily depend on the efforts of a party other than the investors. The district court stated that such a rule is "inconsistent with the policies underlying the federal securities laws and misconceives the nature of investments in viatical settlements." Such bright-line rules are not favored, stated the court, "as they tend to create loopholes that can be used by the clever and dishonest."

¨ SEC v. Mutual Benefits Corp. (SD Fla) is reported at ¶92,852 .