II 109th CONGRESS 1st Session S. 418 IN THE SENATE OF THE UNITED STATES February 17, 2005 Mr. Enzi (for himself, Mrs. Clinton, Mr. Hagel, and Mr. Schumer) introduced the following bill; which was read twice and referred to the Committee on Banking, Housing, and Urban Affairs A BILL To protect members of the Armed Forces from unscrupulous practices regarding sales of insurance, financial, and investment products.

1.

Short title

This Act may be cited as the Military Personnel Financial Services Protection Act.

2.

Congressional findings

Congress finds the following: (1)Our military personnel perform great sacrifices in protecting our Nation in the War on Terror and promoting democracy abroad. (2)Our brave men and women in uniform deserve to be offered first-rate financial products in order to provide for their families and to save and invest for retirement. (3)Our military personnel are being offered high-cost securities and life insurance products by some financial services companies engaging in abusive and misleading sales practices. (4)One securities product being offered to our service members, the contractual plan, has largely disappeared from the civilian market since the 1980s, due to its excessive sales charges. A 50 percent sales commission is assessed against the first year of contributions, even though the average commission on other securities products such as mutual funds is less than 6 percent on each sale. (5)The excessive sales charges of the contractual plan makes it susceptible to abusive and misleading sales practices. (6)Certain life insurance products being offered to our service members are being improperly marketed as investment products. These products provide very low death benefits for very high premiums that are front-loaded in the first few years, making them completely inappropriate for most military personnel. (7)Regulation of these securities and life insurance products and their sale on military bases has been clearly inadequate and requires Congressional legislation to address.

3.

Prohibition on future sales of periodic payment plans

(a)

Amendment

Section 27 of the Investment Company Act of 1940 (15 U.S.C. 80a–27) is amended by adding at the end the following new subsection: (j)

Termination of sales

(1)

Termination

Effective 30 days after the date of enactment of the Military Personnel Financial Services Protection Act, it shall be unlawful, subject to subsection (i)— (A)for any registered investment company to issue any periodic payment plan certificate; or (B)for such company, or any depositor of or underwriter for any such company, or any other person, to sell such a certificate. (2)

No invalidation of existing certificates

Paragraph (1) shall not be construed to alter, invalidate, or otherwise affect any rights or obligations, including rights of redemption, under any periodic payment plan certificate issued and sold before 30 days after such date of enactment. . (b)

Technical amendment

Section 27(i)(2)(B) of the Investment Company Act of 1940 (15 U.S.C. 80a–27(i)(2)(B)) is amended by striking section 26(e) each place that term appears and inserting section 26(f). (c)

Report on refunds, sales practices, and revenues from periodic payment plans

Not later than 6 months after the date of enactment of this Act, the Securities and Exchange Commission shall submit to the Committee on Financial Services of the House of Representatives and the Committee on Banking, Housing, and Urban Affairs of the Senate, a report describing— (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 past 5 years 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 past 5 years and what products such brokers or dealers market to replace the revenue generated from the sales of periodic payment plan certificates prohibited under subsection (a).

4.

Method of maintaining broker and dealer registration, disciplinary, and other data

Section 15A(i) of the Securities Exchange Act of 1934 (15 U.S.C. 78o–3(i)) is amended to read as follows: (i)

Obligation to maintain registration, disciplinary, and other data

(1)

Maintenance of system to respond to inquiries

A registered securities association shall— (A)establish and maintain a system for collecting and retaining registration information; (B)establish and maintain a toll-free telephone listing, and a readily accessible electronic or other process, to receive and promptly respond to inquiries regarding— (i)registration information on its members and their associated persons; and (ii)registration information on the members and their associated persons of any registered national securities exchange that uses the system described in subparagraph (A) for the registration of its members and their associated persons; and (C)adopt rules governing the process for making inquiries and the type, scope, and presentation of information to be provided in response to such inquiries in consultation with any registered national securities exchange providing information pursuant to subparagraph (B)(ii). (2)

Recovery of costs

A registered securities association may charge persons making inquiries described in paragraph (1)(B), other than individual investors, reasonable fees for responses to such inquiries. (3)

Process for disputed information

Each registered securities association shall adopt rules establishing an administrative process for disputing the accuracy of information provided in response to inquiries under this subsection in consultation with any registered national securities exchange providing information pursuant to paragraph (1)(B)(ii). (4)

Limitation on liability

A registered securities association, or an exchange reporting information to such an association, shall not have any liability to any person for any actions taken or omitted in good faith under this subsection. (5)

Definition

For purposes of this subsection, the term registration information means the information reported in connection with the registration or licensing of brokers and dealers and their associated persons, including disciplinary actions, regulatory, judicial, and arbitration proceedings, and other information required by law, or exchange or association rule, and the source and status of such information. .

5.

Filing depositories for investment advisers

(a)

Investment advisers

Section 204 of the Investment Advisers Act of 1940 (15 U.S.C. 80b–4) is amended— (1)by striking Every investment and inserting the following: (a)

In general

Every investment ; and (2)by adding at the end the following: (b)

Filing depositories

The Commission may, by rule, require an investment adviser— (1)to file with the Commission any fee, application, report, or notice required to be filed by this title or the rules issued under this title through any entity designated by the Commission for that purpose; and (2)to pay the reasonable costs associated with such filing and the establishment and maintenance of the systems required by subsection (c). (c)

Access to disciplinary and other information

(1)

Maintenance of system to respond to inquiries

The Commission shall require the entity designated by the Commission under subsection (b)(1) to establish and maintain a toll-free telephone listing, or a readily accessible electronic or other process, to receive and promptly respond to inquiries regarding registration information (including disciplinary actions, regulatory, judicial, and arbitration proceedings, and other information required by law or rule to be reported) involving investment advisers and persons associated with investment advisers. (2)

Recovery of costs

An entity designated by the Commission under subsection (b)(1) may charge persons making inquiries, other than individual investors, reasonable fees for responses to inquiries described in paragraph (1). (3)

Limitation on liability

An entity designated by the Commission under subsection (b)(1) shall not have any liability to any person for any actions taken or omitted in good faith under this subsection. . (b)

Conforming amendments

(1)Section 203A of the Investment Advisers Act of 1940 (15 U.S.C. 80b–3a) is amended— (A)by striking subsection (d); and (B)by redesignating subsection (e) as subsection (d). (2)Section 306 of the National Securities Markets Improvement Act of 1996 (15 U.S.C. 80b–10, note) is repealed.

6.

State insurance jurisdiction on military installations

(a)

Clarification of jurisdiction

Any law, regulation, or order of a State with respect to regulating the business of insurance shall apply to insurance activities conducted on Federal land or facilities in the United States and abroad, including military installations, except to the extent that such law, regulation, or order— (1)directly conflicts with any applicable Federal law, regulation, or authorized directive; or (2)would not apply if such activity were conducted on State land. (b)

Primary State jurisdiction

To the extent that multiple State laws would otherwise apply pursuant to subsection (a) to an insurance activity of an individual or entity on Federal land or facilities, the State having the primary duty to regulate such activity and the laws of which shall apply to such activity in the case of a conflict shall be— (1)the State within which the Federal land or facility is located; or (2)if the Federal land or facility is located outside of the United States, the State in which— (A)in the case of an individual engaged in the business of insurance, such individual has been issued a resident license; or (B)in the case of an entity engaged in the business of insurance, such entity is domiciled.

7.

Required development of military personnel protection standards regarding insurance sales

(a)

State standards

Congress intends that— (1)the States collectively work with the Secretary of Defense to ensure implementation of appropriate standards to protect members of the Armed Forces from dishonest and predatory insurance sales practices while on a military installation of the United States (including installations located outside of the United States); and (2)each State identify its role in promoting the standards described in paragraph (1) in a uniform manner, not later than 12 months after the date of enactment of this Act. (b)

State report

It is the sense of Congress that the NAIC should, after consultation with the Secretary of Defense and, not later than 12 months after the date of enactment of this Act, conduct a study to determine the extent to which the States have met the requirement of subsection (a), and report the results of such study to the Committee on Financial Services of the House of Representatives and the Committee on Banking, Housing, and Urban Affairs of the Senate.

8.

Required disclosures regarding life insurance

(a)

Requirement

Except as provided in subsection (d), no insurer or producer may sell or solicit, in person, any life insurance product to any member of the Armed Forces on a military installation of the United States, unless a disclosure in accordance with this section is provided to such member before the sale of such insurance. (b)

Disclosure

A disclosure in accordance with this section is a written disclosure that— (1)states that subsidized life insurance may be available to the member of the Armed Forces from the Federal Government; (2)states that the United States Government has in no way sanctioned, recommended, or encouraged the sale of the product being offered; (3)is made in plain and readily understandable language and in a type font at least as large as the font used for the majority of the policy; and (4)with respect to a sale or solicitation on Federal land or facilities located outside of the United States by an individual or entity engaged in the business of insurance, except to the extent otherwise specifically provided by the laws of such State in reference to this Act, lists the address and phone number where consumer complaints are received by the State insurance commissioner for the State in which the individual has been issued a resident license or the entity is domiciled, as applicable. (c)

Enforcement

If it is determined by a State or Federal agency, or in a final court proceeding, that any individual or entity has intentionally failed to provide a disclosure required by this section, such individual or entity shall be prohibited from further engaging in the business of insurance with respect to employees of the Federal Government on Federal land, except— (1)with respect to existing policies; and (2)to the extent required by the Federal Government pursuant to previous commitments. (d)

Exceptions

(1)

Federal and State insurance activity

This section shall not apply to insurance activities— (A)specifically contracted by or through the Federal Government or any State government; or (B)specifically exempted from the applicability of this Act by a Federal or State law, regulation, or order that specifically refers to this paragraph. (2)

Uniform State standards

If a majority of the States have adopted, in materially identical form, a standard setting forth the disclosures required under this section that apply to insurance solicitations and sales to military personnel on military installations of the United States, after the expiration of the 2-year period beginning on the date of such majority adoption, such standard shall apply in lieu of the requirements of this section to all insurance solicitations and sales to military personnel on military installations, with respect to such States, to the extent that such standards do not directly conflict with any applicable authorized Federal regulation or directive. (3)

Materially identical form

For purposes of this subsection, standards adopted by more than one State shall be considered to have materially identical form to the extent that such standards require or prohibit identical conduct with respect to the same activity, notwithstanding that the standards may differ with respect to conduct required or prohibited with respect to other activities.

9.

Improving life insurance product standards

(a)

In general

It is the sense of Congress that the NAIC should, after consultation with the Secretary of Defense, and not later than 12 months after the date of enactment of this Act, conduct a study and submit a report to the Committee on Financial Services of the House of Representatives and the Committee on Banking, Housing, and Urban Affairs of the Senate on ways of improving the quality of and sale of life insurance products sold by insurers and producers on military installations of the United States, which may include limiting sales authority to companies and producers that are certified as meeting appropriate best practices procedures or creating standards for products specifically designed for members of the Armed Forces regardless of the sales location. (b)

Conditional GAO report

If the NAIC does not submit the report as described in subsection (a), the Comptroller General of the United States shall study any proposals that have been made to improve the quality and sale of life insurance products sold by insurers and producers on military installations of the United States and report to the Committee on Financial Services of the House of Representatives and the Committee on Banking, Housing, and Urban Affairs of the Senate on such proposals not later than 6 months after the expiration of the period referred to in subsection (a).

10.

Required reporting of disciplined insurance agents

(a)

Reporting by insurers

After the expiration of the 2-year period beginning on the date of enactment of this Act, no insurer may enter into or renew a contractual relationship with a producer that solicits or sells life insurance on military installations of the United States, unless the insurer has implemented a system to report, to the State insurance commissioner of the State of the domicile of the insurer and the State of residence of the insurance producer, disciplinary actions taken against the producer with respect to the producer’s sales or solicitation of insurance on a military installation of the United States, as follows: (1)Any disciplinary action taken by any government entity that the insurer knows has been taken. (2)Any significant disciplinary action taken by the insurer. (b)

Reporting by States

It is the sense of Congress that, not later than 2 years after the date of enactment of this Act, the States should collectively implement a system to— (1)receive reports of disciplinary actions taken against insurance producers by insurers or government entities with respect to the producers’ sale or solicitation of insurance on a military installation; and (2)disseminate such information to all other States and to the Secretary of Defense.

11.

Reporting barred persons selling insurance or securities

(a)

Establishment

The Secretary of Defense shall maintain a list of the name, address, and other appropriate information of persons engaged in the business of securities or insurance that have been barred, banned, or otherwise limited in any manner that is not generally applicable to all such type of persons, from any or all military installations of the United States. (b)

Notice and access

The Secretary of Defense shall ensure that— (1)the appropriate Federal and State agencies responsible for securities and insurance regulation are promptly notified upon the inclusion in or removal from the list required by subsection (a) of a person under such agencies’ jurisdiction; and (2)the list is kept current and easily accessible— (A)for use by such agencies; and (B)for purposes of enforcing or considering any such bar, ban, or limitation by the appropriate Federal personnel, including commanders of military installations. (c)

Regulations

(1)

In general

The Secretary of Defense shall issue regulations in accordance with this subsection to provide for the establishment and maintenance of the list required by this section, including appropriate due process considerations. (2)

Timing

(A)

Proposed regulations

Not later than the expiration of the 60-day period beginning on the date of enactment of this Act, the Secretary of Defense shall prepare and submit to the appropriate Committees a copy of the regulations under this subsection that are proposed to be published for comment. The Secretary may not publish such regulations for comment in the Federal Register until the expiration of the 15-day period beginning on the date of such submission to the appropriate Committees. (B)

Final regulations

Not later than 90 days after the date of enactment of this Act, the Secretary of Defense shall submit to the appropriate Committees a copy of the regulations under this section to be published in final form. (C)

Effective date

Such regulations shall become effective upon the expiration of the 30-day period beginning on the date of such submission to the appropriate Committees. (d)

Definition

For purposes of this section, the term appropriate Committees means— (1)the Committee on Financial Services and the Committee on Armed Services of the House of Representatives; and (2)the Committee on Banking, Housing, and Urban Affairs and the Committee on Armed Services of the Senate.

12.

Sense of Congress

It is the sense of the Congress that the Federal and State agencies responsible for insurance and securities regulation should provide advice to the appropriate Federal entities to consider— (1)significantly increasing the life insurance coverage made available through the Federal Government to members of the Armed Forces; (2)implementing appropriate procedures to encourage members of the Armed Forces to improve their financial literacy objectives; and (3)improving the benefits and matching contributions provided under the Federal Thrift Savings Plan (established under section 8437 of title 5, United States Code) to members of the Armed Forces.

13.

Definitions

For purposes of this Act, the following definitions shall apply: (1)

Entity

The term entity includes insurers. (2)

Individual

The term individual includes insurance agents and producers. (3)

NAIC

The term NAIC means the National Association of Insurance Commissioners. (4)

State insurance commissioner

The term State insurance commissioner means, with respect to a State, the officer, agency, or other entity of the State that has primary regulatory authority over the business of insurance and over any person engaged in the business of insurance, to the extent of such business activities, in such State.