The Law and Other Anomalies

The current issue of a leading life settlements industry newsletter predicts that 2019 should be a good year to invest in life settlements because it is a growing recognized investment class; but also and frighteningly, because aging boomers will need to sell their policies for cash in order to pay for their own health care!

Life settlement investment works like this: you buy a life insurance policy on the life of Mr. Smith for a sum of money you calculate as follows: you pay say $10X dollars for a policy that on death pays say 20X; and the cost of premiums is $X a year; you calculate how long Mr Smith will live based on health, age, actuarial tables, etc.; you “bet” that Mr Smith will die sooner rather than later so that you collect your $20X life insurance death benefit before your cost to purchase + premiums you paid + your cost of money is less than the $20X proceeds– much less.

Obviously you can get lucky with Mr Smith (next week he is hit and killed by a driver-less car, for example), but there is risk; he may have great genes or a propensity for diseases which modern medicine can treat, and he lives to be 110.  So the safe approach, aside from getting good actuarial tables, is to buy a variety of policies so that statistically the portfolio will protect you from buying a policy on a small number of unlucky — that is long-lived — people.  This business concept gave birth to both a recognized industry and an investment class.

Back to the boomers selling their policies in order to pay health care costs.  This is facially unsettling, yes?  What about the benefits of Social Security, Medicare, Medicaid, the support structure we are supposed to have in order to protect our aging population?  In a related development, a US House bill, which in fact died at the end of the last Congressional session, sought to permit seniors selling their policies to avoid paying taxes on the proceeds provided the proceeds were used for healthcare, including long-term care.  It is expected that the bill will be re-introduced next session.

I guess the lesson here is that if you have sizable life insurance which you no longer believe you need to maintain, you should get a quote to sell the policy and compare it to any cash surrender value you might receive from the insurance company; particularly for term policies, with no surrender value and possibly lower premium costs, you may well find yourself with a hidden profit center by selling your policy, even after you adjust for any tax burden.

Years ago (six? more?) Congress legislated that the SEC should design a mandatory disclosure comparing CEO comp to the median compensation of all entity employees.  It took the SEC years to institute that disclosure requirement, during which time its bald impact was softened to permit companies with odd situations to, for example, make estimates or report sampling in some instances.  But even as enacted, the rule seemed to many (and to me) silly.  Using disclosure to control what was perceived to be runaway executive compensation seemed likely to be ineffectual as proposed, not to mention possibly just unwise; perhaps a CEO should even be rewarded for creating a vast difference between his or her comp and that of the other employees, having found inexpensive labor sources, perhaps even overseas.

So now we have an SEC requirement to effect a relatively complex computation comparing CEO comp to the median cost of labor in an entity, and no one is paying attention, right?

Well, not quite right; but, there is a twist.

Today, there is as much interest in income disparity across all of society is there is concerning CEOs within one company.  Investors, worried about the long-term societal implications of growing income discrepancies across our whole society, now are suggesting that the statistic be used as a window into the company’s approach to its entire workforce.  That kind of interest, perfectly logical, once was viewed as wholly operational and thus shareholders were to hold their tongues; the ratio was a way for shareholders to get a voice in this key operational metric.

Meanwhile, the prestigious Corporate Counsel blog, which I swear I recall at one time derided gathering the ratio statistic, now wants comp committees to pay attention because the effect of detailed disclosure of CEO pay has, to date, simply driven boards to continue to pay CEOs in the top quartile, in a rush to the top.  What board wants to tell shareholders, in effect, “we have chosen to lead your company a person who is average”?

People who slam-dunk or hit 40 home runs out-earn most CEOs.  The market-place speaks to us.  It may be that the solution to leveling comp in our overall society lies with the taxing authorities, as unsettling as that prospect always has been.  Or adoption of an enlightened social policy that recognizes the risk of social upheaval as outweighing what has become our sense of the free labor market.  Neither of those discussions is much informed by the SEC ratio disclosures.

The wires this week are all aflame with the news of passage of the new Farm Act, which was promptly signed by the President.  The bill legalizes hemp, a plant with substantial industrial use which has been banned in the US because of its chemical relationship to cannabis.  One cannot fail to note the business buzz about, and substantial investment in companies involved in, the cannabis business.

Hemp has very low content of THC, which is the stuff that gives weed its kick, and higher content of CBD, another derivative of marijuana which is non-hallucinogenic and which is removed from the controlled substance list by the Farm Bill.  The impact on the THC side of the business is the subject of current trade speculation, although since now-legal CBD can be derived from marijuana there will be at least some positive effect; query whether this is another step towards Federal acceptance of marijuana, thus ending the absurd stand-off between the States and the Feds.

A footnote from the trade press: looks like cannabis beer is on the horizon; various companies have formed cannabis partnerships or undertaken research.

Seems Harvard is under attack by everyone these days.  One group has sued claiming bias in favor of white undergraduate applicants to the detriment of Asian students.  But Harvard Law School, including particularly the Harvard Law Review, is being sued on behalf of white males, claiming the membership on the prestigious Board of Editors and the selection of articles is biased in favor of “racial, gender and sexual orientation-based diversity.”

While I must confess that no one ever chased me to either join or write for the Review notwithstanding my patent male white-ness, I always understood that election to the Review was merit based and, hence, I was confident that my exclusion was wholly appropriate.  Further, it seems unclear who if anyone should be sued; the Review is a separate entity not owned or run by the University.  And while I guess I can understand why the same claims are being asserted against NYU and its law school also, the naming of US Secretary of Education Betsy DeVos seems attenuated.

Perhaps if I had in fact been named to Law Review I would have better understanding of the legal issues involved here.

But since the lawsuit names no one who has been or is about to be injured by whatever the policies of Review may be, I don’t understand how someone can bring a lawsuit in order to establish an idea or practice, as opposed to the seeking of a judicial determination of an actual case.  Indeed, lawyers for the University argued as much in Federal Court yesterday.

Not to slip into policy debate, particularly as my fact base is derivative and limited, but if the demographics of our country are changing then we would expect that the Review membership and the mix of submitting scholars would change also.  Further, one must suspect that if history is any guide, then the need for remedial action is to protect groups other than white males at Harvard Law School.

I must stop posting now and sit by my mailbox, awaiting my Law Review invitation.  It is about five decades late.  Mail service is so slow around the Holidays….

It has been a while since my last post but end of year is pretty busy for attorneys.  I have been collecting items about which I want to share my views, however, and this is the first of a brief series of posts which caught my attention as matters of general interest.

Everyone reads almost daily that the SEC has shut down some virtual currency deal as involving the illegal sale of unregistered securities.  Yet Bitcoin and Ether are still around, which means they are not perceived to involve a security.  Why is that?  Both use block-chain and are distributed ledgers.  Both contemplate so-called smart contracts.  Both purport to be a currency but are highly volatile.

Let us go back to the seminal Supreme Court case defining a security, Howey, in the mid-40s.  A security is an investment utilized to finance an enterprise of some sort wherein the investor expects to make a profit from the efforts of others.  The ’33 Act has specific  examples, including stocks and notes, but Howey found a security existed in a management contract to run orange groves that the investor purchased.  (Another side-light: although the Act declares that notes are securities, court cases have decided that some notes are commercial instruments and not investments intended to be covered, for example the note you sign when you take out a house mortgage.)

Applying the common sense approach of what an investment actually is, in June the head of the SEC’s Division of Corporate Finance suggested that Ether fulfills a commercial function. There is no central “issuer” who takes the money and promises a return.  Control is decentralized.  Ether is a method of payment.

Enter the Commodity Futures Trading Commission, addressing futures contracts and options on Bitcoin and Ether.  This month the CFTC, in an effort better to understand Ether, posed the following questions:

How is ether being used?  How many transactions before we can be sure that transactions do not end up on an invalid block?  How do we know Ether can support smart contracts?  When will Ether move from  a “proof of work” standard where miners are rewarded for processing transactions to a “proof of stake” where control falls to users of the system as currency, or for contracting, or as an open ledger?  How is the network governed (is it liable to splinter apart due to disagreements)? Will there be negative impact if there is a derivative market for Ether?  What is status of cyber security?

Interestingly, the SEC is of the view that digital currency that once was marketing generally or to the public with speculative aspects might have been a security at the time but, by substantive use in real transactions, may morph out of being a security.  Implicit in this observation is the likely result that the SEC is not going backwards to punish what might once have been a violation; indeed, whom would they be punishing at this point?