[House Report 109-40]
[From the U.S. Government Publishing Office]
109th Congress Report
HOUSE OF REPRESENTATIVES
1st Session 109-40
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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.
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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.
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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.
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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\
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\9\ Securities and Exchange Commission, Public Policy Implication
of Investment Company Growth 224 (1966).
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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).
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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\
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\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\
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\15\ Id.
\16\ Id. at 207.
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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.
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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.
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\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\
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\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).]