[House Report 109-40]
[From the U.S. Government Publishing Office]



109th Congress                                                   Report
                        HOUSE OF REPRESENTATIVES
 1st Session                                                     109-40

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



 
          MILITARY PERSONNEL FINANCIAL SERVICES PROTECTION ACT

                                _______
                                

 April 13, 2005.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed

                                _______
                                

  Mr. Oxley, from the Committee on Financial Services, submitted the 
                               following

                              R E P O R T

                        [To accompany H.R. 458]

      [Including cost estimate of the Congressional Budget Office]

  The Committee on Financial Services, to whom was referred the 
bill (H.R. 458) to prevent the sale of abusive insurance and 
investment products to military personnel, having considered 
the same, report favorably thereon without amendment and 
recommend that the bill do pass.

                                CONTENTS

                                                                   Page
Purpose and Summary..............................................     1
Background and Need for Legislation..............................     2
Hearings.........................................................     5
Committee Consideration..........................................     6
Committee Votes..................................................     6
Committee Oversight Findings.....................................     6
Performance Goals and Objectives.................................     6
New Budget Authority, Entitlement Authority, and Tax Expenditures     6
Committee Cost Estimate..........................................     6
Congressional Budget Office Estimate.............................     7
Federal Mandates Statement.......................................     9
Advisory Committee Statement.....................................     9
Constitutional Authority Statement...............................     9
Applicability to Legislative Branch..............................     9
Exchange of Committee Correspondence.............................     9
Section-by-Section Analysis of the Legislation...................    10
Changes in Existing Law Made by the Bill, as Reported............    16

                          Purpose and Summary

    H.R. 458, the Military Personnel Financial Services 
Protection Act, will protect military services members from the 
sale of questionable financial products, curb abusive sales 
practices on military installations, and ensure regulatory 
oversight of financial services sales on military 
installations. Specifically, H.R. 458 bans the sale of 
contractual plans, requires written disclosures in conjunction 
with certain on-installation sales or solicitations, encourages 
the development of improved products for military personnel, 
increases investor access to broker registration and 
disciplinary information, and improves regulatory oversight by 
coordinating and encouraging contact among insurance companies, 
Federal and State regulators, and the Secretary of Defense.
    To further protect military personnel, a registry of barred 
and banned agents will be established and maintained by the 
Secretary of Defense, and the registry information is to be 
made readily available to the appropriate Federal and State 
regulators. The Secretary of Defense is directed to notify the 
appropriate regulatory authorities when an individual is added 
to or removed from the registry.

                  Background and Need for Legislation

    There is an extensive history of abusive and misleading 
marketing and sales of financial services products on military 
installations. Problems have included abusive and coercive 
sales tactics, expensive and outdated products, and a lack of 
uniform regulatory oversight for on-installation sales.
    A Pentagon-commissioned study by General Thomas Cuthbert 
and a separate Navy Judge Advocate General Corps report by Lt. 
Wayne Hildreth documented the problem of abusive sales 
practices of life insurance agents on domestic and foreign U.S. 
military installations.\1\ These reports detailed improper 
solicitation on installations, the use of fraternal military 
organizations to sell insurance products, a lack of uniform 
oversight or regulation of insurance sales on installations, 
and routine and systemic violations of Department of Defense 
rules. These reports were followed by a series of news articles 
in the summer of 2004 that alleged abusive sales practices on 
several military installations throughout the country and 
overseas.
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    \1\ Final Report, Insurance Solicitation on Department of Defense 
Installations, May 15, 2000; Litigation Report, Investigation of NCOA 
Standard Procedures for Selling Insurance, November 19, 1997.
---------------------------------------------------------------------------
    A 1986 Department of Defense Directive limits personal 
commercial solicitations to licensed and approved entities with 
specific appointments.\2\ The Directive prohibits, among other 
practices, solicitation of recruits, trainees, and transient 
personnel in a ``mass'' or ``captive'' audience, using 
misleading advertising and sales literature, and giving the 
appearance that the Department of Defense endorses any 
particular company.\3\ Despite these prohibitions, ``agents 
have made misleading pitches to `captive' audiences * * * posed 
as counselors on veterans benefits and independent financial 
advisers [and] solicited soldiers in their barracks or while 
they were on duty, [which are all] violations of Defense 
Department regulations.'' \4\
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    \2\ DoD Directive 1344.7, Sect. 6.1.
    \3\ DoD Directive 1344.7, Sect. 6.4.
    \4\ Diana B. Henriques, Basic Training Doesn't Guard Against 
Insurance Pitch to G.I.'s, N.Y. Times, July 20, 2004, at A1.
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    Witnesses at a September 9, 2004 hearing before the 
Subcommittee on Capital Markets, Insurance and Government 
Sponsored Enterprises criticized these abusive sales practices. 
Mr. David F. Woods, CEO of the National Association of 
Insurance and Financial Advisors, testified that, ``We condemn 
* * * deceptive, and unethical sales practices and have 
consistently worked to eliminate them from sales on and off 
base.'' \5\ In addition to criticizing the sales practices, 
witnesses before the Subcommittee discussed the lack of 
regulatory oversight for on-installation sales. As another 
witness testified, ``We are convinced that the reason these 
issues continue to come up is because of the lack of clarity 
over who has the authority to oversee such sales and the 
absence of clear procedures to ensure the highest standards for 
dealing with men and women in uniform.'' \6\
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    \5\ Hearing entitled ``G.I. Finances: Protecting Those Who Protect 
Us'' before the House Subcommittee on Capital Markets, September 9, 
2004, written testimony of David F. Woods, p. 3.
    \6\ Hearing, written testimony of Hon. Frank Keating, President and 
CEO, American Council of Life Insurers, p. 4.
---------------------------------------------------------------------------
    In addition to improper and unethical sales practices, 
witnesses at the Subcommittee hearing criticized the securities 
and life insurance products being sold, suggesting that the 
products were particularly unsuitable for most members of the 
armed services and superior investments were available for all 
investors. For example, Ms. Elizabeth Jetton, President of the 
Financial Planning Association, testified that the American 
Amicable Insurance Company's sales tactic of pitching insurance 
as a retirement vehicle was ``misguided and misleading'' and 
that ``any disinterested third party would have a very 
difficult time justifying [such] insurance as a rational 
retirement investment for the typical serviceman.'' \7\ Mr. 
Mercer Bullard, President and Founder of Fund Democracy, 
testified that, ``it is particularly offensive that insurance 
agents peddle overpriced, unsuitable products to the men and 
women who daily put their lives on the line for America's 
defense * * *.'' \8\
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    \7\ Hearing, written testimony of Ms. Elisabeth W. Jetton, CFP, on 
behalf of the Financial Planning Association, p. 5.
    \8\ Hearing, written testimony of Mr. Mercer E. Bullard, President 
of Fund Democracy, Inc. and Assistant Professor of Law, University of 
Mississippi School of Law, p. 3.
---------------------------------------------------------------------------
    The Subcommittee investigation in preparation for the 
hearing revealed that one financial services company was 
targeting military personnel with the sale of contractual 
plans, an obscure financial product through which an investor 
contributes equal monthly payments typically for 15 to 25 years 
into shares of a designated mutual fund. The hallmark of the 
contractual plan is a sales load of 50% assessed against the 
first year of contributions.
    First offered in 1930, contractual plans were created to 
allow the investor of modest means to make monthly payments of 
as little as $10 and still experience the benefits of investing 
in the financial markets. Yet, these plans fell quickly into 
disrepute, beginning a sordid history of abusive selling 
practices and excessive sales charges.\9\
---------------------------------------------------------------------------
    \9\ Securities and Exchange Commission, Public Policy Implication 
of Investment Company Growth 224 (1966).
---------------------------------------------------------------------------
    In congressional hearings on the investment industry in 
1940 that led to the passage of the Investment Company Act of 
1940, Securities and Exchange Commission attorney John Boland 
testified that the SEC's investigation into the contractual 
plan industryrevealed gross abuses, including rampant 
misrepresentations concerning the sales loads.\10\ To counter these 
abuses, Congress included in the Investment Company Act provisions 
applying to sales of contractual plans. First defining a contractual 
plan as a ``periodic payment plan certificate,'' \11\ Congress then 
placed restrictions on sales loads, the most relevant being the sales 
load cannot exceed 9% of the aggregate payments into the plan and 
cannot be more than 50% of the first twelve monthly payments into the 
plan.\12\
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    \10\ Hearings Before a Subcommittee of the Committee on Banking and 
Currency on S. 3580, 76th Cong. 3d. Sess. (1940), Testimony of John 
Boland, Attorney, General Counsel's Office, Securities and Exchange 
Commission, pp. 168, 172.
    \11\ Investment Company Act of 1940, Sec. 2(a)(27).
    \12\ Investment Company Act of 1940. Sec. 27(a).
---------------------------------------------------------------------------
    Again reviewing these plans in the 1960s in two different 
congressional reports, the SEC questioned the justification for 
the high front-end load as well as the product itself. 
Responding to Congress' request to study investor protection in 
light of the rules of the securities markets, in 1963 the SEC 
published the Report of the Special Study of Securities 
Markets.\13\ The report devoted some analysis to the 
contractual plan, concluding that the high first-year sales 
load was unjustifiable: ``[O]nly compelling reasons can justify 
the continued existence of the front-end load [on contractual 
plans]. The study has concluded that the justifications 
advanced by the industry are hardly persuasive and certainly 
not compelling.'' \14\
---------------------------------------------------------------------------
    \13\ H.R. Doc. No. 95, 88th Cong., 1st Sess. (1963).
    \14\ Id. at 211.
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    The Special Study Report then called for considering the 
elimination of the excessively high first-year front-end 
load.\15\ The Special Study Report also noted the likely 
unsuitability of the product for investors of modest means: 
``To some extent the industry is reluctant to concede that 
questions of suitability can ever arise in the sale of funds or 
plans, but * * * [the] evidence concerning contractual plan 
redemptions and lapses leave no doubt that a substantial number 
of plans are sold to persons for whom, because they have 
insufficient income or inadequate other financial resources, 
they are likely to be unsuitable investments.'' \16\
---------------------------------------------------------------------------
    \15\ Id.
    \16\ Id. at 207.
---------------------------------------------------------------------------
    Following upon the 1963 Report, in 1966 the SEC released 
the Report of the Securities and Exchange Commission on the 
Public Policy Implications of Investment Company Growth.\17\ In 
the report, the SEC noted that early contractual plan redeemers 
``pay `effective' or cumulative average sales loads which often 
amount to many times the normal sales loads applicable to the 
underlying fund shares--effective sales loads which clearly 
would be `unconscionable or grossly excessive' but for the 
express provisions of [Section 27(a)] of the [Investment 
Company] Act with respect to front-end loads.'' \18\ In 
addition the SEC noted the potential for sales abuses: 
``Moreover, though the contractual plan is a long-range program 
for systematic investing, the front-end load only provides 
retailers with a strong incentive to get purchasers to initiate 
such a plan, regardless of their circumstances, in order to 
realize commissions on at least the front-end portion of the 
load. After these first-year payments are made, the salesman's 
interest in the completion of the plans he sells is sharply 
eroded by the fact that his commissions are substantially 
decreased.'' \19\
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    \17\ H.R. Rep. No. 2337, 89th Cong., 2d Sess. (1966).
    \18\ Id. at 237.
    \19\ Id. at 244.
---------------------------------------------------------------------------
    In concluding its analysis of the structure and sales of 
contractual plans in the Public Policy Implications of 
Investment Company Growth, the SEC recommended to Congress the 
abolition of the front-end load on contractual plans and the 
reduction of the maximum aggregate load during the plan's term 
from 9% to 5%.\20\ In 1967, the SEC drafted a bill to implement 
those and other policy recommendations. The bill included a 
provision to abolish the front-end load on contractual plans. 
Bowing to industry pressure, Congress refused to follow the 
SEC's recommendation, passing the Investment Company Act 
Amendments of 1970, which implemented refund and surrender 
privileges for contractual plan investors, but did not reduce 
the front-end load.
---------------------------------------------------------------------------
    \20\ Id. at 246-47.
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    After the 1970 Amendments, Congress and regulators focused 
little attention on contractual plans \21\ as sales declined 
with the advent of no-load and low-load mutual funds and the 
possibility of dollar cost averaging with minimal monthly 
contributions. In fact, in a mutual fund market that has over 7 
trillion dollars invested, these plans account for only 
approximately 11 billion dollars of which 90 percent are held 
by military personnel. Today financial experts decry these 
investment vehicles. Vanguard Group founder John C. Bogle 
asserted: ``Would I ever recommend that an investor buy 
contractual plans? No, I would not.'' \22\ Similarly, 
Morningstar Inc.'s Senior Fund Analyst Bridget Hughes 
succinctly stated, ``There are really no advantages to these 
contractual funds; they are old-fashioned, based on old ideas 
of how to force people to commit to systematic investing.'' 
\23\
---------------------------------------------------------------------------
    \21\ The only substantive amendment to Section 27 was passed under 
the National Securities Markets Improvement Act of 1996, which exempted 
variable life insurance and variable annuities from the strictures of 
Section 27. See Section 27(i) of the 1940 Act. Note that in 1971, 
Congress further amended Section 27(f) to clarify that the 60 day 
notice provision did not apply to periodic payment plans where the 
sales load was always under 9% of the total monthly payment (i.e. a 
plan without a disproportionate front-end load).
    \22\ Diana B. Henriques, Basic Training Doesn't Guard Against 
Insurance Pitch to G.I.'s, N.Y. Times, July 20, 2004, at A1.
    \23\ Gary S. Mogel, Congress Questions Sale of High-Fee Funds to 
Military: Contractual Plans Come under Scrutiny, Investment News, Vol. 
8, Issue 34, Sept. 13, 2004, at 21.
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    In December 2004, the dominant retailer of contractual 
plans, a financial services company catering exclusively to 
military personnel, voluntarily stopped selling them in the 
wake of last year's Committee action and investigations by the 
SEC and NASD into its use of misleading contractual plan sales 
materials. Later that same month the company settled the 
charges with the SEC and NASD, agreeing to pay $12 million to 
reimburse certain customers and provide investor education to 
the military. At the same time NASD issued a warning to 
investors regarding the high upfront costs associated with 
contractual plans.

                                Hearings

    The Subcommittee on Capital Markets, Insurance and 
Government Sponsored Enterprises held a hearing on financial 
product sales to military personnel entitled ``G.I. Finances: 
Protecting Those Who Protect Us'' on September 9, 2004. The 
Subcommittee received testimony from the following witnesses: 
Specialist Brandon Conger, United States Army; Ms. Elizabeth W. 
Jetton, President, Financial Planning Association; Mr. Mercer 
Bullard, Founder and Chief Executive Officer, Fund Democracy, 
Inc.; Mr. Lamar C. Smith, Chairman and Chief Executive Officer, 
First Command Financial Planning, Inc.; Mr. Joe W. Dunlap, 
Executive Vice President, American Amicable Life Insurance 
Company of Texas; Mr. David Woods, Chief Executive Officer, 
National Association of Insurance and Financial Agents; Hon. 
Frank Keating, President and Chief Executive Officer, American 
Council of Life Insurers.

                        Committee Consideration

    The Committee on Financial Services met in open session on 
March 15, 2005 and ordered H.R. 458, the Military Personnel 
Financial Services Protection Act, favorably reported to the 
House by a voice vote.

                            Committee Votes

    Clause 3(b) of rule XIII of the Rules of the House of 
Representatives requires the Committee to list the record votes 
on the motion to report legislation and amendments thereto. A 
motion by Mr. Oxley to report the bill to the House with a 
favorablerecommendation was agreed by a voice vote. An 
amendment offered by Mr. Gutierrez, no. 1, to limit ``pay day'' lending 
activities was withdrawn.

                      Committee Oversight Findings

    Pursuant to clause 3(c)(1) of rule XIII of the Rules of the 
House of Representatives, the Committee has held hearings 
previously and made findings that are reflected in this report.

                    Performance Goals and Objectives

    Pursuant to clause 3(c)(4) of rule XIII of the Rules of the 
House of Representatives, the Committee establishes the 
following performance related goals and objectives for this 
legislation:
    The Secretary of Defense and State and Federal financial 
regulators will use the authority granted by this legislation 
to protect members of the military from abusive sales practices 
on military installations. Further, the Secretary of Defense 
will use the authority granted by this legislation to create 
and maintain a registry of agents and broker/dealers who have 
been banned or barred from selling financial services products 
on military installations.

   New Budget Authority, Entitlement Authority, and Tax Expenditures

    In compliance with clause 3(c)(2) of rule XIII of the Rules 
of the House of Representatives, the Committee finds that this 
legislation would result in no new budget authority, 
entitlement authority, or tax expenditures or revenues.

                        Committee Cost Estimate

    The Committee adopts as its own the cost estimate prepared 
by the Director of the Congressional Budget Office pursuant to 
section 402 of the Congressional Budget Act of 1974.

                  Congressional Budget Office Estimate

    Pursuant to clause 3(c)(3) of rule XIII of the Rules of the 
House of Representatives, the following is the cost estimate 
provided by the Congressional Budget Office pursuant to section 
402 of the Congressional Budget Act of 1974:

                                                    April 13, 2005.
Hon. Michael G. Oxley,
Chairman, Committee on Financial Services,
House of Representatives, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for H.R. 458, the Military 
Personnel Financial Services Protection Act.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contacts are Melissa E. 
Zimmerman (for federal costs),and Craig Cammarata (for the 
private-sector impact).
            Sincerely,
                                               Douglas Holtz-Eakin.
    Enclosure.

H.R. 458--Military Personnel Financial Services Protection Act

    Summary: H.R. 458 would ban the sale of mutual funds sold 
though contractual plans. The bill also would require insurance 
companies to provide certain notices about insurance policies 
offered by the U.S. government when selling an insurance policy 
to servicemembers or while marketing on military installations. 
The bill would require the Department of Defense to maintain a 
list of agents and advisors barred from doing business on 
military installations. Finally, the bill would amend 
securities law to require registered securities associations to 
provide public access to certain consumer information and to 
file certain financial information with the Securities and 
Exchange Commission.
    CBO estimates that implementing H.R. 458 would result in no 
significant cost to the federal government and would not affect 
direct spending or revenues.
    H.R. 458 contains no intergovernmental mandates as defined 
in the Unfunded Mandates Reform Act (UMRA), and any costs to 
state, local, or tribal governments would be voluntary.
    H.R. 458 contains private-sector mandates as defined in 
UMRA related to the sales of mutual fund and life insurance 
products. Based on information provided by industry and 
government sources, CBO expects that the aggregate direct costs 
of complying with those mandates would fall below the annual 
threshold established by UMRA for private-sector mandates ($123 
million in 2005, adjusted annually for inflation).
    Estimated cost to the Federal Government: CBO estimates 
that implementing H.R. 458 would result in no significant cost 
to the Federal Government and would not affect direct spending 
or revenues.
    Estimated impact on state, local, and tribal governments: 
H.R. 458 contains no intergovernmental mandates as defined in 
UMRA, and any costs to state, local, or tribal governments 
would be voluntary. The bill would encourage state insurance 
regulators to coordinate with the Department of Defense to 
protect military personnel from predatory life insurance 
schemes. Based on information from state insurance 
commissioners, CBO estimates that the costs of such cooperation 
would not be significant.
    Estimated impact on the private sector: H.R. 458 contains 
private-sector mandates as defined in UMRA related to the sales 
of mutual fund and life insurance products. Based on 
information provided by industry and government sources, CBO 
expects that the aggregate direct costs of complying with those 
mandates would fall below the annual threshold established by 
UMRA for private-sector mandates ($123 million in 2005, 
adjusted annually for inflation).
    H.R. 458 would impose private-sector mandates on registered 
investment companies, registered securities associations, 
insurers and those selling life insurance products to members 
of the Armed Forces on military installations of the United 
States. Specifically, the bill would impose mandates by:
          Prohibiting the sales of periodic-payment-plan 
        certificates;
          Requiring a registered securities association to 
        provide an electronic or other process to receive and 
        respond to inquiries about disciplinary actions taken 
        against brokers and dealers; and
          Requiring insurers and producers of life insurance 
        products to make certain disclosures when selling or 
        soliciting life insurance products on military 
        installations.

Prohibition on the sales of periodic plan certificates

    Purchasers of periodic-payment-plan certificates make 
monthly investment payments into mutual funds, typically for a 
period of 15 years or more. Under current law, the Investment 
Company Act limits the sales load on such certificates to 9 
percent of the total payments to be made during the life of the 
plan, but allows that sales load to be significantly front-
loaded. Specifically, up to half of the monthly investment 
payments made in the first year may be deducted for sales load. 
According to industry sources, current practice is to charge a 
sales load that amounts to 3.3 percent of the total payments 
expected to be made over the life of the plan, and to collect 
that sales charge for the entire plan period by deducting half 
of the first 12 investment payments.
    H.R. 458 would impose a private-sector mandate on 
registered investment companies by prohibiting them from 
selling any more periodic-payment-plan certificates. The cost 
of complying with the mandate would be the income (sales load) 
forgone net of any operating expenses to generate that income. 
Based on information from industry sources on sales in 2003 and 
2004, CBO estimates that the annual sales load that would be 
forgone by the prohibition of new sales of periodic-payment-
plan certificates would range between $30 million and $35 
million.

Disclosure and inquiry response requirements

    The bill also would impose private-sector mandates 
regarding additional disclosures by those selling life 
insurance on military bases, and responses to inquiries about 
broker or dealer registration information. Based on information 
from industry and government sources, CBO estimates that the 
direct cost to comply with those mandates would be small. Those 
mandates would:
          Require insurers and producers of life insurance 
        products selling or soliciting those products on 
        military installations to provide a written disclosure 
        to the consumer that subsidized life insurance may be 
        available from the federal government, and that the 
        U.S. government has in no way sanctioned, recommended, 
        or encouraged the product being offered; and
          Require a registered securities association to 
        establish and maintain a readily accessible electronic 
        or other process to respond to inquiries regarding 
        registration information about brokers and dealers and 
        their associated persons, including disciplinary 
        actions taken against them.
    Estimate prepared by: Federal Costs: Melissa E. Zimmerman; 
State and Local Impact: Sarah Puro; and Private-Sector Impact: 
Craig Cammarata.
    Estimate approved by: Peter H. Fontaine, Deputy Assistant 
Director for Budget Analysis.

                       Federal Mandates Statement

    The Committee adopts as its own the estimate of Federal 
mandates prepared by the Director of the Congressional Budget 
Office pursuant to section 423 of the Unfunded Mandates Reform 
Act.

                      Advisory Committee Statement

    No advisory committees within the meaning of section 5(b) 
of the Federal Advisory Committee Act were created by this 
legislation.

                   Constitutional Authority Statement

    Pursuant to clause 3(d)(1) of rule XIII of the Rules of the 
House of Representatives, the Committee finds that the 
Constitutional Authority of Congress to enact this legislation 
is provided by Article 1, section 8, clause 1 (relating to the 
general welfare of the United States) and clause 3 (relating to 
the power to regulate interstate commerce).

                  Applicability to Legislative Branch

    The Committee finds that the legislation does not relate to 
the terms and conditions of employment or access to public 
services or accommodations within the meaning of section 
102(b)(3) of the Congressional Accountability Act.

                  Exchange of Committee Correspondence

                     U.S. House of Representatives,
                               Committee on Armed Services,
                                    Washington, DC, March 16, 2005.
Hon. Michael G. Oxley,
Chairman, Committee on Financial Services,
Rayburn House Office Building, Washington, DC.
    Dear Mr. Chairman: On March 16, 2005, the Committee on 
Financial Services reported H.R. 458, a bill to prevent the 
sale of abusive insurance and investment products to military 
personnel. As you know, H.R. 458, as ordered reported, 
contained provisions within the jurisdiction of the Committee 
on Armed Services.
    Because of your willingness to consult with this Committee, 
and because of your desire to move this legislation 
expeditiously, I will waive consideration of the bill by the 
Committee on Armed Services. By agreeing to waive this 
consideration of the bill, the Committee does not waive its 
jurisdiction over H.R. 458. In addition, should a conference be 
convened on this legislation, the Committee reserves its 
authority to seek conferees on any provisions of the bill that 
are within its jurisdiction. I ask for your commitment to 
support any request for conferees by the Committee on H.R. 458 
or similar legislation.
    I request that you include this letter and your response in 
the Congressional Record during your consideration of the 
legislation on the House floor. Thank you for your 
consideration of these matters.
    With best wishes.
            Sincerely,
                                             Duncan Hunter,
                                                          Chairman.
                                ------                                

                     U.S. House of Representatives,
                           Committee on Financial Services,
                                    Washington, DC, March 16, 2005.
Hon. Duncan Hunter,
Chairman, Committee on Armed Services
Rayburn House Office Building, Washington, DC.
    Dear Chairman Hunter: Thank you for your recent letter 
regarding your committee's jurisdictional interest in H.R. 458, 
the Military Personnel Financial Services Protection Act. I 
appreciate all of your efforts to expedite consideration of 
this important legislation.
    I acknowledge your committee's jurisdictional interest in 
section 11 of the bill as ordered reported by the Committee on 
Financial Services and appreciate your cooperation in allowing 
speedy consideration of the legislation. I agree that your 
decision to forego further action on the bill will not 
prejudice the Committee on Armed Services with respect to its 
jurisdictional prerogatives on this or similar legislation. I 
will support your request for an appropriate number of 
conferees should there be a House-Senate conference on this or 
similar legislation.
    Finally, I will include a copy of your letter and this 
response in Committee's report on the bill and the 
Congressional Record when the legislation is considered by the 
House.
    Thank you again for your assistance.
            Yours truly,
                                          Michael G. Oxley,
                                                          Chairman.

             Section-by-Section Analysis of the Legislation


Section 1. Short title

    This section provides the short title for the bill, the 
``Military Personnel Financial Services Protection Act''.

Section 2. Congressional findings

    The section sets forth certain Congressional findings 
describing the need to protect members of the Armed Forces from 
the sale of inappropriate financial products and from abusive 
and misleading sales tactics.

Section 3. Prohibition on future sales of periodic payment plans

    This section amends section 27 of the Investment Company 
Act of 1940 by prohibiting both the issuance of periodic 
payment plan certificates by registered investment companies 
and the sales of periodic payment plan certificates by 
registered investment companies and the depositors and 
underwriters of such companies. This section does not alter, 
invalidate, or affect the rights or obligations under any 
periodic payment plan certificates issued before the 
aforementioned prohibition takes effect. This section also 
directs the Securities and Exchange Commission to submit a 
report to the House Committee on Financial Services and the 
Senate Committee on Banking, Housing, and Urban Affairs within 
six months of the enactment of the legislation regarding any 
measures taken by a broker or dealer to voluntarily refund 
payments made by military personnel on any periodic payment 
plan certificate, and the amounts of such refunds; the sales 
practices of such brokers or dealers on military installations 
over the past 5 years and any legislative or regulatory 
recommendations to improve such practices; and the revenues 
generated by such brokers or dealers in the sales of periodic 
payment plan certificates over the past 5 years and what 
products such brokers or dealers market to replace the revenue 
generated from the sales of periodic payment plan certificates.

Section 4. Method of maintaining broker/dealer registration, 
        disciplinary, and other data

    This section amends section 15A(i) of the Securities 
Exchange Act of 1934, which requires a registered securities 
association to maintain a toll-free telephone listing to 
receive inquiries regarding disciplinary actions involving its 
members and their associated persons, and to respond to those 
inquiries in writing. The amended language requires a 
registered securities association to establish a system to 
collect and maintain registration information, and to establish 
an easily accessible electronic or other process (in addition 
to the toll-free telephone listing) to respond to inquiries 
about registration information.
    Registration information will be collected on the 
association's members and their associated persons, as well as 
the members and associated persons of any registered national 
securities exchange that uses the system for the registration 
of such persons. The association may charge persons making 
inquiries, other than an individual investor, reasonable fees 
for producing a response.
    The registered securities association, in consultation with 
the participating registered national securities exchanges, 
also will be required to adopt rules on the process for making 
inquiries and responses, and on the establishment of an 
administrative process for disputes that may arise concerning 
the accuracy of information given in responses to inquiries. As 
under current law, the association and participating exchanges 
will not be liable to any persons for actions taken or omitted 
in good faith under this provision.

Section 5. Filings depositories for investment advisors

    This section reorganizes and codifies in the Investment 
Advisers Act of 1940 provisions of the National Securities 
Markets Improvement Act of 1996, in which Congress directed the 
Commission to establish an electronic filing system, and 
mandated the creation of a public disclosure program, for 
investment advisers. Pursuant to this directive, the Commission 
designated the NASD to operate the electronic filing system for 
investment advisers, which is called the Investment Adviser 
Registration Depository, and created an Internet-based public 
disclosure program containing investment adviser registration 
and disciplinary information.
    This section codifies this arrangement, although it 
requires a toll-free telephone listing, or electronic means, 
for receiving and responding to inquiries for registration 
information.
    The new provision recognizes that the NASD also operates 
the public disclosure program on behalf of the Commission and 
conforms the Investment Advisers Act provision to the terms of 
the Securities Exchange Act of 1934 so that the NASD has 
immunity from liability for actions taken in good faith in 
operating the investment adviser public disclosure program.

Section 6. State insurance jurisdiction on military installations

    This section clarifies State jurisdiction over the 
regulation of the business of insurance as conducted on Federal 
land or facilities in the United States and abroad, including 
military installations. State insurance jurisdiction will 
generally apply to all private insurance activities on Federal 
land, except to the extent there is direct conflict with 
applicable and authorized Federal rules or where a State law 
would not apply to the activity even if it were being conducted 
on State land.
    To the extent there is a conflict among State laws that 
would apply to insurance activities conducted on Federal land, 
the section provides that the State law that has priority (and 
primary enforcement responsibility) is that of the State within 
which the Federal land is located. If the Federal land or 
facility is located outside of the United States (such as in a 
foreign country), then the State with primary jurisdiction is 
the State that primarily regulates the individual or entity 
engaged in the insurance activity. For the regulation of any 
activity involving an insurance producer (e.g., agent or 
broker), where the producer is licensed in multiple States and 
there is a conflict among the laws of those States, the law of 
the State that issued the producer's resident license applies 
and that State is primarily responsible for enforcing its laws 
against that producer. For the regulation of any activity 
involving any other insurance entity where there is a conflict 
among State laws that would otherwise apply, such as questions 
regarding an insurance product from an insurer licensed in 
multiple States, then the law of the State of the entity's 
domicile applies and that State is primarily responsible for 
enforcing its laws against that entity.
    These provisions are intended to ensure that there are no 
gaps between Federal and State insurance protections for 
military personnel, that States are ableand required to enforce 
their insurance laws with respect to private insurance activities on 
Federal land, and that there is always at least one State that is 
recognized as responsible for regulating any private insurance activity 
conducted on Federal land.

Section 7. Required development of military personnel protection 
        standards regarding insurance sales

    This section expresses the intent of Congress that the 
States collectively work together with the Secretary of Defense 
to ensure that there are appropriate standards implemented to 
protect members of the military from dishonest and predatory 
insurance sales practices while on military installations. The 
goal of this provision is to promote the development, 
identification, and implementation of uniform and coordinated 
protection standards to ensure that members of the military are 
not exposed to abusive sales tactics on military installations. 
The Committee intends the National Association of Insurance 
Commissioners (NAIC) (or NCOIL or similar organization of 
States) to work collaboratively with the Secretary to determine 
the appropriate regulatory division of insurance protections, 
under whose jurisdiction each protection should be implemented, 
and how each protection should be enforced in a coordinated and 
uniform manner to avoid regulatory gaps or inappropriate 
inconsistencies.
    To achieve the goal of this section, the Committee expects 
that each State will identify its role in promoting these 
uniform standards within 12 months of the date of enactment of 
this legislation. The NAIC is expected to work with the 
Secretary of Defense to determine to what extent the States 
have implemented appropriate and uniform protection standards, 
and submit a report on how these goals have been met to the 
Committee on Financial Services of the House of Representatives 
and the Committee on Banking, Housing, and Urban Affairs of the 
Senate. The Committee intends that this report will include a 
description of the work of the States and the Secretary in 
balancing responsibilities to ensure coordinated and uniform 
implementation to avoid any gaps in protecting our military 
personnel from inappropriate insurance products and sales 
practices.

Section 8. Required disclosures regarding life insurance

    The purpose of this section is to ensure that no life 
insurance is sold to a member of the Armed Forces pursuant to 
an on-installation solicitation unless certain written 
disclosures are made first. If an insurer or producer solicits 
insurance on a military installation, then before the sale of 
the insurance, the insurer or producer must disclose to the 
consumer that the Federal Government has not sanctioned, 
recommended, or encouraged the sale of the product and that 
subsidized life insurance may be available from the Federal 
Government. If the solicitation is occurring on Federal land 
outside of the United States, then the disclosure must also 
include the address and phone numbers where consumer complaints 
are received by the appropriate State insurance departments 
(that primarily regulate the producer and insurer selling the 
product). The disclosure must be made in plain and readily 
understandable language in a type font at least as large as the 
font used for the majority of the policy. These written 
disclosures will help to ensure that members of the armed 
forces make an informed decision before purchasing private life 
insurance after having been solicited on a military 
installation.
    Penalties have been provided as an enforcement tool for the 
intentional failure to provide written disclosures. If it is 
determined by a State or Federal agency, or in a final court 
proceeding, that the individual or entity intentionally failed 
to provide a disclosure as required by this section, then that 
individual or entity will be prohibited from engaging in the 
business of insurance on Federal facilities. These penalties do 
not apply to insurance activities that are specifically 
contracted by or through the Federal or any State Government or 
are specifically exempted from the applicability of this 
legislation by Federal or State law, regulation, or order that 
specifically refers to this section.
    States are encouraged to develop and adopt, in materially 
identical form, a standard setting forth the requirements for 
disclosures under this section that apply to the business of 
insurance as sold to military personnel on military 
installations. The goal is to make this section dynamic to 
respond to future developments and to allow the States to 
develop their own standards. If standards are developed by a 
majority of the States, then those standards will apply in lieu 
of the requirements of this section for activities governed by 
those States (so long as there is no direct conflict with any 
Federal requirement other than this section). For purposes of 
this provision, the term ``materially identical form'' means 
that with respect to a particular activity in question, the 
exact same conduct is required or prohibited or otherwise 
regulated in exactly the same manner. The disclosures required 
by the majority of States may differ from or exceed the 
disclosures provided for in this section, as long as such 
disclosures are uniform in all material respects across all 
those States.

Section 9. Improving life insurance product standards

    This section requests that the NAIC work with the Secretary 
of Defense to study and report to Congress on ways to improve 
the quality and sale of life insurance products sold by 
insurers and life insurance agents on military installations. 
This section is intended to focus the States and the Secretary 
on stopping not only abusive and misleading sales practices, 
but also inappropriate products from being sold to the men and 
women protecting the United States. Among other solutions, 
Congress intends that the study consider limiting sales 
authority to companies and producers that are certified as 
meeting appropriate best practices (such as the Insurance 
Marketplace Standards Association), and developing appropriate 
standards to stop bad products from being targeted to military 
personnel regardless of whether they are on or off 
installation. If the NAIC does not submit the report to the 
Committees of jurisdiction as directed by this section, then 
the Comptroller General of the United States must report to 
Congress on any proposals that have been made by relevant 
parties to improve the quality and sale of life insurance 
products sold to military personnel.

Section 10. Required reporting of disciplined insurance agents

    This section effectively requires insurers whose producers 
are soliciting life insurance on military installations to 
implement a system to report to the appropriate insurance 
department any disciplinary actions taken against any of those 
producers by the military that the insurer is aware of, as well 
as anysignificant disciplinary action imposed by the insurer. 
The term ``significant'' is intended by the Committee to distinguish 
disciplinary actions for infractions that have bearing on the 
likelihood of a producer to engage in improper sales activities as 
opposed to minor actions that have no bearing on the producer's 
integrity or conduct and that would not otherwise be appropriate to 
report to a State.
    This section also expresses the intent of Congress that the 
States collectively implement a system to receive reports of 
disciplinary actions taken against producers with respect to 
sales on military installations, and to disseminate information 
on disciplinary actions among themselves and the Secretary of 
Defense.
    These provisions, along with section 11, are intended to 
prevent life insurance producers disciplined at one military 
installation from continuing to sell insurance at other Federal 
facilities, by ensuring that information on disciplinary 
actions against producers is being effectively communicated 
among all the relevant parties. The Committee expects the 
States to fulfill the requirements of this section by using the 
Producer Database (PDB) system of the National Insurance 
Producer Registry, a non-profit affiliate of the NAIC that most 
State insurance departments rely on to both share information 
regarding the licensing status of producers and make that 
information available to insurers. The Committee intends that 
all States utilize the PDB or a similar system, and improve PDB 
to be able to receive and share relevant information on 
producer licensing status with the Secretary of Defense.

Section 11. Registry of barred insurance agents and financial advisors

    This section directs the Secretary of Defense to create and 
maintain a registry of banned or barred financial advisors and 
life insurance agents. The Secretary of Defense will be 
responsible for updating and maintaining the registry, which 
will provide the name, address, and other identifying 
information of the banned or barred agent or advisor. The 
registry must be accessible and searchable by local 
installation commanders and appropriate Federal and State 
financial regulators.
    The Secretary of Defense is further required to promptly 
notify the appropriate Federal and State regulators when an 
individual has been added to or removed from the registry. The 
Secretary of Defense is also responsible for implementing an 
appeal process, and for issuing regulations to ensure the 
maintenance and operation of the registry.
    The Committee intends this section to provide local 
installation commanders with adequate information to make 
access determinations for life insurance producers. The 
Committee expects the Secretary to fulfill the notification 
requirement by providing and receiving information through an 
electronic system networked with the NAIC's PDB or other 
similar system established by the States pursuant to section 
10, as well as any similar systems created by the Securities 
and Exchange Commission or the NASD, to ensure that 
installation commanders, the Secretary, the appropriate 
securities and insurance regulators, and financial companies 
share information regarding disciplinary actions taken against 
producers and advisors to prevent the migration of rogue 
salespersons.

Section 12. Sense of Congress

    This section indicates the sense of Congress that the 
Federal and State agencies responsible for regulation of 
insurance and securities should provide advice to the 
appropriate Federal entities to consider significantly 
increasing the life insurance coverage made available through 
the Federal Government to members of the military, encouraging 
greater financial literacy and objective financial counseling 
for military service members, and improving the benefits and 
matching contributions under the Thrift Savings Plan for 
military personnel.

Section 13. Definitions

    This section defines certain terms used in the legislation.

         Changes in Existing Law Made by the Bill, as Reported

  In compliance with clause 3(e) of rule XIII of the Rules of 
the House of Representatives, changes in existing law made by 
the bill, as reported, are shown as follows (existing law 
proposed to be omitted is enclosed in black brackets, new 
matter is printed in italics, existing law in which no change 
is proposed is shown in roman):

            SECTION 27 OF THE INVESTMENT COMPANY ACT OF 1940


                         PERIODIC PAYMENT PLANS

  Sec. 27. (a) * * *

           *       *       *       *       *       *       *

  (i)(1) * * *
  (2) It shall be unlawful for any registered separate account 
funding variable insurance contracts, or for the sponsoring 
insurance company of such account, to sell any such contract 
unless--
          (A) such contract is a redeemable security; and
          (B) the insurance company complies with section 
        [26(e)] 26(f) and any rules or regulations issued by 
        the Commission under section [26(e)] 26(f).
  (j) Termination of Sales.--
          (1) Termination.--Effective 30 days after the date of 
        enactment of the Military Personnel Financial Services 
        Protection Act, it shall be unlawful, subject to 
        subsection (i)--
                  (A) for any registered investment company to 
                issue any periodic payment plan certificate; or
                  (B) for such company, or any depositor of or 
                underwriter for any such company, or any other 
                person, to sell such a certificate.
          (2) No invalidation of existing certificates.--
        Paragraph (1) shall not be construed to alter, 
        invalidate, or otherwise affect any rights or 
        obligations, including rights of redemption, under any 
        periodic payment plan certificate issued and sold 
        before 30 days after such date of enactment.
                              ----------                              


           SECTION 15A OF THE SECURITIES EXCHANGE ACT OF 1934

                   REGISTERED SECURITIES ASSOCIATIONS

  Sec. 15A. (a) * * *

           *       *       *       *       *       *       *

  [(i) A registered securities association shall, within one 
year from the date of enactment of this section, (1) establish 
and maintain a toll-free telephone listing to receive inquiries 
regarding disciplinary actions involving its members and their 
associated persons, and (2) promptly respond to such inquiries 
in writing. Such association may charge persons, other than 
individual investors, reasonable fees for written responses to 
such inquiries. Such an association shall not have any 
liability to any person for any actions taken or omitted in 
good faith under this paragraph.]
  (i) Obligation to Maintain Registration, Disciplinary and 
Other Data.--
          (1) Maintenance of system to respond to inquiries.--A 
        registered securities association shall--
                  (A) establish and maintain a system for 
                collecting and retaining registration 
                information;
                  (B) establish and maintain a toll-free 
                telephone listing, and a readily accessible 
                electronic or other process, to receive and 
                promptly respond to inquiries regarding--
                          (i) registration information on its 
                        members and their associated persons; 
                        and
                          (ii) registration information on the 
                        members and their associated persons of 
                        any registered national securities 
                        exchange that uses the system described 
                        in subparagraph (A) for the 
                        registration of its members and their 
                        associated persons; and
                  (C) adopt rules governing the process for 
                making inquiries and the type, scope, and 
                presentation of information to be provided in 
                response to such inquiries in consultation with 
                any registered national securities exchange 
                providing information pursuant to subparagraph 
                (B)(ii).
          (2) Recovery of costs.--Such an association may 
        charge persons making inquiries, other than individual 
        investors, reasonable fees for responses to such 
        inquiries.
          (3) Process for disputed information.--Such an 
        association shall adopt rules establishing an 
        administrative process for disputing the accuracy of 
        information provided in response to inquiries under 
        this subsection in consultation with any registered 
        national securities exchange providing information 
        pursuant to paragraph (1)(B)(ii).
          (4) Limitation of liability.--Such an association, or 
        an exchange reporting information to such an 
        association, shall not have any liability to any person 
        for any actions taken or omitted in good faith under 
        this subsection.
          (5) Definition.--For purposes of this subsection, the 
        term ``registration information'' means the information 
        reported in connection with the registration or 
        licensing of brokers and dealers and their associated 
        persons, including disciplinary actions, regulatory, 
        judicial, and arbitration proceedings, and other 
        information required by law, or exchange or association 
        rule, and the source and status of such information.

           *       *       *       *       *       *       *

                              ----------                              


                    INVESTMENT ADVISERS ACT OF 1940

TITLE II--INVESTMENT ADVISERS

           *       *       *       *       *       *       *


SEC. 203A. STATE AND FEDERAL RESPONSIBILITIES.

  (a) * * *

           *       *       *       *       *       *       *

  [(d) Filing Depositories.--The Commission may, by rule, 
require an investment adviser--
          [(1) to file with the Commission any fee, 
        application, report, or notice required by this title 
        or by the rules issued under this title through any 
        entity designated by the Commission for that purpose; 
        and
          [(2) to pay the reasonable costs associated with such 
        filing.]
  [(e)] (d) State Assistance.--Upon request of the securities 
commissioner (or any agency or officer performing like 
functions) of any State, the Commission may provide such 
training, technical 
assistance, or other reasonable assistance in connection with 
the regulation of investment advisers by the State.

                        ANNUAL AND OTHER REPORTS

  Sec. 204. [Every investment]
  (a) In General.--Every investment adviser who makes use of 
the mails or of any means or instrumentality of interstate 
commerce in connection with his or its business as an 
investment adviser (other than one specifically exempted from 
registration pursuant to section 203(b) of this title), shall 
make and keep for prescribed periods such records (as defined 
in section 3(a)(37) of the Securities Exchange Act of 1934), 
furnish such copies thereof, and make and disseminate such 
reports as the Commission, by rule, may prescribe as necessary 
or appropriate in the public interest or for the protection of 
investors. All records (as so defined) of such investment 
advisers are subject at any time, or from time to time, to such 
reasonable periodic, special, or other examinations by 
representatives of the Commission as the Commission deems 
necessary or appropriate in the public interest or for the 
protection of investors.
  (b) Filing Depositories.--The Commission may, by rule, 
require an investment adviser--
          (1) to file with the Commission any fee, application, 
        report, or notice required to be filed by this title or 
        the rules issued under this title through any entity 
        designated by the Commission for that purpose; and
          (2) to pay the reasonable costs associated with such 
        filing and the establishment and maintenance of the 
        systems required by subsection (c).
  (c) Access to Disciplinary and Other Information.--
          (1) Maintenance of system to respond to inquiries.--
        The Commission shall require the entity designated by 
        the Commission under subsection (b)(1) to establish and 
        maintain a toll-free telephone listing, or a readily 
        accessible electronic or other process, to receive and 
        promptly respond to inquiries regarding registration 
        information (including disciplinary actions, 
        regulatory, judicial, and arbitration proceedings, and 
        other information required by law or rule to be 
        reported) involving investment advisers and persons 
        associated with investment advisers.
          (2) Recovery of costs.--An entity designated by the 
        Commission under subsection (b)(1) may charge persons 
        making inquiries, other than individual investors, 
        reasonable fees for responses to inquiries made under 
        paragraph (1).
          (3) Limitation on liability.--An entity designated by 
        the Commission under subsection (b)(1) shall not have 
        any liability to any person for any actions taken or 
        omitted in good faith under this subsection.

           *       *       *       *       *       *       *

                              ----------                              


 SECTION 306 OF THE NATIONAL SECURITIES MARKETS IMPROVEMENT ACT OF 1996

[SEC. 306. INVESTOR ACCESS TO INFORMATION.

  [The Commission shall--
          [(1) provide for the establishment and maintenance of 
        a readily accessible telephonic or other electronic 
        process to receive inquiries regarding disciplinary 
        actions and proceedings involving investment advisers 
        and persons associated with investment advisers; and
          [(2) provide for prompt response to any inquiry 
        described in paragraph (1).]

                                  
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