United States Government Accountability Office

GAO Testimony 

Before the Committee on Banking, 

Housing, and Urban Affairs, U.S. Senate

FINANCIAL PRODUCT 

SALES 

Actions Needed to Protect 

Military Members 

Statement of Richard J. Hillman, Managing Director 

Financial Markets and Community Investment 

For Release on Delivery

Expected at 10 a.m. EST 

Thursday, November 17, 2005 

 

GAO-06-245T 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

November 17, 2005

FINANCIAL PRODUCT SALES 

Actions Needed to Protect Military 

Highlights of GAO-06-245T, testimony Members 

before the Committee on Banking, 

Housing, and Urban Affairs, U.S. Senate 

In 2004, a series of media articles

alleged that financial firms were

marketing expensive and 

potentially unnecessary insurance 

or other financial products to

members of the military. GAO’s 

report for this committee examined

(1) features and marketing of 

certain insurance and securities 

products being sold to military

members and (2) how financial 

regulators and the Department of

Defense (DOD) were overseeing

the sales of insurance and 

securities products to military

members. GAO also examined 

issues relating to DOD’s oversight 

of insurance sales for a report 

issued in June 2005. 

What GAO Recommends

GAO’s report to this committee

recommends that Congress

consider acting to ban contractual 

plans, have regulators ensure that 

products being sold to military

members meet existing insurance 

requirements, and have

appropriateness or suitability

standards for military sales 

developed. GAO’s report also 

recommends that DOD and

financial regulators take steps to

improve information sharing

between them and take other steps 

to improve their oversight efforts. 

These organizations provided 

comments generally agreeing with

this report and its 

recommendations. 

A limited number of firms accused of using deceptive sales practices are 

targeting costly financial products to military members with features that 

reduce their benefits to military purchasers. Although some service 

members benefited from a product that combines insurance with a savings 

component, the additional coverage was more expensive than the low-cost 

government insurance almost all service members already receive. One 

feature reducing these products’ benefits was that if the service member 

ever stopped making payments and did not request a refund, the 

accumulated savings is used to continue the life insurance coverage. With 

military members often leaving the service within a few years, most stopped 

their payments and likely failed to amass any savings from their purchase. 

Various regulatory and other actions have been taken against the insurance 

companies that sell these products in the past and new investigations are 

underway in 14 states over whether these companies have failed to clearly 

identify the products as insurance as required by law or whether the 

products’ features comply with all state insurance requirements. A small 

number of broker-dealers were also marketing a securities product—the 

mutual fund contractual plan—that has largely disappeared from the civilian 

marketplace. Although potentially providing returns equivalent to other 

products if steady payments are made over a long period, these contractual 

plans proved more expensive to most military purchasers than other widely 

available alternative products because many military members stopped 

making payments in the first few years. In addition, the largest brokerdealer selling contractual plans has already been sanctioned by regulators 

for using misleading marketing materials and examinations into the 

practices of other firms marketing this product are also underway. 

A lack of routine complaint sharing by DOD prevented financial regulators 

from identifying inappropriate sales to military service members earlier.

Although insurance regulators in some states review sales activities 

periodically, most rely on complaints to indicate that potentially problematic

sales are occurring, particularly since no appropriateness or suitability 

standards exist for insurance. Securities regulators’ efforts were also 

hampered by the lack of complaint sharing from DOD personnel. Because 

sharing with financial regulators can be complicated by privacy regulations 

and potential legal restrictions, DOD personnel at individual installations 

generally resolved matters involving product sales with companies directly. 

However, in light of the problems identified in our June 2005 report and the 

report issued for this committee, DOD has efforts underway to revise its 

solicitation policies regarding such sales, and has reviewed ways in which it 

can legally share additional information with financial regulators. However,

DOD has not yet issued these new policies or coordinated with military 

installation personnel or with regulators on appropriate ways that additional 

sharing could occur. 

www.gao.gov/cgi-bin/getrpt?GAO-06-245T.

To view the full product, click on the link 

above. For more information, contact Richard 

Hillman (202) 512-8678 or hillmanr@gao.gov.
Mr. Chairman and Members of the Subcommittee: 

I am pleased to be here to discuss GAO’s work on the sales of financial 

products to members of the U.S. military. In 2004, a series of media reports 

highlighted allegations of financial firms marketing expensive and 

potentially unnecessary insurance and other financial products to 

members of the military. These accounts included claims of insurance 

companies improperly selling insurance as investment products and 

broker-dealer firms marketing a mutual fund product with high upfront 

sales charges that was rarely being offered to civilians. These media 

reports raised concerns within Congress and elsewhere over whether the

men and women in the armed services were as adequately protected from

inappropriate financial product sales as their civilian counterparts. 

Today, I will summarize the results from the report being released today 

that we prepared at this committee’s request, which is entitled Financial 

Product Sales: Actions Needed to Better Protect Military Members.

1

Specifically, I will discuss (1) the insurance and securities products that 

were being sold primarily to military members and how these products 

were being marketed, and (2) the ability of financial regulators and the 

Department of Defense (DOD) to oversee the sales of insurance and 

securities products to military members. Where applicable, I will also 

present results from a related report entitled Military Personnel: DOD 

Needs Better Controls over Supplemental Life Insurance Solicitation 

Policies Involving Servicemembers.

2

In summary: 

A limited number of firms accused of using deceptive sales practices are

targeting costly financial products to military members with features that 

reduce their benefits to military purchasers. About six insurance 

companies are marketing products that combine high-cost insurance with 

a savings component. Although some service members and their survivors 

have benefited from these products, many have not. Most of the 

purchasers of these products were unmarried individuals with no 

dependents and thus may have had little need for more coverage beyond 

that already provided through the low-cost government insurance offered 

to service members. In addition, these products also appeared to be a poor 

 1

GAO-06-23 (Washington, D.C.: Nov. 2, 2005). 

2

See GAO-05-696 (Washington, D.C.: June 29, 2005). 

Page 1 GAO-06-245T 
investment choice for service members because they include provisions 

that allow the money accumulated in the savings fund to be used to keep 

the life insurance in force if the service member ever stops making 

payments and does not request a refund of this savings. Given that military 

members move frequently and often leave the service within a few years, 

many did not continue their payments and failed to cancel their policy and 

request refunds, and as a result, few likely amassed any savings from their 

purchase. Since the 1990s, state regulators, law enforcement authorities, 

and DOD have taken various actions against the few insurance companies

that sell these products to military members and current investigations are 

continuing in as many as 14 states. Among the allegations being 

investigated is whether these companies are violating state laws by failing 

to clearly identify the products as insurance. In addition, several states are 

also reviewing whether the products’ features comply with all state 

insurance requirements. Similarly, a small number of broker-dealers were 

marketing a securities product—the mutual fund contractual plan—that 

has largely disappeared from the civilian marketplace. Although

potentially providing returns equivalent to other products if steady 

payments are made over a long period of time, these contractual plans 

proved more expensive to most military purchasers than other widely 

available alternative products because many military members stopped 

making payments in the first few years. Securities regulators are also 

concerned over the practices used to market these products and the 

largest broker-dealer selling contractual plans recently agreed to pay a $12

million penalty to settle Securities and Exchange Commission (SEC) and 

NASD allegations that it used misleading marketing materials. In addition,

these regulators are currently conducting examinations into practices of 

the other firms that also marketed these products to military members.3

A lack of routine complaint sharing between financial regulators and DOD 

was the primary reason that regulators did not generally identify the 

problematic sales of financial products to military service members until 

such accounts appeared in the media. Although insurance regulators in 

some states review sales activities periodically, insurance regulators in 

most states generally rely on complaints from purchasers to indicate that 

potentially problematic sales are occurring. One reason that insurance 

company sales activities are not reviewed more extensively is because 

most states lack any appropriateness or suitability standards for insurance 

 3

NASD, formerly known as the National Association of Securities Dealers, oversees the 

broker-dealer firms and their registered sales representatives that market securities. 

Page 2 GAO-06-245T 
products. Although conducting periodic examinations of broker-dealers 

sales practices, securities regulators’ ability to identify problems involving 

the sale of contractual plans was also hampered by the lack of complaint 

sharing from DOD personnel and the absence of standardized information 

on the extent to which contractual plan purchasers were successfully 

making their payments. Because sharing with financial regulators can be

complicated by privacy regulations and potential legal restrictions, DOD 

personnel at individual installations generally resolved matters involving 

product sales with the service member and the companies directly. 

However, in light of the problems identified in our June 2005 report and 

the report we issued for this committee, DOD has efforts underway to 

revise its solicitation policies regarding such sales and has reviewed ways

in which it can legally share additional information with financial 

regulators. However, DOD has not yet issued these new policies or 

coordinated with its installation personnel or with regulators on 

appropriate ways that additional sharing can occur. State insurance and

securities regulators also expressed concerns over whether their 

jurisdiction over sales of financial products on military installations was 

sufficiently clear. 

Given the concerns over potentially inappropriate financial product sales 

to military members, the need for definitive actions to better protect 

service members appears overdue. The report we issued to this committee 

recommends actions by Congress that are consistent with many of the 

provisions that seek to improve protections for military members in the 

bills that passed the House of Representatives and are under consideration 

in the U.S. Senate.4

 Because the features of the products being sold to 

military members provided limited benefits to many military purchasers, 

we believe that Congress should act to have all state insurance regulators 

conduct reviews to ensure that only legal products are being sold to 

military members and to have regulators work cooperatively with DOD to 

develop standards that could help ensure that companies only market 

products appropriate for the military members’ needs and circumstances. 

Similarly, given the wide availability of less expensive alternatives, 

Congress should act to amend the Investment Company Act to ban the sale

of contractual plans. Because financial regulators’ ability to adequately 

oversee sales to military members was hampered by a lack of information 

sharing about military members’ complaints and concerns, we also 

 4

See Military Personnel Financial Services Protection Act, H.R. 458, 109th Congress (2005)

and Military Personnel Financial Services Protection Act, S. 418, 109th Congress (2005). 

Page 3 GAO-06-245T 
recommend that Congress direct DOD to work with insurance and 

securities regulators to overcome barriers to sharing information and to 

clarify that state regulators have jurisdiction on military installations. In 

the report prepared for this committee, we also recommend that DOD 

issue its revised solicitation policies that will require military personnel to 

share complaints with financial regulators. To improve oversight by state 

insurance regulators, SEC, and NASD, we recommend that these 

organizations designate specific members of their staff to receive 

complaints and conduct outreach to proactively learn of problems 

involving military members. In the event that contractual plans continue to 

be sold, we also recommended that SEC and NASD improve the 

information they have to assess the sales of contractual plans. DOD, SEC, 

NASD, and the National Association of Insurance Commissioners (NAIC) 

provided comments on our current report and indicated that they intend to 

take steps to consider and implement our recommendations. 

A limited number of insurance companies and broker-dealers are under 

investigation for deceptive sales practices to target military members with 

financial products that have features that reduce their benefit to service 

members. Although most service members already receive considerable 

low-cost life insurance as part of their government benefits, state 

insurance regulators we contacted said that at least six insurance 

companies have been selling a hybrid insurance product that combines life 

insurance coverage with a side savings fund to thousands of service 

members at installations across the United States and around the world. 

For example, four of these companies were licensed to sell insurance in at 

least 40 states, and the other two licensed in at least 35 states and five of 

them had received DOD approval to conduct business at U.S. military 

installations overseas. These insurance companies also appeared to 

market primarily to junior enlisted service members. According to state 

insurance regulators we contacted, the companies primarily sold 

insurance policies to military personnel during their first few years of 

service, including during their initial basic training or advanced training 

provided after basic training. 

Costly Financial 

Products With 

Features 

Inappropriate for 

Military Members 

Raise Sales Practice 

Concerns 

Although the exact number of service members that have purchased these 

products is not known, regulators told us that these companies sell 

thousands of policies to military personnel each year. We also found 

evidence that large numbers of these products were being sold. For 

example, base personnel at one naval training facility we visited said they 

regularly received several hundred allotment forms each month to initiate 

Page 4 GAO-06-245T 
automatic premium payment deductions from military members’ 

paychecks for these insurance products. 

These products provide additional death benefits but are significantly 

more expensive than other life insurance coverage available to service 

members. For example, service members purchasing these products make 

payments of about $100 per month for additional death benefits generally

ranging from $25,000 to $50,000. In contrast, all service members are 

currently able to purchase $400,000 of life insurance through 

Servicemembers’ Group Life Insurance (SGLI) for $26 per month.5

Although the insurance products these six companies were selling also 

included a savings component that recently promised to earn interest 

between 6.5 and 8.1 percent, these products also included features that 

reduced the likelihood that service members purchasing them would 

accumulate large amounts of savings. As we reported, military members 

move frequently and many leave the service after a few years, which which 

may reduce their ability or willingness to continue making payments to 

fulfill a long-term financial commitment. However, the products being 

marketed by these insurance companies require a long series of payments 

to result in significant benefits to their purchasers. For example, most of 

the payments made in the earliest years—ranging from 1 to 7 years—

would be used to pay the premiums for life insurance coverage. In 

subsequent years, more of the service members’ payment would be 

allocated to the savings component.6 In addition, these products also 

included features that allowed the companies to use the money 

accumulated in a service member’s savings fund to automatically pay any 

unpaid insurance premiums. Although this would extend the period of 

 5

Previously, service members were automatically covered for the maximum amount of

$250,000 of insurance on their first day of active duty status, unless they declined or 

reduced their coverage. Included in the Emergency Supplemental Appropriations Act of

Defense, the Global War on Terror, and Tsunami Relief, for the Fiscal Year Ending 

September 30, 2005, Pub. L. No. 109-13, sec. 1012 (May 11, 2005), were provisions that 

increased this amount to $400,000 effective September 1, 2005. This act also increased the

death gratuity paid upon a service member’s death from $12,000 to $100,000, under certain 

circumstances. 

6

For example, for a $100 monthly payment for the product sold by three of the companies 

100 percent of the first year’s payments would be allocated to the insurance premium. 

Between the second and the seventh years, 75 percent of the purchaser’s total payment

would be allocated to the life insurance premium and 25 percent would allocated to the

savings fund. After 7 years, all of the total payment would be allocated to the savings. Three

other companies sold products that allocated 75 percent of the total payment to the life 

insurance premium during the first year, followed by 25 percent in subsequent years. 

Page 5 GAO-06-245T 
time that these service members would be covered under the insurance 

policy, data we obtained from several of these companies indicated that 40

percent or more of the service members that purchased these products 

stopped making payments within the first 3 years. With regulators 

indicating that most purchasers failed to request refunds of their saving 

fund balance, few likely accumulated any savings as a result of their 

purchase. 

According to our analysis, the amount of time that it takes for a service 

member’s savings fund on these combined insurance and savings products 

to become totally depleted through the automatic payment provision 

varied. Figure 1 shows the impact on a service member who purchases the

product providing $30,000 of insurance coverage that requires full 

payment of the total life insurance premimium during the first 7 years. As 

the figure shows, the money in the savings fund of a service member who 

makes the required $100 monthly payments for 4 years and then stops 

paying would be totally depleted to pay the subsequent insurance 

premiums in just over 1 year. This occurs because of the large premiums 

due in the early years on this type of policy, and because the accumulated 

value of the savings fund for this product was modest. For the other type 

of insurance and savings product typically being sold to military members, 

which involves lower but continuous premium payments over the life of 

the policy, service members who halt their payments after 4 years would 

have accumulated sufficient savings to extend the $30,000 of life insurance 

coverage for another 13 years. In contrast, a service member could have

used the $100 monthly payment to instead purchase $30,000 of SGLI term 

coverage at a cost of only about $23 per year and invest the remainder into 

the Thrift Savings Plan (TSP), which is the low-cost retirement savings 

plan available to military members and federal employees. Although 

ceasing payments on SGLI after 4 years would terminate the service 

member’s life insurance, the money contributed to the TSP and left to earn 

just 4 percent interest would grow to about $9,545 in 20 years.7

 7

While in the service, a service member can purchase SGLI and contribute to the TSP. If a 

service member leaves, he or she may elect to purchase Veterans’ Group Life Insurance 

(VGLI) and can either leave any accumulated savings in TSP, withdraw the money from 

TSP, or roll over the TSP balance into a similar savings instrument, such as an individual 

retirement account. In addition, we used the low risk TSP G Fund for this calculation 

because it invests in interest bearing securities and thus was comparable to the interest 

earning products offered by these insurance companies.

Page 6 GAO-06-245T 
Figure 1: Total Approximate Future Values of Insurance Products’ Savings Fund 

and TSP with Payments Ceasing after Year 4 

Dollars (in thousands)

0

2

4

6

8

10

Source: GAO analysis.

7-year premium product

Continuous premium product

SGLI with TSP

Policy year

Payments

cease

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Insurance Companies 

Accused of Inappropriate 

Sales Practices to Military 

Members 

The companies that market primarily to military members have been 

subject to actions by state insurance regulators, the Department of Justice 

(DOJ), DOD, and others. In the report we prepared for this committee, we

identified at least 17 lawsuits or administrative actions that had been taken 

against companies that market primarily to military members. In many of 

these actions taken by state and federal regulators, federal law 

enforcement organizations, or others, the companies have been accused of 

inappropriate sales practices and agreed to settlements as part of lawsuits 

or administration actions involving fines, refunds, and other actions. For 

example, in December 2002, DOJ announced a settlement against an 

insurance company that had marketed a combined insurance and saving

product primarily to military members in which the company paid a 

penalty and agreed to no longer sell insurance in the United States. 

According to the DOJ complaint, this company had allegedly defrauded 

Page 7 GAO-06-245T 
military service members who purchased life insurance policies from the 

company by having its agents pose as independent and objective 

counselors representing a nonprofit fraternal organization that offered, as 

one of its benefits, the ability to purchase the company’s life insurance. 

The insurance companies that marketed primarily to service members 

have also been accused of violating DOD’s own solicitation policies for 

many years. For example, a 1999 DOD Inspector General report and a 

DOD-commissioned report issued in 2000 found that insurance companies 

were frequently employing improper sales practices as part of marketing 

to service members. Among the activities prohibited by DOD that the 

Inspector General’s report found were occurring included presentations 

being made by unauthorized personnel, presentations being made to group 

gatherings of service members, and solicitation of service members during 

duty hours or in their barracks. More recently, DOD personnel conducted 

an April 2005 proceeding in Georgia to review the practice of one of the

companies currently being investigated by state insurance regulators 

regarding allegations of multiple violations of the DOD directive on 

insurance solicitation. Among the practices alleged at this hearing were 

misleading sales presentations to group audiences and solicitations in 

unauthorized areas, such as in housing or barracks areas. DOD recently 

began maintaining an online listing of actions taken against insurance 

companies or their agents by various DOD installations. As of August 11, 

2005, this web site listed 21 agents from some of the 6 companies that 

market primarily to military members that are permanently barred—or 

have had their solicitation privileges temporarily suspended—at 8 

different military installations. 

Our own work also found that problems involving sales of insurance 

products to military members appeared to be widespread. We reported in 

June 2005 that DOD only recently began systematically collecting and 

disseminating information on violations of DOD’s solicitation policy by 

sellers of financial products.8

 However, as part of that report, we also 

surveyed DOD personal financial training program managers and found 

that nearly 37 percent believed that insurance company representatives 

had made misleading sales presentations at their installations during 2004,

with 12 percent believing that such presentations were occurring 

routinely. At the two bases visited as part of work for this report, we also 

found evidence that problematic sales to service members were occurring. 

 8

GAO-05-696. 

Page 8 GAO-06-245T 
For example, our review of statements taken from 41 service members 

that military investigators interviewed at one Army base indicated that 

more than 70 percent of the service members said that the insurance sales 

personnel had described the product being sold as a savings or investment 

product rather than as insurance, which violates state insurance laws. 

Additionally, many of these service members also described conduct that

appeared to represent instances in which insurance company sales 

personnel had violated one or more of the restrictions in DOD’s 

solicitation policy, such as making these sales presentations during group 

training sessions. 

In addition to these past actions, insurance regulators in as many as 14

states are also conducting examinations of these six insurance companies,

as well as others that market to military members. Among the issues that 

regulators are investigating are whether representatives of these 

companies have not been clearly identifying these products as insurance, 

as state laws require, but instead marketing them as investments. 

Regulators and other organizations are also examining whether the sellers

of these products are misrepresenting information on the forms used to 

initiate pay allotments to deduct the payments for the products directly 

from the service members’ pay. 

In addition, insurance regulators in some states are currently reviewing 

whether these combined insurance and savings products that are being 

sold to military members comply with all applicable state insurance laws 

and regulations. For example, regulators in Washington state rescinded 

approval to sell the products that had previously been approved for sales

by some of these companies because the savings component, which the 

companies had been labeling as an annuity riders, was determined to not 

meet that state’s annuity regulations.9

 Regulators in Virginia also recently 

ordered three companies that marketed primarily to military members to 

cease sales of combined insurance and savings products because of 

concerns over whether these products adequately complied with that 

state’s insurance law. However, although these products may be marketed 

in as many as 46 states, currently only 14 states are involved in such 

reviews of the legality of these products. As a result, in the report we 

prepared for this committee, we recommend that Congress act to have

 9

In an annuity contract, an insurer agrees to make a series of payments for a specified 

period or for the life of the contract holder, providing insurance against the possibility that 

the contract holder will outlive his or her assets during the period covered under the

contract. 

Page 9 GAO-06-245T 
insurance regulators in all states conduct reviews to ensure that the 

products being marketed to military members adequately comply with 

state insurance laws. 

Companies also Selling 

Service Members a Mutual 

Fund Product with 

Features that Reduce Its 

Benefit to Most Military 

Members 

Large numbers of service members, including officers, were also 

purchasing a unique securities product, known as a contractual plan, with 

features that reduce its benefit to military members. Under the terms of 

the contractual plans sold to military service members, they would be 

expected to make monthly payments of a set amount for long periods, 

such as 15 years, that would be invested in the mutual funds offered by 

some of the largest mutual fund companies. Under the terms of the 

contractual plan, the broker-dealer selling the product deducts a sales 

charge (called a load) of up to 50 percent from each of the first year’s 

monthly payments with generally no further sales load deductions 

thereafter. In contrast, conventional mutual funds typically deduct loads 

that average 5 percent from each contribution made into the fund. 

According to regulators, about five broker-dealers accounted for the bulk 

of contractual plan sales to military members. According to the marketing 

materials of the broker-dealer that was the largest seller of contractual 

plans, this firm had nearly 300,000 military customers, with an estimated 

one-third of all commissioned officers and 40 percent of active duty 

generals or admirals as clients. This firm also employs about 1,000 

registered representatives in more than 200 branch offices throughout the 

United States, as well as locations in Europe and in the Pacific region. The 

great majority of the firm’s sales representatives are former commissioned 

or noncommissioned military officers. 

While sales charges for contractual plans are initially much higher than 

those of other mutual fund products, the effective sales load—the ratio of

the total sales charge paid to the total amount invested—becomes lower 

as additional investments are made. Over time the effective sales load for a 

contractual plan will decrease to a level comparable to—or even lower 

than—other conventional mutual funds with a sales load.10 As illustrated in 

Figure 2, if all 180 monthly payments are made under a contractual plan, 

the effective sales load on the total investment decreases to 3.33 percent 

 10Many mutual funds that are sold with sales charges or loads offer discounts to investors

who invest certain amounts of money. As such, if an investor continues to invest in a 

conventional mutual fund over time, eventually the sales charge percentage of that fund 

will decrease as the total initial investments reach a certain amount, such as $25,000 or 

$50,000. 

Page 10 GAO-06-245T 
by year 15. However, if a purchaser of one of these plans stops making 

regular investments earlier, the effective sales charge can be much higher. 

For example, halting payments after 3 years results in an effective sales 

load of 17 percent of the amount invested. 

Figure 2: Mutual Fund Sales Load as a Percentage of Investment by Year 

Source: GAO analysis.

Percentage

Contractual plan load

Traditional plan load

Plan year

0

10

20

30

40

50

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

At one time, contractual plans were the only way for small investors to 

invest in mutual funds as in the past many mutual funds required large 

initial investments, which prevented them from being a viable investment 

option for many individual investors. However, today, other lower-cost 

alternatives exist for small investors to begin and maintain investments in 

mutual funds. For example, many mutual fund companies now allow 

investors to open a mutual fund account with a small initial investment, 

such as $1,000, if additional investments—including amounts as low as $50 

per month—are made through automatic withdrawals from a bank 

checking or savings account. According to a recent study by the mutual 

fund industry association, over 70 percent of the companies offering S&P 

500 index mutual funds in 2004 had minimum initial investment amounts 

Page 11 GAO-06-245T 
of $1,000 or less, with 9 having minimum investment amounts of $250 or 

less.11 Securities regulators saw the wide availability of such products as 

the reason that contractual plans were rarely being offered to most 

investors. Another alternative investment option available to service 

members since 2002 is the government-provided TSP. Comparable to 

401(k) retirement plans available from private employers, service 

members can currently invest up to 10 percent of their gross pay into TSP

without paying any sales charge. The various funds offered as part of TSP 

also have much lower operating expenses than other mutual funds, 

including those being offered as contractual plans. Service members could 

also choose to invest as many other investors do in mutual funds offered 

by companies that do not charge any sales load. Called no-load funds, 

these are available from some of the largest mutual fund companies over 

the telephone, the Internet, or by mail. 

Although contractual plans can provide benefits to those holding them for 

long periods, many service members were not making the expected 

payments and thus ended up paying more than had they invested in other

alternatively available products. Given military members’ frequent moves 

and with many leaving the service after a few years, regulators found that 

most service members were not investing in their plans for the entire term. 

For example, SEC and NASD found that only 43 percent of the clients that 

purchased plans between 1980 and 1987 from the broker-dealer that was 

the largest marketer of contractual plans had completed the full 15 years 

required under the contract—with many service members ceasing their 

payments after about 3 years and thus effectively having paid sales loads 

of 17 percent on their investment. Regulators found that customers of the 

other broker-dealers marketing these plans were similarly or even less 

successfully making all of the payments expected under the plan—for 

example, at one firm only 10 percent of customers had made payments for 

a full 15 years. 

Contractual plans have been associated with sales practice abuses for 

decades. Concerns about excessive sales charges and other abuses 

involving these products during the 1930s provided the impetus for 

provisions in the Investment Company Act of 1940 that limited the 

amounts that purchasers of contractual plans could be charged. Additional 

 11The study identified 98 companies offering S&P 500 index funds. See Investment 

Company Institute, “Are S&P 500 Index Mutual Funds Commodities?” Perspective, Vol. 11,

No. 3 (August 2005). 

Page 12 GAO-06-245T 
concerns involving contractual plans during the 1950s and 1960s also led 

Congress to amend the Act in 1970 to further limit the maximum sales 

charges and to provide a period in which purchasers could obtain refunds 

of their investment. Firms marketing contractual plans have again been 

accused of inappropriate sales practices. In December 2004, SEC and 

NASD sanctioned the largest broker-dealer marketing these plans to 

service members after alleging that the firm’s marketing materials were 

misleading. For example, according to the regulators, the firm’s marketing 

materials allegedly included various misleading comparisons of 

contractual plans to other mutual funds, including characterizing noncontractual funds as attracting only speculators, and erroneously stating 

that withdrawals by investors in other funds force the managers of those 

funds to sell stocks. The regulators also alleged that the firm’s materials 

did not present the low-cost TSP as a viable alternative to their contractual 

plans. This firm agreed to pay a total of about $12 million and has 

voluntarily discontinued sales of contractual plan products. About $8 

million of the total money paid by this firm is to be used to fund financial 

education efforts for military members that are being developed and 

administered by NASD. Regulatory examinations of the other four smaller 

broker-dealers that continue to sell contractual plans are continuing. 

Given the longstanding history of sales-practice abuses associated with the 

contractual plans and the availability of viable alternative investments, we 

believe that Congress should act to ban the further sale of contractual 

plans. The bills currently under consideration in the Congress include 

language that would amend the Investment Company Act of 1940 to render

sales of such plans illegal, thereby removing from the market a product 

that appears to have little need to continue to exist.12

 12S. 418, Sec. 3, and H.R. 458, Sec. 102. 

Page 13 GAO-06-245T 
Additional actions by Congress, DOD, and regulators also appear 

warranted to improve the effectiveness of insurance and securities 

regulators in overseeing sales of financial products to military members. 

As we reported, the ability of insurance and securities regulators to 

identify problems involving sales to military members was hampered 

because DOD personnel were not generally sharing service member 

concerns and complaints. In addition to conducting routine examinations, 

insurance and securities regulators use complaints from financial firms’ 

customers as an indicator that problems involving particular products, or 

the practices of particular firms, exist. For example, state insurance 

regulators conduct various types of reviews of the insurance companies 

they oversee, including reviews focusing on insurance companies’ 

financial soundness. Regulators in some states also review some aspects 

of insurance product sales as part of market conduct examinations that 

may involve reviews of a range of company practices, including sales, 

underwriting, and claims processing and payment. Although some states 

routinely perform market conduct reviews of the companies they oversee,

most states only conduct such investigations when they receive 

complaints from customers or otherwise obtain information that raises 

concerns about the activities of an insurance company. 

Lack of DOD 

Complaint Sharing 

Hampered Regulators’ 

Ability to Identify 

Problems Involving 

Sales to Military 

Members 

One reason that insurance regulators do not review insurance company 

sales practices more routinely is that standards requiring that any 

insurance products sold be appropriate or suitable for the purchaser do 

not generally exist. As a result, under most state insurance laws, insurance 

regulators do not have the authority to evaluate whether the product sold 

to a military member was appropriate or suitable given the customer’s 

needs. State regulators and others have previously attempted to establish 

suitability standards for insurance products, but these efforts have had 

limited success. For example, a NAIC working group originally formed to 

develop suitability standards to apply to all insurance sales instead 

concluded its efforts by developing standards that applied only to the sale

of annuity products to seniors age 65 and over.13

To reduce the likelihood that service members will be marketed products 

inappropriate to their needs, in the report we prepared for this committee,

we recommend that Congress act to have insurance regulators work 

 13Other organizations have also attempted to develop suitability standards. For example, 

the Insurance Marketplace Standards Association (IMSA) has developed various standards

applicable to insurance companies’ marketing practices. IMSA also provides qualification 

to companies that comply with its marketing practices standards. 

Page 14 GAO-06-245T 
cooperatively with DOD to develop suitability or appropriateness 

standards that would apply to the sale of financial products to military 

members. The bills being considered in the U.S. Senate include provisions 

to have these parties work together to develop such standards.14 Such 

standards could ensure that companies offer only products that address 

actual service member needs for insurance and that take into account

service members’ itinerant lifestyles and income levels. Having such 

standards could also provide protection for service members that are 

located in overseas installations not directly overseen by state regulators.

Securities Regulators Also 

Hampered by Lack of 

Complaints Involving 

Military Members 

Similarly, the ability of SEC and NASD to identify problems involving sales 

by broker-dealers to military members was also hampered by the lack of

complaints from DOD and for other reasons. For example, previous SEC 

and NASD examinations of the largest marketer of contractual plans had 

not identified any significant problems. However, staff from these 

organizations told us that identifying the problems involving the sale of 

this product was made more difficult because neither of the regulators had

previously received any complaints about the firm from service members. 

The securities regulators’ ability to detect problems was also hampered by 

the lack of standardized data on the extent to which customers were 

completing contractual plans. For example, SEC examiners had obtained 

data from the largest broker-dealer that purported to show that the 

persistency rate for the contractual plans—which represented the 

proportion of plans that were still open—was over 80 percent for the 

previous 3 years. However, after press reports appeared, NASD and SEC 

examiners reviewing this firm’s operations found that the firm maintained 

various sets of data on its customers’ activity. However, these various sets 

did not always include all customers’ information, which made regulators’ 

efforts to definitively determine the extent to which this firm’s customers 

were continuing to make payments and successfully completing their 

plans more difficult. By further analyzing the data, the regulators 

determined that, by excluding any customer whose account remained 

open but had not made any payments in the last year, the actual extent to

which this broker-dealer’s customers were successfully completing their 

contractual plans was only 43 percent. As a result, the report we prepared

for this committee recommends that, if contractual plans continue to be 

sold, SEC and NASD should consider ways (such as through revised 

examination procedures or recordkeeping rules) to ensure that they obtain 

 14S. 418, Sec. 9, and H.R. 458, Sec. 108. 

Page 15 GAO-06-245T 
better information on the extent to which broker-dealer customers are 

successfully making their payments. 

DOD Acting to Improve 

Sharing with Financial 

Regulators but Not All 

Efforts Complete 

DOD has also taken some actions to address potentially problematic sales 

of financial products to service members, although it does not currently 

share all relevant information with financial regulators. A primary way that 

DOD attempts to protect service members from inappropriate sales is 

through its directive on commercial solicitation on military installations.15

DOD staff within the Office of the Under Secretary of Defense for 

Personnel and Readiness are revising this directive and, in April 2005, 

sought public comments on a revised version that incorporates new 

requirements. For example, the revised directive would expressly prohibit 

insurance products from being sold as investments. The draft of the 

revised solicitation directive includes provisions that would also require 

installation personnel to report all instances in which they ban or suspend 

the solicitation privileges of any companies or individuals selling financial 

products to the Principal Deputy Under Secretary of Defense for 

Personnel and Readiness. In our June 2005 report, we recommended that

DOD create a database of all violations of its solicitation policy. DOD has 

collected and posted some of this information to a web site available to its 

personnel and others. The bills under consideration in the Senate would 

further require DOD to promptly notify insurance and securities regulators

of those individuals or companies whose solicitation privileges have been

suspended, limited, or revoked by DOD installations.16 In our June 2005 

report, we also identified various improvements that DOD has agreed to 

make to its oversight of insurance purchasers by military members, 

including the regulations governing the pay allotment process. We 

summarize these findings and DOD’s proposed improvements in appendix 

I of this statement. 

Although DOD personnel had not routinely shared service member 

complaints with financial regulators in the past, DOD officials have told us

that they intend to require their personnel to report more of this type of 

information to regulators. Under the current solicitation policy directive, 

DOD personnel are not required to share information relating to service 

member concerns or complaints with other parties, and the revised draft 

 15DOD Directive 1344.7, Personal Commercial Solicitation on DOD Installations (Feb. 13,

1986).

16S. 418, Sec. 11, and H.R. 458, Sec. 110. 

Page 16 GAO-06-245T 
that was published for comment also lacked any provisions relating to 

such information. In addition, when we issued our June 2005 report on 

DOD’s insurance solicitation oversight, DOD was reluctant to provide 

information to regulators beyond indicating that DOD installations had 

suspended or revoked a given firm’s or individual’s solicitation privileges 

or that the violations involved the eligibility of the agent to hold a State 

license or meet other regulatory requirements.17 However, staff in the 

office that oversees the policy directive told us more recently that they

intend to specifically require in the new directive that base personnel 

report to financial regulators any service member concerns or complaints 

that relate to the quality of the financial products offered to them or 

regarding the appropriateness of the practices used to market these 

products. DOD has not, as of yet, issued this new directive. To ensure that 

financial regulators have critical information that they need to identify 

problematic products and sales practices, the report we prepared for this 

committee recommends that DOD issue a revised DOD solicitation policy 

directive that would require that information on service member 

complaints related to financial product sales be provided to relevant state

and federal financial regulators. 

DOD and financial regulators have also worked together to increase 

education for military members. For example, NAIC and DOD personnel 

have worked to together to develop a brochure that can be distributed to 

service members that describes insurance products and lists the state 

regulatory organizations to contact if they have concerns. In addition, 

NASD was cooperated with DOD personnel as part of developing the 

education campaign that is being planned using the money from the 

broker-dealer contractual plan settlement. 

However, DOD has not acted to fully address potential barriers to 

increased sharing with financial regulators. For example, securities 

regulatory staff told us that while they were conducting their 

investigations of contractual plan sales, personnel at some DOD 

installations were reluctant to share any information involving specific 

service members for various reasons. According to these regulators, the 

 17In response to our June 2005 report (GAO-05-696), DOD also concurred with several other

recommendations we made, including agreeing to clarify the policy in the revised 

solicitation directive relating to the “cooling off” period before processing allotments for 

insurance, improving its database of insurance allotments, and reminding all installations

of the policies related to initiating or changing allotments. Our findings on these issues are 

discussed in appendix 1. 

Page 17 GAO-06-245T 
installation personnel cited military privacy regulations and the 

restrictions that arise from attorney-client privilege if the service member 

was being assisted by military legal counsel. According to the director of

the DOD office responsible for administering the solicitation policy, such 

issues can affect their ability to share information with entities outside the 

military. However, he explained that DOD has researched these legal 

issues and now believe that they can share information that is deemed to 

be necessary for the official needs of the requesting organization, 

including financial regulators. This DOD official also acknowledged that 

more coordination could be done to ensure that both military installation 

personnel and financial regulatory staff understand how additional sharing 

could appropriately occur 

To ensure that financial regulators have critical information that they need

to identify problematic products and sales practices, the report we 

prepared for this committee recommends that Congress direct DOD to 

develop mechanisms to overcome any barriers and coordinate with its 

installation personnel and with financial regulators on ways to share 

additional information about problematic financial firm practices and 

service member concerns. Our report further recommends that insurance 

regulators, SEC, and NASD designate specific staff that would receive

complaints from DOD and conduct outreach with military installations to 

proactively learn of issues or concerns involving product sales. 

Another concern over whether military members are adequately protected 

from inappropriate sales stems from uncertainty over financial regulators’ 

jurisdiction on U.S. military installations. Although most of the insurance 

and securities regulators we contacted believed they had jurisdiction over

the sales of financial products on military installations, some regulators 

expressed uncertainty over their authority to regulate sales on military 

installations, where the federal government may have “legislative 

jurisdiction.”18 For example, a Texas insurance department official told us 

that he had trouble getting access to complaints information at a military 

installation because installation personnel questioned his authority to 

 18When used in connection with an area of land, the term “legislative jurisdiction” means 

the authority to legislate and to exercise executive and judicial powers within that area. 

The federal government holds land under varying degrees of legislative jurisdiction, 

including “exclusive” legislative jurisdiction, where the state’s ability to enforce its laws 

and regulations is extremely limited. The type of existing legislative jurisdiction over

military installations may vary depending on when and how specific tracts of land were 

acquired. 

Page 18 GAO-06-245T 
request such information. As part of the work on DOD’s oversight of 

insurance sales that we reported on in June 2005, we surveyed the various

state and territorial insurance commissioners.19 Of those that responded to 

the question regarding whether they had authority over sales of life 

insurance on military installations, four commissioners indicated that they 

did not have such authority. State insurance regulators also noted they 

lack jurisdiction over sales taking place outside the United States at 

overseas installations. At least one state securities regulator responded to

a North American Securities Administrators Association survey that it did

not have adequate authority over sales taking place on military 

installations. 

As a result, the report that we prepared for this committee also 

recommends that Congress consider acting to clarify the jurisdiction of 

state regulators over sales of financial products on military installations. 

Of the legislation under consideration in the Congress, the bill that passed

the House of Representatives includes language stating that any state law,

regulation, or order pertaining to the regulation of insurance or securities 

offers and sales are generally applicable to any such activities conducted 

on Federal land or facilities in the United States and abroad, including 

military installations. The version introduced in the U.S. Senate includes 

similar language but would only apply to insurance activities.20

- - - - - - - - - - - - - - 

Mr. Chairman, this concludes my prepared statement and I would be 

happy to respond to questions you or other members of the Committee 

many have. 

GAO Contacts and 

Acknowledgements 

For further information regarding this testimony, please contact Richard J.

Hillman (202) 512-8678. In addition, others making key contributions to 

 19GAO 05-696. 

20S. 418, Sec. 6(a), and H.R. 458, Sec. 105(a). 

Page 19 GAO-06-245T 
this statement included Cody Goebel, Assistant Director; Jack Edwards, 

Gwenetta Blackwell-Greer; Tania Calhoun; Barry Kirby; and Josephine 

Perez. 

Page 20 GAO-06-245T 
Page 21 GAO-06-245T 

Appendix I: Additional Actions Needed to 

Improve Oversight of Pay Allotments for 

Insurance for Military Members 

As a result of a report we issued in June 2005, the Department of Defense 

(DOD) has agreed with our recommendations to improve aspects of its 

oversight of insurance purchases by military members. 1

 At the request of

the chairs of the House Committee on Government Reform and House 

Committee on Armed Services as well as various other members of the 

House of Representatives, we reviewed DOD’s procedures to oversee the 

sale of insurance products to military members, including the procedures 

used to process pay deduction allotments to pay for insurance products.

Based on the work we conducted, we determined that DOD was not able 

to monitor the extent to which service members were purchasing 

supplement insurance because of problems with its personnel pay 

databases. Pay information for service members is maintained by the 

Defense Finance and Accounting Service (DFAS) in separate databases for 

the different military services. However, we were not able, even with 

DFAS assistance, to use information from these databases to reliably 

determine the extent to which service members had purchased additional

insurance. For example, the codes in the databases used to identify an 

insurance company are not the same for all services. Further, DOD and 

service regulations permit the use of at least seven different allotment 

forms, but not all of these forms explicityly identify which allotments are 

for supplemental life insurance. 

A major cause of these database-related problems is DOD’s systems 

supporting service members’ pay, which we had previously found 

unreliable.2

 While a significant system enhancement project is under way 

to improve the administration of military pay, DOD is likely to continue 

operating with existing system constraints for several years. The 

continued use of forms that do not require information and coding specific 

to supplemental life insurance could cause allotment data to continue to 

be unreliable for oversight purposes. 

The absence of accurate data on the extent to which service members are 

purchasing supplemental life insurance limits the ability of DOD policy 

officials and installation solicitation coordinators to oversee such sales 

 1

GAO 05-696. 

2

See GAO, DOD Systems Modernization: Management of Integrated Military Human

Capital Program Needs Additional Improvement, GAO-05-189 (Washington, D.C.: Feb. 11, 

2005), and GAO, Military Pay Army National Guard Personnel Mobilized to Active Duty

Experienced Significant Pay Problems, GAO-04-89 (Washington, D.C.: Nov. 13, 2003). 
and ensure that all relevant DOD policies are being followed. For example, 

the lack of accurate data prevents DOD personnel from readily identifying 

whether service members at a particular installation have submitted an 

unusually large number of new allotments for supplemental life insurance 

during a short period, which could indicate that a mass solicitation to 

recruits or trainees has occurred in violation of DOD’s personal 

commercial solicitation policy directive.3

As a result, our June 2005 report recommended that DOD determine what 

current and future modifications should be made to the regulations, forms, 

and procedures used to initiate and electronically capture supplemental 

life insurance allotments so that more useable data are available to the 

DOD, service, and installation offices responsible for overseeing 

supplemental life insurance solicitation. In its comments on a draft of our 

report, DOD concurred with this recommendation and stated that the 

department will consider our proposed changes for a future enhancement

of their pay system and will review the regulations and forms to determine 

what further modification should be made. 

Based on our work, we also found that weaknesses in DOD’s regulations 

and forms prevented it from determining the extent to which its personnel 

adhere to allotment regulations. For junior enlisted service members (pay 

grades E-l to E-3), the DOD directive on personal commercial solicitation 

requires that at least 7 days elapse before the allotment is to be processed 

to allow these members to receive counseling about the purchase of the 

supplemental life insurance. However, contrary to the regulation, we 

found that some DOD financial personnel were accepting allotment forms 

to start supplemental life insurance without verifying that a cooling-off 

period had elapsed.4

 Currently, the allotment forms that service members 

use to start supplemental life insurance do not require certification that 

the required cooling-off period and, possibly, counseling have occurred. 

The absence of this information from allotment forms prevents finance 

personnel from readily determining whether the 7 days have elapsed 

before they certify the allotment. In addition, ambiguities in the language

of the solicitation policy directive may have also led to improper allotment 

processing. For example, the directive was not clear as to whether the 

 3

DOD Directive 1344.7. 

4

This cooling off period can be waived. For example, the directive states that the 

purchaser’s commanding officer may grant a waiver of this requirement for good cause,

such as the purchaser’s imminent permanent change of station. 

Page 22 GAO-06-245T 
counseling is required or optional during the cooling-off period. In 

addition, the directive and the standard allotment forms do not contain 

procedures for documenting whether the counseling took place. 

To ensure better compliance with the directive, our June 2005 report 

recommended that DOD clarify the requirements relating to the cooling-off 

period in its upcoming revision to the solicitation policy directive, and 

thereby eliminate the ambiguities about its requirements. In its comments 

on a draft of our report, DOD concurred with this recommendation and 

stated that it had identified an additional ambiguity in the current revised 

directive regarding who is responsible for monitoring and enforcing the 

cooling-off period for supplemental life insurance purchases. It indicates 

that the proposed revision to the directive will address these issues. 

We also found DOD personnel were not consistently complying with 

regulations relating to ensuring that allotments were appropriately 

authorized. According to DOD’s Financial Management Regulation, 

establishment of, discontinuance of, or changes to existing allotments for 

supplemental life insurance are to be based on a written request by a 

service member or someone with a special power of attorney on behalf of 

the service member.5

 However, DOD personnel and insurance agents 

indicated that some offices accepted allotment forms personally submitted 

by insurance agents or through the mail with only the signature on the 

form serving as proof that the service member initiated the allotment. For 

example, finance office personnel at Naval Station Great Lakes said that 

about half of all insurance allotment forms submitted to and processed by 

their office came from insurance agents. In addition, we reported that a 

life insurance agent was alleged to have submitted allotment forms at Fort 

Bragg for service members who later said they had not wanted the policies 

for which they were paying. Finance personnel said they accepted 

allotment forms in this manner to ensure that polices start promptly, but 

starting allotments without service members’ awareness can negatively 

affect members’ finances and their unit’s morale and readiness. 

 5

DOD, Financial Management Regulation 7000.14-R, Vol. 7A, Chapter 41, sec. 410801. This 

regulation allows most financial allotments to be established though MyPay, DOD’s 

automated payroll program. MyPay allows service members to start, stop, or change

allotments with financial institutions when the funds are directed to be sent to a savings or 

checking account. MyPay is not intended to be used for allotments to purchase

supplemental life insurance. Use of MyPay to establish a supplemental insurance allotment 

makes it impossible for installation officials to monitor or enforce the proper use of 

insurance allotments and other parts of the on-installation personal commercial solicitation

requirements. 

Page 23 GAO-06-245T 
To ensure that allotments are properly authorized, our June 2005 report 

recommended that DOD issue a message to all finance offices and DFAS 

offices that process allotments for supplemental life insurance to remind

personnel that DOD’s Financial Management Regulation indicates that 

only service members or their designated representatives with special 

power of attorney for the prescribed purpose are authorized to start, stop, 

or modify financial allotments. In its comments on a draft of our report, 

DOD concurred with this recommendation and stated that it will issue 

such a statement. 

Page 24 GAO-06-245T (250268) 
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