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35–374 PDF 2007

S. HRG. 109–892

A REVIEW OF THE GAO REPORT

ON THE SALE OF FINANCIAL

PRODUCTS TO MILITARY PERSONNEL

HEARING

BEFORE THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

ON

EXAMINATION OF A GOVERNMENT ACCOUNTABILITY OFFICE REPORT 

ON THE SALE OF FINANCIAL PRODUCTS TO MILITARY PERSONNEL, 

FOCUSING ON ACTIONS NEEDED TO PROTECT MILITARY MEMBERS

NOVEMBER 17, 2005

Printed for the use of the Committee on Banking, Housing, and Urban Affairs

(

Available at: http://www.access.gpo.gov/congress/senate/senate05sh.html 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

RICHARD C. SHELBY, Alabama, Chairman

ROBERT F. BENNETT, Utah 

WAYNE ALLARD, Colorado 

MICHAEL B. ENZI, Wyoming 

CHUCK HAGEL, Nebraska 

RICK SANTORUM, Pennsylvania 

JIM BUNNING, Kentucky 

MIKE CRAPO, Idaho 

JOHN E. SUNUNU, New Hampshire 

ELIZABETH DOLE, North Carolina 

MEL MARTINEZ, Florida 

PAUL S. SARBANES, Maryland 

CHRISTOPHER J. DODD, Connecticut 

TIM JOHNSON, South Dakota 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

EVAN BAYH, Indiana 

THOMAS R. CARPER, Delaware 

DEBBIE STABENOW, Michigan 

ROBERT MENENDEZ, New Jersey

KATHLEEN L. CASEY, Staff Director and Counsel 

STEVEN B. HARRIS, Democratic Staff Director and Chief Counsel 

JUSTIN DALY, Counsel 

STEPHEN R. KROLL, Democratic Special Counsel 

JONATHAN MILLER, Democratic Professional Staff 

PATIENCE R. SINGLETON, Democratic Counsel 

DEAN V. SHAHINIAN, Democratic Counsel 

JOSEPH R. KOLINSKI, Chief Clerk and Computer Systems Administrator 

GEORGE E. WHITTLE, Editor

(II)

CONTENTS

THURSDAY, NOVEMBER 17, 2005

Page

Opening statement of Chairman Shelby ................................................................ 1

Opening statements, comments, or prepared statements of: 

Senator Sarbanes .............................................................................................. 2

Senator Enzi ..................................................................................................... 4

Senator Schumer .............................................................................................. 5

Senator Bunning ............................................................................................... 6

Senator Dole ...................................................................................................... 7

Senator Allard ................................................................................................... 8

WITNESSES 

Richard J. Hillman, Managing Director, Financial Markets and Community 

Investment, U.S. Government Accountability Office; accompanied by Cody 

J. Goebel And Jack Edwards .............................................................................. 9

Prepared statement .......................................................................................... 37

John M. Molino, Deputy Under Secretary of Defense for Military Community 

and Family Policy, U.S. Department of Defense ............................................... 22

Prepared statement .......................................................................................... 62

Lori Richards, Director, Office of Compliance, Inspections, and Examinations, 

U.S. Securities and Exchange Commission ....................................................... 23

Prepared statement .......................................................................................... 67

Mary Schapiro, Vice Chairman and President, Regulatory Policy and Oversight, National Association of Securities Dealers .............................................. 25

Prepared statement .......................................................................................... 73

Response to written questions of Senator Sarbanes ...................................... 81

John Oxendine, Commissioner of Insurance, State of Georgia ............................ 27

Prepared statement .......................................................................................... 77

Response to a written question of Senator Sarbanes .................................... 84

(III)

(1)

A REVIEW OF THE GAO REPORT 

ON THE SALE OF FINANCIAL 

PRODUCTS TO MILITARY PERSONNEL 

THURSDAY, NOVEMBER 17, 2005

U.S. SENATE, 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, 

Washington, DC.

The Committee met at 10:06 in room SD–538, Dirksen Senate 

Office Building, Senator Richard C. Shelby (Chairman of the Committee) presiding. 

OPENING STATEMENT OF CHAIRMAN RICHARD C. SHELBY 

Chairman SHELBY. The hearing will come to order. 

This morning, the Committee will hold a hearing on a recently 

completed Government Accountability Office investigation examining the sale of financial products to our Nation’s servicemen and 

-women. Last year, I, along with Senator Sarbanes, asked the GAO 

to study the regulatory oversight associated with the marketing 

and sale of the insurance and investment products being offered to 

servicemembers. We also asked the General Accounting Office to 

assess the range and quality of these financial products, particularly with respect to the offerings in the civilian market. 

Quite simply, GAO’s findings are troubling. The report makes 

clear that military personnel are being sold costly, outdated, and 

even unnecessary securities and insurance products. It also indicates that military personnel frequently are victims of deceptive 

and illegal sales practices. 

Specifically, with respect to securities products, GAO found that 

a few financial service companies marketing specifically to servicemembers sell an archaic and obscure investment vehicle called a 

contractual plan that is characterized by an unusually high 50-percent sales charge over the first year. These sales persist notwithstanding the fact this product all but disappeared from the civilian 

market in the early 1980’s due to excessive sales commissions. 

Furthermore, financial advisers have questions whether this 

product is ever a suitable investment given the fact that there are 

hundreds of reputable no-load mutual funds available today. 

With respect to insurance products, GAO identified six insurance 

companies that catered to the military market. According to the report, insurance agents from these companies sell expensive life insurance that is oftentimes illegally marketed as a security. They 

market these products to the military even though most serviceVerDate 0ct 09 2002 17:35 May 18, 2007 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 S:\DOCS\1117.TXT SBANK4 PsN: KEVIN
2

members automatically carry a low-cost, government-provided 

$400,000 life insurance policy that provides coverage here. 

Perhaps most troubling, there is ample evidence that our men 

and women in uniform are routinely rushed through stacks of paperwork as part of a captive audience, unaware of what they are 

signing and purchasing. 

The report is also quite critical of the Department of Defense’s 

performance in regulating solicitations on military installations 

and sharing information with financial regulators. To discuss 

GAO’s investigation and related issues with us this morning, we 

have Richard Hillman, who authored the GAO report. On the second panel we will hear from John Molino, who is the Deputy Under 

Secretary of Defense for Military, Community, and Family Policy; 

Lori Richards, who is Director of the Office of Compliance, Inspections, and Examinations, Securities and Exchange Commission; 

Mary Schapiro, who is the Vice Chairman of NASD; and John 

Oxendine, who is the Insurance and Safety Fire Commissioner for 

the State of Georgia. 

I want to commend you, Mr. Hillman, for the excellent report 

and the work GAO has done here, and I look forward to everyone’s 

testimony. 

Senator Sarbanes. 

STATEMENT OF SENATOR PAUL S. SARBANES 

Senator SARBANES. Thank you very much, Mr. Chairman, for 

calling this hearing and for joining in asking for the GAO study. 

We will hear their report this morning on the sale of financial 

products to members of our armed forces. Regrettably, abuses in 

this area have been widely reported. The New York Times1 published a series of articles on this subject last year. In September 

2004, you and I asked GAO to conduct a study of these problems, 

and we will hear their analysis and then the comments by relevant 

regulators here this morning. I would like to also acknowledge the 

efforts of Senator Enzi on this issue. I know he has taken a very 

keen interest in it. 

Chairman SHELBY. Very much. 

Senator SARBANES. And he has introduced legislation on the subject with Senators Clinton, Schumer, Hagel, and others. 

In their report, the GAO has found, ‘‘Large numbers of military 

servicemembers are being targeted by a few firms offering life insurance products that provide limited benefits unless held for long 

periods, which most military purchasers were failing to do.’’

In fact, at least some of the companies understood, and apparently counted on, the fact that the target group for the life insurance sales were enlisted personnel, who have the highest level of 

turnover and would not hold these policies for long periods of time. 

GAO also found, ‘‘Military members were being widely marketed 

a securities product, the contractual mutual fund plan, that has 

largely disappeared from the civilian marketplace and which had 

been periodically involved in sales scandals for decades.’’

The GAO reported that the marketing materials used were misleading and ‘‘misrepresented the advantages of these plans compared to other investments.’’

3

I think it should be a matter of very deep concern that these are 

not new problems. For example, The New York Times has reported 

that Army Times has described similar issues in earlier articles. 

Some military officials sought to alert Pentagon officials to the 

problems in a 1997 report. A 1998 report of the Pentagon’s Inspector General, which looked into life insurance sales on 11 randomly 

selected military bases, found, ‘‘misleading sales presentations, 

presentations by unauthorized personnel, presentations to captive 

audiences, soliciting during duty hours, and soliciting in the barracks.’’

This was a Pentagon Inspector General’s report. 

A May 2000 Pentagon-ordered study by the former Chief Judge 

of the Army’s Court of Criminal Appeals found that DoD policies 

‘‘have been routinely violated’’ in this area for the last 30 years. I 

might also note that the SEC many years ago recommended banning the sale of mutual fund contractual plans altogether. 

Furthermore, Mr. Chairman, there are also widespread abuses in 

the payday lending area directed specifically at our military personnel. 

There are approximately 1.4 million active-duty personnel and 

1.2 million members of the Ready Reserve and our armed forces. 

I am very concerned that any insurance company or agent or stockbroker or dealer would sell inappropriate financial products to our 

servicemen and women. I am very concerned that any lender would 

require economically abusive terms in loans to military personnel. 

Now, we go marching around here waving the flag and everything about the military and the sacrifice of our men and women, 

and I have complete respect for what they do. But it seems to me 

one of the minimal things we could do to show that respect is to 

move aggressively against these kinds of practices which every 

study has found are abusive. I want to make that very clear that 

most of the reputable firms do not engage in this activity. But 

there are enough who do it in such abusive terms that it casts a 

dark cloud over the entire economic sector. 

We are going to hear from a distinguished panel of witnesses this 

morning. I especially want to recognize Richard Hillman, now 

GAO’s Managing Director for Financial Markets and Community 

Investment. Mr. Hillman is no stranger to this Committee, and I 

want to take this opportunity to commend him and his colleagues 

for their careful and thorough work on this important study. And 

I look forward to the second panel as well, and I should just note 

that I am delighted that Mary Schapiro, the Vice Chairman of 

NASD, will be on that panel. She is also no stranger to the Committee, and actually prior to joining NASD, she was Chairman of 

the Commodity Futures Trading Commission and also a Commissioner of the Securities and Exchange Commission. So she is very, 

very knowledgeable. She has been very helpful to this Committee 

in the past, and I look forward to hearing her testimony, as well 

as that of Ms. Richards from the SEC; Mr. Oxendine, who has 

come to be with us from the State of Georgia, the Insurance and 

Safety Fire Commission; and John Molino, the Deputy Under Secretary of Defense for Military, Community, and Family Policy of 

the U.S. Department of Defense. 

4

Mr. Molino, I would just warn you now, we have this Inspector 

General study; we have other studies to the Pentagon about what 

is going on and so forth. So we are going to be curious to know why 

the Department of Defense itself has not moved more aggressively 

in this area heretofore. So, I would just put that out there so you 

can mull about it until we get to your panel. 

Thank you very much, Mr. Chairman. 

Chairman SHELBY. Thank you, Senator Sarbanes. 

Senator Enzi, I am going to recognize you next, but I do want 

to join Senator Sarbanes in recognizing your work and leadership 

in this area. This is a very important subject to all of us. Thank 

you. 

Senator Enzi. 

STATEMENT OF SENATOR MICHAEL B. ENZI 

Senator ENZI. Thank you very much, Mr. Chairman, and I really 

appreciate your holding this hearing because this is an issue that 

is too important to ignore. For years, our men and women in the 

armed services have fallen victim to unscrupulous salespersons 

who are pushing high-cost financial products and life insurance. 

Oftentimes, the Department of Defense directives and the State 

regulations would be violated or completely ignored by these bad 

actors. The lack of oversight and information sharing among regulators has only made the problem more pervasive. 

As this GAO report will show, salespersons have been preying on 

military personnel, who are often young, inexperienced in financial 

matters, and particularly vulnerable to the aggressive sales tactics 

used by come companies. In some examples, life insurance agents 

have posed as instructors arranging veterans benefits classes for 

recruits and trainees. The sales pitches would start as soon as the 

commanding officer left the room. Many young men signed contracts and made payroll deductions because they believed the policies were endorsed by the Department of Defense or their military 

branch. In reality, they bought life insurance policies with low 

death benefits and premiums as high as 14 times the price of similar plans offered by the Servicemembers’ Group Life Insurance. 

In other cases, military personnel were sold investments that 

have all but disappeared from civilian markets. These funds, called 

contractual plans, offer high up-front sales commissions that rob 

investors of years of earnings. Today, there are literally thousands 

of better investments on the market. However, financial advisers 

found a niche outside of the public mainstream where they could 

still sell these disreputable investments on our military bases. 

In 1966, the SEC recommended to Congress that they ban these 

types of funds, but Congress did not act. It is time to finally follow 

through and ban the sale of these funds. My bill would do that. 

One of the most troubling aspects of this issue is the lack of oversight by the Department of Defense. Throughout this GAO report, 

it is noted that the Department of Defense did not share information about these problems with other regulators who could have 

prevented these violations. The report states that DoD personnel 

would generally try to resolve issues within the base. It is very 

clear, however, that this method has only allowed the problem to 

persist. A better system of information sharing is needed to effecVerDate 0ct 09 2002 17:35 May 18, 2007 Jkt 000000 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 S:\DOCS\1117.TXT SBANK4 PsN: KEVIN
5

tively target bad actors and prevent them from ripping off our military personnel. 

I believe that my bill, the Military Personnel Financial Services 

Protection Act, will address these critical needs. My bill would 

draw clear lines of jurisdiction for regulators, create a registry to 

track violators and ban the worst types of financial products being 

sold to our military. These products have disappeared from the civilian market, and they should disappear from military installations, too. 

I am pleased that the GAO has recommended several steps that 

are already included in the bill. I look forward to the testimony of 

Mr. Hillman on how these reforms could best be enacted. 

I would like to thank all the witnesses for appearing before the 

Committee today and sharing their perspectives. The investigations 

recently completed by NASD and SEC helped to bring this issue 

into focus for Congress. I appreciate their hard work. I am also interested to learn about the steps taken by the Department of Defense to better educate our armed forces about the financial investments they make, how they will provide better oversight in the future. I expect this GAO report and this hearing will advance the 

discussion of financial sales to our military personnel. During a 

time when so many of our armed services are bravely fighting tyranny abroad, we have to ensure that they are protected at home. 

Thank you, Mr. Chairman. 

Chairman SHELBY. The Chair recognizes Senator Schumer. 

STATEMENT OF SENATOR CHARLES E. SCHUMER 

Senator SCHUMER. Thank you, Mr. Chairman. I want to thank 

you and Senator Sarbanes for holding a hearing on this really important issue, on the sale of financial products to the military, and 

I want to thank Senator Enzi for his leadership in terms of legislation, which I am proud to cosponsor. 

We all know the problems here, and when I first read the stories 

in The New York Times, it wrenches at your heart that the people 

who serve us were taken advantage of, and sometimes with the 

complicity not of the military, but with people in the military. 

When at Camp Pendleton the marines, 345 marines who bought 

life insurance through briefings that were sponsored by the camp, 

and they had these private insurance agents come in, the results, 

at least the research done by The New York Times, showed that 

those who signed up thought this product was endorsed by the Marine Corps. And that is just appalling. It really was very bothersome to me. 

Now, it is a good question to see what DoD is doing. It is also 

a good question to ask the life insurance made available to military 

personnel by the Government, why is not that adequate? That is 

something we should think about in terms of our soldiers. But I 

think we should—and another question to ask is: Is the Department of Defense—why aren’t they coordinating with other agencies 

in the Government who may have more expertise on these kinds 

of insurance products to try and figure out what they can do on 

their own. 

I think the GAO’s recommendations are exactly right. Banning 

the sale of contractual plans, known for the high front-end sales 

6

charge of 50 percent, that makes sense. These plans, interestingly 

enough, are not in the civilian market at all, but they are being 

used to lure our soldiers. And I support their recommendations requesting that insurance regulators conduct reviews to ensure that 

the products being sold meet the existing insurance requirements. 

That seems to me to be rudimentary and fundamental. 

Again, I think that Senator Enzi’s bill does a very good job, and 

I am proud to be a cosponsor. Let me just make a couple of other 

points here. 

One thing that was missing from the study were recommendations on steps to combat the negative effects posed by the automatic premium payment provisions which are included in many of 

these policies unless the servicemember proactively contacts the insurance company to cancel the policy and request a refund of the 

savings fund. This is an area where we might be able to help our 

soldiers and look at that. 

Also, one legislative area we should look at that goes beyond the 

scope of the report, the way to improve disclosure provisions so 

that military members will know exactly what they are signing up 

for and understand which products automatically take payments 

from a member’s bank account. That always is done quietly and 

people do not know it and they pay less attention to it. 

I would also like to look into whether it may be necessary to 

work with DoD if there should be a certification requirement for 

the sale of products on military bases. That might go a long way 

to protecting people as well. 

So, with that, Mr. Chairman, I thank you for this timely hearing 

and look forward to a legislative solution in large part based on the 

GAO recommendations. 

Chairman SHELBY. Thank you. 

The Chair recognizes Senator Bunning. 

STATEMENT OF SENATOR JIM BUNNING 

Senator BUNNING. Thank you, Mr. Chairman, for holding this 

very important hearing, and I would like to thank all of our witnesses for coming here before us today. 

I do not know anyone who read The New York Times’ investigation of sales of financial products to the military personnel who 

was not at the very least appalled and concerned about the practices. Knowing some unscrupulous financial service companies are 

taking advantage of our servicemen and -women, most of whom are 

very young, deeply disturbed me, as I know it did many others in 

Congress. 

Mr. Chairman, you and Senator Sarbanes asked for the GAO report that we are going to hear testimony on today, and Senator 

Mike Enzi has introduced a bill to curb some of the abuses. My 

good friend and fellow Kentuckian, Jeff Davis, the Congressman 

representing my old district in Kentucky, the 4th, has worked tirelessly on this issue and has introduced a bill very similar to Senator Enzi’s that has already passed the House of Representatives. 

The SEC, the Nasdaq, and the State insurance commissioners have 

also been very involved in this issue. All of you should be commended for your efforts. 

7

We have two large Army bases in Kentucky—Fort Knox and Fort 

Campbell. Like every other State in the Union, Kentucky has many 

Guard and Reserve units called up to fight the war on terror. If 

there is anything anyone can do to help facilitate financial education at the military facilities in Kentucky and prevent our service 

people from getting taken advantage of, please let us know. Let the 

Committee know and let the military bases know. 

It sickens me to know some very bad actors have tried to take 

advantage of these young men and women as they go off to war. 

We must make sure that this does not happen anymore, and we 

must make sure that those who have abused our service people in 

order to make a quick buck are held accountable. 

Thank you, Mr. Chairman. 

Chairman SHELBY. Senator Dole. 

STATEMENT OF SENATOR ELIZABETH DOLE 

Senator DOLE. Thank you, Chairman Shelby. My thanks to the 

witnesses this morning. 

The unscrupulous sale of flawed financial products to our servicemen and -women is an extremely critical matter affecting our military families as well as our military’s readiness. It is an appalling 

situation. Harmful financial products can cause serious financial 

hardships for servicemembers and their families, not only affecting 

morale but also causing military personnel to lose necessary security clearances and lead to career-ending disciplinary measures. 

This is an issue I take very seriously as a Member of both this 

Committee and the Armed Services Committee. And with more 

than 115,000 military personnel stationed in North Carolina, these 

problems truly hit home. 

I want to thank you, Mr. Chairman, and Ranking Member Sarbanes for requesting this important GAO report, which explains 

well the many reasons why military personnel are being targeted 

by dishonest financial services providers. This report has effectively 

painted a picture of the challenges affecting the men and women 

serving our country. 

As we have already heard, many are young. In fact, the report 

points out that the Defense Department is the largest employer of 

young adults in the United States, having in 2004 recruited some 

20,000 men and women into active duty alone, the majority of them 

recent high school graduates. 

Also, our military members face lengthy deployments and frequent relocations, and like most young Americans, they often lack 

financial savvy and security. These very factors make them more 

vulnerable to predatory financial practices. 

The GAO report also details the problems with certain insurance 

and securities products marketed to military personnel that have 

lower payouts and larger fees and commissions. Targeting the military to be consumers of these unscrupulous services deserves our 

closest scrutiny, and I, too, thank my colleague Senator Enzi for introducing such important legislation that takes significant action to 

stop these practices in the insurance and securities areas. 

Still, I am concerned, Mr. Chairman that this report did not investigate lending practices to servicemembers. However, an April 

GAO report described tools that DoD is not fully utilizing to fight 

8

predatory lending. It revealed that consumer advocates, State government officials, DoD officials, and servicemembers in GAO focus 

groups indicated that the military is being targeted and harmed by 

predatory lenders. 

In the defense authorization bill that we passed this week, I was 

very proud to include an amendment that takes important action 

to stop predatory lenders from targeting our military. This measure 

requires the Defense Department, in consultation with Treasury, 

the Federal Reserve, the FDIC, and representatives of military, 

charity, and consumer organizations to report to Congress within 

90 days on the prevalence of predatory lending and to provide specific legislative and administrative actions to prevent this egregious 

practice. 

Indeed, supporting our military is more than just supporting 

their mission in the war against terror. It includes supporting their 

families and their livelihoods. The targeting of our servicemembers 

by unscrupulous financial service providers is seriously harming 

both, and I look forward to working with this Committee as we find 

ways to put a stop to all of these practices. 

Thank you, Mr. Chairman. 

Chairman SHELBY. Senator Allard is recognized. 

STATEMENT OF SENATOR WAYNE ALLARD 

Senator ALLARD. Thank you, Mr. Chairman. I, too, want to join 

my colleagues in thanking you and Senator Sarbanes for holding 

this hearing and my colleague from my neighboring State of Wyoming for taking the lead on this particular issue. I think it is important that we do closely examine the GAO report on the sale of 

financial products to military personnel. I am proud personally to 

represent a State with a significant military presence, and I look 

forward to the opportunity to hear from our witnesses. 

I want to join my other colleagues also in saying we do owe our 

military a great debt. They volunteer to risk their lives to protect 

freedom and democracy. Therefore, it is only reasonable to expect 

that we would protect them against inappropriate sales of financial 

and investment products while on the job. 

Having said that, we also want to be sure that we encourage savings through legitimate products. I think that we do not want to 

step over the line here. There are some very good savings plans, 

and we need to encourage our young people all over this country 

to do more to save, because in my view this country is not saving 

enough. Military people, with proper savings and investment programs, can enhance their future, and so I am looking forward to 

the testimony. 

This GAO report, along with today’s testimony, I think will be 

helpful in finding an appropriate balance, and I look forward to 

hearing from our witnesses. 

Thank you, Mr. Chairman. 

Chairman SHELBY. Mr. Hillman, of course, the GAO report will 

be made part of the hearing record, and we appreciate that. Your 

written testimony will be made part of the hearing record. You proceed as you wish. 

9

STATEMENT OF RICHARD J. HILLMAN

MANAGING DIRECTOR, FINANCIAL MARKETS

AND COMMUNITY INVESTMENT,

U.S. GOVERNMENT ACCOUNTABILITY OFFICE;

ACCOMPANIED BY

CODY J. GOEBEL AND JACK EDWARDS 

Mr. HILLMAN. Thank you very much, Mr. Chairman. Accompanying me today, to my left, is Cody Goebel and to my right Jack 

Edwards. They are Assistant Directors at GAO who were primarily 

responsible for the successful design and implementation of the 

studies being featured today. 

We are pleased to be here to discuss GAO’s work on the sales of 

financial products to the U.S. military. Today, I will summarize the 

results of the report prepared at this Committee’s request entitled 

‘‘Financial Product Sales: Actions Needed to Better Protect Military 

Members.’’ Specifically, I will discuss, one, the insurance and securities products that were being sold primarily to military members 

and how these products were being marketed; and, two, the ability 

of financial regulators and the Department of Defense to oversee 

the sales of insurance and securities products to military members. 

Where applicable, I will also present results from a related June 

2005 study describing the need for DoD to implement controls over 

supplemental life insurance solicitation policies involving servicemembers. 

In summary, regarding sales of insurance products, we found 

that thousands of junior enlisted servicemembers had been sold a 

product that combines life insurance with a savings fund promising 

high returns. Being marketed by a small number of companies, 

these products can provide savings to servicemembers that make 

steady payments and have provided millions in death benefits to 

survivors and others. However, these products are much more costly than the $250,000 of life insurance, now $400,000, that military 

members already receive as part of their Government benefits. 

In addition, these products also appear to be a poor investment 

choice for servicemembers because they included provisions that allowed any savings accumulated on these products to be used to extend the insurance coverage if a servicemember ever stops making 

payments and fails to request a refund of the savings. With most 

military members leaving the service within a few years, many do 

not continue their payments, and as a result, few likely amassed 

any savings from their purchase. 

Several of the companies who have sold these products have been 

sanctioned by regulators in the past, and new investigations are 

underway to assess whether these products were being properly 

represented as insurance and whether their terms were legal under 

existing State laws. 

Regarding the sale of securities products, we found that thousands of military members were also purchasing a mutual fund 

product that also requires an extended series of payments to provide benefit. Known as contractual plans, they expect the servicemember to make payments for set periods, such as 15 years, with 

50 percent of the first year’s payments representing a sales charge 

paid to the selling broker-dealer. If held for the entire period, these 

plans can provide lower sales charges and comparable returns as 

10

other funds; however, with securities regulators finding that only 

about 10 to 40 percent of the military members that purchased 

these products continued to make payments, many paid higher 

sales charges and received lower returns than had they invested in 

alternatively available products. 

Regulators have already taken action against the largest brokerdealer that marketed this product and are investigating the few remaining sellers for using inappropriate sales practices. With the 

wide availability of much less costly alternative products, we and 

the relevant financial regulators question the need for contractual 

plans to continue to exist. 

Sales to military members were receiving less oversight because 

DoD personnel rarely forwarded servicemembers’ complaints to relevant financial regulators. Insurance products also lacked suitability or appropriateness standards that could have prompted regulators to investigate sales to military members sooner. Securities 

regulators’ examinations of contractual plans were also hampered 

by a lack of standardized data showing whether consumers were 

benefiting from their purchases. 

Although recognizing a greater need for sharing information on 

violations of its solicitation policy and servicemember complaints, 

DoD has yet to finalize its policies to require that such information 

be provided to financial regulators, nor has it coordinated with 

these regulators and its installations on appropriate ways that additional sharing can occur. 

Given the concerns over potentially inappropriate financial product sales to military members, the need for definitive action to better protect servicemembers appears overdue. The report we issued 

to this Committee recommends actions by Congress that are consistent with the provisions and bills under consideration by this 

Committee. More specifically, because the features of the products 

being sold to military members provide limited benefits to many 

military purchasers, we believe that Congress should act to have 

all State insurance regulators conduct reviews to ensure that only 

legal products are being sold to military members and to have regulators work cooperatively with DoD to develop standards that 

could help ensure that companies only market appropriate products 

for military members’ needs and circumstances. 

Similarly, given the wide availability of less costly alternatives, 

Congress should act to amend the Investment Company Act to ban 

the sale of contractual mutual fund plans. Because financial regulators’ ability to adequately oversee sales to military members was 

hampered by a lack of information sharing about military members’ complaints and concerns, we also recommend that Congress 

direct DoD to work with insurance and securities regulators to 

overcome barriers to sharing information and to clarify that State 

regulators have jurisdiction on military installations. 

In the report prepared for this Committee, we also recommend 

that DoD issue its revised solicitation policy that will require military personnel to share complaints with financial regulators. And, 

finally, to improve oversight by State insurance regulators, SEC, 

and NASD, we recommend these organizations designate specific 

members of their staff to receive complaints and conduct outreach 

by proactively learning of problems involving servicemembers. In 

11

the event that contractual plans continue to be sold, we also recommend that the SEC and the NASD improve the information they 

have to evaluate the extent to which customers are successfully 

completing their plans. 

DoD and the financial regulators have provided comments on a 

draft of this report being released today, generally agreeing with 

the report’s contents and its recommendations. 

Mr. Chairman, this completes my prepared statement, and I and 

my colleagues would be pleased to respond to any questions you or 

other Members may have. 

Chairman SHELBY. Thank you, Mr. Hillman. 

Could you assess for the Committee this morning the range and 

the quality of financial products offered to the military community 

as well as the sales methods employed to sell these products? And 

let me ask you this: What is the average age of these soldiers they 

are selling to? Did you do any work on that? 

Mr. HILLMAN. Yes, we can provide information on that as well. 

Chairman SHELBY. Okay. 

Mr. HILLMAN. On the insurance products themselves, they were 

typically marketed to junior enlisted service personnel, those who 

have just come into the services and really just coming out of their 

basic training and being redeployed. 

Chairman SHELBY. What would be the average age of these people? Young, would it not? 

Mr. HILLMAN. Young, most often likely right out of high school, 

in their late teens and early 20’s. 

The contractual mutual fund plan, however, was more or less 

targeted to more senior, commissioned officers who had and could 

afford the ability to make payments for investment purposes. 

The insurance companies targeting servicemembers were primarily marketing a hybrid product combining a high-cost insurance 

policy with a savings component. The product costs significantly 

more than other insurance coverage available to servicemembers. 

For example, since 2005, the Servicemembers’ Group Life Insurance, or SGLI, provides $400,000 of life insurance for $26 per 

month. These other products would provide death benefits generally ranging from $25,000 to $50,000 for approximately $100 per 

month, allocating some funds to the savings fund, typically much 

less in the earlier years and more in the later years, depending on 

the product. 

Another debilitating feature of the insurance products is that 

they had this automatic premium payment provision, as Senator 

Schumer mentioned in his opening remarks, which allows companies to deplete the savings fund to pay for any insurance premium 

should a servicemember stop making payments. Given that 

servicemembers more frequently move and leave the service within 

a few years, they are often unable to make payments for long periods of time, and because of this feature, have not been able or were 

likely unable to amass any savings. 

Products also were associated with questionable sales practices 

where the agents were misrepresenting the products not as insurance but as an investment or identifying themselves as representatives of independent benefit and fraternal organizations. These 

products also frequently included very early and stiff withdrawal 

12

penalties, and it was common for companies to credit the amount 

of accumulated savings on the basis of either the year-end balance 

or an average balance, whichever was less. 

So, Mr. Chairman, overall on the insurance side, these products 

were more costly than what was available to servicemembers and 

were being touted as not insurance but investments, largely because of the incentive that members had to purchase insurance 

more cheaply through the Federal Government. 

Chairman SHELBY. It is my understanding the Department of 

Defense has been aware of problems related to commercial solicitations on military installations since the Vietnam War era. Why are 

we still today discussing the same troubling issues 35 years later? 

And it is my understanding also that a lot of these contractual plan 

products they are selling disappeared from the civilian market 25 

years ago due to their excessive sales charges. It looks to me like 

there is some exploitation going on here to kind of a captive young 

market—our soldiers. 

Mr. HILLMAN. You are absolutely right. That was the most surprising thing to us as part of this study. As you have recounted and 

as have others, there has been a variety of reports out there in the 

1990’s and in the 2000 era that go back 10, 20, 30 years, recounting the types of problems they were having with the sales of these 

products. As we conducted work for this report before you as well 

as an earlier report in June 2005, we visited military bases. We 

talked with officers. We talked with junior and senior enlisted personnel. And we would be finding the same story as we were recounted in those studies. It is really quite remarkable. 

Chairman SHELBY. I understand that the Department of Defense 

has banned only one company—one company—from military bases 

worldwide. I believe that was Academy Life Insurance Company in 

1998. 

In light of all the transgressions that have occurred over the past 

20 years or more, I would ask this question: Should more be done 

to protect our men and women in uniform from unscrupulous actors? Senator Enzi has been in the leadership on this, as you know. 

Should more be done? And should we pursue legislation in this regard? Because I am not sure the Department of Defense could do 

it without legislation, or has done it. They have had a long time 

to do it. 

Mr. HILLMAN. That is absolutely right. We were looking into the 

bill that Senators Enzi, Hagel, and Schumer introduced and find 

the provisions in the sections in the bill to be very relevant toward 

solving the problems servicemembers are facing. We have articulated certain important provisions within our report being released 

today, but believe that each of the sections in the bill being introduced have valuable contributions to protecting servicemembers. 

In particular, because some States have reviewed the products 

sold to servicemembers on the insurance side and found them to be 

not in compliance with existing State laws, we are recommending 

that all State insurance commissioners review product provisions 

to ensure that they are in compliance with existing laws. As Senator Schumer said in his opening remarks, that is quite a fundamental requirement. 

13

We have seen the State of Washington and others review products and find them to not be in compliance, and that is one quick 

and easy way to stop the sale of these products to military installations within those States. 

Because State insurance commissioners have no authority to 

evaluate whether the products sold are appropriate or suitable for 

military members, we are also recommending—perhaps one of the 

more controversial recommendations—that State insurance commissioners and the Defense Department work together to develop 

appropriateness or suitability standards for sales of products to 

military servicemembers. 

This has been a particularly contentious issue within the insurance industry, Mr. Chairman. As you know, the securities industry 

already has suitability standards, but such standards do not generally exist on the insurance side. On a limited basis, though, the 

insurance industry has acted where there are at-risk populations. 

For example, they developed suitability standards for senior citizens aged 65 and over as it related to the sale of annuity products. 

We are suggesting that the servicemember population is a similar 

at-risk group. Because of their itinerant lifestyle, moderate income 

levels, and young ages, they are particularly susceptible to abuse 

and, therefore, we are recommending that such standards be developed by DoD and the insurance industry to help curb this activity. 

Chairman SHELBY. Senator Sarbanes is recognized. 

Senator SARBANES. Thank you very much, Mr. Chairman. 

Mr. Hillman, I again want to commend you and your colleagues 

for this extremely helpful report. I have a number of questions. The 

first I want to put to you is, to what extent was the Department 

of Defense allowing situations in which the agents trying to sell 

these products seemed to be clothed with some legitimacy from the 

Department? I mean solicitation on base or the use of certain military facilities, how they portrayed themselves so that their recruits 

did not perceive them as being as they were, a private vendor just 

trying to get a sale, but somehow could come away with the impression that it was somehow an approved activity by the Department of Defense, that it carried some imprimatur of approval as 

they were dealing with these people? 

Mr. HILLMAN. As you know, Senator Sarbanes, one of the commonalities associated with the sales of these products—and I would 

like to have Jack Edwards also respond to this in more detail after 

I complete my initial remarks—one of the commonalities associated 

with the sale of these products is that they are often sold by agents 

who have had prior military service. Therefore, they are totally disarming the servicemembers that they are meeting with, giving 

them the impression that they are providing them with a product 

that is going to more than meet their needs because the agents 

have been where servicemembers are now. 

Military personnel overseeing these activities do have a tough 

job. They are available and present, but the enforcement of their 

solicitation policies have not occurred in a fashion that we would 

have expected them to have occurred. There are requirements in 

the solicitation policy that go way back, prohibiting group sales 

that are prohibiting sales on barracks, and prohibiting sales during 

working hours, and repeatedly in reports you are seeing these 

14

types of infractions taking place. So clearly, much more needs to 

be done by the Department of Defense to help ensure that the individuals who are on base soliciting information are doing in accordance with their policies. 

Mr. Edwards. 

Mr. EDWARDS. Yes. In the case of several of the installations 

where we visited, we did hear of cases of group presentations going 

on which are a problem because they have been prohibited by the 

directive which rules all of the commercial solicitation that occurs 

on the installations. This type of behavior is very difficult to quantify. There are not any statistics out there to suggest how often it 

has occurred. 

However, one piece of information that we can put forward is 

that we did a survey of 175 DoD personnel financial management 

managers. These are people who are on military installations, who 

are in charge of programs to help enlisted people and officers with 

their financial concerns. 

Senator SARBANES. These are DoD employees, is that correct? 

Mr. EDWARDS. Yes. These managers indicated that several of the 

prohibited practices are going on. We could not confirm all of those 

because we did not visit all the bases. But in several cases we 

found 25 percent or more of that sample of 175 installation managers saying that prohibited practices were occurring on their 

bases. 

Senator SARBANES. Your report notes difficulties and resistance 

in the Department of Defense in talking to other financial regulators about a number of these issues. Could you explain that to 

us a little bit? 

Mr. HILLMAN. Yes. DoD has not shared concerns with complaints 

for several reasons. Base personnel prefer to work directly with the 

selling agents to resolve any matters, rather than working directly 

with the financial regulators. Some were concerned that discussions between servicemembers and financial regulators would be 

prohibited due to installations’ legal advisers involvement in the 

complaint handling process. When individual servicemembers contact Judge Advocate General offices these advisers attorney-client 

privileges would prohibit them from sharing information further. 

Upon further review with DoD regarding this matter, they now 

though believe that any legitimate request from an entity such as 

a financial regulator, could overcome the privacy or Judge Advocate 

General limitations. 

Senator SARBANES. But generally speaking, they are not transmitting through to the financial regulators the complaints that 

they are receiving; is that correct? 

Mr. HILLMAN. That is correct. They are not sharing information 

with the financial regulators, and they largely have not had a 

mechanism to even gather internally within DoD information on 

the extent to which there are concerns and complaints out there regarding these products. 

Senator SARBANES. Right. 

Mr. Chairman, my time has expired. Thank you very much. 

Chairman SHELBY. Senator Enzi. 

Senator ENZI. Thank you, Mr. Chairman. I want to follow up just 

a little bit on what Senator Sarbanes was asking about. 

15

There are known violators. How do they get access to the base? 

Is it a communication problem then? Is that what you are saying, 

and perhaps there are some base restrictions that keep them from 

sharing this information? I was not completely clear on what you 

were saying there, by known violators. 

Mr. HILLMAN. The DoD attempts to take action on known violators, but there are a wide variety of agents that do come in on base 

that have not had violations in the past, and they are allowed in 

to provide for services to servicemembers in the insurance and securities area. 

Regarding the fact as to whether or not there are limitations in 

the ability of the Defense Department to provide information to financial regulators, initially they were telling us, through most of 

our study, that, yes, that indeed was the case, that there were privacy concerns and other concerns associated with sharing information outside of the base, and their preference was to handle matters themselves rather than to involve the financial regulators. 

Our understanding is, as a result of our work though, that the 

research that the Department of Defense has done now, they believe that there are no limitations to them sharing information 

about concerns and complaints of servicemembers to other financial 

regulators to the extent that they have a legitimate need to know. 

Senator ENZI. Thank you. Along that same line, you examined 

the quantity and quality of complaints that were filed against insurance agents and held within the Department of Defense or on 

base. Can you give me a little insight into how a typical complaint 

is processed once it is filed, and how that is communicated? 

Mr. HILLMAN. Maybe I should ask Mr. Edwards to respond to 

that. 

Mr. EDWARDS. The actual procedure is probably going to vary a 

little bit by service, so what may be done in the Army may be a 

little different than in the Marine Corps; also it may vary somewhat according to the particular installation. But in some of the 

discussions that we had while visiting installations, typically 

servicemembers who thought that they were experiencing some 

kind of problem would go to the commercial solicitation coordinator 

for the entire base. This would be the individual who would certify 

whether an agent coming on the base was licensed, had had no 

problems on the base before and met certain other requirements. 

After that, the coordinator would discuss what the problem was, 

whether certain activities had occurred, and whether those activities were prohibited practices. At that point the servicemember 

would be given an opportunity to go forward with the complaint or 

not. If it did go forward, then there would be various ways in which 

it could go forward. It might be with a criminal investigation, or 

it may be through some other channel. 

Senator ENZI. Did you see any consistent patterns in the substance of these complaints? 

Mr. EDWARDS. That was one of the interesting things. We ran 

into a problem in the work that was requested in the June report. 

We were asked to look at the incidence of violations. DoD does not 

gather information about the incidence of violations. It only is able 

to quantify those individuals who have committed actions that are 

egregious enough to result in banning. This is one of the reasons 

16

that we recommended that DoD should be monitoring before something gets that severe. DoD partially concurred with our recommendation, and said the current Senate bill requires them only 

to monitor at the banned agent level. 

Senator ENZI. Thank you. Mr. Hillman, did you encounter situations where the jurisdiction of the DoD and the State regulators 

was confusing, and did that cause inaction on the part of either 

party? 

Mr. HILLMAN. Cody. 

Mr. GOEBEL. Yes. We did hear that from regulators. We did some 

surveys as part of preparing this report and the report that Jack 

Edwards worked on. And although generally State insurance regulators and State security regulators expressed the opinion that they 

did have jurisdiction, there were a few that had some doubts about 

their complete jurisdiction. And in at least a couple of cases at 

some States that had large military populations, they definitely 

knew they did not have jurisdiction because some of these installations there are considered Federal enclaves, and so they did not believe they did, which was a concern. 

What some States have done in light of that is, for example, investigators at the State of Maryland conducted some work and 

found violations at bases in that State and in the surrounding area. 

They actually reached out to the FBI and brought them with them 

in some of their initial consultations on the base to make sure they 

had a Federal connection. Investigators in Virginia also reached 

out and got permission from commanders at the base before they 

did any work. So that is how they have tried to address it. 

Mr. HILLMAN. So this notion and this uncertainty about the extent to which they have legal authority is hampering their ability 

to go on base whether they have it or not. So legislation that you 

are introducing dealing with making it more clear that State securities regulators and insurance regulators have the jurisdictional 

right to go onto base to deal with sales practice issues is particularly important. We understand that this legislative jurisdiction requirement varies from one State to another, and we did not have 

the detailed time and resources to go in and look at each individual 

State and State activity. 

However, we understand that the types of existing legislative authority over military installations varies significantly based upon 

when and how specific tracts of land were acquired and the like. 

So it is a confusing area and clarification would be much welcomed. 

Senator ENZI. Thank you. My time has expired. 

Thank you, Mr. Chairman. 

Chairman SHELBY. Senator Bunning is recognized. 

Senator BUNNING. Thank you, Mr. Chairman. 

In your report did you examine the recruitment policies of the 

Army, Navy, Marines, Air Force, and their explaining to recruits 

what benefits a recruit would have as far as life insurance or family benefits, and all the things that seem to be violated after the 

fact? 

Mr. HILLMAN. Again, I would like to have Jack Edwards provide 

any information he may have about the report that he worked on 

looking at solicitation practices within DoD’s policy. Our report 

17

looked at the quality of the products that were being sold and the 

quality——

Senator BUNNING. After the fact. 

Mr. HILLMAN. After the fact, and the quality of the regulation. 

Senator BUNNING. So, I am a young man being recruited into the 

Army, for instance, the recruiter should be telling me now that, 

‘‘Jim Bunning, you are going to have a $400,000 life insurance policy.’’ I would like you to explain what is being done after the fact 

though. 

Mr. EDWARDS. The military has a very strong program for looking at personal financial management. They try to do training for 

everyone who comes in. However, they have experienced some 

problems making sure that everyone gets through training. It was 

not in the report that we are discussing today about the supplemental life insurance, but another one of my teams did a report 

this year that looked at that education process, and it varies quite 

a bit among the different services as to exactly how they do the financial education. There are a wide variety of issues that are required as part of that financial training that each new recruit gets 

during periods which include the basic training and the initial follow-on installations where they go. 

Senator BUNNING. Did you find out in your report that the violators, the people who violate the young service people, the people 

who are trying to sell illegal or unreasonable contracts, whether it 

be in mutual funds or life insurance, did they hit these recruits before they had completed basic training, or was it after the fact that 

they had finally made it through the basic training period, and 

then were members of the services? 

Mr. EDWARDS. It could be in both situations, both while you are 

still in basic training, as well as in the follow-on assignments. 

However, one of the things that must be kept in mind is that the 

directive that DoD is operating under only controls the situation on 

the installations. Some servicemembers go out to the local mall or 

somewhere else and end up buying a policy, and DoD has less control over what occurs——

Senator BUNNING. I understand that. That is not my question. 

My question is the time between when they enter as a recruit until 

the time they finish, is the Department of Defense giving the recruit enough information on the benefits, and therefore, preventing 

our giving a heads-up to these young people, that there are people 

that could be trying to sell them illegitimate insurance policies, 

contractual mutual fund policies and on down the line? 

Mr. EDWARDS. We did not look specifically at that issue. 

Senator BUNNING. You didn’t? 

Mr. EDWARDS. No. 

Senator BUNNING. All right. 

Mr. GOEBEL. Senator. 

Senator BUNNING. Yes. 

Mr. GOEBEL. We also, in our report, have a recommendation to 

the Department of Defense to expand some of the subjects they 

cover in their personal financial management training, not so much 

on the benefits of the products as you are discussing, but on what 

to do if they do have concerns or complaints, notifying them of who 

to complain to, the regulators, the insurance or the securities reguVerDate 0ct 09 2002 17:35 May 18, 2007 Jkt 000000 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 S:\DOCS\1117.TXT SBANK4 PsN: KEVIN
18

lators. We also found that although DoD is attempting, as Jack has 

said, to get that training to all new recruits, there was some desire 

expressed by some servicemembers we talked to to see that held at 

all levels, because as we mentioned, not all of these products are 

targeted to the early——

Senator BUNNING. What I am saying is if something is eliminated 25 years ago from the civilian sales force, the recruit would 

have the same opportunity to complain to the NASD, to the Securities and Exchange Commission, or any other regulator. I know they 

are very young and very unsophisticated investors, but the fact of 

the matter is they have the same rights and privileges that anyone 

who is not in the service has. My only desire is to make sure that 

what is good for people outside the service is also good for them 

when they get in. 

Mr. HILLMAN. Well, the Service Members Life Insurance Program is well-supported by military servicemembers. Well over 90 

percent enroll into that program, so they know that they have insurance. But oftentimes what regulators are telling us is, that 

these insurance products that are being sold to military members 

are being not sold as an insurance product, but are being sold as 

an investment. 

Senator BUNNING. I can understand how that would happen, and 

that also can try to be happening in civilian life. The fact that 

somebody is 19 and right out of high school and the proximity of 

going into war, they would never think that they had enough life 

insurance. The fact of the matter is that if informed of what is 

available at the military level and the upgrading of the military life 

insurance policies that we as a Congress has taken under, would 

have a great deal of effect on what they do as individuals. 

Thank you. 

Chairman SHELBY. Thank you, Senator Bunning. 

Senator SARBANES. It is $400,000 now, is it not? 

Mr. HILLMAN. That is correct, absolutely. 

Senator SARBANES. Right. 

Mr. EDWARDS. Plus $100,000 in death gratuity benefit that everyone would get even if they were not covered by the insurance. 

Chairman SHELBY. Plus survivor benefits, education for children, 

and so forth. 

Senator BUNNING. Oh, it is a package. 

Chairman SHELBY. In addition to that. I am not saying it is sufficient, but we owe them a lot. 

Senator Allard. 

Senator ALLARD. Thank you, Mr. Chairman. The huge benefits 

that can occur, such as for a widow, did not used to be true. But, 

if they have a family of two children and the widow, you can easily 

figure out over a lifetime their accumulated benefits could be over 

a million dollars. I do think that they need some financial consultation. I understand they are providing that. 

But the thing that comes to my mind is what motivates the Department of Defense to think they need to have a salesman on the 

job? I mean these men and women in the armed forces, they are 

working. It is on-the-job sales. I would not let a salesman come in 

and sell to my employees while they are working for me. Why do 

they think that is important? I am trying to think why an employer 

19

would allow that to happen. When I have employees working for 

me, I want them to do the job. If they have something they want 

to buy, they do it on their own time. So my question is, why do we 

even allow a salesman of any kind on the base? 

Mr. HILLMAN. I may have Jack answer this question as well, 

Senator, but I agree with your view that the insurance coverage 

that is being made available for military members today is very 

generous. The investment options being made available to military 

members through their Thrift Savings Plan is equally very generous. You have no-load programs, low-cost operating funds available for servicemembers to invest at least 7 to 10 percent of their 

income into these Thrift Savings Plans. 

Chairman SHELBY. Do they all know that? That is important, to 

communicate that to them. 

Senator ALLARD. Yes, which is available to any Federal employee. 

Chairman SHELBY. Right. 

Senator ALLARD. Yes. I need a response to my question of why 

do we let salesmen on the base where they are working? 

Mr. EDWARDS. A military installation is a little bit different than 

your usual corporate location because we do have people actually 

living on the bases. They will be on there after their work day 

ends. And in the case of people who are living in community family 

housing on the installations, they may arrange to have someone to 

actually come to their house. Or it may be the case that the military member buys a policy from someone who comes to a designated area that the installation commander makes available. 

So part of it is a difference between the military working environment and the civilian working environment. 

Senator ALLARD. It sounded to me like, when we were putting 

this together, they had a group of soldiers together, and this guy 

would come in while they were in uniform, came in and made this 

sales pitch, and it does not seem quite appropriate to me. If they 

are home or whatever, that is probably a different story. 

Senator SARBANES. Did they solicit in the context in which Senator Allard just suggested? 

Mr. EDWARDS. Yes. If you look back at the report from 1999 DoD 

IG, the Cuthbert Report, and our report, each suggests some solicitation was going on during work hours in work situations. You do 

have some situations like those that are documented for Camp 

Pendleton, where individuals did get solicited in groups, which is 

a prohibited activity, much like contacting somebody during the 

work hours. 

Senator ALLARD. The other thing, when they came in and marketed, I assume they approached the soldiers pretty much as this 

was a savings mechanism, a financial investment. Was this in relation to IRA accounts or was it Keogh plans, or how were they structuring the sales to start with? I personally have been approached 

by these people with an IRA account, for example, who say this is 

strictly a savings account, but when you get into it, you find out 

you bought life insurance or some part of that is life insurance, and 

it is very expensive. This sounds to me like the same mechanism 

that we have here. Are they coming in and trying to market an 

20

IRA account, not knowing that they have a Keogh plan, or was 

something like that available? 

Mr. GOEBEL. Yes. The securities product, the contractual plan, 

was largely being sold, from what we understand, as a Roth IRA, 

as a retirement vehicle for the servicemembers. 

Senator ALLARD. Same types of stuff we run into in the private 

sector. We ran into them in the 1970’s particularly, if I recall, although they just had them as IRA accounts at that time, and they 

are deceptive. The salesman persisted that this was not life insurance, but it was there in black and white if you read the fine print. 

I can understand how they can get misled on that kind of stuff, and 

I think that it is a shame. 

Mr. HILLMAN. The SEC and the NASD will be on the next panel, 

can speak very vividly to practices being undertaken by the largest 

seller of this contractual plan, who they identified through scripts 

that were being provided to agents, just how egregiously they were 

touting the limitations of other products and services, and propping 

up the products and services that they were selling. 

Senator ALLARD. Thank you, Mr. Chairman. 

Chairman SHELBY. Mr. Hillman, what single action by the Department of Defense, the insurance commissioners, the Congress, 

or any other interested party would have the greatest impact on 

this decades-old problem in your judgment? Would it be strong, 

meaningful legislation, as Senator Enzi has proposed, or what 

would it be? 

Mr. HILLMAN. As it relates to the Department of Defense, they 

have a major mission and a massive responsibility. It is one of the 

biggest organizations in the world. They need help. The need to solicit the assistance of experts who know about the quality of the 

financial products and who know about problems concerning sales 

practice abuses. They need to outreach more to financial regulators. That, in our view, would be the one major area where we 

could help to curb this type of activity at the SEC, at the NASD, 

indeed within State insurance regulators and the NAIC. They do 

not have resources to look at every issue that may come up as a 

part of an examination and their approach, therefore, is more riskbased, more risk-focused. 

One of the key ingredients in determining the extent to which 

risks exist comes from complaints and concerns that they might 

hear. That will trigger to them a potential problem, that will give 

them an opportunity to review that problem, see to whatever extent it exists, and to deal with it. 

Chairman SHELBY. As we all know, we are dealing with a young 

population as a rule, a very vulnerable population, considering they 

know they are going to be in harm’s way, more than likely. So the 

tendency would be—I think Senator Allard or somebody alluded to 

the fact—to buy insurance to protect their families, protect their 

loved ones. Probably more so than the average person, would you 

think? 

Mr. HILLMAN. I would think so. 

Chairman SHELBY. I think we owe them more than we have 

done. 

Senator Sarbanes, do you have any other questions? 

21

Senator SARBANES. No, I know we have another panel coming, 

Mr. Chairman. 

Chairman SHELBY. A very important panel, too. 

Senator SARBANES. Yes, it is an important panel. These—have 

been very helpful and I am sure we are going to stay in close touch 

with them as we proceed on this issue. 

Chairman SHELBY. Senator Allard has an observation. 

Senator ALLARD. The point I wanted to make is this—they are 

not up front about selling life insurance. 

Chairman SHELBY. Yes. 

Mr. HILLMAN. Right. 

Senator ALLARD. They make the argument they are selling an 

IRA account and it is in a savings account. 

Mr. HILLMAN. Right. 

Senator ALLARD. In reality, it is a partial life insurance policy 

that they are selling. 

Mr. HILLMAN. And what you are finding also, Senator Allard, is 

that the way in which the premiums on these policies are being allocated in the earlier years, the years that servicemembers are likely to make payments, a significant portion of those premiums go 

toward the high-cost insurance. A very limited portion go toward 

the savings fund. Only in the out years do the maximum portion 

of the premiums go toward the savings funds, and of course that 

is when the servicemembers, for their own personal reasons, likely 

have dropped out. 

Senator SARBANES. Is there not information from the companies, 

like internal memos and so forth, where they are relying in fact on 

these sales items not being carried through to get the benefit in the 

later years? It is all part of their calculation as to how to make a 

much larger profit out of what they are doing; is that not correct? 

Mr. GOEBEL. Yes, Senator, in our report we quote from some of 

the internal memos that were obtained through depositions in a 

previous court case, where one of the company officials was attempting to overcome objections within his own company as how 

can their firm could sell this and promise this high rate of return 

that is not feasible. And he told them: ‘‘No, no, do not worry about 

it, we won’t really ever have to pay that amount out, 40 percent 

will drop out in the first year.’’ And so the products, the way they 

were structured and designed seemed almost deceptive to us. 

Chairman SHELBY. I personally believe that companies that are 

doing business this way, as you describe, exploiting our soldiers, 

should be banned or something. You know, I do not know exactly 

how we are going to do it, but we are going to look seriously, Senator Sarbanes and I working with Senator Enzi and others, Senator Allard, on legislation. 

Thank you so much, Mr. Hillman, you and your other people at 

the Government Accountability Office. As usual, you have done 

great work. 

Mr. HILLMAN. Thank you. It has been our pleasure. 

Chairman SHELBY. We are going to call up the second panel. Mr. 

John Molino, Deputy Under Secretary of Defense for Military Community and Family Policy, U.S. Department of Defense; Ms. Lori 

Richards, Director, Office of Compliance, Inspections, and Examinations, the U.S. Securities and Exchange Commission; Ms. Mary 

22

Schapiro, Vice Chairman and President, Regulatory Policy and 

Oversight, National Association of Securities Dealers; and Mr. John 

Oxendine, Insurance and Safety Fire Commissioner for the State of 

Georgia. 

I want to welcome all the members of the panel. Your written 

testimony will be made part of the hearing record of the Committee 

in its entirety. We would like for you to sum up your top points 

and your views and observations here, where we will have a chance 

this morning to have a dialogue with you. 

Mr. Molino, we will start with you. 

STATEMENT OF JOHN M. MOLINO

DEPUTY UNDER SECRETARY OF DEFENSE

FOR MILITARY COMMUNITY AND FAMILY POLICY

U.S. DEPARTMENT OF DEFENSE 

Mr. MOLINO. Thank you, Mr. Chairman. Thank you for having 

this hearing and for the opportunity to express three basic sentiments and then, with your indulgence, I have been making notes 

all throughout the first panel and would like to say a few things 

in that regard. 

First, I want to express the Department’s appreciation to the 

Committee for the interest you have taken in the well-being of our 

troops and their families by holding this hearing and by probing 

into the quality of the products targeted for sale to them. 

Second, I want to express the Department’s eagerness to collaborate with those who share our goals and are not motivated by 

maximizing their profits at the expense of our servicemembers and 

their families. 

And finally, I want to express the Department’s commitment to 

maintain the effort to do what is right in this regard and in the 

best interests of those men and women who selflessly serve to protect the freedom that most of us enjoy and, unfortunately, too 

many of us take for granted. 

We want our troops to be informed consumers with access to 

quality products both on and off our military installations. Working 

with the Congress, the individual States, regulators, and other concerned entities, I believe we can achieve this goal. 

Now, all that I have said might be empty rhetoric, and Senator 

Sarbanes rightly cited a series of reports and recommendations 

that apparently fell on deaf ears across Administrations and across 

sessions of Congress. Soon after I came to the current position I am 

in, in the second half of 2001, my staff brought to me this historic 

record that has been cited frequently. I asked many of the same 

questions that you people have asked today—how could this have 

gone on so long, how could this be going on today? 

Chairman SHELBY. But it is. 

Mr. MOLINO. Yes, sir it is. What we did was we began revising 

policy, staffing that policy. And of course, when you begin to staff 

policy within the Pentagon, it does not stay within the Pentagon. 

We reached out to several Government agencies, we reached out to 

nonprofits to develop an education program which is now having an 

impact, and the statistics are showing us that there is a dramatic 

decrease in the number of servicemembers who report having difficulty making ends meet or paying their bills. We cooperated, inVerDate 0ct 09 2002 17:35 May 18, 2007 Jkt 000000 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 S:\DOCS\1117.TXT SBANK4 PsN: KEVIN
23

deed, with The New York Times reporter who did that wonderful 

expose ́. We have cooperated with the GAO and others in Government, as Senator Schumer has suggested we should do. 

And what are the results to date? We are not there yet, by no 

means. There have been several enforcement actions, most notably 

at Fort Benning, Georgia, which have come to public attention. 

There has been legislation that we find, frankly, very helpful. 

There has been collaboration with States and nonprofits. And this 

has occurred despite enormous pressure from the insurance industry. I am happy to report, however, that many of the letters I received from Congress initially saying why are you being so tough 

on the insurance industry have now shifted to tell me that I am 

not being tough enough. And I welcome those letters. 

We are still, unfortunately, under a restriction imposed by the 

Congress that tells me that I cannot revise my regulations in this 

regard without first giving 30 days’ notice, and I presume that is 

to allow those who do not share our opinions of moving forward 

with reform to advise you of why these are bad ideas. 

We welcome the offers of help from the Hill. We want to cooperate in every way. Many of the actions recommended by the GAO, 

we have already taken, and our other actions in the process are 

consistent with the GAO’s report and their recommendations. We 

endorse the GAO’s recommendations as they deal with State regulators and the suitability standards. We would welcome that kind 

of guidance. 

My commitment is where the Department of Defense is the problem, we will become part of the solution. We welcome Congress’s 

help in allowing the good work we are doing on base and we welcome anything you do to allow that to extend off the installation, 

outside the gate. 

Why hasn’t DoD nor the Congress acted sooner than beginning 

a few years ago? I cannot answer the question. I suspect there are 

reasons, but I would submit to you that none of those reasons are 

acceptable. 

Let me end by restating one salient point. This is an issue that 

I think is on the road to a solution primarily because the Department of Defense chose to turn over some rocks that had been sitting dormant for many years. We welcome the airing that this 

issue is getting. We welcome the help of a legislative nature, of a 

regulatory nature, from our nonprofit partners, from Congress, and 

from those who share our interests. 

I would be happy to entertain your questions, Mr. Chairman. 

Chairman SHELBY. Ms. Richards, on behalf of the Securities and 

Exchange Commission. 

STATEMENT OF LORI RICHARDS

DIRECTOR, OFFICE OF COMPLIANCE,

INSPECTIONS, AND EXAMINATIONS

U.S. SECURITIES AND EXCHANGE COMMISSION 

Ms. RICHARDS. Thank you. Chairman Shelby, Members of the 

Committee, I am pleased to appear before you today to testify on 

behalf of the SEC and to express the Commission’s views with respect to the GAO’s report. My testimony today will address those 

portions of the GAO’s report that deal with securities products. 

24

The Commission strongly believes that our servicemen and servicewomen must be protected from illegal and abusive practices in 

the sale of securities. Over the last year, the Commission and its 

staff have undertaken a comprehensive program to address such 

practices. Our program has included enforcement activity, extensive examination activity, including two examination sweeps, close 

coordination with the Department of Defense and the NASD, and 

finally, investor education. 

My written testimony summarizes all of these actions in some 

detail, so I will just touch on them this morning. 

First, the Commission brought an enforcement action against 

First Command Financial Planning, a broker-dealer that, as you 

heard this morning, specializes in the sale of securities products, 

namely contractual plans or also called periodic payment plans, to 

military personnel. The Commission’s enforcement action ordered 

First Command to cease and desist from illegal and abusive sales 

practices in the sale of those securities and also included an order 

to pay $12 million, $5.2 million in restitution to military customers 

and the remainder, importantly, to fund an investor education program for military members and their families, to be administered 

by the NASD. 

Second, we have also mobilized our troops on this issue. The 

Commission’s examination staff has conducted numerous examinations of broker-dealers that sell securities to military personnel. 

SEC exam staff initiated two separate risk-targeted examination 

sweeps, one focusing on the sales of mutual fund contractual plans 

or periodic payment plans, and the other examination sweep focusing more generally on the sales of securities products to military 

personnel. The examination sweeps included on-site reviews of 

broker-dealer firms serving the military market and visits to these 

firms’ sales offices located in military base communities both in the 

United States and overseas. 

In total, the SEC staff thus far—and I emphasize that our work 

is ongoing—we have examined or are in the process of examining 

about 20 broker-dealer firms with locations near base communities, 

including firms with sales offices near Marine and Navy bases in 

San Diego; near Lackland and Kelly Air Force bases in San Antonio, Texas; near Fort Hood in Killeen, Texas; near the Great Lakes 

Naval Training Center in North Chicago, Illinois; near Rammstein 

Air Force Base in western Germany; near Graffenwoer Army Base 

in eastern Germany; and finally, near Aviano Air Force Base in 

Italy. More examinations are anticipated. 

Third, the Commission staff have worked closely with the Department of Defense and have established a regular liaison with 

the Office of the Secretary of Defense, through which we have 

begun to share information and coordinate our examinations. We 

have also—and this is very important—coordinated our efforts with 

the commands, the local commands of selected bases where we 

have had our examiners go and visit. This coordination is continuing, with the Department of Defense providing us with information that we are using to target our examinations. 

Finally, our staff in the Commission’s Office of Investor Education and Assistance have initiated an investor education program 

directed specifically toward members of the military and their famVerDate 0ct 09 2002 17:35 May 18, 2007 Jkt 000000 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 S:\DOCS\1117.TXT SBANK4 PsN: KEVIN
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ilies. As a charter member of the DoD’s Financial Readiness Campaign, we have assisted in the presentation of financial education 

programs to the military. SEC staff have already conducted several 

financial education workshops on military installations. We have 

also initiated education materials about periodic payment plans 

specifically and published an article in Military Money, a publication that is distributed free in the military community. In all of 

these efforts we have worked closely with the National Association 

of Securities Dealers. 

With respect specifically to the GAO’s report, we strongly agree 

with the GAO’s recommendation that Congress should take legislative action in this area to protect military servicemembers. We recommend that you take steps to address the particular features of 

these plans that make them susceptible to abusive and misleading 

sales practices and excessive fees. 

We strongly agree with the GAO’s recommendation that Congress revisit the law governing mutual fund contractual plans. As 

an alternative to an outright ban on these plans, we believe that 

Congress could consider addressing the excessive sales charges 

which are features of these plans by, for example, reducing the 

maximum allowable load or working with the Commission and the 

NASD on other mechanisms that would provide protection against 

excessive sales loads. 

In addition, in the event that periodic payment plans are not 

banned, securities regulators will consider various means of better 

assuring ourselves that we have adequate information to assess the 

sales of these plans. Should the plans not be banned, we will continue to work with other regulators to ensure that we can have better oversight over their sales. 

In addition, with respect to the GAO’s other recommendation, we 

have already taken action to enhance our information-sharing with 

the DoD, consistent with the GAO’s recommendation, and we will 

continue to work with DoD to help us target examinations. 

More broadly, we look forward to working with this Committee, 

the DoD, the NASD, and other regulators to continue to protect 

members of our military as investors in our markets. 

Thank you. I am happy to answer any questions you have. 

Chairman SHELBY. Thank you, Ms. Richards. 

Ms. SCHAPIRO. As Senator Sarbanes, welcome again to the Committee. You spend a lot of time here. 

STATEMENT OF MARY SCHAPIRO

VICE CHAIRMAN AND PRESIDENT,

REGULATORY POLICY AND OVERSIGHT

NATIONAL ASSOCIATION OF SECURITIES DEALERS 

Ms. SCHAPIRO. Thank you very much. It is very nice to be here, 

Chairman Shelby, Senator Sarbanes, and Senator Enzi. Thank you 

very much for the opportunity to come before the Committee and 

testify about NASD’s efforts to protect members of the armed forces 

from abusive and misleading sales practices. 

This morning, I would like to briefly summarize NASD’s work in 

this area. We have prepared a comprehensive written statement 

and, with your permission, will submit it for inclusion in the 

record. 

26

Chairman SHELBY. Without objection, it will be made part of the 

hearing record. 

Ms. SCHAPIRO. Thank you. 

As you know, Mr. Chairman, America’s men and women in uniform make great personal sacrifices to protect our Nation’s security. They in particular should not have to worry about the honesty 

and the integrity of those who purport to help them make sound 

financial decisions. Yet, thousands of mostly young men and 

women who serve in the military have been disadvantaged by sales 

of investment products called periodic payment plans, or contractual plans. 

In 2003, NASD learned that First Command Financial Planning 

of Fort Worth, Texas, a broker-dealer with many ties to the military, using misleading pitches and improper sales tactics, had targeted and sold more than a half a million of these complicated and 

often extremely expensive products to servicepersons, many of 

whom were young and inexperienced investors. We have responded 

forcefully to end these practices by, punishing those responsible for 

them, ensuring that their victims are recompensed for their losses, 

and establishing an education campaign about investing and saving aimed at military personnel. 

As you heard this morning from GAO, an investor in one of these plans makes monthly payments of as little as $50 for a fixed period 

of time, usually 15 years. The payments are invested in mutual 

funds, and the investor is charged a 50 percent sales load, or upfront fee, on the entire first year’s payments. Payments during the 

remainder of the 15-year term are not subject to sales loads, so 

that the effective sales charge decreases so long as that investor 

can continues to make contributions. However, if the investor stays 

in the plan for more than 45 days, yet fails to make contributions 

over the full 15-year term, he or she can pay a sales charge of up 

to 50 percent of the total amount invested. 

After a thorough investigation, including taking testimony from 

16 current and former First Command employees, reviewing more 

than 25,000 pages of documents, and over 50,000 e-mail messages, 

NASD brought disciplinary action against the firm, in coordination 

with the Securities and Exchange Commission. The firm was, as 

Ms. Richards said, censured and fined $12 million in December 

2004. That amount included restitution to thousands of customers 

who had terminated periodic payment plans after January 1, 1999, 

and had paid effective sales charges greater than 5 percent. 

As of October 18, over $4.3 million had been returned to these 

customers. The remaining funds were transferred to the NASD Investor Education Foundation to be dedicated to the development 

and deployment of comprehensive financial education programs for 

members of the armed services and their families. Working closely 

with the Defense Department and the SEC, we expect to launch a 

multifaceted military financial education program early next year. 

Like any regulator, NASD relies on customer complaints as an 

important source of information about improper sales tactics. Here, 

there were no complaints to NASD. We subsequently learned servicepersons had complained to military attorneys, but those lawyers 

could not relay this information to NASD without specific consent 

from their clients. We therefore support the GAO recommendations 

27

that would facilitate reporting of military investors’ concerns and 

complaints about financial products to the appropriate regulators. 

NASD has designated staff to receive complaints from military personnel and to conduct outreach with DoD to proactively learn of 

issues concerning securities sales. 

Finally, Mr. Chairman, I note that Senator Enzi has introduced 

a bill that would ban the sale of periodic payment plans. His bill 

also recognizes that in situations where an investor is highly dependent upon a broker for advice and guidance, immediate access 

to full information, including the disciplinary history of the broker, 

can be crucial. Learning about your broker’s history after purchasing can be too late. A provision in the bill would allow NASD 

to disclose to investors via the Internet the disciplinary history of 

brokers and firms. Currently we can only disclose this information 

by telephone or in writing or e-mail. Investors are not able to receive the information directly from their search. The bill would 

allow investors to get this crucial information the way they have 

told us they want it—online in real time. Thus far in 2005, 3.7 million online searches were conducted on BrokerCheck, and only 

50,000 over the telephone. Investors clearly prefer to receive their 

information via the Internet. 

NASD supports this bill and appreciates all of this Committee’s 

efforts to protect the financial well-being of our men and women in 

uniform and, indeed, all investors. 

This concludes my statement, and I thank you again for the opportunity to be here and I would be happy to answer any questions. 

Chairman SHELBY. Thank you so much. 

Mr. Oxendine. 

STATEMENT OF JOHN OXENDINE

COMMISSIONER OF INSURANCE,

STATE OF GEORGIA 

Mr. OXENDINE. Thank you very much, Mr. Chairman. My name 

is John Oxendine. I am the Insurance Commissioner of the State 

of Georgia. I want to thank the entire Committee for giving me this 

time to testify. 

I will be testifying on behalf of insurance regulators from all of 

the States which together make up the National Association of Insurance Commissioners. I am also testifying in my capacity as the 

Georgia Insurance Commissioner and will share some unique experiences. 

On behalf of all State regulators, I would like to make three 

points. First, that America’s men and women serving in the armed 

forces are entitled to the same protections under State law enjoyed 

by all other American citizens. Protecting insurance consumers at 

the local level has been a hallmark of State regulation for more 

than a century. Each State has a strong unfair trade practices law 

backed by a dedicated staff that is trained to assist consumers. 

Second, State regulators recognize that those serving our country 

in the military deserve special attention from responsible State and 

Federal officials. We are actively reaching out to the military authorities to educate them about States’ consumer education and 

consumer protection resources and to coordinate with local bases in 

our enforcement activities. 

28

Third, State insurance regulators do support Federal legislation 

that would clarify our authority to regulate the business of insurance wherever it occurs, including military bases both within the 

United States and overseas. We believe that H.R. 458, with some 

minor revisions, would help achieve these goals. 

In Georgia, I have personally been investigating sales abuses involving military personnel and have recovered approximately—or 

proposed $1.5 million in refunds for Georgia’s soldiers alone. And 

that is the first initial wave. We have held hearings, we have listened to sworn testimonies of soldiers stationed in Georgia. Based 

on my investigation, I do have two major concerns. 

First concern is that insurance agents gain access to young soldiers through their relationships with the staff sergeants and that 

young soldiers place too much trust in the agents based on the 

agents’ relationships with their sergeants. Many agents themselves 

are retired sergeants who know their way around the bases and 

know those in charge. Other agents develop relationships with sergeants by being good citizens. They help fund projects related to 

the morale, which of course are needed for our troops. For example, 

insurance agents may provide Thanksgiving turkeys to needy military families or they may sponsor on-base activities for the enlisted 

personnel. 

While not illegal, such favors do generate goodwill between the 

sergeants and the agents. Then, when the agents approach the 

young soldiers, they have an in, because they are friends with the 

sergeants. If a young soldier asks his sergeant about an insurance 

agent who has approached him, he is typically assured that the 

agent is a good guy and trustworthy. In some cases, young soldiers 

come to this conclusion on their own. For example, one soldier testified that he willingly got into the car and rode to a pizza party 

with an agent who he did not know simply because he had seen 

the agent talking to his first sergeant and assumed that the agent 

was trustworthy. 

The problem, of course, is that some agents are not trustworthy. 

Sometimes they sell unsuitable products. Most soldiers already 

purchased the affordable SGLI and may not need supplemental life 

products. These supplemental policies are often sold to soldiers as 

investments rather than as insurance. While it is true that an insurance policy can be one component of an individual’s investment 

strategy, the investment portion of the policy is, in some cases, 

being overemphasized and/or misrepresented. Some soldiers have 

testified that they did not even realize that they had purchased life 

insurance. Some also testified they thought they were opening a 

savings account. 

Second, another concern I have is that nationally there is a culture that discourages military personnel from requesting assistance 

from civilian State agencies, such as insurance departments. In 

Georgia, we have recently shown that this culture can be reversed. 

In conclusion, we all share a commitment to serving insurance 

consumers who are serving our country in the military, and there 

are no easy answers or solutions. To address the problems, I would 

suggest, first, that we educate the NCO’s so that they do not appear to endorse or recommend companies or agents that have provided financial assistance to our enlisted personnel; and second, 

29

that we encourage the NCO’s, the morale and financial counselors, 

and the JAG officers to work with State regulators to educate the 

soldiers and to share information about potentially abusive sales 

practices. 

Thank you, Mr. Chairman, and I will be happy to address any 

questions. 

Chairman SHELBY. Thank you. 

Secretary Molino, you, I believe, said a few minutes ago that we 

were not there—meaning DoD—you are not there yet. But with all 

due respect, 35 years to look under all the rocks? You said we continue to look under the rocks. I think Senator Enzi and GAO have 

found a lot of deep problems on top of the rocks. And we will get 

more into this as we go, but 35 years is a long time. 

Ms. Richards, I want to direct a question to you toward the SEC. 

The dominant retailer of contractual plans has been an SEC-registered broker-dealer subject to the SEC Commission’s inspection 

and compliance regime for almost a half a century. Why did it take 

a series in The New York Times last year to trigger an investigation at the SEC into this company’s deceptive marketing materials 

and sales practice? I understand that NASD had already begun its 

inquiry before the Times investigation was published. We know 

who this is, but it is troubling. 

Ms. RICHARDS. Yes, sir, we had conducted, and the NASD had 

also conducted examinations of this particular firm. 

Chairman SHELBY. We are glad you are doing it, but we wonder 

why it took so long. 

Ms. RICHARDS. Yes, sir. During the course of that examination, 

we had received information from the firm which indicated to the 

examiners a very high persistency rate; in fact, about 80 percent, 

we were told, of investors in the contractual plans maintained 

them for the full 15-year period. That is a pretty significant rate. 

That information, coupled with the fact that we had no customer 

complaints—we did not see any customer complaints either on our 

own records or in the firm’s books and records—led us not to look 

further. It was not until we had early indications from the press 

that in fact the persistency rate, that period of time in which the 

investors——

Chairman SHELBY. The press is doing a good job here. 

Ms. RICHARDS. Yes, sir, a very good job. 

Chairman SHELBY. Give them credit. 

Ms. RICHARDS. Yes, a lot of credit. 

Chairman SHELBY. Maybe not every day, but——

[Laughter.] 

Ms. RICHARDS. We then, based on those inquiries, we went back 

into the firm, and at that point we were able to obtain information 

along with the NASD that led us to conclude that in fact the earlier persistency rates that we had been provided with were not accurate. And in fact, that firm had a much lower rate of investors 

holding the security through the entire 15 years. In fact, we concluded that about 43 percent of the firm’s investors held the security for the full 15-year period. 

The lesson for us, I think, in this examination experience as well 

as in additional examinations we have done more recently of firms 

that sell periodic payment plans is that there really should be—and 

30

we agree with the GAO—there really should be better tools to 

allow securities regulators to see what the actual persistency rates 

are. And we would support requirements for broker-dealers to 

maintain those kinds of books and records and make them available to examiners. 

Chairman SHELBY. Ms. Schapiro, why did the largest retailer of 

contractual plans voluntarily decide last year to stop offering them? 

I understand that this financial services company sold about 90 

percent of all plans in the United States. Given their departure 

from this market right now, what does the future hold for contractual plans? Which mutual fund companies sponsor contractual 

plans and what are the justifications they offer for sponsoring 

plans with such high sales charges? With hundreds of no-load mutual funds available today, it seems to me that a 50 percent sales 

charge would be difficult to justify. It would be out in the marketplace and it should be on the base. I know this is a lot of stuff. 

Ms. SCHAPIRO. That is a multipart question. I probably will not 

remember all the parts, so you should interrupt me. 

Chairman SHELBY. I bet you would. 

[Laughter.] 

Ms. SCHAPIRO. To start at the last part, you are absolutely right, 

there are tremendous alternatives now for investors to a plan such 

as First Command Financial Planning was selling. There are about 

1,300 mutual funds, by our count, that allow you to make monthly 

or periodic contributions of as little as $50, and many of those are 

no-load funds with no up-front costs at all. So to my way of thinking, this is largely a product that has outlived its usefulness, because there are much better, lower-cost alternatives. 

Chairman SHELBY. I think you have to put this in the context 

that these are young soldiers, for the most part, vulnerable, as I 

said earlier, worried about getting in harm’s way—living and 

dying. 

Ms. SCHAPIRO. Right. 

Chairman SHELBY. And so forth. 

Ms. SCHAPIRO. Well, they are not——

Chairman SHELBY. A little different from the ordinary us, everyday. 

Ms. SCHAPIRO. In fact, that made it easier, I think, for these 

broker-dealers to market these plans. This was, as somebody said 

earlier, a captive audience and they had——

Chairman SHELBY. But not an audience to exploit, I hope. 

Ms. SCHAPIRO. No, absolutely not. This is an audience that deserves the highest levels of protection in every aspect of what they 

do, whether it is insurance purchases or securities sales or anything else. 

I believe First Command stopped selling the product as a result 

of the enforcement actions taken by the NASD and the SEC. They 

realized that this is not a product that is suitable for the vast number of young, inexperienced investors to whom they were selling it, 

particularly given the fact that so few were able to maintain their 

contribution levels over the entire 15-year period, which was the 

only way this plan made any sense for these young people. 

Chairman SHELBY. Mr. Oxendine, what is the status of the investigations under way by various State commissions? I know you repVerDate 0ct 09 2002 17:35 May 18, 2007 Jkt 000000 PO 00000 Frm 00034 Fmt 6633 Sfmt 6633 S:\DOCS\1117.TXT SBANK4 PsN: KEVIN
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resent the State of Georgia, but you also are representing your fellow commissioners here at the table today. That is, examining the 

activities of the companies that market to military members. 

Mr. OXENDINE. Yes, Mr. Chairman. I actually am the lead investigator, or lead State, on a multistate investigation into numerous 

different companies. 

Chairman SHELBY. But you come from a State with some huge 

military bases. 

Mr. OXENDINE. We do. We have seen a lot of activity both at Fort 

Benning, Fort Steward, and a little less at Fort Gordon. We were 

the first State to initiate an investigation. Therefore, when the 

NAIC decided to do a multistate national investigation, Georgia 

was asked to chair that, and we are chairing that. We are actually 

very close to wrapping up and, hopefully, settling the first of those 

investigations that we started. That was with American Amicable. 

We are working with that. The other investigations with several 

other companies are ongoing. 

Chairman SHELBY. The GAO, among other things, reported here 

today that some States—I do not know about Georgia, but maybe 

some others—are finding that the products being sold to military 

members do not actually comply with your own State insurance 

laws. How did such products obtain approval originally, and what 

are the individual State commissioners doing to ensure that only 

legal products are sold? Has something fallen through the cracks 

here? 

Mr. OXENDINE. What has happened is one product, Horizon Life 

was a product that was offered, that product has been removed 

from the streets in Georgia and in several other States. But they 

were often filed with our offices as separate products. And where 

as separate products there was nothing wrong with them, when 

they were bundled into a package, then we had concerns with them 

and they started to violate various portions of State laws. They 

were not—there was no indication that they would ever be sold as 

a package. In the civilian market, you would have people starting 

to complain. What happened in the military community, people did 

not complain. 

Chairman SHELBY. This is a captive audience, too, is it not? 

Mr. OXENDINE. And they know soldiers are not going to call their 

State government. We found that that was not happening. And the 

military was not calling their State government. That can be 

changed. Fort Benning, Georgia, for example, we share confidential 

documents together, we work together on sensitive issues, and have 

a great relationship, and I think that relationship can be done 

throughout the country and I think the Senate can help promote 

that. 

Chairman SHELBY. Thank you. 

Senator Sarbanes. 

Senator SARBANES. Thank you, Mr. Chairman. I see a vote has 

started so I will be very brief, because I know you will need to 

draw to a conclusion. 

First of all, I want to thank the panel. It has been very helpful 

testimony. I have just a couple of questions I want to put. 

I would say to NASD and the SEC, I commend you for the actions you took. I mean, this company found it could push the Air 

32

Force around but it could not push NASD and the SEC around. 

You have had to deal with some pretty big players in the past, in 

terms of meting out sanctions and punishments. So, I mean, I 

think they came up—you know, they finally got into a league 

where they could not just rely on old contacts and to get people to 

back off of trying to curb these practices. 

Mr. Molino, why does the military allow pay allotments to be 

used to pay for private-sector products? Am I correct that these recruits could do a check-off here and the money would be withheld 

and sent to the company for these products? Is that correct? 

Mr. MOLINO. That is correct, Senator. 

Senator SARBANES. Why do you allow that? 

Mr. MOLINO. The allotment system has been around for a very 

long time. 

And the reason for that is in recognition of the nature of military 

duty, there are many deployments, there are many times even 

when you are not deployed, you are off training. And when the bills 

come into the mailbox, without the allotment system what you 

would find are people missing payments of their bills because they 

are not writing the checks. 

Senator SARBANES. Who can get on the allotment system? 

Mr. MOLINO. What we found, Senator, was that the abuse of the 

allotment system was the nature of the problem—thanks to the 

people who did the investigations—where salesmen had actually 

worked out deals on some installations where they were delivering 

allotment forms to finance offices and getting them processed. 

Senator SARBANES. Well, how could that be happening? How can 

the military allow that practice? 

Mr. MOLINO. That is in direct violation of existing policy, and 

that should not have happened. And where it has been exposed, it 

has been stopped. But you are exactly right in that the allotment 

system is provided as a aid and a resource for our servicemembers 

that has been abused by some of these predator salesmen. 

Senator SARBANES. It seems to me, I mean, I am supportive of 

what Senator Enzi is trying to do. Those are steps beyond. But 

there are a lot of existing regulations or practices that the military 

has which have not been enforced—they have not been implemented here—which would have at least avoided some of these exploitations that have taken place. Am I correct in that perception? 

Mr. MOLINO. You are correct, yes, Senator. 

Senator SARBANES. I mean, that could be done immediately. 

Mr. MOLINO. It should have been done years ago. And in fact, our 

inquiries into the status of this undertaking and this activity have 

revealed these violations that we have addressed and attacked. 

Senator SARBANES. Do you challenge the right of the State regulators, their authority over insurance sales on military bases? Or 

do you think—I am asking Mr. Molino, but it is a point that Mr. 

Oxendine raised—or is it your view that they have the authority 

to regulate these——

Mr. MOLINO. It is our view that there is sufficient authority out 

there to permit that. And as Mr. Oxendine points out, Georgia 

being a good example, that with a little communication we realize 

that these barriers are not nonexistent, that we can actually work 

together and collaborate, share information. 

33

Senator SARBANES. Is it your perception that the military is any 

way inhibiting or putting up roadblocks to the State regulators’ exercise of authority? 

Mr. MOLINO. I would agree with what I think the GAO’s conclusion was; that if that is occurring, it is occurring out of a misinterpretation of the existing statute and regulations and that we clear 

that up as we clarify with our attorneys. 

Senator SARBANES. Well, could you go back from this hearing 

and start clarifying that immediately? You do not need any authority to do that. 

Mr. MOLINO. I think it is fair to say that we are already engaged 

in that. And I think my colleagues would agree. 

Senator SARBANES. Why do we not intensify it a little bit so the 

State regulators can get on the job? 

Mr. MOLINO. Happy to do it, Senator. 

Senator SARBANES. Mr. Chairman, I have a lot of other questions, but I will defer to my colleague. 

Chairman SHELBY. Keep the record open on this, if we would. 

Senator Enzi. 

Senator ENZI. Mr. Chairman, I was just going to make a request 

that you keep the record open. 

I have a number of questions. This is an outstanding panel and, 

as you know, my accounting background tends to make for fairly 

detailed questions and those usually result better in written answers———than they do in spoken answers. So if you will leave 

the record open and I can submit questions. 

Chairman SHELBY. We respect that. 

I want to say before—we have a vote on the floor and I am going 

to recognize Senator Schumer next—but I want to say again, Senator Enzi, that your leadership in this area is very much appreciated. And this has been noted by us up here, your colleagues, but 

also everywhere else today. 

Senator ENZI. Thank you. 

Chairman SHELBY. Senator Schumer. 

Senator SCHUMER. I am not an accountant, so I will ask the more 

direct questions. Lawyer. Never practiced. Was elected to the Assembly instead of practicing. 

I know Senator Shelby touched on this, Mr. Molino, but I am just 

amazed that this went on for so long and it took a newspaper to 

uncover it. What have you done to prevent the next scandal from 

occurring so it does not go on another 30 or 35 years and we need 

another newspaper to uncover it? I mean—and not just on insurance or even mutual funds, but all these kinds of things. Payday 

lending is an example. 

Mr. MOLINO. Senator, I am not an accountant and I am not a 

lawyer, I am a soldier. But I grew up in Brooklyn, so that might 

help. 

Senator SCHUMER. Oh, well. I think, then, you are doing a great 

job. 

[Laughter.] 

What high school did you go to, Mr. Molino? 

Mr. MOLINO. I went to Xavier, sir, on 16th St. 

Senator SCHUMER. Oh, Xavier is a great school. 

34

Chairman SHELBY. And he wants to know how many family 

members you have voting. 

[Laughter.] 

Senator SCHUMER. That is why the Chairman has been so successful for so long. 

Mr. MOLINO. Mr. Chairman, I suspect the Senator’s success relies on the fact that he already knows how many family members 

I have voting. 

[Laughter.] 

Senator, you are asking me to predict something that is very, 

very tough to get at. 

Senator SCHUMER. I just want to know what steps the military 

has taken to prevent the next problem. 

Mr. MOLINO. Let me just say one thing about—I alluded to it in 

my oral statement, but the conversations that I have had with 

Diana Henriques, who is The New York Times reporter who wrote 

the outstanding series of articles, began not with ‘‘I think you have 

a problem, let me ask you some questions,’’ it began with something akin to ‘‘I understand you have uncovered some problems and 

I want to write about it.’’ And we then opened a very aggressive 

dialogue to ensure that she had access and information so that she 

would be able to reflect an honest portrayal of where we were. 

What I said in my statement is I cannot and, Senator Sarbanes, 

I will not even begin to apologize for 35 years of neglect in this regard. I have a frustration. I have been in this job since June 2001, 

and I am frustrated that we have not moved further than we have. 

In the oral statements of my colleagues here, I counted 13 references to close collaboration or coordination with the Department 

of Defense. Not a very lucky number, but I am proud of it. That 

has come about because the Department said we have a problem 

here, we need to address it. 

Senator SCHUMER. Can you—I am sorry to interrupt——

Mr. MOLINO. No, no, I understand the time limitation. 

Senator SCHUMER. —but, first, we are both from Brooklyn, we always interrupt one another——

Mr. MOLINO. Absolutely. 

Senator SCHUMER. But second, can you please tell me specifically 

what steps have been taken to prevent the next scandal from happening? Do you go monitor now what is happening? Do you survey 

soldiers at random as to what kind of products they are buying? 

Do you check about those products? 

Mr. MOLINO. We do. We post on our website those who have been 

banned, whether their company or the agent has been banned. We 

have a policy that is about ready to be implemented, once we get 

the approval and we pass the 30-day waiting period imposed by the 

Congress, that will require all individuals who have been solicited 

to complete a questionnaire—who solicited you, what is the quality 

of that solicitation, do you think you were pressured? 

Senator SCHUMER. And that would be given out randomly, even 

to bases that——

Mr. MOLINO. No, sir, it will be given out in 100 percent of the 

cases. It is a requirement——

Senator SCHUMER. Not in the—100 percent of the soldiers? 

35

Mr. MOLINO. Yes, sir. It will be a requirement for someone, to 

solicit on an installation, to, at the end of that solicitation, leave 

the form with the individual. And that form does not get returned 

through the agent, it gets returned through the commanding office. 

Senator SCHUMER. Would you support certifying representatives 

who are selling products? 

Mr. MOLINO. Absolutely. 

Senator SCHUMER. That is good. 

Mr. MOLINO. Yes, sir. 

Senator SCHUMER. That is very good. 

Mr. MOLINO. Absolutely we would do that. 

Senator SCHUMER. Okay. That would be a dramatic change. 

Mr. MOLINO. And, sir, insofar as payday lending, which is my 

next campaign that we are currently undergoing, I can assure you 

that I get besieged with requests from individuals who would like 

to be on my calendar to tell me how noble a business that is and 

how they are much better than credit unions and banks. I do not 

believe that is the case. I am not on their Christmas list and they 

are not on mine. 

Senator SCHUMER. Right. Okay, let me ask you this. You talked 

about coordination, you mentioned 13 times. Is there a set system 

in place? Because we are hearing from some other agencies that 

they think coordination could be better. 

Mr. MOLINO. Yes, sir. The GAO, in fact, has said that. 

Senator SCHUMER. I know. 

Mr. MOLINO. That coordination could be better. And I suspect——

Senator SCHUMER. So what can you do to make that better so 

there is real coordination between your colleagues here and everybody else in the military? We do not expect the military to be financial experts. We do expect them to rely on the financial experts 

in Government to protect the soldiers. 

Mr. MOLINO. You are exactly right. We have memorandums of 

understanding with upward of 30 private agencies and governmental agencies to enhance our education effort. And I think, 

through the memorandum of understanding and the memorandum 

of agreement systems, we can secure that. And we endorse the 

GAO’s recommendation that others who are experts advise us on 

suitability of these products. We welcome that advice. 

Senator SCHUMER. And you will do that as part of the certification process as well? 

Mr. MOLINO. Absolutely. 

Senator SCHUMER. That is good. 

Mr. MOLINO. Yes, sir. 

Senator SCHUMER. Let me ask you this. Again, you are not a lawyer. Do we expect any—or have criminal laws been violated and 

would we expect, from your knowledge—I know we do not have 

U.S. attorneys here, we do have some of the people who might refer 

cases—do we expect any criminal indictments coming out of this? 

Mr. MOLINO. I cannot answer that, Senator. I know that at the 

installation level the staff judge advocates look to see if there are 

criminal violations that should be recommended to the commands. 

And there have been cases—Fort Benning, as Mr. Oxendine cited—

where nonjudicial punishment in the Uniform Code of Military JusVerDate 0ct 09 2002 17:35 May 18, 2007 Jkt 000000 PO 00000 Frm 00039 Fmt 6633 Sfmt 6633 S:\DOCS\1117.TXT SBANK4 PsN: KEVIN
36

tice was employed on some of the situations that he cited, 

where——

Senator SCHUMER. So it is a possibility; you just cannot comment 

on it, is what you are saying? 

Mr. MOLINO. I think if you break the law you deserve to get punished in that way. 

Senator SCHUMER. And is that a possibility that that could happen in some of these cases? 

Mr. MOLINO. I suspect that is always a possibility, yes, sir. But 

I would not want to prejudice——

Senator SCHUMER. I am not asking a specific case, I am asking—

you do not prejudice. I can tell you that much as a lawyer, I know. 

Mr. MOLINO. The bottom line is I do not want anybody to get off 

just because I prejudiced a statement that says they probably will 

be punished. 

Senator SCHUMER. Okay. Would any of the other panelists—Ms. 

Richards, Ms. Schapiro—want to comment on the possibility? Have 

potential criminal laws been broken here? 

Ms. RICHARDS. The SEC, as you know, Senator, is a civil enforcement agency. 

Senator SCHUMER. I know. But you do referrals. 

Ms. RICHARDS. We do. As an examiner, I am not aware of any 

ongoing criminal probes. 

Senator SCHUMER. And Ms. Schapiro. 

Ms. SCHAPIRO. I am not aware of any ongoing criminal probes. 

We do have several investigations still ongoing within the NASD 

of other brokerage firms. 

Senator SCHUMER. Let me ask you to just look into that, to see 

if there are criminal violations. Because if there are, I mean, as everybody here said, you read these stories and it just wrenches your 

guts out. And if somebody broke the law, they should be punished 

for it. I mean, it will set an example as much as the prophylactic 

things we are doing in the future. So, I would make a request that 

you redouble your efforts and see if that has happened and then 

make the appropriate referrals—which you do, both agencies do. 

Ms. RICHARDS. Absolutely. 

Senator SCHUMER. Are you both willing to do that? 

Ms. RICHARDS. Yes. 

Ms. SCHAPIRO. Yes. 

Senator SCHUMER. Thank you, Mr. Chairman. 

Chairman SHELBY. Our time on the floor is about gone, Senator. 

I hope they will wait for Senator Schumer, and I will tag along. 

Thank you very much for appearing here today. I believe it has 

been an informative panel, and this gives us some more insight as 

to why we need to correct this problem. Thank you. 

[Whereupon, at 12:04 p.m., the hearing was adjourned.] 

[Prepared statements and response to written questions supplied 

for the record follow:] 

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PREPARED STATEMENT OF JOHN M. MOLINO

DEPUTY UNDER SECRETARY OF DEFENSE, MILITARY COMMUNITY & FAMILY POLICY

U.S. DEPARTMENT OF DEFENSE

NOVEMBER 17, 2005

Mr. Chairman, Members of this distinguished Committee, thank you for the opportunity to be here today and for your interest in protecting the financial wellbeing of the men and women who serve in our armed forces. 

Allow me to provide the Committee with historical information on the personal 

commercial solicitation issue, and to address what the Department has done, and 

intends to do to improve commercial solicitation oversight and enforcement. I will 

focus on the sale of supplemental life insurance and financial products on Department of Defense (DoD) installations. 

Servicemembers have long been seen as targets for charlatans, con men and others who seek to steal their money with deals ‘‘to good to be true,’’ or presented under 

false pretenses. Why is this? 

Servicemembers are typically young and inexperienced. They are often motivated 

by idealism and cannot imagine that their fellow citizens and, in some cases, their 

senior NCO’s, officers, and military retirees would take advantage of them. 

They are often earning a steady paycheck for the first time and, though their pay 

will never make them rich, it is often far more money than they have ever laid their 

hands on in their lives. Those who enlisted are motivated to serve. They also tend 

to be concerned about the future—providing for themselves and their families. 

The confluence of these otherwise noble characteristics makes servicemembers 

subject to swindlers and fast-talking salesmen and women. 

When we permit someone to sell a product to some degree we provide the appearance of an endorsement of that product and the behavior of the salesperson. 

As you know, members of the military have the opportunity to purchase up to 

$400,000 worth of term life for a reasonable premium of $26 per month. For many—

indeed most—military members, $400,000 is a sufficient amount of insurance, especially if combined with Thrift Savings Plan (TSP) participation or another savings 

plan. I will speak more of our Financial Readiness program later. For now, let me 

say that a better informed Servicemember/consumer will be able to make wiser decisions about the products he or she buys. 

We must provide a degree of protection that ensures we do not facilitate deceptive 

practices on the installation. We also must provide training and education that better equips our members and their spouses to a ‘‘smell a rat’’ outside the gate. 

The Department’s concern with the sale of insurance and investment products on 

DoD installations dates back to the Vietnam War era. At that time, problems with 

private sector associations using their quasi-military status to sell life insurance 

products led to establishment of the first DoD personal commercial solicitation policies. These included DoD Directive 1344.7, ‘‘Personal Commercial Affairs,’’ dated 

July 1, 1969 and DoD Directive 1344.1, ‘‘Solicitation and Sale of Insurance on Department of Defense Installations,’’ dated August 31, 1977. These directives were 

later combined into our current DoD Directive 1344.7, ‘‘Personal Commercial Solicitation on DoD Installations,’’ dated February 13, 1986. Though these directives established important rules and prohibited practices concerning on-base solicitation, 

there is ample evidence to prove they have not been easily or consistently enforced. 

1996 USAREUR IG Report: In 1996, the US Army Europe (USAREUR) Inspector 

General (IG) investigated insurance solicitation activities by the Noncommissioned 

Officers Association (NCOA) and Academy Life Insurance Company. The IG found:

• Senior NCO’s (NCOA members) improperly used their authority to require soldiers to attend assemblies/meetings for the purpose of signing up new NCOA 

member in violation of Army USAREUR Regulations. 

• NCOA and Academy Life improperly conducted commercial solicitation during 

duty hours. 

• NCOA improperly received preferential treatment over other nonprofit organizations in violation of Army and USAREUR regulations. 

• The chain of command improperly pressured subordinates to join NCOA. 

• NCOA/Academy Life improperly conducted deceptive solicitation practices in violation of DoD Directive 1344.7 and Army and USAREUR Regulations. 

• NCOA/Academy Life improperly used the military postal system for commercial 

or business purposes in violation of USAREUR Regulations.

In September 1998, as a result of USAREUR IG investigation, Academy Life and 

its agents were barred from conducting commercial activities on DoD installations 

worldwide for a period of 3 years. 

63

1999 DoD IG Report: In January 1998, the Department of Defense Inspector General (DoD IG) was asked to evaluate the Department’s enforcement of personal commercial solicitation policy. The DoD IG visited 11 installations and issued a report 

in March 1999. The IG found policy violations at all 11 installations. The DoD IG 

found:

• Quasi-military associations failed to disclose their relationship to insurance

companies and in some cases, these associations were allowed to make group presentations to military personnel in order to collect personal information for followon solicitation. • Insurance agents were permitted to make ‘‘financial education’’ presentations at 

four installations in direct violation of Department policy. • The Services failed to provide sufficient training on insurance to servicemembers. • Commercial sponsorship, where funding, goods, or services is offered to installation Morale, Welfare, and Recreation activities in return for public recognition or 

advertising promotions, was being used to foster commercial solicitation. • Administrative personnel at two Army installations accepted allotments forms directly from insurance agents, rather than requiring they be submitted by the military member.

The DoD IG recommended the Assistant Secretary of Defense (Force Management 

Policy) establish a task force to:

• Develop consistent controls to administer and enforce the policies regarding commercial solicitation process. 

• Develop the approval and oversight procedures when allowing outside organization personnel from military associations to conduct financial training.

Cuthbert Report: On May 15, 2000, Brigadier General Thomas Cuthbert, U.S. 

Army (Ret), an employee of the Science Applications International Corporation 

(SAIC) on contract with the Department, issued a report on solicitation practices on 

DoD Installations. The Cuthbert Report validated the findings of the DoD IG Report 

and highlighted 30 years of deceptive commercial solicitation practices. The 

Cuthbert Report found:

• DoD policies are routinely violated. 

• DoD allotment systems facilitate the violation of insurance solicitation policies. 

• A coercive and high pressure sales environment remains in effect. 

• Deceptive insurance sales practices continue unabated. 

• Deceptive and coercive solicitation has a clear and present adverse effect on morale, discipline, and unit integrity. 

• Current personal financial education programs are inadequate. 

• Insurance companies have unlawfully retained insurance premiums from cancelled allotments. 

• State insurance regulators do not effectively protect military consumers. 

• On-base insurance sales provide no value added to war fighting capacity.

The Cuthbert Report recommended:

• Eliminate on-base insurance solicitation. 

• Improve consumer protection surrounding the allotment system. 

• Conduct an inquiry into the disposition of unlawfully withheld allotment payments. 

• Improve personal finance training in all enlisted schools. 

• Establish minimum standards for all personal finance training conducted by nonDoD personnel.

DoD Commercial Solicitation Working Group: In response to the DoD IG and 

Cuthbert reports, the Assistant Secretary of Defense (Force Management Policy) established a DoD commercial solicitation working group in January 2001. The group 

recommended:

• Establish commercial solicitation points of contact for each military service. 

• Establish new policy to control third-party financial counseling. 

• Establish new policy to limit the use of commercial sponsorship to foster commercial solicitation.

2001 DoD IG Report: In response to the Cuthbert Report finding regarding insurance premiums being unlawfully retained by insurance companies following cancellation of a policy, the Department requested the DoD IG conduct an audit on

insurance allotment premium refund processing procedures. The IG’s report found: 

Four Defense Finance and Accounting Service (DFAS) sites did not consistently 

process insurance company requests to cancel allotments and one DFAS site would 

not accept returned allotments. 

64

In response, DFAS issued standardized guidance requiring the different sites to 

stop allotments when a properly documented request is received from an insurance 

company and to accept returned allotment payments. 

Financial Education Policy: In April 2002, the Under Secretary of Defense (Personnel and Readiness), issued a policy memorandum that established parameters 

for nongovernmental organizations to provide financial education training to 

servicemembers. The policy directed that any participating non-Federal entity must 

be qualified as a 501(c)(3) nonprofit organization and that the training be approved 

by a presidentialy appointed, Senate-confirmed civilian official of the military department. The policy memo also reemphasized the existing prohibition against 

agents of insurance or financial product companies presenting financial training. 

Initial Revision of DoD Directive 1344.7: After nearly a year of revision and information coordination, the Department forwarded proposed changes to DoD Directive 

1344.7 to the military services for coordination and comment. Proposed policy 

changes included a requirement for junior enlisted personnel to obtain approval 

from their chain of command to purchase supplemental commercial life insurance. 

The insurance industry strongly opposed this proposed change and sought the involvement of Congress to block the reform effort. In November 2003, Public Law 

108–136, Sec. 586, required the Department provide Congress 30 days notification 

prior to implementing any changes to DoD personal commercial solicitation policy. 

To try to maintain the momentum, the Department also agreed to conduct two public forums. The first, to obtain public comment on existing DoD personal commercial 

solicitation policy, and the second, to obtain comment on any proposed changes. 

Financial Readiness Campaign: In May 2003, the Department, in cooperation 

with the Department of the Treasury and the Securities and Exchange Commission, 

initiated a DoD Financial Readiness Campaign. The campaign established agreements with Federal agencies and nonprofit financial education organizations. 

Through the expertise and donated resources of these Federal agencies and nonprofit organizations, the Department has extended the capability of the Military 

Services to train and counsel servicemembers and their families on a range of personal financial issues, to include insurance and financial products. We have included 

a list of over 20 of the partner organizations on our quality of life portal: 

www.militaryhomefront.dod.mil, under ‘‘Financial Readiness.’’ Examples of these 

collaborations include: The American Savings Education Council, which has provided over 57 public service announcements to the Armed Forces Radio and Television Service for broadcast overseas, and the InCharge Institute, which in collaboration with the National Military Family Association, has distributed 250,000 copies 

of their Military Money Magazine (developed for the military spouse) through Defense Commissaries and other high traffic areas on military installations. 

First Public Forum: The first meeting to seek public comment on existing DoD 

personal commercial solicitation policy was held on August 22, 2003. Fifty-nine persons, mostly representatives from insurance and financial services companies, submitted comments. The primary themes of comments received were:

• DoD’s personal commercial solicitation policy is basically sound but needs to be 

better enforced. 

• DoD should not regulate insurance and financial products because that is a State 

and Federal regulator responsibility.

Commercial Sponsorship Policy Revision: In March 2004, the Principal Deputy 

Under Secretary of Defense (Personnel and Readiness) issued new MWR program 

commercial sponsorship policy. An April 2004, policy memorandum directed the 

military departments to decline commercial sponsorship offers that do not reflect favorably upon DoD. In addition, this memorandum directed the military departments 

to ensure commercial sponsors do not use their sponsorship to obtain personal contact information for future solicitation without the written consent of the person to 

be solicited. 

First GAO Audit: In March 2004, the Chairmen of the House Government Reform 

Committee and the House Armed Services Committee requested the Government 

Accountability Office examine DoD and military services policies and procedures for 

the marketing and sale of life insurance policies to military personnel and the processing of financial allotments for military personnel. This audit was requested in response to insurance industry complaints, which alleged officials at Fort Lewis and 

Fort Bragg had deliberately failed to process hundreds of life insurance allotments 

and military personnel were being directed to cancel their supplemental commercial 

life insurance. During this audit, the GAO conducted site visits at Fort Lewis, 

Washington, Naval Training Center Great Lakes, Illinois, Marine Corps Base Camp 

Pendleton, California, Fort Bragg, North Carolina, Lackland Air Force Base, Texas, 

and Fort Campbell, Kentucky. On August 2004, Public Law 108–287, Sec. 8133, proVerDate 0ct 09 2002 17:35 May 18, 2007 Jkt 000000 PO 00000 Frm 00068 Fmt 6621 Sfmt 6621 S:\DOCS\1117.TXT SBANK4 PsN: KEVIN
65

hibited the Department from amending or changing its personal commercial solicitation policies until 90-days after the GAO issued their final report. In its final report, 

issued on June 29, 2005, the GAO could not substantiate the original allegations 

pertaining to Fort Lewis and Fort Bragg, but made three recommendations to improve DoD personal commercial solicitation policy and two recommendations to improve insurance allotment coding and processing. This audit did not examine the 

suitability of insurance and financial products being sold primarily to military personnel or how they were sold. The Department partially concurred with the GAO’s 

first two recommendations and concurred with the other three. The first partial

concurrence concerned a GAO recommendation that the department develop and 

maintain a DoD-wide searchable database to record all violations of DoD personal 

commercial solicitation policy. The Department has developed and maintains a current list of companies and agents that are barred from soliciting on an installation 

and believes that this list is more useful and appropriate than the one the GAO recommends. In the second partial concurrence, the GAO recommended all violations 

of DoD solicitation policy involving insurance or financial products be reported to 

State or Federal regulators. The Department believes only violations that involve 

licensing, compliance with State or Federal laws or regulations, or that result in the 

company or agent being barred from an installation, should be reported to regulatory authorities. The Departments believes reporting only actionable violations to 

State and Federal regulators will serve everyone’s best interests. 

New York Times Investigative Reports: Beginning in July 2004, The New York 

Times published a series of investigative reports that focused much needed attention 

on the DoD personal commercial solicitation issue. Among other things, the reports 

highlighted DoD policy violations by several insurance companies soliciting Army 

trainees at Fort Benning, Georgia and potentially costly periodic payment plans 

marketed by First Command Financial Planning, Inc., mostly to military personnel. 

The Department took these reports very seriously. I asked the Assistant Secretary 

of the Army (Human Resources) to advise my office of actions taken at Fort Benning 

and to recommend whether or not the findings warranted Service-wide or DoD-wide 

action. Fort Benning has conducted detailed proceedings and has taken decisive

action locally. I understand that the Fort Benning commanding general’s recommendation for broader actions is currently at Department of the Army headquarters for legal review. In addition, I requested the Military Departments report 

all documented personal commercial solicitation policy violations that have occurred 

since January 1, 2000 and to provide quarterly update reports. This information is 

used maintain a list of insurance and financial product companies and agents currently barred from soliciting on a DoD installations that is posted on our DoD Commanders Page website. Following enforcement action by the National Association of 

Securities Dealers (NASD) and the Security and Exchange Commission (SEC) 

against First Command Financial Planning, I met with First Command’s President 

and Chief Executive Officer, who informed me that they have ceased selling, and 

will no longer sell, periodic payment plans. The Department has collaborated with 

the National Association of Insurance Commissioners on an educational brochure to 

assist military personnel considering the purchase of supplemental commercial life 

insurance. This brochure includes contact numbers for Insurance Commissions in all 

50 States and the District of Columbia. The Department’s Financial Readiness Campaign is educating our military servicemembers to closely examine products being 

offered and to seek legal advice before signing contracts. This program is intended 

to make servicemembers and their spouses better informed, more discriminating 

consumers. 

Second GAO Audit: Mr. Chairman, in late 2004, you and the Ranking Member 

of this Committee requested the Government Accountability Office review the sale 

of financial products to military members. Specifically, the GAO was asked to ‘‘examine the types and variety of financial products’’ commonly marketed to military 

members; regulatory oversight by insurance and securities regulators and DoD; the 

regulatory oversight and consumer protections afforded to military personnel compared to the general public; and how regulators have assessed the suitability of such 

products. The Department thanks this Committee for its concern, not only in how, 

where, and when insurance and financial products are being sold to military personnel, but also what kinds of products are being sold. This is the first time the 

suitability of insurance and financial products sold primarily to military personnel 

has been examined. This focus is much needed, long overdue, and much appreciated. 

The recommendations in the GAO’s draft report, issued on September 29, 2005, are 

reasonable and appropriate. 

DoD Instruction on Personal Financial Management Education: The Miltiary 

Services have established training for servicemembers on a list of topics that includes insurance, saving, and investing as part of their initial orientation in the 

66

military. DoD Instruction 1342.17 was released in November 2004, providing the 

first comprehensive policy document describing personal financial education and 

counseling requirements for servicemembers and their families, to include the already established training being delivered to junior servicemembers. The instruction 

has given us an opportunity to reinvent this training by requiring junior 

servicemembers be able to show their competence in applying basic financial principles on a wide range of financial topics, to include insurance and savings. In addition, first time supervisors are to demonstrate their understanding of policies and 

practices designed to protect junior servicemembers within their command/supervision, to include policies and practices concerning commercial solicitation. We are 

currently working on the implementation of a strategic plan for Personal Financial 

Readiness that includes establishing the evaluation tools needed to ensure these important policies are being applied. 

Strategic Plan for Personal Financial Readiness: As part of the answer to a GAO 

study on personal financial management programs (GAO–05–638R), the Department 

has crafted a strategic plan that incorporates the steps to ensure the implementation of DoD Instruction 1342.17, and the resources/capabilities of the Financial 

Readiness Campaign. A key new component of this strategic plan is the program 

being developed by the National Association of Securities Dealers (NASD) Foundation. This program, funded through the residual proceeds of the settlement with 

First Command Financial Services, seeks to give servicemembers and their families 

confidence to management their financial resources, by gaining their attention 

through an awareness campaign and providing unbiased educational resources to 

support their decisionmaking needs. The NASD Foundation program includes the 

capabilities and resources of several of the existing Financial Readiness Campaign 

partners, increasing the impact of the overall effort. 

Second Public Forum: The Department’s proposed policy changes were published 

in the Federal Register on April 19, 2005. The substantive changes focused on financial education, oversight, and enforcement. They incorporate the financial education, 

commercial sponsorship, and violation reporting guidance I mentioned previously. 

We also include a new commercial solicitation evaluation form designed to make it 

easier for installations to detect and investigate solicitation policy violations. The 

Department hosted a second open forum on May 6, 2005, to obtain public comment 

on the proposed changes. Twelve persons, representing various insurance, financial 

service, veteran and military fraternal organizations, provided oral comments. In 

addition, 31 other individuals and organizations submitted written comments by the 

June 20, 2005 deadline. A total of 79 specific recommendations were received during 

the second public forum and comment period. 

Proposed Policy Changes: The Department has carefully considered all 79 recommendations. We have accepted 31 and partially accepted 9 of these recommendations for inclusion in our final policy revision. Many of these additional changes clarify questions of interpretation of existing policy or new policy to cover new technologies. Examples include telecommunications aspects of solicitation, electronic 

versus paper pay and allotment transactions, and the use of direct deposit versus 

military pay allotment forms. Other changes include policies to incorporate our responses to the GAO’s recommendations and provisions in pending legislation the 

Department supports and expects will become law. These include solicitation policy 

violation reporting and recordkeeping and enforcement of the military pay allotment 

cooling off period. Our proposed final policy is currently being reviewed for legal sufficiency by the DoD General Counsel. 

In conclusion, the Department does not intend to prevent honest companies from 

doing business on DoD installations but we must take prudent steps to protect military members from superfluous products and predatory sales practices. Problems

associated with on-base commercial solicitation of military personnel have been ongoing for many years. Prior attempts to implement new policies to improve DoD’s 

oversight and enforcement met with resistance on many fronts. We believe now, 

with the public’s attention and the support of this Committee and the Senate and 

House Committees on armed services, long overdue changes to protect the financial 

well-being of military members and their families will finally become reality. Any 

further delay is unacceptable. Our men and women in uniform, and in harm’s way 

everyday, deserve no less. 

67

PREPARED STATEMENT OF LORI RICHARDS

DIRECTOR, OFFICE OF COMPLIANCE, INSPECTIONS, AND EXAMINATIONS

U.S. SECURITIES AND EXCHANGE COMMISSION

NOVEMBER 17, 2005

Introduction and Summary 

Chairman Shelby, Ranking Member Sarbanes, and Members of the Committee, I 

am pleased to appear today to testify on behalf of the Securities and Exchange Commission (Commission) to express the Commission’s views on the Government Accountability Office’s (GAO) report entitled Financial Product Sales: Actions Needed 

to Better Protect Military Members (GAO–06–23). My testimony will address the portion of the report that discusses sales of securities products. 

The Commission strongly believes that our servicemen and women must be protected from illegal and abusive practices in the sale of securities. Over the last year, 

the Commission and its staff have undertaken a comprehensive program to address 

such practices. Our program has included enforcement activity, extensive examination activity, close coordination with the Department of Defense (DoD) and the National Association of Securities Dealers (NASD), and investor education and other 

outreach activity. These actions are summarized below, and described in greater detail in this testimony.

• The Commission brought an enforcement action against a broker-dealer, First 

Command Financial Planning, Inc., that specializes in sales of securities to military personnel. The Commission’s enforcement action ordered First Command to 

cease and desist from illegal and abusive practices in the sale of securities, and 

includes an order to pay $12 million: $5.2 million in restitution to military customers, and the remainder to fund an investor education program for the military 

administered by the NASD. 

• The Commission’s examination staff have conducted numerous examinations of 

broker-dealer firms that sell securities to the military personnel. These examinations have included two separate risk-targeted examination sweeps, one focusing 

on sales of mutual fund contractual plans, or ‘‘periodic payment plans,’’ and the 

other focusing more generally on sales of securities products to military personnel. 

These examinations have included on-site reviews of securities firms serving the 

military market, and visits to sales offices located in military base communities, 

both in the United States and overseas. 

• Commission staff have worked closely with DoD, establishing a regular liaison 

with the Office of the Secretary of Defense, through which we have shared information and coordinated our examinations. We have also coordinated our efforts 

with the commands of selected bases. In our work, we have found the DoD and 

the individual base commands to be open, responsive, and helpful. This coordination is continuing, with DoD providing us with on-going information that we are 

using to target securities firms for examinations. 

• In all of these efforts, Commission staff have worked closely with the NASD. This 

joint effort included coordination of enforcement activity, examinations, and investor education programs for members of the military. 

• Finally, Commission staff in the Office of Investor Education and Assistance have 

conducted an active investor education initiative targeted toward members of the 

military. As a charter member of the DoD’s Financial Readiness Campaign, we 

assisted in the presentation of financial education programs to the military. Commission staff have already conducted several financial education workshops on 

military installations. As part of this initiative, Commission staff prepared an article on periodic payment plans for Military Money, a not-for-profit publication 

that is distributed free in the military community. In addition, an online brochure 

on periodic payment plans is available on our website. Finally, we have also conducted an outreach program to the securities community, with members of the 

Commission’s staff speaking at conferences and in other settings, on the need for 

securities firms to better protect and serve their military customers.

We strongly agree with the GAO’s recommendation that Congress should take legislative action in this area to protect military servicemembers. We recommend that 

you consider taking steps to address the features of mutual fund contractual plans 

that make them susceptible to abusive and misleading sales practices and excessive 

fees. In addition, as noted above, we have already taken action to enhance our information-sharing with DoD. 

68

1 A summary of these duties can be found on the Commission’s website. See www.sec.gov/divisions/marketreg/bdguide.htm. 2 A no-load fund charges no sales commissions on share purchases. 

Regulation of Broker-Dealers and ‘‘Periodic Payment Plans’’

The Commission regulates the sales of securities through, among other things, its 

regulation of broker-dealers. Broker-dealers operate in a comprehensive regulatory 

environment. They must: Register with the Commission and comply with the laws 

and rules governing broker-dealers; become members of the NASD and comply with 

its rules and oversight; and comply with regulations governing, among other things, 

their financial responsibility and the protection of customer funds and securities. 

They must also comply with the antifraud provisions of the Federal securities laws 

and NASD rules, which, among other things, impose duties of fair dealing and an 

obligation to recommend securities that are suitable for the customer.1

To evaluate compliance with these requirements, the Commission, the NASD, and 

other self-regulatory organizations conduct examinations of broker-dealers, in which 

examiners visit broker-dealers, review their books and records, interview their employees, and seek to identify violations of applicable laws or regulations or control 

weaknesses that could lead to such violations. NASD and other self-regulatory organizations conduct routine examinations of their member firms, and the Commission 

staff conduct oversight of the SROs’ programs, ‘‘cause’’ exams based on a complaint 

or a tip, and other types of examinations. In recent years, SEC staff have conducted 

more risk-targeted examination sweeps to quickly identify areas of emerging compliance problems. 

To enforce the Federal securities laws, the Commission can bring enforcement actions. In 2004, the Commission brought 141 enforcement actions involving brokerdealers or associated persons, approximately 22 percent of the enforcement actions 

that it brought in that year. NASD and other self-regulatory organizations also 

bring disciplinary actions against broker-dealers for violations of their rules. 

While there are no formal records that categorize broker-dealers by the types of 

customers they serve, our work in this area indicates that securities are sold to 

members of the military by several different types of broker-dealer firms. A small 

number of broker-dealer firms focus or specialize in selling securities to the military 

market. These are firms that have dedicated either their entire organization or a 

significant business line to serving the military market. There are also smaller 

broker-dealer firms that may have a single office or offices located near military 

bases in the United States or overseas, and that focus sales efforts to military personnel. Finally, there are also broker-dealer firms that do not focus on sales to military personnel, but may have a single sales branch office located in a military community and may develop a local military clientele. In addition to selling securities, 

these sales offices may provide a range of other financial services, including insurance, paycheck loans, and tax preparation. 

In addition to regulating broker-dealers, the Commission also regulates some of 

the financial products that have been sold to members of the military. These include 

a product known as a mutual fund contractual plan, or a ‘‘periodic payment plan.’’ 

This product is governed by the Investment Company Act, which generally defines 

a periodic payment plan certificate as a security in which an investor makes a longterm series of periodic payments to acquire an interest in a specified unit or fund 

of securities (Section 2(a)(27) of the Investment Company Act). Most mutual fund 

contractual plans contemplate that the investor will make periodic monthly payments for 15 or more years. These products contain a high front-end load: Up to 

half of the investor’s payments made in the first 12 months are deducted as a sales 

load. As a result, if the investor redeems his/her investment before the full term of 

the contract, the investor would pay an abnormally large sales load on his/her investment. The Investment Company Act imposes various limitations on the sale of 

these products, including a maximum allowable sales load on the total payments to 

be made by the investor (9 percent), and the maximum portion of the first 12 

monthly installment payments that may be deducted as sales load (50 percent), 

among other things. 

As GAO notes, in the distant past these plans were one of the few means by 

which smaller investors could make low-dollar investments in mutual funds. Over 

the years, however, alternative means of making such investments have been developed by fund firms, including both load and no-load funds that accept low initial 

investments and low periodic or automatic investment plans.2 These alternatives 

provide an opportunity for low-dollar investments without the large up-front sales 

load charged by periodic payment plans. As a result, mutual fund periodic payment 

plans have ceased to attract large numbers of civilian investors. 

69

3During their most recently completed fiscal years, the six largest periodic payment plans 

measured by asset size had aggregate gross sales of $931 million and redemptions of $950 million; resulting in net redemptions of $19 million. Of these six, some of the smaller plans experienced net sales, but the amount of those sales was insufficient to offset the redemptions at the 

larger plans. 

Only a small number of such plans are currently available. As of October 2005, 

there were only 8 financial firms that sponsored periodic payment plans registered 

with the Commission. These firms have registered a total of 19 plans with current 

assets of $12 billion, which represents less than two tenths of 1 percent (<0.2 percent) of the assets currently invested in nonmoney market mutual funds. Indeed, 

many of the registered periodic payment plans are no longer being sold, and even 

the largest plans have shrunk over the last year (measured by aggregate invested 

assets).3 Nonetheless many members of the military have continued to invest in 

these plans. 

The Commission’s Program to Protect the Military from Illegal and

Abusive Practices in the Sale of Securities 

In 2004, when potentially abusive sales practices in the sale of securities to military personnel came to the attention of the Commission’s staff, Commission staff

determined that the military community should be identified as an at-risk group. 

Following this determination, Commission staff quickly deployed resources from 

multiple functional programs of the Commission, including enforcement, examinations, and investor education, and initiated a coordinated approach to seek to protect members of the military from abusive sales practices. Each step is described 

below. 

IN THE MATTER OF FIRST COMMAND FINANCIAL PLANNING, INC. 

On December 15, 2004, the SEC and NASD instituted enforcement proceedings 

against First Command Financial Planning, Inc., a registered broker-dealer based 

in Fort Worth, Texas, whose customer base consisted almost entirely of active-duty 

and retired U.S. military personnel. In coordinated joint actions, the SEC and 

NASD alleged that First Command used misleading sales materials to offer and sell 

periodic payment plans. In settlement of these actions, First Command agreed to 

pay $12 million in disgorgement and prejudgment interest to be used to reimburse 

certain customers and to fund an NASD investor-education program for members 

of the U.S. military and their families. In November 2004, First Command stopped 

selling periodic payment plans altogether. As the Commission’s enforcement order 

entered against First Command states, the firm maintained sales offices near U.S. 

military bases worldwide and claimed that its customers included approximately 40 

percent of the active-duty general officers and approximately one-third of the commissioned officers. The vast majority of First Command’s sales agents were retired 

military officers. This firm was responsible for approximately 90 percent of all sales 

of periodic payment plans. 

Like other periodic payment plans, and as described in the Commission’s order, 

the investments sold by First Command allowed investors to accumulate shares in 

one of five mutual funds by making fixed monthly contributions—typically ranging 

from $100 to $500—over a period of at least 15 years. Each contractual plan imposed a unique sales charge, or ‘‘load,’’ which equaled 50 percent of the plan’s first 

12 monthly payments with no sales load thereafter. If the investor made the plan’s 

scheduled 180 payments over the 15-year period, the effective sales load worked out 

to be approximately 3.3 percent. On the other hand, if the investor failed to make 

all of the scheduled payments, the effective sales load could be substantially higher. 

The Commission’s order further stated that historically, approximately 43 percent 

of First Command’s customers made at least 180 scheduled payments. Many of the 

First Command customers were unable to complete the 180 payments and, consequently, many of them paid loads substantially higher than 5.2 percent, the approximate average sales load for all conventional-load equity mutual funds in 2003. 

In the worst case, those who discontinued payments after 1 year paid a 50 percent 

sales load. 

The Commission’s order against First Command contained findings that, since at 

least January 1999, the firm offered and sold contractual plans using carefully 

worded sales scripts that made misleading comparisons between the periodic payment plans and other mutual-fund investments. For example, First Command

claimed that periodic payment plans are the only funds that are designed for dollarcost averaging investors, that no-load funds were primarily for ‘‘speculative’’ investors, and that transactions by speculative investors reduced the opportunity for the 

no-load fund’s manager to make opportune investments for the fund. In reality, 

70

many long-term investors invest in no-load funds, and many no-load funds maintain 

dollar-cost-averaging programs allowing investors to make relatively small periodic 

contributions. The Commission found that First Command’s sales materials also 

contained misleading statements and omissions concerning the costs of no-load 

funds, and the availability of the Thrift Savings Plan, the Federal Governmentsponsored retirement savings and investment plan, which offers military investors 

many of the features of a contractual plan, but at a lower cost. The Commission further found that, in light of the relatively low completion rate in its periodic payment 

plans, First Command misrepresented the efficacy of the upfront load in ensuring 

that investors remain committed to the contractual plan. The NASD’s action, filed 

on the same day, contained similar findings. 

As part of its settlement with the Commission and NASD, First Command agreed 

to compensate military investors who purchased and terminated their plans during 

a specified period who paid an effective sales load of greater than 5 percent. By prematurely terminating their plans, these investors incurred effective sales loads well 

above the average load charged by conventional-load equity mutual funds. 

In addition to the $12 million payment, the Commission ordered First Command

to cease and desist from committing or causing violations of certain of the antifraud 

provisions of the Federal securities laws. The Commission and NASD orders also 

directed First Command to comply with certain undertakings, including hiring an 

independent consultant to review and make recommendations concerning the adequacy of First Command’s sales scripts, sales training systems and procedures, and 

supervisory systems and procedures. 

As of November 8, 2005, First Command had paid $6.81 million to the military 

investor-education fund operated by the NASD and expects to pay approximately 

$37,000 more into the fund by the end of the year, depending on the final outcome 

of the investor-reimbursement process. As of November 2, 2005, First Command had 

reimbursed approximately $4.3 million to approximately 10,000 military investors 

that were harmed as a result of the misconduct. The independent consultant overseeing the distribution advises that his firm is in the process of tracking down current addresses for approximately 3,500 additional military investors to pay out

approximately $860,000 that remains undistributed in the settlement fund. It is expected that the reimbursement process will be completed by the end of the year. 

Working together, the SEC and NASD brought an end to misleading sales practices affecting approximately 90 percent of the contractual plans sold to U.S. military families, provided for reimbursement to harmed military investors, and obtained significant funding for military investor-education programs. 

EXAMINATION SWEEPS FOCUSING ON SALES TO MILITARY PERSONNEL

Following indications of sales practice problems involving sales to military personnel, the Commission’s examination staff initiated targeted examination sweeps 

of certain broker-dealers. First, the Commission staff initiated an examination 

sweep of broker-dealers (in addition to First Command) that sell periodic payment 

plans. Second, the Commission staff initiated an examination sweep of broker-dealers that sell other securities products to members of the military. Each examination 

sweep is described generally below. In light of the confidential nature of SEC examinations, the SEC has not discussed publicly either the examinations or the names 

of the firms. 

Examinations of Broker-Dealers That Sell Periodic Payment Plans 

In addition to First Command, a small number of other broker-dealers sell periodic payment plans to investors. SEC staff examined four of these firms that sold 

significant amounts of contractual plans. The three largest of the four firms examined were found to sell periodic payment plans exclusively to the military community. In combination with First Command’s sales to the military community, the 

staff believes that our reviews of these products may have captured as much as 95 

percent of the sales of periodic payment plans sold to the military community. Like 

First Command, these firms have discontinued sales of contractual plans. 

Unlike First Command, these three firms generally sold contractual plans to 

lower-ranking enlisted military members. These contractual plans also called for a 

50 percent load paid out in the first 12 installments, with no additional load after 

that, and consisted of at least 120 payments to be made monthly over 10 years. Although the examinations of these firms did not reveal the systemic misrepresentation present in the First Command case, they did show that very few low-ranking 

enlisted members made at least 120 payments. At one firm, fewer than 10 percent 

completed their plans. On average, low-ranking enlisted members paid loads greater 

than 10 percent—significantly higher than they would have paid if they had purchased mutual-fund shares with a conventional load. 

71

The high incidence of incomplete plans discovered in these examinations raised 

concerns that these firms may have routinely recommended contractual plans to investors that required monthly installments in amounts greater than the investor 

could reasonably afford. Under NASD Conduct Rule 2310, a brokerage firm is required to have reasonable grounds for believing that its recommendation is suitable 

for its customer in light of the customer’s financial situation, among other things. 

Accordingly, the Commission’s staff has provided its examination results relating to 

these three firms to the NASD. 

Examinations of Broker-Dealers That Sell Other Securities Products to Military

Personnel 

As noted above, following indications from the First Command matter that members of the military may be at risk due to abusive or misleading sales practices, 

Commission examination staff initiated a second examination sweep to review how 

other securities products are sold to military personnel. This review is on-going. It 

encompasses sales of all securities products, such as mutual funds, variable annuities, stocks and bonds, with a particular focus on sales offices targeting military 

personnel and their families. 

These examinations are focused on sales practices in both the on and off-base 

communities, and on the unique features of the military market. In particular, examination staff are looking for sales practices that take advantage of military personnel when they receive deployment orders or of survivors when they receive large 

insurance payments upon a military person’s death. In addition, the staff is considering whether broker-dealers are recommending unsuitable products to military investors, such as by recommending products that require a stream of payments that 

the investor is unlikely to have the resources to sustain. Finally, the staff are examining how firms characterize the availability of the Thrift Savings Plan to military 

investors. 

Commission staff began the examination sweep by working with DoD and the 

NASD to identify the broker-dealer firms actually selling to military clients. Because there is no requirement for a broker-dealer to report the type of customers 

that the brokerage firm serves, the initial identification process included combing 

through various DoD-related newspapers and periodicals, such as Stars & Stripes

and The Military Times, to identify and evaluate securities product advertisements. 

We also reviewed DoD base structure reports to determine which military facilities, 

domestic and overseas, have the largest numbers of enlisted personnel. These locations were cross-referenced with registration information on broker-dealers. 

As a result of this review, and through interviews with knowledgeable personnel 

in the military and the securities community, we identified firms that direct their 

securities sales efforts to military personnel. We identified three types of firms that 

sell securities to military members:

• A small number of broker-dealer firms focus or specialize in selling securities to 

the military market. These are firms that have dedicated either their entire organization or a significant business line to serving the military market. • There are also smaller broker-dealer firms that may have a single office or offices 

located near a military base in the United States or overseas, and which focus 

sales efforts on military personnel. • Finally, there are also broker-dealer firms that do not focus on sales to the military, but may have a single sales branch office located in a military community 

and may develop a local military clientele. In addition to selling securities, these 

sales offices may provide a range of other financial services, including insurance, 

paycheck loans, and tax preparation.

In coordination with NASD, examinations of each type of firm have been or are 

being conducted. All firms that specialize in selling securities products to military 

personnel have been or are being examined, and, as well, examinations have been 

and are being conducted of the smaller firms and firms that have branch office locations near base communities. As part of this review, SEC examiners have conducted 

unannounced examinations of sales offices located outside the gates of major military bases. We continue to schedule these examinations. 

Initial staff findings have not indicated serious sales practice abuses, but have 

noted deficiencies in the internal controls and supervisory systems of several firms. 

In some cases, it was unclear as to whether securities salespersons had ever received any type of supervisory oversight or compliance training. Our examinations 

are continuing and we will make referrals as appropriate. 

COORDINATION WITH DOD 

The staff is committed to working closely with DoD to ensure that our efforts in 

this area are fully coordinated. To this end, we have established a designated liaison 

72

on the Commission’s examination staff who has worked closely with the DoD. The 

liaison regularly communicates with designated DoD personnel, including frequent 

meetings and weekly conference calls. Through these contacts, we have shared information and coordinated our efforts. For example, DoD has conducted a survey of 

base commands, given us information regarding possible examination candidates 

and issues, as well as instructed base commands to provide local support and assistance to our examiners. 

We have also coordinated our efforts with the commands of selected bases. With 

the assistance of base commanders, we have been able to conduct a systematic review of base records and interview base personnel to identify firms selling securities 

to the local military community, as well as possible complaints about those sales. 

Through this cooperation, we have been able to gain access to a number of useful 

records, including complaints, ‘‘off-limits’’ procedures, the issuance of ‘‘solicitation 

passes’’ to securities salesmen who wish to enter the premises of the base, the revocation of such passes, and other related matters. In addition, beyond providing us 

with access to records and information, base commands have taken active and affirmative steps to assist us. 

In our work we have found DoD and the base commands to be open, responsive, 

and helpful. This coordination is continuing, with DoD providing us with on-going 

information that we are using to target base communities and securities firms for 

future examinations. 

COORDINATION WITH THE NASD 

We have coordinated our efforts with the NASD at all levels of this program. This 

joint effort has included coordination of enforcement activity, examinations, and investor education programs for the military. The enforcement action against First 

Command Financial Planners, Inc. was brought after coordinated investigations by 

Commission and NASD staff. The risk-targeted examination sweeps described above 

were coordinated with the NASD, as are the investor education programs for military members described below. 

INVESTOR EDUCATION

The Commission is committed to improving the financial literacy of our 

servicemembers and their families. By actively promoting and supporting financial 

education for military personnel, we help military investors become better positioned to achieve personal saving and investing goals, including retirement, homeownership, and college education for their children. 

Through the Commission’s Office of Investor Education and Assistance, the Commission participates, as a charter member, in the DoD’s Financial Readiness Campaign. The DoD launched the Financial Readiness Campaign to give 

servicemembers and their families a chance to learn more about personal finances 

and to encourage them to better manage their money. The effort is directed toward 

junior enlisted servicemembers and spouses of servicemembers because they are less 

likely to have received the personal finance information that servicemembers received as part of their training. We have pledged our support to the personnel at 

military installations who are responsible for providing financial education. 

Over the past year, the Commission’s staff have conducted several workshops at 

military installations for military personal financial managers, educators, command 

financial specialists, and servicemembers. We have also distributed brochures to 

these groups containing neutral, unbiased information on saving and investing. We 

continue to work with DoD to provide useful financial information. 

The Commission’s staff have also created additional educational materials to help 

investors understand and make informed decisions regarding periodic payment 

plans. We published an article on these plans earlier this year in Military Money,

a free magazine focusing on the finances and lifestyle of military families. The magazine is distributed at most U.S. military bases nationwide, to military personnel 

in Europe and Asia via the Stars and Stripes newspaper, and to approximately 180 

DoD commissaries worldwide. We plan to continue to publish articles in this magazine, as part of the Financial Readiness Campaign, which is supported by the Office 

of the Under Secretary of Defense for Military Community and Family Policy. 

In addition, in August 2004, we posted on our website a comprehensive online brochure on mutual fund contractual plans titled ‘‘Periodic Payment Plans.’’ Articles 

about these plans also appeared in newspapers distributed to military personnel, 

such as Army Times and Marine Corps Times, and have directed readers to our online brochure. 

In addition, the Commission’s staff have conducted an outreach program to the 

securities community. We believe that securities professionals can play a key role 

in protecting the financial interests of servicemembers. Members of the CommisVerDate 0ct 09 2002 17:35 May 18, 2007 Jkt 000000 PO 00000 Frm 00076 Fmt 6621 Sfmt 6621 S:\DOCS\1117.TXT SBANK4 PsN: KEVIN
73

sion’s staff have spoken to industry conferences and seminars, identifying the military community as a risk group that should be given extra compliance attention. 

GAO’s Recommendations 

We strongly agree with GAO’s recommendation that Congress revisit the law governing mutual fund contractual plans. As an alternative to an outright ban, we

believe that Congress could consider addressing excessive sales charges by, for example, reducing the maximum allowable load or working with the Commission and 

the NASD on other mechanisms that would provide protection against excessive 

sales loads in this product. 

In addition, in the event periodic payment plans are not banned, securities regulators will consider various means of better assuring that regulators have adequate 

information to assess the sales of these plans. In particular, as GAO notes in its 

report, SEC and NASD efforts to review sales of periodic payment plans were hampered by a lack of standardized data at these firms on the persistency rates of the 

investments in the plans. Should these plans not be banned, we will work with 

other regulators to ensure that we have adequate information to assess the sales 

of those plans. 

We fully support GAO’s recommendation that the Commission and DoD share information and coordinate their efforts. As described above, the Commission and its 

staff have already taken steps to implement this recommendation, and have seen 

positive results from our efforts. 

Conclusion 

The Commission strongly believes that our servicemen and women must be protected from illegal and abusive practices in the sale of securities. Over the last year, 

the Commission and its staff have undertaken a comprehensive program to address 

such practices. Our program has included enforcement activity, extensive examination activity, close coordination with DoD and the NASD, and investor education 

and other outreach activity. We support the GAO’s recommendations in this regard. 

We look forward to working closely with this Committee, DoD, the NASD, and other 

regulators to continue to protect members of the military as investors in our markets. 

—————

PREPARED STATEMENT OF MARY SCHAPIRO

VICE CHAIRMAN AND PRESIDENT, REGULATORY POLICY AND OVERSIGHT

NATIONAL ASSOCIATION OF SECURITIES DEALERS

NOVEMBER 17, 2005

Mr. Chairman and Members of the Subcommittee: NASD is grateful to the committee for inviting us to testify on NASD’s regulatory activities regarding inappropriate sales of certain investment products to members of the armed forces, and for 

allowing us to submit this statement for the record. 

NASD 

Founded in 1936, NASD is the world’s preeminent private-sector securities regulator. In 1939, the SEC approved NASD’s registration as a national securities association under authority granted by the 1938 Maloney Act Amendments to the Securities Exchange Act of 1934. We regulate every broker-dealer in the United States 

that conducts a securities business with the public—about 5,200 securities firms 

that operate more than 108,000 branch offices and employ about 664,000 registered 

representatives. 

Our rules regulate every aspect of the brokerage business. Our market integrity 

and investor protection responsibilities include compliance examinations, rule writing, enforcement, professional training, licensing and registration, dispute resolution, and investor education. NASD examines broker-dealers for compliance with 

NASD rules, MSRB rules and the Federal securities laws, and we discipline those 

who fail to comply. Last year, NASD filed a record number of new enforcement actions (1,410) and barred or suspended more individuals (830) from the securities industry than in any previous year. NASD has a nationwide staff of more than 2,400 

and is overseen by a Board of Governors, more than half of whom are not in the 

securities industry. During the last 4 years, NASD has been in the process of separating from The Nasdaq Stock Market. 

74

Executive Summary 

America’s men and women in uniform make great personal sacrifices to protect 

our Nation’s security. They should not have to worry about the honesty and integrity of those who purport to help them make sound financial decisions for themselves and their families. Yet thousands of mostly young servicepersons have been 

disadvantaged by the sale of an investment product called Periodic Payment Plans 

or PPP’s. 

NASD learned in 2003 that a broker-dealer, located in Texas, was targeting U.S. 

servicemen and women with these investment products and was doing so using improper sales practices. We have responded forcefully to end these practices, punish 

those responsible for them, ensure that their victims are recompensed for their 

losses, and educate military personnel broadly about investing and saving. 

In this statement, we will tell the Committee (a) what we discovered and what 

we did about it; (b) our subsequent efforts to educate servicepersons and civilians 

about PPP’s and investing more generally, so that they might avoid being taken advantage of; and (c) about NASD’s belief in the need for legislative remedies to deal 

with abusive sales practices and enhancing the system by which information on securities firms and brokers is provided to the investing public. 

Sales of Periodic Payment Plans to the Military 

First Command Financial Planning Inc., of Fort Worth, Texas, a broker-dealer 

with strong ties to the military, had been marketing Periodic Payment Plans to 

members of the U.S. military for many years. In August 2003, NASD learned of concerns about First Command’s sales to military personnel of products that levied 

huge upfront commissions. The staff immediately began an investigation and found 

that First Command used misleading statements in its sales literature and scripts 

to attract military customers to its products. Using these and other improper tactics, 

the firm sold more than a half-million of these complicated and often extremely expensive products to service persons, many of whom were young and inexperienced 

investors. 

An investor in a Periodic Payment Plan makes monthly payments of as little as 

$50 for a fixed time period, usually 15 years. The payments are invested in an underlying mutual fund and the investor is charged a 50 percent sales load on the first 

12 monthly payments. Payments during the remainder of the 15-year term are not 

subject to sales loads, so that the effective sales charge decreases so long as the investor continues to make contributions. However, if the investor does not terminate 

the plan within 45 days, yet fails to make contributions over the full 15-year term, 

he or she can pay a sales charge of up to 50 percent of the total amount invested. 

In their sales pitches, First Command representatives told potential customers 

that the 50 percent first-year sales load would decrease to 3.3 percent upon completion of the term. They said this high upfront sales load would serve as an incentive 

for investors to complete the plan. However, they failed to divulge that their own 

data showed that, historically, only 43 percent of First Command’s customers completed the 15-year term. As a result, more than half of First Command’s customers 

paid a higher—in many cases, significantly higher—sales load for their mutual fund 

purchases. 

Company sales representatives also told potential customers that the 50 percent 

first-year sales load was intended to ‘‘instill discipline,’’ but they did not inform the 

customer of the lost earnings potential from the cash that was not invested during 

the first 12 months. 

Sales representatives also made misleading statements about alternative products. They said, for example, that no-load mutual funds had higher costs than other 

investment products and were primarily for ‘‘market speculators.’’

First Command training manuals cautioned its brokers not to suggest to individuals who preferred no load funds that they talk to people who had already bought 

PPP’s, as this would be ‘‘like voluntarily spreading a cancer in your market.’’ In addition to the problematic sales practices, our investigation found that a First Command district supervisor had inappropriately confronted an Air Force officer who 

had complained about First Command’s sales tactics in an e-mail to numerous individuals. The officer wrote that he had lost money on his investment and advised 

readers not to do business with the firm. A First Command district supervisor informed the officer that high-level Air Force commanders were being told of his complaint and that a temporary duty assignment might be jeopardized. The supervisor 

also contacted the officer’s squadron commander and told her First Command might 

file a grievance against her subordinate. 

First Command eventually sent the officer a written apology, but took no action 

against their district supervisor. 

75

How NASD Responded 

After a thorough investigation of First Command’s sales practices that included 

NASD taking testimony from 16 current and former First Command employees, reviewing more than 25,000 pages of documents and over 50,000 e-mail messages, 

NASD and the SEC both brought disciplinary actions against the firm simultaneously. 

NASD censured the firm and fined it $12 million in December 2004. That amount 

included restitution to thousands of customers who had terminated PPP’s after January 1, 1999 and had paid effective sales charges greater than 5 percent. As of October 18, 2005, more than $4.3 million had been returned to these customers. 

The remaining funds, about $6.8 million, were transferred to the NASD Investor 

Education Foundation to be dedicated to financial education programs for members 

of the armed services and their families. 

NASD also ordered First Command to hire an independent consultant to oversee 

its restitution payments and review its sales practices. In addition, NASD required 

that for 1 year First Command submit its proposed advertising materials to NASD 

for review prior to use. 

NASD separately fined the First Command supervisor who had inappropriately 

confronted the complaining Air Force officer $25,000 and suspended him from acting 

in a supervisory role for 30 days. 

First Command has informed NASD that it has ceased selling PPP’s. We note 

that First Command was not the only firm selling PPP’s to military servicepersons. 

NASD has ongoing investigations of additional, smaller, firms that also sold the 

plans, although most of them have now stopped. Statistics show that the rate of new 

PPP account openings at one of the largest sponsors has dropped from about 1,000 

per month to about 10 per month. 

Like any regulator, NASD is heavily dependent on customer complaints as an impetus for investigations and enforcement actions. It is important to note that in the 

case of First Command, NASD received no complaints from servicepersons. We subsequently learned that servicepersons had complained to military attorneys but 

those lawyers could not relay this information to NASD without specific consent 

from their clients. We began our investigation in August 2003, immediately after 

an article about First Command appeared in Kiplinger’s Personal Finance magazine. 

We therefore support the GAO recommendation to the Secretary of Defense that 

he revise the DoD solicitation policy to require that information on servicemember’s 

complaints related to financial product sales be provided to relevant State and Federal financial regulators. We also support the recommendation that information be 

provided to servicemembers of all levels about how and to whom they should raise 

concerns or complaints about potentially inappropriate sales of financial products, 

including providing the information necessary for contacting the regulators. NASD 

has designated staff to receive complaints from military personnel and conduct outreach with DoD to proactively learn of issues concerning securities sales to military 

personnel. 

NASD Financial Education Efforts for the Military 

Since the settlement with First Command, NASD has devoted a great deal of 

time, money and attention to developing a program for providing financial education 

to military servicepersons and their families. 

The First Command case illustrates most vividly the need for the education and 

protection of military servicepersons and family members who invest in securities. 

NASD established the Foundation in December 2003, inspired in part by survey 

data that showed mainstream investors had a troubling lack of knowledge and understanding of markets and investment products. Since then, we have contributed 

$31 million to the foundation, and it has awarded more than $5 million in grants 

to universities and nonprofit organizations that provide research and teaching in the 

service of investors. 

As mentioned above, approximately $6.8 million of the First Command settlement 

funds has been transferred to the NASD Investor Education Foundation and specifically earmarked for programs designed to help members of the military and their 

families better understand basic investing and the markets. 

This money will fund the foundation’s new Military Financial Education Program. 

We have been working closely with the Department of Defense and we expect to 

launch a multifaceted military financial education program in early 2006. The program will be implemented on military installations nationwide and will strive to encourage members of the armed forces to take control of their financial futures—by 

providing them and their and spouses with financial information to help them make 

intelligent saving and investing decisions. 

76

Through a combination of its own initiatives and partner programs funded by 

foundation grants, the foundation will bring the financial education community together with the goals of empowering individuals to learn more in less time, helping 

organizations work together on new and existing initiatives, and establishing more 

coordinated and uniform financial education programs. Specific programs will include:

• A military-specific online resource center that will serve as a centralized, trustworthy source of unbiased information on saving and investing, including learning 

centers, interactive tools and games, links to other resources, frequently asked 

questions and more. • On-the-ground training efforts to support the military’s current Personal Financial Management program by establishing a coordinated and uniform financial 

education program, including the training and continued certification of personal 

financial managers and other volunteers. • Educational toolkits for trainers and investors offering multiple levels of personal 

financial information.

To ensure that these programs and tools are well-exploited by the military community, the foundation efforts will include a long-term, public awareness campaign 

that will:

• Provide a coordinated, national financial literacy campaign to a military population that is often unable to set and achieve financial goals, unwilling or unable 

to save, overextended in debt, vulnerable to fraud and unaware of what can be 

done to gain control of the situation. • Help military families understand how the financial choices they make can either 

improve or diminish their ability to achieve goals such as homeownership, a college education, a secure retirement, and peace of mind. • Communicate positive and motivational messages in a variety of ways and 

through a diversity of media so that everyone in the military has the opportunity 

to see, understand, and act upon them.

In order to ensure the Military Financial Education Program’s effectiveness, the 

NASD Investor Education Foundation plans to conduct both qualitative and quantitative research that will determine current levels of investment knowledge among 

military personnel, identify motivations for seeking educational opportunities, discover how they typically access saving and investing information, and identify trustworthy sources of information. 

S. 418 The Military Personnel Financial Services Protection Act 

NASD supports legislation that not only would ban sales of PPP’s, but would also 

enhance and improve the method by which basic information about brokers and 

firms is provided to the investing public. 

S. 1A418, introduced by Senator Enzi, and cosponsored by several other Senators, 

including Senators Hagel and Schumer of this Committee, would halt completely 

the sale of PPP’s to members of the investing public, including the military. We 

agree with Senator Enzi that the excessive sales charges of these contractually 

based financial products make them susceptible to abusive and misleading sales 

practices and that a small group of individuals have targeted these products almost 

entirely to military. 

NASD also agrees with Senator Enzi that there is a great value to investors having real-time access to information regarding the background, qualifications, and 

disciplinary history of securities professionals with whom they consider doing business. As we saw in the First Command situation, unsophisticated investors can be 

subjected to high-pressure sales tactics. In these situations, immediate access to information such as the disciplinary history of the salesperson can be crucial. All too 

often, learning about your broker after purchasing can be too late. 

A provision in Senator Enzi’s bill would revise the requirements for collecting and 

retaining registration information about securities firms and their brokers and for 

providing such information to investors. 

Under Federal and State law, securities firms and brokers must provide information to regulators through a system operated by NASD, called ‘‘BrokerCheck.’’ This 

information, including both administrative information and disciplinary history, is 

reported to NASD by securities firms, brokers, and other regulators, including the 

States. 

In 1990, Congress mandated that NASD make relevant portions of the information available to the public without charge through a toll-free telephone number, the 

easiest and most convenient solution at the time. In so doing, Congress accorded 

NASD immunity from liability for the release of such information to the public—

recognizing that the disclosure of key information about securities firms and brokers 

77

is a critical part of NASD’s regulatory and investor protection mission and that the 

veracity of the information reported to NASD cannot be independently verified. 

Therefore the grant of immunity from liability for release of this information was 

needed. 

Because of the narrow language of the existing statute, NASD is not able to make 

‘‘disclosure information’’ available online. Investors must request and wait for a 

written disclosure report to be mailed or e-mailed to them. 

Informed investors are critical to market integrity and investor protection. Ready 

access through NASD BrokerCheck to complete information about their brokers and 

the firms that employ them is critical to informing investors and building their confidence. 

Investors have embraced the Internet as their preferred means of obtaining information about securities firms and brokers. Of the more than 3.75 million inquiries 

the NASD BrokerCheck program has received thus far this year, over 98 percent 

came through the Internet and less than 2 percent by telephone. 

Investors want and need online access to disclosure information to help them

decide whether to do business with a securities firm or broker. The proposed legislation will permit NASD to put disclosure information online with appropriate protections against indiscriminate access and exclusion of information that could be used 

for ‘‘identity theft.’’

The legislation NASD favors would:

• Provide an appropriate limitation of liability for acts taken or omissions made in 

good faith. • Require NASD to continue its BrokerCheck program, without charge to individual 

investors. • Provide NASD flexibility in providing investor access to the program through the 

Internet and future technology. • Maintain the requirement for toll-free telephone access for those investors who do 

not use, or prefer not to use, the Internet. • Expressly provide for SEC review and approval of the scope, presentation, and 

procedures of the NASD BrokerCheck program. • Require NASD, subject to SEC approval, to implement appropriate procedures for 

brokers or others to dispute the accuracy of information disclosure through the 

BrokerCheck program. 

Conclusion 

Thank you for giving us the opportunity to testify on these important topics and 

for your important work on this issue. America’s men and women in uniform deserve honesty and integrity from those who sell them financial products. NASD will 

continue its work to protect all investors, including those in our Nation’s military. 

—————

PREPARED STATEMENT OF JOHN OXENDINE

COMMISSIONER OF INSURANCE, STATE OF GEORGIA

NOVEMBER 17, 2005

Introduction 

My name is John Oxendine. I am Commissioner of Insurance for the State of 

Georgia, a State that has been active in investigating and preventing sales abuses 

involving military personnel. Today, I am testifying on behalf of the National Association of Insurance Commissioners (NAIC). We appreciate the opportunity to testify 

regarding the role of the State insurance departments and NAIC in better protecting military insurance consumers from faulty life insurance products and abusive sales practices. 

Today, I want to make three basic points:

• First, America’s men and women serving in the armed forces are also American 

consumers entitled to the same protections under State law enjoyed by all other 

citizens. Protecting insurance consumers at the local level in the communities 

where they live has been the hallmark of State regulation for more than a century. Every State in this Nation has a strong unfair trade practices law backed 

by an insurance department staffed with dedicated employees trained to assist 

consumers who purchase insurance products and file claims. 

• Second, State regulators recognize that insurance consumers serving our country 

in the military deserve special attention from State and Federal officials responsible for supervising the sales of life insurance and investment products on military bases in the United States and overseas. We are actively reaching out to 

78

military authorities to educate them about State consumer protection resources 

and coordinate our enforcement activities. The military’s chain of command structure emphasizing obedience to superiors poses unique consumer protection challenges that differ from civilian society. The same training, working, and living

environment that produces highly disciplined and loyal military units to defend 

America’s freedoms can also create pressures on individuals that may negatively 

affect their ability to make fully independent and informed decisions regarding 

the most sensible financial products for their own personal security. • Third, State insurance regulators and the NAIC support Federal legislation that 

would clarify our authority under the McCarran-Ferguson Act and the GrammLeach-Bliley Act (GLBA) to supervise the business of insurance wherever it occurs, including military bases. We agree with the Government Accountability Office (GAO) that the Federal Government should facilitate cooperation among the 

Department of Defense (DoD), military base commanders, and State insurance departments by opening up lines of communication and sharing relevant information 

about consumer complaints and known violations. We believe that H.R. 458, the 

Military Personnel Financial Services Protection Act, would help achieve those 

goals. However, the version passed by the House of Representatives needs to be 

amended to remove unnecessary directives that could undermine State supervision authority under GLBA and deflect State efforts to address the real problems identified by State insurance regulators and GAO. 

State Insurance Regulators Have Expertise and Resources to Help the

Military 

Paying for insurance products is one of the largest annual household expenditures 

of any kind for most Americans. Consumers—including military personnel—have an 

enormous financial and emotional stake in making sure the promises made by

insurance companies are kept. Because people often have trouble understanding insurance products and sales practices, State governments devote substantial resources toward educating and assisting the public on insurance matters, as well as 

licensing and monitoring insurance companies and agents. When problems arise, 

State insurance departments are fully staffed to handle consumer inquiries and 

complaints quickly with a local phone call. 

People who live and work on military bases are an integral part of the communities where they are located. Like other citizens, they can rely upon the expertise 

and help of State regulatory staff who are also local residents to understand and 

benefit from the laws that govern insurance products. As regulators, we are responsible for making sure their legitimate expectations are met regarding financial safety and fair treatment by insurance providers. During 2003, State insurance departments handled approximately 3.4 million consumer inquiries and complaints regarding the content of their policies and their treatment by insurance companies and 

agents. 

NAIC and State Regulators Are Actively Assisting Military Personnel and

DoD 

As recognized by GAO in its report, ‘‘Financial Product Sales; Actions Needed to 

Better Protect Military Members’’, State regulators must be aware of insurance 

problems before they can help remedy them. Prior to media reports last year, military insurance sales problems were not being brought to our attention because there 

were few complaints to State regulators about the products involved and there was 

no NAIC coding of complaints to signify they came from military sources. Once we 

became aware of problems, enforcement investigations were launched in States 

where they occurred, and NAIC commenced an active program to educate regulators, military personnel, and DoD about State resources for protecting military insurance consumers. 

We believe State insurance regulators and the NAIC are taking actions that will 

meet the major recommendations of GAO in its report. Here are the key initiatives 

being undertaken:

• The NAIC set up the Sale of Life Insurance to Military Service Members Collaborative Group, which has 30 States participating. There are currently targeted 

market conduct examinations underway involving nine insurers. 

• The NAIC, in conjunction with the DoD, developed a consumer brochure specifically addressing life insurance information for military personnel. We have encouraged DoD to make this brochure freely available to members of the armed 

services during training and on-base at convenient locations. 

• The NAIC created an extensive online resource specifically aimed at helping military personnel purchase life insurance as well as other insurance products. In

addition to explanations and tips about buying insurance, the NAIC military inVerDate 0ct 09 2002 17:35 May 18, 2007 Jkt 000000 PO 00000 Frm 00082 Fmt 6621 Sfmt 6621 S:\DOCS\1117.TXT SBANK4 PsN: KEVIN
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surance webpage includes information on how to electronically file a complaint 

with State insurance departments, as well as links and contact information for 

the insurance department in each State, links to consumer help sites maintained 

by the military services and Federal agencies, and links to pending legislation in 

Congress. The military assistance webpage is featured on NAIC’s main page at 

www.naic.org.

• Since becoming aware of military sales problems, State insurance regulators have 

reached out to the DoD. Diane Koken, the Pennsylvania Insurance Commissioner 

and NAIC President, visited twice this year with DoD leaders to foster a relationship of ongoing cooperation. The NAIC’s efforts include: (1) compiling a list of insurance department contacts for the DoD to ensure military officials have proper 

information for getting State assistance; (2) updating the NAIC’s Complaint Database System form to identify complaints that are submitted by military personnel; 

and (3) providing the DoD with a State-by-State premium volume summary for 

those companies that state insurance regulators know are soliciting or have solicited insurance products on military bases. 

• The NAIC believes basic financial literacy training of military personnel should 

include assistance information and contact data for State insurance departments. 

Many people are not aware these valuable resources exist to help them at no cost 

as part of State government, or that State regulators can help prevent or resolve 

insurance problems that occur on military installations not otherwise under State 

jurisdiction. We intend to keep working with DoD to develop training programs 

and materials that communicate with military insurance consumers in clear and 

direct language which is easily understood. 

• During 2006, the NAIC’s Life Insurance & Annuities (A) Committee will be reviewing the types of life insurance which has been sold to military personnel in 

order to recommend a position on the products being offered in the marketplace. 

• Finally, State insurance departments already have strong prohibitions against 

misleading and deceptive sales practices, and will continue to enforce these prohibitions when inappropriate activity is identified.

The GAO report recommends that Congress direct State regulators to conduct 

legal compliance reviews of existing insurance products, and cooperate with DoD in 

developing ‘‘suitability’’ standards for insurance products sold to military personnel 

in the future. The NAIC does not believe Congress needs to ‘‘direct’’ State officials 

or NAIC to meet their public responsibilities, especially in view of the strong actions 

taken by them in response to problems identified in the media. While the NAIC will 

continue to provide full cooperation and technical assistance to Federal officials, we 

believe it is appropriately within the sole domain of DoD to determine what is best 

for military personnel since DoD understands and is responsible for the military 

command structure and financial benefits that apply to America’s men and women 

in uniform. 

In Order to Better Help Soldiers, State Regulators Need More Help from

DoD 

In its report, the GAO noted that DoD should provide State insurance regulators 

with complete access to data on complaints by military personnel, but is reluctant 

to do so. The NAIC agrees with GAO regarding the need for State insurance departments to obtain all complaint information and administrative actions from DoD as 

early as possible. Insurance regulators review complaint information and regulatory 

actions to identify potential patterns and practices of conduct that could indicate 

violations that might not be apparent to local base commanders. State regulators 

can take corrective actions sooner rather than later if timely and complete information is available for review. We encourage DoD to improve its ability to fully share 

information with us for the benefit of military insurance consumers. 

To facilitate State cooperation and information sharing with military authorities 

on insurance matters, the NAIC plans to invite DoD representatives to attend the 

NAIC’s Winter National Meeting, which will be held in Chicago, Illinois from December 3–6, 2005. Representatives of the Federal banking agencies already attend 

NAIC meetings, and have found it useful as a way of promoting our common regulatory goals under GLBA. We believe personal interaction between DoD and State 

insurance regulators would further enhance our ability to communicate and protect 

military personnel from inappropriate sales practices. The NAIC would also like to 

extend an offer to develop a Memorandum of Understanding between DoD and individual State insurance departments to address any outstanding confidentiality 

issues surrounding the sharing of information. 

80

Comments on H.R. 458

H.R. 458, the ‘‘Military Personnel Services Protection Act’’, passed the House of 

Representatives by a vote of 402–2 on June 28, 2005, and is now pending before 

the Senate Committee on Banking, Housing, and Urban Affairs. The NAIC would 

like to offer these comments regarding the sections of H.R. 458 that affect State insurance regulation. 

Section 105—This section clarifies the jurisdiction of State insurance regulators 

on Federal land and facilities, as well as which State’s law should apply. The NAIC 

fully supports enactment of this section. 

Section 106—This section expresses a Congressional intent that States should 

work cooperatively with DoD to ensure implementation of appropriate standards to 

protect armed forces personnel, and additionally that each State should identify its 

role in promoting uniform standards within 12 months. The section also says NAIC 

should conduct a study of State compliance and issue a report to Congress. 

State regulators and the NAIC are already meeting the intentions expressed in 

Section 106 through the enforcement of long-standing State prohibitions against 

misleading and deceptive sales practices, and will continue to do so because we are 

just as much concerned as Congress about protecting military personnel. Moreover, 

the statutory intention that States spend their time and resources adopting uniform 

national standards at the direction of Congress diverts attention and effort from fixing the real problems that occur in States with major military bases, while also 

needlessly undercutting the equal authority of states as functional regulators of insurance that is mandated in GLBA. As a practical matter, State regulators and 

NAIC are effectively working together and cooperating with DoD at the present 

time. Consequently, the NAIC recommends that Section 106 be deleted from 

H.R. 458 because it is unnecessary and counterproductive to enhancing the authority of State insurance regulators set forth in GLBA and other parts of H.R. 458. 

Section 107—This section provides that insurers and producers shall not sell life 

insurance products to members of the armed forces without proper disclosures. It 

also provides that States will be involved in enforcing these disclosure requirements. 

The NAIC fully supports the disclosure and enforcement provisions in Section 107. 

Section 108—This section expresses a Congressional intent that NAIC should consult with DoD and submit a report to Congress within 12 months on ways of improving the quality and sales of insurance on military installations. If NAIC does 

not submit a report, the GAO is directed to do it. The NAIC has always cooperated 

fully with requests of Congress and GAO for information and assistance. There is 

no need for the statutory directive to NAIC in Section 108, since a simple request 

is sufficient to produce the desired results. The NAIC recommends deleting any statutory inference which infers that NAIC might not meet a Congressional request for 

information and assistance on military insurance issues. 

Section 109—This section requires that insurers operating on military bases implement a system to check and report to State officials regarding disciplinary actions against producers representing the insurer, and that States set up a collective 

system to receive such reports. There is also an expression of Congressional intent 

that States achieve this goal within 2 years. The NAIC supports the goals of this 

section, but questions whether a Federal statutory directive to States is needed to 

achieve the desired results. 

Section 111—This section expresses a Congressional intent that State agencies 

provide advice to Federal entities regarding insurance coverage issues. The NAIC 

is already meeting this goal, and will continue to do so. 

Conclusion 

All of us share a commitment to assuring that America’s armed forces personnel 

receive fair treatment, solid advice, and strong consumer protections with respect 

to the insurance products they purchase. State insurance regulators and NAIC are 

meeting that commitment with effective outreach to the military, useful educational 

resources, and active enforcement of State laws to protect military insurance consumers. We look forward to continuing our efforts, and to working more closely with 

Congress and DoD to make the consumer protection system meet the high expectations which military personnel rightly deserve. 

81

RESPONSE TO WRITTEN QUESTIONS OF SENATOR SARBANES

FROM MARY SCHAPIRO 

Q.1. Did the National Association of Securities Dealers encounter 

a lack of cooperation from the Air Force or the Department of Defense during the NASD investigation of First Command Financial 

Planning, Inc.?

A.1. NASD did not encounter a lack of cooperation from the Air 

Force or the Department of Defense during the investigation of 

First Command Financial Planning, Inc. However, we were informed by a JAG officer working in the Air Force headquarters for 

legal assistance that, because of Air Force regulations, he could not 

give us information about complaints that had been filed with Air 

Force legal offices without specific individual client consent. While 

he also informed us that he encouraged individuals with complaints to contact NASD, the staff did not receive any complaints.

Q.2. The GAO reported that ‘‘contractual plans have been periodically involved in sales scandals for decade.’’ Why did misconduct in 

sales of this type of product persist ‘‘for decades?’’ As a result of the 

recent occurrences, what have the regulators learned?

A.2. As noted in the statement that NASD submitted, we agree 

that the excessive sales charges of these contractual-based financial 

products make them susceptible to abusive and misleading sales 

practices. NASD supports legislation that would ban sales of these 

products. NASD rules preclude brokerage firms from charging customers sales loads at this level for ordinary mutual funds, and absent specific legislative authorization of this product’s sales 

charges, NASD members would not be permitted to sell any financial product with 50 percent first year sales charges. Section 27 of 

the Investment Company Act of 1940 permits contractual plans to 

impose huge front-end sales loads, which naturally leads to sales 

practice abuses. While this authority does not limit NASD’s obligation to examine broker-dealers that sell contractual plans, eliminating the potential for huge front-end loads by amending Section 

27 of the 1940 Act would also lead to fewer abuses related to the 

sales of these plans.

Q.3. The GAO report states that ‘‘although sales of securities products are covered by suitability standards, securities regulators also 

rely on receiving complaints to initiate actions and were, therefore, 

not generally aware of problems involving military members and 

contractual plans until press reports appeared.’’ Do you agree with 

this conclusion? What means other than investor complaints enable 

the regulators to identify sales practice abuses?

A.3. NASD agrees that customer complaints are a significant 

source of information alerting regulators to potential problems in 

the sale of investment products. We are also alerted to sales practice abuses through NASD’s periodic brokerage firm examinations, 

focused sweep examinations, filings required to be made by brokerage firms (for example, when the firm terminates a registered representative for cause), discussions with industry representatives 

through NASD Board standing committees, conferences, and other 

channels, press reports, and anonymous tips. In addition, NASD foVerDate 0ct 09 2002 17:35 May 18, 2007 Jkt 000000 PO 00000 Frm 00085 Fmt 6602 Sfmt 6602 S:\DOCS\1117.TXT SBANK4 PsN: KEVIN
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1 Year by year, NASD reviewed the following: 

Year—Communications Reviewed: 2005—89,653; 2004—88,301; 2003—85,735; 2002—87,855. 

cuses resources on monitoring industry trends and seeking out 

problematic areas likely to occur.

Q.4. The NASD, in a press release dated December 15, 2004, announced the settlement of disciplinary proceedings against a major 

seller of periodic payment contracts to military personnel that was 

‘‘[u]sing misleading sales scripts, inappropriate comparisons and 

omissions if important information.’’ The NASD’s long-standing 

rule on ‘‘Communication with the Public’’ requires broker-dealers to 

file certain advertisements and sales literature concerning registered investment companies’’ with NASD ‘‘within 10 business 

days of first use of publication.’’

Please describe the NASD’s process of reviewing the advertisements and sales materials used by brokerage firms. In light of recent public concern about sales practices involving the systematic 

investment plans, has the NASD reviewed or modified the standards it uses to review advertising and sales materials?

A.4. Over the past 4 years, NASD has reviewed in excess of 

350,000 1 brokerage advertisements and other items of sales material. NASD conducts these reviews through several different programs involving staff in its Advertising Regulation Department as 

well as the District Offices and the Department of Enforcement. 

Filings 

NASD reviews the largest volume of brokerage firm advertisements and other sales material through routine filings made with 

the Advertising Regulation Department (the Department). As noted 

in the inquiry, brokerage firms file certain communications with 

the Department pursuant to rule requirements. The majority of 

material filed concerns registered investment company securities 

including mutual funds, variable annuities, variable life insurance, 

and unit investment trusts. Historically, communications about 

systematic investment plans reflect a very tiny subset of the investment company communications reviewed. In the past year, since 

the disciplinary proceeding referenced in the inquiry, this volume 

has declined further. 

When a brokerage firm files an advertisement or other communication with the Department, the analyst assigned to the specific 

firm conducts a review for compliance with NASD rules as well as 

applicable SEC, MSRB, and SIPC standards. These reviews reflect 

the staff’s analysis of the given communication based on the information available to the staff member at the time of the review. For 

example, it is expressly assumed that members’ submissions are 

complete and accurate. 

In response to each filing, staff provides the brokerage firm with 

an advisory review in the form of a written letter. When the staff 

observes substantive rule violations, it will refer them for further 

investigation and potential disciplinary action. 

Investigations 

Department staff also reviews materials submitted by third parties as a complaint or inquiry. For example, NASD District Office 

83

or Enforcement Department staff will uncover advertisements in 

connection with their examinations of brokerage firms. Where they 

detect problematic or questionable material, they will refer those 

items to Department staff for review and appropriate action. Generally, the Department staff will work with the referring office in 

resolving any rule violations observed in connection with an ongoing examination. For example, Department staff will provide ongoing analysis and support to the Enforcement Department as it pursues a formal disciplinary action against a given brokerage firm. 

The Department also receives referrals from brokerage firms that 

are in competition with the firm that has used a given communication. Regulators at the Federal or State level may also refer items 

to the Department as will the occasional investor. The Department 

reviews every advertisement or other item of sales literature for 

compliance with applicable NASD, SEC, MSRB, and SIPC rules. If 

there are rule violations indicated, staff will contact the brokerage 

firm with commentary on the relative compliance of the subject advertisement and will provide a recommended course of action, for 

example, advise the firm to stop using a given advertisement completely or advise the firm to correct an advertisement before it is 

used further. The Department will obtain a written response from 

the brokerage firm as to its course of action, the origins of the problem advertisement and its immediate impact on the public. Depending on the rule violations and their scope, the Department 

may determine no further action is required, issue an informal disciplinary action against the firm, or refer the matter to the

Enforcement Department requesting that the staff pursue formal 

disciplinary action. 

Sweeps 

Department staff conduct sweep reviews of brokerage firms’ advertising and other sales material. The staff will contact a group 

of member firms to request specific types of communications that 

are not normally filed and may reflect an area of current regulatory interest for NASD. For example, recent sweeps have focused 

on communications about equity-indexed annuities, research reports, and hedge funds. 

The Department reviews any sales communications provided in 

response to the sweep request and provides written commentary to 

the brokerage firm on items that fail to comply with applicable 

rules. As with investigations, the Department staff will request information in response to its comment letter and, upon receipt of 

such information, make a determination as to whether to close the 

matter or pursue disciplinary action from the sweep. 

Standards NASD Uses to Review Systematic Investment

Plan Communications 

NASD continuously seeks to update and improve the standards 

it applies to members’ communications. For example, NASD has recently proposed amendments to the rules governing advertising to 

require firms to file prior to use all television, radio, and video advertisements that are 15 seconds or longer as well as advertiseVerDate 0ct 09 2002 17:35 May 18, 2007 Jkt 000000 PO 00000 Frm 00087 Fmt 6602 Sfmt 6602 S:\DOCS\1117.TXT SBANK4 PsN: KEVIN
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2See Notice to Members 05–25, copy attached. 3See Notice to Members 05–27, copy attached. 4 NASD Rule 2210(d)(1) states, in part:

(A) All member communications with the public shall be based on principles of fair dealing 

and good faith, must be fair and balanced, and must provide a sound basis for evaluating the 

facts in regard to any particular security or type of security, industry, or service. No member 

may omit any material fact or qualification if the omission, in the light of the context of the 

material presented, would cause the communications to be misleading. 

(B) No member may make any false, exaggerated, unwarranted, or misleading statement or 

claim in any communication with the public. No member may publish, circulate, or distribute 

any public communication that the member knows or has reason to know contains any untrue 

statement of a material fact or is otherwise false or misleading.

Further, NASD Rule 2210(d)(2)(B) states ‘‘Any comparison in advertisements or sales literature between investments or services must disclose all material differences between them, 

including (as applicable) investment objectives, costs and expenses, liquidity, safety, guarantees 

or insurance, fluctuation of principal or return, and tax features.’’

ments concerning new products.2 Similarly, NASD has also proposed stricter standards for the internal review and approval of 

correspondence (for example, letters, e-mail, and instant messages) 

with existing retail customers. 3

The standards implicated in the disciplinary proceeding noted 

above were some of the most fundamental applicable to brokerage 

firm communications, that is, the prohibition on misleading statements, the requirement that members’ communications be fair, balanced, and complete, and the requirement that comparisons include 

all relevant material differences between the subjects of the comparison.4 Accordingly, NASD appears to have sufficient standards 

in place to pursue rule violations in this area going forward. In addition, should Congress adopt the proposed ban on systematic investment plans advocated by NASD, there would be even less need 

to adopt specialized rules. 

RESPONSE TO A WRITTEN QUESTION OF SENATOR SARBANES

FROM JOHN OXENDINE 

Q.1. GAO notes that many States lack appropriateness or suitability standards for sales of insurance products to military members, so that investigators must prove that companies are misrepresenting products, which is difficult to do. Does the NAIC support 

GAO’s recommendation that appropriateness or suitability standards for sales of insurance products to military personnel be developed? If not, why not?

A.1. In 2000, the NAIC adopted the white paper, ‘‘Suitability of 

Sales of Life Insurance & Annuities,’’ which recommends that rules 

be developed requiring that suitability be determined by the producer and carrier in the sale of nonregistered life insurance and 

annuity products. While the NAIC agreed in concept that the development of suitability standards is necessary, the implementation of 

suitability standards is more difficult. Because of this, the NAIC 

first focused on the development of standards for seniors, which is 

the segment of the marketplace in which significant problems were 

identified. The NAIC membership adopted the Senior Protection in 

Annuity Transactions Model Regulation model in 2003. Today, approximately one-third of the States have some form of suitability 

standards that apply to seniors or the broader marketplace. 

In testimony to Congress in November of 2005 the NAIC recognized the Department of Defense (DoD) is in the best position to 

know the needs of military personnel and pledged its full cooperaVerDate 0ct 09 2002 17:35 May 18, 2007 Jkt 000000 PO 00000 Frm 00088 Fmt 6602 Sfmt 6602 S:\DOCS\1117.TXT SBANK4 PsN: KEVIN
85

tion and technical support to the DoD in meeting the needs of military personnel. In addition, the NAIC’s Life Insurance & Annuities 

(A) Committee has the following charge for 2006: Review life insurance sold with a side fund to recommend a position on the products 

being offered in the marketplace. Life insurance with a side fund 

is the predominate life insurance product being sold to the military 

today. 

In early February 2006, the NAIC will hold its annual commissioners conference to discuss critical issues facing State insurance 

regulators in 2006 and to set the NAIC’s strategic plan for 2006. 

The NAIC will discuss the development of suitability standards for 

life insurance products sold to military personnel during this conference and will provide additional comment on future NAIC activity after this conference.