Conclusions For Claimant: Daniel Harwin, Esquire Freedland Harwin Valori, P.L. 110 Southeast 6th Street, Suite 2300 Fort Lauderdale, Florida 33301 For Defendant: S. William Fuller, Jr., Esquire Hall Booth Smith, P.C. 200 West Forsyth Street, Suite 400 Jacksonville, Florida 32202
Other Judicial Opinions A party who is adversely affected by this Final Order is entitled to judicial review pursuant to section 120.68, Florida Statutes. Review proceedings are governed by the Florida Rules of Appellate Procedure. Such proceedings are commenced by filing the original notice of administrative appeal with the agency clerk of the Division of Administrative Hearings within 30 days of rendition of the order to be reviewed, and a copy of the notice, accompanied by any filing fees prescribed by law, with the clerk of the district court of appeal in the appellate district where the agency maintains its headquarters or where a party resides or as otherwise provided by law.
The Issue The issue for determination is whether Proposed Rule 69O-204.101 is an invalid exercise of delegated legislative authority.
Findings Of Fact Respondent, Office of Insurance Regulation (hereinafter referred to as "OIR"), is an agency of the State of Florida, created within the Financial Services Commission (hereinafter referred to as "Commission"). § 20.121(3)(a)1., Fla. Stat. (2007).2 Pursuant to Subsection 21.121(3)(a), the OIR is responsible for all activities concerning insurers and other risk-bearing entities, including licensing, rates, policy forms, market conduct, claims, issuance of certificates of authority, solvency, viatical settlements, premium financing, and administrative supervision, as provided under the Florida Insurance Code or Chapter 636. The Florida Insurance Code includes Chapters 624 through 632. The Commissioner of Insurance Regulation is the agency head of the OIR. However, the Commission is the agency head for purposes of rulemaking. § 20.121(3)(c). The matter at issue in this proceeding is Respondent's Proposed Rule 69O-204.101 entitled, "Disclosures to Viator of Disbursement" (the "Proposed Rule"). The Commission advertised the text of the Proposed Rule on November 30, 2007, in Volume 33, Number 48, of the Florida Administrative Weekly, and, subsequently, filed a Notice of Change to the Proposed Rule on February 15, 2008, and, again, on February 22, 2008. A final public hearing regarding the Proposed Rule was conducted by the Commission on March 25, 2008, at which time the Commission approved the Proposed Rule for final adoption. According to the published notice, the purpose and effect of Proposed Rule 69O-204.101 is "to establish disclosures to viators of reconciliation of funds." The text of the Proposed Rule, as noticed for final adoption, reads as follows: 69O-204.101 Disclosures to Viator of Disbursement. Prior to or concurrently with a viator's execution of a viatical settlement contract, the viatical settlement provider shall provide to the viator, in duplicate, a disclosure statement in legible written form disclosing: The name of each viatical settlement broker who receives or is to receive compensation and the amount of each broker's compensation related to that transaction. For the purpose of this rule, compensation includes anything of value paid or given by or at the direction of a viatical settlement provider or person acquiring an interest in one or more life insurance policies to a viatical settlement broker in connection with the viatical settlement contract; and A complete reconciliation of the gross offer or bid by the viatical settlement provider to the net amount of proceeds or value to be received by the viator related to that transaction. For the purpose of this rule, gross offer or bid shall mean the total amount or value offered by the viatical settlement provider for the purchase of an interest in one or more life insurance policies, inclusive of commissions, compensation, or other proceeds or value being deducted from the gross offer or bid. The disclosure statement shall be signed and dated by the viator prior to or concurrently with the viator's execution of a viatical settlement contract with the duplicate copy of the disclosure statement to be retained by the viator. If a viatical settlement contract has been entered into and the contract is subsequently amended or if there is any change in the viatical settlement provider's gross offer or bid amount or change in the net amount of proceeds or value to be received by the viator or change in the information provided in the disclosure statement to the viator the viatical settlement provider shall provide, in duplicate, an amended disclosure statement to the viator, containing the information in paragraphs (1)(a) and (b). The amended disclosure statement shall be signed and dated by the viator with the duplicate copy of the amended disclosure statement to be retained by the viator. The viatical settlement provider shall obtain the signed and dated amended disclosure statement. Prior to a viatical settlement provider's execution of a viatical settlement contract, the viatical settlement provider must have obtained the signed and dated disclosure statement and any amended disclosure statement required by this rule. In transactions where no broker is used the viatical settlement provider must have obtained the signed and dated disclosure statement from the viator. The documentation required in this rule shall be maintained by the viatical settlement provider pursuant to the provisions set forth in Subsection 626.9922(2), Florida Statutes, and shall be available to the office at any time for copying and inspection upon reasonable notice to the viatical settlement provider. The Proposed Rule cites Subsection 624.308(1) and Section 626.9925 as specific authority for the Proposed Rule. The Proposed Rule cites Sections 626.9923, 626.9924, and 626.9925 as the law implemented by the Proposed Rule. The Proposed Rule involves regulation of viatical settlement providers pursuant to Florida's Viatical Settlement Act, Part X, Chapter 626 (hereinafter referred to as the "Act"). The Act regulates both viatical settlements and life settlements. The Act does not define "viatical settlement" or "life settlement." However, both types of transactions involve the sale of the ownership interest in life insurance policies. A "viatical settlement" involves the sale of an ownership interest in a life insurance policy by a person who is expected to live for less than two years. A "life settlement" involves the sale of the ownership interest in a life insurance policy by a person who is expected to live longer than two years after the date of the sale. Viatical settlements and life settlements are regulated in essentially the same manner and each of the foregoing transactions are included in the definition of "viatical settlement contract" as defined in the Act. Therefore, references to "viatical settlements" under Florida law refer to both life settlements and viatical settlements. Subsection 626.9911(10) defines "viatical settlement contract" as follows: (10) "Viatical settlement contract" means a written agreement entered into between a viatical settlement provider, or its related provider trust, and a viator. The viatical settlement contract includes an agreement to transfer ownership or change the beneficiary designation of a life insurance policy at a later date, regardless of the date that compensation is paid to the viator. The agreement must establish the terms under which the viatical settlement provider will pay compensation or anything of value, which compensation or value is less than the expected death benefit of the insurance policy or certificate, in return for the viator's assignment, transfer, sale, devise, or bequest of the death benefit or ownership of all or a portion of the insurance policy or certificate of insurance to the viatical settlement provider. A viatical settlement contract also includes a contract for a loan or other financial transaction secured primarily by an individual or group life insurance policy, other than a loan by a life insurance company pursuant to the terms of the life insurance contract, or a loan secured by the cash value of a policy. In a viatical settlement transaction, the "viatical settlement provider" is the purchaser of the ownership interest in a life insurance policy, including the right to receive the policy proceeds upon the death of the insured. Also see § 626.9911(12).3 The "viator" is the owner of an insurance policy who sells the ownership interest in the policy. Also see § 626.9911(14).4 The term "viatical settlement broker" is defined in Subsection 626.9911(9), as follows: (9) "Viatical settlement broker" means a person who, on behalf of a viator and for a fee, commission, or other valuable consideration, offers or attempts to negotiate viatical settlement contracts between a viator resident in this state and one or more viatical settlement providers. Notwithstanding the manner in which the viatical settlement broker is compensated, a viatical settlement broker is deemed to represent only the viator and owes a fiduciary duty to the viator to act according to the viator's instructions and in the best interest of the viator. The term does not include an attorney, licensed Certified Public Accountant, or investment adviser lawfully registered under chapter 517, who is retained to represent the viator and whose compensation is paid directly by or at the direction and on behalf of the viator. Pursuant to Subsection 626.9911(9), the "viatical settlement broker" is an agent of the viator and, as such, owes a fiduciary duty to the viator to obtain the best price for the insurance policy. Thus, typically, the viatical settlement broker solicits bids from multiple viatical settlement providers on behalf of the viator. The Proposed Rule requires viatical settlement providers to furnish viators with a detailed accounting of all funds involved in viatical settlement transactions and to ensure that viators are aware of the accounting. The issues of disclosures required for viatical settlement contracts and transactions are addressed in two provisions of the Act, Sections 626.99181 and 626.9923. Section 626.99181, Florida Statutes, requires a viatical settlement broker to disclose its compensation and states, "[a] viatical settlement broker shall disclose to a prospective viator the amount and method of calculating the broker's compensation." That provision states the "compensation" includes "anything of value paid or given to a viatical settlement broker for the placement of a policy." Section 626.9923 addresses viatical settlement contracts and required disclosures to viators and states that: Viatical settlement contracts; required disclosures.--The viatical settlement broker, or the viatical settlement provider in transactions in which no broker is used, must inform the viator by the date of application for a viatical settlement contract: That there are possible alternatives to viatical settlement contracts for persons who have a catastrophic or life-threatening illness, including, but not limited to, accelerated benefits offered by the issuer of a life insurance policy. That proceeds of the viatical settlement could be taxable, and assistance should be sought from a personal tax advisor. That viatical settlement proceeds could be subject to the claims of creditors. That receipt of viatical settlement proceeds could adversely affect the recipient's eligibility for Medicaid or other government benefits or entitlements, and advice should be obtained from the appropriate agencies. That all viatical settlement contracts entered into in this state must contain an unconditional rescission provision which allows the viator to rescind the contract within 15 days after the viator receives the viatical settlement proceeds, conditioned on the return of such proceeds. The name, business address, and telephone number of the independent third- party escrow agent, and the fact that the viator may inspect or receive copies of the relevant escrow or trust agreements or documents. Petitioner is an established trade association in the life settlement industry and is comprised of over 175 member companies, some of which include Florida-licensed viatical settlement providers who would be subject to the Proposed Rule. Petitioner's members would be substantially affected by the Proposed Rule because it would require them to make disclosures to viators in addition to the disclosures required by the Act.
The Issue This issue in this case is whether Petitioner has jurisdiction to prosecute a viatical settlement sales agent for conduct relating to transactions involving viatical settlement purchase agreements, which Petitioner contends were “investment contracts”——and hence securities——subject to regulation under the Florida Securities and Investor Protection Act.
Findings Of Fact Petitioner Department of Financial Services, Office of Financial Institutions and Securities Regulation (the “Office”), as successor to the Division, is the state agency charged with administering and enforcing the Florida Securities and Investor Protection Act, Chapter 517, Sections 517.011-517.32, Florida Statutes. Respondent David H. Kligfeld (“Kligfeld”) was, at all relevant times, a Florida-licensed life and health agent subject to the regulatory jurisdiction of the Department of Insurance. Respondent Dhalco Financial Services, Inc. (“Dhalco”) was, at all relevant times, a Florida corporation of which Kligfeld was a director. The evidence does not establish that Dhalco engaged in any conduct distinct from Kligfeld’s in connection with the transactions at issue. Therefore, Respondents will be referred to collectively as “Kligfeld.” During a period of about one year, from early 1998 through early 1999, Kligfeld arranged for some of his clients to purchase equitable interests in life insurance policies that had been the subject of viatical settlement contracts. The following explanation of the viatical settlement business will put these deals in proper context. A traditional viatical settlement occurs when a person who is terminally ill, known as a “viator,” sells to an investor the right to receive death benefits under his life insurance policy. The investor pays a discount off the face value of the policy that reflects the viator’s life expectancy. For example, if the viator were expected to live for three more years, the investor might pay $.40 on the dollar (e.g. $40,000 for a $100,000 policy), whereas he might pay $.60 on the dollar for a policy insuring a person whose life expectancy is one year.1 Typically, the investor is responsible for paying any premiums that come due under the policy, which is known as a “viaticated policy” after the sale. His return——the death benefits less the total amount invested in the policy——is realized when the viator dies, the sooner the better. Under Florida law, a person who invests in a viatical settlement as just described is called a “viatical settlement provider.” In the instant case, one party to the subject transactions was a viatical settlement provider called American Benefits Services, Inc. (“ABS”). As a viatical settlement provider, ABS acquired——or purported to acquire——an inventory of viaticated policies. ABS in turn sold “interests” in these viaticated policies to other investors. The evidence shows that these investors——who are known under Florida law as “viatical settlement purchasers”—— bought death benefit dollars at a discounted price reflecting the viator’s life expectancy. Before going into greater detail about the viatical settlement purchase transactions that are at the heart of this case, it is important to note that viatical settlement purchasers do not enter into a traditional viatical settlement because they do not deal directly, or even indirectly, with the viator. In effect, viatical settlement purchasers buy at “retail” a product (death benefit dollars) that the viatical settlement provider has acquired in the “wholesale” market. To make money, the viatical settlement provider, like any retailer, must charge more per dollar of coverage (its product) than it paid for that dollar. In the instant case, the Office established that Kligfeld arranged for ten investors (hereafter, the “Investors”) to purchase death benefit dollars from ABS in 18 separate transactions.2 What follows is a general description of these transactions. ABS offered viatical settlement purchasers the option of investing in either a “growth” plan or an “income” plan. Because all but one of the 18 transactions at issue involved the growth plan, it will be discussed first. The growth plan offered an investor a choice between three levels of risk based on life expectancy. These were: Life Expectancy 2 years or less (28%) Life Expectancy 2½ years or less (35%) Life Expectancy 3 years or less (42%) The percentages in the parentheses reflect the discounted price per dollar of death benefit in each category of risk. To explain, for the “three-year” growth plan, an investor would pay $1.00 for $1.42 worth of death benefits, or a bit more than $.70 on the dollar——roughly a 30% discount.3 Thus, an investment of $100,000 would purchase $142,000 in death benefits, resulting in a net return to the investor, when the underlying policy matured, of $42,000 ($142,000 - $100,000)——a 42% increase in his money. The actual yield upon such an investment naturally would depend on the viator’s lifespan. For example, if the viator lived for 10 more years instead of three, thereby deferring the $142,000 payoff for 10 years, the net return of $42,000 would be worth far less, due to the time-value of money, than if the viator passed away within a year. The income plan, in contrast, offered only one level of risk, namely, the “three years or less” life expectancy. As well, the price per benefit dollar under the income plan was much higher than under the corresponding “three-year” growth plan: approximately $.77 per dollar for “income” versus about $.70 per dollar for “growth.” The income investor, however, was entitled to receive from ABS up to (but no more than) 36 monthly payments, calculated to return 9.86% simple interest annually on his investment, making a net return, at the end of three years, equal to 29.58% of the amount invested. At that point, he would receive no further payments until the viator’s death caused the underlying policy to mature, triggering a distribution of the death benefits. (As with the growth plan, the actual yield upon the income investor’s investment would not be known until the underlying policy matured and his equity was returned. Also, keep in mind that an investor would not “make money” unless and until he got back all of this original capital, which would not happen until the policy matured.) If the policy in which the income investor held an interest happened to mature before the end of three years, then he would be paid the amount of death benefits he had purchased, less the monthly distributions already paid. Thus, for example, an investment of $100,000 in the income plan would purchase $129,580 worth of death benefits. The investor would be entitled to receive up to 36 monthly payments of $821.66. If he received all 36 payments, then at the time the policy matured he would receive a final payment of $100,000 (returning his equity), producing a yield upon investment that would depend on the length of time he had waited for the payoff. If, on the other hand, the policy matured after, say, only two years, he would receive a final payment of $109,860——which, together with the previous distributions totaling $19,720, would make a net return on his investment of $29,580, producing a relatively high yield. Although not described as such in any of the documents or testimony in evidence, the income plan, in economic substance, called for ABS to lend money to the investor as an advance against the anticipated payout under the viaticated policy. This meant that ABS retained some of the risk that the policy would mature outside the projected timeframe4——a risk that, in contrast, ABS passed along in full to the growth investors.5 The element of risk to ABS coupled with the concomitantly reduced risk to the investor explains why the income plan was quite a bit more expensive. Whether the Investor chose the growth plan or the investment plan, the deal was structured the same way, using the same basic transaction documents. The core instrument was the Participation Agreement, to which the parties were ABS and the individual Investor.6 The Participation Agreement provided in pertinent part: Whereas, AMERICAN BENEFITS SERVICES, INC. (hereinafter ABS) is in the business, on behalf of other individuals, of finding and securing Viaticated Insurance Benefits (hereinafter VI Benefits); and, Whereas, PARTICIPANT [i.e. the investor] wants to have ABS make available VI Benefits that have been assigned to an independent third-party escrow company. All VI Benefits must meet the criteria set forth herein. Now then, in consideration of the foregoing, it is agreed by the parties: TERMS OF PARTICIPATION PARTICIPANT and ABS agree to the terms of this PARTICIPATION AGREEMENT, as expressed herein. This agreement incorporates by reference, as if set forth fully herein, pages 10 and 11, of the VIATICATED INSURANCE BENEFITS PARTICIPATION DISCLOSURE, entitled DESCRIPTION OF THE PARTICIPATION.[7] * * * ACKNOWLEDGMENTS, REPRESENTATIONS AND WARRANTIES PARTICIPANT warrants and represents that PARTICIPANT has read this agreement and understands it, along with the 13 page VIATICATED INSURANCE BENEFITS PARTICIPATION DISCLOSURE, and, specifically, the DESCRIPTION OF THE PARTICIPATION. PARTICIPANT warrants and represents that PARTICIPANT understands that PARTICIPANT will not receive his or her principal and interest until the maturity of the policy (which occurs at the death of the insured) and, therefore, the PARTICIPANT may not receive his or her VI Benefits within the 36 month life expectancy. For this reason, PARTICIPANT will not be able to liquidate this participation except as set forth in the PARTICIPATION DISCLOSURE under DESCRIPTION OF THE PARTICIPATION.[8] PARTICIPANT warrants and represents that, in reaching his or her decision regarding this participation, PARTICIPANT has not relied on any statement of AMERICAN BENEFITS SERVICES, INC. or its agents, except for those statements which are made in this Participation Agreement or in the VIATICATED INSURANCE BENEFITS PARTICIPATION DISCLOSURE. GENERAL PARTICIPATION PROVISIONS A. ENTIRE UNDERSTANDING OF PARTICIPATION: This Agreement constitutes the entire understanding of the parties and there are no representations, warranties, covenants, or undertakings other than those expressly set forth herein. In addition to the Participation Agreement, each Investor also executed a Disbursement Letter of Instruction and a Letter of Instruction to Trust. The former directed the escrow agent, to whom the Investor’s funds were remitted, to disburse the invested funds to Financial Federated Title & Trust, Inc. (“FinFed”) upon his receipt of certain documents (e.g. proof that the viaticated policy was in full force and effect). The latter instructed FinFed——which evidently held legal title to the viaticated policy, in the capacity of trustee——to establish a trust, or “fractionalized interest” in a trust, for the benefit of the Investor.9 The Participation Agreement, Disbursement Letter of Instruction, and Letter of Instruction to Trust will hereafter be referred to collectively as the “Contract.” It is undisputed that the Investors lost all or most of the money they had invested under the Contracts. They did not lose their money as a direct and proximate result of anything that Kligfeld had done or failed to do, however, but rather because, as it turned out, ABS was perpetrating a massive fraud on its victims, including the Investors and Kligfeld, who had also purchased death benefits from ABS.10 It should be stressed, too, that the Office did not charge Kligfeld with fraud of any kind. Despite this, the Office has argued, or at least insinuated, in its Proposed Recommended Order that Kligfeld misrepresented the nature of the transaction, or the terms of the deal, when soliciting the Investors. Given the specific violations alleged, however, no findings in this regard are required. Along the same line, some of the Investors who testified at the final hearing described representations and promises that they believed were part of the deal, but which are not contained in, and indeed contradict the unambiguous provisions of, the Contract. It is difficult to tell whether such representations were really made——or whether the testimony simply reflects fading memories, a lack of understanding on a given Investor’s part regarding the actual details of the deal, or some combination thereof. Since fraud was not charged, however, and because each Contract speaks for itself as to the terms and conditions of the deal, it is not necessary to make any findings of fact concerning whether extra-contractual promises were made.11
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that the Office enter a final order dismissing all charges against Respondents. DONE AND ENTERED this 25th day of March, 2003, in Tallahassee, Leon County, Florida. JOHN G. VAN LANINGHAM Administrative Law Judge Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-3060 (850) 488-9675 SUNCOM 278-9675 Fax Filing (850) 921-6847 www.doah.state.fl.us Filed with the Clerk of the Division of Administrative Hearings this 25th day of March, 2003.
The Issue The issues for determination in this case are whether Respondent violated the law as charged by Petitioner in its Administrative Complaint, and, if so, what discipline is appropriate.
Findings Of Fact Petitioner is the state agency with the statutory authority and duty to license and regulate insurance agents in Florida. Respondent holds license D033674 as a life and health insurance agent. At the time of the events which are the subject of this case, Respondent also held a license to sell securities. At the time of the events which are the subject of this case, Respondent was employed by First Liberty Group and sold life insurance, annuities, and viatical settlement purchase agreements ("viaticals"). A viatical is a written agreement which provides for an investor's purchase of an interest in the proceeds of a life insurance policy of an anonymous insured person, the "viator." The agreement provides for the amount of money that the investor will receive upon the death of the viator. One general principle underlying a viatical is that it provides a means for a terminally ill person who needs money to sell or assign the proceeds of a life insurance policy that would be paid upon his or her death. Another general principle is that the viator, due to the terminal illness, has been diagnosed to have a short life expectancy. Although the identity of the viator is not revealed to the investor, the investor is provided information about the viator's gender, age, illness, and life expectancy. Facts Common to All Counts A company that "viaticates" life insurance policies and arranges for diagnoses of life expectancies by medical doctors is called a "viatical settlement provider." For all the viaticals sold by Respondent, the viatical settlement provider was Mutual Benefits Corporation. Mutual Benefits Corporation was charged with and ultimately determined to have committed fraud with respect to its practices as a viatical settlement provider. The nature of the fraud was not made a part of the record in this case. Mutual Benefits Corporation was placed in a receivership to manage the remaining assets, liabilities, and contracts of the company. Respondent's employer, First Liberty Group, advertised that it offered a certificate of deposit (CD) at a very competitive annual interest rate. Potential customers who came in to inquire about or to purchase a CD were also informed about annuities and viaticals. Petitioner referred to this as a "bait and switch" technique. However, although the CD interest rate might have been the bait, there was no switch. Customers who wanted CDs were able to and did purchase CDs from First Liberty Group through Respondent at the advertised interest rate. Some customers also purchased annuities and viaticals. In the advertising materials provided to the investors by Respondent and in the Viatical Settlement Purchase Agreements signed by the investors, the amount the investors would receive upon the death of the insured is described as "fixed." For example, the return on an investment in a viaticated insurance policy for a viator with a three-year life expectancy was represented to be 42 percent. The 42 percent return was fixed in the sense that on an investment of $20,000, for example, the investor would receive 42 percent of $20,000, or $8,400, when the viator died. If the viator died six months after the purchase of the viatical, the investor would receive $8,400. If the viator died three years later, the investor would receive $8,400. If the viator died ten years later, the investor would receive $8,400. The viatical sales literature that Respondent gave to customers disclosed that the life expectancy of the viator, as determined by a doctor, was not guaranteed. Therefore, the amount of the return on the viatical investment was not fixed in the sense of an annual interest rate. In the examples given above, the annualized rate of return to the investor if the insured died six months later would be 84 percent (42 divided by .5 years). The annualized rate of return if the viator died three years later would be 14 percent (42 divided by 3 years). The annualized rate of return if the viator died ten years later would be 4.2 percent (42 divided by 10 years). Petitioner charged Respondent with not explaining to the investors that "the real rate of return on the investment was tied to the viator's date of death." However, Petitioner failed to prove this charge. Respondent did not tell the investors that the 42 percent return, for example, was an annual rate of return. The viatical sales materials provided to customers by Respondent did not describe the return on the investment as an annual rate of return. The effect that the date of the viator's death would have on the rate of return on the viatical is obvious. The sooner the viator died, the better the return; the later the viator died, the worse the return. The investors did not need specialized knowledge to understand this simple concept. No investor in this case said they did not understand that their return would be affected by when the viator died. None of the investors said they thought the "fixed rate" figure, such as 42 percent for a three-year viatical, was a guaranteed annual return. Each investor signed a Viatical Settlement Purchase Agreement that included a statement that the returns "are fixed and not annualized returns." (Emphasis in the original). Another factor affecting the actual return on a viatical investment is the possibility provided for under the terms of the viatical contract that the investor might have to pay a portion of the premiums on the life insurance policy in the event the viator lived longer than his or her life expectancy. Any payment of an insurance premium by the investor would cause a reduction in the return on the viatical investment. In the example given above, if the investor was required to pay $2,000 in premiums, his return on the $20,000 would no longer be $8,400, but only $6,400. The annualized return on the investment would be correspondingly reduced. In a worse case scenario, the possibility exists that the requirement to make premium payments could completely eliminate any potential return to the investor and even jeopardize the principal. The viatical advertising materials that Respondent provided to customers did not describe the possibility or impact of having to make premium payments as discussed above. The advertising materials generally downplayed the risks associated with a viatical. For example, one sales document described the viatical as appropriate for a conservative investor and suggested that viaticals are investments that provide "peace of mind." It was reasonable for Respondent and the sales materials to describe the insurance companies that issued the insurance policies as reliable and secure. However, it was not reasonable, nor accurate, to describe the viaticals as conservative investments because of the possibility that the insured person would live many years beyond his or her life expectancy and the possibility that the investor would have to make premium payments. Viaticals have the potential to provide a much better investment return than other types of investments. However, in conformance with the general rule that the higher the potential return on an investment, the greater the risk, the relatively high potential return on a viatical comes with a relatively high risk.1/ Respondent disclosed to the investors that there was a possibility they might have to make future premium payments, and it was described in paragraphs 20 and 21 of the Viatical Settlement Purchase Agreements signed by the investors under the heading "Payment of Future Premiums." The agreement states that the payment of insurance premiums beyond the life expectancy of the viator is at the discretion of Mutual Benefits Corporation. Respondent told the investors that Mutual Benefits Corporation had a reserve or escrow fund that was managed in a way that created a premium "pool" so that the early death of a viator provided a surplus of money that could be used to pay premiums on the insurance policies of viators who lived beyond their life expectancies. Respondent also told the investors that 85 percent of the viators died early, which created a large surplus in the escrow fund to pay future premiums. The viatical contracts, however, only stated that unused premiums "may" be retained in the reserve fund by Mutual Benefits Corporation. At some point after the investors involved in this case purchased viaticals from Respondent, Mutual Benefits Corporation was the subject of enforcement action for fraud and placed in receivership. There was evidently no longer a surplus or reserve fund to pay premiums on insurance policies associated with viators who lived beyond their life expectancy, and that burden fell on the investors. All the investors involved in this case told Respondent they were conservative investors with a low tolerance for risk. There is a commonality in their perceptions of viaticals derived from their discussions with Respondent, that viaticals were safe and conservative investments. However, viaticals are relatively risky investments due to their illiquidity and the fundamental conditions affecting the return and the security of the principal that are beyond the control of the investor. Respondent knew or should have known, through the exercise of reasonable diligence on behalf of the customers who purchased viaticals, that viaticals are relatively high-risk investments. Respondent misrepresented the risk character of viaticals in his discussions with the investors involved in this case. He had a motive to downplay the true risk character of the viaticals, because he received a commission for every sale of a viatical. If Respondent had informed the investors of the true risk character of viaticals, the investors might not have purchased the viaticals. The definition of "security" in Section 517.021, Florida Statutes, was amended in 2006 to specifically identify "viatical settlement investment" as a type of security. Respondent does not dispute that a viatical is a security. There is no dispute that the viaticals sold by Respondent, which are the subject of this case, were not registered securities when Respondent sold them in 2003. Count I - Simons Charles Simons was 81 years old in 2003. He has eight years of education. He used to work as a truck driver in a quarry associated with a cement plant, but is now retired. He owns real estate and has an annual income over $100,000 and a net worth of $600,000 to $700,000. Mr. Simons saw the CD advertised by First Liberty Group and came in with his wife to invest $100,000 he had acquired from the recent sale of real estate. They met with Respondent in July 2003. Mr. and Mrs. Simons invested $50,000 in two or more CDs and an annuity. They also purchased two viaticals for $50,000. Mr. and Mrs. Simons purchased two three-year viaticals, meaning that medical doctors who had purportedly examined the medical records of the insured persons expected them to die of their terminal illnesses within three years. The Simons invested $25,000 in each of the viaticals. Although four years have passed since the Simons purchased the three-year viaticals, neither of the insured persons has died. Mr. Simons has had to make a premium payment of approximately $2,000 on one of the underlying policies.2/ Count II – Lenois Allan Lenois was 70 years old in 2003. He is a high school graduate, studied accounting and taxation, and worked for a lumber company where he supervised 300 employees. His wife, Marion, was an accountant. They are now retired. In August 2003, Mr. and Mrs. Lenois went to see Respondent after seeing the CD advertisement in the newspaper. While in Respondent's office, they noticed a poster advertisement on the office wall about viaticals and asked Respondent about them. Mr. Lenois' deposition testimony that Respondent called the viaticals "guaranteed" is not persuasive, given Respondent's testimony at the final hearing that he used these kinds of words to describe the industry rating of the insurance companies involved and the federal-insured reserve fund account, not the viatical itself. However, as previously found, Respondent misrepresented the viaticals to be relatively conservative investments to all the investors. Mr. and Mrs. Lenois invested $20,000 in an annuity. In a deposition of Mr. Lenois, he stated that he thought he had purchased a CD from Respondent, not an annuity, and was surprised that he had to pay a surrender penalty. Petitioner makes this same allegation in its Proposed Recommended Order, but Mr. Lenois' testimony is not persuasive because he signed a disclosure document that states "I understand that I have purchased an annuity . . . and not a Bank Certificate of Deposit," and the word "annuity" is written on the personal check used to purchase the annuity. Furthermore, the allegation was not included in the Administrative Complaint. Mr. and Mrs. Lenois purchased one three-year viatical for $10,000. Although four years have passed since they purchased the viatical, the viator is still alive. Mr. and Ms. Lenois have not yet had to make a premium payment associated with their viatical. Count II – Luenberger Floy Leuenberger is a retired school teacher. She has a master's degree in counseling and education. Her husband is a retired bank employee. The Leuenbergers have a net worth just over $500,000. The Leuenbergers saw the CD advertised by First Liberty Group and came in to invest $75,000. They met with Respondent in October 2003. They saw a poster on the wall of Respondent's office about viaticals and asked Respondent about them. The Leuenbergers invested $50,000 in CDs and purchased two viaticals for $12,500 each. One of the viaticals purchased by the Leuenbergers "paid out" because the viator died, and they received the return Respondent quoted to them. The other viatical they purchased from Respondent has not yet paid out. The Leuenbergers have had to make a premium payment of approximately $1,500 on the remaining viatical. Count III – Berge Oscar Berge is retired from the United States Air Force and from a subsequent job as a maintenance supervisor for a health care facility. Mr. Berge obtained a college degree in avionics instrument technology while in the Air Force. Mr. Berge saw the CD advertised by First Liberty Group. He and his wife met with Respondent in late 2002 and, in January 2003, invested in two annuities and five viaticals. Mr. and Mrs. Berge purchased two three-year viaticals for $30,000 each and three five-year viaticals for $30,000 each; a total investment of $150,000. Although four years have passed since the Berges purchased the three-year viaticals, the two viators have not died. The Berges have had to make two premium payments totaling approximately $5,000.
Recommendation Based on the Findings of Fact and Conclusions of Law set forth above, it is RECOMMENDED that a final order be entered which finds that Respondent Bradley Kline violated Subsections 626.611(5), (7), (9), and (16) and 626.621(9), Florida Statutes, and revokes his license as an insurance agent. DONE AND ENTERED this 9th day of October, 2007, in Tallahassee, Leon County, Florida. S BRAM D. E. CANTER Administrative Law Judge Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-3060 (850) 488-9675 SUNCOM 278-9675 Fax Filing (850) 921-6847 www.doah.state.fl.us Filed with the Clerk of the Division of Administrative Hearings this 9th day of October, 2007.
The Issue The issue is whether Proposed Rule 69O-204.040 is an invalid exercise of delegated legislative authority.
Findings Of Fact The Viatical Settlement Act codified in Part X of Chapter 626, Florida Statutes, is one of several statutes that provide for the regulation of viatical settlements in Florida. A viatical settlement is the sale of a life insurance policy by its owner on the secondary market.3/ The parties involved in the transaction are the viator, the viatical settlement broker, the viatical settlement provider, and the investor who purchases the policy. The viator is the owner of the policy being sold. The viator is typically, but not always, the insured under the policy. The viatical settlement broker is the person who solicits bids and negotiates the sale of the policy on behalf of the viator. In order to perform the services of a viatical settlement broker in Florida, a person must be a licensed life insurance agent, self-appoint him/herself with the Department of Financial Services (DFS), and pay the applicable fees to DFS. The viatical settlement provider is the intermediary between the viatical settlement broker and the investor who purchases the policy. The viatical settlement provider presents the policy to potential investors; conveys the investors’ bids to the viatical settlement broker; and, after a bid is accepted by the viator, performs the administrative functions necessary to complete the transaction. Viatical settlement providers are licensed and regulated by OIR. Viatical settlement brokers are licensed and regulated by DFS, not OIR. Petitioner ILS-Florida is a Delaware limited liability company owned by NFP Life Services, LLC (45.5 percent), Genworth Institutional Life Services, Inc. (45.5 percent), and GS Re Holdings, Inc. (nine percent). NFP Life Services, LLC, is a wholly-owned subsidiary of National Financial Partners Corporation (NFP). NFP Brokerage Agency is also a wholly-owned subsidiary of NFP. NFP Brokerage Agency employs licensed viatical settlement brokers in a number of states, including Florida. The viatical settlement brokers working for NFP Brokerage Agency are considered to be “affiliated brokers” of ILS-Florida by virtue of NFP’s ownership interest in both companies. ILS-Florida was formed on September 8, 2008, “specifically for the purpose of doing business as a viatical settlement provider . . . in the State of Florida.” On or about October 29, 2008, ILS-Florida submitted to OIR an application for licensure as a viatical settlement provider. The application was still “pending” as of the date of the final hearing, but on March 20, 2009, OIR approved the application, and ILS-Florida is now a licensed viatical settlement provider, No. 09-800257957. ILS-Florida’s parent companies have another subsidiary -- ILS-Florida’s “sister company” -- that is currently licensed as a viatical settlement provider in a number of states. ILS-Florida intends to use a similar business plan in Florida that its sister company uses in the states where it is licensed. The business plan contemplates using only brokers working for NFP Brokerage Agency for at least the first year of operation, although it is possible that ILS-Florida may use both affiliated and non-affiliated brokers from the outset. ILS-Florida wants to be able to use brokers working for NFP Brokerage Agency because it considers them to be “higher-quality brokers” because they “have already agreed to a higher standard of compliance than is generally seen . . . in the industry.” Also, because NFP Brokerage Agency already has a number of brokers involved in the viatical settlement business in Florida, its brokers represent a significant source of potential business for ILS-Florida. The proposed rule will more likely than not preclude ILS-Florida from using affiliated brokers working for NFP Brokerage Agency because NFP has significant ownership interests in both companies. Petitioner David Matthew Janecek is a resident of Texas. He works for a brokerage in Texas that is owned by NFP Brokerage Agency. Mr. Janecek is licensed in Florida as a non-resident life insurance agent. His license, No. P161957, was issued on September 9, 2008. Mr. Janecek is not, and never has been, a licensed viatical settlement broker in any state. He has not self- appointed himself as a viatical settlement broker with DFS, and he has no present intention of acting as a viatical settlement broker in Florida.4/ Respondent Financial Services Commission (Commission) is the agency head responsible for the promulgation of the proposed rule. The Commission, which is comprised of the Governor and Cabinet, was created within DFS, but it is not subject to the control of DFS and it is effectively a separate agency from DFS. Respondent OIR is an office under the Commission. OIR developed the proposed rule and will be responsible for implementing the rule. Respondents published the proposed rule in the Florida Administrative Weekly (FAW) on September 26, 2008. A notice of change to the proposed rule was published in the FAW on December 24, 2008. The parties stipulated that Respondents met all applicable rulemaking publication and notice requirements, and that the petition challenging the proposed rule was timely filed. The proposed rule is titled “Prohibited Practices and Conflicts of Interest,” and states: With respect to any viatical settlement contract or insurance policy, no viatical settlement provider knowingly may enter into a viatical settlement contract with a viator, if, in connection with such viatical settlement contract, anything of value will be paid to a viatical settlement broker that is controlling, controlled by, or under common control with such viatical settlement provider, financing entity or related provider trust that is involved in such viatical settlement contract. The “specific authority” listed in the FAW notice for the proposed rule is Section 626.9925, Florida Statutes. That statute authorizes the Commission to: adopt rules to administer this act, including rules establishing standards for evaluating advertising by licensees; rules providing for the collection of data, for disclosures to viators, for the reporting of life expectancies, and for the registration of life expectancy providers; and rules defining terms used in this act and prescribing recordkeeping requirements relating to executed viatical settlement contracts. (Emphasis supplied). The only language in the statute that Respondents are relying on as authorization for the proposed rule is the underlined language. The FAW notice states that the “law implemented” by the proposed rule is Sections 626.9911(9), 626.9916(1), and 626.9916(5), Florida Statutes. Section 626.9911(9), Florida Statutes, defines “viatical settlement broker” for purposes of the Viatical Settlement Act. The definition includes the following language, which is also contained in Section 626.9916(5), Florida Statutes: Notwithstanding the manner in which the viatical settlement broker is compensated, a viatical settlement broker is deemed to represent only the viator and owes a fiduciary duty to the viator to act according to the viator's instructions and in the best interest of the viator. Section 626.9916(1), Florida Statutes, prohibits any person other than a licensed life agent from performing the functions of a viatical settlement broker. The text of the proposed rule was derived almost verbatim from Section 12.B. of the Viatical Settlements Model Act developed by the National Association of Insurance Commissioners (NAIC). The “model acts” developed by NAIC are intended to be used by state legislatures in drafting statutes. NAIC also develops “model regulations” that are intended to be used by state regulatory agencies in drafting rules to implement the statutes. The proposed rule prohibits a viatical settlement provider from entering into a viatical settlement contract involving a viatical settlement broker over which the provider has direct or indirect control. The determination as to whether the viatical settlement provider has control over a viatical settlement broker will be made on a case-by-case basis applying the definition of “control” contained in Proposed Rule 69O- 204.020(1). According to OIR, the proposed rule is intended to protect the viator by preventing the viatical settlement provider from using its control over the viatical settlement broker to induce or encourage the broker to breach his or her fiduciary duty to the viator. It is undisputed that Florida law does not currently prohibit the practice prescribed by the proposed rule so long as the broker satisfies his or her fiduciary duty to the viator. The proposed rule will prohibit transactions between affiliated viatical settlement providers and brokers, irrespective of whether the broker’s fiduciary duty to the viator has been breached. For example, if a broker recommends that a viator accept a bid for the policy from an affiliated provider that was not the highest bid, such action would constitute both a breach of the broker’s fiduciary duty and a violation of the proposed rule; however, if the bid from the affiliated broker was the highest bid for the policy, the broker’s recommendation to accept the bid would not constitute a violation of the broker’s fiduciary duty, but it would violate the proposed rule. During the rulemaking process, OIR staff considered adding language to the proposed rule that would have allowed affiliated providers and brokers to enter into viatical settlement contracts so long as certain disclosure requirements and other safeguards were met. The record does not reflect why this language was not included in the proposed rule published in the FAW, although it can be inferred from the e-mails received into evidence on this issue that OIR and/or the Commission did not feel compelled to add the language suggested by staff.
The Issue Whether Respondents improperly charged a real estate client a fee for document preparation and storage and, if so, what penalty should be imposed.
Findings Of Fact Respondent CMT Holding, Ltd., trading as the Prudential Florida Realty (CMT), is a limited partnership registered as a real estate broker, holding license number 0266433. Respondent CMT Holdings, Ltd., is registered as a real estate broker, holding license number 0266412. Respondent Patricia A. Brotherton (Brotherton) is registered as a real estate broker, holding license number 0601688. At all material times, Brotherton was the Naples branch manager for CMT. At all material times, Judith Price was a real estate salesperson employed by CMT. On October 3, John Iraci, as buyer, and Donald J. and Beryl B. Cullette, as sellers, entered into a contract for the sale of a condominium for $210,000. The contract acknowledges that CMT is the selling broker and an unrelated broker is the listing broker. CMT also executed the contract as the escrow agent holding the $1000 deposit. The Cullettes signed the contract on October 3 and counteroffered $210,000, rejecting Iraci's offer of $200,000. Iraci accepted the counteroffer. Price and CMT entered into an agency agreement with Iraci the previous month. The Agency Disclosure form that they signed promised that Price and CMT would make full disclosure to Iraci. On October 2, Price presented Iraci with a Real Property Disclosure Statement. She reviewed with him the expenses to be paid by buyer, including an item identified as "Processing and document preparation fee." Although the form does not disclose actual expenses, except for the rate at which statutorily imposed charges are imposed, Price explained to Iraci that the processing and document preparation fee was $110 paid to CMT. Iraci expressed no objection to the charges, and Price prepared the October 3 sales contract. On January 3, 1996, Respondent sent the closing agent, attorney Louis X. Amato, a document entitled, "Fund Disbursement Instructions." The document instructed Amato to divide the $12,600 real estate commission equally between the two brokers and pay CMT an additional $110 for a processing and document preparation fee, which will be a buyer's expense on the closing statement. Amato refused to add the $110 fee to the closing statement or charge Iraci for this expense. On January 8, 1996, Amato sent a letter to Petitioner complaining of this practice. On the next day, the sale closed without payment of the $110 fee to CMT. At the closing, Iraci executed a first mortgage note and lien. Iraci visited Price on the day of the closing to discuss Amato's refusal to collect this fee. Price said that she would pay the fee, if Iraci did not. Iraci returned to Price's office on January 15 and paid the fee. Four months later, Price and CMT sold Iraci's former condominium. Iraci paid the $110 fee on this transaction. No litigation or complaint ensued. The purpose of the $110 fee is to compensate CMT for the costs of preparing and storing documents. There is no evidence that the fee is disproportionate to the preparation and storage expenses. On occasions where the $110 fee has been inadvertently omitted from the closing statement, Price has paid it herself. Petitioner filed the Administrative Complaint more than one year after the closing and payment of the fee by Iraci.
Recommendation It is RECOMMENDED: That the Florida Real Estate Commission enter a final order dismissing the Administrative Complaint against Respondents and denying their request for attorney's fees. DONE AND ORDERED this 6th day of November, 1997, in Tallahassee, Leon County, Florida. COPIES FURNISHED: Geoffrey T. Kirk, Esquire Daniel Villazon, Esquire Division of Real Estate Department of Business and Professional Regulation Post Office Box 1900 Orlando, Florida 32802-1900 ROBERT E. MEALE Administrative Law Judge Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-3060 (904) 488-9675 SUNCOM 278-9675 Fax Filing (904) 921-6847 Filed with the Clerk of the Division of Administrative Hearings this 6th day of November, 1997. James H. Gillis, Esquire Gillis and Wilsen Suite B 1415 East Robinson Street Orlando, Florida 32801 Jeffrey D. Fridkin, Attorney Thomas G. Norsworthy, Attorney Grant Fridkin & Pearson, P.A. Pelican Bay Corporate Centre 5551 Ridgewood Drive, Suite 501 Naples, Florida 34108 Lynda L. Goodgame, General Counsel Department of Business and Professional Regulation 1940 North Monroe Street Tallahassee, Florida 32399-0792 Henry M. Solares, Division Director Division of Real Estate Department of Business and Professional Regulation Post Office Box 1900 Orlando, Florida 32802-1900
