Financial Product Sales: Actions Needed to Better Protect	 
Military Members (02-NOV-05, GAO-06-23).			 
                                                                 
In 2004, a series of press articles alleged that financial firms 
were marketing expensive and potentially unnecessary insurance or
other financial products to members of the military. To assess	 
whether military service members were adequately protected from  
inappropriate product sales, GAO examined (1) features and	 
marketing of certain insurance products being sold to military	 
members, (2) features and marketing of certain securities	 
products being sold to military members, and (3) how financial	 
regulators and the Department of Defense (DOD) were overseeing	 
the sales of insurance and securities products to military	 
members.							 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-06-23						        
    ACCNO:   A40838						        
  TITLE:     Financial Product Sales: Actions Needed to Better Protect
Military Members						 
     DATE:   11/02/2005 
  SUBJECT:   Insurance						 
	     Insurance companies				 
	     Insurance regulation				 
	     Marketing						 
	     Military personnel 				 
	     Product evaluation 				 
	     Securities 					 
	     Securities regulation				 
	     Deceptive business practices			 

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GAO-06-23

United States Government Accountability Office

GAO	Report to the Committee on Banking, Housing, and Urban Affairs, U.S. Senate

November 2005

FINANCIAL PRODUCT SALES

               Actions Needed to Better Protect Military Members

                                       a

GAO-06-23

November 2005

FINANCIAL PRODUCT SALES

Actions Needed to Better Protect Military Members

[IMG]

  What GAO Found

Thousands of junior enlisted service members have been sold a product that
combines life insurance with a savings fund promising high returns. Being
marketed by a small number of companies, these products can provide
savings to service members that make steady payments and have provided
millions in death benefits to the survivors of others. However, these
products are much more costly than the $250,000 of life insurance-now
$400,000-that military members already receive as part of their government
benefits. In addition, the products also allow any savings accumulated on
these products to be used to extend the insurance coverage if a service
member ever stops making payments and fails to request a refund of the
savings. With most military members leaving the service within a few
years, many do not continue their payments and, as a result, few likely
amassed any savings from their purchase. Several of the companies selling
these products have been sanctioned by regulators in the past and new
investigations are underway to assess whether these products were being
properly represented as insurance and whether their terms were legal under
existing state laws.

Thousands of military members were also purchasing a mutual fund product
that also requires an extended series of payments to provide benefit.
Known as contractual plans, they expect the service member to make
payments for set periods (such as 15 years), with 50 percent of the first
year's payments representing a sales charge paid to the selling
broker-dealer. If held for the entire period, these plans can provide
lower sales charges and comparable returns as other funds. However, with
securities regulators finding that only about 10 to 40 percent of the
military members that purchased these products continued to make payments,
many paid higher sales charges and received lower returns than had they
invested in alternatively available products. Regulators have already
taken action against the largest brokerdealer that marketed this product
and are investigating the few remaining sellers for using inappropriate
sales practices. With the wide availability of much less costly
alternative products, regulators also question the need for contractual
plans to continue to be sold.

Financial regulators were generally unaware of the problematic sales to
military members because DOD personnel rarely forwarded service member
complaints to them. Insurance products also usually lacked suitability or
appropriateness standards that could have prompted regulators to
investigate sales to military members sooner. Securities regulators'
examinations of contractual plan sales were also hampered by lack of
standardized data showing whether customers were benefiting from their
purchases. Although recognizing a greater need for sharing information on
violations of its solicitation policies and service member complaints, DOD
has not revised its policies to require that such information be provided
to financial regulators nor has it coordinated with these regulators and
its installations on appropriate ways that additional sharing can occur.

United States Government Accountability Office

Contents

  Letter

Background
Results in Brief
Sales of Costly Insurance Products to Service Members Raise Sales

Practice Concerns
A Unique Securities Product with High Sales Charges Sold to
Military Members Has Also Raised Sales Practice Concerns
Lack of Complaint Sharing Prevented Earlier Identification of

Improper Sales to Military Members
Conclusions
Matters for Congressional Consideration
Recommendations
Agency Comments

1 2 9

12

30

38 55 59 59 60

     Appendixes                                                            
      Appendix I:            Objectives, Scope, and Methodology            63 
     Appendix II:   Actions Taken Against Financial Companies that Have    
                          Frequently Marketed to Military Members          67 
    Appendix III: Performance of Contractual Plans Compared to Alternative 
                                        Investments                        71 
     Appendix IV: Jurisdictions in Which at Least One of the Six Insurance 
                  Companies That Target Military Members Were Licensed to  
                                       Sell Insurance                      73 
      Appendix V:         Comments from the Department of Defense          74 
     Appendix VI:   Comments from the Securities and Exchange Commission   77 
    Appendix VII:     Comments from NASD (Formerly Called the National     
                             Association of Securities Dealers)            78 
Appendix VIII:   Comments from the National Association of Insurance    
                                       Commissioners                       81 
     Appendix IX:          GAO Contact and Staff Acknowledgments           83 

Tables Table 1:	Regulatory Actions or Activities Involving Companies that
Have Frequently Marketed to Military Members 67

                                    Contents

Table 2:	Investment Performance of a $100 Monthly Contribution into a
Contractual Plan, Conventional Mutual Fund, and TSP C Fund, Assuming Each
Earns a 7 Percent Return 72

Figures	Figure 1: Figure 2:

Figure 3:

Figure 4: Figure 5:

Number of Service Members by Military Pay Grade
Groupings (as of Year-end 2004) 3
Sample Payment Allocations of $100 per Month for a
Term Life Insurance Product Sold to Military Service
Members with a 7-Year Premium Period and a Side
Savings Fund Crediting 4 Percent 15
Sample Payment Allocations of $100 per Month for a
Modified Whole Life Insurance Product Sold to Military
Service Members with a Side Savings Fund Crediting 4
Percent (First 20 Years Shown) 17
Total Approximate Future Values of Insurance Products'
Savings Fund and TSP with Payments Ceasing after Year
4 21
Mutual Fund Sales Load asa Percentage ofInvestmentby
Year 33

Abbreviations

DFAS Defense Financial and Accounting Service
DOD Department of Defense
DOJ Department of Justice
IMSA Insurance Marketplace Standards Association
NAIC National Association of Insurance Commissioners
NASAA North American Securities Administrators Association
NASD National Association of Securities Dealers
PCS Permanent Change of Station
SEC Securities Exchange Commission
TSP Thrift Savings Plan
SGLI Servicemembers' Group Life Insurance
VGLI Veterans' Group Life Insurance

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protection in the United States. It may be reproduced and distributed in
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separately.

A

United States Government Accountability Office Washington, D.C. 20548

November 2, 2005

The Honorable Richard Shelby
Chairman
The Honorable Paul S. Sarbanes
Ranking Minority Member
Committee on Banking, Housing, and Urban Affairs
United States Senate

In 2004, a series of media reports highlighted allegations of financial
firms
marketing expensive and potentially unnecessary insurance and other
financial products to members of the military. These accounts included
claims of insurance companies improperly selling insurance as investment
products and marketing them during personal finance briefings on military
bases in violation of Department of Defense (DOD) regulations. In
addition,
these accounts raised concerns about a firm that employed retired and
former military members to market a mutual fund product with high up
front sales charges that was rarely being offered to civilians. As a
result of
these media accounts, Congress and others have become concerned over
whether the men and women in the armed services are as adequately
protected from inappropriate financial product sales as their civilian
counterparts.

As a result of these allegations, you asked us to review the sales of
financial
products to members of the U.S. military. This report identifies (1) the
extent to which certain insurance products were being sold to military
members and how these products were being marketed, (2) the extent to
which certain securities products were being sold to military members and
how these products were being marketed, and (3) how financial regulators
and DOD oversaw the sales of insurance and securities products to military
members.

To identify the extent to which certain insurance products were sold and
how they were marketed to military members, we contacted state
insurance regulators in several states with active investigations of
insurance sales involving service members. During this work, we
interviewed regulatory staff and reviewed available information and
materials as part of these regulatory investigative activities. We also
reviewed documents and met with Department of Justice (DOJ) staff
involved in investigating sales by insurance companies to military
members. Additionally, we interviewed officials from six insurance
companies that market to service members and reviewed their marketing

materials. We also interviewed military personnel at two large training
bases and reviewed documents pertaining to sales and complaints at these
locations.1 Furthermore, we obtained data on insurance sales to military
members from DOD's Defense Finance and Accounting Service (DFAS), which
maintains military personnel pay records. To identify the extent to which
certain securities products were being sold and how these were being
marketed to military members, we interviewed staff from federal, state,
and other securities regulators; the largest broker-dealer firm that
markets to military members; and two of the investment management firms
that manage the mutual funds underlying some of the contractual plans sold
to military members. To assess how financial regulators and DOD were
overseeing financial product sales to military members, we interviewed
state insurance and federal, state, and other securities regulators. We
also reviewed materials pertaining to investigations and regulatory
actions involving firms marketing to military members. Additionally, we
contacted DOD officials, conducted fieldwork at two large military
training installations, and reviewed findings from other recent work
concerning supplemental life insurance sales conducted at several other
military installations throughout the country. We conducted this work
between November 2004 and October 2005 in accordance with generally
accepted government auditing standards. (Additional information on our
methodology is included in appendix I.)

Background	Members of the U.S. military serve in different branches in
locations across the country and around the world. The various branches
within DOD include the Department of the Air Force, the Department of the
Army, and Department of the Navy, which also incorporates forces of the
Marine Corps. DOD also oversees the members of the Coast Guard along with
the Department of Transportation. As of 2004, approximately 1.4 million
active duty military personnel served in the various branches in more than
6,000 locations. In addition, 2 million retirees receive pay and benefits
from the department. DOD is also the largest employer and trainer of young
adults in the United States, recruiting about 200,000 individuals into
active duty in 2004-the majority of them recent high school graduates. As
shown in

1We also obtained information, including complaints and other alleged
problems, involving insurance product sales at six additional military
installations as part of a separate review. See GAO, Military Personnel:
DOD Needs Better Controls Over Supplemental Life Insurance Solicitation
Policies Involving Servicemembers, GAO-05-696 (Washington, D.C.: June 29,
2005).

figure 1, the pay of typical junior enlisted staff-grades E-1 through E-3-
ranges between $1,143 and $1,641 per month.

Figure 1: Number of Service Members by Military Pay Grade Groupings (as of
                                 Year-end 2004)

                       Source: GAO analysis of DOD data.

Entry-level military personnel are generally young and have limited
education and incomes. A 2002 private research organization report that
examined the financial situation of military members noted that the
military hires primarily young, untrained, entry-level employees.2
Comparing data from various surveys done of large numbers of civilians and
military members, this report found that less than 5 percent of junior
enlisted personnel held bachelor's degrees compared to 27 percent of the
civilians.3 In terms of income, this report found that 87 percent of
junior enlisted personnel had total monthly family incomes of $3,000 or
less. However, a DOD commission that reviews military compensation has
found that military members are paid at the 70th percentile or higher of
comparably educated civilians. In addition, military members receive
housing and subsistence benefits, with about half living in on-base
housing and many having access to military facilities that provide meals.

Various aspects of the military life can increase the challenges that
service members face in managing their finances. According to the private
research report, factors that appeared to increase the financial distress
among military members were the family separations resulting from changes
in duty stations and deployments away from home. According to our report
on military relocations, DOD reported that about one-third of all military
members make Permanent Change of Station (PCS) moves every year.4 The
average length of time spent at each location can also be brief, with 20
percent of such relocations lasting less than 1 year and about 50 percent
lasting 2 years or less. Leaving or retiring from the service also
represents the last major transition in a service member's career, with
data

2Richard Buddin and D. Phuong Do, Assessing the Personal Financial
Problems of Junior Enlisted Personnel, RAND Corporation, 2002.

3The report's data on civilians were drawn from the 1996 Panel Study of
Income Dynamics, which was a nationally representative sample of 1,465
individuals. The survey is longitudinal and has been conducted annually
since 1968. To be comparable to the military junior enlisted population,
the authors excluded civilians who were full-time students or over the age
of 40. The report's data on military members came from two surveys of
military personnel. The first survey was a random sample of 6,200 enlisted
members with 10 or less years of service conduct in 1997. This survey
explored various dimensions of the reenlistment decision for junior
enlisted personnel. The second survey was a 1999 random sample of enlisted
and officer personnel in all service branches. This survey included about
36,000 respondents but this report analyzed the 8,000 respondents who were
enlisted personnel with 10 or less years of military service.

4GAO, Military Personnel: Longer Time between Moves Related to Higher
Satisfaction and Retention, GAO-01-841 (Washington, D.C.: Aug. 3, 2001).

indicating that most enlisted personnel leave after their initial duty
commitment.5

As with their civilian counterparts, military service members may be
offered various types of financial products, including life insurance.
Types of life insurance commonly sold include term, whole, universal, and
variable life insurance products. Many companies offer term life
insurance, which generally provides basic death benefits for a specified
time period, such as 10 or 20 years. At the end of this term, the insured
can usually renew the coverage at a higher premium rate for another set
term period. The coverage on a term policy may also end if the insured
person ceases making the required periodic premium payments. Under a whole
life policy, an insured person can make level premium payments, which will
provide the specified amount of death benefits. Because the premium
generally stays the same throughout the time that the policy is in force,
premiums for whole life insurance are generally higher initially than for
comparable amounts of term life coverage. Whole life insurance policies
can build cash value, which can be borrowed upon, though this will reduce
death benefits until the loan is repaid in full. Some whole life policies
are known as "modified whole life insurance" in which the policyowner pays
a lower than normal premium for a specified initial period, such as 5
years, after which time the premium increases to a higher amount that is
payable for the life of the policy. Universal life products may also
provide permanent insurance-like a whole life policy-but may also offer
their purchasers more flexibility. Under such policies, the holder can
vary the amount of the premium to build up the cash value of the policy by
increasing the amount of the payment, or can pay less into the policy at
other times, when money is needed for other purposes. Similarly, under a
variable life policy, a cash value accumulates that can be used to invest
in various instruments, such as common stocks, bonds, or mutual fund
investments. However, with a variable life policy, the policyholder (and
not the company) assumes the investment risk tied to the product. If these
investments perform well, the death benefits paid on the policy can
increase; conversely, if the investments perform poorly, the purchaser may
have to increase their premiums to keep the policy in force.

5D.R. Segal and M.W. Segal, "America's Military Population," Population
Bulletin, vol. 59, no. 4 (Dec. 2004).

The federal government offers service members life insurance as part of
their total benefits package. Each member is eligible for inexpensive
coverage under Servicemembers' Group Life Insurance (SGLI), which provides
group term life insurance. Until September 1, 2005, service members were
automatically covered for the maximum amount of $250,000 of insurance on
their first day of active duty status, unless they decline or reduce their
coverage, but Congress has now increased this amount to $400,000.6 Service
members leaving the military can also opt to continue coverage through the
government-sponsored coverage provided to veterans. Although many life
insurance policies exclude coverage for deaths resulting from acts of war,
these government-sponsored policies do not contain this exclusion.

State government entities are the primary regulators of insurance
companies and agents in the United States.7 When first establishing
operations, an insurance company must obtain a charter or license in order
to write business in a state. This state becomes its state of domicile.
Insurers may obtain approval to market products in multiple states, and
therefore the sales by insurers can be overseen by multiple state
regulators, though financial solvency of each company is primarily
overseen by the regulator in the company's state of domicile. Some
insurance companies market their products using their own proprietary
sales force. Some companies may also use agents employed by independent
firms who may be marketing the products of multiple companies to their
customers. The state insurance regulators oversee the insurance companies
and agents that do business in their jurisdictions in several ways,
including reviewing and approving products for sale and examining the
operations of companies to ensure their financial soundness or proper
market conduct behavior.

6The increase in coverage and various death payments was included in the
Emergency Supplemental Appropriations Act for Defense, the Global War on
Terror, and Tsunami Relief, for the Fiscal Year Ending September 30, 2005,
Pub. L. No. 109-13, sec. 1012 (May 11, 2005). This bill also increased the
death gratuity paid upon a service member's death from $12,000 to $100,000
under certain circumstances. Some of the increases were made retroactively
to October 1, 2001.

7Although insurance is generally exclusively regulated by state entities,
some products offered by insurance companies are overseen by other
regulators. For example, variable life insurance may be considered an
investment vehicle due to the ability of the policy owner to direct the
cash values or accumulation funds into various investment instruments.
Unlike the other life insurance products, the variable life insurance
product may have a dual regulatory enforcement; the life insurance portion
regulated by the insurance regulator and the investment portion (cash
value) regulated by securities regulators.

Although each state has its own insurance regulator and laws, the National
Association of Insurance Commissioners (NAIC) provides a national forum
for addressing and resolving major insurance issues and for allowing
regulators to develop consistent policies on the regulation of insurance
when consistency is deemed appropriate. This association consists of the
heads of each state insurance department, the District of Columbia, and
four U.S. territories. It serves as a clearinghouse for exchanging
information and provides a structure for interstate cooperation for
examinations of multistate insurers. NAIC staff also coordinate the
development of model insurance laws and regulations for consideration by
states. Its staff also review state insurance departments' regulatory
activities as part of its national financial accreditation program.

To meet their financial investment needs, military members may also be
offered various securities products. These can include stocks issued by
public companies that are traded in various markets, or debt securities,
such as bonds that provide interest income to their holders. A common
securities product that many investors purchase is a mutual fund. Mutual
funds are investment companies that pool the money of many investors, and
then invest them in other assets, such as stocks or bonds. By holding the
shares of the mutual fund, investors can benefit from owning a broad
portfolio of diversified securities managed by professional money
managers, whose services they might otherwise be unable to obtain or
afford. Investors are charged mutual fund fees, which cover the day-to-day
costs of running a fund. Mutual funds are sold through a variety of
distribution channels. For instance, investors can buy them directly by
telephone or mail, or they can be sold by sales forces, such as the
account representatives of third party broker-dealers. Some mutual funds
assess sales charges (also called "loads"), which are generally paid at
the time of purchase to compensate these sales personnel.8

Securities-and the firms that market them-are overseen by various
regulators. At the federal level, the Securities and Exchange Commission
(SEC) oversees securities issued by public companies. The firms that
market securities to investors, known as broker-dealers, must also
register and subject themselves to SEC oversight. This includes complying
with

8Loads that mutual funds impose at the time of purchase (other than
through reinvestment of dividends or capital gains) are called "frontend
loads." Some funds also offer classes of shares that impose contingent
"deferred sales loads", which an investor may pay at the time the shares
are sold. Such deferred sales loads decline and eventually disappear
depending on how long an investor holds the shares.

various requirements for regulatory reporting, financial soundness, and
sales practice regulations designed to protect investors. In addition to
oversight by SEC, broker-dealers also are overseen by private entities
known as self-regulatory organizations. The New York Stock Exchange and
NASD (formerly called the National Association of Securities Dealers) are
two examples of such organizations. State regulators also oversee
securities activities.

Congressional concerns over the adequacy of military member's financial
literacy and the processes in place to address financial product sales
have prompted recent reviews and legislative actions. In response to a
Congressional committee's request to review military members' financial
condition, we recently reviewed and reported on the financial condition of
active duty service members and their families. We also reported on DOD's
efforts to evaluate programs to assist deployed and non-deployed service
members in managing their personal finances and the extent to which junior
enlisted members received required personal financial management
training.9 As part of this study, we found that the financial conditions
of deployed and non-deployed service members and their families are
similar, but deployed service members and their families may face
additional financial problems related to pay. We also found that DOD lacks
an oversight framework for evaluating the effectiveness of its personal
financial management training programs across services, and that some
junior enlisted service members were not receiving personal financial
management training required by service regulations. In addition, we
reviewed and reported on the extent of violations of DOD's policies
governing the solicitation of supplemental life insurance to active duty
service members and DOD personnel's compliance with procedures for
establishing payroll deductions (commonly referred to as allotments) for
supplemental life insurance purchases.10 The findings of this review are
discussed later in this report.

In response to concerns over the sale of questionable financial products
to military members, the House of Representatives passed legislation in
2004 and 2005 requiring additional protections for service members.11 In

9GAO, Military Personnel: More DOD Actions Needed to Address
Servicemembers' Personal Financial Management Issues, GAO-05-348
(Washington, D.C.: Apr. 26, 2005).

10GAO-05-696.

11Military Personnel Financial Services Protection Act, H.R. 458, 109th
Congress (2005).

February 2005, a similar bill was introduced in the U.S. Senate.12 Both
bills contain various congressional findings, including the finding that
military members are being offered high-cost securities and life insurance
products by some financial services companies engaging in abusive and
misleading sales practices. According to the bills, Congress finds that
the regulation of these products and their sale on military bases has been
clearly inadequate and requires congressional legislation to address these
issues. These bills have been referred to the Senate Committee on Banking,
Housing, and Urban Affairs for further consideration.

Results in Brief	State regulators in various states have found that a
small number of insurance companies have been marketing a type of
high-cost insurance product to thousands of low-ranking service members at
military installations across the United States and around the world.
According to state insurance regulators, at least six companies were
targeting military members and selling a product that combines life
insurance with a savings or investment fund that promises high returns but
includes provisions that reduce the likelihood that military purchasers
will benefit. Although military members already receive considerable
low-cost life insurance as part of their government benefits, these
companies' products usually provide small amounts of additional death
benefits and survivors of some service members that died have received
millions in death benefit payments from these companies. However, the
products sold by these companies had much higher premiums than those that
military members pay on policies offered by the government or other
companies. In addition, these products raise concerns because they have a
provision that depletes any accumulated savings to pay the insurance
premiums if the military members, many of whom move frequently and leave
the service within the first few years, ever stop making the scheduled
payments. With state insurance regulators indicating that most military
members halt their payments within the first few years and often fail to
request refunds of their savings, most purchasers were left with little or
no savings in exchange for a small amount of expensive insurance coverage.
Insurance regulators and others have already taken actions to seek
remediation on behalf of service members from several companies selling
these products and additional investigations are underway in as many as 14
states. Regulators are examining allegations of whether representatives of
these companies

12Military Personnel Financial Services Protection Act, S. 418, 109th
Congress (2005).

misrepresented the products as investments rather than insurance,
including investigating cases in which premiums for the products were
alleged to have been fraudulently identified as going into savings
accounts on forms used to deduct premium payments from the military
members' pay. Information from our work, DOD, DOJ, and other organizations
have documented that these companies have frequently been found to have
violated DOD restrictions on selling products on military installations
for years. During the course of our work, we also referred several
potential fraud-related concerns to our special investigators, who have
initiated contacts with federal law enforcement authorities, state
insurance regulators, and DOD criminal investigative organizations.

Financial regulators have also found that a securities product known as a
"mutual fund contractual plan" was also being widely marketed to military
members.13 Although rarely marketed to civilians since less expensive
products have become widely available, securities regulators found that a
small number of broker-dealers have been selling contractual plans that
expect the purchaser to invest a set amount for a set period, such as 15
years. Although 50 percent of the contractual plan's first-year payments
represent a sales charge paid to the selling broker-dealer, its total
sales charges are generally less than for other load funds if held for the
entire period. However, securities regulators found that only between 10
to 43 percent of the military members that purchased contractual plan
funds completed their plans, and as a result, the majority of service
members purchasing this product paid higher sales charges and likely
received lower returns than had they invested in other available products.
In addition to being less beneficial for those that stop making payments
before completing the full term, regulators have also found that firms
marketing contractual plans were using inappropriate sales practices. In a
settlement reached with securities regulators in late 2004, the largest
marketer of these contractual plans, a broker-dealer with nearly 300,000
clients, was censured for, among other things, using market materials that
misrepresented the advantages of these plans compared to other

13Contractual plans are legal investments referred to and regulated as
"periodic payment plans" under Section 27 of the Investment Company Act of
1940. These plans allow investors to accumulate shares of a specified
mutual fund indirectly by contributing a fixed amount of money on a
regular basis for a specified period usually ranging between 10 and 20
years. An investor in a contractual plan does not directly own shares of a
mutual fund. Instead, he or she owns an interest in the plan trust. The
plan trust invests the investor's regular payments, after deducting
applicable fees, in shares of a mutual fund. An investor in a plan has a
beneficial ownership interest in those shares. For purposes of this report
we refer to these plans as "contractual plans."

investments. Investigations at other firms are continuing. Because these
contractual plans have been periodically involved in sales scandals for
decades, regulators questioned whether they should continue to be allowed
to be sold, particularly since the innovations of the last 20 years have
resulted in wide availability of lower-cost alternatives, such as no-load
mutual funds and a government-provided retirement savings plan.

Financial regulators did not identify the problems occurring with sales to
military members until they were brought to light by press reports for
various reasons. Most state insurance regulators generally only conduct
investigations of insurance company sales practices when they receive
customer complaints. Although some state insurance regulators review
insurance companies' product sales practices as part of market conduct
reviews, few insurance products are subject to any suitability or
appropriateness standards. However, DOD personnel were rarely forwarding
service member concerns or complaints about potentially inappropriate
insurance sales. As a result, insurance regulators in some states were not
made aware of problems involving sales to military members. Although sales
of securities products are covered by suitability standards, securities
regulators also rely on receiving complaints to initiate actions and were,
therefore, not generally aware of problems involving military members and
contractual plans until press reports appeared. In addition, prior
securities regulatory examinations of the broker-dealers selling these
products did not reveal problems because firms lacked standardized data on
the extent to which their customers were successfully completing their
contractual plans. Some state insurance and securities regulators also
expressed concerns about whether they had clear jurisdiction over sales of
financial products taking place on military installations. DOD is also
attempting to improve its oversight of financial product sales on its
installations, and has indicated that it plans to share additional
information with financial regulators. However, it has not yet revised its
policy relating to financial product sales to require its personnel to
share information about service member concerns or complaints, or on
violations of DOD policies by sellers of financial products. DOD was also
reviewing various perceived barriers to sharing information, such as
military privacy regulations, with external organizations, but has also
not coordinated on procedures for overcoming these barriers with its
installations or with financial regulators.

This report presents various matters for congressional consideration and
includes recommendations to DOD and financial regulators. Given that
service members already receive considerable low-cost insurance,

Congress should consider directing DOD and requesting insurance regulators
to develop standards applicable to the sale of insurance products to
military members, and require that DOD take steps to improve its sharing
of information with financial regulators. Given the availability of less
expensive alternative products, Congress should also consider banning
contractual plans. This report also includes recommendations to insurance
and securities regulators to proactively seek information about sales to
military members, and take other actions to improve the oversight of such
products. We obtained comments on a draft of this report from DOD, NAIC,
NASD, and SEC. Each of these organizations provided written comments
expressing general agreement with our report and its recommendations
(these comments appear in appendixes V through VIII).

  Sales of Costly Insurance Products to Service Members Raise Sales Practice
  Concerns

A limited number of insurance companies that appear to target junior
enlisted military members nationwide and around the world have sold
certain costly, problematic insurance products, sometimes using
inappropriate sales practices. These insurance products combine life
insurance coverage with a side savings fund. The insurance products
typically provide small amounts of death benefits and are considerably
more costly than coverage offered to service members by the government or
other private firms. Although they combine insurance with a savings
component promising high returns, many military personnel did not benefit
because any savings accumulated on these products can be used to extend
the insurance coverage if service members ever stop making payments and
fail to request a refund of their savings. A number of financial
regulators are also investigating the claims that these companies have
been using inappropriate sales practices when soliciting military members,
including examining allegations that agents have been inappropriately
marketing the insurance products as "investments." Some of these companies
have also been subject to past disciplinary actions by insurance
regulators and for violations of DOD regulations governing commercial
solicitation on military installations.

Small Number of Firms Are According to state insurance regulators we
contacted, at least six Targeting Junior Military insurance companies were
marketing products combining insurance and Personnel with Expensive
savings funds with provisions that reduce the likelihood that military

purchasers would accumulate any lasting savings with such
products.Insurance Products with These state insurance regulators are
currently reviewing the operations of Adverse Provisions these companies.
Several of these companies share common ownership,

with three owned by the same firm and two others having key executives
from the same family. These companies operate extensively throughout the
United States, with four licensed to sell insurance in at least 40 states,
and the other two licensed in at least 35 states. In addition, as of July
2005, DOD approved five of these companies to conduct business at U.S.
military installations overseas.14

These insurance companies also appeared to market primarily to junior
enlisted service members. According to state insurance regulators we
contacted, the companies primarily sold insurance policies to military
personnel during their first few years of service, including during their
initial basic training or advanced training provided after basic training.
Although the exact number of service members that have purchased these
products is not known, regulators told us that these companies sell
thousands of policies to military personnel each year. We also found
evidence that large numbers of these products were being sold. For
example, base personnel at one naval training facility we visited said
they regularly received several hundred allotment forms each month to
initiate automatic premium payment deductions from military members'
paychecks for these insurance products.

Products Couple High-Cost The insurance companies that target military
service members are

Insurance with a Savings primarily marketing a hybrid product that
combines a high-cost insurance

Component Promising High policy with a savings component. According to
insurance regulators we

Rates of Return	contacted, and company marketing materials that we
examined, the insurance component generally consists of either a term or
modified whole life policy that would provide death benefits generally
ranging from $25,000 to $50,000 for premiums of approximately $100 per
month in the first year with different variations in the premium amounts
for subsequent years, depending on the product. In addition to the
insurance component, part of the total monthly payment is allocated to a
savings fund. Based on our review of these products, most (or all) of the
service member's payments in the first year are applied to the insurance
component of the product. In subsequent years, more money is allocated to
the savings fund to varying degrees, depending on the specific product.

14Companies interested in selling insurance products on military
installations overseas are required to apply to DOD each year for
permission through its Overseas Life Insurance Accreditation Program. In
order to gain authorization to conduct business in overseas installations,
companies are to demonstrate continuous successful operation in the life
insurance business for at least five years and must be assigned an
acceptable rating from a private organization that assesses insurance
company financial soundness.

The companies marketing these products advertised that they paid
relatively high rates of return on these savings funds. At the time we
conducted our work, all of the companies were promising to pay 6.5 percent
interest, or higher, on the savings fund portions of their products with a
minimum of no less than 4 percent interest guaranteed. In contrast, as of
August 30, 2005, the average national interest rate paid for a money
market account was 2.16 percent.15 Company officials also told us that in
the past they had paid much higher interest rates. For example, one
company's marketing materials for their product stated that over the past
25 years they had paid an average rate of 11.4 percent on the savings
fund. Further, another company's marketing material stated that their
saving fund interest rate for the past 10 years averaged over 10 percent.

The six companies that were marketing primarily to military members were
selling two primary variations of these combined insurance and saving
products. Three of the companies sold a product that provided 20 years of
term life insurance. However, the premium payments for this product were
structured so that purchasers would pay for the entire 20 years of life
insurance coverage within the first 7 years. As a result, most of the
service member's monthly payment for the first 7 years was allocated to
the life insurance premium, not the savings fund. After the seventh year,
all subsequent payments are to be deposited into the savings fund. In
addition, this product also promised the full return of the total premiums
paid for the insurance at the end of the 20th year, although state
insurance regulators told us they were not aware of any policies that had
reached this 20-year point and received this refund. Figure 2 provides an
example of how the payments would be allocated for a service member
purchasing this "7-year premium" term insurance product, assuming a
monthly payment of $100 and a savings portion crediting the guaranteed 4
percent simple interest paid annually.

15Information on current rates obtained from The New York Times Business
Section. The New York Times uses interest data provided by
http://www.bankrate.com.

Figure 2: Sample Payment Allocations of $100 per Month for a Term Life
Insurance Product Sold to Military Service Members with a 7-Year Premium
Period and a Side Savings Fund Crediting 4 Percent

Source: GAO summary of sample product marketing material.

Notes:

For purposes of this illustration, we used a specific policy of a firm
offering $30,000 of life insurance coverage to a 20-year-old male coupled
with a savings fund in which the insurance portion of the product is
prepaid in the first seven years.

aAside from interest credited in the side savings fund, the increased
value of the fund at the end of year 20 includes $6,600 that the company
declares will be deposited into the fund representing the return to the
purchaser of the total insurance policy premiums paid in the first 7 years
(with no additional interest).

Three other companies marketing primarily to military members sold other
variations of the combined insurance and savings product. Generally, these
products combined a modified whole life insurance policy with a savings
fund. Under the basic terms of these products, most of the service
members' first year's payments would be applied to the life insurance
premium and the remainder allocated to the savings fund. From the second
year on, the allocation proportions reverse where most of the money is
applied to the savings fund. Premium payments on these products could
continue for the life of the purchaser, although the face value of the
death benefit would be reduced to half its initial amount after a certain
period or when the policyholder reached a certain age, depending on the
product. Figure 3 provides an example of how the payments could be
allocated for a service member purchasing this type of product with a $100
total monthly payment and 4 percent simple interest credited on the
savings fund.

Figure 3: Sample Payment Allocations of $100 per Month for a Modified
Whole Life Insurance Product Sold to Military Service Members with a Side
Savings Fund Crediting 4 Percent (First 20 Years Shown)

Source: GAO summary of sample product marketing material.

Note: For purposes of this illustration, we used specific policies of a
modified whole life product offered by two companies. A policy of one
company provided $25,000 of life insurance for a 28-yearold service
member. The cash value associated with the insurance portion of the
product was $325 in year 4, $1,142 in year 10, and $2,706 in year 20. A
policy of another company provided $38,054 of life insurance coverage to a
22-year-old service member for the first 10 years, dropping in half to
$19,027 thereafter. The cash value of the insurance portion of the product
was about $57 in year 5, $476 in year 10, and $2,055 in year 20.

These insurance products also cost significantly more than other life
insurance coverage available to service members. Prior to September 2005,
all service members could purchase $250,000 of term life insurance through
SGLI for $16.25 per month. Since September 1, 2005, the total coverage has
increased to $400,000 for $26 per month. According to the Department of
Veterans Affairs, which administers the SGLI program, 98 percent of all

service members opt to receive this coverage. After leaving the service,
service members can convert their SGLI coverage to a Veterans' Group Life
Insurance (VGLI) policy which now also provides up to $400,000 of lowcost
term life insurance for veterans, with rates dependent upon age. For
example, veterans between the ages of 40 and 44 years of age can purchase
$50,000 of life insurance for less than $10 per month. In addition to
government-sponsored coverage, service members can also purchase similar
coverage, including covering combat deaths, from other insurance
companies. For example, according to officials of one company that sells
insurance and other financial products to military personnel directly,
they could provide a 20-year-old service member an additional $250,000 of
life insurance to supplement SGLI for $15 to $20 per month.

In addition to being many times more expensive than other products already
available to military members, companies have been selling insurance
products to service members who generally do not appear to need additional
life insurance, according to state regulators we contacted. These
regulators also said the companies that targeted military members
typically marketed their products to junior enlisted service members, who
often have no dependents. During our review, we obtained data from the
Defense Finance and Accounting Service (DFAS), which maintains military
personnel pay records, indicating that most service members that appeared
to have purchased life insurance products from some of these insurance
companies had no dependents. For example, according to DFAS data on Marine
Corps service members, over 6,500 pay deduction allotments to send premium
payments to banks used by three of these insurance companies, starting
between July 2004 and June 2005, indicated that approximately two-thirds
were unmarried service members with no other dependents. Data available
from other Services on allotments sent to these insurance companies during
the same period also indicated that most of the service members had no
dependents. Regulatory officials we contacted noted that the amount of
coverage available to these members from SGLI would likely be adequate for
their insurance needs, and thus no additional insurance coverage would be
necessary.

Officials with one of the companies that targeted military members told us
that the insurance they sell has benefited some service members. For
example, their company has paid $37 million in death claims for service
members in the last 5 years, including $1.5 million to survivors of
service members killed in the recent conflict in Iraq.

Certain Product Provisions Prevented Many Service Members from Receiving
Favorable Investment Returns

The insurance products with combined insurance and savings components
being sold by several companies to service members had provisions that
reduced their benefits to purchasers that could not--or did not--pay into
the product for a long-term period. According to regulators we contacted
and our review of selected policies, the products being sold by at least
six companies had an automatic premium payment provision, which allows the
companies to use money accumulated in the service member's savings fund to
automatically pay any unpaid insurance premiums. The provision extends the
period of time that the service member is covered under the life insurance
policy if the service member does not proactively contact the insurance
company to cancel the insurance policy and request a refund of the savings
fund. After the automatic premium payment provision is triggered and the
savings fund becomes depleted, the policy then terminates, or lapses.
Regulators we contacted were critical of the impact that this provision
can have on purchasers of these products. For example, an official at one
state regulatory agency described this provision as allowing the company
to "parasitize" the savings fund for its own benefit. In contrast,
representatives of one company told us that this provision allows the
service member to receive extended life insurance coverage.

Many military members that purchased these products only made their
payments for a short period of time. State insurance regulators we
contacted believed that most service members that purchased these products
from these companies stopped making payments within the first few years,
and that the lapse rates were significantly higher than industry norms.
During our review, we received data on the percentage of policies that
lapsed or terminated during the first year on products offered by four
insurance companies that substantiated lapse rates above industry
averages. For instance, information we obtained from one company that
targets the military market segment indicated that approximately 40
percent of products purchased had lapsed or terminated within the first
year. Data provided to us from three other firms indicated that the
majority of policies had lapsed after being held between two and three
years.

The characteristics of the military population that these companies were
marketing to increases the likelihood that service members will stop
making payments and not receive any savings they have accumulated in these
products. Regulatory officials we spoke with said that one of the reasons
so many service members discontinue making payments is that they leave the
service and thus the automatic deductions of their premium payments to
these companies also stop. Company officials we spoke with told us that
service members ceasing payments can request and receive

refunds of the amounts accumulated in their savings accounts. However,
according to regulators we contacted, companies do not always receive such
requests from service members at the time payments cease. According to
these regulators, many service members may not have received refunds of
any accumulated savings given that such funds are automatically depleted
to pay for the insurance policy for an extended period until such amounts
were exhausted. As a result, many of the service members who simply stop
paying into the product likely did not receive any of the money they had
paid into the savings portion of the product. As such, they obtained some
extended life insurance coverage after their payments ceased that, as
shown previously, was more expensive than insurance they already receive
and that they would not likely have purchased except for the promised
savings provision.

According to our analysis, the amount of time that it takes for a service
member's savings fund on the products these six companies were selling
with a monthly payment of $100 to become totally depleted through the
automatic payment provision varied. Figure 4 shows the impact on a service
member that purchases the 20-year term life product with the 7year premium
period with $30,000 of insurance coverage, makes $100 monthly payments for
4 years totaling $4,800, and then stops making payments. As the figure
shows, the money in this service member's savings fund would be totally
depleted to pay the subsequent insurance premiums in just over 1 year.
This occurs because the policy requires that the entire 20 years of
coverage be paid for in the first 7 years, which results in the monthly
premium being larger than comparable policies. In addition, because almost
all of the service member's payments during the first few years are
allocated to the insurance policy, the accumulated value of the savings
fund is modest. For the modified whole life product previously discussed,
which required lower premium payments and larger savings accumulation
after the first year, the savings fund of service members that ceased
making their payments after 4 years would be sufficient to extend the
$30,000 of life insurance coverage for another 13 years. In contrast, a
service member could have used the $100 monthly payment to instead
purchase $30,000 of SGLI term coverage at a cost of only about $23 per
year-totaling $92 for 4 years-and invest the remaining $4,708 into the
Thrift Savings Plan (TSP), which is the low-cost retirement savings plan
available to military members and federal employees. Although ceasing
payments on SGLI after 4 years would terminate the service member's

life insurance, the money contributed to the TSP and left to earn just 4
percent interest would grow to about $9,545 in 20 years.16

Figure 4: Total Approximate Future Values of Insurance Products' Savings
Fund and TSP with Payments Ceasing after Year 4

Dollars (in thousands)

10

8

6

4

2

0 1 2 3 4 5 6 7 8 9 1011121314151617181920

Policy year

Term-life product

Whole-life product

SGLI with TSP

Source: GAO analysis.

16While in the service, a service member can purchase SGLI and contribute
to the TSP. If a service member leaves, he or she may elect to purchase
VGLI and can either leave any accumulated savings in TSP, withdraw the
money from TSP, or roll over the TSP balance into a similar savings
instrument, such as an individual retirement account. In addition, we used
the low risk TSP G Fund for this calculation because it invests in
interest bearing securities and thus was comparable to the interest
earning products offered by these insurance companies.

In addition to the high costs associated with the insurance portion of
these combination products, other provisions diminished the value of the
savings component as well. According to regulators we contacted,
withdrawal penalties and unique methods of interest crediting
significantly reduced the advertised rate of return for these products.
Typically, service members withdrawing all or part of the accumulated
money in the savings fund any time after purchase within the first 10
years would be assessed early withdrawal penalties. For example, one of
the companies assessed an early withdrawal fee of 10 percent in the first
year, with this fee declining by 1 percent each subsequent year until
reaching zero in the 10th year. Several companies credit the amount
accumulated on the basis of either the yearend balance or the average
balance--whichever is less.17 For sufficiently large withdrawals, a
service member would not receive any interest at the end of that policy
year on the money withdrawn from the fund. Under this methodology, amounts
withdrawn during the year earn no interest, thereby reducing (in some
instances significantly) the advertised rate of return.

    Allegations of Improper Sales Practices often Associated with Companies
    Targeting Military Members

Insurance companies that market primarily to military members have been
frequently accused of using inappropriate sales practices by regulators,
DOD, and others. As part of our review, we identified at least 15 lawsuits
or administrative actions that had been taken against companies that
market primarily to military members. In many of these actions taken by
state and federal regulators, federal law enforcement organizations, or
others, the companies were accused of misrepresenting the products as
investments or identifying themselves as representatives of independent
benefit or fraternal organizations. (Appendix II lists these actions.) For
example, in December 1998, two of the insurance companies that target
military members settled a lawsuit filed by DOJ in Washington state that
alleged that their agents had misrepresented their insurance policies as
investment plans. As part of the settlement the companies had to offer
refunds to approximately 215 service members in certain states who
purchased life insurance polices between 1994 and 1997. In an agreement
with the Attorney General's Office in the state in which one of the
companies was domiciled, each of the companies also made $1 million
donations to a university in that state. More recently, after the Georgia
Insurance and Safety Fire Commissioner initiated investigations to review
allegations of improper insurance sales practices at military
installations in that state,

17End of year balance is the money accumulated in the fund during the
policy year ending on the policy's anniversary date.

two insurance companies have agreed to make refunds of about $2.4 million
to soldiers who had purchased insurance products.

After a series of articles in The New York Times raised concerns over
sales of financial products to military members, state regulators in as
many as 14 states began new investigations into the practices of companies
that target service members.18 According to regulators in these states,
various sales practice concerns are being examined. As of September 2005,
the investigations by these states generally had not been concluded. In
addition to efforts by insurance regulators, law enforcement organizations
and securities regulators are also reviewing the activities of some of the
insurance companies that target military members.

One of the issues that is again a focus of regulators and others in their
new investigations, is whether the companies and their agents were
inappropriately marketing these products--not as insurance--but primarily
as investment products. State insurance laws generally require any product
with an insurance component to be clearly identified and marketed as
insurance. However, regulators in various states raised concerns that the
companies targeting service members were deemphasizing the insurance
aspects of the product. Some state officials told us that the companies
would have considerable incentive to obscure the insurance aspects of the
product because 98 percent of service members already obtain a substantial
amount of life insurance through the government-offered SGLI program.
Insurance regulators we contacted told us that when marketing to military
members these companies typically emphasize the investment provision of
the products even though most, if not all, of the payments in the first
year are used to pay the insurance premiums. Furthermore, most of this
amount is then used by the companies to pay sales commissions to the
selling agents.

The marketing materials for the companies that we examined also emphasized
the savings component of the products. For example, a script from a sales
presentation of one company mentions the insurance coverage third, after
describing other product benefits. It also highlighted that the cost of
the insurance was "free" if the service member completes the product
terms. Insurance regulators with whom we spoke mentioned that

18Diana B. Henriques, "Basic Training Doesn't Guard Against Insurance
Pitch to G.I.'s," New York Times, July 20, 2004 and "Insurers Rely on
Congress to Keep Access to G.I.'s," New York Times, July 21, 2004.

such a sales presentation is designed to overcome objections from service
members that they did not need any additional life insurance. In addition,
examiners in one state reported in 2002 that one of the companies'
materials referred to the premium payments for the insurance product being
sold to service members as "considerations" or "contributions," which were
terms that they said were typically used when selling investment products.
Our review of information provided by legal offices at Fort Benning,
Georgia, and Great Lakes Naval Training Center, Illinois, also indicated
issues related to insurance products being marketed and sold primarily as
investment products.

The design of the products themselves may have also been misleading.
Despite emphasizing the investment returns and high rates of promised
interest earnings that were possible with these products, regulators in
one state told us that the companies may have assumed that their actual
policyholders would not generally attain these returns. As part of a class
action case previously filed against one of these companies, presented as
evidence were a series of internal company memorandums dating from around
the time the company was proposing to begin selling a combined insurance
and saving fund product. In one of these documents, a company official
states the assumption that product purchasers would not earn the
initially-promised 11 percent interest, or any amount even close to that,
because the product's savings fund "is inextricably coupled with a rather
expensive traditional life insurance policy," and has restrictive interest
crediting and withdrawal provisions.

According to a deposition taken of a former company official, the company
also assumed that many purchasers would not hold the product for very
long. For example, this official stated that the company assumed that as
many as 45 percent of purchasers would stop paying into the product within
1 year and another 25 to 30 percent would stop paying by years 2 and 3. In
contrast, data from a service that tracks the rates at which insurance
policyholders stop paying on their policies-called lapse rates- indicates
that the lapse rate in the first year on term life policies requiring
monthly premium payments averaged less than 15 percent.19

19LIMRA International/Society of Actuaries, Individual Life Insurance
Persistency Study: Preliminary Results, (March 2005).

Other federal regulators are also investigating the extent to which the
companies that market primarily to military members were marketing
insurance as investment products. According to SEC officials with whom we
spoke, insurance products marketed as investments may need to be
registered as securities. Currently, insurance policies and annuity
contracts issued by an entity subject to supervision by state insurance or
banking regulators are exempt from securities registration.20 Under
existing case law, one factor that is important in determining whether an
insurance product is entitled to this exemption is the manner in which the
product is marketed. 21 Under a safe harbor created by SEC Rule 151, one
condition for annuity contracts to avoid being subject to the federal
securities laws is to not be marketed primarily as an investments. As of
September 2005, SEC staff told us their inquiries into some of these
companies' operations were continuing. In addition, DOJ officials also
confirmed that they are investigating some insurance companies that market
primarily to military members.

Officials with several of the companies that market primarily to military
members told us that they clearly inform service members that the product
they are offering is insurance. For example, officials at one of the
companies showed us documents that they said are to be initialed and
signed in multiple places by purchasers of their product that indicate
that the product is insurance. An investigation by DOD personnel into
sales at one naval facility indicated that many members knew they were
buying insurance as well. However, an investigator of one of the states
that previously sanctioned one of these companies told us that they had
received information indicating that the company's sales agents may have
found ways to present the products without the service members realizing
they were buying insurance. Such allegations illustrate the difficulties
that regulators face in determining whether inappropriate sales practices
were being used.

20Section 3(a)(8) of the 1933 Securities Act exempts from securities
registration any "insurance policy" or "annuity contract" issued by a
corporation subject to the supervision of an insurance commissioner, bank
commissioner, or similar state regulatory authority.

21Another important factor is the allocation of investment risk between
insurer and contract owner.

Irregularities on Pay Allotment Forms Used for Deducting Premium Payments
Being Investigated

Insurance regulators and other investigators are also investigating
whether some of the companies have been misrepresenting the nature of the
products in the forms used to initiate deductions for the premiums from
service members' pay. According to DOD staff responsible for personnel pay
systems, service members can have various types of allotments deducted
from their pay, including deductions to be sent to savings accounts or to
pay for insurance they purchase. However, for insurance allotments for
junior enlisted members (those at rank E-3 and below), a 7day "cooling off
period" is required to pass before the allotment can be processed.
Although these companies were selling insurance products, state regulatory
officials we contacted were concerned that, in some cases, the companies
were mislabeling the government pay deduction forms to reinforce the
appearance that these purchases were investments and not insurance. For
example, we reviewed pay allotment documents that appeared to indicate the
service member purchasing this product was initiating a pay deduction that
would be sent to a savings account in the member's name at a bank. In
addition, the service member would also be asked to complete a form that
authorized the recipient bank to withdraw the premiums due on the
insurance product from the service member's account at that bank. However,
state insurance regulators told us that the service members did not
actually have accounts at these banks; rather, the money was deposited in
a single account belonging to the insurance company. After we contacted
officials at some of the banks to which these insurance companies were
having service member payments routed, bank officials confirmed to us that
the service members did not have accounts at the bank, but rather,
contributions were sent to accounts belonging to the insurance companies.
Thus, routing the payments to a bank with the allotment appearing as a
bank allotment on the service member's pay statement, rather than an
insurance allotment, could reinforce the impression that the service
member had purchased an investment product rather than insurance.
Insurance regulators in one state also told us that they found instances
in which insurance agents were assisting service members to access online
military pay systems to add allotments for insurance premiums.

Our own review found additional evidence of possible irregularities
involving pay allotment forms and other activities by agents selling these
combined insurance and saving products. During a review of documents used
to initiate allotments from service members' pay at two military
installations we visited, we also found several examples of allotment
deduction forms that seemed as though the service member involved had a
savings account at a bank used by the insurance company.

We also noted several other potentially irregular activities. In some
instances, insurance agents mailed allotment forms to the finance office
that processes pay transactions for service members stationed at one of
these bases using bank envelopes that had a bank's address as its return
address. The use of bank envelopes could help convince base personnel that
these were savings rather than insurance allotments, and thus not subject
to any required "cooling off period." In another example of insurance
company agents attempting to make the service member allotments used to
pay for these insurance products appear to be savings allotments, we saw
multiple instances of the use of an allotment form bearing the signature
of the same bank official as the initiator of the allotment. After we
contacted this bank official, he told us that he had once signed such a
form but that the repeated use of the form with his signature was being
done by the insurance agents without his knowledge. The results of these
reviews and indications of potential fraud were referred to our special
investigators, who are conducting further reviews and have initiated
contacts with other law-enforcement organizations, DOD investigative
agencies, and state regulatory departments.

Our review of allotment forms raised questions about whether agents
marketing products targeting military members were encouraging service
members to reduce tax withholdings and other savings contributions, thus
providing a source of income to invest in the insurance products.
Specifically, we found several examples of forms canceling service
members' TSP contributions and altering the number of exemptions claimed
on service members' W-4 forms (reducing the amount of tax withheld from
their pay) that were submitted along with insurance allotment forms.
Forgoing investment in TSP (which is generally recognized as being one of
the lowest-cost ways to invest for retirement available anywhere) to
purchase expensive insurance would not generally be in the service
member's best interest financially. By reducing the member's withholdings
and TSP contributions, the agents in these cases may have been attempting
to overcome service member objections about affording the additional
payment for the insurance product. In addition, reducing a service
member's withholdings could potentially result in additional taxes due at
year's end.

Concerns Exist over Whether Another sales practice issue that insurance
regulators we contacted have

Insurance Company Personnel been concerned about is whether some
individuals that are selling

Represent Themselves as insurance were not clearly representing themselves
as insurance agents

Members of Other Organizations 	when marketing to military service
members. In the past, DOD has found that insurance agents who have
marketed to service members frequently

identify themselves as counselors from benefits associations. Such
entities provide counseling on obtaining government benefits or other
services and may also offer their members discounts on other products,
such as auto services. By representing themselves as benefits counselors,
insurance agents may more readily gain access to service members.

However, regulators and others have documented prior instances in which
insurance agents marketing to military members misrepresented themselves
as benefits association employees. For example, in December 2002, DOJ
announced a settlement against an insurance company that targeted military
members whose agents had misrepresented themselves solely as employees of
a benefits association. According to the DOJ complaint, this company had
allegedly defrauded military service members who purchased life insurance
policies from the company by having its agents pose as independent and
objective counselors representing a nonprofit fraternal organization that
offered as one of its benefits the ability to purchase the company's life
insurance.22 However, the company's agents allegedly failed to disclose to
the service members that they only were compensated through commissions
from the insurance company, and that the company was making undisclosed
payments to the benefits association for every policy sold. Under the
terms of the settlement, the company agreed to, among other things,
increase the face amount of all in force coverage by 6.5 percent, pay $2.7
million to all service members who canceled their policies during a
specific period, and to never again sell another insurance policy or
reapply for DOD permission to conduct business on U.S. military
installations.23 According to a state insurance department investigation
that was finalized in January 2002, agents from an insurance company that
is currently being investigated by other states portrayed themselves as
benefit association representatives without disclosing that they were
insurance agents. As a result these agents were allowed to conduct
military training during which they would solicit insurance to groups of
service members. According to the report, the service members believed
that the benefit association was part of the military establishment.

22Complaint, United States v. Academy Life Insurance Co., U.S. Dist. Ct.,
E.D. Pa., Civil Action No. 02-9125 (Dec. 19, 2000).

23Settlement Agreement, United States v. Academy Life Insurance Co., U.S.
Dist. Ct., E.D. Pa., Civil Action No. 02-9125 (Dec. 10, 2002).

Regulators Are Reviewing Whether Some Insurance Product Sales Comply With
State and Federal Laws

Insurance Companies Targeting Military Members Also Frequently Accused of
Violating DOD Solicitation Policies

Another aspect of the operations of the companies that market primarily to
military members that state insurance regulators were examining was
whether the products comply with applicable state laws and regulations.
For example, regulators in several states have been examining whether the
saving funds that some of the companies had labeled as annuities may not
actually qualify as such under their laws. After concerns arose about the
sale of these combined insurance and savings products, insurance
regulators in Washington state rescinded approval to sell the products
that had previously been approved for sales by one of the companies that
targeted the military in June 1997 and for three additional companies in
October 2004. In taking these actions, the state's insurance department
noted that it had determined that the savings fund provision of these
products the companies were marketing were not properly structured to meet
the requirements of this state's regulations pertaining to annuities.

In addition to raising concerns among financial regulators, the companies
that target military members also have been accused of violating DOD's own
solicitation policies. For example, DOD personnel conducted an April 2005
proceeding in Georgia to review the practice of one of the companies
currently being investigated by state insurance regulators regarding
allegations of multiple violations of the DOD directive on insurance
solicitation. Among the practices alleged at this hearing were misleading
sales presentations to captive audiences and solicitations in unauthorized
areas, such as in housing or barracks areas. DOD recently began
maintaining an online listing of actions taken against insurance companies
or their agents by various DOD installations.24 Last updated on August 11,
2005, this web site lists 21 agents from some of the 6 companies that are
permanently barred--or have had their solicitation privileges temporarily
suspended--at 8 different military installations.

24See http://www.commanderspage.dod.mil/dav/lsn/LSN/BINARY_RESOURCE/
BINARY_CONTENT/1827481.pdf.

Concerns over such violations are longstanding. For example, in March
1999, the DOD Inspector General also found that insurance companies were
frequently employing improper sales practices as part of marketing to
service members. Among the activities prohibited by DOD that the Inspector
General report found were occurring included presentations being made by
unauthorized personnel, presentations being made to group gatherings of
service members, and solicitation of service members during duty hours or
in their barracks.25 Similarly, a May 2000 report commissioned by the
Office of the Under Secretary of Defense for Personnel and Readiness also
reviewed insurance solicitation practices on DOD installations and
identified many of the same concerns and recommendations as those the DOD
Inspector General had identified.26 As result of these two reports, DOD
officials began efforts to revise its directive governing commercial
solicitation on military installations.

  A Unique Securities Product with High Sales Charges Sold to Military Members
  Has Also Raised Sales Practice Concerns

A few broker-dealers have marketed a unique securities product, often
referred to as a contractual plan, to military service members that has
proven to be more costly than other commonly available products. These
contractual plans were primarily being sold by one large firm and several
smaller firms that generally marketed only to service members. These
products involve making periodic investments into a mutual fund under
contractual agreements with much of the first year's investments going to
pay a sales load that compensates the selling broker-dealer. Purchasers
that make all required payments for the entire term of the contractual
mutual fund plan would pay charges slightly less than the amount charged
by other load funds. However, regulators found that most military
purchasers were not making all required payments, resulting in them paying
higher sales charges than would have been paid on other commonly available
mutual funds. Regulators indicated that contractual plans are rarely sold
to civilians and the products have been associated with sales practice
abuses for decades. Regulators recently sanctioned the largest seller of
these plans for inaccuracies in its marketing materials. Investigations
into the activities of other broker-dealers selling contractual plans are
also underway.

25DOD, Commercial Life Insurance Sales Procedures in DOD, DOD Office of
the Inspector General Report No. 99-106 (Arlington, VA: Mar. 10, 1999).

26DOD, Final Report: Insurance Solicitation Practices on Department of
Defense Installations, Office of the Under Secretary of Defense for
Personnel and Readiness

(Washington, D.C. May 15, 2000).

    Most Contractual Plans Were Sold in the Military Market by One Firm

Although being sold to large numbers of service members, contractual
mutual fund plans were being marketed by only a few broker-dealers. SEC
and NASD staff told us that their investigations have identified only
about five broker-dealer firms that were marketing these plans. According
to regulators, one of the broker-dealers accounted for over 90 percent of
the $11 billion invested in contractual plans as of year-end 2003. Unlike
the insurance companies that targeted junior service members, this
brokerdealer generally marketed its products to more experienced military
members, including commissioned officers and senior noncommissioned
officers.

According to its marketing materials, this firm had nearly 300,000
military customers, and indicated that one-third of all commissioned
officers and 40 percent of active duty generals or admirals were clients.
The firm employs about 1,000 registered representatives in more than 200
branch offices throughout the United States, as well as locations in
Europe and in the Pacific region. The great majority of the firm's sales
representatives are former commissioned or noncommissioned military
officers. From January 1999 through March 2004, the firm received
approximately $175 million in front-end load revenue from the sale of
contractual plans. Officials with the firm announced in December 2004 that
they would be voluntarily discontinuing sales of contractual plans after
being sanctioned by SEC and NASD.

The other four firms that continue to sell contractual plans were smaller
broker-dealers. Of these, regulators told us that three also principally
targeted military service members although, unlike the largest
brokerdealer, these three firms generally sold contractual plans to junior
enlisted personnel. According to regulators, the fourth broker-dealer
appeared to be marketing to civilians. However, given the availability of
other alternative low-cost mutual fund products in the marketplace that
allow investors to make relatively small contributions on a regular basis,
regulators indicated that they rarely see contractual plans being sold to
civilians by other firms.

    Contractual Payment Plans Feature High Up-Front Sales Charges that Are Not
    Typical of Other Securities Products Available

Under the terms of the contractual plans being sold to military service
members, the purchaser enters into a contract to make periodic investments
for a set term (such as 10 to 15 years).27 These payments are invested
into funds offered by some of the largest mutual fund companies.

Under the contractual plan, the firm deducts a sales load of up to 50
percent from each of the first year's monthly payments but generally no
further sales loads are applied thereafter. In contrast, a conventional
mutual fund with a sales load will deduct a certain percentage-currently
averaging about 5 percent-from each contribution made into the fund. While
sales charges for contractual plans are initially much higher than those
of other mutual fund products, the effective sales load-the ratio of the
total sales charge paid to the total amount invested-becomes lower as
additional investments are made. Over time the effective sales load for a
contractual plan will decrease to a level comparable to-or even lower
than-other conventional mutual funds with a sales load.28 As illustrated
in Figure 5, if all 180 monthly payments are made under a contractual
plan, the effective sales load on the total investment decreases to 3.33
percent by year 15.

27Under the contractual payment plans commonly sold in the military
market, the investor is to pay 180 fixed monthly installments (15 years),
which may be extended to 300 payments (25 years) at the investor's option
with no additional sales charge.

28Many mutual funds that are sold with sales charges or loads offer
discounts to investors who invest certain amounts of money. As such, if an
investor continues to invest in a conventional mutual fund over time,
eventually the sales charge percentage of that fund will decrease as the
total initial investments reach a certain amount, such as $25,000 or
$50,000.

Figure 5: Mutual Fund Sales Load as a Percentage of Investment by Year
Percentage

0 1 2 3 4 5 6 7 8 9101112131415

Plan year

Traditional plan load

Contractual plan load

Source: GAO analysis.

At one time, contractual plans were the only way for small investors to
invest in mutual funds. Regulators told us that in the past, many mutual
funds required large initial investments that prevented them from being a
viable investment option for many individual investors. However, today,
other lower-cost alternatives exist for small investors to begin and
maintain investments in mutual funds. For example, many mutual fund
companies now allow investors to open a mutual fund account with a small
initial investment, such as $1,000, if additional investments-including
amounts as low as $50 per month---are made through automatic withdrawals
from a bank checking or savings account. According to a recent study by
the mutual fund industry association, over 70 percent of the companies
offering S&P 500 index mutual funds in 2004 had minimum initial investment
amounts of $1,000 or less, with 9 having minimum investment

amounts of $250 or less.29 Securities regulators saw the wide availability
of such products as the reason that contractual plans were rarely being
offered to most investors. Another alternative investment option available
to service members since 2002 is the government-provided TSP. Comparable
to 401(k) retirement plans available from private employers, service
members can invest up to 10 percent of their gross pay into TSP without
paying any sales charge. The various funds offered as part of TSP also
have much lower operating expenses than other mutual funds, including
those being offered as contractual plans. Service members could also
choose to invest as many other investors do in mutual funds offered by
companies that do not charge any sales load. Called no-load funds, these
are available from some of the largest mutual fund companies through
tollfree numbers, the Internet, or by mail.

According to industry participants, contractual plans provide their
purchasers with the incentive to invest for the long term. Officials from
the most active broker-dealer that marketed contractual plans told us that
the larger upfront sales load encourages the investor to maintain a
long-term investment plan because of the financial penalty that results
from halting their payments too early. They also said that the contractual
nature of the product helps purchasers make regular investments. In
addition, these officials explained that the clients they serve are not
high-income individuals with considerable accumulated wealth available for
investment. As a result, they said that other broker-dealers do not
provide financial services to these individuals. The officials from this
firm said that their sales representatives spend many hours explaining the
products and preparing and updating financial plans for their military
clients. As a result, the higher up-front sales charge compensates their
staff for the amount of time spent with clients. Officials from this firm
told us that clients who purchased contractual plans and received
financial plans from their firm generally benefited as the result of an
improved financial condition overall.

    Many Service Members Failed to Benefit from Contractual Plans

However, according to data obtained from securities regulators, many
service members did not benefit from purchasing contractual plans.
Although such plans can prove beneficial to an investor that makes all of
the required periodic payments, regulators found that many service

29The study identified 98 companies offering S&P 500 index funds. See
Investment Company Institute, "Are S&P 500 Index Mutual Funds
Commodities?" Perspective Vol. 11 No. 3 (August 2005).

members were not investing in their plans for the entire term. For
example, SEC and NASD found that only 43 percent of the clients that
purchased plans between 1980 and 1987 from the largest broker-dealer had
completed the full 15 years required under the contract. Instead, 35
percent of these clients that bought during this period had terminated
their plans early. Another 22 percent had not cancelled their plans but
were not making regular payments. According to securities regulatory
staff, most of the clients that stopped making payments into this
broker-dealer's contractual plans ceased doing so after about 3 years.

SEC staff told us that the customers of the other broker-dealers that were
marketing contractual plans to military members had the same or even lower
success rates of contracts completion. For example, they said that only
about 43 percent of the clients of one of these broker dealers had made
all required payments for a full 15-year period and, at another firm, just
10 percent of the customers had successfully completed a plan.

Because of the manner in which sales charges are assessed, terminating a
contractual plan or halting payments early can greatly reduce the benefits
to an investor. If the investor does not continue paying into the plan,
the effective sales load can be much higher than industry norms. For
example, as shown previously in Figure 5, an investor terminating after 3
years pays an effective sales load of 17 percent of the amount invested,
which is more than three times the current average sales load in the
mutual fund industry. As result, many of the service members that
purchased contractual plans from these firms likely paid much higher sales
charges than they would have under other alternative investments. Even if
an investor makes all required payments under a contractual plan, we found
that the amount accumulated on a contractual plan investment earning a 7
percent annual return is lower than that of a conventional mutual fund
with a 5 percent sales load earning the same projected return until at
least year 16 (this analysis is shown in appendix III).

    Long Associated with Sales Practice Abuses, Firms Marketing Contractual
    Plans Again Raising Regulatory Concerns

Contractual plans have long been associated with sales practice concerns
and recently regulators have taken action against the largest seller of
these products. According to an SEC study, contractual plans to sell
mutual fund securities were first introduced to the public in 1930.30
However, concerns over the sale of these products, including excessive
sales charges, arose and, as a result, the subsequently-enacted Investment
Company Act of 1940 included a provision that limited the sales load that
could be charged on contractual plans. After the passage of the Act, sales
of contractual plans declined, with most of the companies selling such
plans halting their marketing of such products.

However, during the 1950s and 1960s sales of contractual plans
significantly increased. With researchers finding that many contractual
plan purchasers were not continuing to invest in their plans, SEC
recommended that the Investment Company Act of 1940 be amended to prohibit
future sales of contractual plans. Although Congress chose not to ban
contractual plans, it amended the Act in 1970 to increase protections for
contractual plan investors. Specifically, Section 27 was revised to allow
investors who cancel their plans within the first 18 months of purchase to
obtain refunds on that portion of the sales charges which exceeds 15
percent of the gross payments made.31 In addition, investors terminating
their plan within the first 45 days could receive their full investment
back with no sales charge deductions. Even with such limitations, sales
charges associated with contractual plans can still be much higher than
those of other mutual fund products and industry norms.

However, regulators again found inappropriate sales practices associated
with contractual plans even after this provision was changed. For example,
in the early 1990s, federal and state securities regulators took action
against a broker-dealer, First Investors Corporation, for improper
marketing of contractual plan investments, including its alleged failure
to notify investors that they could invest in the same funds without
having to pay the high sales charge required under the contractual plan.
During this period, other low-cost mutual fund products emerged in the
marketplace, allowing investors to make relatively small monthly payments
into a mutual fund product with low fees. The contractual plan product
generally

30SEC, Public Policy Implications of Investment Company Growth, H.R. Rep.
No. 2337, 89th Cong., 2d Sess. (1966).

31Pub. L No. 91-547 S:16, codified at 15 USC S:80a-27(d).

disappeared from the civilian marketplace but continued to be sold in the
military market by a few firms, with one emerging as the dominant player
in this niche market.

Recently, securities regulators have taken actions against a firm
marketing contractual plans to military service members. In December 2004,
SEC and NASD sanctioned the broker-dealer firm that was the dominant
seller of such plans to service members. According to settlements reached
with these regulators, the firm's marketing materials were alleged to have
been misleading and to have inappropriately disparaged other viable
investment options available to their clients. For example, according to
the regulators, the firm's marketing materials allegedly included various
misleading comparisons of contractual plans to other mutual funds,
including characterizing non-contractual funds as attracting only
speculators, and erroneously stating that withdrawals by investors in
other funds force the managers of those funds to sell stocks. The
regulators also alleged that the firm's materials did not present the
low-cost TSP as a viable alternative to their contractual plans. The SEC
and NASD settlements also alleged that the firm mischaracterized the
contractual plan's high up-front sales load as the only way to ensure that
purchasers remain long-term investors and presented comparisons of
contractual plans using a holding periods of more than 14 years despite
having data within the firm that showed that many of its customers were
not successfully completing their plans. As a result, securities
regulators found that the firm's service member clients paid higher than
normal sales charges because they frequently did not continue making
enough payments into such plans to reduce the effective sales charges to a
level comparable to typical mutual fund sales charges in the industry.

The regulators also took action against the firm for inappropriate
handling of customer complaints. As part of its investigation into this
firm's practices, NASD sanctioned the firm for the actions of one of its
supervisors who made improper statements to a service member who had
previously expressed dissatisfaction with the broker-dealer. The
regulatory settlement provides a summary of a call made to this customer
in which the firm's supervisor appeared to threaten the service member
with adverse consequences from his military superiors, including possible
cancellation of his previously approved temporary duty orders.

In settling with SEC and NASD, the broker-dealer agreed to pay a total of
about $12 million, including restitution to compensate customers who paid
an effective sales charge of more than five percent on investments made
since January 1999. As of October 6, 2005, $4.3 million has been paid to
investors. The remaining money is to be used to fund an educational
program for service members that NASD will administer (this program is
described later in this report). As previously stated, this broker-dealer
announced that it has voluntarily discontinued sales of contractual plan
products. SEC and NASD continue to investigate the other smaller
brokerdealer firms that are marketing contractual plan products to
military members and others. In addition, SEC staff also began conducting
reviews of sales to military members in overseas locations and at
installations in the United States. Two bills before the U.S. Senate (one
of which passed the House of Representatives) would amend Section 27 of
the Investment Company Act of 1940 to ban further sales of contractual
plans.32

  Lack of Complaint Sharing Prevented Earlier Identification of Improper Sales
  to Military Members

A lack of routine complaint sharing between financial regulators and DOD
was the primary reason that regulators did not identify problematic sales
of financial products to military service members before such issues were
raised in press accounts, although other limitations among regulators'
practices also contributed. Insurance companies are generally required to
submit products for regulatory approval before marketing them but the
review processes in most states may not have addressed the appropriateness
of their features for service members. Although insurance regulators in
some states review sales activities periodically, insurance regulators in
most states generally rely on complaints from purchasers to indicate that
potentially problematic sales are occurring. One reason that insurance
company sales activities are not reviewed more extensively is because most
states lack any appropriateness or suitability standards for insurance
products. Although some states had taken action, other state insurance
regulators were not generally aware of problems involving military members
until recent press reports, in part because DOD personnel were not usually
sharing complaints or information about other inappropriate practices
regarding the companies that targeted service members. However, we found
evidence that concerns over inappropriate sales to service members exist
widely at various military installations. Similarly, securities regulators
also did not identify recent problems

32S. 418, Sec. 3, and H.R. 458, Sec. 102.

involving contractual plan sales to service members until such press
accounts appeared. These regulators' ability to detect problems was also
hampered by the lack of information on the extent to which broker-dealer
customers purchasing contractual plans were successfully making their
payments. In light of the problems surrounding sales of financial products
to military members, DOD has efforts underway to revise its policies
regarding such sales and has reviewed ways in which it could share
additional information. However, DOD has not coordinated these efforts
with military installation personnel or with regulators.

    Without Complaints, Regular Insurance Regulatory Processes Did Not Identify
    Problems

The product approval processes followed by many insurance regulators did
not allow them to identify the products being marketed to military members
as potentially problematic. One of the ways that state insurance
regulators ensure that the products being sold in their states comply with
insurance laws and regulations is through product approval requirements.
Although insurance regulators in most states require insurance companies
to submit products for approval before marketing them, state insurance
officials in the states we contacted explained that the processes for
approving products varied. In several of these states, insurance companies
must submit products to the state regulators for reviews that are intended
to assess whether the provisions and terms of the products comply with
existing insurance regulations in those states. Companies sometimes submit
additions to existing products, called riders, which change terms or
provide additional features to their policies. However, according to some
regulators in the states we contacted, the entire product may not be
reexamined by their reviewers when such riders are submitted. In at least
2 states we contacted, different components of products sold to military
members were filed and approved separately but then marketed and sold as a
single product. For example, the savings fund of the insurance product
being sold by four of the companies that target military members was
submitted as a rider to a previously approved policy. However, regulators
found that it was being sold as an integral part of the entire product,
not as an optional feature to a life insurance policy. In at least one
state we contacted, many insurance products are not reviewed but can be
sold immediately upon filing notification with their department of the
company's intent to market the products.

Additionally, insurance product approval processes may not necessarily
reveal how a product is to be marketed or the target market for the
product. According to officials in the state insurance departments we
contacted, none of these states required insurance companies to provide

descriptions of the target market for a particular product during the form
filing process. As part of the investigations that state insurance
regulators are conducting of the companies that target military members,
some of the regulators are also reexamining the products these companies
sell to ensure that they meet existing state requirements. For example,
insurance regulators in Virginia issued an order in September 2005 to
three companies to cease and desist from selling such products. However,
the extent to which this review is occurring in other states is not clear.

Insurance Regulatory State insurance regulators may conduct various types
of reviews of the

Examinations Generally Focus insurance companies they oversee. Many of the
routine reviews that these

on Financial Soundness	regulators conduct focus on insurance companies'
financial soundness. During such examinations, the regulators assess the
quality of insurance companies' assets and whether their income is
sufficient to meet present and future financial obligations to their
policyholders.

Some state insurance regulators also review some aspects of insurance
product sales as part of market conduct examinations. Designed to help
protect consumers from unfair practices, market conduct reviews are done
for a wide range of company practices, including sales, underwriting, and
claims processing and payment.33 For example, a regulator may review a
sample of sales by a particular company to ensure that its agents have not
misrepresented products or otherwise violated the requirements of their
particular state. Although some states routinely perform market conduct
reviews of the companies they oversee, most states only conduct such
investigations when they receive complaints from customers or otherwise
obtain information that raises concerns about the activities of an
insurance company.

33GAO, Insurance Regulation: Common Standards and Improved Coordination
Need to Strengthen Market Regulation, GAO-03-433 (Washington, D.C.: Sept.
30, 2003).

Many States Lack Appropriateness or Suitability Standards

One reason that insurance regulators do not review insurance company sales
practices more routinely is that standards requiring that any insurance
products sold be appropriate or suitable for the purchaser do not
generally exist. As a result, when an insurance regulator receives a
complaint or other information indicating that potentially problematic
sales have occurred, they can review the marketing practices of any
insurance companies involved to assess whether any misrepresentations or
other fraudulent activities occurred. However, under most state insurance
laws, insurance regulators do not have the authority to evaluate whether
the product sold was appropriate or suitable given the customer's needs.
In contrast, broker-dealers selling securities products are required to
assess the financial circumstances of their customers to ensure that any
products they recommend to these customers are suitable. Specifically,
brokerdealers are required to consider such factors as their customer's
income level, investment objectives, risk tolerance, and other relevant
information.34

State regulators and others have tried to establish suitability standards
for insurance products, but these efforts have generally not been
successful. For example, in 2001, NAIC formed a working group to collect
and analyze data, prioritize key issues for examination, and assess
interstate cooperation in developing guidelines for market conduct
standards. These market conduct standards would be intended to protect
consumers from abuses in the insurance market, including those related to
the availability and affordability of insurance. Using such standards,
state insurance regulators would review the underwriting and marketing
practices of insurance companies and their agents.

34NASD Rule 2310, Recommendations to Customers (Suitability), states that
in recommending to a customer the purchase, sale, or exchange of any
security, a brokerdealer is required to have "reasonable grounds for
believing that the recommendation is suitable for such customer upon the
basis of the facts, if any, disclosed by such customer as to his other
security holdings and as to his financial situation and needs." For
example, recommending a product that poses a high risk of loss to an
investor on a limited income could represent an unsuitable recommendation.

However, after being unable to come to consensus on suitability standards
that would apply to all insurance sales, the NAIC working group narrowed
its approach. Instead, the group drafted a model law that provided
standards for annuity products sold to seniors age 65 and over.35 This
draft model legislation would require that before insurance agents
recommend the purchase or exchange of an annuity, they must take into
account the purchaser's financial situation (including other investments
or insurance policies owned) and reasonably believe that the
recommendation is suitable for the purchaser. As of July 2005, NAIC
reported that only nine states had fully or partially adopted this model
law, 10 others already had similar or related legislation, and 35 states
or territories had yet to take any action.

Other organizations have also attempted to develop suitability standards.
For example, the Insurance Marketplace Standards Association (IMSA) has
developed various standards applicable to insurance companies' marketing
practices. IMSA also provides qualification to companies that comply with
its marketing practices standards.36 After becoming IMSA qualified, a
company's salesforce would be expected to assess a potential buyer's need
for insurance before recommending its purchase. A representative of IMSA
told us that insurance companies and agents following IMSA's guidelines
for conducting a needs-based selling analysis would review a customer's
insurable needs and financial objectives to determine the appropriate life
insurance product, if any, to be offered. In many cases, junior service
members with no dependents may not need additional life insurance beyond
that available through the low-cost, government-offered SGLI. However,
none of the six companies that were primarily marketing to military
members with the combined insurance and savings product were IMSA
qualified.

35In an annuity contract, an insurer agrees to make a series of payments
for a specified period or for the life of the contract holder, providing
insurance against the possibility that the contract holder will outlive
his or her assets during the period covered under the contract.

36To become IMSA-qualified, an insurance company must conduct a self
assessment of its ability to comply with IMSA's market conduct standards,
which is reviewed by a Qualified Independent Assessor authorized to
conduct an independent assessment of the company's policies and procedures
on behalf of IMSA. A company must undergo the self and independent
assessment every 3 years in order to retain its IMSA qualification.

Legislation has been proposed that would require insurance regulators and
DOD to work together to study ways to improve the quality of--and
practices used to sell--life insurance products sold on military
installations. For example, one option offered by these bills would be to
only allow those companies that have met best practice procedures (such as
those developed by IMSA) to sell insurance on military installations.
These bills also propose that standards that would apply to the sale of
products to military members could be developed.37

Concerns and Complaints Although concerns or complaints involving
insurance sales existed on DOD

Existed at Military Installations	installations, insurance regulators we
contacted mentioned that they generally have not historically received
complaints from DOD officials about potentially problematic sales of
products to service members. The actual extent to which service members
have concerns or complaints involving insurance product sales is not known
because, as we reported in June 2005, DOD only recently began
systematically collecting information on violations of DOD's solicitation
policy by sellers of financial products.38 However, the DOD reports
described earlier in this report, and work we conducted for this report
and several other reports we recently issued, appears to indicate that
concerns over inappropriate practices related to product sales among
military members was widespread. For example, for our April 2005 report on
the financial condition of military members, we surveyed 175 U.S.
installation-level managers of DOD's personal financial management
program, which provides service members with financial literacy training,
financial counseling, and other assistance to avoid or mitigate the
adverse effects associated with personal financial problems.39 We reported
in June 2005 that about 25 percent of the managers surveyed believed that
insurance company representatives occasionally made misleading sales
presentations at their installations during 2004, and 12 percent believed
that such presentations were made routinely.

At the two bases visited as part of work for this report, we also found
evidence that service members had concerns or complaints about the
marketing practices used by sales personnel from some of the companies
that targeted military members. After complaints were raised by some

37S. 418, Sec. 9, and H.R. 458, Sec. 108.
38GAO-05-696.
39GAO-05-348.

service members at these bases, military personnel conducted
investigations of the matters. For example, at Fort Benning, Georgia,
statements were taken from several service members that were solicited
insurance products between 2001 and 2004. Of the 41 statements in the
investigative files that we were able to review, more than 70 percent
indicated that the sales personnel had described the product as a savings
or investment product. Additionally, almost all of these service members
indicated that the insurance company sales personnel had taken actions
that violated one or more of the restrictions in DOD's solicitation
policy, such as making these sales presentations during group training
sessions.

At Great Lakes Naval Training Center, base legal advisers told us they do
not receive many complaints because service members were often being
solicited shortly before they transferred to other installations. However,
legal staff at Great Lakes Naval Training Center showed us documentation
related to 5 complaints pertaining to insurance products from service
members between January and June 2005. In addition, they also indicated
that they have also seen complaints arising from other military
installations after leaving Great Lakes Naval Training Center. We also
spoke with finance office personnel at this base who had become concerned
about the sale of insurance to service members occurring there. As a
result, these personnel had retained copies of some of the pay deduction
allotment forms submitted for processing between June and September 2004.
Numbering over 100, the copies represented forms that had been used to
initiate pay deductions for products purchased by base service members
from three different insurance companies, according to military pay
personnel. We attempted to contact a random selection of these service
members. We were able to speak with three of the service members and a
spouse representing a service member who had purchased these products, and
all indicated that the insurance product they had purchased had been
generally represented as an investment.

However, state insurance regulators we contacted generally were not aware
of the potentially problematic sales to military members because they
generally were not receiving information about concerns or complaints from
military personnel. These state insurance regulators and NAIC officials
told us that they had received few complaints involving military members.
For example, as part of our June 2005 report, we surveyed insurance
regulators in 50 U.S. states and 4 territories and received 48 responses.
Of these, regulators in only 8 states indicated that they had received
life insurance related complaints from service members or on their behalf
between October 2003 and December 2004.

According to the director of the DOD office that oversees commercial
solicitations on military installations, information about service member
concerns or complaints involving financial product sales are not generally
shared with state regulators for several reasons. In some cases, service
members expressing reservations about purchasing one of these products
might have received advice from other members or from superior officers to
cancel, rather than complain to a regulator. In other cases, DOD officials
told us that base personnel will work directly with the selling company to
resolve a matter rather than involving a financial regulator. For example,
a service member with concerns about a purchase of a financial product
could consult with the installations' legal advisers from the judge
advocate general staff. However, DOD officials stated that interactions
between service members and these staff are covered by attorney-client
privilege and thus are more difficult to share with external parties, such
as financial regulators. Attorneys representing two state insurance
departments believed that DOD attorneys should be forwarding such
complaints because this would be in the best interest of the service
members. They emphasized that complaints related to financial products
should be forwarded to the financial regulators that can take action on
behalf of the service members. They emphasized that failure to notify
regulators that there are service members with concerns about financial
product sales deprives regulators of important information necessary for
their oversight processes to function properly.

In some cases in which military installations have reported concerns or
complaints, regulators have been able to take action against insurance
companies that conduct business with military service members. For
example, regulators in Maryland were notified in the 1990s about potential
improprieties involving sales of insurance products to junior enlisted
personnel by a concerned official at one military training base in their
state. In an examination report issued in January 2002, insurance
regulators found that companies (including some of those that are
currently being investigated by other states) marketing combined insurance
and savings products to military personnel in Aberdeen Proving Grounds and
other locations had violated various state laws and regulations and had
misled some service members about the nature of the products, including
misrepresenting insurance products as investments.40 As noted previously,
regulators in Washington state also became aware of problematic sales at

40See Maryland Insurance Administration Market Conduct Examination Report
of Life and Health Business, Report No. 490-01 (Baltimore, MD: Jan. 25,
2002).

military installations in their state in the 1990s. This state eventually
took action to rescind approval of certain insurance products where the
side savings fund did not meet the state's requirements for an annuity, a
premium deposit fund, or a universal life product. In addition, regulators
in Virginia have also ordered that some companies that target military
members to cease selling certain products in their state However,
regulators in the other states that are currently conducting
investigations of the companies targeting military members were not
generally aware of such sales until recent press reports because DOD
personnel were not generally sharing information about any service member
complaints or concerns they received.

    Lacking Complaints and Data on Actual Customer Experiences with Contractual
    Plans, Securities Regulators Were also Unable to Identify Problems Involving
    Sales to Service Members

Lacking information on complaints and data on the extent to which
brokerdealer customers were successfully completing contractual mutual
fund plans, securities regulators, similar to insurance regulators, also
did not identify problems involving military members until press reports
appeared. Although SEC and NASD, which has primary regulatory
responsibility over the broker-dealers that were marketing contractual
plans to service members, took enforcement actions against the firm that
was the largest marketer of these products in late 2004, both regulators
had conducted earlier examinations of this firm and did not identify any
significant problems. SEC and NASD staff told us that identifying the
problems involving the sale of this product was made more difficult
because neither of the regulators had previously received any complaints
about the firm from service members. However, NASD staff told us that
after a DOD online periodical reported in 2003 that securities regulators
were reviewing contractual plan sales, DOD staff received several
inquiries from service members who had concerns about the products they
had purchased. To the securities regulator staff, this provided evidence
that concerns or complaints from military members were not being directed
to the regulators--either by the service members themselves, or by the DOD
personnel aware of such concerns.

Securities regulators' ability to detect problems was also hampered by the
lack of standardized data on the extent to which customers were completing
contractual plans. For example, in response to an article in The Wall
Street Journal in 2002 that raised questions about the appropriateness of
the sales of such plans to military members, SEC staff reviewed the

operations of the largest seller of contractual plans.41 According to SEC
staff, their review did not raise any major concerns because they found no
evidence that military members were complaining about their purchases from
this firm. In addition, the firm provided the SEC staff with documents
that purported to show that the persistency rate for the contractual
plans- which represented the proportion of plans that were still
open---was over 80 percent for the previous 3 years. The SEC staff told us
that their examiners accepted these statistics as valid because they were
also able to obtain data from one of the major mutual fund companies whose
funds represented the majority of those in which this broker-dealer's
customers had invested. The data showed that most of this broker-dealer's
customers still had open plans with the company.

After an article that raised concerns about contractual plan sales to
military members appeared in Kiplingers, a personal financial magazine, in
2003, NASD staff also initiated an examination of this broker-dealer.42
According to NASD staff, although they had concerns over the sales of the
contractual plan product, obtaining data on the extent to which the firm's
customers were continuing to make payments and successfully completing
their plans was difficult, particularly since no specific requirement
mandates that broker-dealers maintain records or standardized data.
According to NASD staff, this firm maintained various sets of data on its
contractual plan customers and becoming familiar with the differences in
the information and determining what would be most useful for their
reviews proved to be difficult and time consuming. They also noted that
their existing examination procedures did not address issues such as
persistency rates that were found to be relevant to examining contractual
plans.

However, these regulators were able to identify concerns after they
required the firm to provide comprehensive data on all customers that
purchased such products. According to SEC and NASD staff, they were able
to determine how successful this firm's customers were being with their
contractual plans only after they required the firm to provide specific
data on all customers that purchased contractual plans covering a full
15year period. After obtaining this data, regulators determined that the
actual proportion of customers making all required payments for the
15-year term

41Tom Lauricella, "Some Military Investors Bear a Heavy Load" The Wall
Street Journal, C.1. (New York, N.Y.: Nov 27, 2002).

42Steven T. Goldberg, "Funds: A Marketer is Selling funds with Sky High
Fees to Military Personnel," Kiplinger's Personal Finance, Volume 57, No.
9, p. 53 (Sept. 2003).

of the plans was only 43 percent. This percentage was about half of the
persistency or success rate shown in documents that the firm had
previously provided to the regulators during their prior examinations,
because the previously supplied data had excluded any customer whose
account remained open but had not made any payments in the last year.
However, in the view of regulators, investors that were no longer making
payments into their plans should be taken into consideration when
determining the overall extent to which a firm's customers were
successfully completing their plans.

    DOD also Taking Actions to Address Problematic Sales to Military Members,
    but Remains Reluctant to Fully Share Information with Financial Regulators

DOD has also taken some actions to address potentially problematic sales
of financial products to service members, although it does not currently
share all relevant information with financial regulators. The primary way
that DOD attempts to protect service members from inappropriate sales is
through its directive on commercial solicitation on military
installations. This directive, DOD Directive 1344.7, is administered by
the Office of the Under Secretary of Defense for Personnel and Readiness.
The directive currently places various requirements and restrictions on
financial firms seeking to market products on military installations in
the United States and overseas. For example, it prohibits sales from
occurring as part of group meetings and instead requires financial
institution personnel to make an advance appointment and meet with service
members individually. In addition, sales personnel that are former
military members are also prohibited from using their military
identification to gain access to an installation. In the event that a
company, its agents, or representatives violate DOD's solicitation policy,
installation commanders can permanently withdraw the company's or
individuals' solicitation privileges through a ban or can temporarily
suspend those privileges for a specified period.

Following the DOD reports that detailed issues and concerns associated
with insurance sales to military members, staff within the Office of the
Undersecretary for Defense for Personnel and Readiness began efforts to
revise DOD's solicitation directive. In April 2005, DOD sought public
comments on a revised directive that incorporates new requirements. For
example, the revised directive expressly prohibits insurance products from
being sold as investments. In addition, it also includes a new evaluation
form that is intended to be completed by each service member that has been
solicited. The form would allow service members to indicate, with yes or
no answers, whether the individual soliciting them violated certain
aspects of DOD's policy, such as contacting them during duty hours. The
evaluation form also has questions relating to salespersons' conduct
during

any solicitation, such as whether they pressured the service member into
making a purchase, failed to provide adequate information, or implied that
they were endorsed by the military.

In addition to revising its solicitation directive, DOD personnel have
also taken enforcement actions against several insurance agents for
improper solicitations at several military installations. For instance, at
Fort Benning, an insurance company and its agents that operate in the
military market segment were banned from conducting sales on the base.
Additionally, several military personnel in supervisory positions were
also disciplined for allowing improper insurance solicitations to occur
and not properly enforcing existing solicitation policies.

DOD Lacks Requirements to Although DOD has taken some steps to better
protect its service members

Comprehensively Share from inappropriate financial products, DOD does not
currently require its

Violations and Complaints with personnel to share all relevant information
with financial regulators,

Financial Regulators	including complaints from service members. DOD's
current policy regarding financial product solicitation only requires
installation commanders to notify the appropriate regulatory authorities
if they determine that an agent or company does not possess a valid
license or has failed to meet other state or federal regulatory
requirements. However, the draft of the revised solicitation directive
includes provisions that would require installation personnel to report
all instances in which they ban or suspend the solicitation privileges of
any companies or individuals selling financial products to the Principal
Deputy Under Secretary of Defense for Personnel and Readiness. The
legislation being considered in Congress would also require DOD to
maintain a list of names, addresses, and other appropriate information of
any individuals selling financial products that have been barred, banned,
or limited from conducting business on any or all military installations
or with service members.43

DOD has already begun collecting and publishing information on actions
taken by individual installations for violations of the solicitation
policy. As noted previously, DOD has already consolidated this information
from its installations and posted it on a web site. Under the legislation
before Congress, DOD would also be required to promptly notify insurance
and securities regulators of those individuals included or removed from
this list. DOD officials have indicated that financial regulators can
access the information about the actions taken against individuals or
companies that

43S. 418, Sec. 11, and H.R. 458, Sec. 110.

have violated DOD solicitation policies from the web site and that, if
these additional requirements become law, they will provide the
information on their listing to financial regulators as it changes.

Although DOD is planning to share more information with financial
regulators, DOD officials remained reluctant to share all information on
violations of DOD policies that do not result in bans or suspensions. We
recommended in our June 2005 report that DOD implement a departmentwide
searchable database to capture all violations of its own solicitation
policy and provide this information to financial regulators. However, DOD
officials told us that violations of some DOD policies, such as when sales
personnel solicit without an appointment or solicit groups of service
members, would probably not represent violations of financial regulations
and therefore would be of little concern to such regulators. DOD officials
also said that being required to report every time even minor violations
occur, such as when a retired military member uses military identification
to obtain base access for a solicitation visit, would be burdensome to
their personnel.

However, financial regulators' staff told us that receiving information
related to violations of DOD's commercial solicitation policies also would
be very helpful in determining whether further action, such as revocation
of licenses, was warranted. For example, officials from one state
insurance department told us that insurance agents have the obligation to
be trustworthy and that if such individuals are violating any DOD
regulations, this information could help them determine whether the
conduct of the agents also violate their state's requirements.

Although DOD personnel had not routinely shared service member complaints
with financial regulators in the past, DOD officials have also told us
that they intend to require their personnel to report more of that type of
information to regulators. Under the current solicitation policy
directive, DOD personnel are not required to share information relating to
service member concerns or complaints with other parties, and the revised
draft that was published for comment also lacked any provisions relating
to such information. However, staff in the office that oversees the policy
directive told us that, as part of addressing the comments they have
received, they intend to specifically require in the new directive that
base personnel report to financial regulators any service member concerns
or complaints that relate to the quality of the financial products offered
to them or regarding the appropriateness of the practices used to market
these products.

Financial regulators indicated that receiving such information from DOD
would greatly improve their ability to recognize and act on potentially
problematic financial product sales involving service members. Insurance
and securities regulator staff told us that promptly receiving concerns or
complaints raised by service members would allow their normal regulatory
oversight processes to function properly, which rely on complaints as an
important indicator of potential problems involving insurance company or
broker-dealer practices.

Congress also may be increasing the amount of information that both
regulators and DOD have about potentially problematic practices by
insurance sellers. Both of the bills currently under consideration in
Congress would prohibit insurers from using agents that sell life
insurance on military installations unless the insurer has a system to
report to the state insurance regulators in its state of domicile and in
the state of residence of an agent any disciplinary actions known to have
been taken by any government entity and any significant disciplinary
action taken by the insurer itself against an agent with regard to the
agent's sales on military installations.44 Furthermore, the bills would
require that state insurance regulators develop a system for receiving
such information and the ability to disseminate it to all states and to
DOD.

However, some barriers appear to make sharing between DOD and financial
regulators more difficult. As part of conducting their investigations of
contractual plan sales, securities regulator staff told us that personnel
at some DOD installations were reluctant to share any information
involving specific service members for various reasons. According to these
regulators, the installation personnel cited military privacy regulations
and the restrictions that arise from attorney-client privilege if the
service member was being assisted by military legal counsel. According to
the director of the DOD office responsible for administering the
solicitation policy, such issues can affect their ability to share
information with entities outside the military. However, he explained that
they have researched these issues with their legal staff and believe that
they can share information that is deemed to be necessary for the official
needs of the requesting organization, including financial regulators. This
DOD official also acknowledged that more coordination could be done to
ensure that both its own military installation personnel and financial
regulatory staff understand how additional sharing could appropriately

44S. 418, Sec. 10, and H.R. 458, Sec. 109.

occur. In addition, to improve financial regulators' ability to obtain
information from DOD, officials from NASD told us that the financial
regulators could create liaisons on their staff to receive complaints and
be the primary person responsible for seeking information from the
military as part of examinations.

Inadequate Financial Literacy Although increased financial literacy could
also help protect military and Lack of Jurisdictional Clarity service
members from inappropriate financial product sales, concerns

                               Are also Concerns

exist over the adequacy of such efforts to date. In a report on the extent
to which consumers understand and review their credit reports, we noted
that individuals' ability to understand credit matters differed across
various demographic characteristics. For example, we found that
college-educated individuals with high incomes and credit experience
exhibited more expertise than those without such characteristics.45
Similarly, many military members also tend to lack advanced education or
high incomes. As our April 2005 report on the financial condition of
military members noted, almost 40 percent of service members reported
having some trouble managing their financial affairs and studies by
private consultants have found that the overall financial literacy among
service members is not high.46

DOD is attempting to increase financial literacy among military members.
As noted previously, DOD has developed personal financial management
programs to provide service members with financial literacy training,
financial counseling, and other assistance to avoid or mitigate the
adverse effects associated with personal financial problems. However, as
we reported in April 2005, not all service members were receiving the
training required as part of these programs. As a result, our report
recommended that DOD implement a monitoring plan to ensure that all junior
enlisted members receive the required personal financial management
training.

Similarly, financial regulators have also begun working with DOD to
increase financial literacy and awareness among service members, but these
efforts have not been completed. For example, approximately $7 million of
the settlement that SEC and NASD reached with the largest broker-dealer
selling contractual plans to military members will be used to

45GAO, Credit Reporting Literacy: Consumers Understood the Basics but
Could Benefit from Targeted Educational Efforts, GAO-05-223 (Washington,
D.C.: Mar. 16, 2005).

46GAO-05-348.

fund financial education efforts among service members. Using the proceeds
of the settlement, NASD staff told us that the staff of the NASD Investor
Education Foundation plan to conduct research to determine current levels
of service members' investment knowledge and use this to plan and develop
its military education efforts. Among the efforts currently being designed
are a military-specific online resource center to provide unbiased
information on saving and investing. In addition, they plan to develop
training to support the military's current personal financial management
program by establishing a coordinated and uniform financial education
program. They also plan to conduct a public outreach campaign to promote
saving and investing to members of the military and their families. These
efforts are anticipated to be publicly launched in late 2005 with many
national and local activities taking place in 2006.

To help convey information to service members about insurance regulatory
organizations outside the military that can receive and help resolve their
complaints, NAIC and DOD staff have also been working together on
materials to help educate service members. As of October 2005, their
efforts have produced a consumer brochure for military members that
contains information to help service members better understand factors to
consider when purchasing life insurance and regulatory entities that
service members can contact should they have complaints concerning
insurance sales. According to NAIC officials, they are also working on
information to be presented on a NAIC Web site.

Congress has also recognized the need for additional information to better
protect military service members from inappropriate product sales. For
example, both versions of the bill currently under consideration in
Congress would require that, for any sales taking place on a military
installation, insurance representatives disclose that subsidized life
insurance may be available from the government to the service member and
that the government has not sanctioned, recommended, or encouraged the
sale of the product being offered.47 In addition, this legislation also
would require that service members be provided with information about
where to complain regarding any problems involving an insurance sale on a
military installation. Specifically, both bills would generally require
that, for any sales taking place on federal land or facilities located
outside the United States, insurance sellers provide a disclosure that
lists the address

47S. 418, Sec. 8, and H.R. 458, Sec. 107.

and phone number where consumer complaints are received by the applicable
state insurance regulator.48

Although DOD currently has a program to provide financial literacy
training to junior personnel, not all levels of the services receive such
information. Currently, the personal financial management training that
the various branches offer to service members are provided only to junior
enlisted members. However, an officer in one branch of the service also
told us that she and other more senior members of the military are also
solicited by financial firms and thus having such training, including
addressing proper procedures for directing concerns or complaints, offered
to more than just junior personnel would be helpful.

Another concern over whether military members are adequately protected
from inappropriate sales stems from uncertainty over financial regulators'
jurisdiction on U.S. military installations. Although most of the
insurance and securities regulators we contacted believed they had
jurisdiction over the sales of financial products on military
installations, some regulators expressed uncertainty over their authority
to regulate sales on military installations, where the federal government
may have "legislative jurisdiction."49 For example, regulators from
Maryland conducting work on a market conduct examination mentioned that
they had asked an agent from the Federal Bureau of Investigation to
accompany them when visiting the military installation in case
installation personnel questioned the insurance regulators' authority to
conduct an investigation on the installations. Further, according to a
Texas insurance department official, he had trouble getting access to
complaints information at a military installation because installation
personnel question his authority to request such information. In addition,
Georgia officials told us that a military installation in their state had
an "exclusive federal jurisdiction" designation that could potentially
present a jurisdictional issue. However, regulators in Virginia noted that
they have been able to conduct examinations after seeking and obtaining
written permission from base commanders. As part

48S. 418, Sec. 8(b)(4), and H.R. 458, Sec. 107(b)(4).

49When used in connection with an area of land, the term "legislative
jurisdiction" means the authority to legislate and to exercise executive
and judicial powers within that area. The federal government holds land
under varying degrees of legislative jurisdiction, including "exclusive"
legislative jurisdiction, where the state's ability to enforce its laws
and regulations is extremely limited. The type of existing legislative
jurisdiction over military installations may vary depending on when and
how specific tracts of land were acquired.

of the work on DOD's oversight of insurance sales that we reported on in
June 2005, we surveyed the various state and territorial insurance
commissioners.50 Of those that responded to the question regarding whether
they had authority over sales of life insurance on military installations,
four commissioners indicated that they did not have such authority. State
insurance regulators also noted they lack jurisdiction over sales taking
place outside the United States at overseas installations.

While securities regulators also generally believed they had jurisdiction
over sales on military installations, they too indicated that greater
clarity would be beneficial. At least one state securities regulator
responded to a North American Securities Administrators Association survey
that it did not have adequate authority over sales taking place on
military installations. Of the legislation under consideration in the
Congress, the bill that passed the House of Representatives includes
language stating that any state law, regulation, or order pertaining to
the regulation of insurance or securities sales is generally applicable to
any such activity conducted on Federal land or facilities in the United
States and abroad, including military installations. The version
introduced in the U.S. Senate includes similar language but would only
apply to insurance sales.51

Conclusions	Large numbers of military service members are being targeted
by a few firms offering products that provide limited benefits unless held
for long periods, which most military purchasers were failing to do.
Thousands of service members across the United States and around the world
are purchasing products from insurance companies that combine insurance
and savings. Although some service members and their survivors have
benefited from these products, many have not. Most of the purchasers of
these products were unmarried individuals with no dependents and thus
little need for any more coverage than that already provided by the
lowcost government insurance service members receive. Instead, they were
likely attracted to these products for their investment features. However,
by being tied to expensive life insurance, these products appeared to be a
poor investment choice for service members because they include provisions
that allow the accumulated savings to be used to keep the life insurance
in force if the service member ever stops making payments and

50GAO 05-696. 51S. 418, Sec. 6(a), and H.R. 458, Sec. 105(a).

does not request a refund of this savings. Given that military members
move frequently and often leave the service within a few years, many did
not continue their payments and failed to request refunds, and as a
result, few likely amassed any savings from their purchase. The few
companies that sell these products also have been accused of using
inappropriate sales practices in the past, have been sanctioned, and are
again being investigated by numerous federal and state regulatory and law
enforcement authorities.

With concerns over potentially inappropriate insurance sales to military
members being longstanding, the need to take definitive actions to better
protect service members appears overdue. The legislation that passed the
House of Representatives and is being considered in the U.S. Senate
includes various provisions that, based on our work, would appear to
improve the protections for military members. Some of the provisions of
these bills are of particular importance. Currently, both would direct
insurance regulators and DOD to work together to develop measures to
address sales to military members. Given that many service members were
obtaining only limited benefits from purchasing these combined insurance
and savings products, we believe that congressional action that results in
state regulators undertaking reviews to ensure that only products that
comply with state insurance regulations, an area in which regulators in
some states now have developed concerns, is warranted to provide
protections to military personnel in all U.S. jurisdictions. In addition,
having insurance regulators and DOD work cooperatively to develop
suitability or appropriateness standards could ensure that companies offer
only products that address actual service member needs for insurance and
that take into account service members' itinerant lifestyles, income
levels, and likely inability to make payments for extended periods of
time. This could also provide protection for service members that are
located in overseas installations not directly overseen by state
regulators.

Similarly, military members were also being widely marketed a securities
product-the contractual plan-that has largely disappeared from the
civilian marketplace. Although potentially providing returns equivalent to
other products if steady investments are made over the required 15-year
term, these products were likely less beneficial to the many service
members that failed to make payments for that extended length of time. In
the many years since contractual plans were first offered, a variety of
alternative investments have become widely available for individuals with
modest incomes, including other load funds, no-load funds, and TSP, which
is now available to service members and likely offers the lowest
investment

expenses of any product. Given the longstanding history of sales practices
abuses associated with the contractual plans and the availability of
viable alternative investments, we believe that congressional approval of
the legislation currently under consideration, which includes language to
ban these products, would remove products that appear to have little need
to continue to exist.

Although insurance and securities regulators have taken actions since
allegations of inappropriate sales to military members have come to light,
additional actions could mitigate some of the limitations that hampered
regulators' ability to address these problems. As our work found, state
insurance and securities regulators sometimes were uncertain of the
adequacy of their authority over sales taking place on military
installations. As a result, some of these regulators and officials from
associations representing state insurance and securities regulators
expressed support for congressional action to clarify that state financial
regulators have jurisdiction over sales taking place in such locations.

In addition, congressional action could serve to better ensure that
financial regulators are made aware of potentially inappropriate sales
involving military members. As we found, federal and state insurance
regulators' ability to more promptly identify inappropriate sales of
financial products involving military members was hampered by the lack of
information sharing by DOD. DOD officials have expressed their willingness
to provide financial regulators with information on actions taken against
individuals or firms that violate DOD's solicitation policies. They have
also indicated their intention to require their personnel to provide
information regarding service member complaints and concerns. However,
they note that privacy requirements can pose perceived barriers to such
sharing. In addition, they remain reluctant to share information about all
instances in which sellers of financial products violate DOD solicitation
policies. However, such information could allow financial regulators to
determine whether such situations also represent potential violations of
federal or state laws. As a result, we believe that
congressionally-mandated direction is needed to ensure that DOD identifies
ways to overcome these barriers and coordinates with its installation
personnel and with financial regulators about ways to share additional
information about problematic company behavior and service member
concerns.

Additional DOD actions also could help protect service members from firms
using unscrupulous sales practices. DOD officials have indicated that
having their personnel share some information relating to service member

concerns and complaints is appropriate. Including such a requirement in
the revision of DOD's solicitation policy would better ensure that
financial regulators receive this important information. DOD is also
currently attempting to provide personal financial management training to
improve financial literacy and competence among military members. Such
training would also appear to be a useful forum for informing military
personnel about proper procedures for submitting concerns or complaints.
Given that more senior officers were customers of some of the financial
firms that target military members, periodically providing such training
to service members at all levels throughout the military would also likely
raise awareness and assist them in making sound financial decisions.

Financial regulators also appear to have opportunities to improve their
ability to protect military members from inappropriate sales. Because
complaint information is a critical input to their regulatory processes,
proactively seeking such information from DOD and its installations would
likely improve regulators' oversight efforts. Given the uniqueness of the
military environment, having staff or offices within regulators' own
organizations that serve as liaisons with DOD and individual installations
could allow both DOD and financial regulators to build trust and gain
experience in sharing information and assisting investigations of
potentially problematic financial product sales. Ensuring that financial
regulators' staff also make use of any listings compiled by DOD of
individuals or firms that have been sanctioned by the military for
activities relating to financial product sales to target examination and
investigation resources would also likely improve the protections that are
afforded to military members.

SEC and NASD efforts to oversee broker-dealers marketing contractual plan
mutual funds were hampered by a lack of standardized data at these firms
on the success of clients in investing in these plans. In the event that
such plans continue to be legally sold, having these regulators evaluate
how best to ensure they will have such information in the future would
improve their ability to oversee these products. Some possible ways to
ensure such information is readily available would be to implement a rule
requiring broker-dealers to maintain standardized records that show how
successfully their customers are completing any contractual plans
purchased. Alternatively, SEC and NASD examiners could routinely request
such information prior to conducting a review of the broker-dealers
selling these products.

  Matters for Congressional Consideration

To better protect military service members from financial products with
limited benefits to them, the Congress should consider taking the
following five actions:

o 	Provide that products being marketed primarily to military members are
reviewed by state insurance commissioners to ensure that all such product
provisions are in compliance with existing state laws, and provide for
reports through NAIC to relevant congressional committees on the results
of these reviews within 12 months.

o 	Provide that state insurance commissioners work cooperatively with DOD
to develop appropriateness or suitability standards for sales to military
service members.

o  Ban the sale of contractual mutual fund plans.

o 	Specify that state insurance and securities regulators have full access
to persons and information necessary to oversee sales taking place on
military installations or involving service personnel.

o 	Require DOD to work cooperatively with financial regulators to develop
mechanisms that overcome existing barriers to sharing information about
insurance and securities firm activities and service member concerns and
complaints that can allow financial regulators to determine whether
violations of existing federal or state laws or regulations are occurring.

Recommendations	To better protect service members from unscrupulous sales
of financial products, the Secretary of Defense should take the following
two actions:

o 	Issue a revised DOD solicitation policy requiring that information on
service member complaints related to financial product sales be provided
to relevant state and federal financial regulators.

o 	Include in the personal financial management training for all service
members information and materials developed in conjunction with insurance
and securities regulators that explains how and to whom service members
should raise concerns or complaints about potentially inappropriate sales
of financial products, including providing the

information necessary for contacting these regulators. Such training should also
           periodically be offered to service members of all levels.

To better ensure that federal, state, and other financial regulators can
oversee sales of insurance and securities products to military members,
the heads of SEC, NASD, and state insurance and securities regulators
should designate staff to receive complaints from DOD and conduct outreach
with DOD headquarters and individual installations to proactively learn of
issues or concerns regarding product sales.

These staff should also make use of any listings that DOD maintains of
individuals or firms that have been sanctioned by the military for
improper solicitation practices.

In the event that contractual mutual funds are not banned, the Chairman of
SEC and the Chairman of NASD should consider various means of better
assuring that their staff has adequate information to assess the sales of
contractual plans.

Agency Comments	We provided a draft of this report to DOD, NAIC, NASD, and
SEC for comments. Each of these organizations provided written comments
expressing general agreement with our report and its recommendations
(these comments appear in appendixes IV through VII). In concurring with
our recommendation that DOD require that information on service member
complaints be provided to financial regulators, a letter from DOD's acting
principal deputy for the Undersecretary for Personnel and Readiness
indicated that their revised solicitation directive will require
installations to report such information to regulators. The principal
deputy's letter also indicates they concur with our recommendation to
provide all service members with information during personal financial
management training on how to complain to regulators and states that they
have developed a strategic plan for programs to assist members with
determining appropriate financial products for their needs and how to
remedy concerns or complaints. They also intend to approach state
regulatory agencies to assist in providing educational information to all
service members and provide such information during new comer orientations
and through tollfree assistance lines.

In SEC's letter, the director of that agency's Office of Compliance
Inspections and Examinations stated that they shared our concerns that
securities products be properly marketed to military members. She also

stated that in the event that Congress does not ban the sale of
contractual plans they will consider our recommendation that SEC consider
ways to ensure that it have adequate information to assess sales of such
products. In NASD's letter, the NASD Chairman and Chief Executive Officer
states that men and women of the U.S. armed forces deserve the same
protection from inappropriate financial product sales as their civilian
counterparts and that our report will help NASD and others to ensure that
this is achieved. NASD's letter also describes the actions the
organization has taken against the largest seller of contractual plans,
including noting, as our report acknowledged, that they began reviewing
this firm in 2003. NASD's letter also describes their efforts to develop
education for military members.

In its letter, NAIC's Executive Vice President and Chief Executive Officer
notes that we ask Congress to direct the states to review currently
approved products being marketed to military members. In response, she
indicates that a number of states are examining companies that have
engaged in questionable practices involving these products and that an
NAIC committee plans to review life insurance sold with a side fund to
recommend a position on products being offered in the marketplace in 2006.
Regarding our request that Congress direct DOD and the insurance
regulators to work together to improve information sharing, NAIC's letter
indicates that they are in the process of;

o 	compiling a list of insurance department contacts to ensure that DOD
has the proper contact information for further state assistance;

o 	updating NAIC's Complaint Database System form to identify complaints
that are submitted by military personnel; and

o 	providing DOD with a state-by-state premium volume summary for those
companies that state insurance regulators know are soliciting or have
solicited insurance products on military bases.

Regarding our recommendation that DOD and regulators work together to
develop training materials, NAIC's letter indicates that they have worked
with DOD to develop a consumer brochure and a Web site specifically
addressing life insurance information for military personnel and remain
committed to developing other materials to fill any financial literacy
needs that DOD identifies.

We also received technical comments from each of these organizations that
we incorporated where appropriate.

As agreed with your offices, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days
after the date of this report. At that time, we will send copies of this
report to the Chairman and Ranking Minority Member, Senate Committee on
Armed Services; Chairman and Ranking Minority Member, House Committee on
Armed Services; and Chairman and Ranking Minority Member, House Committee
on Financial Services. We will also send copies of this report to the
Secretary of Defense, Chairman, SEC; and Chairman, NASD. We will also make
copies available to others upon request. In addition, the report will be
available at no charge on GAO's Web site at http://www.gao.gov.

If you or your staff have any questions regarding this report, please
contact me at (202) 512-8678 or [email protected]. Contact points for our
Offices of Congressional Relations and Public Affairs may be found on the
last page of this report. Key contributors to this report are listed in
appendix VIII.

Richard J. Hillman Managing Director, Financial Markets

and Community Investment

Appendix I

                       Objectives, Scope, and Methodology

To identify the insurance products being sold and how these were being
marketed to military members, we reviewed prior Department of Defense
(DOD) reports, spoke to officials at the National Association of Insurance
Commissioners (NAIC), and met with regulatory officials from several state
regulators that are currently conducting or have previously conducted
reviews of insurance companies that market primarily to military members.
This work included interviewing regulatory officials and reviewing
available documentation from the Georgia Insurance and Safety Fire
Commissioner, the Texas Department of Insurance, the Florida Office of
Insurance Regulation, and the Illinois Department of Insurance, and the
Virginia State Corporation Commission Bureau of Insurance. In addition, we
contacted staff from the Maryland Insurance Administration and the
Washington Office of the Insurance Commissioner to discuss their past
investigations of certain insurance companies targeting junior enlisted
service members and reviewed documents pertaining to such investigations.
We also visited Fort Benning, Georgia, and Great Lakes Naval Training
Center, Illinois, to better understand the insurance solicitation issues
present at two large military training installations. During these site
visits we interviewed staff judge advocate personnel and reviewed
documents pertaining to current and past investigations of sales of
insurance products at these locations. Furthermore, we obtained data on
the characteristics of military members making allotments to three
different insurance companies in this market from DOD's Defense Finance
and Accounting Service (DFAS), which maintains military personnel pay
records. In our prior report, we were unable to reliably determine the
total number of service members who have allotments for supplemental life
insurance products or the number of dollars that service members pay to
life insurance companies through the DFAS systems because not all
allotments for insurance were identified as such. To provide accurate
information for this report, we instead obtained from DFAS the dependent
status of service members for allotments that were being routed to
specific banks being used by some of the insurance companies that market
primarily to military members, which produced results that we did believe
were sufficiently reliable to highlight that a significant percentage of
service members who had made allotments to specific companies had no
dependents. Further, we contacted officials from the six insurance
companies identified by the multistate investigation as being those
companies that primarily market to service members, and reviewed their
marketing materials for the product sold to service members.

Appendix IObjectives, Scope, and Methodology

To illustrate the cost and the possible performance of sample insurance
policies offered by these companies we obtained and analyzed sample
policies for a junior enlisted service member from six companies. We also
compared the cost and performance of these products to other products
offered to service members by the government including Servicemembers'
Group Life Insurance (SGLI), Veterans' Group Life Insurance (VGLI), and
the Thrift Savings Plan (TSP), as well as insurance products offered by a
private insurance company. We chose the TSP G Fund as the savings
component to be coupled with the government-offered insurance because of
its low risk and its comparable return rate to the minimum rates claimed
by the insurance companies. We assumed a 4 percent rate of return for all
of our analysis based on the guarantee rate claimed on the policies
typically marketed to service members by the six companies we reviewed.
For approximating the projected TSP return, we compounded the 4 percent
rate on a monthly basis. To project the return on the insurance products'
savings components, we used the method of crediting interest in the
products' terms, in which interest is credited on the lesser of the
average balance during the year or the year-end balance. We also conducted
analysis to illustrate the performance of the products after a service
member stops making payments at the end of the fourth policy year.
Further, the analyses we conducted are for illustrative purposes only and
do not necessarily depict actual policy, plan schedules, or are adjusted
according to various proprietary risk classes that could apply for a
particular individual.

To identify the securities products being sold and how these were being
marketed to military members, we interviewed staff from NASD (formerly
called the National Association of Securities Dealers), Securities and
Exchange Commission (SEC), and North American Securities Administrators
Association (NASAA).1 We also interviewed officials from the largest
broker-dealer firm that markets to military members, which represents 90
percent of the military market segment, and two of the investment
management firms that manage mutual funds underlying the contractual plans
sold to service members. To determine the cost and performance of the
contractual plan product offered by this broker-dealer firm, we conducted
analysis to illustrate a contractual plan product typically marketed to
career service members using a $600 front-end load.

1NASAA is a voluntary association representing 67 state, provincial, and
territorial securities administrators in the 50 states, the District of
Columbia, Puerto Rico, the U.S. Virgin Islands, Canada, and Mexico.

Appendix IObjectives, Scope, and Methodology

To illustrate how this product compared to other similar products we
analyzed the cost and performance of a typical fund using the Investment
Company Institute recommended 5 percent load and TSP C Fund with no load.
We chose the TSP C Fund because it invests in common stocks and was
therefore comparable to the contractual plan product. We analyzed these
products for a 15 year--or "full term"--period. We assumed a 7 percent
annual return that we compounded monthly for all products. Further, we
reviewed SEC and NASD investigation files of the sales of securities
products to military service members.

To assess how financial regulators and DOD were overseeing financial
product sales to military members, we interviewed state insurance and
federal, state, and other securities regulators. We also reviewed
available materials pertaining to product approval, investigations, and
regulatory activities and actions involving firms marketing to military
members. Specifically, to assess how insurance regulators were overseeing
sales of insurance products to military service members, we interviewed
officials from NAIC, including the staff working on the multistate
investigation of insurance sales involving service members. We also spoke
with officials and reviewed available documents on activities and actions
from several state insurance departments, including those in Florida,
Georgia, Illinois, Maryland, Texas, and the state of Washington, that have
previously investigated, or are currently investigating, companies
targeting military members. Further, we reviewed legal actions taken
against certain insurance companies as part of Department of Justice (DOJ)
investigations and law suit cases.

To determine the extent to which state insurance regulators received
complaints from military service members or had any concerns about their
jurisdiction on military installations, we relied on an E-mail survey to
the insurance commissioners for the 50 states, the District of Columbia,
and four territories: American Samoa, Guam, Puerto Rico, and the Virgin
Islands administered as part of our June 2005 report.2 We received
completed surveys from 46 states, the District of Columbia, and one U.S.
Territory, yielding an overall response rate of 87 percent. Further, to
make the same determination in regards to the sales of securities products
to military members, we relied on the results of a survey administered by
NASAA. Additionally, we contacted DOD officials, conducted fieldwork at
Fort Benning, Georgia and Naval Station Great Lakes, Illinois-two large

2See GAO-05-696.

Appendix IObjectives, Scope, and Methodology

military training installations--and reviewed findings from other recent
work concerning supplemental life insurance sales conducted at several
other military installations throughout the country.

We performed our work from November 2004 to October 2005 in accordance
with generally accepted government auditing standards.

Appendix II

Actions Taken Against Financial Companies that Have Frequently Marketed to
Military Members

Table 2 summarizes various actions that we identified during the course of
our review that have been taken by regulators or others against companies
that were identified as primarily marketing products to military members.
As indicated, many of the actions were settlements in which the companies
did not admit to any wrongdoing.

Table 1: Regulatory Actions or Activities Involving Companies that Have
Frequently Marketed to Military Members

Entity taking action Alleged violations Resulting actions

Virginia State Corporation The regulatory forms for three insurance The
companies agreed to stop marketing or Commission Bureau of companies'
combined insurance and savings soliciting the particular products which
failed to comply. Insurance product allegedly failed to comply with the
state's

insurance nonforfeiture laws. September 2005

Cease and Desist Settlement Order, Case No. INS-2005-00211, Sept. 29, 2005

Georgia Commissioner of An insurance company was investigated when The
company agreed to refund about $1.1 million in Insurance allegations
surfaced that certain agents violated premiums to soldiers who were
solicited and sold term various DOD and state insurance regulations by
life insurance policies while they were training at two May 2005
identifying themselves as disinterested financial Army bases in Georgia.

advisors while selling policies to soldiers in Commissioner of training.
Insurance Press Release, May 25, 2005

Georgia Commissioner of An insurance company was investigated when The
company agreed to issue refunds totaling about Insurance allegations
surfaced that certain agents violated $1.3 million to certain soldiers at
an Army base in various DOD and state insurance regulations by Georgia.
January 2005 identifying themselves as disinterested financial

advisors while selling policies to soldiers in Commissioner of training.
Insurance Press Release, January 7, 2005

    U.S. Securities and   A broker-dealer allegedly: Without admitting any    
                          wrongdoing, the firm agreed to:                     
    Exchange Commission   
          and NASD        o  offered and sold contractual plans by, in part,  
                                    o  accept a censure from NASD;            
                              making misleading statements and omissions;     
       December 2004         o  pay a fine of $12 million, including about $4 
                                                                  million for 
                           o  violated NASD rules when one of the company's   
                           customer restitution and about $8 million for an   
     SEC Administrative       supervisors inappropriately confronted a former 
                           investor education program for members of the U.S. 
Proceeding File No. 3-  customer who had made negative comments military   
                                        and their families; and               
    11770, December 15,                 about the company; and                
            2004             o  hire an independent consultant to oversee the 
                          o  violated requirements to maintain books and      
                          payment of restitution and review its sales         
                          practices.                                          
     NASD News Release,      records in connection with the retention and     
     December 15, 2004      accessibility of certain E-mail communications.   

Appendix II Actions Taken Against Financial Companies that Have Frequently
Marketed to Military Members

                         (Continued From Previous Page)

Entity taking action Alleged violations Resulting actions

Washington Office of The regulatory forms for four insurance As a result of the
withdrawal of approval of the forms, Insurance Commissioner companies' combined
insurance and savings these companies' products could no longer be sold in
 products allegedly failed to comply with the state's the state of Washington.

October 2004 insurance laws.

Office of Insurance Commissioner Letter, October 21, 2004

Department of Justice The government alleged that an insurance company
engaged in a scheme to defraud December 2002 military members who
purchased life insurance

policies from the company between 1991 and DOJ Press Release, 1998.
December 19, 2002 The company agreed to settle the claims without
admitting liability under the terms of a settlement agreement that the
company:

o  pay a $1 million civil penalty;

o  pay the U.S. $505,965 to cover the costs of its investigation;

o  increase the face amount of all in-force coverage by 6.5%, for a total
in-force increase in death benefits coverage of approximately $160
million;

o  pay $2.7 million to all policyholders who canceled their policies
during the relevant time period; and

o  never again sell another insurance policy or reapply to DOD for
permission to conduct business on military installations.

Maryland Insurance Administration (Commissioner)

January 2001

Insurance Administration Market Conduct Examination Report No. 490-01,
January 25, 2002

Maryland Insurance Administration Consent Order, Case No. MIA-3607/00
(January 7, 2001) The agents for one insurance company allegedly:

o  did not disclose to military personnel that the products being sold
were insurance;

o  did not disclose to military personnel that they were insurance agents;
and

o  misrepresented the product sold as something other than insurance.

The company generally disputed the allegations but voluntarily agreed to,
among other things:

o  submit to the Commissioner the policies and procedures material for
approval;

o  distribute the approved policies and procedures manual to its Maryland
agency force; and

o  pay an administrative penalty to the state of Maryland in the amount of
$100,000, with $50,000 suspended.

Appendix II Actions Taken Against Financial Companies that Have Frequently
                          Marketed to Military Members

                         (Continued From Previous Page)

           Entity taking action Alleged violations Resulting actions

     Florida Department of        Two insurance companies allegedly: The      
                              companies generally denied the allegations but  
           Insurance                    each voluntarily agreed to:           
                                 o  failed to provide their customers with    
                                                  Buyers                      
         February 2000          Guides and Policy Summaries;  o  look for and 
                                     refund certain military members military 
                                    pay allotments received by the companies; 
     Florida Department of        o  failed to properly refund or escheat     
                                                significant                   
                              amounts of funds misdirected to the companies   
    Insurance Consent Order,  o  set up and run a special Complaint and       
                              Alternative                                     
     Case No. 23227-97-CO,     from the pay of military service members; and  
                                        Dispute Resolution Program;           
       February 17, 2000      
                              o  improperly made unilateral reinstatements of 
                                   o  make a mandatory payment of $200,000 to 
                                                                    cover the 
     Florida Department of     lapsed policies. costs of the investigation;   
                                                    and                       
Insurance Letter, April 5, 
              2000            o  contribute a gift of $1 million to a Florida 
                                                                  university. 

Department of Justice

December 1998

Complaint, U.S. Dist. Ct., W.D. Wa., Case No. C985211(Apr. 21, 1998)

Settlement Order, U.S. Dist. Ct., W.D. Wa., Case No. C98-5211RJB (Dec. 7,
1998) The government alleged that two insurance companies:

o  committed mail and wire fraud;

o  made false statements; and

o  conspired to defraud the United States.

The companies denied the allegations but agreed to:

o  not sell or market the life insurance product other than as life
insurance;

o  abide by and observe all DOD directives and military regulations
related to commercial solicitation on military installations;

o 	 conclude a comprehensive and final accounting of all funds paid to the
companies in error, and provide a copy to the United States;

o  offer refunds of any unallocated moneys to payers who can be located
through the exercise of due diligence; and

o  refund the full amount of all premiums paid by 215 specific individuals
who requested a refund.

Washington Office of The product of an insurance company allegedly
Withdrew approval to sell the policies within the state of Insurance
Commissioner did not comply with the state's insurance laws. Washington.

June 1997

Office of Insurance Commissioner Letter, June 10, 1997

Appendix II Actions Taken Against Financial Companies that Have Frequently
Marketed to Military Members

                         (Continued From Previous Page)

Entity taking action Alleged violations Resulting actions

United States Court of Private claimants alleged that an insurance Appeals
court affirmed jury verdict that the firm was

Appeals, Ninth Circuit	company violated the Racketeer Influenced and
liable for conspiracy to violate a provision of RICO in Corrupt
Organizations Act (RICO) and committed connection with a tax avoidance
scheme. The jury

February 1997	fraud, and misrepresentation to facilitate sales of awarded
the plaintiffs: insurance as part of a tax avoidance scheme.

108 F.3d 1123, (9th Cir.  o  $259,366 in actual damages (which were
trebled

1997) pursuant to RICO);

o 	 $87,000 in damages for fraud and negligent misrepresentation; and

o  $500,000 in punitive damages under state law.

                             Source: GAO analysis.

Appendix III

Performance of Contractual Plans Compared to Alternative Investments

Because of the structure of their sales charges, contractual plans are not
likely to offer superior returns to a long-term investor compared to other
alternative products. Table 1 illustrates that investing $100 per month
for 15 years in a contractual mutual fund plan that earns a 7 percent
return would result in an account worth less than one in a conventional
mutual fund with a 5 percent sales load in which the same payments were
made and the same projected return was earned. As shown in the table, the
amount that would be accumulated in a contractual plan does not exceed
that of a conventional mutual fund until after 16 years. The contractual
plan's accumulated value lags behind the conventional fund because its
high upfront sales charge reduces the amount of money that is invested and
available to earn the return of the underlying mutual fund from the
beginning. In contrast, investing $100 monthly in TSP and earning a 7
percent return would result in an account worth $1,600 more than that
accumulated in the contractual plan after 15 years.1

1For projected return rates of below 7 percent, the amount earned on the
contractual fund plan would exceed that of the regular 5 percent load fund
sooner, but for returns of greater than 7 percent, the contractual plan
would require more than 15 years to exceed the 5 percent load fund's
accumulated amount. Because TSP does not charge sales charges, its
accumulated amounts would always exceed those of the other two investments
by increasingly larger increments as the projected return rates are
increased. We used TSP C Fund for this calculation because it invests in
common stocks and was therefore comparable to the contractual plan
product.

Appendix IIIPerformance of Contractual Plans Comparedto Alternative Investments

Table 2: Investment Performance of a $100 Monthly Contribution into a
Contractual Plan, Conventional Mutual Fund, and TSP C Fund, Assuming Each
Earns a 7 Percent Return

Contractual Plan (50% load)

Conventional mutual fund(5% load)

Thrift Savings Plan C Fund (No load)

                             Payment contributions

Policy

                                     Yearly

year

    payments Sales load Total value   Sales   Total value  Sales  Total value 
                                      load                 load   
$1,200.00  $600.00       $623.24  $60.00     $1,184.16   $0.00   $1,246.49 
    1,200.00       0.00    1,914.79     60.00    2,453.93    0.00    2,583.08 
    1,200.00       0.00    3,299.69     60.00    3,815.49    0.00    4,016.30 
    1,200.00       0.00    4,784.72     60.00    5,275.47    0.00    5,553.13 
    1,200.00       0.00    6,377.09     60.00    6,841.00    0.00    7,201.05 
    1,200.00       0.00    8,084.58     60.00    8,519.70    0.00    8,968.10 
    1,200.00       0.00    9,915.50     60.00   10,319.75    0.00   10,862.90 
    1,200.00       0.00  11,878.78      60.00   12,249.93    0.00   12,894.66 
    1,200.00       0.00  13,983.99      60.00   14,319.64    0.00   15,073.31 
    1,200.00       0.00  16,241.38      60.00   16,538.97    0.00   17,409.45 
    1,200.00       0.00  18,661.96      60.00   18,918.74    0.00   19,914.46 
    1,200.00       0.00  21,257.52      60.00   21,470.54    0.00   22,600.57 
    1,200.00       0.00  24,040.71      60.00   24,206.81    0.00   25,480.86 
    1,200.00       0.00  27,025.11      60.00   27,140.89    0.00   28,569.36 
    1,200.00       0.00  30,225.24      60.00   30,287.07    0.00   31,881.12 
    1,200.00       0.00  33,656.71      60.00   33,660.69    0.00   35,432.30 

17  1,200.00   0.00       37,336.25        60.00  37,278.18 0.00 39,240.19 
18  1,200.00   0.00       41,281.77        60.00  41,157.19 0.00 43,323.36 
19  1,200.00   0.00       45,512.52        60.00  45,316.61 0.00 47,701.69 
20  1,200.00   0.00       50,049.12        60.00  49,776.71 0.00 52,396.54 
                       Source: GAO analysis.                        

Note: If the conventional mutual fund offers breakpoints, which are
discounts on the sales loads to investors who invest certain amounts of
money such as investments over $25,000, the investor would earn even more
with a conventional load fund due to lower sales charges for investments
of that amount.

As table 1 also shows, investors that terminate their periodic investments
earlier than the full 15 years are even more likely to be better off with
a conventional mutual fund or TSP. For example, an investor ceasing
payments after 4 years in the contractual plan would have an account worth
about $4,785. However, after 4 years, the account of the conventional
mutual fund would be worth almost $5,275 and the TSP account would be
worth about $5,553.

Appendix IV

Jurisdictions in Which at Least One of the Six Insurance Companies That Target
Military Members Were Licensed to Sell Insurance

Alabama Missouri

Alaska Montana

Arizona Nebraska

Arkansas Nevada

California New Jersey

Colorado New Mexico

Connecticut North Carolina

Delaware North Dakota

                           District of Columbia Ohio

Florida Oklahoma

Georgia Oregon

Hawaii Pennsylvania

Idaho Rhode Island

Illinois South Carolina

Indiana South Dakota

Iowa Tennessee

                                  Kansas Texas

Kentucky Utah Louisiana Virginia Maryland Washington Massachusetts West
Virginia Michigan Wisconsin Minnesota Wyoming Mississippi

Source: NAIC data.

                                   Appendix V

                    Comments from the Department of Defense

Appendix VComments from the Department of Defense

Appendix VComments from the Department of Defense

Appendix VI

Comments from the Securities and Exchange Commission

Appendix VII

Comments from NASD (Formerly Called the National Association of Securities
Dealers)

Appendix VIIComments from NASD (Formerly Called theNational Association of
Securities Dealers)

Appendix VIIComments from NASD (Formerly Called theNational Association of
Securities Dealers)

Appendix VIII

Comments from the National Association of Insurance Commissioners

Appendix VIIIComments from the National Association ofInsurance
Commissioners

Appendix IX

                     GAO Contact and Staff Acknowledgments

GAO Contact Richard J. Hillman (202) 512-8678

Staff In addition to the individual above, Cody Goebel, Assistant
Director; Joseph Applebaum; Gwenetta Blackwell-Greer; Tania Calhoun; Rudy

  AcknowledgmentsChatlos; Lawrence Cluff; Barry Kirby; Marc Molino; Josephine
  Perez; David Pittman; and Amber Yancey-Carroll made key contributions to
  this report.

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