Viatical company ordered to cease trading

The Ontario Securities Commission has ruled that viatical products offered by Universal Settlements International are securities and has issued a cease-trade order against the Kitchener, Ont.-based company.

In a decision released last week, the OSC ordered that USI permanently cease trading in the controversial products until the company either fulfills the province’s registration and prospectus requirements or meets the requirements for an exemption under securities law.

USI and its agents, however, are exempt from the order, but only for the purpose of completing tasks related to existing investments. However, the exemption does not apply to money from investors which has already been committed to life insurance policies. “Such moneys should be returned to the investors, forthwith,” the OSC said.

Viaticals allow a life insurance policy owner to sell the policy to a third party at a discounted rate. Policy owners are typically senior citizens or terminally ill. The buyer becomes the beneficiary of the policy and receives a payout when the owner dies.

USI had argued that it did not need to be registered, since it acts as a third party in the business, buying policies from U.S. providers and re-selling them to individuals as investments.

That’s an important distinction, says Guy Giornio, a lawyer with Fasken Martineau DuMoulin in Toronto and an expert on viaticals.

“The law in most provinces prevents people from entering into viatical settlements, so that wasn’t the issue in this case,” Giornio explains. “These were American policies and the issue in Canada was whether Canadian investors could own shares of those policies.”

“It’s basically impossible for a domestic viatical industry to emerge [in Canada], but it is possible for U.S. companies to solicit investors here.”

In making its ruling, the OSC relied on several U.S. cases, in which courts had ruled that viaticals were investment contracts.

The OSC ruling places a “steep hurdle” in front of companies trying to get Canadian investors to take part in viatical settlements, Giornio adds, since it’s unclear whether the OSC would register such firms.

However, it appears that USI might be willing to make the attempt. In a release issued earlier this week, the firm said it was pleased that the issue has finally been clarified and that “the ruling should not have a negative impact on existing investors while USI moves to comply with the conditions of the order.”

“USI is moving forward with its business strategy and will build on its existing exemplary record in dealing with clients and investors to meet its new regulatory obligations,” the statement concluded.

The company would not comment further on its plans.

USI has approximately 1,200 independent agents and more than 800 clients who have purchased about $29 million US in viaticals. The smallest investment was $5,000 US and the largest was $7 million US, the OSC said, noting that most of the investments were in the lower range.

Filed by Doug Watt, Advisor.ca, doug.watt@advisor.rogers.com