[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]
G.I. FINANCES: PROTECTING
THOSE WHO PROTECT US
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
CAPITAL MARKETS, INSURANCE AND
GOVERNMENT SPONSORED ENTEREPRISES
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTH CONGRESS
SECOND SESSION
__________
SEPTEMBER 9, 2004
__________
Printed for the use of the Committee on Financial Services
Serial No. 108-109
U.S. GOVERNMENT PRINTING OFFICE
97-450 WASHINGTON : 2004
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512�091800
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HOUSE COMMITTEE ON FINANCIAL SERVICES
MICHAEL G. OXLEY, Ohio, Chairman
JAMES A. LEACH, Iowa BARNEY FRANK, Massachusetts
RICHARD H. BAKER, Louisiana PAUL E. KANJORSKI, Pennsylvania
SPENCER BACHUS, Alabama MAXINE WATERS, California
MICHAEL N. CASTLE, Delaware CAROLYN B. MALONEY, New York
PETER T. KING, New York LUIS V. GUTIERREZ, Illinois
EDWARD R. ROYCE, California NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma MELVIN L. WATT, North Carolina
ROBERT W. NEY, Ohio GARY L. ACKERMAN, New York
SUE W. KELLY, New York, Vice Chair DARLENE HOOLEY, Oregon
RON PAUL, Texas JULIA CARSON, Indiana
PAUL E. GILLMOR, Ohio BRAD SHERMAN, California
JIM RYUN, Kansas GREGORY W. MEEKS, New York
STEVEN C. LaTOURETTE, Ohio BARBARA LEE, California
DONALD A. MANZULLO, Illinois JAY INSLEE, Washington
WALTER B. JONES, Jr., North DENNIS MOORE, Kansas
Carolina MICHAEL E. CAPUANO, Massachusetts
DOUG OSE, California HAROLD E. FORD, Jr., Tennessee
JUDY BIGGERT, Illinois RUBEN HINOJOSA, Texas
MARK GREEN, Wisconsin KEN LUCAS, Kentucky
PATRICK J. TOOMEY, Pennsylvania JOSEPH CROWLEY, New York
CHRISTOPHER SHAYS, Connecticut WM. LACY CLAY, Missouri
JOHN B. SHADEGG, Arizona STEVE ISRAEL, New York
VITO FOSSELLA, New York MIKE ROSS, Arkansas
GARY G. MILLER, California CAROLYN McCARTHY, New York
MELISSA A. HART, Pennsylvania JOE BACA, California
SHELLEY MOORE CAPITO, West Virginia JIM MATHESON, Utah
PATRICK J. TIBERI, Ohio STEPHEN F. LYNCH, Massachusetts
MARK R. KENNEDY, Minnesota BRAD MILLER, North Carolina
TOM FEENEY, Florida RAHM EMANUEL, Illinois
JEB HENSARLING, Texas DAVID SCOTT, Georgia
SCOTT GARRETT, New Jersey ARTUR DAVIS, Alabama
TIM MURPHY, Pennsylvania CHRIS BELL, Texas
GINNY BROWN-WAITE, Florida
J. GRESHAM BARRETT, South Carolina BERNARD SANDERS, Vermont
KATHERINE HARRIS, Florida
RICK RENZI, Arizona
Robert U. Foster, III, Staff Director
Subcommittee on Capital Markets, Insurance and Government Sponsored
Enterprises
RICHARD H. BAKER, Louisiana, Chairman
DOUG OSE, California, Vice Chairman PAUL E. KANJORSKI, Pennsylvania
CHRISTOPHER SHAYS, Connecticut GARY L. ACKERMAN, New York
PAUL E. GILLMOR, Ohio DARLENE HOOLEY, Oregon
SPENCER BACHUS, Alabama BRAD SHERMAN, California
MICHAEL N. CASTLE, Delaware GREGORY W. MEEKS, New York
PETER T. KING, New York JAY INSLEE, Washington
FRANK D. LUCAS, Oklahoma DENNIS MOORE, Kansas
EDWARD R. ROYCE, California MICHAEL E. CAPUANO, Massachusetts
DONALD A. MANZULLO, Illinois HAROLD E. FORD, Jr., Tennessee
SUE W. KELLY, New York RUBEN HINOJOSA, Texas
ROBERT W. NEY, Ohio KEN LUCAS, Kentucky
JOHN B. SHADEGG, Arizona JOSEPH CROWLEY, New York
JIM RYUN, Kansas STEVE ISRAEL, New York
VITO FOSSELLA, New York, MIKE ROSS, Arkansas
JUDY BIGGERT, Illinois WM. LACY CLAY, Missouri
MARK GREEN, Wisconsin CAROLYN McCARTHY, New York
GARY G. MILLER, California JOE BACA, California
PATRICK J. TOOMEY, Pennsylvania JIM MATHESON, Utah
SHELLEY MOORE CAPITO, West Virginia STEPHEN F. LYNCH, Massachusetts
MELISSA A. HART, Pennsylvania BRAD MILLER, North Carolina
MARK R. KENNEDY, Minnesota RAHM EMANUEL, Illinois
PATRICK J. TIBERI, Ohio DAVID SCOTT, Georgia
GINNY BROWN-WAITE, Florida NYDIA M. VELAZQUEZ, New York
KATHERINE HARRIS, Florida
RICK RENZI, Arizona
C O N T E N T S
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Page
Hearing held on:
September 9, 2004............................................ 1
Appendix:
September 9, 2004............................................ 65
WITNESSES
Thursday, September 9, 2004
Bullard, Mercer, President and Founder, Fund Democracy, Inc...... 20
Conger, Brandon, Specialist, United States Army.................. 16
Dunlap, Joe W., Executive Vice President, Operations, American
Amicable Life Insurance Company of Texas....................... 46
Jetton, Elizabeth W., Principal, Financial Planning Association.. 18
Keating, Hon. Frank, President, American Council of Life Insurers 26
Smith, Lamar C., Chairman and Chief Executive Officer, First
Command Financial Planning, Inc................................ 44
Woods, David, Chief Executive Officer, National Association of
Insurance and Financial Agents................................. 24
APPENDIX
Prepared statements:
Oxley, Hon. Michael G........................................ 66
Biggert, Hon. Judy........................................... 68
Emanuel, Hon. Rahm........................................... 69
Gillmor, Hon. Paul E......................................... 70
Hinojosa, Hon. Ruben......................................... 71
Kanjorski, Hon. Paul E....................................... 73
Kelly, Hon. Sue W............................................ 75
Ney, Hon. Robert W........................................... 77
Bullard, Mercer.............................................. 78
Dunlap, Joe W................................................ 92
Jetton, Elizabeth W.......................................... 112
Keating, Hon. Frank.......................................... 120
Smith, Lamar C............................................... 129
Woods, David................................................. 146
Additional Material Submitted for the Record
Baker, Hon. Richard H.:
Horizon Life slide presentation.............................. 157
Kelly, Hon. Sue W.:
Insurance Marketplace Standards Association, prepared
statement.................................................. 164
Hildreth, Lt. Wayne, U.S. Navy (ret), prepared statement......... 168
G.I. FINANCES: PROTECTING
THOSE WHO PROTECT US
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Thursday, September 9, 2004
U.S. House of Representatives,
Subcommittee on Capital Markets, Insurance,
and Government Sponsored Enterprises,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to call, at 10:11 a.m., in
Room 2128, Rayburn House Office Building, Hon. Richard H. Baker
[chairman of the subcommittee] presiding.
Present: Representatives Baker, Ose, Bachus, Lucas of
Oklahoma, Oxley (ex officio), Kelly, Ney, Ryun, Biggert,
Kennedy, Brown-Waite, Kanjorski, Inslee, Moore, Hinojosa, Lucas
of Kentucky, Israel, Ross, Baca, Matheson, Miller of North
Carolina, Emanuel, and Scott.
Also present: Representative Max Burns.
Mr. Oxley. [Presiding.] The committee will come to order.
Without objection, the gentleman from Georgia, Mr. Burns,
may sit with the subcommittee during this hearing and
participate in its proceedings. So ordered. The gentleman from
Georgia will be recognized for any opening statement or
questions only after all those members of the subcommittee have
been recognized.
The chair would indicate that Chairman Baker has been
delayed. And I would like to begin the proceedings with an
opening statement.
I want to thank Chairman Baker for convening this important
and timely hearing. I also appreciate the bipartisan interest
among the members of this subcommittee in protecting our GIs.
The men and women who protect our freedom by serving in the
military are giving our country a precious gift. Through their
dedicated service, this nation is successfully fighting
terrorism and promoting democracy abroad, keeping America safe
and strong into the future.
But as these young men and women risk their lives for our
country, we have a responsibility to ensure their financial
well-being and protection. New military recruits brought in for
basic training are often young and relatively inexperienced on
financial matters.
They are trained to obey commands without question and
sometimes operate on little sleep. It is unconscionable, if
true, that groups of recruits have been marched into compulsory
briefings on veterans benefits by salesmen pretending to be
financial planners that quick-step them into signing up for
what turns out to be long-term life insurance.
It is also unconscionable, if true, that firms are using
retired military officers to make on-base sales pitches to
groups of young recruits for mutual funds with 50 percent
first-year commissions--a product that has virtually
disappeared from the civilian market. I have yet to hear any
reason at all, let alone a good one, why these products are
still being marketed to military personnel.
Perhaps most troubling, these reports are not isolated
incidents from boiler-room operations. Some of the biggest
names in the mutual fund business are sponsors of these
contractual plans sold primarily to military personnel.
Problems with illegal sales practices by life insurance
agents on military bases have been reported, studied and
debated by the Pentagon going back at least to 1974 and more
recently in 1997, 1999, 2000, and 2003. I do not support a
complete ban of financial product sales on base, nor do I want
to tarnish the good reputation of independent property-casualty
agents or those life agents who are not involved in these
sales.
But members of Congress can no longer pretend this is about
a few bad apples. This is a systemic problem that needs to be
fixed.
I understand that NASD has been conducting a thorough
investigation of contractual plans for more than a year and
will have an announcement in the near future. The NASD is to be
commended for its work to protect military investors. I look
forward today to a thorough analysis of the problem and
potential solutions for Congress to act on this year.
The time of the chair has expired. I will now turn to the
ranking member, the gentleman from Pennsylvania, Mr. Kanjorski.
[The prepared statement of Hon. Michael G. Oxley can be
found on page 66 in the appendix.]
Mr. Kanjorski. Thank you, Mr. Chairman.
Thanks for the opportunity to offer my initial thoughts
about the marketing of certain securities and life insurance
products to military personnel before we hear from our invited
witnesses. I want to commend you for swiftly focusing our
committee on this important issue.
In recent weeks, several stories in the New York Times have
once again raised concerns about allegedly abusive practices in
the sale of financial products to the men and women who serve
in our armed forces. These accounts have detailed problems with
financial literacy, potentially overly trustful troops and
business products and practices that have raised the concerns
of many.
For example, many financial advisers point out that rather
than committing to long-term contractual plans with large
front-load fees, most investors would be better off setting up
automatic savings programs with smaller fees and initial sales
loads. Additionally, while many in the military may have
greater life insurance needs than average Americans, we need to
ensure that the products they purchase meet their needs and
best serve their long-term purposes.
Without question, we need to work in Washington to protect
those who protect us. As a result of today's proceedings, I
hope that we will gain a better understanding of the military
financial services marketplace.
We already know that our soldiers are more mobile than
average Americans. The recent news reports have also
highlighted potential limitations faced by financial regulators
on military bases, particularly on those installations located
abroad. Both of these issues deserve better exploration today.
In recent days, we have also begun consideration of
legislation that would ban the sale of mutual fund contractual
plans. This bill also seeks to improve the regulation of life
insurance and other financial products sold on military bases.
In order to prevent unintended consequences, I must urge my
colleagues to move deliberately and diligently in these
matters.
As at least one witness points out in his prepared
testimony, efforts to eliminate contractual agreements might
have an effect on variable annuity market. It could also result
in problems for those who have already purchased these plans.
Before we move ahead in these matters, I would therefore
urge you, Mr. Chairman, to consult with the Securities and
Exchange Commission, the National Association of Securities
Dealers, the National Association of Insurance Commissioners,
the Department of Defense and other interested regulatory
entities to ensure that any bill we craft appropriately fixes
these problems before we adopt them into law.
In closing, Mr. Chairman, we need to improve financial
education for military personnel. We need to improve the
enforcement of consumer protections for not only the men and
women in our Armed Forces, but also for all Americans. We
additionally need to have better supervision in the sales of
financial products on military bases.
I want you to know that I am committed to addressing these
matters. These are important discussions for us to have and
important matters for us to resolve.
Thank you, Mr. Chairman.
[The prepared statement of Hon. Paul E. Kanjorski can be
found on page 73 in the appendix.]
Chairman Baker. [Presiding.] Thank the gentleman.
Let me express my apology to members and our witnesses for
my late arrival. I am usually very prompt about starting our
committee hearings. And matters beyond my control kept me from
being here at my usual hour.
Our hearing today is one that is unusual from several
perspectives. We are here to review the effectiveness and
desirability of not only an insurance product, but a securities
product as well. Both matters are clearly within the
jurisdiction of this subcommittee.
The products are unique. They were intentionally designed
to serve the needs of military personnel.
Some of the products have been designed for civilian
utilization in years past. And as long ago as 1966, the SEC
suggested really rather radical reform of the manner in which
these products were marketed; for example, in one such
regulatory recommendation, that the first year load drop from
50 percent to 5 percent. I would consider that radical.
However, for whatever reasons, actions have not been taken
with regard to those pending recommendations since initially
forwarded. I think one of the reasons that we have seen these
products, in all practical purposes, eliminated from the
civilian marketplace is from competitive forces.
Why is that so? Basically, when you have a product which is
priced at a very high end of the market, which provides at the
same time benefits on the very low end of the market, anyone
who has a choice simply will make another choice.
That being the case, the product has disappeared from the
civilian marketplace. I have observed that when you have a
choice between a no-load, a low-load or a what-a-load, you are
probably not going to go for option 3.
Military personnel headed to a theater of war, however, do
not find themselves focused necessarily first on matters of
finance. They do, however, have concerns about the wife, the
spouse, the kids, not sure of what the fortunes of war may
bring.
In these desperate hours before being assigned, who is
there to help them make that decision? Regrettably, it is the
marketing of the product in this case which also causes me some
significant concern.
This is not a product marketed via the television, by mail
or by someone knocking on the door in a three-piece suit. When
you look across the table as an anxious young military person,
you are met by a retired military officer, who assures you that
this is the right decision for you personally, for your family
and for your future. All that is required is for you to sign
here, son.
That is probably more problematic than anything else about
this circumstance. The product worth in relation to similar
products in the civilian market is highly dubious. But the fact
that these individuals are emotionally not centered on matters
of finance, fully focused on military service and being told by
senior retired military officials that this is the right thing
to do is very troublesome.
I have spent a lot of time, as well as every member on this
committee, in matters of Enron, WorldCom, dot-coms and
everything else. At least in those instances where investors
put money into what most members of this committee consider to
be outrageous investments, those investors at least had a
chance not to be swept up by the hype. In this case, I do not
believe the victims had a choice.
The first legislative response posed to the identified
concerns is that by Congressman Max Burns with House bill 5011,
which I am advised by Chairman Oxley that the subcommittee and
full committee will review and take action in due course, as is
warranted.
And certainly, I join with my colleague, Mr. Kanjorski in
welcoming the comments of all of those who have regulatory
perspectives on the appropriateness of this product, the
congressional response appropriate and ensuring that we take
action that is in the best interest of all.
It is troubling that those who have already invested,
whether in active duty service or now retired, it may be the
only remedy for them to date is to ensure the product remains a
viable contract for its maturity in the hope of regaining some
financial remuneration at the end of the contract. However,
going forward, it is pretty clear, at least at this juncture,
that these products do not offer what they hold out to the
marketplace in the military.
And we have a direct responsibility, in light of all the
other hardships our military personnel face. How can we stand
by and not take corrective action in this clearly identified,
what I consider to be abusive, practice?
Mr. Hinojosa? Mr. Hinojosa.
Mr. Hinojosa. Mr. Chairman, I wish to yield at this time. I
do not have a prepared statement.
Chairman Baker. Mr. Israel?
Mr. Israel. Thank you, Mr. Chairman. I appreciate your
convening this hearing. And I also want to thank my ranking
member, Mr. Kanjorski, for his participation in this.
Mr. Chairman, the process by which we insure our troops is
simply dysfunctional. It is doing more harm than good in too
many cases. And I want to share, in the time that I have
allocated to me, just two cases in particular.
One is the case of Raheen Tyson Heighter, who lived in my
district; 19 years old; enlists in the Army and wants to go to
Iraq and fight for his country. He is told he needs life
insurance.
He says, ``I am 19 years old. I really do not need life
insurance.'' He is told, ``Well, you have to have it.'' And he
says, ``What is the cheapest policy that I can buy?'' And they
tell him a $10,000 policy.
He goes to Iraq. He is the first Long Islander killed in
action in Iraq. And his mother gets a call from the Army
saying, ``All your son bought was a $10,000 policy. We are
sorry.''
That is dysfunctional. That is doing more harm than good.
The second case is a member of my own staff here in
Washington who graduated West Point, also served in Iraq. He
sat through a sales pitch in the officer's club at an Army base
where he was clearly exposed to explicit deceptive coercive
marketing practices.
Now we owe Raheen Tyson Heighter and my staff and all the
members of our armed forces much better than that. We owe them
the best and not the shoddiest of protections.
And I wish that Congress would pass the bipartisan
legislation that I have introduced as a member of the Armed
Services Committee. I serve on the Armed Services Committee and
the Financial Services Committee.
And we have bipartisan legislation called the Raheen Tyson
Heighter Life Insurance for America's Troops Act that would
simply say this: that if we are going as a country to send
young men and women into battle, we will take care of their
life insurance for them.
We will not make them dig into their pockets in order to
pay their premiums. We will take care of them. We ought to pass
that bipartisan bill, sooner rather than later.
Those who are taking care of our national security should
not have to worry about their financial security at home. And
when it comes to insurance sales, we should not have to protect
the protectors against coercive and deceptive marketing
practices.
I appreciate the fact that we are having this hearing. And
I intend to ask some questions when it is appropriate.
Thank you, Mr. Chairman. I yield back the balance of my
time.
Chairman Baker. I thank the gentleman.
Mr. Lucas?
Mr. Ney?
Mr. Ney. I will be very brief, Mr. Chairman, because I know
we have witnesses and we want to get to the subject. I have a
statement for the record I would like to submit.
[The prepared statement of Hon. Robert W. Ney can be found
on page 77 in the appendix.]
But I just wanted to say thank you to the chairman for
having the hearing. We have issues in predatory lending and
then also issues obviously of predatory practices that we have
to look at.
I did want to point out that there is a young gentleman
whose mother is in Athens, Ohio. And it is a very compelling
argument as to why this should be looked at today.
Bottom line, he thought he was having $100 deducted out of
his pay, which was going to be in some type of fund. The worst
part is not only did he get back and find that that was not in
some type of fund, but that he had paid $100 a month, according
to this article, for less than $44,000 of insurance. About a
$250,000 policy, young person's age, male or female, would be
about $17, I think, or maybe $20 or so a month. So these are
not good practices.
Also, I wanted to point out too--and this might have been
said before; I apologize if it has been--but you know, these
are young men and women that are being trained. And they are
trained to observe the military order. And all of a sudden,
they are in a military setting. And I think that could also
influence them just to do this.
So thank you, Mr. Chairman, for the hearing.
Chairman Baker. I thank the gentleman for his statement.
Mr. Emanuel?
Mr. Emanuel. Thank you, Mr. Chairman, for holding the
hearing and for following the request I asked for this hearing.
I think the question we need to ask ourselves is, at least
about the contractual mutual fund instrument, is: if it is such
a great product, why is it not marketed to the general public?
And if it is not good enough for the general public, why are we
allowing it to be sold to men and women in uniform and on our
bases?
The mutual fund industry is about $7 trillion; about $15
billion worth of contractual mutual funds, one-eighth of 1
percent. And it is almost all of that is held by people in
uniform.
It is not sold to the general public because of what the
SEC had recommended in the 1960s and 1980s. And it basically
fell out of favor in the market. And we should not encourage
this--if not outright ban it--on our bases and to our men and
women in uniform.
Many of our troops are of modest financial means and do not
need to be spending those types of resources in this type of
account. And I do not think those in the industry should view
the men and women in uniform as a fee machine, where they
literally turn them on as an ATM machine to generate fees for
themselves, especially given the--I think--high, high, high,
high costs of 50 percent upfront in the first year in the sense
of the fee that the agents receive.
I also think it is important, as we deal with the life
insurance issue, that we have adequate disclosure, so it is
crystal clear to our servicemen and women what they are buying
and what they have available to them. It is important that the
companies give recruits plain English documents, telling them
the U.S. government does not endorse, recommend or encourage
them to buy this type of life insurance.
As I think everybody in the industry agrees, informed
investors or informed consumers is a good thing. So let's
inform them and give them all the information.
The clear disclosure and informed consent are the keys here
to success. That is why I am going to introduce legislation
with the Virginia senator from New York.
It would ban contractual mutual funds. And if we could not
succeed in doing that, as has been tried in the past and
recommended by the SEC, we give what is the equivalent of a
surgeon general's warning, an SEC warning, warning that: they
are harmful to your financial health; there are 50 percent
commissions; they are not sold to the civilian or general
public anymore; and that the SEC recommended that Congress,
back in the 1960s or earlier, ban them.
For troops whose families feel that they need to purchase
more than $250,000 in life insurance, my bill would allow them
to buy up to $500,000 in insurance from the government at the
same low cost that the government already provides at the
$250,000 level.
It also requires new disclosures, tightens the guidelines
for base access and clarifies the role of state insurance
regulators. So that would be the legislation I will be
introducing.
I look forward to today's panel and appreciate the fact
that the subcommittee and the full committee will look at
legislation and are holding this hearing today.
Thank you, Mr. Chairman.
[The prepared statement of Hon. Rahm Emanuel can be found
on page 69 in the appendix.]
Chairman Baker. Thank the gentleman.
Mr. Ryun?
Mr. Ryun. Mr. Chairman, I want to thank you and the
subcommittee for scheduling this hearing. The issue of
protecting the men and women of our military from abusive sales
practices is one that should receive our careful attention, as
it is today.
As we consider how to best govern the sales of financial
service products to our military installations, let me be very
clear about one thing: the first priority of this committee
should be protecting our servicemembers from those who would
prey on them for financial gain. Standing by while our
servicemembers are taken advantage of is not an option.
This goal must also be shared by those in the business of
providing financial services to our men and women in uniform.
The abuses that have been recently publicized are extremely
disturbing. This committee must determine what actions are
necessary to put an end to these abusive practices.
These actions must not be a mere gesture, but must provide
sound protection for our soldiers. It is important that the bad
actors be rooted out, not only to eliminate predatory
practices, but also to allow those doing business with
integrity to better service our servicemembers.
Among the practices that we must take a look are the sales
of investment plans with large front-end fees. These plans are
almost nonexistent in the civilian market, as we have already
talked about, yet remain prevalent on the military bases.
It is important to ask why a product that is not available
to the general public is sold to our servicemembers. While I
generally oppose federal intervention on this sort of
transaction, there is enough concern with the structure of
these plans to warrant our consideration.
One word of caution though: it is important that we address
the problematic plans without unintentionally affecting other
non-offending financial products.
We must also do what we can to preserve the authority of
our base commanders. These commanders already have the
authority to prohibit access to their base. And we must be
cautious that our efforts do not compromise their authority.
One of our base commanders' most fundamental responsibility
is protecting those residing on the base. If a commander deems
an agent or a company unfit to do business on the base, their
decision must stand. We must also help the base commanders
obtain the knowledge necessary to go ahead and make their
decisions.
Next, it is necessary to improve interaction between state
regulators and military bases. It is a significant problem when
financial sales on military bases are not accountable to the
same standards that govern similar sales made off the base.
We must also protect the right of our soldiers to have
access to a competitive financial service marketplace. Some
have proposed prohibiting outside providers from selling
financial services products on our military bases.
I oppose this proposal. It would essentially remove all
competition, leaving our soldier with only on-base institutions
for financial services. Surely, protecting our servicemembers
must involve giving them the choice of where to conduct their
financial affairs.
I do not have all the solutions to this problem that
exists. However, I am pleased that this committee has
recognized that there is a problem. And I hope that some real
protection for our soldiers will result from our efforts here.
I am committed to working for changes that provide critical
protection and that promote the most choices for our men and
women in uniform. We are here today to find solutions for our
soldiers. I look forward to the panel of witnesses. And I thank
you, Mr. Chairman.
Chairman Baker. Thank the gentleman for his statement.
Mr. Hinojosa, did you wish to make your statement now, sir?
Mr. Hinojosa. Yes, thank you.
Chairman Oxley and Ranking Member Frank, thank you for
holding this very important and timely hearing today. As we all
learned this week, 1,000 U.S. men and women have lost their
lives during Operation Iraqi Freedom. And each, including
several from the Rio Grande Valley, which I represent, should
be remembered for their courage and valor in defending our
nation and the principles for which it stands.
Based on the information I have received in my office, it
seems to me that more than 70 percent of the dead are soldiers
in the Army. And more than 20 percent are marines.
More than half were in the lowest-paid enlisted ranks. On
average, the servicemembers who died were about age 26. The
youngest was 18; the oldest, 59.
About half were married, according to the death roll, which
does not include a handful yet to be identified by the Defense
Department and three civilians who worked for the military.
Part-time soldiers, the guardsmen and reservists who once
expected to tend to floods and hurricanes, were called to Iraq
on a scale not seen through five decades of war.
Increasingly, Iraq is becoming the conflict of the National
Guard. And in growing numbers this spring and early summer,
these part-time soldiers died there.
Ten times as many of them died from April to July of this
year as had in the war's first 2 months. This past weekend, the
Rio Grande Valley lost another of its soldiers while bravely
serving our country during Operation Iraqi Freedom.
On September 6, United States Army National Guardsman Tomas
Garces died in Iraq. Garces died when his convoy was attacked
by enemy forces using an improvised explosive device.
Garces was assigned to the National Guard's 1836th
Transportation Company from Fort Bliss, Texas. And his family
resides in Weslaco, Texas, which is in my congressional
district.
At just 19 years of age, Tomas' loyalty to the cause of
freedom was steadfast and clear. A 2003 graduate of Weslaco
High School, Tomas was a champion wrestler and took his lessons
from the mat with him to the Guard. In July, he had been
recommended for a Bronze Star for his actions during an ambush.
These brave troops in our nation's military are working
every day to guarantee the safety, security and freedom for
Americans and Iraqis. And Tomas was no exception.
My thoughts and prayers are with his parents, Rafael and
Sonia, his brothers and sister and his entire family at this
difficult time. Garces is the tenth soldier from the Rio Grande
Valley to die in the line of duty in Iraq since the conflict
began.
These individuals tend not to be well-versed in financial
services issues. Some of them do not even have bank accounts.
Unfortunately, this is not very uncommon in the United States
in general, as financial literacy in this country is abysmal.
While I must condemn any company or industry that preys
upon these brave individuals who risk their lives for our
country and our democracy, I realize that sometimes the
negative actions and sales are done by a few bad apples and do
not represent the industry as a whole. Life insurance and
mutual funds, when appropriately crafted and appropriately
marketed to our military, are just that--very appropriate.
In closing, I want to say that when someone goes after a
financially unsophisticated, courageous youth headed into
battle with a product that will not benefit his family if he
does not return from his tour of duty alive, I have to draw the
line.
Mr. Chairman, I hope today's hearing will shed light on the
inappropriate sales of contractual mutual funds to our military
personnel. And I would hope that all of you would pray for the
families of our lost soldiers.
I yield back the balance of my time.
[The prepared statement of Hon. Ruben Hinojosa can be found
on page 71 in the appendix.]
Chairman Baker. I thank the gentleman.
Chairman Bachus?
Mr. Bachus. Thank you, Chairman Baker. And I want to
commend you for holding this important hearing. And I want to
commend another member, Representative Max Burns.
Congressman Burns has taken the lead in this Congress on
protecting the men and women in uniform from this practice. He
was the first member I know of in Congress that spoke out about
this matter. And he did so before publicity on this matter
reached the press.
And I am joining him as a cosponsor on legislation that he
is introducing this morning. And I would ask each member of
this committee to take a look at that legislation.
It takes a reasoned approach. I am happy to say that
independent property and casualty agents did not participate in
this. And it was only a small minority of mutual funds and life
agents.
And I think Congressman Ryun mentioned that these practices
basically disappeared from the private market some 20, 25 years
ago because they offered very little value. And what we are
talking about here is in the first year of premiums, which is
$1,200, $600 of that goes to commission.
But probably the thing that shocks me the most is the
Department of Defense, back in 1986, issued a directive that
ought to prohibit this type of thing. This was done in direct
violation of Defense Department regulations.
And I will close simply by quoting that. The directive
``prohibits solicitation of recruits, trainees and transient
personnel in a mass or captive audience, using misleading
advertising or sales literature or giving the appearance that
the DOD endorses any particular company.''
Now despite that, there is at least reports in the media
that these recruits were brought in and that insurance agents
posing as counselors on veterans' benefits and independent
financial advisers then advised them to purchase this product.
They did it while they were on duty. They did it in their
barracks, violating two more Defense Department regulations.
And apparently--and this disappoints me--their commanding
officers arranged all this, which I think, as a former enlisted
man, sounds to me like an abuse of the chain of command and an
abuse of the enlisted men.
But I do think this: I am surprised that the state
regulators and those who regulate our regulators have not
stepped in and done something about this. It should not have
gone on this long.
I commend Congressman Burns. And I think his bill takes a
reasoned approach.
It does not blast everybody. It allows your state insurance
and your security regulators to do their job.
And I think the Pentagon also needs to get back involved
and engaged on this issue. But I want to thank you, Congressman
Burns.
Chairman Baker. I thank the gentleman for his statement.
Mr. Scott?
Mr. Scott. Thank you very much, Mr. Chairman. I too want to
thank the committee for this very, very important hearing.
What we have before us today is scandalous. It is shameful
and, especially at a time of war, taking advantage of young,
impressionable soldiers.
What bothers me more than anything else about this is that
there is apparent collusion going on within the military
itself. It is shameful that these unscrupulous, shall we say,
``insurance agents'' are allowed to even go into barracks and
to confront soldiers who are under pressure, the pressure of
their lives being flashed before them, as they are being
trained and prepared to go overseas to risk their lives.
Eighteen-, 19-, 20-year-old kids are being swamped with
very complex financial details of life insurance and
contractual plans whose practices have been outlawed in the
public sector many, many years. And yet this activity has been
going on for over 30 years.
And to have military personnel, high-ranking generals
serving on the boards of directors of these companies. And what
is so disturbing is that these are veterans who are taking
advantage of these young enlisted men.
There is no more important assignment than we can be faced
with today, ladies and gentlemen, than correcting this mess.
Harry Truman said it right, ``The buck stops here.''
The military has got some tall walking to do today because
I think that there are some dirty hands here. The insurance
industry has some tall walking to do today.
And I am looking forward to this Congress doing its
rightful duty of oversight. There is indeed enough blame to go
around to all of us.
Let us make our resolve this morning in this committee to
right this tragic wrong and to give our young men and women in
uniform the dignity and respect that they need. Maybe it is
regulation; maybe it is outright banning of some of these
products.
I think there should be free exercise of enterprise, to
have competitive products being on military bases. I do not
think banning insurance companies from going on is the right
thing.
But we can do a better job. And we have to do a better job.
And one thing we have to do, more than anything else: we
have to understand the importance of financial literacy.
Nowhere is there a greater example of the need for it than in
preparing and equipping our men and women in uniform with the
information that they can arm themselves with.
Chairman Baker. The gentleman's time has expired.
Mr. Scott. I look forward to the rest of the hearing. Thank
you, Mr. Chairman.
Chairman Baker. I thank the gentleman.
Ms. Brown-Waite?
Ms. Brown-Waite. Thank you very much, Mr. Chairman.
You know, I think the title of this hearing is very
appropriate, ``Protecting Those Who Protect Us.'' And when you
read through the material and you read the newspaper articles--
and believe me, I am not somebody who believes everything I
read in the newspaper--but when you read through both the staff
research and the newspaper articles, I am ashamed that we had
to hold this hearing today.
You know, insurance companies should not have taken
advantage of young men and women who are really fiscal
neophytes. Most of them have never had a checking account.
So many of them join the military right out of high school,
right out of college, where they really have no experience.
They have no idea of what a mutual fund really is.
And equally important, I think that the Department of
Defense needs to be called on the carpet as to why they have
not abided by their own Rule 1344.7. I think the military was
doing a ``wink and nod'' approach to this. And that is just
wrong.
Every one of us in Congress has lost young men and women in
the war in Iraq and Afghanistan. And to think that these young
men and women who do not understand had the Department of
Defense let them down by having them be captive audiences,
which is a direct violation of the Department of Defense's own
rules.
I think, on behalf of the young men and women, on behalf of
their families, who are making such sacrifices, that the
Department of Defense has a lot of answering to do. It is
absolutely shameful.
And I commend Mr. Burns and have agreed to go on his
legislation. It is a measured approach and one that I am
ashamed to say that we have to be here to even consider.
Because if the Department of Defense had done its job and if
some of the insurance companies had not been so damn greedy, we
would not even be here today.
Mr. Chairman, I yield back the balance of my time.
Chairman Baker. I thank the gentlelady.
Mr. Moore?
Mr. Moore. Thank you, Chairman Baker. And I want to thank
you and Ranking Member Kanjorski for convening this hearing. I
think this is very, very important.
And I have learned a great deal already, just in hearing
opening statements by some of my colleagues. I was not aware of
Mr. Israel's bill, which has been pending for some time--I
guess about a year now--and looks to be very good.
I also have seen Mr. Emanuel's bill. And that looks good.
And I have heard about Mr. Burns' bill this morning. So I want
to take a look at all those.
I want to take just a slight twist on this. And it gets
just a little--it is collateral to this, but I think it is very
important as well.
I was stunned when I learned that our troops, young men and
women who might be killed in Afghanistan and Iraq, had a death
gratuity benefit from our country of $12,000. I say ``stunned''
because to me that is almost like a slap in the face.
We talk about how much we value our troops and the good job
they do for us. And I think virtually everybody in Congress
believes that.
But to pay $12,000 to the family of a young person who has
been killed in Iraq or Afghanistan to me was just not showing
value and appreciation for our troops.
I have a bill today and just started talking to my
colleagues yesterday and have four Republicans and four
Democrats on it right now. And it should not be partisan at
all. It would provide a $50,000 death gratuity benefit to young
people who are killed in Iraq or Afghanistan.
And whether it is a financial services product, such as
life insurance, that we help them out with, or whether we
provide a death gratuity is not as important to me as the fact
that we somehow show a greater understanding and appreciation
for the situation our young men and women face when they are in
the military forces and that we provide some benefit to them--
again, through life insurance payments, maybe or a death
gratuity benefit. But I think we need to do a better job than
what we have done in the past.
And again, Mr. Chairman, thank you for convening this
hearing.
Chairman Baker. I thank the gentleman for his statement.
Ms. Kelly?
Mrs. Kelly. Thank you, Chairman Baker, for holding this
hearing to ensure that we are protecting the individuals who
have made sacrifices for our nation. Since we do not teach
financial literacy in our schools, we have to help our military
personnel receive the financial shelter and guidance that they
deserve and that the public needs to demand.
And this includes ensuring that the servicemen and women
have access to clear and accurate financial information and
advice that meets both their short-term and their long-term
needs. I represent three military installations: Camp Smith in
Cortlandt Manor, the United States Military Academy at West
Point and Stewart International Airport at Newburgh, which is a
large reserve air base.
I have been deeply troubled by the recent allegations of
the abusive practices in the sale of financial products to the
military personnel. In spite of a directive from the Department
of Defense restricting commercial solicitations, there have
been reports of agents selling insurance and investment
products that may not be in the best interests of the people in
uniform.
This committee needs to learn more about the contractual
plans, those that enable an investor to make gradual
contributions to a mutual fund that may have steep front-end
sales loads. It is my understanding that the contractual plans
have more or less disappeared in the civilian market several
decades ago because they are not widely marketed because of the
pricey sales charges. And there is very little flexibility
built into them.
We need to hear about some of the other insurance products
that are marketed to military personnel. It is my understanding
some of these products are not well structured for the unique
needs of our servicepeople and that some of the policies offer
very little more than high premiums and very low benefits.
More troubling than some of the misguided and inappropriate
products being marketed toward our military personnel are some
of the questionable and misleading tactics that have been
reportedly used to sell these products to our military. There
are reports of individuals posing as counselors on veterans'
benefits and independent financial advisers, sometimes when the
soldiers are in their barracks or even on duty.
And there are other accounts of individuals pressuring
military personnel with the deceitful implication that their
supervisors or government support products and services they
are selling. While there are a lot of honest and helpful life
agents and brokers with good intentions out there, our military
personnel deserve better service.
And I believe that the agents and brokers not only have a
fiduciary responsibility to their clients, but they have a
personal responsibility to our service personnel.
I look forward to hearing from our witnesses about the
financial products marketed to military personnel and the sales
practices that they employ, as well as the potential solutions
to try to improve protections for military personnel. The men
and women of our armed forces make sacrifices every single day.
And they exemplify the best of American spirit.
They take care of us. We need to take care of them. We have
to get them all the support, compensation, benefits and
protections that they deserve.
This hearing is important. And I am happy that you have
held it.
I also, Mr. Chairman, would like to insert in the record at
this time a statement from the Insurance Marketplace Standards
Association.
Chairman Baker. Without objection.
Mrs. Kelly. Thank you very much.
[The following information can be found on page 164 in the
appendix.]
[The prepared statement of Hon. Sue W. Kelly can be found
on page 75 in the appendix.]
Chairman Baker. I thank the gentlelady.
Mr. Ross?
Mr. Ross. Thank you, Mr. Chairman.
It is a little loud this morning.
Thank you, Mr. Chairman and Ranking Member Kanjorski, for
holding this hearing on our soldiers and finances and
protecting those who protect us.
There has been a lot said. And I will be brief so we can
hear from our panel of witnesses this morning.
I think we all know that one of the reasons we are here is
these abusive practices in the sale of financial products to
military personnel, which have been uncovered. I would
particularly like to thank the 6-month examination that was
done by the New York Times that found that several financial
service companies or their agents are using questionable
tactics on military bases to sell insurance and investments
that may not fit the needs of people in uniform.
I have a brother-in-law in the United States Air Force. I
have a first cousin in the United States Army whose wife gave
birth to their first child while he was serving our country in
Iraq.
Today, we have some 3,000 Arkansas National Guard soldiers
in Iraq. Last month, I was in Baghdad to visit with them.
These are people that I once taught Sunday school to,
people I duck hunt with, people whose wives back home teach my
children. It really puts a face on it.
And I believe their service and the service of all men and
women in uniform is much greater than mine or any member of
Congress or any president or vice president's could ever be.
And I believe if they are going to go across the globe and
protect America and our interests, the least we can do is
protect them and their finances at home.
And that is why I want to thank the chairman and the
ranking member for holding this important hearing today. I want
to thank my colleague from Long Island, Mr. Israel, and Mr.
Emanuel for their leadership on this issue. And hopefully, we
can work together in a bipartisan manner to try and ensure that
these practices stop and that our men and women in uniform and
their families back home are protected from such fraudulent and
deceptive sales pitches.
Thank you, Mr. Chairman.
Chairman Baker. I thank the gentleman.
Ms. Biggert?
Mrs. Biggert. Thank you, Mr. Chairman. And thank you for
holding this very important hearing today, for I believe it
will send a clear message to our military personnel that we do
care about their financial welfare. These men and women serve
and sacrifice for America, and for the world, to ensure that
all people dwell in freedom, liberty and justice.
As you may know, financial literacy is one of my top
priorities. And it has been brought to my attention that
financial organizations have voluntarily met with servicemen
and women to educate them about financial services.
While I encourage bona fide financial education programs
that are conducted in a legal and ethical fashion, I am not an
advocate for programs that violate Defense Department
regulations or that are a sales pitch fronting as a financial
education program. I am disturbed to read that young and
impressionable members of our armed forces may be fooled into
believing that they are being educated about finance, but are
in fact being influenced by salesmen who pose as instructors.
I would encourage our witnesses today to fully disclose the
accuracy of the report that ``several financial services
companies or their agents are using questionable tactics on
military bases to sell insurance and investments that may not
fit the needs of people in uniform.''
Our military should know that we in Congress will not deny
them access to the financial benefits of a free-market society,
but we will take action, if necessary, to protect them from
financial scam artists.
I look forward to hearing from the witnesses. Thank you and
I yield back.
[The prepared statement of Hon. Judy Biggert can be found
on page 68 in the appendix.]
Chairman Baker. I thank the gentlelady.
Mr. Inslee?
Mr. Matheson?
Mr. Miller?
If there are no further members having opening statements,
I would like at this time to ask unanimous consent----
Mr. Oxley. Already granted.
Chairman Baker. Oh, then by prior agreement, at this time,
I recognize Mr. Burns.
Mr. Burns. I thank the chairman and the ranking member. I
appreciate the opportunity to join the committee this morning
for this certainly important hearing.
This past Tuesday, I was joined by colleagues--Mike
Simpson, Charlie Norwood, Chet Edwards and Joe Wilson--in
introducing H.R. 5011, which is the Military Personnel
Financial Services Protection Act. The purpose of this act is
quite simple: it would ban the sale of questionable financial
products and insurance policies on military bases, both at home
and abroad.
The bill would also provide a layer of oversight on
unscrupulous insurance companies and their employees that have
been using federal military property to evade the jurisdiction
of state insurance commissioners and other state regulatory
bodies. Those who sell products to our citizens, especially to
our troops who sacrifice so much for the freedoms that we all
enjoy, have a responsibility and a duty to be honest and
clearly inform their potential customers.
Clearly, there have been transgressions in these areas that
must be addressed. In the past weeks, I have become aware of
numerous servicemembers, including those residing in Georgia's
12th congressional district--Fort Gordon, Georgia; Fort Stewart
and Hunter Army Airfield, Georgia; the Navy Supply Corps School
in Athens, Georgia, all of which are in the 12th--have suffered
financially as a result of dubious financial products and
questionable insurance policies.
I and my colleagues will not sit by and watch innocent
members suffer from unscrupulous sales practices in our
military installations. I look forward to the testimony of the
witnesses. I look forward to working with the Financial
Services Committee and congressional leadership in crafting an
effective bill to deal with this challenging problem.
I again thank the chairman and the ranking member for the
opportunity to join you today. I yield back.
Chairman Baker. I thank the gentleman for his good work and
his participation here today. We now turn to our patient
witnesses for their remarks this morning. And it is indeed an
honor for me to introduce to the committee today Specialist
Brandon Conger, United States Army, who has just returned from
a tour of duty in Iraq.
Sir, I wish to extend to you my deep appreciation for your
service. And we are honored to have you here with us to give us
your concerns.
Please proceed as you would like. Normal practice requested
by the committee is that all witnesses try to make their
presentations within 5 minutes. Your full and complete
statement will be made part of the official committee record.
Welcome.
STATEMENT OF SPECIALIST BRANDON CONGER, UNITED STATES ARMY
Mr. Conger. Thank you.
Mr. Chairman, distinguished members of the committee, good
morning. My name is Specialist Brandon Conger from Butler,
Missouri. I am infantryman with headquarters in Headquarters
Company, 2nd Battalion, 325th Airborne Infantry Regiment, 82nd
Airborne Division.
Thank you for this opportunity to testify in front of the
committee. I would like to give you a brief synopsis of my
involvement with American Amicable Life Insurance.
In August 2002, during my third week of basic training in
Fort Benning, Georgia, my drill sergeants held a briefing for
my platoon concerning a group of financial advisers. The drill
sergeants explained to us that a group of financial advisers
were coming to speak with us about mutual funds.
The drill sergeants said that they were a good investment.
And if we started now and stuck with them, that we would make
lots of money.
The next day, the financial advisers held a classroom
briefing and specifically told us that by investing money in
these mutual funds, it would only help us make money. They
showed us charts on their laptops, showing each of us
individually how much money we would make long term, depending
on how much money we put in on a monthly basis.
They then passed out paperwork to sign an order for the
money to begin coming out of our bank accounts. Neither the
financial advisers nor our drill sergeants or the paperwork
said anything about life insurance.
I had ACLI. I was putting in $20 a month for the insurance
in the Army. I did not need life insurance.
After graduating basic training airborne school, I was
assigned to the 82nd Airborne Division in January 2003. By
then, I still had not received a statement of any kind from
American Amicable.
In March 2003, my unit deployed to Iraq in support of
Operation Iraqi Freedom. Late January of 2004, I redeployed
back home to Fort Bragg, North Carolina.
In February of 2004, after still receiving nothing from the
company, I decided to call them. Most of my calls were never
answered. And those that were ended up with me being put on
hold until I hung up the phone.
Finally, in April, a fellow paratrooper who had signed up
with the same financial company told me that this group of
financial advisers was a fraud. I then cancelled my allotment.
In May, a reporter from the New York Times who wanted to
hear my story, contacted me. That same month, I informed my
company commander and we called American Amicable and requested
a copy of my insurance policy be mailed to the unit.
A couple of weeks later, after I still had not received the
policy, my commander and I called and e-mailed American
Amicable, requesting a policy again. Finally, on the 23rd of
July, I received my insurance policy.
This has been an extremely disappointing ordeal for me and
for some of my fellow soldiers, not because I lost money, but
because I was misrepresented by a former soldier working for
American Amicable Life Insurance, who used his contacts to gain
the trust and confidence of young soldiers.
Again, Mr. Chairman, I want to thank you and the committee
for allowing me the opportunity to testify today. Thank you.
Chairman Baker. Thank you, sir. And I assure you, we will
take your testimony and review it very carefully and we will
act accordingly. We appreciate your willingness to participate.
Our next witness is Ms. Elizabeth W. Jetton, president, the
Financial Planning Association. Welcome, Ms. Jetton.
STATEMENT OF ELIZABETH W. JETTON, PRINCIPAL, THE FINANCIAL
PLANNING ASSOCIATION
Ms. Jetton. Thank you.
Thank you, Chairman Baker and Ranking Member Kanjorski and
members of the subcommittee for this opportunity to testify
today on the marketing of certain insurance and investment
products to our enlisted men and women on military bases.
My name is Elizabeth Jetton. I am a partner in an
independent financial planning firm in Atlanta and hold the
``Certified Financial Planner'' designation. I appear before
you today as the president of the Financial Planning
Association.
FPA represents more than 28,500 members who provide
professional advice to individuals and their families or to
those who support the financial planning process. Recently, FPA
began a national community services program to provide pro bono
financial planning and education, delivered by certified
financial planner practitioners to those in need and unable to
pay for professional advice.
As part of this program, we are currently in discussions
with the Pentagon representatives to see how we can provide pro
bono advice to reservists and National Guard personnel called
to active duty in Iraq.
I have personally been in the financial services industry
since 1980 and have previously held an insurance producers'
license. For the past 14 years, I have been in the practice of
comprehensive financial planning, registered with the State of
Georgia Division of Securities as an investment adviser. I am
also affiliated with a broker-dealer and am licensed to sell
securities.
I was personally disturbed to read about the allegations of
abusive sales practices to our men and women in uniform. And I
am particularly concerned about those who are young and
starting out in their first career, and who consequently may
not the more complicated insurance and retirement needs or
knowledge of an older person or even know how to ask the right
questions to determine their need.
In providing financial planning advice to clients to help
them achieve their goals in life, it is incumbent upon a
professional adviser to review their insurance needs as part of
an overall plan. With respect to any kind of life insurance
product, there are basic questions that a consumer needs to ask
about the product, particularly since life insurance agents are
not required to comply with practice standards.
Unlike on the securities side of the business, where NASD
suitability rules come into play, or as an investment adviser,
where you actually have a fiduciary duty to place the clients'
interests first, the insurance agent has no statutory
obligation to the customer for determining the suitability of
the product to the individual's need.
Some of the questions that I, as a financial planner, ask
my clients: First, is there a need for insurance? Life
insurance is recommended to replace the earned income of the
insured for the benefit of his or her family, to provide
funding for financial and life goals that that income would
have provided for, perhaps such as college tuition.
If a soldier is young and single, I am not sure a life
insurance policy is necessary, unless he has dependents or
aging parents who need help or is perhaps concerned about his
own future declining health.
Second, if it is determined that there is a need for life
insurance, how long is the coverage needed? Again, the answer
depends on the age of the insured and their particular
concerns, goals and financial priorities.
If there are small children, the insured probably would
want to have coverage that would last until that child leaves
home. A needs analysis would look at the family's
circumstances, determine its annual needs and arrive at a lump
sum that is sufficient to provide the required annual income to
support that family if the insured died.
Generally, an insurance company will provide a death
benefit of about 16 times an individual's annual income. Let's
assume that a soldier is 30 years old and has been enlisted for
6 years, his income would be roughly around $30,000. He may
already receive $250,000 of insurance, purchased at a
reasonable price from the U.S. government.
Another $250,000 in 20-year term insurance with an A+ rated
company could possibly be obtained for as little as $167 a
year. And a $250,000 permanent universal life policy from a
reputable company might cost $1,077 a year. In contrast,
according to information provided FPA by this committee, a so-
called ``seven pay term'' life insurance with a death benefit
of just $29,949 has a premium of $900 per year.
There is a saying that if all you have is a hammer,
everything looks like a nail; in other words, unscrupulous
insurance salesmen who have only life insurance to offer will
try to solve every financial issue with an insurance product.
A financial planner who must put the interests of their
client ahead of their own considers what investment tools are
most appropriate given the financial constraints and priorities
of the client.
I feel compelled briefly to talk about other investment
products marketed on military bases. Very often, an annuity
accumulation fund is connected to the insurance policy I
described earlier that generates a negative return in the first
2 years and has a 5 percent early withdrawal penalty during the
first 10 years. I wonder whether information is adequately
disclosed about the costs and lack of liquidity of this
annuity, as well as the fact that the funds are not generally
available prior to age 59.5 without additional penalties
imposed by the IRS.
We are concerned about the marketing of contractual plans
on military bases to less sophisticated and lower ranking
members of the military. This type of fund has the 50 percent
sales charge on the first-year contributions and it is seldom
the best investment product for these members of the military.
The NASD imposes limits on mutual fund sales charges to 8.5
percent. But these charges rarely exceed 6.5 percent. And in my
experience, civilians working with reputable financial advisers
typically pay no more than 5 percent of the first year's
investment on a mutual fund purchase, including systematic
investment plans.
When our soldiers are convinced to purchase inappropriate
and excessively expensive life insurance and investment
products, it may mean that other financial needs go
unaddressed. If these news reports are accurate and those who
most need basic financial services to protect their loved ones
and their futures are being taken advantage of by companies
that are getting access to these men and women in the guise of
providing financial education seminars, FPA believes it would
be prudent for Congress to consider restricting the sale of
contractual plans and granting states the authority to regulate
insurance sales practices.
I thank you for holding this important hearing. FPA looks
forward to working with the committee on this issue. Thank you.
[The prepared statement of Elizabeth W. Jetton can be found
on page 112 in the appendix.]
Chairman Baker. Thank you, Ms. Jetton.
Mr. Mercer Bullard, welcome again for your third time;
founder and chief executive officer, Fund Democracy. Welcome.
STATEMENT OF MERCER BULLARD, PRESIDENT AND FOUNDER AND CHIEF
EXECUTIVE OFFICER, FUND DEMOCRACY, INC.
Mr. Bullard. Thank you. Thank you, Chairman Baker, Ranking
Member Kanjorski, members of the subcommittee. It is again a
pleasure to appear before you today to talk about these
important issues.
Like this subcommittee, when reports of abusive sales
practices and unsuitable investment advice on military bases
were reported in July, I was appalled. But I cannot say I was
surprised.
The abuses stem from a number of observable structural
causes. And some of them are more easily addressed than others.
I am going to briefly survey what I believe to be the main
causes of these abuses and suggest possible solutions. I will
spend most of time talking about the one that I believe would
be easiest to address through fairly simple legislation, and
that is the most shocking abuse, which I find to be the amount
and the structure of sales loads charged on certain investment
products.
They are shocking because of the substantial losses that
result from the excessive loads. But they are also shocking
because the amount and structure have been expressly authorized
by Congress. The Investment Company Act expressly permits sales
loads on periodic payment plans of up to 9 percent.
This means that a $100 per month investment in a 10-year
periodic payment plan would incur a total sales load of $1,080
on total investments of $12,000 over the life of the plan. What
is worse is the act expressly permits sales loads to be
collected on an accelerated basis.
These are the upfront 50 percent of the early payments that
we have heard mentioned in this hearing already. And those are
specifically permitted under the Investment Company Act under
federal law.
The distributor can deduct, on that basis, half of every
$100 payment until the entire sales load has been collected.
This means that, for example, after 22 months and $2,200 in
contributions, only $1,120 will have been invested. The broker
will have pocketed $1,080, again compared to the $1,100
actually in the investment.
If the investor cancels the plan, the broker gets to keep
the entire sales load. And the investor is left with a 50
percent loss.
The act mitigates this exploitive structure somewhat by
requiring that investors may cancel the plan within 45 plans of
receiving a notice that describes their cancellation rights.
And then they receive the value of their investment plus the
total commissions paid.
If the investor cancels within the first 18 months, they
have the right to receive the value of the investment, plus a
refund of the commission, less 15 percent of the gross payments
made. So this means that even if the investor cancels after 18
months, he will still be obligated to pay a commission of $270
on contributions of $1,800 to an investment plan that he did
not even keep for 2 years.
If the distributor agrees to spread the sales load
deductions over 4 years and deduct more than average of 16
percent of the contributions during that time, it does not even
have to make available that 18-month cancellation option. So in
this case, the investor would pay 16 percent in commissions,
instead of 15 percent in commissions, on the 18-month
investment.
At least the investor is better off if he cancels after 22
months. In that case, he will have paid only $352 in
commissions, as opposed to $1,080, again on only $2,200 in
contributions on an 18-month investment.
What makes these rules particularly shocking is that the
sales load limits for sales of mutual funds--and when I refer
to mutual funds, I mean mutual funds not sold through periodic
payment plans, because as you may know, mutual funds are
usually the underlying investment vehicle of periodic payment
plans--the sales load limits for mutual funds set by the
securities industry is substantially lower than the standard
set by Congress. Normally, the securities industry will argue
for higher limits than legislators. But that is not the case in
this situation.
Under NASD rules, as Ms. Jetton described, mutual fund
sales loads cannot exceed 8.5 percent, with that limit being
reduced in a number of situations where, as a practical matter,
you can almost never charge the full 8.5 percent load. In
practice, mutual fund sales loads rarely exceed about 5.75
percent. And there are some occasions in which, as she
mentioned, they will reach about 6.5 percent.
More importantly, the load is deducted from contributions
as they are made and cannot be accelerated. This means that if
the investor cancels the investment, commission paid does not
exceed 5.75 percent.
Compare that with a 9 percent or 15 percent or 50 percent
commission paid by investors in periodic payment plans. To put
the different treatment of mutual funds and periodic payment
plans in perspective, if a mutual fund investor invests $100
per month in a mutual fund with a 5 percent load--and this will
be typically known, what is often offered as a systematic
investment plans that most mutual funds offer--and they redeem
the shares after 2 years, he would have paid $120 in
commissions, compared with the $1,080 in commissions paid by
the investors in the periodic plan--virtually the same
investment.
If the mutual fund shareholder invests in a class of shares
that charge a 1 percent 12b1-fee instead of a front-end load--
the front-end load being the 5 percent front-end load--he would
pay only about $25 in distribution fees, again compared with
$1,080 for the investor in the periodic payment plan. The
commission paid by the investor in the periodic payment plan is
4,320 percent of the commission paid by the investor in the
mutual fund.
As you are well aware, the mutual fund industry has
thrived, despite the lower limits imposed on sales charges. In
fact, competition has driven down sales loads well below the
limits imposed by the NASD.
There is no reasonable basis for subjecting periodic
payment plans and mutual funds, which often offer their own
systematic plans similar to period payment plans, subject to
NASD limits, to different standards. I strongly recommend that
Congress repeal the statutory restrictions on sales loads on
periodic payment plans and direct the NASD to extend its rules
to such plans.
This would be a deregulatory measure because it would shift
to the securities industry authority for regulating sales loads
on periodic payment plans. It would be more efficient because
it would place the authority for regulating these sales loads
in one place--that is the NASD--rather than two--the NASD and
the statute. And it would be more flexible because the NASD
would be in a better position than Congress to respond to
changing business practices.
The other causes of sales abuses on military bases are also
quite observable. But they are not nearly as susceptible to
relatively easy solutions.
One problem is the inadequate and inconsistent regulation
of investment advice mentioned by Ms. Jetton. The unsuitable
recommendations made to military personnel are characteristic
of the lower standards that apply to brokers and the even lower
standards that apply to insurance agents.
Brokers who provide individualized investment advice often
are not even regulated as investment advisers, pursuant to SEC
positions, or subject to fiduciary standards. And insurance
agents often are not even subject to minimal suitability
standards.
Both categories of professionals are provided
individualized investment and financial advice and,
accordingly, should be held to a fiduciary standard of care.
Most of the financial services industry is adamant, is
adamantly opposed to being held responsible for acting only in
their clients' best interests, even while they become less the
sellers of products and more the purveyors of advice.
Congress should conduct a bottom-up review of the
regulation of financial advice.
Another problem is the special vulnerability of military
personnel, especially junior personnel, to abusive sales
practices, whether such practices involve periodic payment
plans, life insurance, home financing or any other retail
product you can think of. The isolated command nature of
military life is a double-edged sword.
It creates unique opportunity for the government to protect
our soldiers from abusive sales practices. But for salespeople,
it provides the opportunity to more easily exploit
unsophisticated investors.
Ideally, the military would regulate sales practices on
military bases. But it is not well suited for this job, which
is not its primary mission.
We would not ask the SEC Chairman Donaldson to direct the
war in Iraq any more than we should seriously expect the
Pentagon to be the most efficient regulator of financial
services on bases.
But as long as the military continues to exercise some
control over sales activities on bases, state and federal
regulators will be justifiably reluctant to intervene and apply
what may be a different set of rules and a different set of
procedures. Congress probably should encourage the military to
establish a central office for the regulation of sales
practices on military bases. And that office should work
closely with state regulators and the SEC to come up with
consistent standards.
But even with such a structure, it will be difficult to
enforce the same sales practices for the benefit of our
soldiers as we do for our civilian population.
The broadest and last problem is that the financial
services industry is regulated in a generally dysfunctional
smorgasbord of rules, promulgated in force by a wide variety of
state and federal regulators, each of whom takes a different
approach to regulation and oversees arbitrarily defined product
lines. The reports on sales abuses on military bases illustrate
how this patchwork of financial services regulation compromises
consumer protection, increases costs and suppresses
competition.
Our system of financial services regulation is a drain on
capital formation and wealth creation. Congress should begin a
systemic review of financial services regulation with the goal
of efficient, functional regulation of all financial services
providers and products.
These are the essential problems I see underlying the sales
abuses documented in recent reports. Some are fairly
intractable. And I hope only that there will be some progress
in addressing them during my lifetime.
But some can be effectively addressed in the short term. I
would again recommend strongly that Congress shift regulation
of sales loads on periodic payment plans to the NASD. This is a
simple deregulatory step that would have an immediate, bottom
line impact on our soldiers' financial security and help them
benefit from the free market system that they are fighting to
defend.
Thanks very much. And I would be happy to take questions.
[The prepared statement of Mercer Bullard can be found on
page 78 in the appendix.]
Chairman Baker. I thank you for your testimony.
Our next witness is Mr. David Woods, chief executive
officer, National Association of Insurance and Financial
Agents.
Welcome, Mr. Woods.
STATEMENT OF DAVID WOODS, CHIEF EXECUTIVE OFFICER, NATIONAL
ASSOCIATION OF INSURANCE AND FINANCIAL AGENTS
Mr. Woods. Thank you, Chairman Baker, Ranking Member
Kanjorski, members of the committee. It is our privilege this
morning to spend a few minutes with you, sharing our view of
this problem and some of the solutions that we think might be
appropriate.
I do represent the National Association of Insurance and
Financial Advisers. We represent 65,000 insurance agents and
financial advisers and another 150,000 of their employees
across the United States.
The Life and Health Insurance Foundation, of which I am
also the president, is a non-profit organization whose mission
is to educate the public about the essential role of life,
health, disability income and long-term care insurance in their
financial plans and the value added by qualified and
professional insurance agents and financial advisers.
NAIFA has worked closely with the Department of Defense and
with Congress over many years to improve and to establish
proper regulation of insurance sales on military bases, to
improve financial education for these men and women, which many
members of the committee have already established is of
critical importance.
Let me start, however, by making it very clear that in our
view, the vast majority of life insurance agents and financial
advisers adhere to the very highest professional and ethical
standards. And in doing so, we obviously condemn those who do
not.
As our mission statement indicates, NAIFA's reason for
being is: to promote professional, ethical business practices.
Just as an aside and as a moment of personal privilege, I am
sure Ms. Jetton did not mean to imply that those who are not
members of the Financial Planning Association or who are not
registered with the NASD are not ethical and are unscrupulous.
In fact, as she well knows and all of you well know, life
insurance--its policies, its marketing practices--are well
regulated by every state and by insurance commissioners across
this country.
All of us--Congress, the Department of Defense, NAIFA--we
all have the same goal here and that is to educate military
personnel about financial matters that are critical to them and
to stop the deceptive and unfair sale of insurance products. We
must be steadfast, obviously, in guarding against unethical and
possibly illegal sales practices. And we believe that the
importance of ensuring that military men and women have access
to insurance products cannot be overstated.
As I indicated, the sale of insurance of course is
regulated by both the federal government through the Department
of Defense and the states, which are our nation's primary
regulators of insurance. The current regulatory structure
establishes a workable mechanism for the supervision of
insurance agents on and off military bases and strikes a proper
balance between guaranteeing the right of military personnel to
have meaningful access to insurance products and financial
education and ensuring ample protection for these insurance
consumers from predatory sales practices.
The problem, however, with the current structure is the
lack of coordination and communication between the Department
of Defense and state regulatory authorities and the lack of
adequate enforcement of existing rules. To correct these
problems, in our view, the Department of Defense and the state
insurance commissioners need to work together to develop a
scheme to improve communication, improve coordination and
improve enforcement of both Department of Defense rules and
state laws.
We are delighted and we applaud Representative Max Burns
for your efforts, sir, to provide solutions to these problems
with the introduction of your Military Personnel Financial
Services Protection Act. We enthusiastically support the
proposal's embrace of state insurance regulatory authority by
clarifying current law regarding state insurance regulatory
authority over insurance transactions on military
installations, which is certainly less than clear at the
moment, as you have said.
The bill supplements the authority of base commanders and
improves the ability of the Department of Defense and state
authorities to ensure that insurance sales are properly
handled.
We would, however, point out that there is some language in
the bill which does cause some concern to us because it could
be interpreted more broadly and lead to unintended and perhaps
problematic consequences for the insurance industry and
insurance consumers. And our statement gets into it in greater
detail.
We would look forward to working with you, sir, and with
the committee to refine the language so your intent is clear
and it does not do some harm where it should not.
We recognize that the majority of military personnel are,
like Special Conger, young, often have little financial
background or formal financial planning education. This is true
not only in the military, but in society as a whole.
We support the framework established under the directive by
which military personnel can and do receive critical financial
education. The Life Foundation, of which I am the president,
provides crucial insurance-based financial information directly
to a broad spectrum of society, including high school students.
In fact, we already provide educational programs and
material to 25 percent of high school juniors and seniors
throughout the country. The Life Foundation has offered and
continues to offer--and do so here--to provide educational
programs and materials that it has already developed to the
Department of Defense for servicemen and women.
So in summary, Mr. Chairman, clarification of current law,
improvements in communication, coordination in enforcement and
financial education are all critical elements in ensuring that
current laws work to provide military personnel with the
consumer protections that they need. With these goals in mind,
NAIFA and the American Council of Life Insurers developed a set
of best practices, which we have submitted to you, for military
sales and their functional regulation. And these are attached
to our statement.
And thank you again, sir, for the opportunity and the
privilege of appearing before you today.
[The prepared statement of David Woods can be found on page
146 in the appendix.]
Chairman Baker. Thank you again, sir.
Our next witness is Mr. Frank Keating, president, chief
executive officer, the American Council of Life Insurers.
Welcome.
STATEMENT OF FRANK KEATING, PRESIDENT, THE AMERICAN COUNCIL OF
LIFE INSURERS
Mr. Keating. Mr. Chairman and members of the subcommittee,
I appreciate the opportunity to appear today and to discuss how
best to address unscrupulous sales of financial services,
including insurance, to our men and women in the military
service.
You are to be congratulated on conducting this expeditious
hearing. We at the ACLI are glad that the revelations of this
summer have finally opened communications among those whose
responsibility it is to solve the reported problems.
For more than a year, the ACLI has been aware of such
allegations of misbehavior. As a matter of fact, before the New
York Times articles appeared, I personally met with senior
officials of the Department of Defense to discuss this issue
with them.
We have sought attention at the highest levels. Today, we
have solutions we wish to share with you.
We believed we had achieved a breakthrough earlier this
year when we were able to sit down with representatives of the
U.S. Government Accounting Office to help them plan their
investigation into the accusations leveled by all sides. We
encouraged the GAO to dig deep beneath its express mandate to
get to the bottom of things.
But it was the stories published by The New York Times in
July that rocked everyone out of complacency and into remedial
action. And it is about time.
The telling thing about the newspaper's stories is that the
news was old news. Many of the same allegations involving the
same companies were reported 4 years ago in the Cuthbert
Report, which is the unofficial name of the official Defense
Department investigation into ``Insurance Solicitation
Practices on Department of Defense Installations.''
While that report itself is controversial, it was clear
long before it was published that something was amiss in the
supervision of insurance sales to military personnel. It should
have been clear that alleged insurance problems required
something of state regulators as well as defense officials.
Our military mobilization since September 11th accelerated
personal financial planning for our newly enlisted, accelerated
sales of insurance and perhaps accelerated incidents of
coercive selling. But it did not accelerate communications
between industry and defense officials and state insurance
officials until now.
The ACLI and the National Association of Insurance and
Financial Advisers--NAIFA--have shared with you for this
hearing a dozen best practices for military insurance sales and
their financial regulation. Our recommendations are divided
into three areas.
The first addresses military installation market conduct by
insurers and insurance agents. The second area recommends
improved, standardized financial literacy opportunities for our
servicemen and servicewomen. The third area recommends
improvements in regulatory supervision of the military market
for insurance sales.
Thus, we offer suggestions for improvement for both
industry and regulators. We have more ideas to offer and we are
actively soliciting suggestions from our member companies and
agents.
We want to assure that our military servicemen and women
have the education, information, safeguards and independent
sources of advice necessary for their individual needs. No
industry can endanger its fundamental enterprise by tolerating
misconduct in its core activities.
We do not want our many good companies and agents unfairly
tarred by a brush intended for a few. That is why ACLI is here
today and anxious, on behalf of the companies, to help you sort
out the regulation of military sales of life insurance.
We are convinced that the reason these issues continue to
come up is because of the lack of clarity over who has the
authority to oversee such sales and the absence of clear
procedures to ensure the highest standards for dealing with men
and women in uniform.
I might take a moment now to address remedial legislation
drafted by Representative Max Burns of Georgia. I commend
Congressman Burns for his authorship of this bill. I also
commend Congressman Emanuel for what he has proposed.
At the heart of it is the genuine solution to many of the
problems reported in the press: state regulation. That solution
involves the realization of genuinely functional regulation in
both the technical and common sense terms.
We support the overall concept of both bills. But there are
a few ancillary provisions to which I would like to make some
suggested improvements.
First, the Burns bill intends, we believe, to prohibit a
particular investment product known as contractual mutual
funds. As this is not a life insurance product, ACLI has no
opinion about the pros and cons of such an investment.
However, the description of the product in the legislation
goes far beyond contractual mutual funds to prohibit all kinds
of insurance and annuities that have a variable element in
them. ACLI has communicated with the committee staff on how to
refine the technical description in the bill to the
controversial product under your review.
My second observation is that the notion of asking 50 state
insurance regulators to implement new standards to protect
military personnel from insurance sales misconduct is
unnecessary and probably unwanted by all the regulators
involved. It has been the absence of any kind of functional
regulation of insurance sales on military installations that
has created cracks through which misbehavior has reportedly
taken root.
Further, it is in the complete absence of effective
enforcement of all relevant rules that has caused some of our
soldiers to become victims of scams. Fifty new state rules in
addition to existing rules will not better protect our
servicemen and women if neither the states nor the Defense
Department can enforce any rule.
The military services are a unique environment. It is
populated by highly mobile individuals who have special needs
and a healthy respect for those in authority or who otherwise
provide guidance.
The functional regulation of insurance by the states must
be reconciled with the functional regulation of our military
personnel by the Defense Department. We believe that the
necessary balance can be achieved in two ways: first, by
centralizing relevant financial services information for all
military services within a particular command in the Defense
Department; and secondly, by looking to that centralized
defense command to serve as the liaison and coordinator of
financial services sales supervision, the handling of
complaints and regulatory assistance with the financial service
functional regulators at the state level.
Under this approach, an infraction by a sales agent or a
company on a military installation is not an isolated incident
receiving an arbitrary evaluation. Rather, it becomes an
incident reported to multiple regulators and multiple
installation commanders.
It is subjected to fair and certain adjudication. And it
will result, in some cases, appropriately in license
revocations or penalties that sting.
The cracks in the system become sealed and misbehavior is
rooted out, not to find fertile ground on another installation
or in another state or foreign country. Ignorance breeds
ignorance. If there is no ability for commanders to communicate
or for regulators to communicate and to have this system put in
place here in Washington to provide information, corrective
action will never be taken.
Thank you, Mr. Chairman, again, for allowing me to address
these important topics and ideas. We at ACLI are eager to help
address effectively the problems under investigation by the
GAO. We very much believe we can be part of the solution and
that our recommended best practices provide a path to success.
Thank you.
[The prepared statement of Hon. Frank Keating can be found
on page 120 in the appendix.]
Chairman Baker. Thank you for your participation.
Specialist Conger, at the time that you were first
approached by the sales representative for the American
Amicable investment, do you recall whether the words ``front
loaded'' were used or that there was any disclosure made about
fees that you would pay in that first or second year or
financial penalties that might be associated with any premature
actions on your part?
What can you tell me, from your memory, about the
presentation, when they said, ``This is a good deal. This is
what we need from you. And here is what you get?"
Did they tell you where your money was going to go when
they asked you to make that check out?
Mr. Conger. They did not tell us exactly where it was going
to go. They showed us on charts pretty much how much money we
would make. And they told us the sooner we put our money into
it and if we decided later on to take it out, that there would
be a very big penalty, very big fine.
And that is about all I know.
Chairman Baker. Do you recall did they tell you how long
you had to leave it in to avoid paying that big penalty? Did
they tell you that?
Mr. Conger. They said, at the time, we had to leave it in
up to 2 years, I believe.
Chairman Baker. 2 years.
Mr. Conger. I believe.
Chairman Baker. That is interesting. Okay.
Thank you very much, sir.
Mr. Conger. Yes, sir.
Chairman Baker. Ms. Jetton, a contract plan with a 50
percent first-year commission, as American Amicable provides,
starting with a $900 premium for a $21,000 death benefit, is
that a good deal?
Ms. Jetton. Well, in the civilian marketplace, just to give
you comparison, if we are talking about term life insurance,
someone of a young age could get $250,000 of term insurance for
$200 or less.
We have two different things here and I think even we are
getting confused at times. On the contractual mutual fund plan,
where you have the 50 percent sales charge on the first year's
contributions as Mr. Bullard and I commented, in the civilian
marketplace you cannot charge more than 8.5 percent front-end
load. And that comes out only as you invest new monies.
And typical practice is you do not really see front loads
higher than 6.5 percent. And truly a very reputable financial
adviser who is, by law, putting the interests of their client
first, can find good quality investments in a commission front
load product, where the commission might be between 4 to 5.75
percent.
Chairman Baker. Well, let me state it a little different
way, then. If you were sitting in the room with some of these
young men and women, typically, as I understand the profile of
most of the customers, they are about 24 median age, total
annual compensation of about $30,000, very minimal net worth
calculations not really any identifiable near-term financial
needs because of their military obligation.
How does someone come to the conclusion that either of
these products are professionally appropriate for their
financial next step?
Ms. Jetton. Well, that is the question. I have met with
young enlisted and officers in the course of my career and
typically their primary concerns are living within their means,
avoiding debt, having just some liquid reserves in a savings
account to protect them from all the kind of uncertainties,
such as a car breaking down or a child needing some medical
attention. So I would in no way ever recommend this type of
product.
What we are always looking to do is make their dollars
stretch as far as we can to cover all of the financial issues
that they are facing, both what they are facing today in their
lives and, if there is a life insurance need, finding the most
economically viable, quality insurance product possible with
the highest death benefit that would be appropriate.
Chairman Baker. Generally, I am just appalled that this
level of advice was permitted to be given to frankly
individuals who were not in a position or mental state to make
judgments, in light of the exorbitant financial costs
associated with the extraordinarily low benefit. I just keep
looking for an explanation from somebody as to how this
happens.
And apparently, it has happened to a great extent over a
considerable period of time because there are several companies
that appear to be doing quite well selling this product. I am
advised that this series of votes, commencing now, will be a
series of three votes. I leave it to the gentleman's discretion
whether we would like to just recess now and go for the votes,
or would you care to proceed with your questions? If you would
like to be recognized, sir?
Mr. Kanjorski. Sure.
Chairman Baker. I would recognize Mr. Kanjorski for his
questions.
Mr. Kanjorski. The testimony poses some disturbing facts.
No one likes to see the armed forces, their personnel being
taken advantage of. But it raises the other side of the issue
on consumer protection generally and how far government and
regulation should get involved, really.
It reminds me of a hearing the chairman participated with
me several months ago in Monroe County in the purchase of homes
and mortgaging and brokerage of homes. And the question was
that people from the greater New York area were buying homes
sometimes twice their value.
And as a result, once they purchased the home and they
started to pay on their mortgage for a year or two and they
went for a refinancing, they found out the value of their home
was about half what they paid for it. And needless to say,
hundreds of people either went into foreclosure or were very
disturbed with that fact.
And it raises the question: just what should the role of
government be in saving people from their own misjudgment or
failure to exercise reasonable procedures in the marketplace? I
keep thinking of: is Casablanca shocking, that there is
gambling in the casino? Well, is it shocking that there is
profiteering in business?
We are really going to raise the question here: just how
much do we hold the hands of not only military personnel, but
consumers generally? And what the constraints of that will be
on the free enterprise system.
In an ideal world, I would like every member of the armed
forces to have a financial planner. I would like to be certain
that they do not get charged any greater amount than the median
amount in cost of investments.
But the reality and the practicality of that is we are
going to have to block the military from having any activities
with financial transactions while they are in the service
because invariably, unless we are able to write some sort of
regulatory provisions or legal provisions that guarantee that
we will stand behind the failure to use good financial judgment
and I do not think it is possible to do that.
The question is: do you find--and maybe I should direct
this question to Ms. Jetton and Mr. Bullard--do you find that
the practices are so outlandish that the government should, in
a very heavy-handed way, step in and restrict any participation
except for those that are qualified to be absolutely foolproof
to potential armed forces personnel? Or is this just the risk
we take?
Mr. Bullard. As a general matter, we should step in only
where there is some evidence of market failure. And sales
practices on military bases, I think, would clearly qualify.
It is a closed market. It is controlled by the Pentagon. It
is highly susceptible to affinity marketing, which is another
word for using relationships to exploit consumers.
And therefore, given that some degree of market failure, I
think it is appropriate to think about stepping in.
But another answer to your question would be we already
regulate and impose price restrictions with respect to sales
practices. The reason we do that and not, for example, impose
price limits on mutual funds themselves is that the potential
for abuse in sales practices is so much greater.
You have someone who is very difficult to regulate on the
ground, engaged in interpersonal reactions, where it is very
hard to prevent sales abuses from occurring. And decades ago,
Congress decided that it was appropriate to impose limits.
The mistake it made was that when it gave the NASD the
ability to impose limits on mutual fund sales, it did not then
also repeal the provisions for periodic payment plans and also
send that along with the same package. So we have really
answered the question as to sales loads.
They are regulated. They are regulated by imposing very
specific restrictions.
But we have an archaic set of provisions that allowed
accelerated payments that really would have gone by the wayside
if the industry itself had been regulating these securities
products. So I think the answer would be that in evidence of
market failure and a long history of already providing those
kinds of restrictions, that there is a very strong argument for
having some more government oversight in this case.
Ms. Jetton. And I would agree. And I would also note that
we do have fairly heavy-handed regulation in the civilian
marketplace through the NASD and the SEC. And the military, in
some ways, has been carved out as a niche, when in fact, it is
probably an area that needs at least the same level of
protection because of the very people we are talking about, who
are so very often young, who are coming into it with a focus on
serving their country.
And their lives are complex and chaotic as a result of
that. And I think they need our very special care.
There is also a problem in that anyone can call themselves
a financial planner in this country without having credentials.
There is a credential, the Certified Financial Planner. There
is a meaning to the term ``investment adviser'' that should
mean--and does mean--that you are registered with the SEC and
have a fiduciary relationship.
But unfortunately, those terms are battered around. And
there is no statutory regulation there, so that anyone can just
use the language and be the wolf in sheep's clothing.
And I am certainly not denigrating the insurance profession
overall. But again, there is a difference in our regulatory
standard and professional standard. There is not a fiduciary
standard in place for insurance. And therefore, I think
Congress has a role.
Mr. Kanjorski. Are you suggesting a special regulatory
entity for defense personnel, as opposed to a more broadly
regulated entity?
Ms. Jetton. I am not necessarily making that case. We have
had so little time to really consider the issue. But we would
be happy to consider and make more comments.
Mr. Kanjorski. Thank you.
Gentlemen, I just want to get to you for a second. Are you
full of scoundrels in your industry? Or is this an aberration?
Mr. Keating. No, our industry is not full of scoundrels.
But I disagree with this nice lady. If you are selling a
product, you may almost have a fiduciary relationship to the
person to whom you are selling the product.
But let me say this, as you know, Congressman, bad facts
frequently make bad law. We have to reflect, before we take
action or propose action, that an 18-year-old in this country
is an adult. An 18-year-old can serve in the military. An 18-
year-old can enter into a personal property contract.
Mr. Kanjorski. They do not vote very often though,
governor.
Mr. Keating. The same thing with real estate; the same
thing with serving on a jury and sending somebody to their
execution or to a prison term. So what we propose is to say,
look, this is an unusual environment.
What we ought to have is a full, complete and utterly
impartial financial services seminar for military personnel,
because this is a family decision--their retirement, their
savings, these are matters of real interest to them. It
obviously is of real interest to the military: to not permit
its people to sign unknowingly on the dotted line at those
kinds of events. If there is a bad apple--and there are bad
doctors; there are bad lawyers; there are bad insurance
salesmen it is important to have that information provided to
the Department of Defense, and shared among insurance
commissioners.
There already is a system in place that can communicate,
insurance commissioner to insurance commissioner, to all the
agents and all the companies. So to bring together the
regulators in an office at Defense and give the opportunity for
base commanders to access that information so that they are not
dealing with someone who has been booted off another base is
readily available. I think it is rather simply handled.
But I think we do not need to patronize people. We need to
give them the very best information and not permit abusive
practices on bases.
Mr. Ballard. Could I respond to one comment? It is
factually and legally incorrect to say that sellers of life
insurance have a fiduciary duty. They do not, never have. And
Ms. Jetton is exactly right.
And the product you describe, Chairman Baker, would have
been a violation of that seller's fiduciary duty. But because
they are not subject to fiduciary duty, we have this issue in
front of us today.
Mr. Keating. That is not true.
Mr. Ballard. We do not need to debate that.
Chairman Baker. No, we do not. We are down to about 5
minutes on the vote. With everyone's tolerance, since there are
two pending matters, I understand the second vote may now be a
15-minute vote, we will stand in recess until 12:30 to
accommodate everyone.
Thank you.
[Recess.]
Chairman Baker. I would like to call this meeting of the
Capital Markets Subcommittee back to order. We will certainly
have members returning, as circumstances warrant. But in order
not to delay our panel any longer, I wish to proceed in
recognition of members for questions.
Mr. Kanjorski had been previously recognized prior to our
recess. Mr. Lucas would now be in order.
Mr. Lucas of Oklahoma. Thank you, Mr. Chairman.
Governor Keating, you testified that ACLI had sat down with
the GAO office to help them plan their investigation into the
accusations leveled by all sides concerning military insurance
sales. Could you describe to the committee a little bit the
nature of some of those accusations and the inappropriate
practices and then what ACLI's suggestions were to the GAO in
regards to that?
Mr. Keating. Congressman Lucas, as I alluded to in my
formal testimony, I came aboard just after the first of last
year, mid-January. And one of the first letters I wrote was to
the Department of Defense after we heard about allegations of
oppressive sales practices and inappropriate products being
sold, asking for a meeting with the Department of Defense.
That meeting was declined. In the course of the inquiries
from GAO, we have taken up with them these issues, as recently
we did with the Department of Defense in a meeting with them.
We have subsequently had a meeting with officials from the
Department of Defense and taken the position that the answer
must always be a regulatory scheme that works.
And it is very difficult if a state insurance commissioner
who has responsibility over life insurance sales does not know
about an accusation. It is very difficult for that insurance
commissioner to take action against either the company or the
agent.
It is particularly difficult for the company if they do not
know that there is a problem on a base with a particular agent.
So with the GAO, as well as with the Department of Defense, our
position has consistently been a clearing house at DOD, with
access to the computerized information of all the agents and
companies in the country.
Let's say an agent acts improperly at, let's say, Fort Sill
in Oklahoma. That individual should not be able to just go on
to Fort Lewis, Washington and begin business as usual because
his name, the fact that he has been excluded from the base,
would be in this national system, accessible by the Department
of Defense, by state insurance regulators. And not only can
action be taken by the department in the barring of that
individual, but also the license can be suspended by the
insurance commissioner.
The problem has been, as I indicated, there really has been
no communication or very little communication. And we are
representing the companies involved--some 400 life companies,
most of whom do not do business, by the way, on military bases.
So we are very anxious and insistent that there be
communication between the Department of Defense and the state
insurance regulators, a consistent system of sharing
information and taking action when those bad apples and actors
do surface.
Mr. Lucas of Oklahoma. Understood. And clearly, in that
kind of a scheme, situation, regulatory regime, where the state
insurance commissioners were involved in the regulatory
process, if there was a problem with a company, with an agent,
it would be possible for the insurance regulators surely to
report to the base commanders that those entities are no longer
licensed to do business in that state, I would think.
In the long haul, governor, do you think that this is a
situation that, granted it is a limited number of companies
perhaps that specialize in this kind of a business, but is it a
situation, based on your insights, you think, that has been a
problem perhaps at a number of military bases across the
country, as opposed to just a limited number of isolated
incidents?
Mr. Keating. I only know, Congressman, anecdotally, because
again there has not been a universal sharing of accusations and
information. But certainly the information provided in the New
York Times pieces would suggest there were more than just a few
bases involved.
And that is why the timeliness and the urgency of action is
upon us. And to the extent that we can make sure that bad
actors are identified and removed by the companies, to the
extent we can make sure that bad actors are identified and
either fined or removed by insurance commissioners, we need to
do that.
And as you well know, as long as life and casualty and
medical insurance are state regulated, you are going to have a
wide variety of interest in these things. But if the Department
of Defense can collate the information and share it with the
insurance commissioners and become the bully pulpit to insist
that action is taken in a public way, I think you are going to
see this problem moderate very dramatically and very quickly.
Mr. Lucas of Oklahoma. Thank you.
Specialist Conger, thinking back to the information that
was made available to you, how much time was spent by anyone
for that matter discussing the various options that could be
available to you, all the way from buying savings bonds on down
to not participating in things. How much time would you say, in
your military experience, was actually devoted to this kind of
information providing? Guesstimate?
Mr. Conger. Congressman, I would say probably about three
hours. There was a discussion on investing money into mutual
funds and the options. There really were not any other options
that they gave us.
They kind of hurried us up in this situation and never
really gave us any options or anything.
Mr. Lucas of Oklahoma. Thank you, Specialist.
Thank you, Mr. Chairman, for your time.
Chairman Baker. Thank you, sir.
Mr. Scott, did you have questions?
Mr. Scott. Thank you very much, Mr. Chairman.
We are missing somebody at this hearing and that is the
military. We have private insurance companies who are being
given access to U.S. military bases, to sell young Americans in
uniform expensive insurance that they do not need. And they are
charging our soldiers high fees for investments that have been
disgraced and outlawed in the civilian market.
And because these insurance salesmen have been given the
military's permission to sell such products on their bases,
many of our soldiers, like Specialist Conger, believe the
products have their commander's stamp of approval. And we are
having this hearing to come to a way to fix this problem. And
we do not have a representative of the Pentagon or the military
here.
And I was just wondering, Mr. Chairman, if you could share
with us: were they invited? Is there any reason why they are
not here? I do believe that they are an important part of
getting to the core of this issue.
Mr. Chairman?
Chairman Baker. I am sorry, I was not listening.
Mr. Scott. My question was: did we invite the military
here? I was very concerned that we have a problem that
expressly happens in an environment that the military controls,
been happening for 30 years, being perpetrated by agents who
themselves are retired military and by companies on whose
boards the military is highly represented. And here we are,
trying to come to a solution to this and the military and the
Pentagon is not here to answer questions before this committee.
And I wanted to know: were they invited? And if they were,
why did they not come? And certainly, I would certainly want to
make the case that before we move further to try to come up
with answers to a problem, we certainly need the input of the
defense and the Pentagon here to help us with this.
Chairman Baker. I certainly understand the gentleman's
concerns. The military would be the second tier level of
concern, at least from my perspective at this time.
This is a free enterprise product, marketed through the
approval or permission of the military administrations who
allow a product to be brought to the attention of enlisted
personnel for the enlisted personnel to be able to make
independent financial decisions. However, it is clear to me,
given the manner by which the marketing was conducted through
retired officers to enlisted personnel in happy hour
environments, that it was not a judgmental circumstance in
which personnel could exercise independent financial judgments.
Therefore, at the appropriate time, I assure the gentleman
that we shall engage military personnel responsible for
authorization to explain to us their review processes. Now
military personnel who allow private vendors on to military
bases can not always be held accountable for unprofessional
conduct.
If a private vendor was to come on to a military base with
vending machines that took quarters on every occasion, that
would not necessarily be an oversight of military personnel.
However, given the longstanding practice, the excessive
charges, the limited benefit, the reported incidences in which
individuals reported their unwillingness to participate, there
will be a requirement to have some thorough explanation as to
how this practice and methodology was continued on such a
longstanding basis.
But to the military's defense today, they were not extended
an invitation to appear. We, rather, chose to focus on the
financial aspects as a consumer product first.
Mr. Scott. Okay, Mr. Chairman. I certainly look forward to
an opportunity, at the appropriate time, that I might be able
to ask the military and the Defense Department.
Chairman Baker. Oh, without question, the gentleman will
reserve that right.
Mr. Scott. Let me ask Mr. Bullard, in your opinion, can you
explain to me how contractual mutual fund plans are better
suited for the military when it is almost non-existent in the
civilian market? And are these insurance products commonly sold
by other firms?
Mr. Bullard. The contractual plans you are talking about, I
assume are the ones through which you can charge up to the 9
percent sales load and deduct the sales load, up to 50 percent
of each contribution for the first couple of years. And those
are not sold in the civilian marketplace simply because they
cannot compete with other mutual fund products.
In the civilian marketplace, you have an open marketplace.
There is a great deal of competition and information out there.
And it is for that reason only are periodic payments that sell
mutual funds not sold, but even mutual funds competing for
business set their sales loads at levels that are substantially
below what is allowed by the NASD.
So the obvious explanation is competition, which leads me
to look at the military base environment and, not surprisingly,
find a lot of examples of why the markets are not working
efficiently. You have a command structure, which lends itself
to officers and enlisted personnel who are vulnerable to
influence by senior officers, senior retired officers.
You have an environment where you have a selective group of
persons who have access, thereby creating high barriers of
entry to that market. So there are a lot of market reasons why
this is probably a fairly inefficient market and additional
regulatory scrutiny is needed.
Mr. Scott. All right.
Governor Keating, let me ask you this. Are you familiar
with First Command Financial Planning?
Mr. Keating. Only from the news reports. That is correct,
Congressman.
Mr. Scott. Only from the news reports?
Mr. Keating. Yes. They are not a member of our association.
Mr. Scott. What about American Amicable Life Insurance
Company?
Mr. Keating. From the news reports as well.
Mr. Scott. They are not a part of your organization?
Mr. Keating. They are.
Mr. Scott. They are?
Mr. Keating. Yes.
Mr. Scott. Pioneer American Insurance Company?
Mr. Keating. No.
Mr. Scott. A part of, I think, our task here is, as I see
it from the enterprise standpoint and our oversight of coming
up with legislation, is: how do we get at the bad actors here?
And can you share with me your experiences with trying to get
any assistance on this?
And secondly, and perhaps Mr. Woods too with his
organization that comes I with the insurance, were there any
bureaucratic barriers in your way? And if you could give to me
what was the genesis of the GAO investigation?
Mr. Keating. Well maybe Mr. Woods can comment about the GAO
investigation. But I can say that when it came to my
attention--and ACLI represents about 400 life insurance
companies, most of whom do not do any sales on military bases--
but this was a challenge to our franchise, the ethics and
integrity of the institution of life insurance and life
products.
So I contacted by letter the Defense Department and asked
for a meeting so we could discuss: what can we do to make sure
that bad actors and bad companies do not misbehave on military
bases and take advantage of young and frequently uninformed
military servicemen and women? Their information back, their
response back was, ``We cannot meet with you.''
Now as a result of the passage of some months and even
before the New York Times article appeared and some additional
efforts to try to have them meet with us, we did meet with
them. We explained that it was very difficult for a company to
know if they have a bad agent if the base commander and/or the
Department of Defense do not share that information.
And the response back was, ``Well, FOIA.'' And you know, a
lot of things in the FOIA exchange are redacted. It is
difficult to find out: what did go on here? Can I really fire
this person?
So that is the reason we have been insistent, Congressman,
from the start, that there be transparency--very much like the
Emanuel bill, quite truthfully--that there be transparency,
full sharing of information and a proactive role on the part of
the Department of Defense to make sure that the agents and the
companies doing business--because banks, securities firms and
life companies have been on bases for many, many years and they
are, in fact, not abusing, and not taking advantage of
servicepeople.
This is a $3.5 trillion industry, an extraordinarily
important industry to America, to our economic vitality and
success. We want to make sure that only good men and women are
in it and particularly only good men and women are on military
bases.
So I think, from my standpoint, the thing that was
frustrating to me was on the Department of Defense's reaction.
It was not as urgent as it was to us. But again, we represent
the industry. And we felt great urgency to address this
problem.
Mr. Scott. Do you think that these companies that I
mentioned, that throughout this whole investigation or research
we have been doing, appear to be repeat offenders of this, like
Amicable, First Command, those companies? Do you think
companies themselves who engage in this should be banned from
the military bases?
Or do you see this in terms of bad actors, as rogue agents?
Do you see them doing it on their own? I mean, it is hard to
think that----
Mr. Keating. Again, Congressman, all I know is anecdotal.
And the companies or several companies are here to answer your
specific questions about your specific concerns about conduct,
practices or sales.
But the reality is there is authority in every state to
take action against bad companies and bad agents. And just as I
indicated, we have bad lawyers, bad doctors, bad siding
salesmen in this country. And you need--we need--to take action
against them.
Chairman Baker. Mr. Scott, we have been quite liberal, but
you are well over your time.
Mr. Scott. And I appreciate your generosity, Mr. Chairman.
Chairman Baker. Thank you, Mr. Scott.
Mr. Emanuel?
Mr. Emanuel. Thank you, Mr. Chairman.
I think what would be helpful is, rather than mixing up
mutual funds or contractual mutual funds with life insurance
products, we kind of separate the two. And even though the
legislation puts the two together, there are actually a
different set of problems and a different set of solutions,
number one.
And I think on the contractual plans, what I find
interesting through--and I will make one observation, at least
as I understand what you said, Mercer, and if I got it wrong, I
apologize for the characterization--is that there is not enough
of a marketplace, so you had one product driving through.
And I think, on the insurance side, you have in a weird way
too much competition and not enough information. And therefore,
people are buying the wrong products. So they have different
problems associated with them. That is number one.
On the contractual mutual funds, given this product is not
in the civilian market and given it is not part of the general
public, we should approach and try to wean it out in the same
way--not wean it out, either end it and eliminate it, as my
legislation calls for, or give a clear warning to all the men
and women in uniform of how this product is perceived by the
SEC, so it is unambiguous in the understanding for any
consumer.
So if they want to buy it, there is what I call a surgeon
general label on it from the SEC. ``This is absolutely looked
down upon, frowned upon. We do not think this product is
good.''
Now I think we should ban it. But if, for whatever reason,
we cannot get ourselves, like the prior Congresses, to ban it,
put a clear warning on it with all the red, flashing lights so
everybody knows what that is.
And then maybe we should deal and look at further, as
people want to look at mutual funds or other types of
investment vehicles, of how we can get those products out.
But the learning lesson on the insurance side is: one,
although the Defense Department seems to come for some
criticism, I would like to come to at least one note of
defense. We actually provide a product, the $250,000 life
insurance product, that is a good product at very cost-
effective basis.
And what should be done--since nobody else will tout my
legislation, I will do it--is raise that ceiling to $500,000. I
do not think the insurance industry would have a problem if the
government was doing that.
And give people the option of $250,000 or whatever other
breakpoints they want to make, but up to $500,000. Ninety-six
percent of all people in uniform are in that insurance product,
as I think I got that statistic right.
And then allow people in the private insurance industry to
sell different products, niche products. So obviously you would
tailor these on a customer-by-customer basis and inform them,
which leads me to my question to Governor Keating.
What do you think is the knowledge basis--and again, you
are not on the base knowing, but through your associated
firms--the knowledge basis on some of the servicemen and women?
If one product is being sold something like a savings plan, but
it is really a life insurance policy, et cetera, what is the
knowledge basis that they know of what they are buying and what
they are purchasing?
What is the knowledge basis of what they think they need
going in? And what can we do?
We have a general public problem of information, knowledge,
et cetera. They are not there to be trained on financial
literacy. That is not what they are there for.
So what can we do to make this easier? They can do what
they need to do for themselves and their family? What knowledge
basis do they have?
And then I have one other statement after that.
Mr. Keating. Congressman, many years ago, when I became an
FBI agent, we had a session in the course of our training about
retirement and savings and all those things. But we were 22 to
25, 27 years old. And we did not care about it.
So everybody sat and listened. But how much really was
absorbed was anybody's guess; probably not very much. Perhaps
people who had children and families absorbed more than those
of us who were single.
I think a similar challenge exists with respect to military
families and military singles. The reality is that the military
is a family, just like in my service in the Bureau, it was a
family.
And they cared about us to make sure that if anything
happened to us, our families were taken care of. And we should
have listened more.
And in their case, they had a very transparent, very broad,
very open information. Here are the things you need to think
about; here are some of the solutions out there.
But in the FBI no one signed on the dotted line. And there
was not a salesman who made the presentation. It was a series
of professionals that did not try to sell us anything.
And I think to take, like Specialist Conger's example,
enlisted men, single people, men and women with families and
say, okay, you have so many dollars in pay. You can buy a
little bit more insurance, a lot more, or another $250,000. You
can buy even more coverage than that, a half a million dollars
worth.
But if you do not have any kids, you probably do not need
that. If you have children, you probably need that coverage or
perhaps more.
Here are some thoughts that you need, with respect to
mutual funds or retirement products or savings products to best
secure you and your family's security. Openness, transparency,
and full information about the product. Then let adults make
decisions for themselves and not be bludgeoned or coerced into
a decision by a superior officer or a superior enlisted man.
If you can do that--and I think it can be done--then I
think you virtually solve the problem.
Mr. Emanuel. I think that I am sympathetic to your case as
a 27-year old young enlisted in the FBI. My wife accuses me of
having the adult version of ADD. I am sympathetic to that
attention and what people had.
I do think one of the things that we can do in this
legislation is clarify the role of the Defense Department, the
commanders on the base, et cetera, so it does not look like
they are blessing, encouraging or directing enlistees to sign
up for something. So as the hosts, we may be sending an
ambiguous if not--I do not want to say duplicitous, that is not
exactly the right word--a message that should not be sent by
encouraging people.
I do think one of the solutions is allowing the government
to offer more life insurance than the $250,000 cap. That would
be an opportunity so those who think they need more can,
purchase more. They do it at a very cost effective basis.
The second thing we need to do at the Defense Department is
set some clear guidelines so they do not write their own rules
that give ambiguous messages to the enlistees of what they are
or are not doing, are or are not saying. But the most important
thing is to get to the contractual mutual funds and not allow
$15 billion to exist.
And one last thing is then on the variable, as my
legislation does, it grandfathers those in so we do not hold
people and harm them in the process of making a transition.
Mr. Keating. Congressman, looking at your proposals only of
course in very summary form, those make a lot of sense.
Congressman Burns' bill makes a lot of sense: to provide a
regulatory apparatus, a sharing of information and a role for
the Department of Defense to make sure that servicemen and
women are not taken advantage of.
And particularly, I believe in your bill, where you
literally sign a statement that there is no requirement that
you buy a certain product or that there is no encouragement
that a particular product be purchased. And I think that is
sound public policy.
Mr. Emanuel. Just because it is sensible, we would not want
that to get in the way.
[Laughter.]
Thank you, Mr. Chairman.
Chairman Baker. Thank you, Mr. Emanuel.
Mr. Burns?
Mr. Burns. Thank you, Mr. Chairman. I appreciate the input
from the panel.
We have a tough challenge and a difficult problem. Let me
start first with Specialist Conger. Thank you for your service.
Thank you for being a part of the 82nd Airborne. I spent a
little bit of time at Fort Bragg and crawled around those hills
a bit.
Can you give me--just a simple question--the allotment that
you signed, how much per month did you have withdrawn?
Mr. Conger. Congressman, I had $100 withdrawn a month.
Mr. Burns. Was that fairly typical?
Mr. Conger. Just about everybody in my platoon that signed
up for it had about the same amount of money.
Mr. Burns. Just about everybody?
Mr. Conger. About 45 percent of everybody in my platoon.
Mr. Burns. Okay. And how long was that allotment withheld?
Mr. Conger. I would say----
Mr. Burns. Eighteen months?
Mr. Conger. I believe about 18 months.
Mr. Burns. And again, the challenge that we face is when
you agree to have your pay reduced and diverted, you were
unfortunately not aware of what that was going for. Is that a
fair statement?
Mr. Conger. Yes, Congressman.
Mr. Burns. Okay.
Ms. Jetton, in your testimony, one of the statements that
you made is that contractual plans are seldom--seldom--the best
investment product for these members of the military. Can you
identify times when perhaps they would be?
Ms. Jetton. I think the positive that those plans are
trying to address can be accomplished in other ways more
efficiently; and that is, encouraging people to invest over a
long period of time, to save money. And that is a wonderful
thing to encourage.
But it is not necessary to encourage it at such a cost in
the early years when folks are struggling to meet other
financial demands. In any mutual fund you might purchase,
mutual fund companies may at no additional cost have automatic
drafts withdrawn from one's checking account.
So very often in our practice, we will encourage an
individual to do a savings plan of $100, $200, whatever they
can afford, on a regular basis. They can turn that spigot on
and off at any time with no consequences. And again, they will
pay a lower sales charge of typically no more five, at most
6.5, percent, only withdrawn as they make those contributions.
So I really cannot think of a time when there is not a
better alternative that can accomplish the goals that these are
apparently designed to address.
Mr. Burns. I appreciate the certified financial planner's
willingness to help in the education process, the counseling
process. As an individual, if I were to ask you to evaluate my
financial position and develop a plan for me, what kind of a
challenge would that be? And how much time or how many dollars
might that require?
Ms. Jetton. Congressman, it would depend. Different
financial planners work in different niches. And we tend to
work with middle class. We have a structure where we may work
on an hourly basis with those who are starting out and charge
$100 an hour, just for advice.
We have a signed engagement that every client would sign,
that is basically outlining the scope of the relationship. In
other words, it would say: this is how I am compensated. You do
not have to buy anything from me.
But if you do, this is how I might be compensated. If I am
working with you hourly, we can only cover so much, so be
warned that I may not have a chance to address these issues.
So it is very clearly defined. And that is one of the steps
of the financial planning process that all certified financial
planners must abide by, is first of all outlining the scope.
I might also work in an engagement that is an annual fee,
where it is almost carte blanche service for an individual.
Other financial planners may receive commission as a way to be
compensated for their advice, but they make that very clear.
I guess the point I would make here is that full advance
disclosure is a requirement. And that disclosure includes
specifically how you are compensated.
So if it is a life insurance contract, exactly how much
percentage. If it is a term policy, it is not unusual in the
first year to be paid 90 percent of the first year's premium.
But in the case of a certified financial planner, that has
to be disclosed. The actual dollar amounts and how you will be
compensated must always be disclosed in advance of any
engagement.
Mr. Burns. Okay, thank you.
Mr. Bullard, in your testimony, you were comparing maybe
the Investment Company Act with the statutory Section 27
requirements versus the NASD Rule 2830. Is the solution to
adopt NASD Rule 2830?
Mr. Bullard. Well, I think the problem that we have with
periodic payment plans is that they are periodic, it is that
you can accelerate the payments, as Ms. Jetton was talking
about. And it is the Investment Company Act that expressly
authorizes that.
And it is for that reason, if I were the NASD, I would not
want to touch the regulation of that issue because of the
obvious conflict with federal law. So by repealing that
provision, what you would do is you would let the NASD step in
and apply the same kind of analysis they apply to mutual funds
and probably arrive at the same results, which is to have
similar regulation.
So I think it would be preferable, instead of Congress
trying to continue to be in the business of trying to regulate
with specificity the exact charges that can be imposed on a
product, which is not what I think Congress is best at, instead
to let the self-regulatory organization that knows the product
well, is down there at the grass roots level, to take on that
responsibility, which really should have been done back in the
1970s when it took on responsibility for mutual funds.
Mr. Burns. Should contractual plans be eliminated?
Mr. Bullard. No. I think that if contractual plan means the
ability to sign a contract whereby you would have an amount
deducted on a periodic basis and commit to that, that is a
wonderful product. That is a great thing and is ideally suited
for someone like Specialist Conger.
The problem is if he put his $100 a month in a mutual fund
that was under the kind of sales load I described, they take
$50 out of that $100 and put it in the broker's pocket. And he
only gets $50 invested.
If he invested in a mutual fund with a 1 percent 12b1-fee,
he would pay seven cents instead of $50.
Mr. Burns. Right. Specialist Conger unfortunately was not
involved in a contractual plan.
Is that correct, Specialist? You were involved with a
product that supposedly was a mutual fund, but in reality was
an insurance policy. Is that a fair statement?
Mr. Conger. That is correct, Congressman.
Mr. Burns. And the value, the face value of the insurance
policy was? For that $100 a month, you finally got a copy of it
after repeated attempts. But the face value was, do you recall?
Mr. Conger. Around $2,000, Congressman.
Mr. Burns. Wow. Okay. Now I think we have two problems and
we are just trying to differentiate. But if I understand, Mr.
Bullard, correctly, you feel that the NASD Rule 2830, if it
were allowed to be appropriately applied, could help the
problem?
Mr. Bullard. Right. I imagine that what the NASD would do
would be to eliminate acceleration of payments and subject the
sales holds on period payment plans to the same 8.5 outside
limit and the other provisions as well.
Mr. Burns. Okay, thank you.
I appreciate NAIFA and ACLI's input. And I appreciate their
willingness to work with the committee and the Congress in
helping resolve this problem because I think we all share the
same goal.
We want to make sure that our men and women in uniform and
that serve our nation receive the highest quality financial
products and the best investment advice and the best insurance
advice. And to my good friend, Mr. Emanuel, I am delighted to
know that his ideas are well received. And we will work
together to find opportunities to craft legislation.
This committee has been exceptionally helpful in not only
providing the hearing, but in addressing the issue that has,
for years, been unfortunately ignored. And we do have some
challenges in the Department of Defense. And I do agree that we
need some kind of a mechanism for the monitoring and reporting
and management of those who might abuse their privileges on one
base, to make sure that they do not just go to a different base
or go to a foreign installation.
So I think all of those things are challenges that we can
address within the legislation that I have proposed or within
the legislation that will come out of the discussions we are
having today and other members' input. And I thank the chairman
for the opportunity to be here and yield back.
Chairman Baker. I thank the gentleman. There being no
further members for questions for this panel, I want to express
to each of you my appreciation for your patience and
participation today. It has been most helpful.
The hearing today is certainly not the conclusion of our
work on this matter. But your testimony has been most helpful
in taking us to the next step.
The committee does reserve the right to have additional
questions forwarded to each witness within an additional 5
days. Thank you very much. And this panel is dismissed.
Mr. Conger. Thank you, Chairman.
Chairman Baker. I would like at this time to proceed with
our second panel. We have appearing with us today: Mr. Lamar C.
Smith, chairman and chief executive officer, First Command
Financial Planning, Incorporated; and Mr. Joe W. Dunlap,
executive vice president, operations, American Amicable Life
Insurance Company of Texas.
And I do wish to extend to you my appreciation for your
willingness to appear. Others were asked to come today and had
scheduling conflicts.
Under our normal committee procedures, you are encouraged
to make your statements within a five-minute period. In light
of the number of members actually participating at this time,
certainly liberties will be given on that. But your full
statement will be made part of the official record.
Mr. Smith, please proceed as you wish.
STATEMENT OF LAMAR C. SMITH, CHAIRMAN AND CHIEF EXECUTIVE
OFFICE, FIRST COMMAND FINANCIAL PLANNING, INC.
Mr. Smith. Thank you, Chairman Baker. I am Lamar Smith,
chairman and chief executive officer of First Command Financial
Planning. It is my privilege to lead this 45-year-old company,
which is 100 percent employee-owned. I have been with the
company for 29 years and served at most levels within the
company.
We are the largest provider of financial plans to the
military families in the leadership ranks. We currently serve
305,000 client families including 129,000 who are still on
active duty. We only recommend products offered by the leading
insurance and investment companies.
I would like to address three issues in my statement today.
First, I want to correct certain misimpressions about First
Command. These misimpressions have been continued here this
morning in the testimony and in the questions.
First Command is not the company recently portrayed in the
media. In fact, First Command has been a leading voice for
reform and improvements within our industry. And we renew that
call today.
Therefore, in my second point, I would like to highlight
four reform recommendations that we detail on pages five and
six of our written statement. Several of these proposals are
extensions of recommendations we presented last year at a
Defense Department public forum.
Third, I want to comment on the systematic investment
product known as ``contractual plans,'' which is a subject of
today's hearing. Please allow me to commend the members of the
committee for investigating sales practices that target junior
enlisted servicemembers with questionable financial products.
At the same time, let me take a moment to ensure there is
no further misunderstanding about First Command, information
which is outlined in greater detail on pages two and three of
my written statement.
Please listen carefully.
First Command does not solicit business from junior
enlisted servicemembers. We serve the military's leadership
ranks of senior sergeants and petty officers, warrant officers
and commissioned officers of all grades, including the flag
ranks.
Unfortunately, the recent press reports confused this
point. And there has been a great deal of confusion in the
marketplace and this morning in this hearing. And I call on
members of the press who are here present to straighten out
that misunderstanding in any reports going forward.
Further, First Command does not recommend life insurance
for savings or investment purposes. First Command does not sell
at mandatory formations.
We are honored, as the market leader, with a 20 percent
market share. Further, 90 percent of our clients recently
surveyed said they would recommend us to their peers.
We take our mission as a company seriously, serving those
who serve all of us in the defense of freedom and democracy.
Keeping faith with this goal is our highest priority. That is
why, as detailed in my written statement, we are proposing the
following four recommendations to help address some of the
matters before this panel.
One idea: require junior enlisted personnel to meet with a
specially trained independent counselor from their installation
prior to enrolling in a financial product affecting their pay.
Secondly, create a centralized DOD registry of agents and the
companies that they represent to identify trends and any
unscrupulous practitioners.
Thirdly, require companies to provide lapse rate date,
which refers to the rate at which purchasers on average
terminate a given financial product. A low lapse rate indicates
the marketplace values a product and receives a benefit from
it. A high lapse rate indicates the contrary.
Concerning contractual plans, we support extending the
period of time from 18 to 36 months in which a purchaser can
terminate a plan and receive a substantial refund of their
sales charges. Further, the portion of the refund should be
increased.
This brings me to my final point, a further word on
contractual plans. These plans are only recommended to
investors who have long-term goals for wealth accumulation,
such as most of our clients, who will likely enjoy many years
of steady employment.
Critics have implied that contractual plan customers are
somehow locked into these plans. No one is locked into them.
The contractual plan purchaser can terminate his plan at any
time.
Since we are here to seek ways to protect and serve
military families, I would like to read a few passages from
letters we have received from our clients very recently.
First letter, just a passage, that is written by a military
wife: ``I firmly believe in their systematic programs for
making payments to my investments. If they had not made it so
easy to do my investments through systematic monthly payments,
I would not likely have any kind of retirement plan.''
A passage from a second letter: ``Looking back over the 11
years of our association with First Command, Frank and I have
moved from being essentially newlyweds with no plan for our
financial future to now. Frank is a colonel approaching
retirement. And we are within a few years of complete financial
independence.''
``It is amazing how far we have come in little more than a
decade. We both consider the discipline required by our
systematic investment plan as the key to that remarkable
progress.''
Another letter: ``I have been so pleased with the programs
that First Command developed for me that I referred both my
sons to them. Both boys are in their mid-20s and have started
systematic investment plans recommended by First Command, so
they too can be financially prepared for retirement.''
And lastly: ``In the 12 years we have been clients, we have
been relocated nine times.'' That is very typical, by the way,
in today's military. ``Always, it has been a smooth transition
with First Command. And we have never been without a
representative to help us answer questions.''
``We believe that it is a great company. And we are
thankful for their guidance and support.''
We believe these statements are common among our clients. I
do look forward to answering your questions. And I want the
distinguished members of this panel to know that First Command
stands ready to work with you and to support whatever course of
action Congress takes.
Thank you.
[The prepared statement of Lamar C. Smith can be found on
page 129 in the appendix.]
Chairman Baker. Thank you very much.
Mr. Dunlap, proceed at your leisure.
STATEMENT OF JOE W. DUNLAP, EXECUTIVE VICE PRESIDENT,
OPERATIONS, AMERICAN AMICABLE LIFE INSURANCE COMPANY OF TEXAS
Mr. Dunlap. Chairman Baker and members of the subcommittee,
thank you for the opportunity to appear before the committee
today. My name is Joe Dunlap. And I am here on behalf of the
American Amicable Life Insurance Company.
I have worked at American Amicable for 26 years and have
served as executive vice president of operations for the past
1.5 years. Prior to that, I served as vice president of policy
administration for 18 years.
On behalf of American Amicable, I would like to commend the
committee for holding this hearing today. We believe that our
company--and, more importantly, our customers--benefit when all
salespeople and agents from all companies selling financial and
insurance products and services comply with the applicable
rules and regulations.
We also support all reasonable efforts that can be made to
provide additional financial education opportunities to
military personnel to help them make informed financial
decisions for themselves and their families.
We believe that those who have a high level of
understanding about our products and the other financial and
investment products sold within the military bases will benefit
substantially.
On behalf of American Amicable, I also want to commend
Representative Burns' and Representative Emanuel's legislative
proposal and to say that we support the insurance provisions as
we understand them today, including a stronger role for the
state regulators in regard to on-base military sales. American
Amicable does not sell the other investment products that are
addressed in the proposed legislation
Our company, American Amicable Life Insurance Company of
Texas, dates back to 1910. Today, it is part of the American
Amicable Group, a nationwide company that provides benefits and
protection to over 180,000 policyholders.
We sell life insurance. We do not sell mutual funds.
The majority of our military business today is sold off-
base. And one-third of our Horizon Life policyholders are
civilians, not military.
Over the past 20 years, the group has paid more than $428
million in death benefits across the full line of business.
Last year alone, we paid $8.2 million in death claims on
policies issued in the military market.
To date, we have paid nearly $1.5 million to beneficiaries
of servicemembers who unfortunately lost their lives in Iraq.
We are proud of the service we provide to our customers,
including many members of the U.S. military. But we are not
proud of the conduct of the agents who sold our products at
Fort Benning and Camp Pendleton in a manner totally
inconsistent with our compliance policies.
While those agents constitute a small percentage of the
nearly 3,000 independent agents who are authorized to sell our
products, there is no excuse for their conduct. It is
inconsistent not only with our standards and policies, but with
the certifications we require our agents to sign, pledging
compliance with all military, state and local regulations.
I want to assure you that we take these matters very
seriously and expended a considerable amount of time, resources
and effort to investigate these matters and take corrective
action, to include terminating the agents that were involved,
terminating their contracts, offering full refunds to all
affected policyholders, developing new and improved compliance
programs, including a new agent audit system that includes
surprise inspections of field agent offices that we believe
will make us an industry leader in compliance.
And further, we are working with outside counsel today on a
companywide investigation of agent compliance. We do not want a
single member of our armed forces to feel taken advantage of by
our products or by the agents who sell them.
But I want to make clear that we believe our Horizon Life
policy, which we market to both military and civilians, is a
strong product. It offers benefits to our military
policyholders, such as the ability to accumulate cash with no
load whatsoever, not provided by the Servicemembers' Group Life
Insurance subsidized by DOD.
I want to emphasize that we market Horizon Life as a
supplement to, not a replacement for, SGLI.
Thank you, Mr. Chairman and members of the committee for
your time and attention today. We at American Amicable pride
ourselves on our integrity. We have already taken corrective
action regarding the incidents at Fort Benning and Camp
Pendleton. And we will take any additional action that is
warranted by our continuing investigation.
We would be pleased to work with the committee to assist in
the development of legislative measures to strengthen the
financial education of our customers and to improve and better
regulate the sales practices of companies who sell mutual
funds, other investment vehicles, financial products and
insurance policies on military installations.
I welcome your questions.
[The prepared statement of Joe W. Dunlap can be found on
page 92 in the appendix.]
Chairman Baker. I thank you both, gentlemen. You do come in
to an environment where strong opinions are already
established. And in that light, I have just a brief set of
slides I want to show you.
[The following information can be found on page 157 in the
appendix.]
They are going to bring you, because it is on the wall
behind you and I do not want you to have to turn around, they
will present you with a hand copy. This is just a typical
Horizon Life presentation sheet, just promotional in nature.
It is what the young man who was here earlier would have
gotten, talking about the potential return for Horizon Life.
And it is not really very descriptive of what the product is
about.
Next slide. This gives sort of the rates of return. You
focus more on that annuity accumulation thing, where the
annuity and the life policy benefits kind of get cloudy.
If you read real close up at the top, then you can see that
it is referencing a life policy. But the big things that catch
the eye of someone is: ``You give us your money.'' As a matter
of fact, that is the line below the box that has the big word
``opportunity'' in it.
``You provide the time,'' meaning you stay alive. ``You
give us your money. And then we are going to take care of
you.''
And then those numbers in those blue boxes down there are
very important. I will come back to that with some other
additional data. I did not have time to get the chart prepared.
Go to the next slide. And this is just a typical
demographic so the committee has an understanding: 24; $30,000;
ranking three and up; typical service time, 7 years. That is
important for everybody to remember.
Next slide. Now here is the thing that is perhaps the most
striking. When you look at the Horizon Plan and your premium of
$900 and the death benefit of $20,950, contrasted with the
militarily available program of $240 annual premium for a
$250,000 government benefit, this is where we begin to question
the value of that life product.
And although it is supplemental to the military offering,
why would most young people with few assets, few debts, headed
to military service, concern themselves with coverage in excess
of $250,000? I am not sure. But this helps to frame the problem
in my mind as to the appropriateness of it.
Next slide. This looks at it over the 7-year term. Now the
reason for the 7-year term, its significance, is this is the
timeframe over which the average military term lasts.
So the typical retiree would have $4,945 paid in within the
earned benefit of $20,950. You would have, in term premium paid
into the government program, $1,680, with still the $250,000
coverage for that same period.
Next slide. And this is sort of an annuity, which most of
those young men do not really understand very well. What is
extraordinary about it is that in year 1 and 2, you note that
you are actually in a negative return rate position, which as I
understand, if someone were to choose to leave, there are
significant consequences to that.
You do not get back to break even until just at year 2. And
you track it on out all the way to the end and you are at about
3.75. That is also significant because there is a guaranteed
effective rate return of 4 percent.
But that is exclusive of sales and commission cost. So you
are actually netting about 3.75, 3.8 percent, depending on the
performance of the markets.
That is it. And the reason why I just wanted to get those
facts into the debate, when we go to Fidelity's--this is the
prospectus of a November 28, 2003, so I am using Fidelity's
data--and we look at the annualized 5-year rate of return for
Fidelity Destiny I, it had an annualized 5-year rate of return
of--20.27 percent.
Now that was a rough period in the market. So we chose the
S&P 500 index as a comparable, which is available through the
thrift savings plans, which federal employees have and now
military personnel have access to.
They would have earned a paltry 1.13 percent, had they been
in the TSP. But that is still a 21.5 percent improvement over
the Fidelity Destiny I product.
The facts are what trouble me here. It is that no matter
how I come at this, who is it that designs the product and
recommends that this be marketed?
I am not alleging you gentlemen are devising the product
and intentionally going out and selling young people things
that they do not need. From your testimony, it is clear you
believe you are, in fact, providing a service that otherwise
would not be made available.
But in the free market, if we had base commanders in the
position to allow 20 companies on the base and had an insurance
seminar and let people go around and pick what they wanted, I
do not see how you survive in the comparison.
I will state it another way. If you had the choice to buy
your life product at a monthly premium of $75, which is what it
works out to be, with a guaranteed $20,950 life benefit, versus
a military product at $20 a month for a $250,000 life benefit,
which one would you buy?
Mr. Dunlap. If I may, Mr. Chairman, can I explain or
provide you comparisons?
Chairman Baker. Please.
Mr. Dunlap. Okay. As I said earlier, the Horizon Life
product is absolutely not intended to replace Servicemembers'
Group Life Insurance. In fact, we think that SGLI is a very
good product. And certainly, we do not encourage any soldier to
drop that coverage.
But to compare Horizon Life to Servicemembers' Group Life
is very much an apples and oranges comparison. And if I may, I
would like to give you just a few additional provisions about
Horizon Life that hopefully will serve to distinguish it from
SGLI.
Horizon Life is a combination of life insurance and an
accumulation fund. It has two distinct components. But it
always has these two components.
There is a seven-pay, 20-year term life insurance coverage
in the product. By seven-pay, I mean that the premiums for the
life insurance are fully paid up in 7 years.
Chairman Baker. Isn't that because most servicemen leave
the service in 7 years, so you make sure you get your premium?
Mr. Dunlap. No, sir. We do not make that correlation.
Chairman Baker. Then why would you pick a 7-year period to
get a repayment? Why would you do that?
Mr. Dunlap. I do not know.
Chairman Baker. I was not alleging you were doing it. I am
just saying, I am looking at it across the desk and saying,
``Okay, why would I pay up 7 years for a product that has a 20-
year life span?"
Virtually everything else you buy, the amortization
schedule fits with the life of the product or close to it.
Mr. Dunlap. Mr. Chairman, the product is sold as a long-
term commitment. It is emphasized to the purchaser that it is a
long-term commitment.
We have a building success program that we use in the
majority of our field offices today. And it emphasizes just
that. It does a needs-based analysis of the ability to pay.
And it also emphasizes the fact that this plan is a long-
term commitment. That is the way that it works to the benefit
of the customer.
Chairman Baker. Now on your point about a needs-based
ability to pay, are you suggesting that you sit down with an
individual enlisted person, you get his financial condition and
then you develop a product that fits his particular need? I
thought this was pretty much a standard, boilerplate, $20,950
guaranteed death benefit. The annuity is on top of the life
benefit.
Mr. Dunlap. Part of the building success program does
analyze the existing debts and payments that the applicant has.
Chairman Baker. And what effect does that have on the
premium or the benefit?
Mr. Dunlap. I would assume in some cases that the agent
would sell either a higher or lower premium, depending upon the
facts that he determined through that analysis.
Chairman Baker. So that you have a higher or lower benefit?
I am not following. I thought we were looking at sort of a
fixed package here.
Mr. Dunlap. Certainly, you can pay a higher premium and
have a higher death benefit or a lower premium with a lower
death benefit.
If I may continue, Mr. Chairman, with a couple of other
aspects of the product? As I was saying, the life insurance
element is fully paid up after 7 years. At the end of the 20-
year term period, all of the life insurance premiums are
returned to the policyholder.
In year 2, the premium reduces by 25 percent. And in years
2 through 7, that premium is the amount payable. After 7 years,
the life premiums are fully paid up.
I should add that not only does this product not have a war
clause, none of the products that our companies offer today
have a war clause; in other words, a clause that would prevent
the payment of a death benefit in the event that death occurred
in a war zone or due to hostile combat. In fact, this product,
the Horizon Life product, has a benefit that, after the policy
has been in force 1 year, the face amount is increased by 50
percent in the unfortunate event that death occurs in a combat
zone.
And in fact, we have had a number of those cases in Iraq,
unfortunately.
Chairman Baker. I would hope that would be the case. My
goodness, if you were selling a policy to an enlisted military
personnel about to be deployed to an active theater and you
would have an exclusion for war, there would be a reaction in
this room that would be--let me put it this way, that did not
help your defense. But please proceed.
Mr. Emanuel. Yes.
Chairman Baker. Mr. Emanuel says ``yes.''
Mr. Dunlap. The other element is the accumulation fund. The
accumulation fund does not have any loads. You deposit money
into the accumulation fund, it goes into the accumulation fund.
There are no loads.
There is a 5-percent withdrawal charge in the event that
money is taken out during the first 10 years. After 10 years,
there is no charge for withdrawals at all.
The current rate on the money in the accumulation fund is
6.5 percent. The guaranteed interest rate on the fund is 4
percent. And in fact, the historical average of the fund, I
believe as I understand it, is approximately 10 percent.
Chairman Baker. I am sorry, I did not mean to cut you off.
Do you have further comment?
Mr. Dunlap. I have gone to the FirstCommand.com Web page
and looked at--well, this is called Cardinal Cornerstones. And
in it, we discuss the availability of seminars. And in the
explanation of the benefit, attending the seminar, it is
described as ``no get rich quick schemes.''
That is the first thing that I found that is probably right
on target. And I have reviewed all of the marketing information
associated with the First Command product line.
I still do not have a good understanding as to how you feel
that the rate of return for the individual involved in your
product is being well served, given the information we have
been provided. And I want to give you every opportunity to make
us understand that our impressions of performance are not
accurate. Can you help me?
Mr. Smith. I would be pleased to, sir. Perhaps the best
thing to do is to give you my personal example as a starting
point.
I was a 29-year-old Air Force captain in 1976, back from
Vietnam, newlywed. My wife and I were trying to get ahead. We
had bought an annuity that did not seem to be promising too
much.
We were saving a little money. We were not overspending.
But we were trying to get a bead on what the long term
looked like. And I received an invitation in the mail to one of
those seminars. And it was interesting to me. So my wife and I
attended.
It was off the base. It was mostly my peers were in
attendance. They were officers from the base in those days. And
it was an informational and motivational seminar that gave me
some ideas about how to structure a blueprint for success that
would make sense.
I was then given an opportunity to have a personal
financial plan developed. A representative came to our home in
those days; we now work in offices.
He took a lot of information. He sat with my wife and I. We
clarified our goals. We answered his questions.
He went away. And a plan of recommendations came back. It
addressed insurance. It was very needs-based, which is a term I
have heard here today that we subscribe to greatly.
The purpose of insurance is peace of mind and then actual
benefit to survivors if death occurs. And I got a lot of peace
of mind from knowing that my insurance was straightened out.
It contained savings recommendations. Savings are
appropriate for near-term planned spending needs and emergency
purpose. And the savings component of a plan is very important
to protect the investment component, which fluctuates in value
if it is equity-based, if you are investing in stocks or stock
portfolios, which fluctuate in value. And it contained a
recommendation for a Fidelity Destiny contractual mutual fund
plan, 1976.
We bought it, $150 per month. That year, I made $22,700 as
an Air Force captain on flying status. So $150 a month was not
insignificant.
Today, that plan has been face changed increased. And I am
investing $1,000 per month in that plan, that same plan. I have
missed 4 months in all of those years.
And after that brief period of income interruption was
completed, I made up that lost time. So essentially, I have not
missed any lost time since 1976 in investing monthly.
I have invested $179,000 out of pocket, real money, my
money, into that plan. I can liquidate it today for $531,000.
Chairman Baker. Over what period of time? I am sorry.
Mr. Smith. Since 1976 to about 3 days ago when these
calculations were done.
Chairman Baker. Have you ever taken that same set of
figures and cranked it into, say, an S&P 500 rate of return or
a no-load mutual fund return or any other program?
Mr. Smith. Certainly it can be compared. And I have not
specifically done that, but that is easily done.
Interestingly, my brokerage on that account is a hair under
3 percent at that point. And that is not the only contractual
mutual fund account my family and I own.
We have six accounts. We have invested $438,000 out of
pocket. And we have a bit over $1 million in there, including
my only daughter's college money.
She is an entering freshman at Wake Forest. And her
$120,000 for that experience is sitting in her contractual plan
in her name, having invested for, guess what? 18 years.
Chairman Baker. That has to be the trick, the fact that you
were able to be in control of that fund for 18 years and not
have her elect to make an early withdrawal. It is that point
that is the key on which your plan works.
Mr. Smith. Yes, sir.
Chairman Baker. It is a rare set of individuals who are
going to put money at risk and leave it in the market for 18
years. In this case, it was your infant child in whom you made
this appropriate decision.
Almost investing in anything for your child over 18 years
is better than no investment at all. My point is that the
extraordinary front-end costs associated with participating in
these plans has led the private market to all but eliminate
them from offering to traditional civilians.
If this is such a great product, why isn't it offered to
the civilian marketplace?
Mr. Smith. Thank you for the question, sir. Mr. Emanuel
indicated that the contractual plan industry is about $15
billion. We have a hair over $9 billion invested from our
clients. So it is being sold.
We understand from the plan sponsors, the big mutual fund
companies that offer these, that there are 106 brokers who have
sold these plans in the last 2 years. Now we do sell the
majority of them. But it is sold in the civilian world.
Chairman Baker. By majority, that would be like X percent?
Mr. Smith. We understand that we represent about 70 percent
of the sales.
Chairman Baker. I thought it was closer to 90, but that is
okay.
Mr. Smith. I am giving you the information that I have from
them.
Chairman Baker. Sure.
Mr. Smith. Also, there is some confusion, I think, based on
earlier comments, about them being illegal in the civilian
world. Not true. They are specifically authorized by the
federal law.
And there is no different set of laws--federal laws--that
pertain to military installations and military personnel. And
your comment was that my infant daughter, who did not have any
choice and I did it for her, had the discipline.
Part of the answer to your question is that this product is
ideally suited to people who have steady income, relative
insulation from financial catastrophe, who have the ability to
understand commitment and planning and to make plans for their
long term and commit.
Chairman Baker. Mr. Emanuel?
Mr. Emanuel. Mr. Chairman. You would agree though, Mr.
Smith, nobody said they were illegal. They were discouraged
over a long period of time.
Pretty much of the $15 billion that exists in contractual
mutual funds, almost 90 percent, if not all, are in the
military. Correct or incorrect?
Mr. Smith. That is not my understanding, sir. And I am not
here to speak for the entire industry. I am here to answer
questions about our firm.
Mr. Emanuel. That product has been discouraged by the SEC
in the general public; is almost nonexistent as a product being
sold in the general public; and of the $15 billion out of $7
trillion in the mutual fund industry, almost all of it is held
by individuals in the military. And so you may not know that.
But given that you sold 70 percent of it and your company sells
it, I find it hard to believe that you do not know that
information.
And if you have information to refute it, I would be
interested. But right now, that is what is in the public
knowledge, that basis.
Mr. Smith. I can speak to the $9-plus billion that we have.
And it is mostly military. It is almost all military.
Mr. Emanuel. I appreciate that.
Mr. Smith. And I am not here to refute.
Mr. Emanuel. Okay.
Can I ask another question?
Chairman Baker. Oh, please proceed. I have abused the time,
so please go ahead.
Mr. Emanuel. Mr. Smith, to follow up, what percentage of
your product mix is contractual mutual funds? And I have a
follow-up question on how you compensate your agents.
Mr. Smith. Of the mutual fund operation, it is about 70
percent. Of the company at large, the revenues from contractual
plans is about 20 percent.
Mr. Emanuel. Okay. But in the mutual fund area, it
represents 70 percent. And you represent about 70 or 80 percent
of that market?
Mr. Smith. We understand 70 percent.
Mr. Emanuel. Okay. And almost all of it is held in the
hands of people that are servicemen and women.
Mr. Smith. Yes, in the leadership ranks.
Mr. Emanuel. Okay. Second, in the compensation, in that
area for your agents, do you have an open architecture? How are
they rewarded in the selling of contractual mutual funds versus
other products? Do they get a higher fee?
Mr. Smith. The reason for the contractual plan----
Mr. Emanuel. No, no. I asked you: how do you compensate
your agents?
Mr. Smith. We compensate them from the first-year
commission, which is where the commission is, which mirrors the
effort to create the sale, to create the service, to create the
investor. That is the piece that is missing, Mr. Emanuel.
The big problem in this country is the savings rate. People
are overspending. Credit card debt is going up; Personal
bankruptcy. And those same features are represented in our all-
voluntary military force.
The problem is not that they have the wrong investments; it
is that they are not saving. It is that they are running up
their debts and they do not have a plan for the future.
Our representatives spend time with these precious people
and create a financial awakening. We help them get a spending
plan on the table.
Oftentimes, we will help them cut up their credit cards.
And we help them become savers and investors. That is immensely
valuable.
Mr. Emanuel. Mr. Smith, I do appreciate that. I agree with
you that we need to have general savings in our society better
than the consumption that goes on. But I asked you about the
compensation of your agents.
But I will take that answer as is. Let me ask you this
question: is there any scenario that you can have that you can
describe, or any circumstance that you can describe, in which
your product--the contractual mutual fund--is less expensive
than a no-load savings?
Mr. Smith. The no-load implies or the typical term ``no-
load'' means that there is no brokerage. That does not mean
that there are not fees.
Mr. Emanuel. Okay.
Mr. Smith. There is an expense to operate the fund. It is
an expense ratio that is attached to----
Mr. Emanuel. We have spent a lot of time here on 12b1-fees
and associated costs, so we are okay.
Mr. Smith. There are no-load funds with higher expense
ratios, which when you do a hypothetical run out or an actual
experience over a lot of years, where the total expenses
charged against the portfolio actually exceed the expenses and
the brokerage charged against the contractual plan. They do
exist.
Mr. Emanuel. I am done.
Chairman Baker. Thank you, Mr. Emanuel. I am waiting----
Mr. Emanuel. Thank you very much for being here.
Chairman Baker. I am waiting on Mr. Burns to return. And in
that brief moment--I will hold my questions until Mr. Burns is
done.
Mr. Burns?
Mr. Burns. I apologize for having to step out. I had some
constituents here that needed just a moment of time.
I appreciate both of you being here. I know that sometimes
criticisms have been public and heated and demanding. And I
appreciate the fact that you are willing to come and you are
willing to help and you are willing to work through this
process and to find a solution that will be in the best
interests of the clients that you have.
I have just a number of questions that I want to try and
ensure. And I know that the chairman and Mr. Emanuel covered
these. But there is always the question, as we look at
insurance.
The young man who was with us in the first panel was from
Fort Bragg and with the 82nd. Was he advised clearly about the
SGLI availability, Mr. Dunlap? Do you know?
Was he informed? Did he have full disclosure? Was there
transparency in this transaction?
Mr. Dunlap. Congressman, no, I do not know that for sure.
Obviously, there were some sales malpractices that occurred at
Fort Benning. So I certainly do not know that for sure.
I do know there was a mention, in fact a documented SGLI
coverage amount of $250,000 on the Army insurance solicitation
form that came in with the application. But no, I do not know
if he was advised of that. No, sir.
Mr. Burns. Was it common practice for agents who may have
marketed your products to present financial planning seminars
in a group form? Was that typical or common practice?
Mr. Dunlap. Congressman, we do not think so. We are very
disappointed in what happened at Fort Benning. And we are
trying to take remedial actions to guard against those things
happening again.
Mr. Burns. Were senior NCOs or junior officers compensated
in any way to promote or provide access to an agent that might
market your product? In other words, was there any form of
remuneration or compensation to that drill sergeant who said,
``This a good deal, you ought to sign up?"
Mr. Dunlap. Congressman, I do not know. I have seen the
investigative file at Fort Benning, which is heavily, heavily
redacted. And I do not recall any reference to that in the
investigative file.
Mr. Burns. I think that is a tough question, but we have
to--the reality of life is certain agents were given certain
access. And they violated standing DOD regulations. And the
question is: what motivated those individuals to do that?
And again, I want to thank you for accepting the challenge
of dealing with the problem and recognizing it. Do you sell a
term life policy that does not include an annuity?
Mr. Dunlap. Yes, we do have one pure term life policy that
does not include any accumulation element to it. Yes,
Congressman.
Mr. Burns. And again, I think part of the challenge we face
is that as these products were marketed, they were not always
clearly defined. In many cases--or, I should say, it appears
that at least in some cases--individuals signed up for things
they did not know what they were signing up for. And that is
disturbing. So I think disclosure and the distinction between
insurance and investments.
Now in your program, you refer to ``the fund.'' Could you
expand a little bit on the fund? You say you do not sell mutual
funds, so this is not an instrument that you would take these
dollars and purchase Fidelity or some other mutual fund
investment, I assume.
What is the fund?
Mr. Dunlap. Each Horizon Life policy has two components:
the life insurance component and the accumulation fund
component. The accumulation fund is a no-load fund. There are
no charges, no deductions for deposits made to the fund.
The current interest rate on that fund is 6.5 percent.
Mr. Burns. Right. And the minimum guaranteed is four. I
heard the testimony. Now my question is: what do you do with
the money? Where do you invest it?
Is this something that American Amicable invests? And is it
not put into a particular mutual fund or a particular strategy,
perhaps, as the chairman suggested, maybe an S&P 500 index or
whatever?
Mr. Dunlap. No, it is the funds accumulated for the benefit
of the customer. But there are certainly no separate investment
objectives for money in the accumulation fund.
Mr. Burns. It just sits there?
Mr. Dunlap. Well, obviously----
Mr. Burns. It has to be managed. My point is it has to be
managed.
Mr. Dunlap. Obviously, the company has an investment
portfolio, as all companies do.
Mr. Burns. Right.
Mr. Dunlap. And those funds are managed.
Mr. Burns. But the purchaser of the product would not in
any way have control over how those funds are invested. Those
are pretty much the determination by your investment
specialists?
Mr. Dunlap. That is correct.
Mr. Burns. Okay. As we look at contractual plans, I think I
appreciate the input and the testimony. And I have tried to
understand the challenges associated with those.
And again, we have talked about contractual plans being
marketed in the military environment and not being marketed to
the general public. Is there a specific reason for that?
Mr. Smith. I believe so, Mr. Burns. The financial services
industry--the brokers and the financial planners--have limited
services available and limited attention given to the beginning
investor. And I think that what has happened with the
contractual plan being less available in the civilian world is
really a part of a bigger picture of the industry moving away
from those who do not already have sums to invest accumulated.
The typical broker and financial planner today that is
brokerage-based is looking for people who generally have
$100,000 or more of investable income and can supplement that
with on the order of $10,000 a year going forward. It is
uneconomic, as a matter of fact, to spend the time necessary to
do a lot of financial planning, of the type Ms. Jetton talked
about.
She talked about a $100 per hour fee. Our representatives
spend between nine and 17 hours with the clients and additional
time on the case, working up the financial plans that we
provide, which are comprehensive.
And that is an expensive process. And if the client is
going to get the benefit, if the consumer is going to get the
benefit, somebody has to pay for it. And generally, that has to
be the consumer.
There are various models and ways for that to happen. Very
few beginning investors, however, who are debt-ridden and
stressed or they are just really getting started, even though
they are in a position to get started financially, very few
understand the benefit of the planning process and the advice
given.
The contractual plan is a great way for us to reach our
military customers. The reason they are still sold in the
military is, I think, First Command. We are committed to this
market.
They are generally beginning investors. And the contractual
plan product is a model, which is legal, authorized in the
federal law and which has worked well and which our clients
appreciate and find benefit from.
Mr. Burns. Mr. Bullard in his testimony, I had asked him
the question about the statutory Investment Company Act versus
the NASD limits. If we adopted--if we repeal the statutory
regulations on contractual plans and set NASD or allowed NASD
to set the limits on sales loads, how does that affect
contractual plans?
How does that affect the marketing of contractual plans?
And again, civilian versus military?
Mr. Smith. That is for me, sir?
Mr. Burns. Yes, sir. Please.
Mr. Smith. I would believe that if Section 27 of the
Investment Company Act of 1940, amended in 1970, is amended in
the way that your bill calls for, that basically the
contractual plan product would go away.
Mr. Burns. What if it was an NASD as opposed to ban?
Mr. Smith. It is difficult for me to predict how the
regulators would view it. But it would be my estimation that
the result would be about the same.
Mr. Burns. Okay. Mr. Bullard also made a comment in his
testimony--and you may not have had a full copy of it--but in
his comment, he said that the level of compensation paid to
brokers who sell the periodic payment plans--I am quoting him--
"virtually assures that abusive sales practices will be more
egregious and frequent than for other products.''
How do you respond? He suggests that because of the front
load, that abusive sales practices would be more egregious and
more frequent.
Mr. Smith. Well, sir, at First Command, we enjoy the client
relationships that I have already described in the leadership
ranks of the military. These include 40 percent of the general
officers on active duty today, in excess of about 30 percent of
the commissioned and warrant officers and about 16 percent of
the senior NCOs.
These are people with judgment. These are people with
education. These are people who are used to decisionmaking and
taking lots of data.
If they were being ill-served, they would speak up. And
yet, if you review our complaint history, our consumer
complaint history----
Mr. Burns. It is very nominal.
Mr. Smith. There is very little. The people who know us
best--our clients--enjoy the relationship and feel that they
benefit from it. And the numbers support that.
Mr. Burns. Let's shift back to the insurance world for just
a moment. In the agents' environments, these are independent
agents that are marketing products that you would provide. Is
that correct, Mr. Dunlap?
Mr. Dunlap. Yes, they are independent.
Mr. Burns. They are independent agents. One of the
suggestions that has been made today is a registry of bad
apples. And again, another suggestion was a disclaimer on some
other products.
But let's talk about federal oversight and state oversight
of insurance products marketed on our military bases. Your
agents tend to be licensed within a state. Is that a fair
statement?
Mr. Dunlap. Yes.
Mr. Burns. They are all licensed by a state either in
securities or insurance or both. I think the clarification--I
do not see any dissension as far as clarifying the position
that insurance agents should be under the jurisdiction of the
state that the military installation resides. I do not see any
dissension there. Do we agree on that?
Mr. Dunlap. Absolutely.
Mr. Burns. My question then becomes: how do we deal with
foreign installations? How do we deal with foreign
installations where there is not an insurance commissioner on a
foreign base? And I am asking for input.
Mr. Dunlap. Well, that is a good question. And in fact, I
think one comment that Governor Keating made earlier, which I
thought was very good, is there needs to be increased
coordination between the Department of Defense and the state
insurance departments, in terms of identifying what these
problems are and making sure that the information is
communicated to the people that can take action on them.
Mr. Burns. There have been several suggestions just in
casual dialogue. But it could be the home-based installation.
For example, I have the 3rd Infantry Division, which is at
Fort Stewart, Georgia. They were deployed to Iraq. They tend to
receive multiple deployments over time.
If they were marketed a product, it could be at their home-
based installation. Some of these are permanently assigned
overseas.
They might be associated with a particular command. Or they
may be associated with an individual's home community. Or they
may be associated with the agent's home state.
So there are any number of options. And I am just saying we
have to address that issue.
I think the problem that we face is we have to provide
effective oversight and effective control and management in the
sale of a product that is in the marketplace. And your agents,
when they market your products off of a military installation,
they certainly adhere to those regulations and those guidelines
within a state, for example.
So if they are not in Fort Stewart and they are in
Savannah, Georgia, then they are under the insurance
commissioner in Georgia, who I think has done an excellent job
of managing and monitoring that. We can clarify that. I think
part of the challenge is: how do we deal with it from an
international perspective?
Mr. Smith. Mr. Burns?
Mr. Burns. Yes?
Mr. Smith. May I comment?
Mr. Burns. Certainly.
Mr. Smith. I would suggest that the DOD develop rules or
strengthen their rules, that any agent that is going to market
in aforeign area must have a stateside license in some state
and that be on file with the installation. And he has to live
by those rules, the rules of that state. And if there is a
problem, then the insurance commissioner in that state has
jurisdiction.
Further, Congress may consider in this connection
encouraging the states, through the NAIC, through model
regulations, for the states to adopt regulations in their
states that require insurance agents who market to the military
who are registered in their states to comply with the military
regulations. And that gives an additional tooth to the state
regulation if there are violations of military regulations.
Chairman Baker. Mr. Burns, if I could get you to yield for
a moment? Mr. Emanuel had another question before he has to
leave.
Mr. Burns. Certainly. Be happy to yield.
Mr. Emanuel. Thank you, Mr. Burns. In 2000, if I am not
mistaken, military men and women were allowed to get into the
thrift saving plan that we have access to as members of
Congress. And my gut tells me that their involvement--and it is
a good enough plan for members of Congress and I think it is
actually not just a good enough plan, I think it is an
excellent plan--that plan has become a competitor to the
contractual mutual fund.
And I believe that these should be banned and, if we cannot
ban them, a clear warning be put on them. But now that we have
another savings vehicle as a 401(k) plan, the type of thrift
saving plan that we have that now the military can get in, that
is that market opportunity and that choice that will steer
them. And I would be interested: do you have any records of
what has happened to your selling of your products since 2000?
Mr. Smith. Our sales are stronger today than they were
then. However, Mr. Emanuel, you said that the military has the
TSP that members of Congress and the other federal workers
have. And that is not exactly true.
They do not enjoy one of the most significant benefits; and
that is, matching funds. It is authorized within the law. But
it has not been budgeted yet. And we hope that it will be.
And when it is, you are right. It is a hands-down favorite
and should be the top recommendation. We believe that the
comparison of the TSP to the other alternatives that are
available--for instance, the Roth IRA--they are very sensitive
to the assumptions that you make about taxation in retirement.
Mr. Emanuel. I understand.
Mr. Smith. If you plan to be successful, if you expect to
be successful in a relatively higher tax bracket, the Roth IRA
actually, we believe, offers some benefits worth considering.
If you believe that you are not as likely to be in a high tax
bracket at that time, then the military version of the TSP,
even without the matching, is probably the superior product.
We work very hard to point this out to our clients and
disclose this information and discuss it with them. And we did
a sample of a recent 12,000 plans. And about 17 percent of
those did have TSP recommendations.
Mr. Emanuel. Thank you.
Mr. Smith. Thank you, sir.
Chairman Baker. Mr. Burns?
Mr. Burns. Thank you, Mr. Chairman. Just a couple of
points. Mr. Smith, are your employees, are they CFP or are they
certified in financial planning or investing?
Mr. Smith. Not a large number of them are. We have several.
But that is not a requirement. However, we are moving in that
direction.
Mr. Burns. Finally, the New York Times mentioned a
situation where an officer was in debt and still was encouraged
by First Command to invest in contractual plans. Why would that
be to his advantage? Why would that be a good recommendation?
Mr. Smith. Thank you, sir, for that question. I am very
pleased to talk about that. I have a four-page letter from that
client, talking about the experience.
He is very pleased. I will summarize the letter briefly. He
is very pleased with his financial progress that he has made
since he became a First Command client and very pleased with
our service.
He described his situation at the time that he first was
referred to us as ``a bit less than ideal.'' And I have his
permission to give this information.
He had large credit card debt. He had missed some payments,
not due to lack of financial ability to make them, but he was
disorganized and he described himself as ``less mature.'' His
interest rate had kicked up in one case to 25 percent on one of
those credit cards.
He had no car insurance. And you are required to have car
insurance in that state. So he was very much at risk there.
He had set no goals and he had no savings habit. However,
he had never been contacted by anybody else offering any help--
no fee only planner, nobody else. He was promoted and received
a pay raise. And he thought that was a grand opportunity--
correctly so--a grand opportunity for him to address his
situation.
And so he asked around among his peers. And one of our
clients, a satisfied client, referred him to us.
And he describes the situation, how our representative met
with him a number of times to get to know him and to talk about
the situation that he was in. He was impressed by the fact that
it was not high pressure and it was focused on his best
circumstance.
Our representative tried to get him a debt consolidation
loan to pull down those debts, the effective interest rate. But
he could not qualify because of his blemished credit history.
So the representative helped him understand the need to get
on a regular habit with those payments. And he accelerated the
financial payoff of the higher interest debt with a plan, which
the lieutenant agreed with, that he would try again for a debt
consolidation loan in about 6 months, with an expectation of a
better credit history that he could qualify.
We put him in a balanced financial plan involving some life
insurance, a savings--as we typically do to protect the
investments--and starter investment plans. What we have found
is that people who are in debt and who are needing to dig out,
mathematically the case can be made without question that if
someone has, for instance, 15 percent debt, any extra money
that you can put against that 15 percent is like a guaranteed
15 percent return.
Mr. Burns. It certainly is.
Mr. Smith. However, if someone has dug himself into a hole
and all he is going to do with every spare dollar is put it in
the hole, put it in the hole, put it in and he does not see
anything building up, our experience is that they typically
become discouraged after a few months and they go back to the
old habits. Or at least they are at risk of that.
So a small investment and some savings to see something
building up above ground, so to speak, as well as emphasis on
debt payoff, has been the winning formula. And this young man
today describes himself as on-track, getting better fast. He
has now qualified for that debt consolidation loan. And his
effective interest rate is way down and his debts are being
liquidated very rapidly.
Mr. Burns. One of the biggest concerns that I have and
especially among our younger adults is they are carrying an
excessively high burden of high-interest debt. And I tell you,
every dollar that reduces that debt is, to me, like you
suggest, a very positive return.
Again, I want a balanced, effective solution. I want
markets that work for our military. I do not wish our
servicemen or women to be taken advantage of in any way. And I
want them to be given quality advice and quality products.
If we have agents who are marketing either insurance
products or investment products that need to be labeled as
``dangerous to your financial health,'' then I think that is
something that this Congress needs to pursue. I do appreciate
the panel today and the input that they have provided because I
think that helps us focus on what we need to do within the
legislation.
And I am very grateful to the chairman and the ranking
member for the opportunity to be a part of the hearing today.
And I look forward to working with them as we pursue the
legislation.
Thank you, Mr. Chairman.
Chairman Baker. I thank the gentleman. I also want to
extend my appreciation to you individually for appearing here.
I think in fairness to you, I should say that you have not
necessarily won me over to your position. But by getting your
facts on the record, it may help you to a degree.
Mr. Dunlap, I would really recommend that you get to the
committee some explanation of how the company executives do
invest those annuity funds. It is not a mystical process. They
are taking dollars from military personnel, putting them in a
pool----
Mr. Dunlap. Mr. Chairman?
Chairman Baker. Yes?
Mr. Dunlap. Just to make sure that I am clear on that and I
gave the appropriate answer, any money that is accumulated for
an individual policyholder is kept as a part of that policy.
Chairman Baker. Sure. No, I understand that. And there is
an accounting. But the money is fungible. And it is used in
some investment strategy.
I am not saying the investment strategy is bad. I am not
saying it is not working. I am saying we do not know what it
is.
We do not know what fees or costs are associated with it.
If they are taking those funds and putting them into equities
and there is constant turnover in mutual fund holdings, that
turnover generates fees for the sales and transaction costs.
All of that has to be paid by that consumer.
And so the net rate of return from an annuity to the
individual investor, to a great extent, is adversely impacted
by managerial sales loads and undisclosed costs. It would be
helpful for us to understand the performance of the fund by
knowing more detail about what is going on, not within your
purview, but within the investment side of the company for
which you cannot speak today.
Further, you defend the life product performance and the
costs associated with it because of that annuity portion of the
product, which is the reason why I brought those annuity
performance factors up for discussion. But even when you take
the annuity performance, as reported by company documents, and
look at the premium assessed for the package as it has been
developed, the appropriateness of that product being sold to
young individuals who do not have the financial
sophistication--which both of you acknowledge they do not
have--and that they are counseled to wind up at this conclusion
is troubling.
Because if we look at options that would be available to
them through the private market, through competitive
opportunity, if we were to have the military go out and ask the
top 20 companies to put together a package for military
personnel across the country to provide an average $200,000
life benefit for some 10-and 20-year period, I guarantee you we
could get a really good competitive product provided.
What seems to have happened here is that we have had a
closed marketplace with military personnel--not in all cases,
but in the reported press examples--using their stature among
enlisted personnel to make them feel comfortable that this
investment need no further examination. You have acknowledged
that this marketing practice is not appropriate. We certainly
agree on that point.
It is still very much a concern that once we get by those
marketing practices and we look at the underlying consequence
of the product being offered, not the manner in which it is
offered, and the funds being collected, and the benefits
potentially generated still do not square up in my book. But
the committee is still open to further information, should the
company choose to provide it.
Mr. Smith, without regard to your company or its practices,
just with regard to contractual plans, they really are
inconsistent with the financial goal of most Americans and
certainly young military personnel. And I say that because the
vast majority of financial planners who would have no vested
interest in any particular direction will say with neutrality
that only a few Americans who are fully invested in all
retirement options, with idle cash looking for a place to get a
rate of return, would likely look to a contractual plan as an
advisable investment strategy.
As to your own company's practices, your goal of helping
unsophisticated, troubled young folks with financial
difficulties by taking half their initial year's investment out
of the market is a problem from my perspective. If that were
the goal, it would seem to either have a low annualized rate
spread over the term of the product offering or at least a zero
at the beginning, rising over time, as the assets develop in
the individual's portfolio.
It is those early dollars in that get them out quicker. And
by having the initial years' contributions, when it is most
difficult for them to juggle paying off prior existing debts,
perform their military duty and have half of their investment
egg spent on company commissions is a problem.
I am not yet fully determined of the direction that the
committee should take. And I regret that you gentlemen
voluntarily appeared and that I have expressed opinions, which
I know you do not appreciate. I thank you because I sense from
each of you sincerity about your product and what you are
doing.
We just have a disagreement about the value and the
inconsequence of those products. Certainly, going forward,
there are going to be definitive and decisive actions taken.
And I would strongly recommend that senior officials from both
companies urgently communicate any other information that might
be advisable for this committee to know.
Chairman Oxley has indicated we need to do our due
diligence. We need to make sure we understand. But we better
get it done quick.
So with that, I thank you. And our meeting stands
adjourned.
[Whereupon, at 2:20 p.m., the subcommittee was adjourned.]
A P P E N D I X
September 9, 2004
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