[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) 512ï¿½091800  
Fax: (202) 512ï¿½092250 Mail: Stop SSOP, Washington, DC 20402ï¿½090001

                 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

                              ----------                              
                                                                   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

                              ----------                              


                      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


[GRAPHIC] [TIFF OMITTED] T7450.001

[GRAPHIC] [TIFF OMITTED] T7450.002

[GRAPHIC] [TIFF OMITTED] T7450.003

[GRAPHIC] [TIFF OMITTED] T7450.004

[GRAPHIC] [TIFF OMITTED] T7450.005

[GRAPHIC] [TIFF OMITTED] T7450.006

[GRAPHIC] [TIFF OMITTED] T7450.007

[GRAPHIC] [TIFF OMITTED] T7450.008

[GRAPHIC] [TIFF OMITTED] T7450.009

[GRAPHIC] [TIFF OMITTED] T7450.010

[GRAPHIC] [TIFF OMITTED] T7450.011

[GRAPHIC] [TIFF OMITTED] T7450.012

[GRAPHIC] [TIFF OMITTED] T7450.013

[GRAPHIC] [TIFF OMITTED] T7450.014

[GRAPHIC] [TIFF OMITTED] T7450.015

[GRAPHIC] [TIFF OMITTED] T7450.016

[GRAPHIC] [TIFF OMITTED] T7450.017

[GRAPHIC] [TIFF OMITTED] T7450.018

[GRAPHIC] [TIFF OMITTED] T7450.019

[GRAPHIC] [TIFF OMITTED] T7450.020

[GRAPHIC] [TIFF OMITTED] T7450.021

[GRAPHIC] [TIFF OMITTED] T7450.022

[GRAPHIC] [TIFF OMITTED] T7450.023

[GRAPHIC] [TIFF OMITTED] T7450.024

[GRAPHIC] [TIFF OMITTED] T7450.025

[GRAPHIC] [TIFF OMITTED] T7450.026

[GRAPHIC] [TIFF OMITTED] T7450.027

[GRAPHIC] [TIFF OMITTED] T7450.028

[GRAPHIC] [TIFF OMITTED] T7450.029

[GRAPHIC] [TIFF OMITTED] T7450.030

[GRAPHIC] [TIFF OMITTED] T7450.031

[GRAPHIC] [TIFF OMITTED] T7450.032

[GRAPHIC] [TIFF OMITTED] T7450.033

[GRAPHIC] [TIFF OMITTED] T7450.034

[GRAPHIC] [TIFF OMITTED] T7450.035

[GRAPHIC] [TIFF OMITTED] T7450.036

[GRAPHIC] [TIFF OMITTED] T7450.037

[GRAPHIC] [TIFF OMITTED] T7450.038

[GRAPHIC] [TIFF OMITTED] T7450.039

[GRAPHIC] [TIFF OMITTED] T7450.040

[GRAPHIC] [TIFF OMITTED] T7450.041

[GRAPHIC] [TIFF OMITTED] T7450.042

[GRAPHIC] [TIFF OMITTED] T7450.043

[GRAPHIC] [TIFF OMITTED] T7450.044

[GRAPHIC] [TIFF OMITTED] T7450.045

[GRAPHIC] [TIFF OMITTED] T7450.046

[GRAPHIC] [TIFF OMITTED] T7450.047

[GRAPHIC] [TIFF OMITTED] T7450.048

[GRAPHIC] [TIFF OMITTED] T7450.049

[GRAPHIC] [TIFF OMITTED] T7450.050

[GRAPHIC] [TIFF OMITTED] T7450.051

[GRAPHIC] [TIFF OMITTED] T7450.052

[GRAPHIC] [TIFF OMITTED] T7450.053

[GRAPHIC] [TIFF OMITTED] T7450.054

[GRAPHIC] [TIFF OMITTED] T7450.055

[GRAPHIC] [TIFF OMITTED] T7450.056

[GRAPHIC] [TIFF OMITTED] T7450.057

[GRAPHIC] [TIFF OMITTED] T7450.058

[GRAPHIC] [TIFF OMITTED] T7450.059

[GRAPHIC] [TIFF OMITTED] T7450.060

[GRAPHIC] [TIFF OMITTED] T7450.061

[GRAPHIC] [TIFF OMITTED] T7450.062

[GRAPHIC] [TIFF OMITTED] T7450.063

[GRAPHIC] [TIFF OMITTED] T7450.064

[GRAPHIC] [TIFF OMITTED] T7450.065

[GRAPHIC] [TIFF OMITTED] T7450.066

[GRAPHIC] [TIFF OMITTED] T7450.067

[GRAPHIC] [TIFF OMITTED] T7450.068

[GRAPHIC] [TIFF OMITTED] T7450.069

[GRAPHIC] [TIFF OMITTED] T7450.070

[GRAPHIC] [TIFF OMITTED] T7450.071

[GRAPHIC] [TIFF OMITTED] T7450.072

[GRAPHIC] [TIFF OMITTED] T7450.073

[GRAPHIC] [TIFF OMITTED] T7450.074

[GRAPHIC] [TIFF OMITTED] T7450.075

[GRAPHIC] [TIFF OMITTED] T7450.076

[GRAPHIC] [TIFF OMITTED] T7450.077

[GRAPHIC] [TIFF OMITTED] T7450.078

[GRAPHIC] [TIFF OMITTED] T7450.079

[GRAPHIC] [TIFF OMITTED] T7450.080

[GRAPHIC] [TIFF OMITTED] T7450.081

[GRAPHIC] [TIFF OMITTED] T7450.082

[GRAPHIC] [TIFF OMITTED] T7450.083

[GRAPHIC] [TIFF OMITTED] T7450.084

[GRAPHIC] [TIFF OMITTED] T7450.085

[GRAPHIC] [TIFF OMITTED] T7450.086

[GRAPHIC] [TIFF OMITTED] T7450.087

[GRAPHIC] [TIFF OMITTED] T7450.088

[GRAPHIC] [TIFF OMITTED] T7450.089

[GRAPHIC] [TIFF OMITTED] T7450.090

[GRAPHIC] [TIFF OMITTED] T7450.091

[GRAPHIC] [TIFF OMITTED] T7450.092

[GRAPHIC] [TIFF OMITTED] T7450.093

[GRAPHIC] [TIFF OMITTED] T7450.094

[GRAPHIC] [TIFF OMITTED] T7450.095

[GRAPHIC] [TIFF OMITTED] T7450.096

[GRAPHIC] [TIFF OMITTED] T7450.097

[GRAPHIC] [TIFF OMITTED] T7450.098

[GRAPHIC] [TIFF OMITTED] T7450.099

[GRAPHIC] [TIFF OMITTED] T7450.100

[GRAPHIC] [TIFF OMITTED] T7450.101

[GRAPHIC] [TIFF OMITTED] T7450.102

[GRAPHIC] [TIFF OMITTED] T7450.103

[GRAPHIC] [TIFF OMITTED] T7450.104

[GRAPHIC] [TIFF OMITTED] T7450.105

