[Senate Hearing 109-892]
[From the U.S. Government Publishing Office]





                                                        S. Hrg. 109-892


                       A REVIEW OF THE GAO REPORT
                        ON THE SALE OF FINANCIAL
                     PRODUCTS TO MILITARY PERSONNEL

=======================================================================

                                HEARING

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                                   ON

EXAMINATION OF A GOVERNMENT ACCOUNTABILITY OFFICE REPORT ON THE SALE OF 
FINANCIAL PRODUCTS TO MILITARY PERSONNEL, FOCUSING ON ACTIONS NEEDED TO 
                        PROTECT MILITARY MEMBERS

                               __________

                           NOVEMBER 17, 2005

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs


      Available at: http: //www.access.gpo.gov /congress /senate/
                            senate05sh.html

                                 ______


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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  RICHARD C. SHELBY, Alabama, Chairman

ROBERT F. BENNETT, Utah              PAUL S. SARBANES, Maryland
WAYNE ALLARD, Colorado               CHRISTOPHER J. DODD, Connecticut
MICHAEL B. ENZI, Wyoming             TIM JOHNSON, South Dakota
CHUCK HAGEL, Nebraska                JACK REED, Rhode Island
RICK SANTORUM, Pennsylvania          CHARLES E. SCHUMER, New York
JIM BUNNING, Kentucky                EVAN BAYH, Indiana
MIKE CRAPO, Idaho                    THOMAS R. CARPER, Delaware
JOHN E. SUNUNU, New Hampshire        DEBBIE STABENOW, Michigan
ELIZABETH DOLE, North Carolina       ROBERT MENENDEZ, New Jersey
MEL MARTINEZ, Florida

             Kathleen L. Casey, Staff Director and Counsel

     Steven B. Harris, Democratic Staff Director and Chief Counsel

                          Justin Daly, Counsel

              Stephen R. Kroll, Democratic Special Counsel

             Jonathan Miller, Democratic Professional Staff

               Patience R. Singleton, Democratic Counsel

                 Dean V. Shahinian, Democratic Counsel

   Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator

                       George E. Whittle, Editor

                                  (ii)




                            C O N T E N T S

                              ----------                              

                      THURSDAY, NOVEMBER 17, 2005

                                                                   Page

Opening statement of Chairman Shelby.............................     1

Opening statements, comments, or prepared statements of:
    Senator Sarbanes.............................................     2
    Senator Enzi.................................................     4
    Senator Schumer..............................................     5
    Senator Bunning..............................................     6
    Senator Dole.................................................     7
    Senator Allard...............................................     8

                               WITNESSES

Richard J. Hillman, Managing Director, Financial Markets and 
  Community Investment, U.S. Government Accountability Office; 
  accompanied by Cody J. Goebel And Jack Edwards.................     9
    Prepared statement...........................................    37
John M. Molino, Deputy Under Secretary of Defense for Military 
  Community and Family Policy, U.S. Department of Defense........    22
    Prepared statement...........................................    62
Lori Richards, Director, Office of Compliance, Inspections, and 
  Examinations, U.S. Securities and Exchange Commission..........    23
    Prepared statement...........................................    67
Mary Schapiro, Vice Chairman and President, Regulatory Policy and 
  Oversight, National Association of Securities Dealers..........    25
    Prepared statement...........................................    73
    Response to written questions of Senator Sarbanes............    81
John Oxendine, Commissioner of Insurance, State of Georgia.......    27
    Prepared statement...........................................    77
    Response to a written question of Senator Sarbanes...........    84

                                 (iii)



 
                       A REVIEW OF THE GAO REPORT
                        ON THE SALE OF FINANCIAL
                     PRODUCTS TO MILITARY PERSONNEL

                              ----------                              


                      THURSDAY, NOVEMBER 17, 2005

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.

    The Committee met at 10:06 in room SD-538, Dirksen Senate 
Office Building, Senator Richard C. Shelby (Chairman of the 
Committee) presiding.

        OPENING STATEMENT OF CHAIRMAN RICHARD C. SHELBY

    Chairman Shelby. The hearing will come to order.
    This morning, the Committee will hold a hearing on a 
recently completed Government Accountability Office 
investigation examining the sale of financial products to our 
Nation's servicemen and -women. Last year, I, along with 
Senator Sarbanes, asked the GAO to study the regulatory 
oversight associated with the marketing and sale of the 
insurance and investment products being offered to 
servicemembers. We also asked the General Accounting Office to 
assess the range and quality of these financial products, 
particularly with respect to the offerings in the civilian 
market.
    Quite simply, GAO's findings are troubling. The report 
makes clear that military personnel are being sold costly, 
outdated, and even unnecessary securities and insurance 
products. It also indicates that military personnel frequently 
are victims of deceptive and illegal sales practices.
    Specifically, with respect to securities products, GAO 
found that a few financial service companies marketing 
specifically to service-members sell an archaic and obscure 
investment vehicle called a contractual plan that is 
characterized by an unusually high 50-percent sales charge over 
the first year. These sales persist notwithstanding the fact 
this product all but disappeared from the civilian market in 
the early 1980's due to excessive sales commissions.
    Furthermore, financial advisers have questions whether this 
product is ever a suitable investment given the fact that there 
are hundreds of reputable no-load mutual funds available today.
    With respect to insurance products, GAO identified six 
insurance companies that catered to the military market. 
According to the report, insurance agents from these companies 
sell expensive life insurance that is oftentimes illegally 
marketed as a security. They market these products to the 
military even though most service-members automatically carry a 
low-cost, government-provided $400,000 life insurance policy 
that provides coverage here.
    Perhaps most troubling, there is ample evidence that our 
men and women in uniform are routinely rushed through stacks of 
paperwork as part of a captive audience, unaware of what they 
are signing and purchasing.
    The report is also quite critical of the Department of 
Defense's performance in regulating solicitations on military 
installations and sharing information with financial 
regulators. To discuss GAO's investigation and related issues 
with us this morning, we have Richard Hillman, who authored the 
GAO report. On the second panel we will hear from John Molino, 
who is the Deputy Under Secretary of Defense for Military, 
Community, and Family Policy; Lori Richards, who is Director of 
the Office of Compliance, Inspections, and Examinations, 
Securities and Exchange Commission; Mary Schapiro, who is the 
Vice Chairman of NASD; and John Oxendine, who is the Insurance 
and Safety Fire Commissioner for the State of Georgia.
    I want to commend you, Mr. Hillman, for the excellent 
report and the work GAO has done here, and I look forward to 
everyone's testimony.
    Senator Sarbanes.

             STATEMENT OF SENATOR PAUL S. SARBANES

    Senator Sarbanes. Thank you very much, Mr. Chairman, for 
calling this hearing and for joining in asking for the GAO 
study. We will hear their report this morning on the sale of 
financial products to members of our armed forces. Regrettably, 
abuses in this area have been widely reported. The New York 
Times1 published a series of articles on this subject last 
year. In September 2004, you and I asked GAO to conduct a study 
of these problems, and we will hear their analysis and then the 
comments by relevant regulators here this morning. I would like 
to also acknowledge the efforts of Senator Enzi on this issue. 
I know he has taken a very keen interest in it.
    Chairman Shelby. Very much.
    Senator Sarbanes. And he has introduced legislation on the 
subject with Senators Clinton, Schumer, Hagel, and others.
    In their report, the GAO has found, ``Large numbers of 
military servicemembers are being targeted by a few firms 
offering life insurance products that provide limited benefits 
unless held for long periods, which most military purchasers 
were failing to do.''
    In fact, at least some of the companies understood, and 
apparently counted on, the fact that the target group for the 
life insurance sales were enlisted personnel, who have the 
highest level of turnover and would not hold these policies for 
long periods of time.
    GAO also found, ``Military members were being widely 
marketed a securities product, the contractual mutual fund 
plan, that has largely disappeared from the civilian 
marketplace and which had been periodically involved in sales 
scandals for decades.''
    The GAO reported that the marketing materials used were 
misleading and ``misrepresented the advantages of these plans 
compared to other investments.''
    I think it should be a matter of very deep concern that 
these are not new problems. For example, The New York Times has 
reported that Army Times has described similar issues in 
earlier articles. Some military officials sought to alert 
Pentagon officials to the problems in a 1997 report. A 1998 
report of the Pentagon's Inspector General, which looked into 
life insurance sales on 11 randomly selected military bases, 
found, ``misleading sales presentations, presentations by 
unauthorized personnel, presentations to captive audiences, 
soliciting during duty hours, and soliciting in the barracks.''
    This was a Pentagon Inspector General's report.
    A May 2000 Pentagon-ordered study by the former Chief Judge 
of the Army's Court of Criminal Appeals found that DoD policies 
``have been routinely violated'' in this area for the last 30 
years. I might also note that the SEC many years ago 
recommended banning the sale of mutual fund contractual plans 
altogether.
    Furthermore, Mr. Chairman, there are also widespread abuses 
in the payday lending area directed specifically at our 
military personnel.
    There are approximately 1.4 million active-duty personnel 
and 1.2 million members of the Ready Reserve and our armed 
forces. I am very concerned that any insurance company or agent 
or stockbroker or dealer would sell inappropriate financial 
products to our servicemen and women. I am very concerned that 
any lender would require economically abusive terms in loans to 
military personnel.
    Now, we go marching around here waving the flag and 
everything about the military and the sacrifice of our men and 
women, and I have complete respect for what they do. But it 
seems to me one of the minimal things we could do to show that 
respect is to move aggressively against these kinds of 
practices which every study has found are abusive. I want to 
make that very clear that most of the reputable firms do not 
engage in this activity. But there are enough who do it in such 
abusive terms that it casts a dark cloud over the entire 
economic sector.
    We are going to hear from a distinguished panel of 
witnesses this morning. I especially want to recognize Richard 
Hillman, now GAO's Managing Director for Financial Markets and 
Community Investment. Mr. Hillman is no stranger to this 
Committee, and I want to take this opportunity to commend him 
and his colleagues for their careful and thorough work on this 
important study. And I look forward to the second panel as 
well, and I should just note that I am delighted that Mary 
Schapiro, the Vice Chairman of NASD, will be on that panel. She 
is also no stranger to the Committee, and actually prior to 
joining NASD, she was Chairman of the Commodity Futures Trading 
Commission and also a Commissioner of the Securities and 
Exchange Commission. So she is very, very knowledgeable. She 
has been very helpful to this Committee in the past, and I look 
forward to hearing her testimony, as well as that of Ms. 
Richards from the SEC; Mr. Oxendine, who has come to be with us 
from the State of Georgia, the Insurance and Safety Fire 
Commission; and John Molino, the Deputy Under Secretary of 
Defense for Military, Community, and Family Policy of the U.S. 
Department of Defense.
    Mr. Molino, I would just warn you now, we have this 
Inspector General study; we have other studies to the Pentagon 
about what is going on and so forth. So we are going to be 
curious to know why the Department of Defense itself has not 
moved more aggressively in this area heretofore. So, I would 
just put that out there so you can mull about it until we get 
to your panel.
    Thank you very much, Mr. Chairman.
    Chairman Shelby. Thank you, Senator Sarbanes.
    Senator Enzi, I am going to recognize you next, but I do 
want to join Senator Sarbanes in recognizing your work and 
leadership in this area. This is a very important subject to 
all of us. Thank you.
    Senator Enzi.

              STATEMENT OF SENATOR MICHAEL B. ENZI

    Senator Enzi. Thank you very much, Mr. Chairman, and I 
really appreciate your holding this hearing because this is an 
issue that is too important to ignore. For years, our men and 
women in the armed services have fallen victim to unscrupulous 
salespersons who are pushing high-cost financial products and 
life insurance. Oftentimes, the Department of Defense 
directives and the State regulations would be violated or 
completely ignored by these bad actors. The lack of oversight 
and information sharing among regulators has only made the 
problem more pervasive.
    As this GAO report will show, salespersons have been 
preying on military personnel, who are often young, 
inexperienced in financial matters, and particularly vulnerable 
to the aggressive sales tactics used by come companies. In some 
examples, life insurance agents have posed as instructors 
arranging veterans benefits classes for recruits and trainees. 
The sales pitches would start as soon as the commanding officer 
left the room. Many young men signed contracts and made payroll 
deductions because they believed the policies were endorsed by 
the Department of Defense or their military branch. In reality, 
they bought life insurance policies with low death benefits and 
premiums as high as 14 times the price of similar plans offered 
by the Servicemembers' Group Life Insurance.
    In other cases, military personnel were sold investments 
that have all but disappeared from civilian markets. These 
funds, called contractual plans, offer high up-front sales 
commissions that rob investors of years of earnings. Today, 
there are literally thousands of better investments on the 
market. However, financial advisers found a niche outside of 
the public mainstream where they could still sell these 
disreputable investments on our military bases.
    In 1966, the SEC recommended to Congress that they ban 
these types of funds, but Congress did not act. It is time to 
finally follow through and ban the sale of these funds. My bill 
would do that.
    One of the most troubling aspects of this issue is the lack 
of oversight by the Department of Defense. Throughout this GAO 
report, it is noted that the Department of Defense did not 
share information about these problems with other regulators 
who could have prevented these violations. The report states 
that DoD personnel would generally try to resolve issues within 
the base. It is very clear, however, that this method has only 
allowed the problem to persist. A better system of information 
sharing is needed to effectively target bad actors and prevent 
them from ripping off our military personnel.
    I believe that my bill, the Military Personnel Financial 
Services Protection Act, will address these critical needs. My 
bill would draw clear lines of jurisdiction for regulators, 
create a registry to track violators and ban the worst types of 
financial products being sold to our military. These products 
have disappeared from the civilian market, and they should 
disappear from military installations, too.
    I am pleased that the GAO has recommended several steps 
that are already included in the bill. I look forward to the 
testimony of Mr. Hillman on how these reforms could best be 
enacted.
    I would like to thank all the witnesses for appearing 
before the Committee today and sharing their perspectives. The 
investigations recently completed by NASD and SEC helped to 
bring this issue into focus for Congress. I appreciate their 
hard work. I am also interested to learn about the steps taken 
by the Department of Defense to better educate our armed forces 
about the financial investments they make, how they will 
provide better oversight in the future. I expect this GAO 
report and this hearing will advance the discussion of 
financial sales to our military personnel. During a time when 
so many of our armed services are bravely fighting tyranny 
abroad, we have to ensure that they are protected at home.
    Thank you, Mr. Chairman.
    Chairman Shelby. The Chair recognizes Senator Schumer.

            STATEMENT OF SENATOR CHARLES E. SCHUMER

    Senator Schumer. Thank you, Mr. Chairman. I want to thank 
you and Senator Sarbanes for holding a hearing on this really 
important issue, on the sale of financial products to the 
military, and I want to thank Senator Enzi for his leadership 
in terms of legislation, which I am proud to cosponsor.
    We all know the problems here, and when I first read the 
stories in The New York Times, it wrenches at your heart that 
the people who serve us were taken advantage of, and sometimes 
with the complicity not of the military, but with people in the 
military. When at Camp Pendleton the marines, 345 marines who 
bought life insurance through briefings that were sponsored by 
the camp, and they had these private insurance agents come in, 
the results, at least the research done by The New York Times, 
showed that those who signed up thought this product was 
endorsed by the Marine Corps. And that is just appalling. It 
really was very bothersome to me.
    Now, it is a good question to see what DoD is doing. It is 
also a good question to ask the life insurance made available 
to military personnel by the Government, why is not that 
adequate? That is something we should think about in terms of 
our soldiers. But I think we should--and another question to 
ask is: Is the Department of Defense--why aren't they 
coordinating with other agencies in the Government who may have 
more expertise on these kinds of insurance products to try and 
figure out what they can do on their own.
    I think the GAO's recommendations are exactly right. 
Banning the sale of contractual plans, known for the high 
front-end sales charge of 50 percent, that makes sense. These 
plans, interestingly enough, are not in the civilian market at 
all, but they are being used to lure our soldiers. And I 
support their recommendations requesting that insurance 
regulators conduct reviews to ensure that the products being 
sold meet the existing insurance requirements. That seems to me 
to be rudimentary and fundamental.
    Again, I think that Senator Enzi's bill does a very good 
job, and I am proud to be a cosponsor. Let me just make a 
couple of other points here.
    One thing that was missing from the study were 
recommendations on steps to combat the negative effects posed 
by the automatic premium payment provisions which are included 
in many of these policies unless the servicemember proactively 
contacts the insurance company to cancel the policy and request 
a refund of the savings fund. This is an area where we might be 
able to help our soldiers and look at that.
    Also, one legislative area we should look at that goes 
beyond the scope of the report, the way to improve disclosure 
provisions so that military members will know exactly what they 
are signing up for and understand which products automatically 
take payments from a member's bank account. That always is done 
quietly and people do not know it and they pay less attention 
to it.
    I would also like to look into whether it may be necessary 
to work with DoD if there should be a certification requirement 
for the sale of products on military bases. That might go a 
long way to protecting people as well.
    So, with that, Mr. Chairman, I thank you for this timely 
hearing and look forward to a legislative solution in large 
part based on the GAO recommendations.
    Chairman Shelby. Thank you.
    The Chair recognizes Senator Bunning.

                STATEMENT OF SENATOR JIM BUNNING

    Senator Bunning. Thank you, Mr. Chairman, for holding this 
very important hearing, and I would like to thank all of our 
witnesses for coming here before us today.
    I do not know anyone who read The New York Times' 
investigation of sales of financial products to the military 
personnel who was not at the very least appalled and concerned 
about the practices. Knowing some unscrupulous financial 
service companies are taking advantage of our servicemen and -
women, most of whom are very young, deeply disturbed me, as I 
know it did many others in Congress.
    Mr. Chairman, you and Senator Sarbanes asked for the GAO 
report that we are going to hear testimony on today, and 
Senator Mike Enzi has introduced a bill to curb some of the 
abuses. My good friend and fellow Kentuckian, Jeff Davis, the 
Congressman representing my old district in Kentucky, the 4th, 
has worked tirelessly on this issue and has introduced a bill 
very similar to Senator Enzi's that has already passed the 
House of Representatives. The SEC, the Nasdaq, and the State 
insurance commissioners have also been very involved in this 
issue. All of you should be commended for your efforts.
    We have two large Army bases in Kentucky--Fort Knox and 
Fort Campbell. Like every other State in the Union, Kentucky 
has many Guard and Reserve units called up to fight the war on 
terror. If there is anything anyone can do to help facilitate 
financial education at the military facilities in Kentucky and 
prevent our service people from getting taken advantage of, 
please let us know. Let the Committee know and let the military 
bases know.
    It sickens me to know some very bad actors have tried to 
take advantage of these young men and women as they go off to 
war. We must make sure that this does not happen anymore, and 
we must make sure that those who have abused our service people 
in order to make a quick buck are held accountable.
    Thank you, Mr. Chairman.
    Chairman Shelby. Senator Dole.

              STATEMENT OF SENATOR ELIZABETH DOLE

    Senator Dole. Thank you, Chairman Shelby. My thanks to the 
witnesses this morning.
    The unscrupulous sale of flawed financial products to our 
servicemen and -women is an extremely critical matter affecting 
our military families as well as our military's readiness. It 
is an appalling situation. Harmful financial products can cause 
serious financial hardships for servicemembers and their 
families, not only affecting morale but also causing military 
personnel to lose necessary security clearances and lead to 
career-ending disciplinary measures.
    This is an issue I take very seriously as a Member of both 
this Committee and the Armed Services Committee. And with more 
than 115,000 military personnel stationed in North Carolina, 
these problems truly hit home.
    I want to thank you, Mr. Chairman, and Ranking Member 
Sarbanes for requesting this important GAO report, which 
explains well the many reasons why military personnel are being 
targeted by dishonest financial services providers. This report 
has effectively painted a picture of the challenges affecting 
the men and women serving our country.
    As we have already heard, many are young. In fact, the 
report points out that the Defense Department is the largest 
employer of young adults in the United States, having in 2004 
recruited some 20,000 men and women into active duty alone, the 
majority of them recent high school graduates.
    Also, our military members face lengthy deployments and 
frequent relocations, and like most young Americans, they often 
lack financial savvy and security. These very factors make them 
more vulnerable to predatory financial practices.
    The GAO report also details the problems with certain 
insurance and securities products marketed to military 
personnel that have lower payouts and larger fees and 
commissions. Targeting the military to be consumers of these 
unscrupulous services deserves our closest scrutiny, and I, 
too, thank my colleague Senator Enzi for introducing such 
important legislation that takes significant action to stop 
these practices in the insurance and securities areas.
    Still, I am concerned, Mr. Chairman that this report did 
not investigate lending practices to servicemembers. However, 
an April GAO report described tools that DoD is not fully 
utilizing to fight predatory lending. It revealed that consumer 
advocates, State government officials, DoD officials, and 
servicemembers in GAO focus groups indicated that the military 
is being targeted and harmed by predatory lenders.
    In the defense authorization bill that we passed this week, 
I was very proud to include an amendment that takes important 
action to stop predatory lenders from targeting our military. 
This measure requires the Defense Department, in consultation 
with Treasury, the Federal Reserve, the FDIC, and 
representatives of military, charity, and consumer 
organizations to report to Congress within 90 days on the 
prevalence of predatory lending and to provide specific 
legislative and administrative actions to prevent this 
egregious practice.
    Indeed, supporting our military is more than just 
supporting their mission in the war against terror. It includes 
supporting their families and their livelihoods. The targeting 
of our servicemembers by unscrupulous financial service 
providers is seriously harming both, and I look forward to 
working with this Committee as we find ways to put a stop to 
all of these practices.
    Thank you, Mr. Chairman.
    Chairman Shelby. Senator Allard is recognized.

               STATEMENT OF SENATOR WAYNE ALLARD

    Senator Allard. Thank you, Mr. Chairman. I, too, want to 
join my colleagues in thanking you and Senator Sarbanes for 
holding this hearing and my colleague from my neighboring State 
of Wyoming for taking the lead on this particular issue. I 
think it is important that we do closely examine the GAO report 
on the sale of financial products to military personnel. I am 
proud personally to represent a State with a significant 
military presence, and I look forward to the opportunity to 
hear from our witnesses.
    I want to join my other colleagues also in saying we do owe 
our military a great debt. They volunteer to risk their lives 
to protect freedom and democracy. Therefore, it is only 
reasonable to expect that we would protect them against 
inappropriate sales of financial and investment products while 
on the job.
    Having said that, we also want to be sure that we encourage 
savings through legitimate products. I think that we do not 
want to step over the line here. There are some very good 
savings plans, and we need to encourage our young people all 
over this country to do more to save, because in my view this 
country is not saving enough. Military people, with proper 
savings and investment programs, can enhance their future, and 
so I am looking forward to the testimony.
    This GAO report, along with today's testimony, I think will 
be helpful in finding an appropriate balance, and I look 
forward to hearing from our witnesses.
    Thank you, Mr. Chairman.
    Chairman Shelby. Mr. Hillman, of course, the GAO report 
will be made part of the hearing record, and we appreciate 
that. Your written testimony will be made part of the hearing 
record. You proceed as you wish.

                STATEMENT OF RICHARD J. HILLMAN

              MANAGING DIRECTOR, FINANCIAL MARKETS

                   AND COMMUNITY INVESTMENT,

             U.S. GOVERNMENT ACCOUNTABILITY OFFICE;

                         ACCOMPANIED BY

                CODY J. GOEBEL AND JACK EDWARDS

    Mr. Hillman. Thank you very much, Mr. Chairman. 
Accompanying me today, to my left, is Cody Goebel and to my 
right Jack Edwards. They are Assistant Directors at GAO who 
were primarily responsible for the successful design and 
implementation of the studies being featured today.
    We are pleased to be here to discuss GAO's work on the 
sales of financial products to the U.S. military. Today, I will 
summarize the results of the report prepared at this 
Committee's request entitled ``Financial Product Sales: Actions 
Needed to Better Protect Military Members.'' Specifically, I 
will discuss, one, the insurance and securities products that 
were being sold primarily to military members and how these 
products were being marketed; and, two, the ability of 
financial regulators and the Department of Defense to oversee 
the sales of insurance and securities products to military 
members. Where applicable, I will also present results from a 
related June 2005 study describing the need for DoD to 
implement controls over supplemental life insurance 
solicitation policies involving service-members.
    In summary, regarding sales of insurance products, we found 
that thousands of junior enlisted servicemembers had been sold 
a product that combines life insurance with a savings fund 
promising high returns. Being marketed by a small number of 
companies, these products can provide savings to servicemembers 
that make steady payments and have provided millions in death 
benefits to survivors and others. However, these products are 
much more costly than the $250,000 of life insurance, now 
$400,000, that military members already receive as part of 
their Government benefits.
    In addition, these products also appear to be a poor 
investment choice for servicemembers because they included 
provisions that allowed any savings accumulated on these 
products to be used to extend the insurance coverage if a 
servicemember ever stops making payments and fails to request a 
refund of the savings. With most military members leaving the 
service within a few years, many do not continue their 
payments, and as a result, few likely amassed any savings from 
their purchase.
    Several of the companies who have sold these products have 
been sanctioned by regulators in the past, and new 
investigations are underway to assess whether these products 
were being properly represented as insurance and whether their 
terms were legal under existing State laws.
    Regarding the sale of securities products, we found that 
thousands of military members were also purchasing a mutual 
fund product that also requires an extended series of payments 
to provide benefit. Known as contractual plans, they expect the 
service-member to make payments for set periods, such as 15 
years, with 50 percent of the first year's payments 
representing a sales charge paid to the selling broker-dealer. 
If held for the entire period, these plans can provide lower 
sales charges and comparable returns as other funds; however, 
with securities regulators finding that only about 10 to 40 
percent of the military members that purchased these products 
continued to make payments, many paid higher sales charges and 
received lower returns than had they invested in alternatively 
available products.
    Regulators have already taken action against the largest 
broker-dealer that marketed this product and are investigating 
the few remaining sellers for using inappropriate sales 
practices. With the wide availability of much less costly 
alternative products, we and the relevant financial regulators 
question the need for contractual plans to continue to exist.
    Sales to military members were receiving less oversight 
because DoD personnel rarely forwarded servicemembers' 
complaints to relevant financial regulators. Insurance products 
also lacked suitability or appropriateness standards that could 
have prompted regulators to investigate sales to military 
members sooner. Securities regulators' examinations of 
contractual plans were also hampered by a lack of standardized 
data showing whether consumers were benefiting from their 
purchases.
    Although recognizing a greater need for sharing information 
on violations of its solicitation policy and servicemember 
complaints, DoD has yet to finalize its policies to require 
that such information be provided to financial regulators, nor 
has it coordinated with these regulators and its installations 
on appropriate ways that additional sharing can occur.
    Given the concerns over potentially inappropriate financial 
product sales to military members, the need for definitive 
action to better protect servicemembers appears overdue. The 
report we issued to this Committee recommends actions by 
Congress that are consistent with the provisions and bills 
under consideration by this Committee. More specifically, 
because the features of the products being sold to military 
members provide limited benefits to many military purchasers, 
we believe that Congress should act to have all State insurance 
regulators conduct reviews to ensure that only legal products 
are being sold to military members and to have regulators work 
cooperatively with DoD to develop standards that could help 
ensure that companies only market appropriate products for 
military members' needs and circumstances.
    Similarly, given the wide availability of less costly 
alternatives, Congress should act to amend the Investment 
Company Act to ban the sale of contractual mutual fund plans. 
Because financial regulators' ability to adequately oversee 
sales to military members was hampered by a lack of information 
sharing about military members' complaints and concerns, we 
also recommend that Congress direct DoD to work with insurance 
and securities regulators to overcome barriers to sharing 
information and to clarify that State regulators have 
jurisdiction on military installations.
    In the report prepared for this Committee, we also 
recommend that DoD issue its revised solicitation policy that 
will require military personnel to share complaints with 
financial regulators. And, finally, to improve oversight by 
State insurance regulators, SEC, and NASD, we recommend these 
organizations designate specific members of their staff to 
receive complaints and conduct outreach by proactively learning 
of problems involving servicemembers. In the event that 
contractual plans continue to be sold, we also recommend that 
the SEC and the NASD improve the information they have to 
evaluate the extent to which customers are successfully 
completing their plans.
    DoD and the financial regulators have provided comments on 
a draft of this report being released today, generally agreeing 
with the report's contents and its recommendations.
    Mr. Chairman, this completes my prepared statement, and I 
and my colleagues would be pleased to respond to any questions 
you or other Members may have.
    Chairman Shelby. Thank you, Mr. Hillman.
    Could you assess for the Committee this morning the range 
and the quality of financial products offered to the military 
community as well as the sales methods employed to sell these 
products? And let me ask you this: What is the average age of 
these soldiers they are selling to? Did you do any work on 
that?
    Mr. Hillman. Yes, we can provide information on that as 
well.
    Chairman Shelby. Okay.
    Mr. Hillman. On the insurance products themselves, they 
were typically marketed to junior enlisted service personnel, 
those who have just come into the services and really just 
coming out of their basic training and being redeployed.
    Chairman Shelby. What would be the average age of these 
people? Young, would it not?
    Mr. Hillman. Young, most often likely right out of high 
school, in their late teens and early 20's.
    The contractual mutual fund plan, however, was more or less 
targeted to more senior, commissioned officers who had and 
could afford the ability to make payments for investment 
purposes.
    The insurance companies targeting servicemembers were 
primarily marketing a hybrid product combining a high-cost 
insurance policy with a savings component. The product costs 
significantly more than other insurance coverage available to 
servicemembers. For example, since 2005, the Servicemembers' 
Group Life Insurance, or SGLI, provides $400,000 of life 
insurance for $26 per month. These other products would provide 
death benefits generally ranging from $25,000 to $50,000 for 
approximately $100 per month, allocating some funds to the 
savings fund, typically much less in the earlier years and more 
in the later years, depending on the product.
    Another debilitating feature of the insurance products is 
that they had this automatic premium payment provision, as 
Senator Schumer mentioned in his opening remarks, which allows 
companies to deplete the savings fund to pay for any insurance 
premium should a servicemember stop making payments. Given that 
servicemembers more frequently move and leave the service 
within a few years, they are often unable to make payments for 
long periods of time, and because of this feature, have not 
been able or were likely unable to amass any savings.
    Products also were associated with questionable sales 
practices where the agents were misrepresenting the products 
not as insurance but as an investment or identifying themselves 
as representatives of independent benefit and fraternal 
organizations. These products also frequently included very 
early and stiff withdrawal penalties, and it was common for 
companies to credit the amount of accumulated savings on the 
basis of either the year-end balance or an average balance, 
whichever was less.
    So, Mr. Chairman, overall on the insurance side, these 
products were more costly than what was available to 
servicemembers and were being touted as not insurance but 
investments, largely because of the incentive that members had 
to purchase insurance more cheaply through the Federal 
Government.
    Chairman Shelby. It is my understanding the Department of 
Defense has been aware of problems related to commercial 
solicitations on military installations since the Vietnam War 
era. Why are we still today discussing the same troubling 
issues 35 years later? And it is my understanding also that a 
lot of these contractual plan products they are selling 
disappeared from the civilian market 25 years ago due to their 
excessive sales charges. It looks to me like there is some 
exploitation going on here to kind of a captive young market--
our soldiers.
    Mr. Hillman. You are absolutely right. That was the most 
surprising thing to us as part of this study. As you have 
recounted and as have others, there has been a variety of 
reports out there in the 1990's and in the 2000 era that go 
back 10, 20, 30 years, recounting the types of problems they 
were having with the sales of these products. As we conducted 
work for this report before you as well as an earlier report in 
June 2005, we visited military bases. We talked with officers. 
We talked with junior and senior enlisted personnel. And we 
would be finding the same story as we were recounted in those 
studies. It is really quite remarkable.
    Chairman Shelby. I understand that the Department of 
Defense has banned only one company--one company--from military 
bases worldwide. I believe that was Academy Life Insurance 
Company in 1998.
    In light of all the transgressions that have occurred over 
the past 20 years or more, I would ask this question: Should 
more be done to protect our men and women in uniform from 
unscrupulous actors? Senator Enzi has been in the leadership on 
this, as you know. Should more be done? And should we pursue 
legislation in this regard? Because I am not sure the 
Department of Defense could do it without legislation, or has 
done it. They have had a long time to do it.
    Mr. Hillman. That is absolutely right. We were looking into 
the bill that Senators Enzi, Hagel, and Schumer introduced and 
find the provisions in the sections in the bill to be very 
relevant toward solving the problems servicemembers are facing. 
We have articulated certain important provisions within our 
report being released today, but believe that each of the 
sections in the bill being introduced have valuable 
contributions to protecting servicemembers.
    In particular, because some States have reviewed the 
products sold to servicemembers on the insurance side and found 
them to be not in compliance with existing State laws, we are 
recommending that all State insurance commissioners review 
product provisions to ensure that they are in compliance with 
existing laws. As Senator Schumer said in his opening remarks, 
that is quite a fundamental requirement.
    We have seen the State of Washington and others review 
products and find them to not be in compliance, and that is one 
quick and easy way to stop the sale of these products to 
military installations within those States.
    Because State insurance commissioners have no authority to 
evaluate whether the products sold are appropriate or suitable 
for military members, we are also recommending--perhaps one of 
the more controversial recommendations--that State insurance 
commissioners and the Defense Department work together to 
develop appropriateness or suitability standards for sales of 
products to military servicemembers.
    This has been a particularly contentious issue within the 
insurance industry, Mr. Chairman. As you know, the securities 
industry already has suitability standards, but such standards 
do not generally exist on the insurance side. On a limited 
basis, though, the insurance industry has acted where there are 
at-risk populations. For example, they developed suitability 
standards for senior citizens aged 65 and over as it related to 
the sale of annuity products. We are suggesting that the 
servicemember population is a similar at-risk group. Because of 
their itinerant lifestyle, moderate income levels, and young 
ages, they are particularly susceptible to abuse and, 
therefore, we are recommending that such standards be developed 
by DoD and the insurance industry to help curb this activity.
    Chairman Shelby. Senator Sarbanes is recognized.
    Senator Sarbanes. Thank you very much, Mr. Chairman.
    Mr. Hillman, I again want to commend you and your 
colleagues for this extremely helpful report. I have a number 
of questions. The first I want to put to you is, to what extent 
was the Department of Defense allowing situations in which the 
agents trying to sell these products seemed to be clothed with 
some legitimacy from the Department? I mean solicitation on 
base or the use of certain military facilities, how they 
portrayed themselves so that their recruits did not perceive 
them as being as they were, a private vendor just trying to get 
a sale, but somehow could come away with the impression that it 
was somehow an approved activity by the Department of Defense, 
that it carried some imprimatur of approval as they were 
dealing with these people?
    Mr. Hillman. As you know, Senator Sarbanes, one of the 
commonalities associated with the sales of these products--and 
I would like to have Jack Edwards also respond to this in more 
detail after I complete my initial remarks--one of the 
commonalities associated with the sale of these products is 
that they are often sold by agents who have had prior military 
service. Therefore, they are totally disarming the 
servicemembers that they are meeting with, giving them the 
impression that they are providing them with a product that is 
going to more than meet their needs because the agents have 
been where servicemembers are now.
    Military personnel overseeing these activities do have a 
tough job. They are available and present, but the enforcement 
of their solicitation policies have not occurred in a fashion 
that we would have expected them to have occurred. There are 
requirements in the solicitation policy that go way back, 
prohibiting group sales that are prohibiting sales on barracks, 
and prohibiting sales during working hours, and repeatedly in 
reports you are seeing these types of infractions taking place. 
So clearly, much more needs to be done by the Department of 
Defense to help ensure that the individuals who are on base 
soliciting information are doing in accordance with their 
policies.
    Mr. Edwards.
    Mr. Edwards. Yes. In the case of several of the 
installations where we visited, we did hear of cases of group 
presentations going on which are a problem because they have 
been prohibited by the directive which rules all of the 
commercial solicitation that occurs on the installations. This 
type of behavior is very difficult to quantify. There are not 
any statistics out there to suggest how often it has occurred.
    However, one piece of information that we can put forward 
is that we did a survey of 175 DoD personnel financial 
management managers. These are people who are on military 
installations, who are in charge of programs to help enlisted 
people and officers with their financial concerns.
    Senator Sarbanes. These are DoD employees, is that correct?
    Mr. Edwards. Yes. These managers indicated that several of 
the prohibited practices are going on. We could not confirm all 
of those because we did not visit all the bases. But in several 
cases we found 25 percent or more of that sample of 175 
installation managers saying that prohibited practices were 
occurring on their bases.
    Senator Sarbanes. Your report notes difficulties and 
resistance in the Department of Defense in talking to other 
financial regulators about a number of these issues. Could you 
explain that to us a little bit?
    Mr. Hillman. Yes. DoD has not shared concerns with 
complaints for several reasons. Base personnel prefer to work 
directly with the selling agents to resolve any matters, rather 
than working directly with the financial regulators. Some were 
concerned that discussions between servicemembers and financial 
regulators would be prohibited due to installations' legal 
advisers involvement in the complaint handling process. When 
individual servicemembers contact Judge Advocate General 
offices these advisers attorney-client privileges would 
prohibit them from sharing information further.
    Upon further review with DoD regarding this matter, they 
now though believe that any legitimate request from an entity 
such as a financial regulator, could overcome the privacy or 
Judge Advocate General limitations.
    Senator Sarbanes. But generally speaking, they are not 
transmitting through to the financial regulators the complaints 
that they are receiving; is that correct?
    Mr. Hillman. That is correct. They are not sharing 
information with the financial regulators, and they largely 
have not had a mechanism to even gather internally within DoD 
information on the extent to which there are concerns and 
complaints out there regarding these products.
    Senator Sarbanes. Right.
    Mr. Chairman, my time has expired. Thank you very much.
    Chairman Shelby. Senator Enzi.
    Senator Enzi. Thank you, Mr. Chairman. I want to follow up 
just a little bit on what Senator Sarbanes was asking about.
    There are known violators. How do they get access to the 
base? Is it a communication problem then? Is that what you are 
saying, and perhaps there are some base restrictions that keep 
them from sharing this information? I was not completely clear 
on what you were saying there, by known violators.
    Mr. Hillman. The DoD attempts to take action on known 
violators, but there are a wide variety of agents that do come 
in on base that have not had violations in the past, and they 
are allowed in to provide for services to servicemembers in the 
insurance and securities area.
    Regarding the fact as to whether or not there are 
limitations in the ability of the Defense Department to provide 
information to financial regulators, initially they were 
telling us, through most of our study, that, yes, that indeed 
was the case, that there were privacy concerns and other 
concerns associated with sharing information outside of the 
base, and their preference was to handle matters themselves 
rather than to involve the financial regulators.
    Our understanding is, as a result of our work though, that 
the research that the Department of Defense has done now, they 
believe that there are no limitations to them sharing 
information about concerns and complaints of servicemembers to 
other financial regulators to the extent that they have a 
legitimate need to know.
    Senator Enzi. Thank you. Along that same line, you examined 
the quantity and quality of complaints that were filed against 
insurance agents and held within the Department of Defense or 
on base. Can you give me a little insight into how a typical 
complaint is processed once it is filed, and how that is 
communicated?
    Mr. Hillman. Maybe I should ask Mr. Edwards to respond to 
that.
    Mr. Edwards. The actual procedure is probably going to vary 
a little bit by service, so what may be done in the Army may be 
a little different than in the Marine Corps; also it may vary 
somewhat according to the particular installation. But in some 
of the discussions that we had while visiting installations, 
typically servicemembers who thought that they were 
experiencing some kind of problem would go to the commercial 
solicitation coordinator for the entire base. This would be the 
individual who would certify whether an agent coming on the 
base was licensed, had had no problems on the base before and 
met certain other requirements.
    After that, the coordinator would discuss what the problem 
was, whether certain activities had occurred, and whether those 
activities were prohibited practices. At that point the 
servicemember would be given an opportunity to go forward with 
the complaint or not. If it did go forward, then there would be 
various ways in which it could go forward. It might be with a 
criminal investigation, or it may be through some other 
channel.
    Senator Enzi. Did you see any consistent patterns in the 
substance of these complaints?
    Mr. Edwards. That was one of the interesting things. We ran 
into a problem in the work that was requested in the June 
report. We were asked to look at the incidence of violations. 
DoD does not gather information about the incidence of 
violations. It only is able to quantify those individuals who 
have committed actions that are egregious enough to result in 
banning. This is one of the reasons that we recommended that 
DoD should be monitoring before something gets that severe. DoD 
partially concurred with our recommendation, and said the 
current Senate bill requires them only to monitor at the banned 
agent level.
    Senator Enzi. Thank you. Mr. Hillman, did you encounter 
situations where the jurisdiction of the DoD and the State 
regulators was confusing, and did that cause inaction on the 
part of either party?
    Mr. Hillman. Cody.
    Mr. Goebel. Yes. We did hear that from regulators. We did 
some surveys as part of preparing this report and the report 
that Jack Edwards worked on. And although generally State 
insurance regulators and State security regulators expressed 
the opinion that they did have jurisdiction, there were a few 
that had some doubts about their complete jurisdiction. And in 
at least a couple of cases at some States that had large 
military populations, they definitely knew they did not have 
jurisdiction because some of these installations there are 
considered Federal enclaves, and so they did not believe they 
did, which was a concern.
    What some States have done in light of that is, for 
example, investigators at the State of Maryland conducted some 
work and found violations at bases in that State and in the 
surrounding area. They actually reached out to the FBI and 
brought them with them in some of their initial consultations 
on the base to make sure they had a Federal connection. 
Investigators in Virginia also reached out and got permission 
from commanders at the base before they did any work. So that 
is how they have tried to address it.
    Mr. Hillman. So this notion and this uncertainty about the 
extent to which they have legal authority is hampering their 
ability to go on base whether they have it or not. So 
legislation that you are introducing dealing with making it 
more clear that State securities regulators and insurance 
regulators have the jurisdictional right to go onto base to 
deal with sales practice issues is particularly important. We 
understand that this legislative jurisdiction requirement 
varies from one State to another, and we did not have the 
detailed time and resources to go in and look at each 
individual State and State activity.
    However, we understand that the types of existing 
legislative authority over military installations varies 
significantly based upon when and how specific tracts of land 
were acquired and the like. So it is a confusing area and 
clarification would be much welcomed.
    Senator Enzi. Thank you. My time has expired.
    Thank you, Mr. Chairman.
    Chairman Shelby. Senator Bunning is recognized.
    Senator Bunning. Thank you, Mr. Chairman.
    In your report did you examine the recruitment policies of 
the Army, Navy, Marines, Air Force, and their explaining to 
recruits what benefits a recruit would have as far as life 
insurance or family benefits, and all the things that seem to 
be violated after the fact?
    Mr. Hillman. Again, I would like to have Jack Edwards 
provide any information he may have about the report that he 
worked on looking at solicitation practices within DoD's 
policy. Our report looked at the quality of the products that 
were being sold and the quality----
    Senator Bunning. After the fact.
    Mr. Hillman. After the fact, and the quality of the 
regulation.
    Senator Bunning. So, I am a young man being recruited into 
the Army, for instance, the recruiter should be telling me now 
that, ``Jim Bunning, you are going to have a $400,000 life 
insurance policy.'' I would like you to explain what is being 
done after the fact though.
    Mr. Edwards. The military has a very strong program for 
looking at personal financial management. They try to do 
training for everyone who comes in. However, they have 
experienced some problems making sure that everyone gets 
through training. It was not in the report that we are 
discussing today about the supplemental life insurance, but 
another one of my teams did a report this year that looked at 
that education process, and it varies quite a bit among the 
different services as to exactly how they do the financial 
education. There are a wide variety of issues that are required 
as part of that financial training that each new recruit gets 
during periods which include the basic training and the initial 
follow-on installations where they go.
    Senator Bunning. Did you find out in your report that the 
violators, the people who violate the young service people, the 
people who are trying to sell illegal or unreasonable 
contracts, whether it be in mutual funds or life insurance, did 
they hit these recruits before they had completed basic 
training, or was it after the fact that they had finally made 
it through the basic training period, and then were members of 
the services?
    Mr. Edwards. It could be in both situations, both while you 
are still in basic training, as well as in the follow-on 
assignments. However, one of the things that must be kept in 
mind is that the directive that DoD is operating under only 
controls the situation on the installations. Some 
servicemembers go out to the local mall or somewhere else and 
end up buying a policy, and DoD has less control over what 
occurs----
    Senator Bunning. I understand that. That is not my 
question. My question is the time between when they enter as a 
recruit until the time they finish, is the Department of 
Defense giving the recruit enough information on the benefits, 
and therefore, preventing our giving a heads-up to these young 
people, that there are people that could be trying to sell them 
illegitimate insurance policies, contractual mutual fund 
policies and on down the line?
    Mr. Edwards. We did not look specifically at that issue.
    Senator Bunning. You didn't?
    Mr. Edwards. No.
    Senator Bunning. All right.
    Mr. Goebel. Senator.
    Senator Bunning. Yes.
    Mr. Goebel. We also, in our report, have a recommendation 
to the Department of Defense to expand some of the subjects 
they cover in their personal financial management training, not 
so much on the benefits of the products as you are discussing, 
but on what to do if they do have concerns or complaints, 
notifying them of who to complain to, the regulators, the 
insurance or the securities regulators. We also found that 
although DoD is attempting, as Jack has said, to get that 
training to all new recruits, there was some desire expressed 
by some servicemembers we talked to to see that held at all 
levels, because as we mentioned, not all of these products are 
targeted to the early----
    Senator Bunning. What I am saying is if something is 
eliminated 25 years ago from the civilian sales force, the 
recruit would have the same opportunity to complain to the 
NASD, to the Securities and Exchange Commission, or any other 
regulator. I know they are very young and very unsophisticated 
investors, but the fact of the matter is they have the same 
rights and privileges that anyone who is not in the service 
has. My only desire is to make sure that what is good for 
people outside the service is also good for them when they get 
in.
    Mr. Hillman. Well, the Service Members Life Insurance 
Program is well-supported by military servicemembers. Well over 
90 percent enroll into that program, so they know that they 
have insurance. But oftentimes what regulators are telling us 
is, that these insurance products that are being sold to 
military members are being not sold as an insurance product, 
but are being sold as an investment.
    Senator Bunning. I can understand how that would happen, 
and that also can try to be happening in civilian life. The 
fact that somebody is 19 and right out of high school and the 
proximity of going into war, they would never think that they 
had enough life insurance. The fact of the matter is that if 
informed of what is available at the military level and the 
upgrading of the military life insurance policies that we as a 
Congress has taken under, would have a great deal of effect on 
what they do as individuals.
    Thank you.
    Chairman Shelby. Thank you, Senator Bunning.
    Senator Sarbanes. It is $400,000 now, is it not?
    Mr. Hillman. That is correct, absolutely.
    Senator Sarbanes. Right.
    Mr. Edwards. Plus $100,000 in death gratuity benefit that 
everyone would get even if they were not covered by the 
insurance.
    Chairman Shelby. Plus survivor benefits, education for 
children, and so forth.
    Senator Bunning. Oh, it is a package.
    Chairman Shelby. In addition to that. I am not saying it is 
sufficient, but we owe them a lot.
    Senator Allard.
    Senator Allard. Thank you, Mr. Chairman. The huge benefits 
that can occur, such as for a widow, did not used to be true. 
But, if they have a family of two children and the widow, you 
can easily figure out over a lifetime their accumulated 
benefits could be over a million dollars. I do think that they 
need some financial consultation. I understand they are 
providing that.
    But the thing that comes to my mind is what motivates the 
Department of Defense to think they need to have a salesman on 
the job? I mean these men and women in the armed forces, they 
are working. It is on-the-job sales. I would not let a salesman 
come in and sell to my employees while they are working for me. 
Why do they think that is important? I am trying to think why 
an employer would allow that to happen. When I have employees 
working for me, I want them to do the job. If they have 
something they want to buy, they do it on their own time. So my 
question is, why do we even allow a salesman of any kind on the 
base?
    Mr. Hillman. I may have Jack answer this question as well, 
Senator, but I agree with your view that the insurance coverage 
that is being made available for military members today is very 
generous. The investment options being made available to 
military members through their Thrift Savings Plan is equally 
very generous. You have no-load programs, low-cost operating 
funds available for servicemembers to invest at least 7 to 10 
percent of their income into these Thrift Savings Plans.
    Chairman Shelby. Do they all know that? That is important, 
to communicate that to them.
    Senator Allard. Yes, which is available to any Federal 
employee.
    Chairman Shelby. Right.
    Senator Allard. Yes. I need a response to my question of 
why do we let salesmen on the base where they are working?
    Mr. Edwards. A military installation is a little bit 
different than your usual corporate location because we do have 
people actually living on the bases. They will be on there 
after their work day ends. And in the case of people who are 
living in community family housing on the installations, they 
may arrange to have someone to actually come to their house. Or 
it may be the case that the military member buys a policy from 
someone who comes to a designated area that the installation 
commander makes available.
    So part of it is a difference between the military working 
environment and the civilian working environment.
    Senator Allard. It sounded to me like, when we were putting 
this together, they had a group of soldiers together, and this 
guy would come in while they were in uniform, came in and made 
this sales pitch, and it does not seem quite appropriate to me. 
If they are home or whatever, that is probably a different 
story.
    Senator Sarbanes. Did they solicit in the context in which 
Senator Allard just suggested?
    Mr. Edwards. Yes. If you look back at the report from 1999 
DoD IG, the Cuthbert Report, and our report, each suggests some 
solicitation was going on during work hours in work situations. 
You do have some situations like those that are documented for 
Camp Pendleton, where individuals did get solicited in groups, 
which is a prohibited activity, much like contacting somebody 
during the work hours.
    Senator Allard. The other thing, when they came in and 
marketed, I assume they approached the soldiers pretty much as 
this was a savings mechanism, a financial investment. Was this 
in relation to IRA accounts or was it Keogh plans, or how were 
they structuring the sales to start with? I personally have 
been approached by these people with an IRA account, for 
example, who say this is strictly a savings account, but when 
you get into it, you find out you bought life insurance or some 
part of that is life insurance, and it is very expensive. This 
sounds to me like the same mechanism that we have here. Are 
they coming in and trying to market an IRA account, not knowing 
that they have a Keogh plan, or was something like that 
available?
    Mr. Goebel. Yes. The securities product, the contractual 
plan, was largely being sold, from what we understand, as a 
Roth IRA, as a retirement vehicle for the servicemembers.
    Senator Allard. Same types of stuff we run into in the 
private sector. We ran into them in the 1970's particularly, if 
I recall, although they just had them as IRA accounts at that 
time, and they are deceptive. The salesman persisted that this 
was not life insurance, but it was there in black and white if 
you read the fine print. I can understand how they can get 
misled on that kind of stuff, and I think that it is a shame.
    Mr. Hillman. The SEC and the NASD will be on the next 
panel, can speak very vividly to practices being undertaken by 
the largest seller of this contractual plan, who they 
identified through scripts that were being provided to agents, 
just how egregiously they were touting the limitations of other 
products and services, and propping up the products and 
services that they were selling.
    Senator Allard. Thank you, Mr. Chairman.
    Chairman Shelby. Mr. Hillman, what single action by the 
Department of Defense, the insurance commissioners, the 
Congress, or any other interested party would have the greatest 
impact on this decades-old problem in your judgment? Would it 
be strong, meaningful legislation, as Senator Enzi has 
proposed, or what would it be?
    Mr. Hillman. As it relates to the Department of Defense, 
they have a major mission and a massive responsibility. It is 
one of the biggest organizations in the world. They need help. 
The need to solicit the assistance of experts who know about 
the quality of the financial products and who know about 
problems concerning sales practice abuses. They need to 
outreach more to financial regulators. That, in our view, would 
be the one major area where we could help to curb this type of 
activity at the SEC, at the NASD, indeed within State insurance 
regulators and the NAIC. They do not have resources to look at 
every issue that may come up as a part of an examination and 
their approach, therefore, is more risk-based, more risk-
focused.
    One of the key ingredients in determining the extent to 
which risks exist comes from complaints and concerns that they 
might hear. That will trigger to them a potential problem, that 
will give them an opportunity to review that problem, see to 
whatever extent it exists, and to deal with it.
    Chairman Shelby. As we all know, we are dealing with a 
young population as a rule, a very vulnerable population, 
considering they know they are going to be in harm's way, more 
than likely. So the tendency would be--I think Senator Allard 
or somebody alluded to the fact--to buy insurance to protect 
their families, protect their loved ones. Probably more so than 
the average person, would you think?
    Mr. Hillman. I would think so.
    Chairman Shelby. I think we owe them more than we have 
done.
    Senator Sarbanes, do you have any other questions?
    Senator Sarbanes. No, I know we have another panel coming, 
Mr. Chairman.
    Chairman Shelby. A very important panel, too.
    Senator Sarbanes. Yes, it is an important panel. These--
have been very helpful and I am sure we are going to stay in 
close touch with them as we proceed on this issue.
    Chairman Shelby. Senator Allard has an observation.
    Senator Allard. The point I wanted to make is this--they 
are not up front about selling life insurance.
    Chairman Shelby. Yes.
    Mr. Hillman. Right.
    Senator Allard. They make the argument they are selling an 
IRA account and it is in a savings account.
    Mr. Hillman. Right.
    Senator Allard. In reality, it is a partial life insurance 
policy that they are selling.
    Mr. Hillman. And what you are finding also, Senator Allard, 
is that the way in which the premiums on these policies are 
being allocated in the earlier years, the years that 
servicemembers are likely to make payments, a significant 
portion of those premiums go toward the high-cost insurance. A 
very limited portion go toward the savings fund. Only in the 
out years do the maximum portion of the premiums go toward the 
savings funds, and of course that is when the servicemembers, 
for their own personal reasons, likely have dropped out.
    Senator Sarbanes. Is there not information from the 
companies, like internal memos and so forth, where they are 
relying in fact on these sales items not being carried through 
to get the benefit in the later years? It is all part of their 
calculation as to how to make a much larger profit out of what 
they are doing; is that not correct?
    Mr. Goebel. Yes, Senator, in our report we quote from some 
of the internal memos that were obtained through depositions in 
a previous court case, where one of the company officials was 
attempting to overcome objections within his own company as how 
can their firm could sell this and promise this high rate of 
return that is not feasible. And he told them: ``No, no, do not 
worry about it, we won't really ever have to pay that amount 
out, 40 percent will drop out in the first year.'' And so the 
products, the way they were structured and designed seemed 
almost deceptive to us.
    Chairman Shelby. I personally believe that companies that 
are doing business this way, as you describe, exploiting our 
soldiers, should be banned or something. You know, I do not 
know exactly how we are going to do it, but we are going to 
look seriously, Senator Sarbanes and I working with Senator 
Enzi and others, Senator Allard, on legislation.
    Thank you so much, Mr. Hillman, you and your other people 
at the Government Accountability Office. As usual, you have 
done great work.
    Mr. Hillman. Thank you. It has been our pleasure.
    Chairman Shelby. We are going to call up the second panel. 
Mr. John Molino, Deputy Under Secretary of Defense for Military 
Community and Family Policy, U.S. Department of Defense; Ms. 
Lori Richards, Director, Office of Compliance, Inspections, and 
Examinations, the U.S. Securities and Exchange Commission; Ms. 
Mary Schapiro, Vice Chairman and President, Regulatory Policy 
and Oversight, National Association of Securities Dealers; and 
Mr. John Oxendine, Insurance and Safety Fire Commissioner for 
the State of Georgia.
    I want to welcome all the members of the panel. Your 
written testimony will be made part of the hearing record of 
the Committee in its entirety. We would like for you to sum up 
your top points and your views and observations here, where we 
will have a chance this morning to have a dialogue with you.
    Mr. Molino, we will start with you.

                  STATEMENT OF JOHN M. MOLINO

               DEPUTY UNDER SECRETARY OF DEFENSE

            FOR MILITARY COMMUNITY AND FAMILY POLICY

                   U.S. DEPARTMENT OF DEFENSE

    Mr. Molino. Thank you, Mr. Chairman. Thank you for having 
this hearing and for the opportunity to express three basic 
sentiments and then, with your indulgence, I have been making 
notes all throughout the first panel and would like to say a 
few things in that regard.
    First, I want to express the Department's appreciation to 
the Committee for the interest you have taken in the well-being 
of our troops and their families by holding this hearing and by 
probing into the quality of the products targeted for sale to 
them.
    Second, I want to express the Department's eagerness to 
collaborate with those who share our goals and are not 
motivated by maximizing their profits at the expense of our 
servicemembers and their families.
    And finally, I want to express the Department's commitment 
to maintain the effort to do what is right in this regard and 
in the best interests of those men and women who selflessly 
serve to protect the freedom that most of us enjoy and, 
unfortunately, too many of us take for granted.
    We want our troops to be informed consumers with access to 
quality products both on and off our military installations. 
Working with the Congress, the individual States, regulators, 
and other concerned entities, I believe we can achieve this 
goal.
    Now, all that I have said might be empty rhetoric, and 
Senator Sarbanes rightly cited a series of reports and 
recommendations that apparently fell on deaf ears across 
Administrations and across sessions of Congress. Soon after I 
came to the current position I am in, in the second half of 
2001, my staff brought to me this historic record that has been 
cited frequently. I asked many of the same questions that you 
people have asked today--how could this have gone on so long, 
how could this be going on today?
    Chairman Shelby. But it is.
    Mr. Molino. Yes, sir it is. What we did was we began 
revising policy, staffing that policy. And of course, when you 
begin to staff policy within the Pentagon, it does not stay 
within the Pentagon. We reached out to several Government 
agencies, we reached out to nonprofits to develop an education 
program which is now having an impact, and the statistics are 
showing us that there is a dramatic decrease in the number of 
servicemembers who report having difficulty making ends meet or 
paying their bills. We cooperated, indeed, with The New York 
Times reporter who did that wonderful expose. We have 
cooperated with the GAO and others in Government, as Senator 
Schumer has suggested we should do.
    And what are the results to date? We are not there yet, by 
no means. There have been several enforcement actions, most 
notably at Fort Benning, Georgia, which have come to public 
attention. There has been legislation that we find, frankly, 
very helpful. There has been collaboration with States and 
nonprofits. And this has occurred despite enormous pressure 
from the insurance industry. I am happy to report, however, 
that many of the letters I received from Congress initially 
saying why are you being so tough on the insurance industry 
have now shifted to tell me that I am not being tough enough. 
And I welcome those letters.
    We are still, unfortunately, under a restriction imposed by 
the Congress that tells me that I cannot revise my regulations 
in this regard without first giving 30 days' notice, and I 
presume that is to allow those who do not share our opinions of 
moving forward with reform to advise you of why these are bad 
ideas.
    We welcome the offers of help from the Hill. We want to 
cooperate in every way. Many of the actions recommended by the 
GAO, we have already taken, and our other actions in the 
process are consistent with the GAO's report and their 
recommendations. We endorse the GAO's recommendations as they 
deal with State regulators and the suitability standards. We 
would welcome that kind of guidance.
    My commitment is where the Department of Defense is the 
problem, we will become part of the solution. We welcome 
Congress's help in allowing the good work we are doing on base 
and we welcome anything you do to allow that to extend off the 
installation, outside the gate.
    Why hasn't DoD nor the Congress acted sooner than beginning 
a few years ago? I cannot answer the question. I suspect there 
are reasons, but I would submit to you that none of those 
reasons are acceptable.
    Let me end by restating one salient point. This is an issue 
that I think is on the road to a solution primarily because the 
Department of Defense chose to turn over some rocks that had 
been sitting dormant for many years. We welcome the airing that 
this issue is getting. We welcome the help of a legislative 
nature, of a regulatory nature, from our nonprofit partners, 
from Congress, and from those who share our interests.
    I would be happy to entertain your questions, Mr. Chairman.
    Chairman Shelby. Ms. Richards, on behalf of the Securities 
and Exchange Commission.

                   STATEMENT OF LORI RICHARDS

                DIRECTOR, OFFICE OF COMPLIANCE,

                 INSPECTIONS, AND EXAMINATIONS

            U.S. SECURITIES AND EXCHANGE COMMISSION

    Ms. Richards. Thank you. Chairman Shelby, Members of the 
Committee, I am pleased to appear before you today to testify 
on behalf of the SEC and to express the Commission's views with 
respect to the GAO's report. My testimony today will address 
those portions of the GAO's report that deal with securities 
products.
    The Commission strongly believes that our servicemen and 
servicewomen must be protected from illegal and abusive 
practices in the sale of securities. Over the last year, the 
Commission and its staff have undertaken a comprehensive 
program to address such practices. Our program has included 
enforcement activity, extensive examination activity, including 
two examination sweeps, close coordination with the Department 
of Defense and the NASD, and finally, investor education.
    My written testimony summarizes all of these actions in 
some detail, so I will just touch on them this morning.
    First, the Commission brought an enforcement action against 
First Command Financial Planning, a broker-dealer that, as you 
heard this morning, specializes in the sale of securities 
products, namely contractual plans or also called periodic 
payment plans, to military personnel. The Commission's 
enforcement action ordered First Command to cease and desist 
from illegal and abusive sales practices in the sale of those 
securities and also included an order to pay $12 million, $5.2 
million in restitution to military customers and the remainder, 
importantly, to fund an investor education program for military 
members and their families, to be administered by the NASD.
    Second, we have also mobilized our troops on this issue. 
The Commission's examination staff has conducted numerous 
examinations of broker-dealers that sell securities to military 
personnel. SEC exam staff initiated two separate risk-targeted 
examination sweeps, one focusing on the sales of mutual fund 
contractual plans or periodic payment plans, and the other 
examination sweep focusing more generally on the sales of 
securities products to military personnel. The examination 
sweeps included on-site reviews of broker-dealer firms serving 
the military market and visits to these firms' sales offices 
located in military base communities both in the United States 
and overseas.
    In total, the SEC staff thus far--and I emphasize that our 
work is ongoing--we have examined or are in the process of 
examining about 20 broker-dealer firms with locations near base 
communities, including firms with sales offices near Marine and 
Navy bases in San Diego; near Lackland and Kelly Air Force 
bases in San Antonio, Texas; near Fort Hood in Killeen, Texas; 
near the Great Lakes Naval Training Center in North Chicago, 
Illinois; near Rammstein Air Force Base in western Germany; 
near Graffenwoer Army Base in eastern Germany; and finally, 
near Aviano Air Force Base in Italy. More examinations are 
anticipated.
    Third, the Commission staff have worked closely with the 
Department of Defense and have established a regular liaison 
with the Office of the Secretary of Defense, through which we 
have begun to share information and coordinate our 
examinations. We have also--and this is very important--
coordinated our efforts with the commands, the local commands 
of selected bases where we have had our examiners go and visit. 
This coordination is continuing, with the Department of Defense 
providing us with information that we are using to target our 
examinations.
    Finally, our staff in the Commission's Office of Investor 
Education and Assistance have initiated an investor education 
program directed specifically toward members of the military 
and their families. As a charter member of the DoD's Financial 
Readiness Campaign, we have assisted in the presentation of 
financial education programs to the military. SEC staff have 
already conducted several financial education workshops on 
military installations. We have also initiated education 
materials about periodic payment plans specifically and 
published an article in Military Money, a publication that is 
distributed free in the military community. In all of these 
efforts we have worked closely with the National Association of 
Securities Dealers.
    With respect specifically to the GAO's report, we strongly 
agree with the GAO's recommendation that Congress should take 
legislative action in this area to protect military 
servicemembers. We recommend that you take steps to address the 
particular features of these plans that make them susceptible 
to abusive and misleading sales practices and excessive fees.
    We strongly agree with the GAO's recommendation that 
Congress revisit the law governing mutual fund contractual 
plans. As an alternative to an outright ban on these plans, we 
believe that Congress could consider addressing the excessive 
sales charges which are features of these plans by, for 
example, reducing the maximum allowable load or working with 
the Commission and the NASD on other mechanisms that would 
provide protection against excessive sales loads.
    In addition, in the event that periodic payment plans are 
not banned, securities regulators will consider various means 
of better assuring ourselves that we have adequate information 
to assess the sales of these plans. Should the plans not be 
banned, we will continue to work with other regulators to 
ensure that we can have better oversight over their sales.
    In addition, with respect to the GAO's other 
recommendation, we have already taken action to enhance our 
information-sharing with the DoD, consistent with the GAO's 
recommendation, and we will continue to work with DoD to help 
us target examinations.
    More broadly, we look forward to working with this 
Committee, the DoD, the NASD, and other regulators to continue 
to protect members of our military as investors in our markets.
    Thank you. I am happy to answer any questions you have.
    Chairman Shelby. Thank you, Ms. Richards.
    Ms. Schapiro. As Senator Sarbanes, welcome again to the 
Committee. You spend a lot of time here.

                   STATEMENT OF MARY SCHAPIRO

                  VICE CHAIRMAN AND PRESIDENT,

                REGULATORY POLICY AND OVERSIGHT

           NATIONAL ASSOCIATION OF SECURITIES DEALERS

    Ms. Schapiro. Thank you very much. It is very nice to be 
here, Chairman Shelby, Senator Sarbanes, and Senator Enzi. 
Thank you very much for the opportunity to come before the 
Committee and testify about NASD's efforts to protect members 
of the armed forces from abusive and misleading sales 
practices.
    This morning, I would like to briefly summarize NASD's work 
in this area. We have prepared a comprehensive written 
statement and, with your permission, will submit it for 
inclusion in the record.
    Chairman Shelby. Without objection, it will be made part of 
the hearing record.
    Ms. Schapiro. Thank you.
    As you know, Mr. Chairman, America's men and women in 
uniform make great personal sacrifices to protect our Nation's 
security. They in particular should not have to worry about the 
honesty and the integrity of those who purport to help them 
make sound financial decisions. Yet, thousands of mostly young 
men and women who serve in the military have been disadvantaged 
by sales of investment products called periodic payment plans, 
or contractual plans.
    In 2003, NASD learned that First Command Financial Planning 
of Fort Worth, Texas, a broker-dealer with many ties to the 
military, using misleading pitches and improper sales tactics, 
had targeted and sold more than a half a million of these 
complicated and often extremely expensive products to 
servicepersons, many of whom were young and inexperienced 
investors. We have responded forcefully to end these practices 
by, punishing those responsible for them, ensuring that their 
victims are recompensed for their losses, and establishing an 
education campaign about investing and saving aimed at military 
personnel.
    As you heard this morning from GAO, an investor in one of 
these plans makes monthly payments of as little as $50 for a 
fixed period of time, usually 15 years. The payments are 
invested in mutual funds, and the investor is charged a 50 
percent sales load, or up-front fee, on the entire first year's 
payments. Payments during the remainder of the 15-year term are 
not subject to sales loads, so that the effective sales charge 
decreases so long as that investor can continues to make 
contributions. However, if the investor stays in the plan for 
more than 45 days, yet fails to make contributions over the 
full 15-year term, he or she can pay a sales charge of up to 50 
percent of the total amount invested.
    After a thorough investigation, including taking testimony 
from 16 current and former First Command employees, reviewing 
more than 25,000 pages of documents, and over 50,000 e-mail 
messages, NASD brought disciplinary action against the firm, in 
coordination with the Securities and Exchange Commission. The 
firm was, as Ms. Richards said, censured and fined $12 million 
in December 2004. That amount included restitution to thousands 
of customers who had terminated periodic payment plans after 
January 1, 1999, and had paid effective sales charges greater 
than 5 percent.
    As of October 18, over $4.3 million had been returned to 
these customers. The remaining funds were transferred to the 
NASD Investor Education Foundation to be dedicated to the 
development and deployment of comprehensive financial education 
programs for members of the armed services and their families. 
Working closely with the Defense Department and the SEC, we 
expect to launch a multifaceted military financial education 
program early next year.
    Like any regulator, NASD relies on customer complaints as 
an important source of information about improper sales 
tactics. Here, there were no complaints to NASD. We 
subsequently learned servicepersons had complained to military 
attorneys, but those lawyers could not relay this information 
to NASD without specific consent from their clients. We 
therefore support the GAO recommendations that would facilitate 
reporting of military investors' concerns and complaints about 
financial products to the appropriate regulators. NASD has 
designated staff to receive complaints from military personnel 
and to conduct outreach with DoD to proactively learn of issues 
concerning securities sales.
    Finally, Mr. Chairman, I note that Senator Enzi has 
introduced a bill that would ban the sale of periodic payment 
plans. His bill also recognizes that in situations where an 
investor is highly dependent upon a broker for advice and 
guidance, immediate access to full information, including the 
disciplinary history of the broker, can be crucial. Learning 
about your broker's history after purchasing can be too late. A 
provision in the bill would allow NASD to disclose to investors 
via the Internet the disciplinary history of brokers and firms. 
Currently we can only disclose this information by telephone or 
in writing or e-mail. Investors are not able to receive the 
information directly from their search. The bill would allow 
investors to get this crucial information the way they have 
told us they want it--online in real time. Thus far in 2005, 
3.7 million online searches were conducted on BrokerCheck, and 
only 50,000 over the telephone. Investors clearly prefer to 
receive their information via the Internet.
    NASD supports this bill and appreciates all of this 
Committee's efforts to protect the financial well-being of our 
men and women in uniform and, indeed, all investors.
    This concludes my statement, and I thank you again for the 
opportunity to be here and I would be happy to answer any 
questions.
    Chairman Shelby. Thank you so much.
    Mr. Oxendine.

                   STATEMENT OF JOHN OXENDINE

                   COMMISSIONER OF INSURANCE,

                        STATE OF GEORGIA

    Mr. Oxendine. Thank you very much, Mr. Chairman. My name is 
John Oxendine. I am the Insurance Commissioner of the State of 
Georgia. I want to thank the entire Committee for giving me 
this time to testify.
    I will be testifying on behalf of insurance regulators from 
all of the States which together make up the National 
Association of Insurance Commissioners. I am also testifying in 
my capacity as the Georgia Insurance Commissioner and will 
share some unique experiences.
    On behalf of all State regulators, I would like to make 
three points. First, that America's men and women serving in 
the armed forces are entitled to the same protections under 
State law enjoyed by all other American citizens. Protecting 
insurance consumers at the local level has been a hallmark of 
State regulation for more than a century. Each State has a 
strong unfair trade practices law backed by a dedicated staff 
that is trained to assist consumers.
    Second, State regulators recognize that those serving our 
country in the military deserve special attention from 
responsible State and Federal officials. We are actively 
reaching out to the military authorities to educate them about 
States' consumer education and consumer protection resources 
and to coordinate with local bases in our enforcement 
activities.
    Third, State insurance regulators do support Federal 
legislation that would clarify our authority to regulate the 
business of insurance wherever it occurs, including military 
bases both within the United States and overseas. We believe 
that H.R. 458, with some minor revisions, would help achieve 
these goals.
    In Georgia, I have personally been investigating sales 
abuses involving military personnel and have recovered 
approximately--or proposed $1.5 million in refunds for 
Georgia's soldiers alone. And that is the first initial wave. 
We have held hearings, we have listened to sworn testimonies of 
soldiers stationed in Georgia. Based on my investigation, I do 
have two major concerns.
    First concern is that insurance agents gain access to young 
soldiers through their relationships with the staff sergeants 
and that young soldiers place too much trust in the agents 
based on the agents' relationships with their sergeants. Many 
agents themselves are retired sergeants who know their way 
around the bases and know those in charge. Other agents develop 
relationships with sergeants by being good citizens. They help 
fund projects related to the morale, which of course are needed 
for our troops. For example, insurance agents may provide 
Thanksgiving turkeys to needy military families or they may 
sponsor on-base activities for the enlisted personnel.
    While not illegal, such favors do generate goodwill between 
the sergeants and the agents. Then, when the agents approach 
the young soldiers, they have an in, because they are friends 
with the sergeants. If a young soldier asks his sergeant about 
an insurance agent who has approached him, he is typically 
assured that the agent is a good guy and trustworthy. In some 
cases, young soldiers come to this conclusion on their own. For 
example, one soldier testified that he willingly got into the 
car and rode to a pizza party with an agent who he did not know 
simply because he had seen the agent talking to his first 
sergeant and assumed that the agent was trustworthy.
    The problem, of course, is that some agents are not 
trustworthy. Sometimes they sell unsuitable products. Most 
soldiers already purchased the affordable SGLI and may not need 
supplemental life products. These supplemental policies are 
often sold to soldiers as investments rather than as insurance. 
While it is true that an insurance policy can be one component 
of an individual's investment strategy, the investment portion 
of the policy is, in some cases, being overemphasized and/or 
misrepresented. Some soldiers have testified that they did not 
even realize that they had purchased life insurance. Some also 
testified they thought they were opening a savings account.
    Second, another concern I have is that nationally there is 
a culture that discourages military personnel from requesting 
assistance from civilian State agencies, such as insurance 
departments. In Georgia, we have recently shown that this 
culture can be reversed.
    In conclusion, we all share a commitment to serving 
insurance consumers who are serving our country in the 
military, and there are no easy answers or solutions. To 
address the problems, I would suggest, first, that we educate 
the NCO's so that they do not appear to endorse or recommend 
companies or agents that have provided financial assistance to 
our enlisted personnel; and second, that we encourage the 
NCO's, the morale and financial counselors, and the JAG 
officers to work with State regulators to educate the soldiers 
and to share information about potentially abusive sales 
practices.
    Thank you, Mr. Chairman, and I will be happy to address any 
questions.
    Chairman Shelby. Thank you.
    Secretary Molino, you, I believe, said a few minutes ago 
that we were not there--meaning DoD--you are not there yet. But 
with all due respect, 35 years to look under all the rocks? You 
said we continue to look under the rocks. I think Senator Enzi 
and GAO have found a lot of deep problems on top of the rocks. 
And we will get more into this as we go, but 35 years is a long 
time.
    Ms. Richards, I want to direct a question to you toward the 
SEC. The dominant retailer of contractual plans has been an 
SEC-registered broker-dealer subject to the SEC Commission's 
inspection and compliance regime for almost a half a century. 
Why did it take a series in The New York Times last year to 
trigger an investigation at the SEC into this company's 
deceptive marketing materials and sales practice? I understand 
that NASD had already begun its inquiry before the Times 
investigation was published. We know who this is, but it is 
troubling.
    Ms. Richards. Yes, sir, we had conducted, and the NASD had 
also conducted examinations of this particular firm.
    Chairman Shelby. We are glad you are doing it, but we 
wonder why it took so long.
    Ms. Richards. Yes, sir. During the course of that 
examination, we had received information from the firm which 
indicated to the examiners a very high persistency rate; in 
fact, about 80 percent, we were told, of investors in the 
contractual plans maintained them for the full 15-year period. 
That is a pretty significant rate. That information, coupled 
with the fact that we had no customer complaints--we did not 
see any customer complaints either on our own records or in the 
firm's books and records--led us not to look further. It was 
not until we had early indications from the press that in fact 
the persistency rate, that period of time in which the 
investors----
    Chairman Shelby. The press is doing a good job here.
    Ms. Richards. Yes, sir, a very good job.
    Chairman Shelby. Give them credit.
    Ms. Richards. Yes, a lot of credit.
    Chairman Shelby. Maybe not every day, but----
    [Laughter.]
    Ms. Richards. We then, based on those inquiries, we went 
back into the firm, and at that point we were able to obtain 
information along with the NASD that led us to conclude that in 
fact the earlier persistency rates that we had been provided 
with were not accurate. And in fact, that firm had a much lower 
rate of investors holding the security through the entire 15 
years. In fact, we concluded that about 43 percent of the 
firm's investors held the security for the full 15-year period.
    The lesson for us, I think, in this examination experience 
as well as in additional examinations we have done more 
recently of firms that sell periodic payment plans is that 
there really should be--and we agree with the GAO--there really 
should be better tools to allow securities regulators to see 
what the actual persistency rates are. And we would support 
requirements for broker-dealers to maintain those kinds of 
books and records and make them available to examiners.
    Chairman Shelby. Ms. Schapiro, why did the largest retailer 
of contractual plans voluntarily decide last year to stop 
offering them? I understand that this financial services 
company sold about 90 percent of all plans in the United 
States. Given their departure from this market right now, what 
does the future hold for contractual plans? Which mutual fund 
companies sponsor contractual plans and what are the 
justifications they offer for sponsoring plans with such high 
sales charges? With hundreds of no-load mutual funds available 
today, it seems to me that a 50 percent sales charge would be 
difficult to justify. It would be out in the marketplace and it 
should be on the base. I know this is a lot of stuff.
    Ms. Schapiro. That is a multipart question. I probably will 
not remember all the parts, so you should interrupt me.
    Chairman Shelby. I bet you would.
    [Laughter.]
    Ms. Schapiro. To start at the last part, you are absolutely 
right, there are tremendous alternatives now for investors to a 
plan such as First Command Financial Planning was selling. 
There are about 1,300 mutual funds, by our count, that allow 
you to make monthly or periodic contributions of as little as 
$50, and many of those are no-load funds with no up-front costs 
at all. So to my way of thinking, this is largely a product 
that has outlived its usefulness, because there are much 
better, lower-cost alternatives.
    Chairman Shelby. I think you have to put this in the 
context that these are young soldiers, for the most part, 
vulnerable, as I said earlier, worried about getting in harm's 
way--living and dying.
    Ms. Schapiro. Right.
    Chairman Shelby. And so forth.
    Ms. Schapiro. Well, they are not----
    Chairman Shelby. A little different from the ordinary us, 
everyday.
    Ms. Schapiro. In fact, that made it easier, I think, for 
these broker-dealers to market these plans. This was, as 
somebody said earlier, a captive audience and they had----
    Chairman Shelby. But not an audience to exploit, I hope.
    Ms. Schapiro. No, absolutely not. This is an audience that 
deserves the highest levels of protection in every aspect of 
what they do, whether it is insurance purchases or securities 
sales or anything else.
    I believe First Command stopped selling the product as a 
result of the enforcement actions taken by the NASD and the 
SEC. They realized that this is not a product that is suitable 
for the vast number of young, inexperienced investors to whom 
they were selling it, particularly given the fact that so few 
were able to maintain their contribution levels over the entire 
15-year period, which was the only way this plan made any sense 
for these young people.
    Chairman Shelby. Mr. Oxendine, what is the status of the 
investigations under way by various State commissions? I know 
you represent the State of Georgia, but you also are 
representing your fellow commissioners here at the table today. 
That is, examining the activities of the companies that market 
to military members.
    Mr. Oxendine. Yes, Mr. Chairman. I actually am the lead 
investigator, or lead State, on a multistate investigation into 
numerous different companies.
    Chairman Shelby. But you come from a State with some huge 
military bases.
    Mr. Oxendine. We do. We have seen a lot of activity both at 
Fort Benning, Fort Steward, and a little less at Fort Gordon. 
We were the first State to initiate an investigation. 
Therefore, when the NAIC decided to do a multistate national 
investigation, Georgia was asked to chair that, and we are 
chairing that. We are actually very close to wrapping up and, 
hopefully, settling the first of those investigations that we 
started. That was with American Amicable. We are working with 
that. The other investigations with several other companies are 
ongoing.
    Chairman Shelby. The GAO, among other things, reported here 
today that some States--I do not know about Georgia, but maybe 
some others--are finding that the products being sold to 
military members do not actually comply with your own State 
insurance laws. How did such products obtain approval 
originally, and what are the individual State commissioners 
doing to ensure that only legal products are sold? Has 
something fallen through the cracks here?
    Mr. Oxendine. What has happened is one product, Horizon 
Life was a product that was offered, that product has been 
removed from the streets in Georgia and in several other 
States. But they were often filed with our offices as separate 
products. And where as separate products there was nothing 
wrong with them, when they were bundled into a package, then we 
had concerns with them and they started to violate various 
portions of State laws. They were not--there was no indication 
that they would ever be sold as a package. In the civilian 
market, you would have people starting to complain. What 
happened in the military community, people did not complain.
    Chairman Shelby. This is a captive audience, too, is it 
not?
    Mr. Oxendine. And they know soldiers are not going to call 
their State government. We found that that was not happening. 
And the military was not calling their State government. That 
can be changed. Fort Benning, Georgia, for example, we share 
confidential documents together, we work together on sensitive 
issues, and have a great relationship, and I think that 
relationship can be done throughout the country and I think the 
Senate can help promote that.
    Chairman Shelby. Thank you.
    Senator Sarbanes.
    Senator Sarbanes. Thank you, Mr. Chairman. I see a vote has 
started so I will be very brief, because I know you will need 
to draw to a conclusion.
    First of all, I want to thank the panel. It has been very 
helpful testimony. I have just a couple of questions I want to 
put.
    I would say to NASD and the SEC, I commend you for the 
actions you took. I mean, this company found it could push the 
Air Force around but it could not push NASD and the SEC around. 
You have had to deal with some pretty big players in the past, 
in terms of meting out sanctions and punishments. So, I mean, I 
think they came up--you know, they finally got into a league 
where they could not just rely on old contacts and to get 
people to back off of trying to curb these practices.
    Mr. Molino, why does the military allow pay allotments to 
be used to pay for private-sector products? Am I correct that 
these recruits could do a check-off here and the money would be 
withheld and sent to the company for these products? Is that 
correct?
    Mr. Molino. That is correct, Senator.
    Senator Sarbanes. Why do you allow that?
    Mr. Molino. The allotment system has been around for a very 
long time.
    And the reason for that is in recognition of the nature of 
military duty, there are many deployments, there are many times 
even when you are not deployed, you are off training. And when 
the bills come into the mailbox, without the allotment system 
what you would find are people missing payments of their bills 
because they are not writing the checks.
    Senator Sarbanes. Who can get on the allotment system?
    Mr. Molino. What we found, Senator, was that the abuse of 
the allotment system was the nature of the problem--thanks to 
the people who did the investigations--where salesmen had 
actually worked out deals on some installations where they were 
delivering allotment forms to finance offices and getting them 
processed.
    Senator Sarbanes. Well, how could that be happening? How 
can the military allow that practice?
    Mr. Molino. That is in direct violation of existing policy, 
and that should not have happened. And where it has been 
exposed, it has been stopped. But you are exactly right in that 
the allotment system is provided as a aid and a resource for 
our servicemembers that has been abused by some of these 
predator salesmen.
    Senator Sarbanes. It seems to me, I mean, I am supportive 
of what Senator Enzi is trying to do. Those are steps beyond. 
But there are a lot of existing regulations or practices that 
the military has which have not been enforced--they have not 
been implemented here--which would have at least avoided some 
of these exploitations that have taken place. Am I correct in 
that perception?
    Mr. Molino. You are correct, yes, Senator.
    Senator Sarbanes. I mean, that could be done immediately.
    Mr. Molino. It should have been done years ago. And in 
fact, our inquiries into the status of this undertaking and 
this activity have revealed these violations that we have 
addressed and attacked.
    Senator Sarbanes. Do you challenge the right of the State 
regulators, their authority over insurance sales on military 
bases? Or do you think--I am asking Mr. Molino, but it is a 
point that Mr. Oxendine raised--or is it your view that they 
have the authority to regulate these----
    Mr. Molino. It is our view that there is sufficient 
authority out there to permit that. And as Mr. Oxendine points 
out, Georgia being a good example, that with a little 
communication we realize that these barriers are not 
nonexistent, that we can actually work together and 
collaborate, share information.
    Senator Sarbanes. Is it your perception that the military 
is any way inhibiting or putting up roadblocks to the State 
regulators' exercise of authority?
    Mr. Molino. I would agree with what I think the GAO's 
conclusion was; that if that is occurring, it is occurring out 
of a misinterpretation of the existing statute and regulations 
and that we clear that up as we clarify with our attorneys.
    Senator Sarbanes. Well, could you go back from this hearing 
and start clarifying that immediately? You do not need any 
authority to do that.
    Mr. Molino. I think it is fair to say that we are already 
engaged in that. And I think my colleagues would agree.
    Senator Sarbanes. Why do we not intensify it a little bit 
so the State regulators can get on the job?
    Mr. Molino. Happy to do it, Senator.
    Senator Sarbanes. Mr. Chairman, I have a lot of other 
questions, but I will defer to my colleague.
    Chairman Shelby. Keep the record open on this, if we would. 
Senator Enzi.
    Senator Enzi. Mr. Chairman, I was just going to make a 
request that you keep the record open.
    I have a number of questions. This is an outstanding panel 
and, as you know, my accounting background tends to make for 
fairly detailed questions and those usually result better in 
written answers------than they do in spoken answers. So if you 
will leave the record open and I can submit questions.
    Chairman Shelby. We respect that.
    I want to say before--we have a vote on the floor and I am 
going to recognize Senator Schumer next--but I want to say 
again, Senator Enzi, that your leadership in this area is very 
much appreciated. And this has been noted by us up here, your 
colleagues, but also everywhere else today.
    Senator Enzi. Thank you.
    Chairman Shelby. Senator Schumer.
    Senator Schumer. I am not an accountant, so I will ask the 
more direct questions. Lawyer. Never practiced. Was elected to 
the Assembly instead of practicing.
    I know Senator Shelby touched on this, Mr. Molino, but I am 
just amazed that this went on for so long and it took a 
newspaper to uncover it. What have you done to prevent the next 
scandal from occurring so it does not go on another 30 or 35 
years and we need another newspaper to uncover it? I mean--and 
not just on insurance or even mutual funds, but all these kinds 
of things. Payday lending is an example.
    Mr. Molino. Senator, I am not an accountant and I am not a 
lawyer, I am a soldier. But I grew up in Brooklyn, so that 
might help.
    Senator Schumer. Oh, well. I think, then, you are doing a 
great job.
    [Laughter.]
    What high school did you go to, Mr. Molino?
    Mr. Molino. I went to Xavier, sir, on 16th St.
    Senator Schumer. Oh, Xavier is a great school.
    Chairman Shelby. And he wants to know how many family 
members you have voting.
    [Laughter.]
    Senator Schumer. That is why the Chairman has been so 
successful for so long.
    Mr. Molino. Mr. Chairman, I suspect the Senator's success 
relies on the fact that he already knows how many family 
members I have voting.
    [Laughter.]
    Senator, you are asking me to predict something that is 
very, very tough to get at.
    Senator Schumer. I just want to know what steps the 
military has taken to prevent the next problem.
    Mr. Molino. Let me just say one thing about--I alluded to 
it in my oral statement, but the conversations that I have had 
with Diana Henriques, who is The New York Times reporter who 
wrote the outstanding series of articles, began not with ``I 
think you have a problem, let me ask you some questions,'' it 
began with something akin to ``I understand you have uncovered 
some problems and I want to write about it.'' And we then 
opened a very aggressive dialogue to ensure that she had access 
and information so that she would be able to reflect an honest 
portrayal of where we were.
    What I said in my statement is I cannot and, Senator 
Sarbanes, I will not even begin to apologize for 35 years of 
neglect in this regard. I have a frustration. I have been in 
this job since June 2001, and I am frustrated that we have not 
moved further than we have. In the oral statements of my 
colleagues here, I counted 13 references to close collaboration 
or coordination with the Department of Defense. Not a very 
lucky number, but I am proud of it. That has come about because 
the Department said we have a problem here, we need to address 
it.
    Senator Schumer. Can you--I am sorry to interrupt----
    Mr. Molino. No, no, I understand the time limitation.
    Senator Schumer. --but, first, we are both from Brooklyn, 
we always interrupt one another----
    Mr. Molino. Absolutely.
    Senator Schumer. But second, can you please tell me 
specifically what steps have been taken to prevent the next 
scandal from happening? Do you go monitor now what is 
happening? Do you survey soldiers at random as to what kind of 
products they are buying? Do you check about those products?
    Mr. Molino. We do. We post on our website those who have 
been banned, whether their company or the agent has been 
banned. We have a policy that is about ready to be implemented, 
once we get the approval and we pass the 30-day waiting period 
imposed by the Congress, that will require all individuals who 
have been solicited to complete a questionnaire--who solicited 
you, what is the quality of that solicitation, do you think you 
were pressured?
    Senator Schumer. And that would be given out randomly, even 
to bases that----
    Mr. Molino. No, sir, it will be given out in 100 percent of 
the cases. It is a requirement----
    Senator Schumer. Not in the--100 percent of the soldiers?
    Mr. Molino. Yes, sir. It will be a requirement for someone, 
to solicit on an installation, to, at the end of that 
solicitation, leave the form with the individual. And that form 
does not get returned through the agent, it gets returned 
through the commanding office.
    Senator Schumer. Would you support certifying 
representatives who are selling products?
    Mr. Molino. Absolutely.
    Senator Schumer. That is good.
    Mr. Molino. Yes, sir.
    Senator Schumer. That is very good.
    Mr. Molino. Absolutely we would do that.
    Senator Schumer. Okay. That would be a dramatic change.
    Mr. Molino. And, sir, insofar as payday lending, which is 
my next campaign that we are currently undergoing, I can assure 
you that I get besieged with requests from individuals who 
would like to be on my calendar to tell me how noble a business 
that is and how they are much better than credit unions and 
banks. I do not believe that is the case. I am not on their 
Christmas list and they are not on mine.
    Senator Schumer. Right. Okay, let me ask you this. You 
talked about coordination, you mentioned 13 times. Is there a 
set system in place? Because we are hearing from some other 
agencies that they think coordination could be better.
    Mr. Molino. Yes, sir. The GAO, in fact, has said that.
    Senator Schumer. I know.
    Mr. Molino. That coordination could be better. And I 
suspect----
    Senator Schumer. So what can you do to make that better so 
there is real coordination between your colleagues here and 
everybody else in the military? We do not expect the military 
to be financial experts. We do expect them to rely on the 
financial experts in Government to protect the soldiers.
    Mr. Molino. You are exactly right. We have memorandums of 
understanding with upward of 30 private agencies and 
governmental agencies to enhance our education effort. And I 
think, through the memorandum of understanding and the 
memorandum of agreement systems, we can secure that. And we 
endorse the GAO's recommendation that others who are experts 
advise us on suitability of these products. We welcome that 
advice.
    Senator Schumer. And you will do that as part of the 
certification process as well?
    Mr. Molino. Absolutely.
    Senator Schumer. That is good.
    Mr. Molino. Yes, sir.
    Senator Schumer. Let me ask you this. Again, you are not a 
lawyer. Do we expect any--or have criminal laws been violated 
and would we expect, from your knowledge--I know we do not have 
U.S. attorneys here, we do have some of the people who might 
refer cases--do we expect any criminal indictments coming out 
of this?
    Mr. Molino. I cannot answer that, Senator. I know that at 
the installation level the staff judge advocates look to see if 
there are criminal violations that should be recommended to the 
commands. And there have been cases--Fort Benning, as Mr. 
Oxendine cited--where nonjudicial punishment in the Uniform 
Code of Military Justice was employed on some of the situations 
that he cited, where----
    Senator Schumer. So it is a possibility; you just cannot 
comment on it, is what you are saying?
    Mr. Molino. I think if you break the law you deserve to get 
punished in that way.
    Senator Schumer. And is that a possibility that that could 
happen in some of these cases?
    Mr. Molino. I suspect that is always a possibility, yes, 
sir. But I would not want to prejudice----
    Senator Schumer. I am not asking a specific case, I am 
asking--you do not prejudice. I can tell you that much as a 
lawyer, I know.
    Mr. Molino. The bottom line is I do not want anybody to get 
off just because I prejudiced a statement that says they 
probably will be punished.
    Senator Schumer. Okay. Would any of the other panelists--
Ms. Richards, Ms. Schapiro--want to comment on the possibility? 
Have potential criminal laws been broken here?
    Ms. Richards. The SEC, as you know, Senator, is a civil 
enforcement agency.
    Senator Schumer. I know. But you do referrals.
    Ms. Richards. We do. As an examiner, I am not aware of any 
ongoing criminal probes.
    Senator Schumer. And Ms. Schapiro.
    Ms. Schapiro. I am not aware of any ongoing criminal 
probes. We do have several investigations still ongoing within 
the NASD of other brokerage firms.
    Senator Schumer. Let me ask you to just look into that, to 
see if there are criminal violations. Because if there are, I 
mean, as everybody here said, you read these stories and it 
just wrenches your guts out. And if somebody broke the law, 
they should be punished for it. I mean, it will set an example 
as much as the prophylactic things we are doing in the future. 
So, I would make a request that you redouble your efforts and 
see if that has happened and then make the appropriate 
referrals--which you do, both agencies do.
    Ms. Richards. Absolutely.
    Senator Schumer. Are you both willing to do that?
    Ms. Richards. Yes.
    Ms. Schapiro. Yes.
    Senator Schumer. Thank you, Mr. Chairman.
    Chairman Shelby. Our time on the floor is about gone, 
Senator. I hope they will wait for Senator Schumer, and I will 
tag along.
    Thank you very much for appearing here today. I believe it 
has been an informative panel, and this gives us some more 
insight as to why we need to correct this problem. Thank you.
    [Whereupon, at 12:04 p.m., the hearing was adjourned.]
    [Prepared statements and response to written questions 
supplied for the record follow:]


















































                  PREPARED STATEMENT OF JOHN M. MOLINO
 Deputy Under Secretary of Defense, Military Community & Family Policy
                       U.S. Department of Defense
                           November 17, 2005
    Mr. Chairman, Members of this distinguished Committee, thank you 
for the opportunity to be here today and for your interest in 
protecting the financial well-being of the men and women who serve in 
our armed forces.
    Allow me to provide the Committee with historical information on 
the personal commercial solicitation issue, and to address what the 
Department has done, and intends to do to improve commercial 
solicitation oversight and enforcement. I will focus on the sale of 
supplemental life insurance and financial products on Department of 
Defense (DoD) installations.
    Servicemembers have long been seen as targets for charlatans, con 
men and others who seek to steal their money with deals ``to good to be 
true,'' or presented under false pretenses. Why is this?
    Servicemembers are typically young and inexperienced. They are 
often motivated by idealism and cannot imagine that their fellow 
citizens and, in some cases, their senior NCO's, officers, and military 
retirees would take advantage of them.
    They are often earning a steady paycheck for the first time and, 
though their pay will never make them rich, it is often far more money 
than they have ever laid their hands on in their lives. Those who 
enlisted are motivated to serve. They also tend to be concerned about 
the future--providing for themselves and their families.
    The confluence of these otherwise noble characteristics makes 
servicemembers subject to swindlers and fast-talking salesmen and 
women.
    When we permit someone to sell a product to some degree we provide 
the appearance of an endorsement of that product and the behavior of 
the salesperson.
    As you know, members of the military have the opportunity to 
purchase up to $400,000 worth of term life for a reasonable premium of 
$26 per month. For many--indeed most--military members, $400,000 is a 
sufficient amount of insurance, especially if combined with Thrift 
Savings Plan (TSP) participation or another savings plan. I will speak 
more of our Financial Readiness program later. For now, let me say that 
a better informed Servicemember/consumer will be able to make wiser 
decisions about the products he or she buys.
    We must provide a degree of protection that ensures we do not 
facilitate deceptive practices on the installation. We also must 
provide training and education that better equips our members and their 
spouses to a ``smell a rat'' outside the gate.
    The Department's concern with the sale of insurance and investment 
products on DoD installations dates back to the Vietnam War era. At 
that time, problems with private sector associations using their quasi-
military status to sell life insurance products led to establishment of 
the first DoD personal commercial solicitation policies. These included 
DoD Directive 1344.7, ``Personal Commercial Affairs,'' dated July 1, 
1969 and DoD Directive 1344.1, ``Solicitation and Sale of Insurance on 
Department of Defense Installations,'' dated August 31, 1977. These 
directives were later combined into our current DoD Directive 1344.7, 
``Personal Commercial Solicitation on DoD Installations,'' dated 
February 13, 1986. Though these directives established important rules 
and prohibited practices concerning on-base solicitation, there is 
ample evidence to prove they have not been easily or consistently 
enforced.
    1996 USAREUR IG Report: In 1996, the US Army Europe (USAREUR) 
Inspector General (IG) investigated insurance solicitation activities 
by the Noncommissioned Officers Association (NCOA) and Academy Life 
Insurance Company. The IG found:

 Senior NCO's (NCOA members) improperly used their authority to 
    require soldiers to attend assemblies/meetings for the purpose of 
    signing up new NCOA member in violation of Army USAREUR 
    Regulations.
 NCOA and Academy Life improperly conducted commercial 
    solicitation during duty hours.
 NCOA improperly received preferential treatment over other 
    nonprofit organizations in violation of Army and USAREUR 
    regulations.
 The chain of command improperly pressured subordinates to join 
    NCOA.
 NCOA/Academy Life improperly conducted deceptive solicitation 
    practices in violation of DoD Directive 1344.7 and Army and USAREUR 
    Regulations.
 NCOA/Academy Life improperly used the military postal system 
    for commercial or business purposes in violation of USAREUR 
    Regulations.

    In September 1998, as a result of USAREUR IG investigation, Academy 
Life and its agents were barred from conducting commercial activities 
on DoD installations worldwide for a period of 3 years.
    1999 DoD IG Report: In January 1998, the Department of Defense 
Inspector General (DoD IG) was asked to evaluate the Department's 
enforcement of personal commercial solicitation policy. The DoD IG 
visited 11 installations and issued a report in March 1999. The IG 
found policy violations at all 11 installations. The DoD IG found:

 Quasi-military associations failed to disclose their 
    relationship to insurance 
    companies and in some cases, these associations were allowed to 
    make group presentations to military personnel in order to collect 
    personal information for follow-on solicitation.
 Insurance agents were permitted to make ``financial 
    education'' presentations at four installations in direct violation 
    of Department policy.
 The Services failed to provide sufficient training on 
    insurance to servicemembers.
 Commercial sponsorship, where funding, goods, or services is 
    offered to installation Morale, Welfare, and Recreation activities 
    in return for public recognition or advertising promotions, was 
    being used to foster commercial solicitation.
 Administrative personnel at two Army installations accepted 
    allotments forms directly from insurance agents, rather than 
    requiring they be submitted by the military member.

    The DoD IG recommended the Assistant Secretary of Defense (Force 
Management Policy) establish a task force to:

 Develop consistent controls to administer and enforce the 
    policies regarding commercial solicitation process.
 Develop the approval and oversight procedures when allowing 
    outside organization personnel from military associations to 
    conduct financial training.

    Cuthbert Report: On May 15, 2000, Brigadier General Thomas 
Cuthbert, U.S. Army (Ret), an employee of the Science Applications 
International Corporation (SAIC) on contract with the Department, 
issued a report on solicitation practices on DoD Installations. The 
Cuthbert Report validated the findings of the DoD IG Report and 
highlighted 30 years of deceptive commercial solicitation practices. 
The Cuthbert Report found:

 DoD policies are routinely violated.
 DoD allotment systems facilitate the violation of insurance 
    solicitation policies.
 A coercive and high pressure sales environment remains in 
    effect.
 Deceptive insurance sales practices continue unabated.
 Deceptive and coercive solicitation has a clear and present 
    adverse effect on morale, discipline, and unit integrity.
 Current personal financial education programs are inadequate.
 Insurance companies have unlawfully retained insurance 
    premiums from cancelled allotments.
 State insurance regulators do not effectively protect military 
    consumers.
 On-base insurance sales provide no value added to war fighting 
    capacity.

    The Cuthbert Report recommended:

 Eliminate on-base insurance solicitation.
 Improve consumer protection surrounding the allotment system.
 Conduct an inquiry into the disposition of unlawfully withheld 
    allotment payments.
 Improve personal finance training in all enlisted schools.
 Establish minimum standards for all personal finance training 
    conducted by non-DoD personnel.

    DoD Commercial Solicitation Working Group: In response to the DoD 
IG and Cuthbert reports, the Assistant Secretary of Defense (Force 
Management Policy) established a DoD commercial solicitation working 
group in January 2001. The group recommended:

 Establish commercial solicitation points of contact for each 
    military service.
 Establish new policy to control third-party financial 
    counseling.
 Establish new policy to limit the use of commercial 
    sponsorship to foster commercial solicitation.

    2001 DoD IG Report: In response to the Cuthbert Report finding 
regarding insurance premiums being unlawfully retained by insurance 
companies following cancellation of a policy, the Department requested 
the DoD IG conduct an audit on 
insurance allotment premium refund processing procedures. The IG's 
report found:
    Four Defense Finance and Accounting Service (DFAS) sites did not 
consistently process insurance company requests to cancel allotments 
and one DFAS site would not accept returned allotments.
    In response, DFAS issued standardized guidance requiring the 
different sites to stop allotments when a properly documented request 
is received from an insurance company and to accept returned allotment 
payments.
    Financial Education Policy: In April 2002, the Under Secretary of 
Defense (Personnel and Readiness), issued a policy memorandum that 
established parameters for nongovernmental organizations to provide 
financial education training to servicemembers. The policy directed 
that any participating non-Federal entity must be qualified as a 
501(c)(3) nonprofit organization and that the training be approved by a 
presidentialy appointed, Senate-confirmed civilian official of the 
military department. The policy memo also reemphasized the existing 
prohibition against agents of insurance or financial product companies 
presenting financial training.
    Initial Revision of DoD Directive 1344.7: After nearly a year of 
revision and information coordination, the Department forwarded 
proposed changes to DoD Directive 1344.7 to the military services for 
coordination and comment. Proposed policy changes included a 
requirement for junior enlisted personnel to obtain approval from their 
chain of command to purchase supplemental commercial life insurance. 
The insurance industry strongly opposed this proposed change and sought 
the involvement of Congress to block the reform effort. In November 
2003, Public Law 108-136, Sec. 586, required the Department provide 
Congress 30 days notification prior to implementing any changes to DoD 
personal commercial solicitation policy. To try to maintain the 
momentum, the Department also agreed to conduct two public forums. The 
first, to obtain public comment on existing DoD personal commercial 
solicitation policy, and the second, to obtain comment on any proposed 
changes.
    Financial Readiness Campaign: In May 2003, the Department, in 
cooperation with the Department of the Treasury and the Securities and 
Exchange Commission, initiated a DoD Financial Readiness Campaign. The 
campaign established agreements with Federal agencies and nonprofit 
financial education organizations. Through the expertise and donated 
resources of these Federal agencies and nonprofit organizations, the 
Department has extended the capability of the Military Services to 
train and counsel servicemembers and their families on a range of 
personal financial issues, to include insurance and financial products. 
We have included a list of over 20 of the partner organizations on our 
quality of life portal: www.militaryhomefront.dod.mil, under 
``Financial Readiness.'' Examples of these collaborations include: The 
American Savings Education Council, which has provided over 57 public 
service announcements to the Armed Forces Radio and Television Service 
for broadcast overseas, and the InCharge Institute, which in 
collaboration with the National Military Family Association, has 
distributed 250,000 copies of their Military Money Magazine (developed 
for the military spouse) through Defense Commissaries and other high 
traffic areas on military installations.
    First Public Forum: The first meeting to seek public comment on 
existing DoD personal commercial solicitation policy was held on August 
22, 2003. Fifty-nine persons, mostly representatives from insurance and 
financial services companies, submitted comments. The primary themes of 
comments received were:

 DoD's personal commercial solicitation policy is basically 
    sound but needs to be better enforced.
 DoD should not regulate insurance and financial products 
    because that is a State and Federal regulator responsibility.

    Commercial Sponsorship Policy Revision: In March 2004, the 
Principal Deputy Under Secretary of Defense (Personnel and Readiness) 
issued new MWR program commercial sponsorship policy. An April 2004, 
policy memorandum directed the military departments to decline 
commercial sponsorship offers that do not reflect favorably upon DoD. 
In addition, this memorandum directed the military departments to 
ensure commercial sponsors do not use their sponsorship to obtain 
personal contact information for future solicitation without the 
written consent of the person to be solicited.
    First GAO Audit: In March 2004, the Chairmen of the House 
Government Reform Committee and the House Armed Services Committee 
requested the Government Accountability Office examine DoD and military 
services policies and procedures for the marketing and sale of life 
insurance policies to military personnel and the processing of 
financial allotments for military personnel. This audit was requested 
in response to insurance industry complaints, which alleged officials 
at Fort Lewis and Fort Bragg had deliberately failed to process 
hundreds of life insurance allotments and military personnel were being 
directed to cancel their supplemental commercial life insurance. During 
this audit, the GAO conducted site visits at Fort Lewis, Washington, 
Naval Training Center Great Lakes, Illinois, Marine Corps Base Camp 
Pendleton, California, Fort Bragg, North Carolina, Lackland Air Force 
Base, Texas, and Fort Campbell, Kentucky. On August 2004, Public Law 
108-287, Sec. 8133, prohibited the Department from amending or changing 
its personal commercial solicitation policies until 90-days after the 
GAO issued their final report. In its final report, issued on June 29, 
2005, the GAO could not substantiate the original allegations 
pertaining to Fort Lewis and Fort Bragg, but made three recommendations 
to improve DoD personal commercial solicitation policy and two 
recommendations to improve insurance allotment coding and processing. 
This audit did not examine the suitability of insurance and financial 
products being sold primarily to military personnel or how they were 
sold. The Department partially concurred with the GAO's first two 
recommendations and concurred with the other three. The first partial 
concurrence concerned a GAO recommendation that the department develop 
and maintain a DoD-wide searchable database to record all violations of 
DoD personal commercial solicitation policy. The Department has 
developed and maintains a current list of companies and agents that are 
barred from soliciting on an installation and believes that this list 
is more useful and appropriate than the one the GAO recommends. In the 
second partial concurrence, the GAO recommended all violations of DoD 
solicitation policy involving insurance or financial products be 
reported to State or Federal regulators. The Department believes only 
violations that involve licensing, compliance with State or Federal 
laws or regulations, or that result in the company or agent being 
barred from an installation, should be reported to regulatory 
authorities. The Departments believes reporting only actionable 
violations to State and Federal regulators will serve everyone's best 
interests.
    New York Times Investigative Reports: Beginning in July 2004, The 
New York Times published a series of investigative reports that focused 
much needed attention on the DoD personal commercial solicitation 
issue. Among other things, the reports highlighted DoD policy 
violations by several insurance companies soliciting Army trainees at 
Fort Benning, Georgia and potentially costly periodic payment plans 
marketed by First Command Financial Planning, Inc., mostly to military 
personnel. The Department took these reports very seriously. I asked 
the Assistant Secretary of the Army (Human Resources) to advise my 
office of actions taken at Fort Benning and to recommend whether or not 
the findings warranted Service-wide or DoD-wide action. Fort Benning 
has conducted detailed proceedings and has taken decisive 
action locally. I understand that the Fort Benning commanding general's 
recommendation for broader actions is currently at Department of the 
Army headquarters for legal review. In addition, I requested the 
Military Departments report all documented personal commercial 
solicitation policy violations that have occurred since January 1, 2000 
and to provide quarterly update reports. This information is used 
maintain a list of insurance and financial product companies and agents 
currently barred from soliciting on a DoD installations that is posted 
on our DoD Commanders Page website. Following enforcement action by the 
National Association of Securities Dealers (NASD) and the Security and 
Exchange Commission (SEC) against First Command Financial Planning, I 
met with First Command's President and Chief Executive Officer, who 
informed me that they have ceased selling, and will no longer sell, 
periodic payment plans. The Department has collaborated with the 
National Association of Insurance Commissioners on an educational 
brochure to assist military personnel considering the purchase of 
supplemental commercial life insurance. This brochure includes contact 
numbers for Insurance Commissions in all 50 States and the District of 
Columbia. The Department's Financial Readiness Campaign is educating 
our military servicemembers to closely examine products being offered 
and to seek legal advice before signing contracts. This program is 
intended to make servicemembers and their spouses better informed, more 
discriminating consumers.
    Second GAO Audit: Mr. Chairman, in late 2004, you and the Ranking 
Member of this Committee requested the Government Accountability Office 
review the sale of financial products to military members. 
Specifically, the GAO was asked to ``examine the types and variety of 
financial products'' commonly marketed to military members; regulatory 
oversight by insurance and securities regulators and DoD; the 
regulatory oversight and consumer protections afforded to military 
personnel compared to the general public; and how regulators have 
assessed the suitability of such products. The Department thanks this 
Committee for its concern, not only in how, where, and when insurance 
and financial products are being sold to military personnel, but also 
what kinds of products are being sold. This is the first time the 
suitability of insurance and financial products sold primarily to 
military personnel has been examined. This focus is much needed, long 
overdue, and much appreciated. The recommendations in the GAO's draft 
report, issued on September 29, 2005, are reasonable and appropriate.
    DoD Instruction on Personal Financial Management Education: The 
Miltiary Services have established training for servicemembers on a 
list of topics that includes insurance, saving, and investing as part 
of their initial orientation in the military. DoD Instruction 1342.17 
was released in November 2004, providing the first comprehensive policy 
document describing personal financial education and counseling 
requirements for servicemembers and their families, to include the 
already established training being delivered to junior servicemembers. 
The instruction has given us an opportunity to reinvent this training 
by requiring junior servicemembers be able to show their competence in 
applying basic financial principles on a wide range of financial 
topics, to include insurance and savings. In addition, first time 
supervisors are to demonstrate their understanding of policies and 
practices designed to protect junior servicemembers within their 
command/supervision, to include policies and practices concerning 
commercial solicitation. We are currently working on the implementation 
of a strategic plan for Personal Financial Readiness that includes 
establishing the evaluation tools needed to ensure these important 
policies are being applied.
    Strategic Plan for Personal Financial Readiness: As part of the 
answer to a GAO study on personal financial management programs (GAO-
05-638R), the Department has crafted a strategic plan that incorporates 
the steps to ensure the implementation of DoD Instruction 1342.17, and 
the resources/capabilities of the Financial Readiness Campaign. A key 
new component of this strategic plan is the program being developed by 
the National Association of Securities Dealers (NASD) Foundation. This 
program, funded through the residual proceeds of the settlement with 
First Command Financial Services, seeks to give servicemembers and 
their families confidence to management their financial resources, by 
gaining their attention through an awareness campaign and providing 
unbiased educational resources to support their decisionmaking needs. 
The NASD Foundation program includes the capabilities and resources of 
several of the existing Financial Readiness Campaign partners, 
increasing the impact of the overall effort.
    Second Public Forum: The Department's proposed policy changes were 
published in the Federal Register on April 19, 2005. The substantive 
changes focused on financial education, oversight, and enforcement. 
They incorporate the financial education, commercial sponsorship, and 
violation reporting guidance I mentioned previously. We also include a 
new commercial solicitation evaluation form designed to make it easier 
for installations to detect and investigate solicitation policy 
violations. The Department hosted a second open forum on May 6, 2005, 
to obtain public comment on the proposed changes. Twelve persons, 
representing various insurance, financial service, veteran and military 
fraternal organizations, provided oral comments. In addition, 31 other 
individuals and organizations submitted written comments by the June 
20, 2005 deadline. A total of 79 specific recommendations were received 
during the second public forum and comment period.
    Proposed Policy Changes: The Department has carefully considered 
all 79 recommendations. We have accepted 31 and partially accepted 9 of 
these recommendations for inclusion in our final policy revision. Many 
of these additional changes clarify questions of interpretation of 
existing policy or new policy to cover new technologies. Examples 
include telecommunications aspects of solicitation, electronic versus 
paper pay and allotment transactions, and the use of direct deposit 
versus military pay allotment forms. Other changes include policies to 
incorporate our responses to the GAO's recommendations and provisions 
in pending legislation the Department supports and expects will become 
law. These include solicitation policy violation reporting and 
recordkeeping and enforcement of the military pay allotment cooling off 
period. Our proposed final policy is currently being reviewed for legal 
sufficiency by the DoD General Counsel.
    In conclusion, the Department does not intend to prevent honest 
companies from doing business on DoD installations but we must take 
prudent steps to protect military members from superfluous products and 
predatory sales practices. Problems 
associated with on-base commercial solicitation of military personnel 
have been ongoing for many years. Prior attempts to implement new 
policies to improve DoD's oversight and enforcement met with resistance 
on many fronts. We believe now, with the public's attention and the 
support of this Committee and the Senate and House Committees on armed 
services, long overdue changes to protect the financial well-being of 
military members and their families will finally become reality. Any 
further delay is unacceptable. Our men and women in uniform, and in 
harm's way everyday, deserve no less.
                  PREPARED STATEMENT OF LORI RICHARDS
     Director, Office of Compliance, Inspections, and Examinations
                U.S. Securities and Exchange Commission
                           November 17, 2005
Introduction and Summary
    Chairman Shelby, Ranking Member Sarbanes, and Members of the 
Committee, I am pleased to appear today to testify on behalf of the 
Securities and Exchange Commission (Commission) to express the 
Commission's views on the Government Accountability Office's (GAO) 
report entitled Financial Product Sales: Actions Needed to Better 
Protect Military Members (GAO-06-23). My testimony will address the 
portion of the report that discusses sales of securities products.
    The Commission strongly believes that our servicemen and women must 
be protected from illegal and abusive practices in the sale of 
securities. Over the last year, the Commission and its staff have 
undertaken a comprehensive program to address such practices. Our 
program has included enforcement activity, extensive examination 
activity, close coordination with the Department of Defense (DoD) and 
the National Association of Securities Dealers (NASD), and investor 
education and other outreach activity. These actions are summarized 
below, and described in greater detail in this testimony.

 The Commission brought an enforcement action against a broker-
    dealer, First Command Financial Planning, Inc., that specializes in 
    sales of securities to military personnel. The Commission's 
    enforcement action ordered First Command to cease and desist from 
    illegal and abusive practices in the sale of securities, and 
    includes an order to pay $12 million: $5.2 million in restitution 
    to military customers, and the remainder to fund an investor 
    education program for the military administered by the NASD.
 The Commission's examination staff have conducted numerous 
    examinations of broker-dealer firms that sell securities to the 
    military personnel. These examinations have included two separate 
    risk-targeted examination sweeps, one focusing on sales of mutual 
    fund contractual plans, or ``periodic payment plans,'' and the 
    other focusing more generally on sales of securities products to 
    military personnel. These examinations have included on-site 
    reviews of securities firms serving the military market, and visits 
    to sales offices located in military base communities, both in the 
    United States and overseas.
 Commission staff have worked closely with DoD, establishing a 
    regular liaison with the Office of the Secretary of Defense, 
    through which we have shared information and coordinated our 
    examinations. We have also coordinated our efforts with the 
    commands of selected bases. In our work, we have found the DoD and 
    the individual base commands to be open, responsive, and helpful. 
    This coordination is continuing, with DoD providing us with on-
    going information that we are using to target securities firms for 
    examinations.
 In all of these efforts, Commission staff have worked closely 
    with the NASD. This joint effort included coordination of 
    enforcement activity, examinations, and investor education programs 
    for members of the military.
 Finally, Commission staff in the Office of Investor Education 
    and Assistance have conducted an active investor education 
    initiative targeted toward members of the military. As a charter 
    member of the DoD's Financial Readiness Campaign, we assisted in 
    the presentation of financial education programs to the military. 
    Commission staff have already conducted several financial education 
    workshops on military installations. As part of this initiative, 
    Commission staff prepared an article on periodic payment plans for 
    Military Money, a not-for-profit publication that is distributed 
    free in the military community. In addition, an online brochure on 
    periodic payment plans is available on our website. Finally, we 
    have also conducted an outreach program to the securities 
    community, with members of the Commission's staff speaking at 
    conferences and in other settings, on the need for securities firms 
    to better protect and serve their military customers.

    We strongly agree with the GAO's recommendation that Congress 
should take legislative action in this area to protect military 
servicemembers. We recommend that you consider taking steps to address 
the features of mutual fund contractual plans that make them 
susceptible to abusive and misleading sales practices and excessive 
fees. In addition, as noted above, we have already taken action to 
enhance our information-sharing with DoD.
Regulation of Broker-Dealers and ``Periodic Payment Plans''
    The Commission regulates the sales of securities through, among 
other things, its regulation of broker-dealers. Broker-dealers operate 
in a comprehensive regulatory environment. They must: Register with the 
Commission and comply with the laws and rules governing broker-dealers; 
become members of the NASD and comply with its rules and oversight; and 
comply with regulations governing, among other things, their financial 
responsibility and the protection of customer funds and securities. 
They must also comply with the antifraud provisions of the Federal 
securities laws and NASD rules, which, among other things, impose 
duties of fair dealing and an obligation to recommend securities that 
are suitable for the customer.\1\
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    \1\ A summary of these duties can be found on the Commission's 
website. See www.sec.gov/divisions/marketreg/bdguide.htm.
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    To evaluate compliance with these requirements, the Commission, the 
NASD, and other self-regulatory organizations conduct examinations of 
broker-dealers, in which examiners visit broker-dealers, review their 
books and records, interview their employees, and seek to identify 
violations of applicable laws or regulations or control weaknesses that 
could lead to such violations. NASD and other self-regulatory 
organizations conduct routine examinations of their member firms, and 
the Commission staff conduct oversight of the SROs' programs, ``cause'' 
exams based on a complaint or a tip, and other types of examinations. 
In recent years, SEC staff have conducted more risk-targeted 
examination sweeps to quickly identify areas of emerging compliance 
problems.
    To enforce the Federal securities laws, the Commission can bring 
enforcement actions. In 2004, the Commission brought 141 enforcement 
actions involving broker-dealers or associated persons, approximately 
22 percent of the enforcement actions that it brought in that year. 
NASD and other self-regulatory organizations also bring disciplinary 
actions against broker-dealers for violations of their rules.
    While there are no formal records that categorize broker-dealers by 
the types of customers they serve, our work in this area indicates that 
securities are sold to members of the military by several different 
types of broker-dealer firms. A small number of broker-dealer firms 
focus or specialize in selling securities to the military market. These 
are firms that have dedicated either their entire organization or a 
significant business line to serving the military market. There are 
also smaller broker-dealer firms that may have a single office or 
offices located near military bases in the United States or overseas, 
and that focus sales efforts to military personnel. Finally, there are 
also broker-dealer firms that do not focus on sales to military 
personnel, but may have a single sales branch office located in a 
military community and may develop a local military clientele. In 
addition to selling securities, these sales offices may provide a range 
of other financial services, including insurance, paycheck loans, and 
tax preparation.
    In addition to regulating broker-dealers, the Commission also 
regulates some of the financial products that have been sold to members 
of the military. These include a product known as a mutual fund 
contractual plan, or a ``periodic payment plan.'' This product is 
governed by the Investment Company Act, which generally defines a 
periodic payment plan certificate as a security in which an investor 
makes a long-term series of periodic payments to acquire an interest in 
a specified unit or fund of securities (Section 2(a)(27) of the 
Investment Company Act). Most mutual fund contractual plans contemplate 
that the investor will make periodic monthly payments for 15 or more 
years. These products contain a high front-end load: Up to half of the 
investor's payments made in the first 12 months are deducted as a sales 
load. As a result, if the investor redeems his/her investment before 
the full term of the contract, the investor would pay an abnormally 
large sales load on his/her investment. The Investment Company Act 
imposes various limitations on the sale of these products, including a 
maximum allowable sales load on the total payments to be made by the 
investor (9 percent), and the maximum portion of the first 12 monthly 
installment payments that may be deducted as sales load (50 percent), 
among other things.
    As GAO notes, in the distant past these plans were one of the few 
means by which smaller investors could make low-dollar investments in 
mutual funds. Over the years, however, alternative means of making such 
investments have been developed by fund firms, including both load and 
no-load funds that accept low initial investments and low periodic or 
automatic investment plans.\2\ These alternatives provide an 
opportunity for low-dollar investments without the large up-front sales 
load charged by periodic payment plans. As a result, mutual fund 
periodic payment plans have ceased to attract large numbers of civilian 
investors.
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    \2\ A no-load fund charges no sales commissions on share purchases.
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    Only a small number of such plans are currently available. As of 
October 2005, there were only 8 financial firms that sponsored periodic 
payment plans registered with the Commission. These firms have 
registered a total of 19 plans with current assets of $12 billion, 
which represents less than two tenths of 1 percent (<0.2 percent) of 
the assets currently invested in nonmoney market mutual funds. Indeed, 
many of the registered periodic payment plans are no longer being sold, 
and even the largest plans have shrunk over the last year (measured by 
aggregate invested assets).\3\ Nonetheless many members of the military 
have continued to invest in these plans.
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    \3\ During their most recently completed fiscal years, the six 
largest periodic payment plans measured by asset size had aggregate 
gross sales of $931 million and redemptions of $950 million; resulting 
in net redemptions of $19 million. Of these six, some of the smaller 
plans experienced net sales, but the amount of those sales was 
insufficient to offset the redemptions at the larger plans.
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The Commission's Program to Protect the Military from Illegal and
Abusive Practices in the Sale of Securities
    In 2004, when potentially abusive sales practices in the sale of 
securities to military personnel came to the attention of the 
Commission's staff, Commission staff 
determined that the military community should be identified as an at-
risk group. Following this determination, Commission staff quickly 
deployed resources from multiple functional programs of the Commission, 
including enforcement, examinations, and investor education, and 
initiated a coordinated approach to seek to protect members of the 
military from abusive sales practices. Each step is described below.
In the Matter of First Command Financial Planning, Inc.
    On December 15, 2004, the SEC and NASD instituted enforcement 
proceedings against First Command Financial Planning, Inc., a 
registered broker-dealer based in Fort Worth, Texas, whose customer 
base consisted almost entirely of active-duty and retired U.S. military 
personnel. In coordinated joint actions, the SEC and NASD alleged that 
First Command used misleading sales materials to offer and sell 
periodic payment plans. In settlement of these actions, First Command 
agreed to pay $12 million in disgorgement and prejudgment interest to 
be used to reimburse certain customers and to fund an NASD investor-
education program for members of the U.S. military and their families. 
In November 2004, First Command stopped selling periodic payment plans 
altogether. As the Commission's enforcement order entered against First 
Command states, the firm maintained sales offices near U.S. military 
bases worldwide and claimed that its customers included approximately 
40 percent of the active-duty general officers and approximately one-
third of the commissioned officers. The vast majority of First 
Command's sales agents were retired military officers. This firm was 
responsible for approximately 90 percent of all sales of periodic 
payment plans.
    Like other periodic payment plans, and as described in the 
Commission's order, the investments sold by First Command allowed 
investors to accumulate shares in one of five mutual funds by making 
fixed monthly contributions--typically ranging from $100 to $500--over 
a period of at least 15 years. Each contractual plan imposed a unique 
sales charge, or ``load,'' which equaled 50 percent of the plan's first 
12 monthly payments with no sales load thereafter. If the investor made 
the plan's scheduled 180 payments over the 15-year period, the 
effective sales load worked out to be approximately 3.3 percent. On the 
other hand, if the investor failed to make all of the scheduled 
payments, the effective sales load could be substantially higher. The 
Commission's order further stated that historically, approximately 43 
percent of First Command's customers made at least 180 scheduled 
payments. Many of the First Command customers were unable to complete 
the 180 payments and, consequently, many of them paid loads 
substantially higher than 5.2 percent, the approximate average sales 
load for all conventional-load equity mutual funds in 2003. In the 
worst case, those who discontinued payments after 1 year paid a 50 
percent sales load.
    The Commission's order against First Command contained findings 
that, since at least January 1999, the firm offered and sold 
contractual plans using carefully worded sales scripts that made 
misleading comparisons between the periodic payment plans and other 
mutual-fund investments. For example, First Command claimed that 
periodic payment plans are the only funds that are designed for dollar-
cost averaging investors, that no-load funds were primarily for 
``speculative'' investors, and that transactions by speculative 
investors reduced the opportunity for the no-load fund's manager to 
make opportune investments for the fund. In reality, many long-term 
investors invest in no-load funds, and many no-load funds maintain 
dollar-cost-averaging programs allowing investors to make relatively 
small periodic contributions. The Commission found that First Command's 
sales materials also contained misleading statements and omissions 
concerning the costs of no-load funds, and the availability of the 
Thrift Savings Plan, the Federal Government-sponsored retirement 
savings and investment plan, which offers military investors many of 
the features of a contractual plan, but at a lower cost. The Commission 
further found that, in light of the relatively low completion rate in 
its periodic payment plans, First Command misrepresented the efficacy 
of the upfront load in ensuring that investors remain committed to the 
contractual plan. The NASD's action, filed on the same day, contained 
similar findings.
    As part of its settlement with the Commission and NASD, First 
Command agreed to compensate military investors who purchased and 
terminated their plans during a specified period who paid an effective 
sales load of greater than 5 percent. By prematurely terminating their 
plans, these investors incurred effective sales loads well above the 
average load charged by conventional-load equity mutual funds.
    In addition to the $12 million payment, the Commission ordered 
First Command to cease and desist from committing or causing violations 
of certain of the antifraud provisions of the Federal securities laws. 
The Commission and NASD orders also directed First Command to comply 
with certain undertakings, including hiring an independent consultant 
to review and make recommendations concerning the adequacy of First 
Command's sales scripts, sales training systems and procedures, and 
supervisory systems and procedures.
    As of November 8, 2005, First Command had paid $6.81 million to the 
military investor-education fund operated by the NASD and expects to 
pay approximately $37,000 more into the fund by the end of the year, 
depending on the final outcome of the investor-reimbursement process. 
As of November 2, 2005, First Command had reimbursed approximately $4.3 
million to approximately 10,000 military investors that were harmed as 
a result of the misconduct. The independent consultant overseeing the 
distribution advises that his firm is in the process of tracking down 
current addresses for approximately 3,500 additional military investors 
to pay out 
approximately $860,000 that remains undistributed in the settlement 
fund. It is expected that the reimbursement process will be completed 
by the end of the year.
    Working together, the SEC and NASD brought an end to misleading 
sales practices affecting approximately 90 percent of the contractual 
plans sold to U.S. military families, provided for reimbursement to 
harmed military investors, and obtained significant funding for 
military investor-education programs.
Examination Sweeps Focusing on Sales to Military Personnel
    Following indications of sales practice problems involving sales to 
military personnel, the Commission's examination staff initiated 
targeted examination sweeps of certain broker-dealers. First, the 
Commission staff initiated an examination sweep of broker-dealers (in 
addition to First Command) that sell periodic payment plans. Second, 
the Commission staff initiated an examination sweep of broker-dealers 
that sell other securities products to members of the military. Each 
examination sweep is described generally below. In light of the 
confidential nature of SEC examinations, the SEC has not discussed 
publicly either the examinations or the names of the firms.
Examinations of Broker-Dealers That Sell Periodic Payment Plans
    In addition to First Command, a small number of other broker-
dealers sell periodic payment plans to investors. SEC staff examined 
four of these firms that sold significant amounts of contractual plans. 
The three largest of the four firms examined were found to sell 
periodic payment plans exclusively to the military community. In 
combination with First Command's sales to the military community, the 
staff believes that our reviews of these products may have captured as 
much as 95 percent of the sales of periodic payment plans sold to the 
military community. Like First Command, these firms have discontinued 
sales of contractual plans.
    Unlike First Command, these three firms generally sold contractual 
plans to lower-ranking enlisted military members. These contractual 
plans also called for a 50 percent load paid out in the first 12 
installments, with no additional load after that, and consisted of at 
least 120 payments to be made monthly over 10 years. Although the 
examinations of these firms did not reveal the systemic 
misrepresentation present in the First Command case, they did show that 
very few low-ranking enlisted members made at least 120 payments. At 
one firm, fewer than 10 percent completed their plans. On average, low-
ranking enlisted members paid loads greater than 10 percent--
significantly higher than they would have paid if they had purchased 
mutual-fund shares with a conventional load.
    The high incidence of incomplete plans discovered in these 
examinations raised concerns that these firms may have routinely 
recommended contractual plans to investors that required monthly 
installments in amounts greater than the investor could reasonably 
afford. Under NASD Conduct Rule 2310, a brokerage firm is required to 
have reasonable grounds for believing that its recommendation is 
suitable for its customer in light of the customer's financial 
situation, among other things. Accordingly, the Commission's staff has 
provided its examination results relating to these three firms to the 
NASD.
Examinations of Broker-Dealers That Sell Other Securities Products to 
        Military
Personnel
    As noted above, following indications from the First Command matter 
that members of the military may be at risk due to abusive or 
misleading sales practices, Commission examination staff initiated a 
second examination sweep to review how other securities products are 
sold to military personnel. This review is on-going. It encompasses 
sales of all securities products, such as mutual funds, variable 
annuities, stocks and bonds, with a particular focus on sales offices 
targeting military personnel and their families.
    These examinations are focused on sales practices in both the on 
and off-base communities, and on the unique features of the military 
market. In particular, examination staff are looking for sales 
practices that take advantage of military personnel when they receive 
deployment orders or of survivors when they receive large insurance 
payments upon a military person's death. In addition, the staff is 
considering whether broker-dealers are recommending unsuitable products 
to military investors, such as by recommending products that require a 
stream of payments that the investor is unlikely to have the resources 
to sustain. Finally, the staff are examining how firms characterize the 
availability of the Thrift Savings Plan to military investors.
    Commission staff began the examination sweep by working with DoD 
and the NASD to identify the broker-dealer firms actually selling to 
military clients. Because there is no requirement for a broker-dealer 
to report the type of customers that the brokerage firm serves, the 
initial identification process included combing through various DoD-
related newspapers and periodicals, such as Stars & Stripes and The 
Military Times, to identify and evaluate securities product 
advertisements. We also reviewed DoD base structure reports to 
determine which military facilities, domestic and overseas, have the 
largest numbers of enlisted personnel. These locations were cross-
referenced with registration information on broker-dealers.
    As a result of this review, and through interviews with 
knowledgeable personnel in the military and the securities community, 
we identified firms that direct their securities sales efforts to 
military personnel. We identified three types of firms that sell 
securities to military members:

 A small number of broker-dealer firms focus or specialize in 
    selling securities to the military market. These are firms that 
    have dedicated either their entire organization or a significant 
    business line to serving the military market.
 There are also smaller broker-dealer firms that may have a 
    single office or offices located near a military base in the United 
    States or overseas, and which focus sales efforts on military 
    personnel.
 Finally, there are also broker-dealer firms that do not focus 
    on sales to the military, but may have a single sales branch office 
    located in a military community and may develop a local military 
    clientele. In addition to selling securities, these sales offices 
    may provide a range of other financial services, including 
    insurance, paycheck loans, and tax preparation.

    In coordination with NASD, examinations of each type of firm have 
been or are being conducted. All firms that specialize in selling 
securities products to military personnel have been or are being 
examined, and, as well, examinations have been and are being conducted 
of the smaller firms and firms that have branch office locations near 
base communities. As part of this review, SEC examiners have conducted 
unannounced examinations of sales offices located outside the gates of 
major military bases. We continue to schedule these examinations.
    Initial staff findings have not indicated serious sales practice 
abuses, but have noted deficiencies in the internal controls and 
supervisory systems of several firms. In some cases, it was unclear as 
to whether securities salespersons had ever received any type of 
supervisory oversight or compliance training. Our examinations are 
continuing and we will make referrals as appropriate.
Coordination with DoD
    The staff is committed to working closely with DoD to ensure that 
our efforts in this area are fully coordinated. To this end, we have 
established a designated liaison on the Commission's examination staff 
who has worked closely with the DoD. The liaison regularly communicates 
with designated DoD personnel, including frequent meetings and weekly 
conference calls. Through these contacts, we have shared information 
and coordinated our efforts. For example, DoD has conducted a survey of 
base commands, given us information regarding possible examination 
candidates and issues, as well as instructed base commands to provide 
local support and assistance to our examiners.
    We have also coordinated our efforts with the commands of selected 
bases. With the assistance of base commanders, we have been able to 
conduct a systematic review of base records and interview base 
personnel to identify firms selling securities to the local military 
community, as well as possible complaints about those sales. Through 
this cooperation, we have been able to gain access to a number of 
useful records, including complaints, ``off-limits'' procedures, the 
issuance of ``solicitation passes'' to securities salesmen who wish to 
enter the premises of the base, the revocation of such passes, and 
other related matters. In addition, beyond providing us with access to 
records and information, base commands have taken active and 
affirmative steps to assist us.
    In our work we have found DoD and the base commands to be open, 
responsive, and helpful. This coordination is continuing, with DoD 
providing us with on-going information that we are using to target base 
communities and securities firms for future examinations.
Coordination with the NASD
    We have coordinated our efforts with the NASD at all levels of this 
program. This joint effort has included coordination of enforcement 
activity, examinations, and investor education programs for the 
military. The enforcement action against First Command Financial 
Planners, Inc. was brought after coordinated investigations by 
Commission and NASD staff. The risk-targeted examination sweeps 
described above were coordinated with the NASD, as are the investor 
education programs for military members described below.
Investor Education
    The Commission is committed to improving the financial literacy of 
our servicemembers and their families. By actively promoting and 
supporting financial education for military personnel, we help military 
investors become better positioned to achieve personal saving and 
investing goals, including retirement, homeownership, and college 
education for their children.
    Through the Commission's Office of Investor Education and 
Assistance, the Commission participates, as a charter member, in the 
DoD's Financial Readiness Campaign. The DoD launched the Financial 
Readiness Campaign to give servicemembers and their families a chance 
to learn more about personal finances and to encourage them to better 
manage their money. The effort is directed toward junior enlisted 
servicemembers and spouses of servicemembers because they are less 
likely to have received the personal finance information that 
servicemembers received as part of their training. We have pledged our 
support to the personnel at military installations who are responsible 
for providing financial education.
    Over the past year, the Commission's staff have conducted several 
workshops at military installations for military personal financial 
managers, educators, command financial specialists, and servicemembers. 
We have also distributed brochures to these groups containing neutral, 
unbiased information on saving and investing. We continue to work with 
DoD to provide useful financial information.
    The Commission's staff have also created additional educational 
materials to help investors understand and make informed decisions 
regarding periodic payment plans. We published an article on these 
plans earlier this year in Military Money, a free magazine focusing on 
the finances and lifestyle of military families. The magazine is 
distributed at most U.S. military bases nationwide, to military 
personnel in Europe and Asia via the Stars and Stripes newspaper, and 
to approximately 180 DoD commissaries worldwide. We plan to continue to 
publish articles in this magazine, as part of the Financial Readiness 
Campaign, which is supported by the Office of the Under Secretary of 
Defense for Military Community and Family Policy.
    In addition, in August 2004, we posted on our website a 
comprehensive online brochure on mutual fund contractual plans titled 
``Periodic Payment Plans.'' Articles about these plans also appeared in 
newspapers distributed to military personnel, such as Army Times and 
Marine Corps Times, and have directed readers to our online brochure.
    In addition, the Commission's staff have conducted an outreach 
program to the securities community. We believe that securities 
professionals can play a key role in protecting the financial interests 
of servicemembers. Members of the Commission's staff have spoken to 
industry conferences and seminars, identifying the military community 
as a risk group that should be given extra compliance attention.
GAO's Recommendations
    We strongly agree with GAO's recommendation that Congress revisit 
the law governing mutual fund contractual plans. As an alternative to 
an outright ban, we 
believe that Congress could consider addressing excessive sales charges 
by, for example, reducing the maximum allowable load or working with 
the Commission and the NASD on other mechanisms that would provide 
protection against excessive sales loads in this product.
    In addition, in the event periodic payment plans are not banned, 
securities regulators will consider various means of better assuring 
that regulators have adequate information to assess the sales of these 
plans. In particular, as GAO notes in its report, SEC and NASD efforts 
to review sales of periodic payment plans were hampered by a lack of 
standardized data at these firms on the persistency rates of the 
investments in the plans. Should these plans not be banned, we will 
work with other regulators to ensure that we have adequate information 
to assess the sales of those plans.
    We fully support GAO's recommendation that the Commission and DoD 
share information and coordinate their efforts. As described above, the 
Commission and its staff have already taken steps to implement this 
recommendation, and have seen positive results from our efforts.
Conclusion
    The Commission strongly believes that our servicemen and women must 
be protected from illegal and abusive practices in the sale of 
securities. Over the last year, the Commission and its staff have 
undertaken a comprehensive program to address such practices. Our 
program has included enforcement activity, extensive examination 
activity, close coordination with DoD and the NASD, and investor 
education and other outreach activity. We support the GAO's 
recommendations in this regard. We look forward to working closely with 
this Committee, DoD, the NASD, and other regulators to continue to 
protect members of the military as investors in our markets.
                               ----------
                  PREPARED STATEMENT OF MARY SCHAPIRO
      Vice Chairman and President, Regulatory Policy and Oversight
               National Association of Securities Dealers
                           November 17, 2005
    Mr. Chairman and Members of the Subcommittee: NASD is grateful to 
the committee for inviting us to testify on NASD's regulatory 
activities regarding inappropriate sales of certain investment products 
to members of the armed forces, and for allowing us to submit this 
statement for the record.
NASD
    Founded in 1936, NASD is the world's preeminent private-sector 
securities regulator. In 1939, the SEC approved NASD's registration as 
a national securities association under authority granted by the 1938 
Maloney Act Amendments to the Securities Exchange Act of 1934. We 
regulate every broker-dealer in the United States that conducts a 
securities business with the public--about 5,200 securities firms that 
operate more than 108,000 branch offices and employ about 664,000 
registered representatives.
    Our rules regulate every aspect of the brokerage business. Our 
market integrity and investor protection responsibilities include 
compliance examinations, rule writing, enforcement, professional 
training, licensing and registration, dispute resolution, and investor 
education. NASD examines broker-dealers for compliance with NASD rules, 
MSRB rules and the Federal securities laws, and we discipline those who 
fail to comply. Last year, NASD filed a record number of new 
enforcement actions (1,410) and barred or suspended more individuals 
(830) from the securities industry than in any previous year. NASD has 
a nationwide staff of more than 2,400 and is overseen by a Board of 
Governors, more than half of whom are not in the securities industry. 
During the last 4 years, NASD has been in the process of separating 
from The Nasdaq Stock Market.
Executive Summary
    America's men and women in uniform make great personal sacrifices 
to protect our Nation's security. They should not have to worry about 
the honesty and integrity of those who purport to help them make sound 
financial decisions for themselves and their families. Yet thousands of 
mostly young servicepersons have been disadvantaged by the sale of an 
investment product called Periodic Payment Plans or PPP's.
    NASD learned in 2003 that a broker-dealer, located in Texas, was 
targeting U.S. servicemen and women with these investment products and 
was doing so using improper sales practices. We have responded 
forcefully to end these practices, punish those responsible for them, 
ensure that their victims are recompensed for their losses, and educate 
military personnel broadly about investing and saving.
    In this statement, we will tell the Committee (a) what we 
discovered and what we did about it; (b) our subsequent efforts to 
educate servicepersons and civilians about PPP's and investing more 
generally, so that they might avoid being taken advantage of; and (c) 
about NASD's belief in the need for legislative remedies to deal with 
abusive sales practices and enhancing the system by which information 
on securities firms and brokers is provided to the investing public.
Sales of Periodic Payment Plans to the Military
    First Command Financial Planning Inc., of Fort Worth, Texas, a 
broker-dealer with strong ties to the military, had been marketing 
Periodic Payment Plans to members of the U.S. military for many years. 
In August 2003, NASD learned of concerns about First Command's sales to 
military personnel of products that levied huge upfront commissions. 
The staff immediately began an investigation and found that First 
Command used misleading statements in its sales literature and scripts 
to attract military customers to its products. Using these and other 
improper tactics, the firm sold more than a half-million of these 
complicated and often extremely expensive products to service persons, 
many of whom were young and inexperienced investors.
    An investor in a Periodic Payment Plan makes monthly payments of as 
little as $50 for a fixed time period, usually 15 years. The payments 
are invested in an underlying mutual fund and the investor is charged a 
50 percent sales load on the first 12 monthly payments. Payments during 
the remainder of the 15-year term are not subject to sales loads, so 
that the effective sales charge decreases so long as the investor 
continues to make contributions. However, if the investor does not 
terminate the plan within 45 days, yet fails to make contributions over 
the full 15-year term, he or she can pay a sales charge of up to 50 
percent of the total amount invested.
    In their sales pitches, First Command representatives told 
potential customers that the 50 percent first-year sales load would 
decrease to 3.3 percent upon completion of the term. They said this 
high upfront sales load would serve as an incentive for investors to 
complete the plan. However, they failed to divulge that their own data 
showed that, historically, only 43 percent of First Command's customers 
completed the 15-year term. As a result, more than half of First 
Command's customers paid a higher--in many cases, significantly 
higher--sales load for their mutual fund purchases.
    Company sales representatives also told potential customers that 
the 50 percent first-year sales load was intended to ``instill 
discipline,'' but they did not inform the customer of the lost earnings 
potential from the cash that was not invested during the first 12 
months.
    Sales representatives also made misleading statements about 
alternative products. They said, for example, that no-load mutual funds 
had higher costs than other investment products and were primarily for 
``market speculators.''
    First Command training manuals cautioned its brokers not to suggest 
to individuals who preferred no load funds that they talk to people who 
had already bought PPP's, as this would be ``like voluntarily spreading 
a cancer in your market.'' In addition to the problematic sales 
practices, our investigation found that a First Command district 
supervisor had inappropriately confronted an Air Force officer who had 
complained about First Command's sales tactics in an e-mail to numerous 
individuals. The officer wrote that he had lost money on his investment 
and advised readers not to do business with the firm. A First Command 
district supervisor informed the officer that high-level Air Force 
commanders were being told of his complaint and that a temporary duty 
assignment might be jeopardized. The supervisor also contacted the 
officer's squadron commander and told her First Command might file a 
grievance against her subordinate.
    First Command eventually sent the officer a written apology, but 
took no action against their district supervisor.
How NASD Responded
    After a thorough investigation of First Command's sales practices 
that included NASD taking testimony from 16 current and former First 
Command employees, reviewing more than 25,000 pages of documents and 
over 50,000 e-mail messages, NASD and the SEC both brought disciplinary 
actions against the firm simultaneously.
    NASD censured the firm and fined it $12 million in December 2004. 
That amount included restitution to thousands of customers who had 
terminated PPP's after January 1, 1999 and had paid effective sales 
charges greater than 5 percent. As of October 18, 2005, more than $4.3 
million had been returned to these customers.
    The remaining funds, about $6.8 million, were transferred to the 
NASD Investor Education Foundation to be dedicated to financial 
education programs for members of the armed services and their 
families.
    NASD also ordered First Command to hire an independent consultant 
to oversee its restitution payments and review its sales practices. In 
addition, NASD required that for 1 year First Command submit its 
proposed advertising materials to NASD for review prior to use.
    NASD separately fined the First Command supervisor who had 
inappropriately confronted the complaining Air Force officer $25,000 
and suspended him from acting in a supervisory role for 30 days.
    First Command has informed NASD that it has ceased selling PPP's. 
We note that First Command was not the only firm selling PPP's to 
military servicepersons. NASD has ongoing investigations of additional, 
smaller, firms that also sold the plans, although most of them have now 
stopped. Statistics show that the rate of new PPP account openings at 
one of the largest sponsors has dropped from about 1,000 per month to 
about 10 per month.
    Like any regulator, NASD is heavily dependent on customer 
complaints as an impetus for investigations and enforcement actions. It 
is important to note that in the case of First Command, NASD received 
no complaints from servicepersons. We subsequently learned that 
servicepersons had complained to military attorneys but those lawyers 
could not relay this information to NASD without specific consent from 
their clients. We began our investigation in August 2003, immediately 
after an article about First Command appeared in Kiplinger's Personal 
Finance magazine.
    We therefore support the GAO recommendation to the Secretary of 
Defense that he revise the DoD solicitation policy to require that 
information on servicemember's complaints related to financial product 
sales be provided to relevant State and Federal financial regulators. 
We also support the recommendation that information be provided to 
servicemembers of all levels about how and to whom they should raise 
concerns or complaints about potentially inappropriate sales of 
financial products, including providing the information necessary for 
contacting the regulators. NASD has designated staff to receive 
complaints from military personnel and conduct outreach with DoD to 
proactively learn of issues concerning securities sales to military 
personnel.
NASD Financial Education Efforts for the Military
    Since the settlement with First Command, NASD has devoted a great 
deal of time, money and attention to developing a program for providing 
financial education to military servicepersons and their families.
    The First Command case illustrates most vividly the need for the 
education and protection of military servicepersons and family members 
who invest in securities.
    NASD established the Foundation in December 2003, inspired in part 
by survey data that showed mainstream investors had a troubling lack of 
knowledge and understanding of markets and investment products. Since 
then, we have contributed $31 million to the foundation, and it has 
awarded more than $5 million in grants to universities and nonprofit 
organizations that provide research and teaching in the service of 
investors.
    As mentioned above, approximately $6.8 million of the First Command 
settlement funds has been transferred to the NASD Investor Education 
Foundation and specifically earmarked for programs designed to help 
members of the military and their families better understand basic 
investing and the markets.
    This money will fund the foundation's new Military Financial 
Education Program. We have been working closely with the Department of 
Defense and we expect to launch a multifaceted military financial 
education program in early 2006. The program will be implemented on 
military installations nationwide and will strive to encourage members 
of the armed forces to take control of their financial futures--by 
providing them and their and spouses with financial information to help 
them make intelligent saving and investing decisions.
    Through a combination of its own initiatives and partner programs 
funded by foundation grants, the foundation will bring the financial 
education community together with the goals of empowering individuals 
to learn more in less time, helping organizations work together on new 
and existing initiatives, and establishing more coordinated and uniform 
financial education programs. Specific programs will include:

 A military-specific online resource center that will serve as 
    a centralized, trustworthy source of unbiased information on saving 
    and investing, including learning centers, interactive tools and 
    games, links to other resources, frequently asked questions and 
    more.
 On-the-ground training efforts to support the military's 
    current Personal Financial Management program by establishing a 
    coordinated and uniform financial education program, including the 
    training and continued certification of personal financial managers 
    and other volunteers.
 Educational toolkits for trainers and investors offering 
    multiple levels of personal financial information.

    To ensure that these programs and tools are well-exploited by the 
military community, the foundation efforts will include a long-term, 
public awareness campaign that will:

 Provide a coordinated, national financial literacy campaign to 
    a military population that is often unable to set and achieve 
    financial goals, unwilling or unable to save, overextended in debt, 
    vulnerable to fraud and unaware of what can be done to gain control 
    of the situation.
 Help military families understand how the financial choices 
    they make can either improve or diminish their ability to achieve 
    goals such as homeownership, a college education, a secure 
    retirement, and peace of mind.
 Communicate positive and motivational messages in a variety of 
    ways and through a diversity of media so that everyone in the 
    military has the opportunity to see, understand, and act upon them.

    In order to ensure the Military Financial Education Program's 
effectiveness, the NASD Investor Education Foundation plans to conduct 
both qualitative and quantitative research that will determine current 
levels of investment knowledge among military personnel, identify 
motivations for seeking educational opportunities, discover how they 
typically access saving and investing information, and identify 
trustworthy sources of information.
S. 418 The Military Personnel Financial Services Protection Act
    NASD supports legislation that not only would ban sales of PPP's, 
but would also enhance and improve the method by which basic 
information about brokers and firms is provided to the investing 
public.
    S. 1A418, introduced by Senator Enzi, and cosponsored by several 
other Senators, including Senators Hagel and Schumer of this Committee, 
would halt completely the sale of PPP's to members of the investing 
public, including the military. We agree with Senator Enzi that the 
excessive sales charges of these contractually based financial products 
make them susceptible to abusive and misleading sales practices and 
that a small group of individuals have targeted these products almost 
entirely to military.
    NASD also agrees with Senator Enzi that there is a great value to 
investors having real-time access to information regarding the 
background, qualifications, and disciplinary history of securities 
professionals with whom they consider doing business. As we saw in the 
First Command situation, unsophisticated investors can be subjected to 
high-pressure sales tactics. In these situations, immediate access to 
information such as the disciplinary history of the salesperson can be 
crucial. All too often, learning about your broker after purchasing can 
be too late.
    A provision in Senator Enzi's bill would revise the requirements 
for collecting and retaining registration information about securities 
firms and their brokers and for providing such information to 
investors.
    Under Federal and State law, securities firms and brokers must 
provide information to regulators through a system operated by NASD, 
called ``BrokerCheck.'' This information, including both administrative 
information and disciplinary history, is reported to NASD by securities 
firms, brokers, and other regulators, including the States.
    In 1990, Congress mandated that NASD make relevant portions of the 
information available to the public without charge through a toll-free 
telephone number, the easiest and most convenient solution at the time. 
In so doing, Congress accorded NASD immunity from liability for the 
release of such information to the public--recognizing that the 
disclosure of key information about securities firms and brokers is a 
critical part of NASD's regulatory and investor protection mission and 
that the veracity of the information reported to NASD cannot be 
independently verified. Therefore the grant of immunity from liability 
for release of this information was needed.
    Because of the narrow language of the existing statute, NASD is not 
able to make ``disclosure information'' available online. Investors 
must request and wait for a written disclosure report to be mailed or 
e-mailed to them.
    Informed investors are critical to market integrity and investor 
protection. Ready access through NASD BrokerCheck to complete 
information about their brokers and the firms that employ them is 
critical to informing investors and building their confidence.
    Investors have embraced the Internet as their preferred means of 
obtaining information about securities firms and brokers. Of the more 
than 3.75 million inquiries the NASD BrokerCheck program has received 
thus far this year, over 98 percent came through the Internet and less 
than 2 percent by telephone.
    Investors want and need online access to disclosure information to 
help them 
decide whether to do business with a securities firm or broker. The 
proposed legislation will permit NASD to put disclosure information 
online with appropriate protections against indiscriminate access and 
exclusion of information that could be used for ``identity theft.''
    The legislation NASD favors would:

 Provide an appropriate limitation of liability for acts taken 
    or omissions made in good faith.
 Require NASD to continue its BrokerCheck program, without 
    charge to individual investors.
 Provide NASD flexibility in providing investor access to the 
    program through the Internet and future technology.
 Maintain the requirement for toll-free telephone access for 
    those investors who do not use, or prefer not to use, the Internet.
 Expressly provide for SEC review and approval of the scope, 
    presentation, and procedures of the NASD BrokerCheck program.
 Require NASD, subject to SEC approval, to implement 
    appropriate procedures for brokers or others to dispute the 
    accuracy of information disclosure through the BrokerCheck program.
Conclusion
    Thank you for giving us the opportunity to testify on these 
important topics and for your important work on this issue. America's 
men and women in uniform deserve honesty and integrity from those who 
sell them financial products. NASD will continue its work to protect 
all investors, including those in our Nation's military.
                               ----------
                  PREPARED STATEMENT OF JOHN OXENDINE
              Commissioner of Insurance, State of Georgia
                           November 17, 2005
Introduction
    My name is John Oxendine. I am Commissioner of Insurance for the 
State of Georgia, a State that has been active in investigating and 
preventing sales abuses involving military personnel. Today, I am 
testifying on behalf of the National Association of Insurance 
Commissioners (NAIC). We appreciate the opportunity to testify 
regarding the role of the State insurance departments and NAIC in 
better protecting military insurance consumers from faulty life 
insurance products and abusive sales practices.
    Today, I want to make three basic points:

 First, America's men and women serving in the armed forces are 
    also American consumers entitled to the same protections under 
    State law enjoyed by all other citizens. Protecting insurance 
    consumers at the local level in the communities where they live has 
    been the hallmark of State regulation for more than a century. 
    Every State in this Nation has a strong unfair trade practices law 
    backed by an insurance department staffed with dedicated employees 
    trained to assist consumers who purchase insurance products and 
    file claims.
 Second, State regulators recognize that insurance consumers 
    serving our country in the military deserve special attention from 
    State and Federal officials responsible for supervising the sales 
    of life insurance and investment products on military bases in the 
    United States and overseas. We are actively reaching out to 
    military authorities to educate them about State consumer 
    protection resources and coordinate our enforcement activities. The 
    military's chain of command structure emphasizing obedience to 
    superiors poses unique consumer protection challenges that differ 
    from civilian society. The same training, working, and living 
    environment that produces highly disciplined and loyal military 
    units to defend America's freedoms can also create pressures on 
    individuals that may negatively affect their ability to make fully 
    independent and informed decisions regarding the most sensible 
    financial products for their own personal security.
 Third, State insurance regulators and the NAIC support Federal 
    legislation that would clarify our authority under the McCarran-
    Ferguson Act and the Gramm-Leach-Bliley Act (GLBA) to supervise the 
    business of insurance wherever it occurs, including military bases. 
    We agree with the Government Accountability Office (GAO) that the 
    Federal Government should facilitate cooperation among the 
    Department of Defense (DoD), military base commanders, and State 
    insurance departments by opening up lines of communication and 
    sharing relevant information about consumer complaints and known 
    violations. We believe that H.R. 458, the Military Personnel 
    Financial Services Protection Act, would help achieve those goals. 
    However, the version passed by the House of Representatives needs 
    to be amended to remove unnecessary directives that could undermine 
    State supervision authority under GLBA and deflect State efforts to 
    address the real problems identified by State insurance regulators 
    and GAO.
State Insurance Regulators Have Expertise and Resources to Help the
Military
    Paying for insurance products is one of the largest annual 
household expenditures of any kind for most Americans. Consumers--
including military personnel--have an enormous financial and emotional 
stake in making sure the promises made by 
insurance companies are kept. Because people often have trouble 
understanding insurance products and sales practices, State governments 
devote substantial resources toward educating and assisting the public 
on insurance matters, as well as licensing and monitoring insurance 
companies and agents. When problems arise, State insurance departments 
are fully staffed to handle consumer inquiries and complaints quickly 
with a local phone call.
    People who live and work on military bases are an integral part of 
the communities where they are located. Like other citizens, they can 
rely upon the expertise and help of State regulatory staff who are also 
local residents to understand and benefit from the laws that govern 
insurance products. As regulators, we are responsible for making sure 
their legitimate expectations are met regarding financial safety and 
fair treatment by insurance providers. During 2003, State insurance 
departments handled approximately 3.4 million consumer inquiries and 
complaints regarding the content of their policies and their treatment 
by insurance companies and agents.
NAIC and State Regulators Are Actively Assisting Military Personnel and
DoD
    As recognized by GAO in its report, ``Financial Product Sales; 
Actions Needed to Better Protect Military Members'', State regulators 
must be aware of insurance problems before they can help remedy them. 
Prior to media reports last year, military insurance sales problems 
were not being brought to our attention because there were few 
complaints to State regulators about the products involved and there 
was no NAIC coding of complaints to signify they came from military 
sources. Once we became aware of problems, enforcement investigations 
were launched in States where they occurred, and NAIC commenced an 
active program to educate regulators, military personnel, and DoD about 
State resources for protecting military insurance consumers.
    We believe State insurance regulators and the NAIC are taking 
actions that will meet the major recommendations of GAO in its report. 
Here are the key initiatives being undertaken:

 The NAIC set up the Sale of Life Insurance to Military Service 
    Members Collaborative Group, which has 30 States participating. 
    There are currently targeted market conduct examinations underway 
    involving nine insurers.
 The NAIC, in conjunction with the DoD, developed a consumer 
    brochure specifically addressing life insurance information for 
    military personnel. We have encouraged DoD to make this brochure 
    freely available to members of the armed services during training 
    and on-base at convenient locations.
 The NAIC created an extensive online resource specifically 
    aimed at helping military personnel purchase life insurance as well 
    as other insurance products. In 
    addition to explanations and tips about buying insurance, the NAIC 
    military insurance webpage includes information on how to 
    electronically file a complaint with State insurance departments, 
    as well as links and contact information for the insurance 
    department in each State, links to consumer help sites maintained 
    by the military services and Federal agencies, and links to pending 
    legislation in Congress. The military assistance webpage is 
    featured on NAIC's main page at www.naic.org.
 Since becoming aware of military sales problems, State 
    insurance regulators have reached out to the DoD. Diane Koken, the 
    Pennsylvania Insurance Commissioner and NAIC President, visited 
    twice this year with DoD leaders to foster a relationship of 
    ongoing cooperation. The NAIC's efforts include: (1) compiling a 
    list of insurance department contacts for the DoD to ensure 
    military officials have proper information for getting State 
    assistance; (2) updating the NAIC's Complaint Database System form 
    to identify complaints that are submitted by military personnel; 
    and (3) providing the DoD with a State-by-State premium volume 
    summary for those companies that state insurance regulators know 
    are soliciting or have solicited insurance products on military 
    bases.
 The NAIC believes basic financial literacy training of 
    military personnel should include assistance information and 
    contact data for State insurance departments. Many people are not 
    aware these valuable resources exist to help them at no cost as 
    part of State government, or that State regulators can help prevent 
    or resolve insurance problems that occur on military installations 
    not otherwise under State jurisdiction. We intend to keep working 
    with DoD to develop training programs and materials that 
    communicate with military insurance consumers in clear and direct 
    language which is easily understood.
 During 2006, the NAIC's Life Insurance & Annuities (A) 
    Committee will be reviewing the types of life insurance which has 
    been sold to military personnel in order to recommend a position on 
    the products being offered in the marketplace.
 Finally, State insurance departments already have strong 
    prohibitions against misleading and deceptive sales practices, and 
    will continue to enforce these prohibitions when inappropriate 
    activity is identified.

    The GAO report recommends that Congress direct State regulators to 
conduct legal compliance reviews of existing insurance products, and 
cooperate with DoD in developing ``suitability'' standards for 
insurance products sold to military personnel in the future. The NAIC 
does not believe Congress needs to ``direct'' State officials or NAIC 
to meet their public responsibilities, especially in view of the strong 
actions taken by them in response to problems identified in the media. 
While the NAIC will continue to provide full cooperation and technical 
assistance to Federal officials, we believe it is appropriately within 
the sole domain of DoD to determine what is best for military personnel 
since DoD understands and is responsible for the military command 
structure and financial benefits that apply to America's men and women 
in uniform.
In Order to Better Help Soldiers, State Regulators Need More Help from
DoD
    In its report, the GAO noted that DoD should provide State 
insurance regulators with complete access to data on complaints by 
military personnel, but is reluctant to do so. The NAIC agrees with GAO 
regarding the need for State insurance departments to obtain all 
complaint information and administrative actions from DoD as early as 
possible. Insurance regulators review complaint information and 
regulatory actions to identify potential patterns and practices of 
conduct that could indicate violations that might not be apparent to 
local base commanders. State regulators can take corrective actions 
sooner rather than later if timely and complete information is 
available for review. We encourage DoD to improve its ability to fully 
share information with us for the benefit of military insurance 
consumers.
    To facilitate State cooperation and information sharing with 
military authorities on insurance matters, the NAIC plans to invite DoD 
representatives to attend the NAIC's Winter National Meeting, which 
will be held in Chicago, Illinois from December 3-6, 2005. 
Representatives of the Federal banking agencies already attend NAIC 
meetings, and have found it useful as a way of promoting our common 
regulatory goals under GLBA. We believe personal interaction between 
DoD and State insurance regulators would further enhance our ability to 
communicate and protect military personnel from inappropriate sales 
practices. The NAIC would also like to extend an offer to develop a 
Memorandum of Understanding between DoD and individual State insurance 
departments to address any outstanding confidentiality issues 
surrounding the sharing of information.
Comments on H.R. 458
    H.R. 458, the ``Military Personnel Services Protection Act'', 
passed the House of Representatives by a vote of 402-2 on June 28, 
2005, and is now pending before the Senate Committee on Banking, 
Housing, and Urban Affairs. The NAIC would like to offer these comments 
regarding the sections of H.R. 458 that affect State insurance 
regulation.
    Section 105--This section clarifies the jurisdiction of State 
insurance regulators on Federal land and facilities, as well as which 
State's law should apply. The NAIC fully supports enactment of this 
section.
    Section 106--This section expresses a Congressional intent that 
States should work cooperatively with DoD to ensure implementation of 
appropriate standards to protect armed forces personnel, and 
additionally that each State should identify its role in promoting 
uniform standards within 12 months. The section also says NAIC should 
conduct a study of State compliance and issue a report to Congress.
    State regulators and the NAIC are already meeting the intentions 
expressed in Section 106 through the enforcement of long-standing State 
prohibitions against misleading and deceptive sales practices, and will 
continue to do so because we are just as much concerned as Congress 
about protecting military personnel. Moreover, the statutory intention 
that States spend their time and resources adopting uniform national 
standards at the direction of Congress diverts attention and effort 
from fixing the real problems that occur in States with major military 
bases, while also needlessly undercutting the equal authority of states 
as functional regulators of insurance that is mandated in GLBA. As a 
practical matter, State regulators and NAIC are effectively working 
together and cooperating with DoD at the present time. Consequently, 
the NAIC recommends that Section 106 be deleted from H.R. 458 because 
it is unnecessary and counterproductive to enhancing the authority of 
State insurance regulators set forth in GLBA and other parts of H.R. 
458.
    Section 107--This section provides that insurers and producers 
shall not sell life insurance products to members of the armed forces 
without proper disclosures. It also provides that States will be 
involved in enforcing these disclosure requirements. The NAIC fully 
supports the disclosure and enforcement provisions in Section 107.
    Section 108--This section expresses a Congressional intent that 
NAIC should consult with DoD and submit a report to Congress within 12 
months on ways of improving the quality and sales of insurance on 
military installations. If NAIC does not submit a report, the GAO is 
directed to do it. The NAIC has always cooperated fully with requests 
of Congress and GAO for information and assistance. There is no need 
for the statutory directive to NAIC in Section 108, since a simple 
request is sufficient to produce the desired results. The NAIC 
recommends deleting any statutory inference which infers that NAIC 
might not meet a Congressional request for information and assistance 
on military insurance issues.
    Section 109--This section requires that insurers operating on 
military bases implement a system to check and report to State 
officials regarding disciplinary actions against producers representing 
the insurer, and that States set up a collective system to receive such 
reports. There is also an expression of Congressional intent that 
States achieve this goal within 2 years. The NAIC supports the goals of 
this section, but questions whether a Federal statutory directive to 
States is needed to achieve the desired results.
    Section 111--This section expresses a Congressional intent that 
State agencies provide advice to Federal entities regarding insurance 
coverage issues. The NAIC is already meeting this goal, and will 
continue to do so.
Conclusion
    All of us share a commitment to assuring that America's armed 
forces personnel receive fair treatment, solid advice, and strong 
consumer protections with respect to the insurance products they 
purchase. State insurance regulators and NAIC are meeting that 
commitment with effective outreach to the military, useful educational 
resources, and active enforcement of State laws to protect military 
insurance consumers. We look forward to continuing our efforts, and to 
working more closely with Congress and DoD to make the consumer 
protection system meet the high expectations which military personnel 
rightly deserve.
       RESPONSE TO WRITTEN QUESTIONS OF SENATOR SARBANES 
                       FROM MARY SCHAPIRO

Q.1. Did the National Association of Securities Dealers 
encounter a lack of cooperation from the Air Force or the 
Department of Defense during the NASD investigation of First 
Command Financial Planning, Inc.?

A.1. NASD did not encounter a lack of cooperation from the Air 
Force or the Department of Defense during the investigation of 
First Command Financial Planning, Inc. However, we were 
informed by a JAG officer working in the Air Force headquarters 
for legal assistance that, because of Air Force regulations, he 
could not give us information about complaints that had been 
filed with Air Force legal offices without specific individual 
client consent. While he also informed us that he encouraged 
individuals with complaints to contact NASD, the staff did not 
receive any complaints.

Q.2. The GAO reported that ``contractual plans have been 
periodically involved in sales scandals for decade.'' Why did 
misconduct in sales of this type of product persist ``for 
decades?'' As a result of the recent occurrences, what have the 
regulators learned?

A.2. As noted in the statement that NASD submitted, we agree 
that the excessive sales charges of these contractual-based 
financial products make them susceptible to abusive and 
misleading sales practices. NASD supports legislation that 
would ban sales of these products. NASD rules preclude 
brokerage firms from charging customers sales loads at this 
level for ordinary mutual funds, and absent specific 
legislative authorization of this product's sales charges, NASD 
members would not be permitted to sell any financial product 
with 50 percent first year sales charges. Section 27 of the 
Investment Company Act of 1940 permits contractual plans to 
impose huge front-end sales loads, which naturally leads to 
sales practice abuses. While this authority does not limit 
NASD's obligation to examine broker-dealers that sell 
contractual plans, eliminating the potential for huge front-end 
loads by amending Section 27 of the 1940 Act would also lead to 
fewer abuses related to the sales of these plans.

Q.3. The GAO report states that ``although sales of securities 
products are covered by suitability standards, securities 
regulators also rely on receiving complaints to initiate 
actions and were, therefore, not generally aware of problems 
involving military members and contractual plans until press 
reports appeared.'' Do you agree with this conclusion? What 
means other than investor complaints enable the regulators to 
identify sales practice abuses?

A.3. NASD agrees that customer complaints are a significant 
source of information alerting regulators to potential problems 
in the sale of investment products. We are also alerted to 
sales practice abuses through NASD's periodic brokerage firm 
examinations, focused sweep examinations, filings required to 
be made by brokerage firms (for example, when the firm 
terminates a registered representative for cause), discussions 
with industry representatives through NASD Board standing 
committees, conferences, and other channels, press reports, and 
anonymous tips. In addition, NASD focuses resources on 
monitoring industry trends and seeking out problematic areas 
likely to occur.

Q.4. The NASD, in a press release dated December 15, 2004, 
announced the settlement of disciplinary proceedings against a 
major seller of periodic payment contracts to military 
personnel that was ``[u]sing misleading sales scripts, 
inappropriate comparisons and omissions if important 
information.'' The NASD's long-standing rule on ``Communication 
with the Public'' requires broker-dealers to file certain 
advertisements and sales literature concerning registered 
investment companies'' with NASD ``within 10 business days of 
first use of publication.''
    Please describe the NASD's process of reviewing the 
advertisements and sales materials used by brokerage firms. In 
light of recent public concern about sales practices involving 
the systematic investment plans, has the NASD reviewed or 
modified the standards it uses to review advertising and sales 
materials?

A.4. Over the past 4 years, NASD has reviewed in excess of 
350,000 \1\ brokerage advertisements and other items of sales 
material. NASD conducts these reviews through several different 
programs involving staff in its Advertising Regulation 
Department as well as the District Offices and the Department 
of Enforcement.
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    \1\ Year by year, NASD reviewed the following:
    Year--Communications Reviewed: 2005--89,653; 2004--88,301; 2003--
85,735; 2002--87,855.
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Filings

    NASD reviews the largest volume of brokerage firm 
advertisements and other sales material through routine filings 
made with the Advertising Regulation Department (the 
Department). As noted in the inquiry, brokerage firms file 
certain communications with the Department pursuant to rule 
requirements. The majority of material filed concerns 
registered investment company securities including mutual 
funds, variable annuities, variable life insurance, and unit 
investment trusts. Historically, communications about 
systematic investment plans reflect a very tiny subset of the 
investment company communications reviewed. In the past year, 
since the disciplinary proceeding referenced in the inquiry, 
this volume has declined further.
    When a brokerage firm files an advertisement or other 
communication with the Department, the analyst assigned to the 
specific firm conducts a review for compliance with NASD rules 
as well as applicable SEC, MSRB, and SIPC standards. These 
reviews reflect the staff's analysis of the given communication 
based on the information available to the staff member at the 
time of the review. For example, it is expressly assumed that 
members' submissions are complete and accurate.
    In response to each filing, staff provides the brokerage 
firm with an advisory review in the form of a written letter. 
When the staff observes substantive rule violations, it will 
refer them for further investigation and potential disciplinary 
action.

Investigations

    Department staff also reviews materials submitted by third 
parties as a complaint or inquiry. For example, NASD District 
Office or Enforcement Department staff will uncover 
advertisements in connection with their examinations of 
brokerage firms. Where they detect problematic or questionable 
material, they will refer those items to Department staff for 
review and appropriate action. Generally, the Department staff 
will work with the referring office in resolving any rule 
violations observed in connection with an ongoing examination. 
For example, Department staff will provide ongoing analysis and 
support to the Enforcement Department as it pursues a formal 
disciplinary action against a given brokerage firm.
    The Department also receives referrals from brokerage firms 
that are in competition with the firm that has used a given 
communication. Regulators at the Federal or State level may 
also refer items to the Department as will the occasional 
investor. The Department reviews every advertisement or other 
item of sales literature for compliance with applicable NASD, 
SEC, MSRB, and SIPC rules. If there are rule violations 
indicated, staff will contact the brokerage firm with 
commentary on the relative compliance of the subject 
advertisement and will provide a recommended course of action, 
for example, advise the firm to stop using a given 
advertisement completely or advise the firm to correct an 
advertisement before it is used further. The Department will 
obtain a written response from the brokerage firm as to its 
course of action, the origins of the problem advertisement and 
its immediate impact on the public. Depending on the rule 
violations and their scope, the Department may determine no 
further action is required, issue an informal disciplinary 
action against the firm, or refer the matter to the 
Enforcement Department requesting that the staff pursue formal 
disciplinary action.

Sweeps

    Department staff conduct sweep reviews of brokerage firms' 
advertising and other sales material. The staff will contact a 
group of member firms to request specific types of 
communications that are not normally filed and may reflect an 
area of current regulatory interest for NASD. For example, 
recent sweeps have focused on communications about equity-
indexed annuities, research reports, and hedge funds.
    The Department reviews any sales communications provided in 
response to the sweep request and provides written commentary 
to the brokerage firm on items that fail to comply with 
applicable rules. As with investigations, the Department staff 
will request information in response to its comment letter and, 
upon receipt of such information, make a determination as to 
whether to close the matter or pursue disciplinary action from 
the sweep.

Standards NASD Uses to Review Systematic Investment

Plan Communications

    NASD continuously seeks to update and improve the standards 
it applies to members' communications. For example, NASD has 
recently proposed amendments to the rules governing advertising 
to require firms to file prior to use all television, radio, 
and video advertisements that are 15 seconds or longer as well 
as advertisements concerning new products.\2\ Similarly, NASD 
has also proposed stricter standards for the internal review 
and approval of correspondence (for example, letters, e-mail, 
and instant messages) with existing retail customers. \3\
---------------------------------------------------------------------------
    \2\ See Notice to Members 05-25, copy attached.
    \3\ See Notice to Members 05-27, copy attached.
---------------------------------------------------------------------------
    The standards implicated in the disciplinary proceeding 
noted above were some of the most fundamental applicable to 
brokerage firm communications, that is, the prohibition on 
misleading statements, the requirement that members' 
communications be fair, balanced, and complete, and the 
requirement that comparisons include all relevant material 
differences between the subjects of the comparison.\4\ 
Accordingly, NASD appears to have sufficient standards in place 
to pursue rule violations in this area going forward. In 
addition, should Congress adopt the proposed ban on systematic 
investment plans advocated by NASD, there would be even less 
need to adopt specialized rules.
---------------------------------------------------------------------------
    \4\ NASD Rule 2210(d)(1) states, in part:

    (A) All member communications with the public shall be based on 
principles of fair dealing and good faith, must be fair and balanced, 
and must provide a sound basis for evaluating the facts in regard to 
any particular security or type of security, industry, or service. No 
member may omit any material fact or qualification if the omission, in 
the light of the context of the material presented, would cause the 
communications to be misleading.
    (B) No member may make any false, exaggerated, unwarranted, or 
misleading statement or claim in any communication with the public. No 
member may publish, circulate, or distribute any public communication 
that the member knows or has reason to know contains any untrue 
statement of a material fact or is otherwise false or misleading.

    Further, NASD Rule 2210(d)(2)(B) states ``Any comparison in 
advertisements or sales literature between investments or services must 
disclose all material differences between them, including (as 
applicable) investment objectives, costs and expenses, liquidity, 
safety, guarantees or insurance, fluctuation of principal or return, 
and tax features.''
---------------------------------------------------------------------------

      RESPONSE TO A WRITTEN QUESTION OF SENATOR SARBANES 
                       FROM JOHN OXENDINE

Q.1. GAO notes that many States lack appropriateness or 
suitability standards for sales of insurance products to 
military members, so that investigators must prove that 
companies are misrepresenting products, which is difficult to 
do. Does the NAIC support GAO's recommendation that 
appropriateness or suitability standards for sales of insurance 
products to military personnel be developed? If not, why not?

A.1. In 2000, the NAIC adopted the white paper, ``Suitability 
of Sales of Life Insurance & Annuities,'' which recommends that 
rules be developed requiring that suitability be determined by 
the producer and carrier in the sale of nonregistered life 
insurance and annuity products. While the NAIC agreed in 
concept that the development of suitability standards is 
necessary, the implementation of suitability standards is more 
difficult. Because of this, the NAIC first focused on the 
development of standards for seniors, which is the segment of 
the marketplace in which significant problems were identified. 
The NAIC membership adopted the Senior Protection in Annuity 
Transactions Model Regulation model in 2003. Today, 
approximately one-third of the States have some form of 
suitability standards that apply to seniors or the broader 
marketplace.
    In testimony to Congress in November of 2005 the NAIC 
recognized the Department of Defense (DoD) is in the best 
position to know the needs of military personnel and pledged 
its full cooperation and technical support to the DoD in 
meeting the needs of military personnel. In addition, the 
NAIC's Life Insurance & Annuities (A) Committee has the 
following charge for 2006: Review life insurance sold with a 
side fund to recommend a position on the products being offered 
in the marketplace. Life insurance with a side fund is the 
predominate life insurance product being sold to the military 
today.
    In early February 2006, the NAIC will hold its annual 
commissioners conference to discuss critical issues facing 
State insurance regulators in 2006 and to set the NAIC's 
strategic plan for 2006. The NAIC will discuss the development 
of suitability standards for life insurance products sold to 
military personnel during this conference and will provide 
additional comment on future NAIC activity after this 
conference.

