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FINRA And The SEC Release Joint Investor Alert Regarding Pensions and Settlement Income Streams

On May 9, 2013, the Financial Industry Regulatory Authority, Inc. (“FINRA”) and the Securities and Exchange Commission (“SEC”) issued a joint Investor Alert to warn investors about the risks associated with pensions and settlement income streams. The Investor Alert can be viewed here: Pension or Settlement Income Streams – What You Need To Know Before Buying Or Selling Them. Specifically, the Investor Alert warned investors who receive pension distributions from former employers or settlements in personal injury lawsuits about salespeople from “factoring companies” who offer to buy the rights to some or all of the payments the investor would receive in the future from their former employer or settlement, in exchange for a structured settlement, which is an upfront lump sum payment. The Investor Alert highlighted that recently retired government employees and members of the military are the most targeted groups of investors. According to the Investor Alert, the upfront lump sum that the investor receives in exchange for signing over the rights to some or all of the future payments, is almost always significantly lower than the present value of the future income stream, and costly as these transactions can charge at least a 7% commission. Although investors may need immediate cash, or feel that the income stream from their pension or settlement is not sufficient enough, the Investor Alert urges investors to consider the following factors: (1) Is the transaction legal?; (2) Is the transaction worth the cost?; (3) What is the reputation of the company offering the lump sum?; (4) Will the factoring company require life insurance?; (5) What are the tax consequences?; and (6) Does the sale fit the investor’s long-term financial goals? In the FINRA press release regarding the Investor Alert, Gerri Walsh, FINRA’s Senior Vice President for Investor Education stated, “[c]onsumers should know that a series of potential pitfalls may greet anyone who is considering selling their rights to an income stream. And any investor who is tempted by the high yield offered by buying the rights to another person’s income stream should know that yield comes with high fees and considerable risks.” Further, Lori J. Schock, Director of the SEC’s Office of Investor Education and Advocacy stated, “[i]nvestors should always learn as much as possible before making an investment decision, and this is certainly true with respect to investing in pension or structured settlement income-stream products. This alert will help investors understand the costs as well as the potentially significant risks of these transactions.”

Lax & Neville LLP has nationally represented small broker-dealers, financial services professionals and securities industry companies in regulatory matters and securities-related and commercial litigation. Additionally, Lax & Neville has extensive experience in successfully prosecuting claims on behalf of customers who have suffered losses as a result of sales practice abuses. Please contact our team of attorneys for a consultation at (212) 696-1999.

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