Report on Refunds, Sales Practices, and Revenues from 

Periodic Payment Plans 

As Required by 

Section 4(c) of the 

Military Personnel Financial Services Protection Act 

U.S. Securities and Exchange Commission 

March 2007 
TABLE OF CONTENTS 

I. EXECUTIVE SUMMARY 

II. INTRODUCTION 

A. Military Personnel Financial Services Protection Act of 2006 

 B. Methodology of this Report 

III. BACKGROUND 

A. Periodic Payment Plans 

B. Sponsors 

C. Broker-Dealers 

IV. BROKER-DEALERS’ REVENUES GENERATED IN THE SALE OF 

PERIODIC PAYMENT PLANS 

A. Revenues from Sales of Periodic Payment Plans 

B. Products Marketed to Replace Sales of Periodic Payment Plans 

V. REFUNDS OF PAYMENTS MADE BY MILITARY PERSONNEL 

VI. PROBLEMS IN SALES OF SECURITIES TO MILITARY PERSONNEL 

A. Problems Identified in Commission Enforcement Actions 

1. In the Matter of First Command Financial Planning, Inc. 

2. SEC v. American-Amicable Life Insurance Company of Texas et al.

B. Problems Identified in Commission Examinations 

1. Risk-Based Examinations of Broker-Dealers That Sell Periodic 

Payment Plans 

2. Risk-Based Examinations of Broker-Dealers That Sell Other 

Securities Products to Military Personnel 

C. Problems Identified by NASD Oversight 

D. Possible “Switching” Identified 

VII. LEGISLATIVE AND REGULATORY RECOMMENDATIONS TO FURTHER 

IMPROVE SALES PRACTICES ON MILITARY INSTALLATIONS 

A. Legislative and Regulatory Initiatives Adopted to Address Problems in 

Sales of Securities to Military Personnel 

1. Prohibition of Sales of Periodic Payment Plans 

2. Initiatives by the Department of Defense 

3. Continuing Oversight by the SEC and NASD of Broker-Dealers 

Selling Securities to Military Personnel 

4. Investor Education for Uniformed Military Personnel 

B. The Commission has No Further Recommendations at this Time 

VIII. CONCLUSION 

2
LIST OF TABLES AND CHARTS 

Tables

Table 1 Periodic Payment Plan Effective Sales Loads Based on Number of 

Payments Made 

Table 2 Periodic Payment Plan Assets by Sponsor (2005) 

Table 3 Date on Which Sponsors Offering Periodic Payment Plans to New 

Investors during the Report Period Ceased Such Offers 

Charts

Chart 1 Periodic Payment Plan Effective Sales Loads Compared to Average 

Front-End Sales Load 

Chart 2 Periodic Payment Plan Assets Compared to Open-End Equity Fund Assets 

(June 1970) 

Chart 3 Periodic Payment Plan Assets Compared to Open-End Equity Fund Assets 

(January 2006) 

Chart 4 Periodic Payment Plan Assets as a Percentage of Open-End Equity Fund 

Assets (June 1970 and January 2006) 

Chart 5 Periodic Payment Plan Assets Compared to Open-End Equity Fund Assets 

(2002-2006) 

Chart 6 Percentage Change in Periodic Payment Plan Assets and Open-End 

Equity Fund Assets (January 2002 and January 2006) 

Chart 7 Periodic Payment Plan Assets by Sponsor (2005) 

Chart 8 Distribution of Periodic Payment Plan Assets between Plans Open and 

Closed to New Investors (June 2006) 

Chart 9 Broker-Dealers Selling Periodic Payment Plans as a Portion of the Total 

Brokerage Population Conducting a Retail Business 

Chart 10 Broker-Dealers’ Yearly Revenues from Periodic Payment Plans from 

Sales Charges and 12b-1 Fees (2002–2006) 

Chart 11 Dominant Broker-Dealers’ Revenue from Periodic Payment Plans 

Compared to Revenues of Other Broker-Dealers from Periodic Payment 

Plans (2002-2006) 

Chart 12 Dominant Broker-Dealers’ Revenue from Periodic Payment Plans 

Compared to Their Total Revenue (2002-2006) 

Chart 13 Broker-Dealers’ Yearly Revenues from Periodic Payment Plans that 

Closed Prior to the Effective Date of the Act Compared to Revenues from 

those that Closed Due to the Act (2002-2006) 

3
I. EXECUTIVE SUMMARY 

On September 29, 2006, Congress enacted the Military Personnel Financial Services 

Protection Act of 2006 (“Act”)1 to protect members of the Armed Forces from 

unscrupulous practices regarding sales of insurance, financial, and investment products. 

Among other things, the Act prohibited the issuance and sale of new periodic payment 

plan certificates after October 29, 2006, without invalidating any rights or obligations 

under a certificate sold before that date. It also required the Securities and Exchange 

Commission (“Commission”) to prepare a report on various matters relating to brokerdealers and the sale of periodic payment plans over the five-year period preceding 

submission of the report, from 2002 to 2006 (the “report period”). This report is 

submitted in compliance with the Act. 

As background, periodic payment plans are a type of investment company, organized as 

unit investment trusts and registered with the Commission. The plans allow investors to 

accumulate shares of mutual funds indirectly by contributing fixed monthly payments, 

usually by making 180 small monthly payments over a period of at least 15 years. They 

are subject to a sales charge or “load” that is unique to this product: 50% of the plan’s 

first 12 monthly payments. As a result of this charge, the effective sales load paid by an 

investor is highly dependent on the number of payments made. Generally, if an investor 

ceases making payments earlier than the 120th payment, that is, on or about the tenth 

anniversary of establishing the plan, a higher sales charge is paid than would have been 

paid if the investor had simply bought a conventional open-end equity mutual fund with 

an average sales load. 

These plans had significant market share around 1970, with approximately 13% of openend equity fund assets. By January 2006, the popularity of these plans had diminished 

significantly, and these products held only approximately two tenths of one percent of all 

assets in open-end equity funds. Moreover, growth in the assets collected by these plans 

was flat over the report period, while open-end equity funds experienced growth of 

approximately 44%. 

Periodic payment plans are managed and sponsored by investment company complexes. 

The number of plan sponsors of periodic payment plans has also declined since 1970. In 

that year approximately 80 sponsors offered periodic payment plans. By 2002, the 

beginning of the report period, only nine sponsors were in operation, with two of them 

holding 75% of plan assets. Moreover, of the nine sponsors in operation, only four 

continued to offer plans to investors in 2002, and three of those closed their plans during 

the report period. As a result, by the time the Act went into effect, only one sponsor’s 

plan remained open to new investors. 

 

1

 Military Personnel Financial Services Protection Act, 109th Cong., 2d Sess., Pub. L. No. 109- 290, 120 

Stat. 1317 (September 29, 2006) (prefatory material). 

4
Periodic payment plans were sold to retail investors by broker-dealers. Sponsors 

identified 127 broker-dealers that sold periodic payment plans during the report period, 

representing approximately 2.4% of all registered broker-dealers at the time the Act went 

into effect. 

The Act directed the Commission to report on several specific matters. These are 

summarized below, and detailed in this Report. 

Revenues obtained by broker-dealers: Congress directed the Commission to describe the 

revenues obtained by broker-dealers from the sale of periodic payment plans during the 

report period. The Commission’s staff (“Staff”) determined that broker-dealers selling 

periodic payment plans during the report period generated approximately $191,880,832 

in revenue. Of this amount, $159,103,583 constituted sales charges and $32,777,249 

constituted 12b-1 fees.2 On a year-by-year basis, the bulk of this revenue was generated 

by broker-dealers during the early years of the report period, with a sharp decline in 2005 

and 2006. The Staff also determined that nine dominant firms obtained revenues of 

$186,546,572 during the report period, giving them approximately 98% of the total 

revenues generated by broker-dealers in the sale of periodic payment plans. Nonetheless, 

this revenue represented only 1% of the dominant firms’ aggregate total revenue. 

Finally, because several plans closed to new investors during the report period, a 

substantial portion of the revenue paid to broker-dealers was paid by sponsors whose 

plans had already closed by the time the Act went into effect. 

“Replacement” products: Congress directed the Commission to describe any products 

marketed by broker-dealers to replace the revenue generated from the sales of periodic 

payment plan certificates prohibited by the Act. The dominant broker-dealers have 

indicated that they are not marketing any products to replace periodic payment plans. 

The Staff tested and analyzed these assertions and found no evidence inconsistent with 

the dominant firms’ claims. 

Existence of voluntary refunds: Congress directed the Commission to describe any 

measures taken by a broker-dealer to voluntarily refund payments made by military 

service members on any periodic payment plan certificate, and the amounts of such 

refunds. Of the dominant broker-dealers only one indicated that it is offering refunds to 

military service members: First Command Financial Planning, Inc. (“First Command”) 3

 

It is doing so pursuant to an enforcement action that predated enactment of the Act. 

Pursuant to the restitution plan established in that action, First Command has issued 

10,845 restitution checks to investors with a total value of $4,523,324. 

 

2

 Rule 12b-1 under the Investment Company Act of 1940, permits funds to make payments for distribution 

expenses so long as certain conditions are met. See Distribution of Shares by Registered Open-End 

Management Investment Companies, 17 C.F.R. 270.12b-1, as last amended in Release No. IC-26591, 69 

F.R. 54728 (2004). Asset-based fees charged to a fund for this purpose are generally called “12b-1 fees.” 

3 First Command Financial Planning, Inc., Release No. 8513, 84 S.E.C. 1332 (December 15, 2004). 

5
Sales practices to military personnel: Congress directed the Commission to describe the 

sales practices of broker-dealers on military installations over the report period. To fulfill 

this mandate, the Commission addressed a broader question: what are the sales practices 

of broker-dealers in connection with sales of securities to military personnel? This 

approach captures sales activity both on the premises of military installations and in sales 

offices located off-base, but near military bases. The Staff observed that many sales of 

securities to military personnel take place off-base, often in sales offices immediately 

outside the gates of military installations. Taking this approach, the Staff observed 

several problems in the sale of securities to military personnel. These included: 

misstatements regarding periodic payment plans; misstatements regarding the wealthbuilding potential of certain other securities products; the marketing of periodic payment 

plans to low-ranking personnel who may not be able to maintain the payments; and other 

concerns such as supervision of sales agents, especially in sales offices located outside 

bases overseas, and recommendations of sales agents to current holders of periodic 

payment plans. In its oversight of broker-dealers, the National Association of Securities 

Dealers (“NASD”), a self-regulatory organization (“SRO”) for broker-dealers, has found 

similar problems. 

Any recommendations: Finally, Congress directed the Commission, after such 

consultation with the Secretary of Defense as the Commission considers appropriate, to 

describe any legislative or regulatory recommendations to improve sales practices on 

military installations. Several legislative and regulatory initiatives have already been 

adopted, including the prohibition on sales of periodic payment plans; the on-going 

initiatives by the Department of Defense; the continuing oversight by the Commission 

and the NASD of broker-dealers that sell securities to military personnel; and the 

Commission and NASD’s active program of investor education for uniformed military 

personnel. In light of these active initiatives, which have already achieved considerable 

success, the Commission has no further legislative or regulatory recommendations to 

make at this time. 

II. INTRODUCTION 

Section 4(c) of the Act requires the Commission to prepare a Report on Refunds, Sales 

Practices, and Revenues from Periodic Payment Plans (“Report”). This provision further 

requires the Commission to submit the Report to the Committee on Financial Services of 

the U.S. House of Representatives and the Committee on Banking, Housing, and Urban 

Affairs of the U.S. Senate not later than six months after the date of enactment of the Act. 

This Report is submitted to the Committee on Financial Services of the U.S. House of 

Representatives and the Committee on Banking, Housing, and Urban Affairs of the U.S. 

Senate in compliance with the Act. 

A. The Military Personnel Financial Services Protection Act of 2006 

Congress enacted the Act to protect members of the Armed Forces from unscrupulous 

practices regarding sales of insurance, financial, and investment products. In Section 2 of 

the Act, Congress found that members of the Armed Forces perform great sacrifices in 

6
protecting our Nation, and that they deserve to be offered “first rate financial products in 

order to provide for their families and to save and invest for retirement.”4

 Unfortunately, 

as Congress also found, members of the Armed Forces were not always receiving such 

products. Instead, they were being offered high-cost securities and life insurance 

products by some financial services companies engaging in abusive and misleading sales 

practices.5

 Congress made findings about two specific products in this regard. 

First, Congress found that one securities product offered to service members, known as 

the “mutual fund contractual plan,” had largely disappeared from the civilian market 

during the 1980s, “due to excessive sales charges.”6 In such a plan, a 50% sales 

commission is assessed against the first year of contributions, despite an average 

commission on other securities products of less than 6% on each sale. The plans’ 

“excessive sales charges” allow abusive and misleading sales practices.7

Second, Congress found that certain life insurance products being offered to members of 

the Armed Forces are improperly marketed as investment products, providing minimal 

death benefits in exchange for excessive premiums that are front-loaded in the first few 

years.8

 These products, Congress found, are “entirely inappropriate for most military 

personnel.”9

Congress concluded its findings by stating that “the need for regulation of the marketing 

and sale of securities and life insurance products on military bases necessitates 

Congressional action.”10 Most importantly, for purposes of this Report, Congress 

prohibited periodic payment plans. Section 4(a)(1) of the Act states that effective 30 

days after the date of enactment, it shall be unlawful for any registered investment 

company to issue any periodic payment plan certificate, or for any such company, or any 

depositor of underwriter for such a company, or any other person to sell such a 

certificate.11 Section 4(a)(2) provides that this provision shall not “alter, invalidate, or 

otherwise affect any rights or obligations, including rights of redemption,” under any 

 

4 Supra. at note 1, §2. 

5 Id. 

6 Id. 

7 Id. Mutual fund contractual plans are also known as “periodic payment plans” or “periodic payment plan 

certificates.” 

8 Id. at §2. 

9 Id. 

10 Id. 

11 Id. at §4(a)(1). 

7
periodic payment plan sold before the termination date.12 As a result, while existing 

plans remain in effect, no new plans may be issued or sold after October 29, 2006. 

In Section 4(c) of the Act, Congress required the Commission to prepare a report13 that 

shall describe: 

(1) any measures taken by a broker or dealer registered with the Securities and 

Exchange Commission pursuant to section 15(b) of the Securities Exchange Act 

of 1934 (15 U.S.C. 78o(b)) to voluntarily refund payments made by military 

service members on any periodic payment plan certificate, and the amounts of 

such refunds; 

(2) after such consultation with the Secretary of Defense, as the Commission 

considers appropriate, the sales practices of such brokers or dealers on military 

installations over the 5 years preceding the date of submission of the report and 

any legislative or regulatory recommendations to improve such practices; and 

(3) the revenues generated by such brokers or dealers in the sales of periodic 

payment plan certificates over the 5 years preceding the date of submission of the 

report, and the products marketed by such brokers or dealers to replace the 

revenue generated from the sales of periodic payment plan certificates prohibited 

under subsection (a). 

 

This Report has been prepared in conformity with the requirements of Section 4(c), as set 

forth above. The order of presentation has been slightly modified from the order of 

Section 4(c) of the Act. The discussion of possible legislative or regulatory 

recommendations is last. 

B. Methodology of this Report 

To prepare this Report, the Staff used various means to collect information relevant to the 

Congressional mandate for the five year review period. The Staff gathered information 

on periodic payment plans from the Commission’s own public, examination, and 

enforcement files. 

The Staff also utilized the Commission’s examination authority to collect information 

from the nine investment company complexes that sponsored periodic payment plans 

during the report period. These sponsors issued 100% of the registered periodic payment 

plans that were in operation during the report period. The Staff also used the 

Commission’s examination authority to collect information from nine broker-dealers that 

earned significant revenues from sales of period payment plans during the report period. 

These firms earned approximately 98% of the revenue that broker-dealers obtained from 

sales of periodic payment plans during the report period. They are described herein as 

 

12 Id. at §4(a)(2). 

13 Id. at §4(c). 

8
the “dominant” broker-dealers because they dominated the market for periodic payment 

plans. The Staff also collected information from SROs for broker-dealers, and consulted 

with the Department of Defense. 

III. BACKGROUND 

Periodic payment plans were issued and sold for many decades prior to the prohibition on 

such activities in Section 4(a) of the Act. Three types of institutions played crucial roles 

in this activity. They were: the periodic payment plans themselves; the sponsors that 

organized and brought the plans to market; and the broker-dealers that sold the plans to 

investors, including military personnel. Each type of institution is discussed below. 

A. Periodic Payment Plans 

Periodic payment plans involve the offer and sale of mutual fund investments by plan 

sponsors through an installment method known as a “contractual” or “systematic 

investment plan.” They are defined in Section 2(a)(27) and regulated under Section 27 of 

the Investment Company Act of 1940. Section 2(a)(27) of the Investment Company Act 

defines a periodic payment plan generally as a security in which an investor makes a 

series of periodic payments to acquire an undivided interest in certain specified securities 

or in a unit or fund of securities. Among other things, Section 27 of the Investment 

Company Act limits the sales charges that periodic payment plans may impose.14 

Periodic payment plans are registered investment companies generally, organized as unit 

investment trusts under Section 26 of the Investment Company Act of 1940. As 

investment companies they are required to file a registration statement with the 

Commission15 and provide investors with a prospectus.16 Thereafter, they are required to 

file with the Commission annual reports on Form N-SAR.17 Investors purchase an 

interest in the unit investment trust. By acquiring an interest in the trust, investors are 

able to accumulate shares of mutual funds indirectly by contributing to the trust or 

custodian a fixed investment amount on a regular basis. The trusts, in turn, invest the 

proceeds in open-end equity mutual funds. Investments in the underlying mutual funds 

are net of trust and custodial fees and a pro rata share of the fees and commissions 

 

14 Investment Company Act of 1940 § 27(a), 15 U.S.C. § 80a-27 provides for alternative limitations on 

sales charges. 

15 The statement must be filed within three months after the filing of notification of registration under 

Section 8(a), 15 U.S.C. § 80a-8. See also, 17 C.F.R. 270.8b-5 (1954). 

 

16 See Section 10(a) of the Securities Act of 1933, 15 U.S.C. § 77j. 

17 See 17 C.F.R. 274.101. Both the designation N-SAR or N-SAR-U represent the reporting form used for 

semi-annual and annual reports by all investment companies that have filed a registration statement, which 

is effective under the Securities Act of 1933. Registered management investment companies are required 

to file a Form N-SAR under 17 C.F.R. 270.30b1-1 as last amended in Release No. 34-47262, 68 F.R. 5348 

(2003) and registered unit investment trusts are required to file a Form N-SAR-U under 17 C.F.R. 270.30a1 as last amended in Release No. 34-47262, 68 F.R. 5348 (2003). 

 

9
associated with the underlying mutual funds.18 The installment contracts usually 

contemplate 180 payments ranging from $100 to $500, over a period of at least 15 years. 

As a result, when entering into a periodic payment plan, an investor makes a long-term 

financial commitment. 

Periodic payment plans are usually subject to a sales charge unique to this type of 

investment, referred to as a “sales and creation charge” or “front-end load” that equals 

50% of the plan’s first 12 monthly payments. There is no sales charge after the first 12 

payments. As a result of this unique sales charge, the amount of the effective sales 

charge paid by an investor is directly dependent on the number of payments made.19 

Once an investor has completed the first 12 payments, the effective sales load is reduced 

with each payment. For example, if the investor makes all 180 payments under the plan, 

the effective sales load on the total investment would be 3.33%.20 If 300 payments are 

made, then the effective sales load on the total investment would be 2%. Conversely, if 

the investor ceases making payments or terminates the plan before making all of the 

required payments under the plan, the effective total sales load may be higher than the 

average sales load charged by a conventional open-end equity mutual fund. The effective 

sales load on the total investment at various discontinuation points is illustrated below in 

Table 1: Periodic Payment Plan Effective Sales Loads as of Number of Payments 

Made.21

 

18 See supra, First Command Financial Planning, Inc. at note 3, generally discussing operations of periodic 

payment plans. 

19 Id. at p. 2. 

20 The NASD informs us that according to the prospectuses, in certain plans, and for a specific share class, 

the sales charges and custodian fees may be up to 7.4%, even after completion of a fifteen year plan. 

21 Id., p.p. 3-4. The Staff converted the information into a table to illustrate the adverse effects on investors 

caused by prematurely terminating payments on a periodic payment plan. 

10
 

Table 1: Periodic Payment Plan Effective Sales Loads Based on Number 

of Payments Made 

Contributions Discontinued Sales Load as a Percentage 

 After: of Amount Invested: 

 12 payments 50.00% 

 18 payments 31.60% 

 24 payments 25.00% 

 60 payments 10.00% 

 120 payments 5.00% 

 180 payments 3.33% 

 300 payments 2.00% 

The average front-end sales load on open-end equity mutual funds is 4.76%, with a 

weighted average of 5.18%.22 As a result, since 120 payments must be made to reach an 

effective commission of 5% on a periodic payment plan, it will generally take an investor 

approximately ten years to reach this point. The relationship between the effective sales 

charge on a periodic payment plan and the average front-end sales load is illustrated 

below in Chart 1: Periodic Payment Plan Effective Sales Loads Compared to Average 

Front-End Sales Load.23

Chart 1: Periodic Payment Plan Effective Sales Load 

Compared to Average Front-End Sales Load 

(Blue = PPP Sales Load Red = Weighted Average 5.18%)

0%

10%

20%

30%

40%

50%

12 18 24 60 120 180 300

Number of Payments After Which Contributions Were Discontinued

Sales Load as a Percentage of 

Amount Invested

 

22 According to the Lipper LANA database, as of September 30, 2006, conventional open-end equity mutual 

funds charged approximately 4.76% as the average load and the weighted average was approximately 

5.18%. 

23 See supra, Table 1. 

11
In addressing how the effective sales charge relates to the number of payments, great care 

must be made to distinguish the “persistency rate” from the “completion rate.” While 

both terms relate to the length of time an investor has been in a plan, they are not the 

same. The persistency rate can include all accounts that remain in the plan, whether or 

not any payment has been made in the last year or more. In essence, the persistency rate 

can include all accounts that have not been terminated by the investor, including dormant 

or inactive plans for which payments ceased at a point producing an extremely high 

effective sales charge. The completion rate includes accounts that have actually made the 

contractually contemplated number of periodic payments. For example, in a recent 

enforcement action, the Staff was given data by a firm selling periodic payment plans that 

indicated an 80% “persistency rate.” However, the Commission determined that the 

completion rate on plans sold by this firm was only 43%.24 

Prior to the 1970s, periodic payment plans were one of the few ways by which small 

investors could make modest investments in mutual funds. As originally constituted, the 

mutual fund industry required investors to make relatively high initial investments. 

Periodic payment plans provided a means for small investors to make low-dollar 

investments in mutual funds. This gave them considerable popularity. In June 1970, for 

example, assets invested in periodic payment plans equaled more than $6 billion, and 

investments in open-end funds equaled approximately $45 billion. This is illustrated 

below in Chart 2: Periodic Payment Plan Assets Compared to Open-End Equity Fund 

Assets (June 1970).

25

Chart 2: Periodic Payment Plan Assets Compared to Open-End Equity

Fund Assets (June 1970)

$6.1

$45.1

$0.0

$10.0

$20.0

$30.0

$40.0

$50.0

Periodic Payment Plan Assets Open End Assets

Billions of Dollars

 

24 See supra, First Command Financial Planning, Inc. at note 3. 

25 See Classification, Assets and Location of Registered Investment Companies under the Investment 

Company Act of 1940, as of June 30, 1970 (SEC Publications and Forms NSAR–U) and the 2006 

Investment Company Fact Book: 46th Edition (Investment Company Institute). 

12
While popular, periodic payment plans became associated with certain types of sales 

practice abuses. These concerns were addressed in provisions of the Investment 

Company Act of 1940 limiting the sales charges purchasers could be assessed when 

purchasing periodic payment plans.26 Despite these limitations, during the 1950s and 

1960s additional concerns were raised, including the sizes of sales charges and 

inappropriate sales practices. In the 1960s, the Staff studied mutual fund sales practices, 

including the sale of contractual plans. The Commission found that “[i]n the salesmen’s 

incentives of the contractual plan lie the greatest potential for unwarranted selling 

pressure on members of the public”27 and recommended eliminating the front-end load 

and reducing fund sales charges to a maximum of 5%.28 

These efforts led to significant amendments to the Investment Company Act in 1970 to 

further limit maximum sales charges for periodic payment plans and to provide a period 

in which purchasers could obtain refunds of their investments.29 The 1970 Act did not 

change Section 27(a) of the Investment Company Act, which continued to allow a 

deduction for sales charges equal to 50% of the first 12 monthly payments. However, 

new Subsections (d), (e) and (f) afforded holders of periodic payment plans certain 

specified rights of refund, withdrawal, and notice.30 

Beginning in the 1970s, alternative means were developed for making small investments 

in mutual funds. Firms began to allow investors to buy mutual fund shares directly and 

furnished services known as “automatic investment programs,” “asset builders” or 

“account builders.” These services allow investors to purchase shares on a regular basis, 

for example, by electronically transferring money from a designated bank account or 

paycheck. Most mutual funds do not charge a fee for setting up or terminating these 

automated transfer services. They applied to both load and no-load funds that accepted 

low initial investments and low periodic or automatic investment payment plans.31

 

Consequently, many investors started investing directly with an open-end mutual fund 

instead of with a periodic payment plan. In the years since, assets invested directly in 

open-end funds have outstripped periodic payment plans. For example, in January 2006, 

 

26 Section 27(a) of the Investment Company Act of 1940 capped the allowable sales load on the total 

payments to be made by the investor at 9% and the maximum portion of the first twelve monthly 

installment payments that may be deducted as sales load at 50%. 

27 Securities and Exchange Commission, Report of the Special Study of the Securities Markets at 99 (1963) 

(available at : //www.sechistorical.org/collection/papers/1960/1963_SS_Sec_Markets/). 

28 Report of the U.S. Securities and Exchange Commission on the Public Policy Implications of Investment 

Company Growth at 22 (Dec. 2, 1966)(available at: 

http://www.sechistorical.org/collection/papers/1960/1966_InvestCoGrowth/). 

29 Investment Company Amendments Act of 1970, Pub. L. 91-547, 84 Stat.1424, 1425 (1970). 

30Investment Company Act of 1940 § 27(d), (e), and (f), 15 U.S.C. § 80a-27 (d), (e), and (f). 

31 See supra, First Command Financial Planning, Inc. at note 3. 

 

13
assets invested in open-end mutual funds had grown to $4.9 trillion. At the same point in 

time, assets invested in periodic payment plans were only $11.5 billion. This is 

illustrated below in Chart 3: Periodic Payment Plan Assets Compared to Open-End 

Equity Fund Assets (January 2006).

32

Chart 3: Periodic Payment Plan Assets Compared to Open-End Equity 

Fund Assets (January 2006)

$11.5

$4,940.0

$0.0

$1,000.0

$2,000.0

$3,000.0

$4,000.0

$5,000.0

$6,000.0

Periodic Payment Plan Assets Open-End Assets

Billions of Dollars

While assets invested in periodic payment plans have grown over the years since 1970, 

they have suffered a severe relative decline when compared to open-end mutual funds. 

Assets invested in periodic payment plans have grown from $6.1 billion in 1970 to $11.5 

billion in January 2006. In other words, over a 35-year period invested assets have 

almost doubled. Yet, over the same period, assets invested in open end mutual funds 

have risen from $45.1 billion to $4,940 billion (or $4.9 trillion), an increase of more than 

a hundred-fold. Given periodic payment plans’ much slower growth rate, their assets 

have shrunk from more than 13% to less than a quarter of one percent (0.23%) of assets 

in mutual funds. This is illustrated below in Chart 4: Periodic Payment Plan Assets as a 

Percentage of Open-End Equity Fund Assets (June 1970 and January 2006).

33

 

32 See generally 2006 Investment Company Fact Book: 46th Edition (Investment Company Institute).

33 See generally 2006 Investment Company Fact Book: 46th Edition (Investment Company Institute); 

Classification, Assets and Location of Registered Investment Companies under the Investment Company 

Act of 1940, as of June 30, 1970 (SEC Publications and Forms N-SAR) and 2006 N-SAR filings made with 

the Commission. 

14
Chart 4: Periodic Payment Plan Assets as a Percentage of Open-End Equity Fund 

Assets (June 1970 and January 2006)

13.41

0.23

0

5

10

15

June 1970 January 2006

Percentage

The relative decline in periodic payment plan assets does not appear to be attributable to 

general conditions in the securities markets. For example, during the report period, assets 

invested in periodic payment plans have remained flat. In 2002 they were $11.5 billion, 

and in 2006 they were again $11.5 billion. In 2003 they dipped to $9.2 billion, probably 

as a result of the general market decline during that period. In 2004 and 2005 they rose 

again to $11.6 and $12.4 billion, respectively. Open-end equity fund assets also 

experienced a dip in the early 2000s. In 2002 they stood at $3,418.2 billion, and they fell 

to $2,662.5 billion in 2003. However, following the dip, while periodic payment plans 

only regained their prior levels of invested assets, open-end equity funds soared to 

$3,684.2 billion in 2004, $4,384.1 billion in 2005 and $4,940 billion in 2006. The 

relative growth of periodic payment plans and open-end equity funds over the report 

period is illustrated below in Chart 5: Periodic Payment Plan Assets Compared to OpenEnd Equity Fund Assets (2002-2006).

34

Chart 5: Periodic Payment Plan Assets Compared to Open-End Equity Fund 

Assets (2002-2006)

$3,418.2

$4,384.1

$4,940.0

$11.5 $9.2 $11.6 $12.4 $11.5

$3,684.2

$2,662.5

0

1000

2000

3000

4000

5000

2002 2003 2004 2005 2006

Billions of Dollars

Periodic Payment Plan Assets Open-End Equity Fund Assets

 

34 2006 Investment Company Fact Book: 46th Edition (Investment Company Institute) and N-SAR-U filings 

made with the Commission. 

15
The aggregate relative growth of these two products over the report period provides a 

stark illustration of the decline in periodic payment plans. From 2002 to 2006 assets 

invested in open-end equity funds increased by 44.5%. At the same time, assets invested 

in period payment plans remained flat. This is illustrated below in Chart 6: Percentage 

Change in Periodic Payment Plan Assets and Open-End Equity Fund Assets (January 

2002 and January 2006).35

Chart 6: Percentage Change in Periodic Payment Plan 

Assets and Open-End Equity Assets 

(January 2002 and January 2006)

0.0%

44.5%

0%

10%

20%

30%

40%

50%

Periodic Payment Plans Open-End Equity Funds

By 2006 periodic payment plans were a small asset class that was experiencing flat 

growth. From a prominent position in 1970, they had shrunk to a tiny relative size when 

compared to open-end equity mutual fund assets. Even when general market conditions 

led to a rapid rise in mutual fund assets, such as the asset growth experienced by openend equity funds in the years after 2003, assets invested in periodic payment plans 

remained flat. 

B. Sponsors 

A periodic payment plan sponsor organizes the plan, enters into agreements with service 

providers, such as a custodian for the plan assets, and then brings the plan to market by 

making arrangements for its distribution to investors. Sponsors are generally registered 

as broker-dealers, and are part of a larger investment company complex.36 In June of 

1970, approximately 80 firms sponsored periodic payment plans. By the time of the 

report period only nine sponsors were in operation, either offering plans that were open to 

 

35 Id. 

36 See Section III.C of this Report for a discussion of broker-dealers. 

16
new investors or servicing existing periodic payment plans that were closed to new 

investors. 

The nine sponsors of periodic payment plans in operation during the report period were: 

AIM Distributors; Baxter Financial Corp.; Capstone Asset Management; First Investors; 

FMR Corp.; Franklin/Templeton Distributors; Oppenheimer Funds Distributor; Pioneer 

Investment Management; and Washington Investor Plans Inc. As of October 2005, they 

sponsored a total of 19 plans. All nine sponsors are registered with the Commission as 

broker-dealers, and have affiliated investment advisory functions that are also registered 

with the Commission. Of those nine sponsors, only four sold the product at some point 

during the report period. These were: AIM Distributors; FMR Corp.; 

Franklin/Templeton Distributors; and Pioneer Funds Distributor. These sponsors 

distributed the periodic payment plans through five separate offerings. 

As previously noted, periodic payment plans collectively held assets of approximately 

$11.5 billion at the close of the report period. However, distribution of these assets 

among sponsors was highly concentrated. This can be seen below in Table 2: Periodic 

Payment Plan Assets by Sponsors (2005).

37

Table 2: Periodic Payment Plan Assets by Sponsor (2005) In Millions 

Sponsor Plan Assets

AIM Distributors $ 2,342.1 

Baxter Financial Corp. $ 47.3 

Capstone Asset Management $ 6.8 

First Investors $ 222.6 

FMR Corp. $ 8,265.9 

Franklin/Templeton Distributors $ 146.9 

Oppenheimer Funds Distributor $ 49.5 

Pioneer Investment Management $ 390.0 

Washington Investor Plans Inc. $ 0.038

AIM Distributors and FMR, Corp., held the preponderance of assets, with 75% of the 

total. The relative size of the different sponsors is illustrated below in Chart 7: Periodic 

Payment Plan Assets by Sponsor (2005).

39

 

37 N-SAR Forms filed with the Commission. 

38 Washington Investor Plans, Inc. is included because its periodic payment plans held assets during the 

report period, but not after 2004. 

39 See supra, Table 2. 

17
Chart 7: Periodic Payment Plan Assets 

by Sponsor (in Millions)

Oppenheimer 

Funds Distributor, 

$49.5

Washington 

Investor Plans 

Inc., $0.0

AIM Distributors, 

$2,342.1

Baxter Financial 

Corp., $47.3

Capstone Asset 

Management, $6.8

First Investors, 

$222.6

FMR Corp., 

$8,265.9

FranklinTempleton 

Distributors, 

$146.9

Pioneer 

Investment 

Management, 

$390.0

Due to the longevity of periodic payment plans, with payments often extending over 

fifteen years, a plan can remain in operation for years after sales are terminated. 

Congress recognized this fact in Section 4(a)(2) of the Act, which provided that the 

prohibition on future issuance or sale of future periodic payment plans shall not “alter, 

invalidate, or otherwise affect any rights or obligations, including rights of redemption,” 

under any periodic payment plan sold before the termination date.40 This can also be 

seen in the operations of sponsors during the report period. 

More than half (5 out of 9 or 55%) of the sponsors in operation during the report period 

had ceased selling plans before 2002. Moreover, of the four sponsors who sold at some 

point during the report period, three ceased selling during the report period. Therefore, 

by the time of the effective date for the prohibition on future issuance and sale of periodic 

payment plans (8 out of 9) or close to 90% of the sponsors were no longer selling the 

product. This is illustrated below in Table 3: Date on Which Sponsors Offering Periodic 

Payment Plans to New Investors during the Report Period Ceased Such Offers.

41

 

40 See supra, Military Personnel Financial Services Protection Act at note 1, § 4(a)(2). 

41 Sponsors’ responsive comments to Commission examinations on periodic payment plans. 

18
Table 3: Date on Which Sponsors Offering Periodic Payment Plans to 

New Investors during the Report Period Ceased Such Offers 

Sponsor Date Offers Ceased

AIM Distributors January 12, 2005 

FMR Corp. Closed by the Act 

 Franklin/Templeton Distributors December 27, 2004 

Pioneer Funds Distributor October 11, 2005 

As a result by 2006, almost a quarter of the assets in periodic payment plans were in 

plans that were no longer being sold. As of January 1, 2006, $8.7 billion were in plans 

that were being sold, and $2.8 billion were in plans that were no longer being sold. This 

is illustrated below in Chart 8: Distribution of Periodic Payment Plan Assets between 

Plans Open and Closed to New Investors (June 2006).

42

Chart 8: Distribution of Periodic Payment Plan Assets 

between Plans Open and Closed to New Investors 

(June 2006)

Active Plan 

Closed to New 

Investors, 

$2.8 Billion

Active Plan Sold 

to New Investors,

$8.7 Billion

By 2006 the population of periodic payment plan sponsors had shrunk dramatically. 

Moreover, assets were highly concentrated among the surviving sponsors, with two 

accounting for approximately 75%. Finally, by the beginning of 2006 only FMR Corp. 

continued to offer its plan to new investors. 

C. Broker-Dealers

Periodic payment plans are sold to investors by broker-dealers. A broker, in general, is 

any person engaged in the business of effecting transactions in securities for the account 

 

42 Id. 

19
of others.43 A dealer, in general, is any person engaged in the business of buying and 

selling securities for such person’s own account through a broker or otherwise.44 To sell 

periodic payment plans, broker-dealers enter into dealer agreements with the plan’s 

sponsor. 

An entity that wishes to act as a broker-dealer, and that does not qualify for an 

exemption, must register both with the Commission and with at least one SRO.45 Most 

non-bank registered broker-dealers also must become members of the Securities Investor 

Protection Corporation.46 The Uniform Application for Broker Dealer Registration, 

Form BD, requires broker-dealers to disclose detailed information about their business, 

including their disciplinary history, if any.47 Similar information about registered 

personnel of broker-dealers must be disclosed on Form U4, the Uniform Application for 

Securities Industry Registration. This information is maintained in the Central 

Registration Depository (“CRD”), which is operated by the NASD. Much of this 

information, including disciplinary history, is made publicly available by NASD through 

BrokerCheck. Broker-dealers must comply with the specific federal securities laws and 

rules thereunder, including: maintaining certain levels of net capital, depending on the 

nature of their business;48 providing certain protections for customer funds and 

securities;49 complying with regulations governing their books and records,50 and 

disclosing specific transactional information to customers.51 The Commission has 

 

43 Securities Exchange Act of 1934 § 3(a)(4), 15 U.S.C. § 78c(a)(4). 

44 Id. § 3(a)(5), 15 U.S.C. § 78c(a)(5). 

 

45 See Securities Exchange Act of 1934 § 15(b)(8), 15 U.S.C. §78o(b)(8). 

46 See Securities Investor Protection Act of 1970 § 3(a)(2), 15 U.S.C. § 78ccc(a)(2). 

47 See, 17 C.F.R. 249.501 as last amended in Release No. 34-41672, 64 F.R. 42594 (1999). See also, The 

“Uniform Application for Broker Dealer Registration,” or “Form BD,” requires broker-dealers to disclose 

information regarding their business organization, control persons, types of business in which they engage, 

disciplinary history, and other additional relevant matters. The “Financial and Operational Combined 

Uniform Single Report,” or “FOCUS Report,” requires broker-dealers to report their capital structure, 

financial status, revenues, and additional relevant matters. 

48 Net Capital Requirement for Brokers or Dealers, 17 C.F.R. 240.15c3-1 as amended in Release No. 34-

49830, 69 F.R. 34428 (2004). 

49 Customer Protection – Reserves and Custody of Securities, 17 C.F.R. 240.15c3-3 as last amended in 

Release No. 34-50295, 69 F.R. 54182 (2004). 

50 Records to be Made by Certain Exchange Members, Broker-dealers, 17 C.F.R. 240.17a-3 as amended by 

Release No. 34-49830, 69 F.R. 34428 (2004); Records to be Preserved by Certain Exchange Members, 

Broker-dealers, 17 C.F.R. 240.17a-4 as amended by Release No. 34-49830, 69 F.R. 34428 (2004); and 

Reports to Be Made by Certain Brokers-Dealers, 17 C.F.R. 240.17a-5 as amended by Release No. 34-

49830, 69 F.R. 34428 (2004). 

51 Confirmation of Transactions, 17 C.F.R. 240.10b-10 as amended in Release No. 34-51808, 70 F.R. 

37496. 

20
authority to impose additional disclosure requirements on broker-dealers pursuant to 

Section 15(c)(2) of the Securities Exchange Act of 1934.52 Broker-dealers must also 

comply with the anti-fraud provisions of the federal securities laws,53 and rules that the 

Commission has promulgated thereunder.54 Moreover, broker-dealers are subject to 

statutory disqualification standards and the Commission's disciplinary authority, which 

are designed to prevent persons with an adverse disciplinary history from becoming, or 

becoming associated with, registered broker-dealers.55 

In addition to their regulation by the Commission, broker-dealers are regulated by 

SROs,56 such as the NASD.57 As members of the NASD, broker-dealers must observe 

high standards of commercial honor and just and equitable principles of trade.58 The 

SROs also have authority to adopt rules that are in accordance with just and equitable 

principles of trade. Broker-dealers must comply with NASD rules and regulations 

requiring them, among other things, to employ principals and sales agents that have 

successfully completed appropriate qualifying examinations (sales agents are known in 

the securities business as “registered representatives”);59 to supervise these agents;60 and 

to provide them with appropriate continuing education.61 Broker-dealers also have 

certain disclosure requirements under SRO rules. NASD requires its members 

recommending the purchase or sale of a mutual fund to a customer, to disclose all 

material facts to the customer. Material facts may include, but are not limited to, the 

fund's investment objective; the fund's portfolio, historical income, or capital 

appreciation; the fund's expense ratio and sales charges; risks of investing in the fund 

relative to other investments; and the fund's hedging or risk amelioration strategies. 

Disclosure of these and other facts concerning a proposed investment is required if the 

 

52 See Securities Exchange Act of 1934 §15(c)(2), 15 U.S.C. §78o(c)(2). 

53 See, e.g., Securities Act of 1933 §17, 15 U.S.C. § 77q; Securities Exchange Act of 1934 §§9(a), 10(b), § 

15(c)(1) and (2), 15 U.S.C. §§ 78i, 77j, and 78o . 

54 See, e.g., Employment of Manipulative and Deceptive Devices, 17 C.F.R. 240.10b-5 as adopted in 

Release No. 34-3230, 13 F.R. 8177 (1942). 

55 See Securities Exchange Act of 1934 §§ 3(a)(39), 15(b)(4), and 15(b)(6) ; 15 U.S.C. §§ 78c(a)(39), 

78o(b)(4), and 78o(b)(6). 

56 Securities Exchange Act of 1934 §19, 15 U.S.C. §78s. 

57 NASD is a registered SRO, and as such is subject to oversight by the Commission. See Securities 

Exchange Act of 1934 §§ 15A, §17(a) and (b), and §19; 15 U.S.C. §§ 78o-3, 78q, and 78s. 

58 NASD Conduct Rule 2110. 

59 NASD Membership and Registration Rules 1020 to 1040. 

60 NASD Conduct Rule 3010. 

61 NASD Membership and Registration Rules 1120. 

21
circumstances surrounding the investment decision lead one to believe the investor would 

regard a fact as material to his decision whether to invest in the fund.62

When broker-dealers sell securities to investors they must comply with several important 

standards, including SRO suitability rules.63 A broker-dealer must make 

recommendations to a customer that are suitable based on a customer’s financial situation 

and needs as well as other securities holdings. Suitability gives rise to a legal obligation 

under the federal antifraud provisions, as well as an ethical duty under SRO rules.64 This 

requirement has been construed to impose a duty of inquiry on brokers to obtain relevant 

information from customers relating to their financial 

situations65 and to keep such information current.66 Factors relevant to whether a 

recommendation is suitable include not only information about the customer, but also 

characteristics of the securities and strategy recommended. Customer-specific factors 

include, but are not limited to, the customer’s age, financial status, investment objectives, 

and level of sophistication in financial matters. Factors relating to the securities and 

investment strategy include, but are not limited to, the nature of the securities, the 

concentration of securities in the customer’s portfolio, the use of margin, and the 

frequency of trading. 

Commission actions against broker-dealers for making unsuitable recommendations 

generally are brought under Securities Exchange Act of 1934 Section 10(b) and Rule l0b5 thereunder.67 Like many other actions for violating the antifraud provisions, the 

Commission must establish that there was a misrepresentation (or material omission) that 

was made with scienter.68 In contrast to the Commission’s actions against broker-dealers 

 

62 See NTM No. 94-16 NASD Reminds Members of Mutual Fund Sales Practice Obligations; see also NTM

No(s). 91-74 Replacement of Certificates of Deposits by Bond Mutual Funds, 93-87 NASD Provides 

Guidance for Reinvestment of Maturing Certificates of Deposits in Mutual Funds, and 95-80 NASD Further 

Explains Members Obligations and Responsibilities Regarding Mutual Funds Sales Practices. 

63 See e.g., NASD Rule 2310. Recommendations to Customers (Suitability) and NYSE Rule 405 Diligence 

as to Accounts. 

64 See Report of the Special Study of Securities Markets of the Securities and Exchange Commission, H. 

Doc. 95, 88th Cong., 1st Sess., at 238 (1963) (“Report of Special Study”). 

65 Gerald M. Greenberg, Release No. 34-6320, 40 S.E.C. 133 (July 21, 1960) (holding that a broker cannot 

avoid the duty to make suitable recommendations simply by avoiding knowledge of the customer’s 

financial situation entirely). 

66 See 17 C.F.R. 17a-3(a)(17)(i) , which requires broker-dealers to update customer records, including 

investment objectives, at least every 36 months. 

67 See, e.g., Clark v. John Lamula Investors, Inc., 583 F.2d 594 (2d Cir. 1978). 

68 See Santa Fe Industries, Inc. v. Green, 430 U.S. 462 (1977) (holding that a mere breach of a fiduciary 

duty in connection with a securities transaction, without misrepresentation, is not a fraud for purposes of 

the federal securities laws). Santa Fe indicates that an unsuitable recommendation cannot serve as the basis 

for a fraud claim, unless the recommendation also entails an element of deception. Recklessness also 

provides a basis for finding scienter. See, e.g., Edgar Alacan, Release No. 34-49970, 83 S.E.C. 723 (Jul. 

6, 2004) (Salesman was “recklessly indifferent” to whether his highly aggressive and speculative 

22
brought under the Securities Exchange Act of 1934, Section 10(b) and Rule l0b-5; actions 

brought against broker-dealers under the Securities Act of 1933, Section 17 and under the 

SRO rules, do not necessarily require proof of scienter to establish a suitability 

violation.69 

The SRO rules are grounded in concepts of professionalism, fair dealing, and just and 

equitable principles of trade, rather than in fraud. This means that the broker-dealer must 

have reasonable grounds for believing that the recommended transaction is suitable for 

the customer on the basis of information furnished by the customer and after “reasonable 

inquiry” concerning the customer's investment objectives, financial situation, and 

needs.70 A broker's recommendations must be consistent with the customer's “best 

interests, and must not be inconsistent with the customer’s financial situation.”71 Finally, 

a recommendation is not suitable merely because the customer acquiesces in the 

recommendation.72 The Commission and the SROs vigorously enforce these anti-fraud 

and suitability standards.

During the report period, approximately 127 broker-dealers sold periodic payment 

plans.73 This represented only a small portion of the total population of broker-dealers. 

In 2006 there were 5,029 registered broker-dealers conducting a retail business.74 

Therefore, the broker-dealers that sold periodic payment plans during the report period 

represented only approximately 2.4% of the relevant broker-dealer community at the time 

the Act was enacted.75 This is illustrated below in Chart 9: Broker-Dealers Selling

 recommendations were consistent with the non-speculative investment objectives of his customers and 

therefore acted with scienter). 

69 See, e.g., Securities Act of 1933 §17, 15 U.S.C. §77q and In re Jack H. Stein, Release No.34- 47335, 79 

S.E.C. 1777 (Feb. 10, 2003) (“Scienter is not an element for finding a violation of the NASD suitability 

rule.”); In re John M. Reynolds, Exchange Act Release No. 34-30036 50 S.E.C. 805(Dec. 4, 1991) (scienter 

unnecessary to establish excessive trading under NASD rules).

70 In the Matter of Dane S. Faber, Release No. 34-49216, 82 S.E.C. 459 (Feb. 10, 2004) (SEC review of 

NASD disciplinary proceeding). 

71 Id. 

72 Id. 

73 This is an approximate number because several broker-dealers sold for more than one sponsor, and in 

some cases selling broker-dealers have merged or been sold to another firm. While many of these issues 

have been resolved, it is possible that some small portion of the 127 firms continue to represent 

duplications. 

74 NASD website: http.//www.nasd.com/PressRoom/Stastics/index.htm. 

75 As a practical matter the portion of registered broker-dealers that sold periodic payment plans is probably 

less than 2.4%. The percentage given in the text compares all broker-dealers selling periodic payment 

plans over a five-year period to the number of all registered broker-dealers as of the end of the report 

period. Due to firms entering and leaving the business, acquisitions, mergers, and other events, the total 

number of registered broker-dealers during the five-year report period was probably greater than 5,029. 

23
Periodic Payment Plans as a Portion of the Total Brokerage Population Conducting a 

Retail Business.

76

Chart 9: Broker - Dealers Selling Periodic Payment Plans as 

a Portion of the Total Brokerage Population Conducting a 

Retail Business

All BDs 97.6%

PPP BDs 2.4%

To sell periodic payment plans, broker-dealers entered into dealer agreements with the 

plan sponsors. Among other things, these agreements provide for the compensation the 

broker-dealers will receive for making sales. For example, in the prospectus for the 

Fidelity Destiny Plans,

77 it stated that: 

Commissions ranging from 41.7% to 92.4% of the total [front end load 

paid by the investor78] will be paid to authorized investment broker-dealer 

firms and mutual fund dealers that are members of the NASD and have 

executed a Destiny Selling Dealer Agreement with the Sponsor. From 

time to time the Sponsor may increase the commissions paid to brokerdealer firms to 100%. 12b-1 fees may also be paid to the broker-dealers. 

As a result of these arrangements, the selling broker receives a significant portion of the 

sales load charged to the investor. In addition, the selling broker may continue to receive 

 Nonetheless, while 2.4% is probably at the high end as a percentage, it illustrates the order of magnitude of 

selling firms. 

76 Sponsors’ responsive comments to Commission examinations on periodic payment plans. 

77 Fidelity Systematic Investment Plans: Destiny Plans I:N; Prospectus (November 29, 2005). The 2005 

prospectus is used herein because the plans are now closed to new investors due to passage of the Act. 

78 The prospectus uses the term “Creation and Sales Charges,” which it states elsewhere, are “sometimes 

called a ‘front-end load.’” 

24
12b-1 fees after the sale had been made.79 The revenues obtained by broker-dealers 

through sales charges and 12b-1 fees on periodic payment plans are described below. 

IV. BROKER-DEALERS’ REVENUES GENERATED IN THE SALE OF 

PERIODIC PAYMENT PLANS 

A. Revenues from Sales of Period Payment Plans 

In Section 4(c)(3) of the Act, Congress directed the Commission to describe the revenues 

generated by brokers-dealers in the sale of periodic payment plan certificates over the 

report period. Set out below are the total revenues generated by brokers or dealers during 

the report period, revenues generated by the nine dominant firms, and revenues classified 

by whether the plan was open or closed to new investors during 2006. 

Periodic payment plan sponsors reported paying to 127 brokers-dealers total revenues of 

$191,880,832 during the report period.80 Of this amount, $159,103,583 constituted sales 

charges and $32,777,249 constituted 12b-1 fees. The bulk of this revenue was paid to 

broker-dealers during the early years of the report period. In 2005 revenues related to 

periodic payment plans fell off sharply. Then in 2006, they fell off again. This decline in 

revenues related to periodic payment plans in the years immediately prior to passage of 

the Act is illustrated below in Chart 10: Broker-Dealers’ Yearly Revenues from Periodic 

Payment Plans from Sales Charges and 12b-1 fees (2002–2006).

81

 

79 17 C.F.R. 270.12b-1 allows investment companies to use their assets to finance sales related expenses. 

See Release No. 11414, 45 F.R. 73898 (November 7, 1980). 

 

80 The revenues reported herein are based on information available as of March 2007. The sponsor that 

offered periodic payment plans during 2006 has indicated it may seek adjustments from several brokerdealers for a number of reasons. Following these adjustments, final revenues may differ from those 

reported herein. 

81 See supra, at note 41 sponsors’ responsive comments to the Commission examinations. 

25
Chart 10: Broker - Dealers' Yearly Revenues from 

Periodic Payment Plans from Sales Charges and 12b-1 

Fees (2002-2006)

$0

$10,000,000

$20,000,000

$30,000,000

$40,000,000

$50,000,000

$60,000,000

2002 2003 2004 2005 2006

Sales Charges 12b-1 Fees

Periodic payment plan sponsors reported paying the nine dominant brokers-dealers 

revenues of $186,546,572 during the report period. Of this amount, $156,709,228 

constituted sales charges and $29,837,344 constituted 12b-1 fees. Therefore, the 

dominant firms received approximately 98% of the total revenues generated by brokerdealers in the sale of periodic payment plans. The dominant position of these nine firms 

is illustrated below in Chart 11: Dominant Broker-Dealers’ Revenue from Periodic 

Payment Plans Compared to Revenues of Other Broker-Dealers from Periodic Payment 

Plans (2002-2006).

82

Chart 11: Dominant Brokers-Dealers' Revenue from 

Periodic Payment Plans Compared to Revenues of Other 

Brokers-Dealers from Periodic Payment Plans 

(2002-2006)

2%

98%

Other Broker-Dealers

Dominant Broker-Dealers

 

 

82 Id. 

26
While the dominant broker-dealers received the bulk of the revenue generated from the 

sale of periodic payment plans, this revenue generally represented only a small portion of 

the firms’ total revenue. In fact, over the five years of the report period, revenues from 

periodic payment plans represented only approximately 1% of the dominant firms’ 

aggregate total revenues. Their revenues totaled $13,271,309,802;83 whereas their 

revenues from periodic payment plans equaled $156,709,227 or $188,627,646, if 12b-1 

fees are included. Hence, revenue from periodic payment plans represented only 1.2% to 

1.4% of their total revenue. This is illustrated below in Chart 12: Dominant Brokerdealers’ Revenue from Periodic Payment Plans Compared to Their Total Revenue (2002-

2006).

84 

Chart 12: Dominant Broker - Dealer Revenues from 

Periodic Payment Plans Compared to their Total 

Revenue (2002-2006)

1.4%

98.6%

As previously noted, many of the periodic payment plans in existence during the report 

period ceased sales either before or during the period. This development is reflected in 

the revenue generated by broker-dealers. Indeed, more revenue was paid to brokerdealers by plans that had closed by the end of the report period, than by plans that 

remained open. Over the report period, plans that remained open into 2006 had paid 

broker-dealers revenues from sales charges (i.e., non-12b-1 revenue) of $71,067,829; 

while those that had closed paid $88,035,754. In both cases, however, revenue declined 

 

83 This information was obtained from FOCUS Filings part II, Item 4030. See supra FOCUS Filings at 

note 47. 

84 Id. 

27
sharply by the end of the report period. This is illustrated below in Chart 13: BrokerDealers’ Yearly Revenues from Periodic Payment Plans that Closed Prior to the Effective 

Date of the Act Compared to Revenues from those that Remained Open to the Effective 

Date of the Act (2002-2006).

85

Chart 13: Broker - Dealers' Yearly Revenues from Periodic 

Payment Plans that Closed Prior to the Effective Date of 

the Act Compared to Revenues from those that Closed 

Due to the Act (2002-2006)

$0

$5,000,000

$10,000,000

$15,000,000

$20,000,000

$25,000,000

$30,000,000

2002 2003 2004 2005 2006

Open Closed

 

In summary, by 2006, the revenues obtained by broker-dealers from sales of periodic 

payment plans had decreased sharply. While a small number of firms dominated sales 

with more than 98% of the revenues generated from such sales, that revenue represented 

only approximately 1% of their total revenue from other products.86 Much of the revenue 

generated by broker-dealers from the sale of periodic payment plans was from plans that 

had closed by the end of the report period. Finally, all revenue from periodic payment 

plans had declined significantly by the end of the report period. 

 

85 Id. 

86 See supra, Chart 12. 

28
B. Products Marketed to Replace Sales of Period Payment Plans 

In Section 4(c)(3) of the Act, Congress directed the Commission to describe any products 

marketed by brokers-dealers to replace the revenue generated from the sales of periodic 

payment plan certificates prohibited by the Act. The dominant broker-dealers have 

indicated that they are not marketing any products to replace periodic payment plans. 

The Staff tested these assertions and found no evidence inconsistent with these claims.87 

In preparation for this Report, the Staff asked the dominant broker-dealers to: “identify 

any products that you have marketed to replace the revenue generated from the sales of 

periodic payment plan certificates that are now prohibited under the Act.” The firms 

uniformly responded that they have not marketed any specific product to replace the 

revenue generated from sales of periodic payment plans.88 

To test these assertions, the Staff compared the revenue received by the dominant brokerdealers from sales of periodic payment plans during the report period to their total 

revenue, as reported in their periodic FOCUS Reports.89 The Staff sought to determine 

whether any of the dominant firms would face such a significant and immediate shortfall 

in revenue following the prohibition on sales of periodic payment plans, so as to call into 

question its claim that no replacement products were being marketed. As previously 

noted, in the aggregate, dominant firms received only approximately 1% of their total 

revenue from periodic payment plans.90 This would suggest that the firms were ready to 

absorb the loss of revenue from periodic payment plans. Nonetheless, when viewed 

individually the Staff determined that the firms relevant to this inquiry91 could be 

classified into three groups. 

The first group of dominant broker-dealers received only a tiny portion of their total 

revenue from sales of periodic payment plans. For three of the firms, revenue from sales 

of periodic payment plans consistently represented less than 1% of the firm’s total 

revenues throughout the report period. The fourth firm derived 3% of its total revenue 

from sales of periodic payment plans in 2002, but that percentage declined through the 

report period to less than 1% in 2005 and 2006. 

 

87 As described below, in Section VI.D.4 of this Report, while the Staff did not identify any products 

marketed firm-wide to replace the revenue from periodic payment plans, it did identify certain possible 

suitability or sales practice issues involved in brokers’ recommendations regarding existing investments in 

periodic payment plans. 

88 While all of the firms indicated that they were not marketing any products to replace periodic payment 

plans, one firm indicated that it was seeking to expand its line of insurance products, fixed annuities, and 

advisory services. According to financial statements provided to the Staff, the sale of annuities and the 

provision of advisory services appear to have expanded the most. 

89 See supra, at note 47, FOCUS Reports. 

90 See supra, Chart 12. 

91 Two of the nine broker-dealers that dominated sales of periodic payment plans during the report period 

have gone out of business. 

29
The second group of dominant broker-dealers received a moderate portion of their total 

revenue from the sale of periodic payment plans at some point during the report period. 

There were two firms in this group. For both firms, the percentage of total revenue 

represented by sales of periodic payment plans started at a moderate level and then fell 

through the report period. For one firm, revenue from sales of periodic payment plans 

represented 44% of its total revenue in 2002, but the percentage fell through the report 

period to only 2% in 2006. The other firm began the report period with 18% of its total 

revenue from sales or periodic payment plans, but this percentage fell through the report 

period to 4.5% in 2005 and zero in 2006. 

Finally, the third group of dominant broker-dealers obtained a high portion of their total 

revenue from the sale of periodic payment plans at some point during the report period. 

There were two firms in this group. Both obtained in excess of 70% of their total 

revenues from the sales of periodic payment plans during at least two years within the 

report period. However, both ceased the sale of periodic payment plans prior to the end 

of the report period, and applicable revenues had significantly declined. One of the firms 

had ceased selling periodic payment plans in October 2004 and the other in April 2005. 

Periodic payment plans evidently played varying roles in the firms’ businesses. 

Nonetheless, they all appear to have fully absorbed the decline in the business prior to the 

Act’s prohibition on future sales. 

 

V. REFUNDS OF PAYMENTS MADE BY MILITARY PERSONNEL 

In Section 4(c)(1) of the Act, Congress directed the Commission to describe any 

measures taken by a broker-dealers to voluntarily refund payments made by military 

service members on any periodic payment plan certificate, and the amounts of such 

refunds. The Staff found no instances where broker-dealers had voluntarily refunded 

payments, however pursuant to the settlement enforcement order noted below, one of the 

dominant broker-dealers, First Command, indicated that it is offering refunds to military 

service members. 

First Command has offered refunds pursuant to the terms of a settled enforcement order 

issued by the Commission and a companion settlement of an NASD disciplinary 

proceeding.92 The misleading sales practices that gave rise to this case are discussed in 

Section VI.A.1 of this Report, below. In the enforcement and disciplinary proceedings, 

First Command was ordered to pay $12 million to be used for a customer-restitution 

program, under the management of an independent consultant.93 Restitution was to be 

made to all First Command customers who had purchased and terminated a periodic 

payment plan between January 1, 1999 and December 15, 2004, the date of the 

 

92 See supra, First Command Financial Planning, Inc. at note 3. 

93 The Commission ordered First Command to fund an investor education program for military personnel 

and their families. Id. The investor-education program was to receive $12 million, less the full cost of any 

restitution payments. As of December 11, 2006, as detailed in the independent consultant’s final report, 

First Command paid a total of $6,813,223 to the investor education program. 

30
Commission’s order. The amount of restitution was to be measured by an amount equal 

to the effective sales charges in excess of 5% of the amounts paid by any given customer, 

plus interest. The independent consultant was required to file periodically an 

Independent Consultant’s Report on Restitution and Policies and Procedures to both the 

Commission and NASD. The final report was dated December 11, 2006. 

In its final report, the independent consultant noted that 79.58% of customers eligible for 

restitution had been paid 87.25% of the restitution amount. The original mailing of a 

letter and declaration to 13,609 eligible customers occurred on February 11, 2005. 

Additional names were added to the database as they became known. Customers who did 

not respond were sent follow-up letters. As of November 15, 2006, the final adjusted 

number of customers eligible for restitution was determined to be 13,628, having total 

claims of $5,184,138. As of December 1, 2006, the independent consultant had issued 

10,845 restitution checks to investors with a total value of $4,523,324. Approximately 

$717,759 remains in the independent consultant’s account, of which $660,814 is still 

owed to investors that have not been located. The independent consultant concluded that 

First Command had complied with the customer-restitution program. Importantly, it also 

noted that First Command remained committed to continue processing and paying 

claims. That commitment extended to eligible claimants who contacted either the 

independent consultant or First Command. 

VI. PROBLEMS IN SALES OF SECURITIES TO MILITARY PERSONNEL 

In Section 4(c)(2) of the Act, Congress directed the Commission to describe the sales 

practices of broker-dealers on military installations over the report period. To fulfill this 

mandate, the Commission believes it should address a broader question. That is, what are 

the sales practices of broker-dealers in the sales of securities to military personnel? This 

approach captures sales activity both on the premises of military installations, and in sales 

offices located off-base. Many sales of securities to military personnel take place offbase, often in sales offices immediately outside the gates of military installations. 

Therefore, while more inclusive than the Report mandated by the Act, the Commission 

believes this approach will address the concerns leading to the Congressional mandate set 

forth in Section 4(c). 

In 2004, when potential problems in sales of securities to military personnel came to the 

attention of the Commission, the Staff determined that the military community should be 

identified as an at-risk group. Following this determination, the Staff quickly deployed 

resources from multiple functional programs of the Commission, including enforcement 

and examinations, and initiated a coordinated approach with the NASD to protect 

members of the military from abusive sales practices. These efforts continued from 2004 

through the preparation of this report. In addition, information for this Report was 

collected from the nine dominant broker-dealers in the periodic payment plan market. 

The problems in sales of securities to military personnel identified through these efforts 

are discussed below. 

31
A. Problems Identified in Commission Enforcement Actions 

To enforce the federal securities laws, the Commission brings enforcement actions. 

These include both administrative proceedings94 and civil actions filed in federal court.95 

Remedies available to the Commission in administrative proceedings include orders that 

the respondent cease and desist from further violations,96 that it disgorge ill-gotten 

gains,97 and that it pay a penalty.98 Remedies available in civil actions include 

injunctions that prohibit the defendant from engaging in future violations,99 that it 

disgorge ill-gotten gains,100 and that it pay a penalty.101 Recently, the Commission has 

brought two significant enforcement actions that identified problems in sales of securities 

to military personnel. 

1. In the Matter of First Command Financial Planning, Inc. 

On December 15, 2004, the Commission instituted an administrative enforcement 

proceeding against First Command,102 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 an action coordinated with the NASD,103 the Commission alleged 

that First Command used misleading sales materials to offer and sell periodic payment 

plans. 

The Commission found that First Command maintained sales offices near U.S. military 

bases worldwide and claimed that its customers included approximately 40% of the 

active-duty general officers and approximately one-third of the commissioned officers. 

 

94 See e.g., Securities Act of 1933 § 8A, 15 U.S.C. § 77h-1; Securities Exchange Act of 1934 §15, 15 

U.S.C. §78o. 

95 See e.g., Securities Act of 1933 §20, 15 U.S.C. §77t and Securities Exchange Act of 1934 §21, 15 U.S.C. 

§78u. 

96 See e.g., Securities Act of 1933 § 8A, 15 U.S.C. §77h-1; Securities Exchange Act of 1934 § 21C, 15 

U.S.C. §78u-3. 

97 See e.g., Securities Act of 1933 §8A(e), 15 U.S.C. §77h-1; Securities Exchange Act § 21C(e), 15 U.S.C. 

§78u-3. 

98 See e.g., Securities Exchange Act of 1934 § 21B, 15 U.S.C. §78u-2. 

99 See e.g., Securities Act of 1933 §20(b), 15 U.S.C. §77t and Securities Exchange Act of 1934 §21(d), 15 

U.S.C. §78u. 

100 See e.g., Securities Exchange Act of 1934 §21(d)(5), 15 U.S.C. §78u. 

101 See e.g., Securities Act of 1933 §20(d), 15 U.S.C. §77t and Securities Exchange Act of 1934 §21(d)(3), 

15 U.S.C. §78u. 

102 See supra, First Command Financial Planning, Inc. at note 3. 

 

103 See infra, Section VI.C discussion on NASD action. 

32
The vast majority of First Command’s sales agents were retired military officers. This 

firm was responsible for approximately 90% of all sales of periodic payment plans. 

The Commission also found that as with investors in other periodic payment plans, if the 

investor in a plan sold by First Command failed to make all of the scheduled payments, 

the effective sales load could be substantially higher than the average paid in a 

conventional front-end load equity fund. The Commission found that historically, 

approximately 43% of First Command’s customers made at least 180 scheduled 

payments. The remainder failed to complete 180 payments and, consequently, many of 

them paid loads substantially higher than the approximate average for a conventionalload equity fund. In the worst case, those who discontinued payments after one year paid 

a 50% sales load. 

In addition, the Commission found that First Command, since at least January 1999, 

offered and sold plans using carefully-worded sales scripts that made misleading 

comparisons between 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 dollar-cost 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, 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 cost of no-load funds, and 

the availability of the Thrift Savings Plan, the Federal Government-sponsored 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 Commission found that First Command’s conduct violated Section 17(a)(2) of the 

Securities Act of 1933, an anti-fraud provision. In settlement of these actions, without 

admitting or denying the Commissions findings, First Command agreed to pay $12 

million in disgorgement and prejudgment interest to be used to reimburse customers104

and to fund an NASD-managed investor-education program for members of the U.S. 

military and their families.105 In October 2004 First Command stopped selling periodic 

payment plans. 

 

104 See supra, Section V. of this Report. 

105 See infra,,Section VII.A.4 of this Report. 

33
2. SEC v. American-Amicable Life Insurance Company of Texas et 

al. 

On August 3, 2006, in the United States District Court for the Southern District of 

California, the Commission filed a civil enforcement action against American-Amicable 

Life Insurance Company of Texas; Pioneer American Insurance Company; and Pioneer 

Security Life Insurance Company (collectively, "American-Amicable"),106 all based in 

Waco, Texas. The Commission charged American-Amicable with securities law 

violations based on its deceptive sales of investments to military personnel. 

The Commission alleged that American-Amicable targeted military personnel with a 

deceptive sales program, known as the “Building Success" system, that misleadingly 

suggested that investing in the company's product, Horizon Life, would make one a 

millionaire. Since 2000, approximately 57,000 members of the United States military 

services had purchased the product. Unlike insurance products that are legitimately 

offered to a wide range of potential buyers with a potential interest in a product’s 

insurance features, Horizon Life was targeted at military personnel who, because of their 

access to low-cost government sponsored coverage, had little or no interest in insurance. 

Instead, American-Amicable represented Horizon Life to military personnel as a security 

and a wealth-creating investment. 

The Commission also alleged that as a material element of its marketing, AmericanAmicable’s senior staff trained sales agents to hold themselves out as "financial advisers" 

or "financial coaches." Purporting to play that role, the sales agents then allegedly misled 

military personnel to believe they could become millionaires if they invested in Horizon 

Life. At the same time, the agents allegedly denigrated other investment alternatives, 

claiming that mutual funds, bank savings accounts and government bonds were not 

sensible investments compared to Horizon Life. Although the written materials 

ultimately provided to investors apparently accurately described the Horizon Life 

product, the company's deceptive sales pitch did not. Contrary to the representations, the 

overwhelming majority of military personnel who purchased Horizon Life earned little or 

nothing from their investment. 

The Commission's complaint charged American-Amicable with violating Sections 

17(a)(2) and (3) of the Securities Act, anti-fraud provisions. Without admitting or 

denying the allegations, American-Amicable agreed to be enjoined from further 

violations of these provisions, and to pay disgorgement of $10 million, which will be 

distributed to the approximately 57,000 military personnel who invested in Horizon 

 

106 SEC v. American-Amicable Life Insurance Company of Texas; Pioneer American Insurance Company; 

and Pioneer Security Life Insurance Company, Case No. 06-CV-1553 JAH WMC (S.D. Cal. filed August 

3, 2006), Litigation Release No. 19791 (August 3, 2006).

34
Life.107 As part of the settlement, American-Amicable agreed to discontinue sales of 

Horizon Life and terminate the “Building Success” system. 

B. Problems Identified in Commission Examinations

To foster preventive compliance by securities firms, and keep the Commission informed 

of developments in the securities business and markets, the Staff conduct examinations of 

broker-dealers.108 In examinations, the Staff review a broker-dealer’s records, interview 

its associated persons, and seek to determine if the entity and its associated persons are in 

compliance with their regulatory obligations under the federal securities laws, rules and 

regulations thereunder, and the applicable rules of SROs. In light of the confidential 

nature of the Commission’s examinations, this Report does not reveal any names of 

examined firms. 

The Commission utilizes a risk-based approach to examinations to ensure that its 

resources are appropriately focused on the areas of greatest need. Through an internal 

process, emerging risks are identified and examinations are directed toward addressing 

those risks. In 2004, when the Commission determined that the military community 

should be identified as an at-risk group, two separate programs of risk-based 

examinations were directed at sales of securities to the military. 

1. Risk-Based Examinations of Broker-Dealers That Sell Periodic 

Payment Plans 

Following indications from the enforcement investigation and proceeding against First 

Command that military personnel may be at risk, the Staff selected four additional 

broker-dealers for examination. The firms were selected because they sold significant 

amounts of periodic payment plans. Three of the four specialized in sales to the military. 

Like First Command, the firms examined in these reviews discontinued sales of periodic 

payment plans prior to enactment of the Act. 

The Staff observed that several of these firms generally sold periodic payment plans to 

lower-ranking enlisted military members. As with other plans, these products called for a 

50% 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 ten years. Although the 

examinations of these firms did not reveal the sort of systemic misrepresentations found 

in the First Command case, they did show that very few low-ranking enlisted members 

 

107 The Commission’s settlement with American-Amicable was part of a global settlement of claims 

brought by the Commission, state insurance regulators led by the Georgia Department of Insurance and the 

Texas Department of Insurance, and the United States Attorney's Office for the Eastern District of 

Pennsylvania. The claims by state insurance regulators were based on state insurance and consumer 

protection laws, and the claims by the United States Attorney were based on civil claims of mail and wire 

fraud. The settlement with the other regulators provided additional relief, which the other regulators valued 

at approximately $60 million. 

108 Securities Exchange Act of 1934 §17(a)(1), 15 U.S.C. §78q. 

35
made at least 120 payments. At one firm, fewer than 10% completed their plans. As a 

result, on average, low-ranking enlisted members paid loads greater than 10%. This rate 

was significantly higher than the rate they would have paid if they had purchased mutualfund shares with a conventional load. 

The high incidence of incomplete plans discovered in these examinations raised concerns 

that these firms may have routinely recommended periodic payment 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 Staff 

provided its examination results to the NASD for appropriate further action. 

2. Risk-Based Examinations of Broker-Dealers That Sell Other 

Securities Products to Military Personnel 

The Staff also initiated a second risk-based examination review of how broker-dealers 

sell securities products to military personnel. This review was broader than the review 

that focused on sales of periodic payment plans (described above), and encompassed 

sales of all securities products, such as mutual funds, variable annuities, and stocks and 

bonds. 

These examinations focused on sales practices in both the on and off-base communities, 

and on the unique features of the military market. In particular, the Staff looked 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 considered whether broker-dealers recommended 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 

examined how firms characterize the availability of the Thrift Savings Plan to military 

investors. 

In general, the Staff noted deficiencies in the internal controls and supervisory systems at 

several firms. In the case of several offices located overseas, it was unclear whether 

some sales agents had ever received any type of supervisory oversight or compliance 

training. Internal controls were lacking in that customer account information was 

incomplete, records of customer activity were incomplete or not available, 

correspondence files were incomplete, and in one case, several customer account forms 

were signed in blank. These deficiencies were brought to the attention of the firms for 

immediate correction. 

Importantly, while the deficiencies noted in these examinations were serious, they do not 

reveal the type of systemic issues involving a distinctly military audience that the 

Commission has found in regards to periodic payment plans and the “Building Success” 

system. In other words, while these reviews did not find serious sales practice abuses, 

they helped define the scope of the emerging risk. Specifically, the reviews indicated that 

36
the abusive activity with respect to securities sales appeared to be largely concentrated in 

the sale of periodic payment plans or products similar to those marketed by AmericanAmicable. 

C. Problems Identified by NASD’s Oversight 

As an SRO governed by the federal securities laws, the NASD enforces compliance by its 

members with the federal securities laws, rules and regulations thereunder, and its own 

rules.109 As noted above, NASD took disciplinary action against First Command in 

connection with its sales of periodic payment plans to military service members and has 

investigated other firms that sold or prepared sales literature about such plans. In 

December 2004, in an action that was coordinated with the Commission, the NASD 

censured and fined First Command $12 million in connection with the sale of periodic 

payment plans to military personnel. NASD made findings that First Command used 

sales scripts that contained misleading statements and omissions about the plans 

including: (i) claims that the plan’s 50% first year sales load increased the likelihood 

investors would complete their plan payments, when First Command had data that 

showed that only 43% of the its customer completed the plans; (ii) comparisons between 

the plans and other mutual fund investments, including telling investors that no-load 

mutual funds were primarily for speculators and had some of the highest long-term costs, 

and (iii) the availability of the Thrift Savings Plan, which offers military investors many 

of the same features of a Plan at lower costs. From the $12 million, First Command was 

ordered to pay restitution to thousands of customers,110 and the remaining funds were 

paid to the NASD Investor Education Foundation, for the investor education needs of 

members of the United States military and their families.111

In addition to its action involving First Command, the NASD has investigated periodic 

payment plan sales to military personnel by two other smaller brokerage firms. The 

NASD continues to focus on, among other things, the failure of each firm to have 

adequate supervisory systems to ensure (i) that investors had the financial capacity to 

complete the Plans and (ii) sales of such plans were conducted in compliance with 

Department of Defense regulations. In another matter, NASD investigated the 

distribution of periodic payment plan sales literature by member firms affiliated with a 

provider of such plans. NASD is focusing on whether that sales literature complied with 

NASD’s advertising rules. 

D. Possible “Switching” Identified 

To prepare this Report, the Staff obtained information on the dominant broker-dealers’ 

efforts to conduct sales activities on military installations or target uniformed military 

personnel. As previously noted, these broker-dealers were collectively responsible for 

 

109 See Securities Exchange Act of 1934 §19(g)(1), 15 U.S.C. §78s. 

110 See supra, Section V. 

111 See infra, Section VII.A.4. 

37
approximately 98% of the sales of periodic payment plans during the report period. If the 

broker-dealer had been the subject of an enforcement action relating to periodic payment 

plans, the Staff sought this information for the period following the enforcement action. 

Otherwise, the Staff sought the information for the five years of the report period. 

Specifically, the Staff asked for copies of “any communications with the public, 

including advertising, sales literature, or correspondence” that the firm utilized during the 

report period to conduct sales activities on military installations or to target unformed 

military personnel. The Staff also asked whether the firm had received or been the 

subject of any of the following regarding sales of securities (including but not limited to 

sales of periodic payment plan certificates, mutual funds, variable insurance products, or 

penny stocks) on military installations: 

a) Customer complaints; 

b) Non-customer complaints or warnings (including complaints or warnings made 

by or brought to your attention by representatives of a base command, military 

police, military attorneys, or others); 

c) Claims in arbitration; 

d) Claims in litigation; 

e) Actions by military authorities to deny you or one or more of your registered 

representatives access to an installation; 

f) Actions by military authorities to declare you or one or more of your sales 

locations off-limits to military personnel; 

g) Findings or recommendations presented to you in writing by an SRO, state 

regulator, or other regulator in an inspection, examination, or investigation; or 

h) Disciplinary or enforcement actions brought against you or any of your registered 

representatives by an SRO, state regulator, or any other regulator?” 

As a result of its review of the materials provided by the dominant firms in response to 

these requests, the Staff identified some issues that may be indicative of further problems 

in sales of securities to military personnel. Specifically, it identified instances where 

registered representatives have recommended that investors withdraw from a periodic 

payment plan to invest in another product. In some cases, it appears that the registered 

representative’s recommendation did not address the effect such a withdrawal would 

have on the effective sales load paid by the investor of the funds already invested in the 

plan. 

 

These facts suggest possible issues with “switching,” which involves transactions where 

shares of a particular security are redeemed and all or part of the proceeds are used to 

purchase shares of another security.112 Switching of mutual funds is of particular 

 

112 See In re Leslie E. Rossello, Release No. 34-43650, (Dec. 1, 2000); In re Charles E. Marland & Co., 

Inc., Release No. 34-11065, 45 S.E.C. 632, 636 (October 21, 1974); In re Thomas Arthur Stewart, Release 

No. 34-3720, 20 S.E.C. 196 (August 6, 1945). 

38
concern because these investments are generally meant to be long-term.113 Thus, 

switching of mutual funds is often evaluated under suitability standards. The NASD has 

stated that any recommendation from a broker-dealer that a customer switch mutual funds 

must not be based on incentives received by the broker.114 Switching among certain fund 

types may be particularly difficult to justify if the financial gain or investment objective 

to be achieved by the customer as a result of the switch is negated by the transaction fees 

associated with the switch.115 Thus, any recommendation to switch mutual funds is 

evaluated with regard to the net investment advantage to the investor.116

Given the unique sales compensation structure of periodic payment plans, the Staff 

believes that any recommendation to withdraw from a plan should take account of the 

resulting effective sales load that the investor would pay. The Staff and the NASD 

continue to look into these situations. 

VII. LEGISLATIVE AND REGULATORY RECOMMENDATIONS TO 

FURTHER IMPROVE SALES PRACTICES ON MILITARY 

INSTALLATIONS 

In Section 4(c)(2) of the Act, Congress directed the Commission to describe, after such 

consultation with the Secretary of Defense as the Commission considers appropriate,117

 

113 See In re the Application of Kenneth C. Krull, Release No. 34-40768, 68 S.E.C. 2227 (December 10, 

1998), Release No. 34-41008, 69 SEC 62 (February 1, 1999) (SEC review of NASD disciplinary 

proceeding emphasized that a pattern of mutual fund switching presumptively violates NASD rules because 

trading in mutual fund shares on a short-term basis violates a salesman’s responsibility for fair dealing.) 

114 See supra, NTM No. 95-80 at note 62. See also In re Leslie E. Rossello, Release No. 43650, 73 S.E.C. 

2627 (December 1, 2000) (finding that a registered representative violated Section 17(a) of the Securities 

Act, and Section 10(b) and Rule 10b-5 of the Exchange Act when she induced mutual fund switches for her 

benefit rather than that of her customers); See also supra at note 111, In re Charles E. Marland & Co., Inc.,

45 S.E.C. 632, 636 (pattern of recommending mutual fund switching exhibited in the facts of this case 

creates rebuttable presumption of unsuitability) and In re Thomas Arthur Stewart, 20 S.E.C. 196, 207 

(finding that the broker violated NASD’s suitability rule because it had a lack of reasonable grounds for 

recommending switching shares of mutual funds). 

115 See supra, NTM No. 95-80 at note 62. 

116 Id. See also, NTM No. 94-16, NASD Reminds Members of Mutual Fund Sales Practice Obligations. 

117 In November 2005 the Government Accountability Office issued a report entitled: “Financial Product 

Sales; Actions Needed to Better Protect Military Members,” GAO-06-23. The report made a number of 

recommendations, including that the Commission should designate staff to receive complaints from the 

Department of Defense, and conduct outreach to defense headquarters and installations to proactively learn 

of issues or concerns regarding product sales. The report also recommended that these staff should make 

use of any listings that the Department of Defense maintains of individuals and firms that have been 

sanctioned by the military for improper solicitation practices. To implement this recommendation the Staff 

designated the Associate Director - Chief Counsel of the Office of Compliance Inspections and 

Examinations as liaison to the Department of Defense. The NASD has also designated an individual to 

serve as liaison to the Department of Defense. The Commission‘s liaison has maintained contact with 

relevant officials in the Department of Defense; facilitated coordinated activities, such as the preparation of 

this report; monitored the Department of Defense’s listing of sanctioned firms and individuals; and worked 

with the Department of Defense and Commission staff to enhance oversight of broker-dealers selling 

39
any legislative or regulatory recommendations to improve the sales practices of brokerdealers on military installations. To respond to this directive, it is essential to discuss the 

legislative and regulatory initiatives that already are in place. 

A. Legislative and Regulatory Initiatives Already in Place to Address 

Problems in Sales of Securities to Military Personnel 

1. Prohibition of Sales of Periodic Payment Plans 

The single most important initiative already in place to address problems in sales of 

securities to military personnel was the recent statutory prohibition on the future issuance 

or sale of periodic payment plans. As discussed above, the Staff observed many 

problems related to periodic payment plans. In particular, the low completion rate of 

many uniformed investors led to these investors paying sales charges far in excess of a 

conventional load. The problems associated with periodic payment plans are no longer a 

significant issue because of the statutory prohibition . 

2. Initiatives by the Department of Defense 

Following consultations with the Staff, the Department of Defense provided the 

Commission with a summary of their initiatives in this area: 

Commercial Insurance Solicitation: The Department of Defense issued policy 

guidance to strengthen oversight of commercial life insurance and investment product 

sales on military installations. Department of Defense Instruction 1344.07, "Personal 

Commercial Solicitation on DoD Installations," was approved on March 30, 2006, 

and became effective on July 10, 2006, when it was published in the Code of Federal 

Regulations. The new instruction requires installations to report any withdrawal or 

suspension of solicitation privileges to their Service Headquarters and to the Office of 

the Secretary of Defense (OSD). OSD now maintains a Department of Defense-wide 

list of insurance, investment companies, and agents who are barred or banned from 

doing business on any Department of Defense installation. Installation commanders 

must review this list prior to approving any new requests to solicit on the installation. 

This list may be viewed at the Personal Commercial Solicitation Report "quick link" 

at www.commanderspage.com. Any changes to this list are also reported to 

appropriate state insurance and federal securities regulators. 

The instruction also contains a policy on the use of non-governmental organizations 

to provide financial education to service members, and a policy to preclude 

commercial sponsorship of morale, welfare and recreations programs or events from 

being used to obtain personal contact information to foster future solicitations. Of 

particular note, on-base solicitors are now required to provide prospective clients with 

 securities in or near base communities. In addition, as described below in Section VII.A.4, the 

Commission’s Office of Investor Education and Assistance has engaged in a proactive program of outreach 

and investor education in the military community. In these programs the Commission’s staff has been 

vigilant for any indication of concerns regarding product sales to the military. 

40
a Personal Solicitation Evaluation form that will provide feedback to installation 

officials on how the solicitation was conducted. The evaluation form is designed to 

detect policy violations and will help installations better enforce on-base commercial 

solicitation rules. 

The military departments are currently revising their service regulations to 

incorporate new policies contained in DoDI 1344.07. The Air Force expects to 

finalize its new commercial solicitation policy guidance by the end of April. The 

Army, Navy and Marine Corps anticipate having their revised personal commercial 

solicitation regulations completed by the end of June. 

Financial Readiness: The Department of Defense considers the personal financial 

stability of service members and their families a significant factor in military 

preparedness – financial stability equates to mission readiness. As such, financial 

readiness remains a top priority for the Department of Defense. The Department of 

Defense is aggressively promoting a culture within the military that values financial 

competency and responsible financial behavior. The Department of Defense’s 

Financial Readiness Campaign encourages Service members to achieve good credit, 

save on a regular basis, obtain good interest rates on loans, and take advantage of the 

opportunity to participate in the Thrift Savings Plan and the Service Members’ and 

Veterans’ Group Life Insurance. 

To assist the military services in delivering financial messages, the Department of 

Defense established the Financial Readiness Campaign in May 2003, which has 

gathered the support of 24 nonprofit organizations and federal agencies.118 In the 

past three years, service members have benefited from the educational materials, 

seminars, and assistance from these agencies. The Financial Readiness Campaign

includes partnerships with other federal, corporate, and non-governmental 

organizations to educate both military members and their families on how to manage 

their finances. 

Education is the first line of defense. In 2006, the Department of Defense provided 

more than 11,800 financial management classes at their installations around the world 

and trained more than 324,000 service members (approximately 24 percent of the 

force), as well as 19,400 family members. The campaign's partner organizations, 

such as those represented by on-installation banks and credit unions, conducted an 

additional 1,300 classes, serving a total of 60,600 service members and their families. 

 

118 The non-government organizational partners are: American Savings Education Council, American 

Institute of Certified Public Accounts, Association of Military Banks of America, Consumer Federation of 

America, Council of Better Business Bureaus, Defense Credit Union Council, Financial Planning 

Association, InCharge Institute of America, Institute for Consumer Financial Education, Jump$tart 

Coalition for Financial Literacy, MoneyWise with Kelvin Boston, National Association of Federal Credit 

Unions, NASD Foundation, National Endowment for Financial Education, National Military Family 

Association, Women's Institute for Financial Education and Center for Responsible Lending. 

Governmental agencies are: Federal Citizen Information Center, Federal Deposits Insurance Corporation, 

Federal Reserve Board, Federal Trade Commission, Securities and Exchange Commission, U.S. 

Department of Agriculture Cooperative State Research Education and Extension Service, and U.S. 

Department of Treasury. 

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These classes help equip service men and women with the necessary tools to achieve 

financial freedom and avoid the financial traps that befall many of their 

contemporaries outside of the military. Other organizational support includes: 

- The Financial Literacy and Education Commission provides educational and 

training materials through the web site www.mymoney.gov. The Financial 

Literacy and Education Commission also supports a toll-free number and 

consolidates education and training materials available through the federal 

agencies that have been widely advertised and linked to the Department of 

Defense and military service web sites. 

- The InCharge Institute provides access to credit counseling/debt management, and 

publishes a quarterly magazine called Military Money in partnership with the 

National Military Family Association. 

- The NASD has funded a multi-year awareness and education program through the 

Investor Education Foundation’s Military Financial Education Campaign 

(“NASD Foundation”) to supplement programs provided by the Department of 

Defense. Included are multimedia public service announcements through sources 

such as Armed Forces Radio and Television Services, service command 

information publications, magazines and radio; an interactive web site – 

www.saveandinvest.org; sponsorship of a scholarship program for military 

spouses through partnership with the National Military Families Association to 

accredit them as ‘financial counselors’ in return for volunteer hours in military 

communities; and education for military service financial counselors and 

educators. 

- Military relief societies continue to provide outstanding educational materials and 

counseling, as well as financial assistance when service members are in need. 

The Department of Defense provides free federal and state on-line tax preparation and 

filing through Military OneSource for all members regardless of component or 

activation status. This service includes free telephonic access to trained financial 

professionals who can answer many of the tax questions that our service members 

and families may have. Department of Defense encourages service members and 

their families to use the Military OneSource free tax preparation service and to add 

any refunds to a savings account. 

The Department of Defense sponsored “Military Saves” Week in February, in 

conjunction with the Consumer Federation of America's nationwide “America Saves”

campaign. This is an intense week of training and encouragement for military 

members and families to start reducing their debt and saving for their future. 

Members can set a savings goal by registering on www.militarysaves.org. 

 

Predatory Lending: The Department of Defense delivered a report to Congress on 

the impact of predatory lending practices on members of the Armed Forces and their 

families. The report showed the Department of Defense is fully engaged in educating 

service members and their families, and several banks and credit unions on military 

installations are providing alternative loans along with the Military Aid Societies. 

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The Department of Defense report stated that service members should consider 

alternative loans and counseling to resolve their credit problems instead of 

perpetuating the credit problems through sources with high credit costs. However, 

the Department of Defense reported there are not adequate methods for controlling 

the prevalence or the impact of high cost short-term loans. 

Legislation in the John Warner National Defense Authorization Act for Fiscal Year 

2007 (“National Defense Authorization Act”) concerning predatory lending gave the 

Department of Defense an opportunity to preclude many of the predatory lending 

practices from impacting service members and their families. Representatives of the 

Department of Defense met with members of federal regulatory agencies designated 

in the National Defense Authorization Act to consult with the Department of Defense, 

and received input from the trade associations, individual financial institutions and 

consumer groups concerning the potential impact and unintended consequences 

associated with the provisions of the National Defense Authorization Act. The 

Department of Defense has worked with the military services and the federal 

regulatory agencies to focus the proposed regulation on the provision of the statute 

that can provide protections for service members and their families, without 

impacting beneficial forms of credit. In addition to this important policy support, the 

Department of Defense will continue to educate service members and their families 

on personal financial matters and work closely with banks and credit unions to 

develop credit products that can provide beneficial support without the potential for 

trapping service members and their families in spiraling debt.

State Liaison Initiatives: In 2004, the Department of Defense approached the 

National Governors Association to request its assistance in supporting those aspects 

of the quality of life for service members and their families that could be influenced 

best through the actions of state governments. In the past two years, the Department 

of Defense has found governors and state legislators have embraced these 

opportunities to show their support for service members and their families, including 

limits on payday lending. The federal legislation provides the opportunity to define 

protections for service members and their families, and the Department of Defense 

will work with state governments to gain assistance in enforcing proposed regulations 

in concert with the statutes and policies of the state governments. 

3. Continuing Oversight by the SEC and NASD of BrokerDealers Selling Securities to Military Personnel 

Another important regulatory initiative that is already under way is the Commission’s and 

the NASD’s continuing oversight of broker-dealers’ sales of securities to military 

personnel. While the Commission has concluded both of the risk-based examination 

reviews specifically targeting sales to the military community, the Commission’s 

examiners remain alert to such risks. These risks are typically reviewed in sales office 

reviews. 

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In a sales office review, examiners visit a local office of a broker-dealer to evaluate 

whether the firm’s policies and procedures are being followed, whether sales practices 

violate the anti-fraud provisions of the federal securities laws, and whether the firm is 

complying with the standards set forth in Commission or NASD rules, or the rules of any 

other SRO that may be applicable. Sales to military personnel may be implicated in such 

a review in several ways. The Staff may select a sales office for review because it is 

located in close proximity to a major military installation. Or, the Staff may select a sales 

office for review because its business relies on monthly allocations from military salaries. 

Also, while on-site at a sales office, the examiners may select the accounts of military 

personnel for detailed review, particularly if they observe potential problems; such as a 

high early surrender rate for variable insurance products purchased by the office’s 

military customers. Moreover, in sales office and other examinations the examiners 

remain alert to any indication of problems similar to those identified in the action against 

American-Amicable.119

In addition, the NASD has adopted examination procedures that address sales of 

securities to military personnel, the new requirements of the Act, and sales of periodic 

payment plans. These procedures, when applicable to the firm being examined, are used 

to determine if the firm and its registered representatives have taken all required steps and 

made all required disclosures in connection with the sale of securities on military 

installations. Also, the NASD will review firms to determine whether they have ceased 

sales of periodic payment plans as directed by the Act. Finally, during routine 

examinations, the NASD will focus on firm’s activities in periodic payment plans. To the 

extent the firm has conducted business in such products and it is deemed to be an area 

that warrants review during the examination, the NASD will look at the suitability of 

sales agents’ recommendations to investors who purchased this product, sales practices in 

connection with plan sales and plan sales literature, and the firm’s system for supervising 

activities relating to this product. 

These reviews by the Commission and the NASD will continue. Hence, even though the 

risk targeted sweeps have been concluded, Commission and NASD examiners will 

continue to review sales practices directed at the military, as appropriate in individual 

examinations. They also will remain alert to any indication of abuses similar to those 

identified in the action against American–Amicable. 

4. Investor Education for Uniformed Military Personnel 

The Commission has made a significant commitment to investor education for military 

personnel. Chairman Christopher Cox testified before the Senate Committee on Banking, 

Housing and Urban Affairs that the Commission is “committed to improving the financial 

literacy of our service members and their families.”120 Commissioner Roel Campos said 

 

119 See supra, Section VI.A.2. 

120 Chairman Christopher Cox, Improving Financial Literacy in the United States, Testimony Before the 

U.S. Senate Committee on Banking, Housing, and Urban Affairs (May 23, 2006). 

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that the Commission was focusing its efforts on military personnel, as one of a small 

number of underserved populations, including, in addition to the military, seniors and 

teachers.121 Finally, while on the Commission, former Commissioner Cynthia Glassman 

noted that as a military wife, some years before, she could have benefited “enormously 

from knowing the financial facts of life,” and therefore, that she was especially pleased at 

the commitment to financial education for the military community.122 Finally, 

Commissioner Paul Atkins has conducted investor town hall meetings at a number of 

military installations, including: Edwards Air Force Base; San Diego Naval Base; Fort 

Campbell, Kentucky; Marine Corp Recruiting Depot, San Diego; and Camp Pendleton. 

This commitment has been implemented in major programs both by the Commission, 

through its Office of Investor Education and Assistance, and the NASD, through its 

NASD Foundation.) 

Through its Office of Investor Education and Assistance, the Commission participates as 

a charter member in the Department of Defense’s Financial Readiness Campaign. That 

campaign is designed to give service families the opportunity to learn more about 

personal finances and to encourage them to better manage their money. The effort is 

directed towards junior enlisted service members and their spouses, because this group is 

less likely to receive this type of information as part of their formal training. The Office 

of Investor Education and Assistance supports the efforts of those military personnel 

stationed at military installations who are responsible for providing financial education to 

service members. By actively promoting and supporting financial education for military 

personnel, the Commission is able to assist military investors become better positioned to 

achieve personal savings and investment goals, including those related to retirement, 

home ownership, and college education costs. 

Additionally, the Commission’s Office of Investor Education and Assistance has 

conducted workshops at several military installations focusing on providing financial 

information both to those who are responsible for educating service personnel and to 

service members themselves. In this regard, it has developed educational materials to 

help investors understand and make informed decisions regarding their investments. An 

article dealing with periodic payment plans was published in Military Money, a widely 

distributed free magazine directed at issues involving the finances and lifestyles of 

military families. Information concerning periodic payment plans and other financial 

information has been posted on the Commission’s website. Finally, the Commission has 

enlisted the securities industry itself to identify the military as a risk group that should be 

given extra compliance attention. 

The Commission’s Office of Investor Education and Assistance is a key partner of 

SaveAndInvest.org, a financial education program developed by the NASD Foundation to 

 

121 Commissioner Roel Campos, Remarks before the CFP Board Program Directors Conference (August 3, 

2006). 

122 Commissioner Cynthia A. Glassman, Remarks before the NASD Investor Education Foundation's 

Military Financial Education Campaign Launch (February 16, 2006). 

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improve the saving and investing knowledge of military service members and their 

families. The effort is funded by fines levied against First Command for misleading 

statements in the sales of systematic investment plans to military personnel. 

The NASD reports that the multifaceted “SaveAndInvest.org” program includes: 

9 Partnerships with other organizations, including the Department of Defense, 

whose expertise in the financial education arena and experience in addressing 

military audiences complement the NASD Foundation's commitment to providing 

financial education information and resources to service members and their 

families; 

9 An online resource center, www.SaveAndInvest.org, that serves as a centralized, 

trusted source for unbiased information on saving and investing, including 

original content, interactive tools and games, partner resources, frequently asked 

questions, and more; 

9 On-the-ground training to support the military's current Personal Financial 

Management program by establishing a coordinated and uniform financial 

education program, including the training and continuous certification of personal 

financial counselors and other volunteers; 

9 A spousal fellowship program that will train a corps of military spouses to 

provide financial counseling and education within the military community; 

9 Educational toolkits for trainers and investors offering multiple levels of personal 

financial information; 

9 Educational activities and events on or near military bases to motivate military 

families to take responsibility for their financial well-being; and 

9 A long-term public outreach campaign, including print, radio and television 

public service announcements, targeted advertising to military-serving 

newspapers, magazines and Web sites and outreach to raise awareness of the 

tools, information and services available to military personnel and their families. 

The NASD states through the NASD Foundation’s Military Financial Education Campaign, 

it is actively committed to providing investor education to the military and has made great 

strides towards helping military service members and their families learn how to manage 

their money with confidence. The NASD Foundation’s campaign was launched at the United 

States Capitol on February 16, 2006, with speeches by Senator Daniel Akaka (D-HI), Senator 

Hillary Rodham Clinton (D-NY), Congressman Michael Oxley (R-OH), and Under Secretary 

of Defense for Personnel and Readiness David S.C. Chu. To date the NASD states the 

NASD Foundation’s most significant accomplishments included: 

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9 Financial Forums reached more than 4,500 members of the military community 

during 25 Military Financial Education Forums at 19 military duty stations 

worldwide, including at sea onboard the USS Ronald Reagan in the Arabian Gulf war 

zone. These events cover the basics of saving and investing, avoiding the predatory 

loan trap, investing in mutual funds, and planning for retirement. In addition to high 

marks on attendee evaluations, the NASD has received three letters of commendation 

for our forum presentations from flag officers and commanders. 

9 The Spouse Outreach campaign created and presented the unique Military Spouse 

Fellowship Program to help military spouses earn the Accredited Financial 

CounselorSM credential. More than 2,800 candidates applied for this highly 

competitive educational opportunity. Currently, 174 fellows are actively engaged, 

four have been hired within the military system, and many others have already begun 

providing volunteer counseling services to their communities. Notably, an August 

2006 survey of program participants showed that 82% have changed their own saving 

and investing habits since joining the program. 

9 Train-the-Trainer Materials have been crafted and delivered, including the “It’s Your 

Move” continuing financial education program for military Personal Financial 

Managers. The program has been successfully complete by 268 Personal Financial 

Managers, representing all of the services. Reaction to the program has been 

overwhelmingly positive, with 82% of the 199 who submitted training session 

evaluations feeling equipped to teach the course themselves. 

9 Relocation resources have been provided by producing and distributing more than 

300,000 copies of “Military Families: Money and Mobility,” which provides 

comprehensive information and checklists for military families preparing for moves 

and deployments. 

9 The Foundation also worked with the Commission’s Office of Investor Education and 

Assistance to produce SaveAndInvest.org. As discussed above, this new online 

resource center at SaveAndInvest.org provides unbiased, noncommercial information 

on saving and investing specifically tailored for service members and their families. 

The interactive site includes original content, content from 11 government and nonprofit partners, interactive tools, links to financial education resources, frequently 

asked questions, and more. 

Throughout 2007, the Commission’s Office of Investor Education and Assistance and the 

NASD will continue to provide military families with the tools and resources they need to 

save and invest with confidence. New events include military forums at Fort Gordon Marine 

Corps Air Station Yuma, San Diego Marine Corps Recruit Depot, Camp Pendleton, Marine 

Corps Air Station Miramar, and Marine Corps Air Ground Combat Center 29 Palms, with 

more than 1,600 officers, enlisted personnel, and spouses attending. The NASD’s additional 

activities underway include plans to launch an e-learning financial simulation game for 

young service members and their families and a pilot program that will provide an innovative 

47
credit management tool that helps military families understand and improve their credit 

scores. 

B. The Commission has No Further Recommendations at this Time 

In light of the legislative and regulatory initiatives already in place, and after 

consultations with the Department of Defense, the Commission has no further legislative 

or regulatory recommendations to make at this time. As discussed above, by prohibiting 

sales of periodic payment plans Congress already has addressed the single leading 

problem identified by the Commission and its staff in sales of securities to military 

personnel. Moreover, the on-going initiatives of the Department of Defense; the 

Commission’s and NASD’s continuing oversight of broker-dealers that sell securities to 

military personnel, including the Commission’s and NASD’s continuing alertness to 

abuses similar to those identified in the action against American-Amicable, and the 

Commission’s and NASD’s active program of investor education for uniformed military 

personnel are already underway and should play significant roles in further protecting our 

uniformed military personnel. The Commission believes the most appropriate action at 

this time is to allow those initiatives to carry forward. All have already achieved 

considerable success. As a result, the Commission has no further legislative or regulatory 

recommendations at this time. 

VIII. CONCLUSION 

The Commission strongly believes that our servicemen and women must be protected 

from illegal and abusive practices in the sale of securities. The Commission has 

undertaken a comprehensive program to address such practices targeting military 

personnel. Our program includes enforcement activity, examination activity, close 

coordination with Department of Defense and the NASD, and investor education and 

other outreach activity. The problems associated with periodic payment plans are no 

longer a significant issue because of the statutory prohibition. We expect to address other 

problems as they arise through our continuing oversight of potentially abusive activities. 

We look forward to continuing to work closely with these Committees, the Department of 

Defense, the NASD, and other regulators to protect members of the military as investors 

in our markets. 

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