Sales of Investments to G.I.'s Under Scrutiny in Washington

The New York Times
July 22, 2004

Securities regulators and lawmakers are looking into the sale of investments to military personnel that may be ill suited to the financial needs of the service members who buy them.

Two prominent lawmakers have called on the Pentagon and Congress to investigate the sale of mutual funds and life insurance on military installations, citing concerns that young recruits and other personnel are being treated as a captive market.

In addition, securities regulators in Washington are looking into the sale of mutual funds to military personnel to determine whether they are suitable for those who buy them and whether the funds' fees have been adequately explained, according to people close to the two investigations that are under way.

The inquiries, the people close to them said, focus on the sales practices of First Command Financial Planning in Fort Worth, which sells mutual funds, insurance and banking services to officers on military bases around the world. Company officials declined to comment yesterday, but in earlier interviews they defended their products as appropriate for their customers and said that their agents were held to the highest standards of business practice.

First Command heavily promotes the sale of contractual plans, an archaic type of mutual fund that vanished from the civilian market two decades ago. These plans require investors to pay half of their first year's contributions in sales charges. As a result, investors who drop out early -- historically a high percentage -- wind up paying a very high portion of their investment as fees, and even investors who do not drop out earn less than if they had avoided the high first-year fees.

The company's sales agents are all licensed securities brokers, subject to regulation by NASD and the Securities and Exchange Commission.

NASD has been investigating First Command's marketing since last summer, two people who were briefed on that inquiry said yesterday. Its work is ''in its very late stages,'' one of those people said. More recently, the S.E.C. has opened an ''active inquiry'' of its own, exploring similar issues of suitability and disclosure, another person close to that effort said. Neither of the investigations has so far produced any formal disciplinary action against the company or its agents.

Concern about the marketing of insurance and mutual funds to military men and women also led yesterday to calls for public hearings in both houses of Congress.

Representative Rahm Emanuel, an Illinois Democrat who was an adviser to President Bill Clinton and is a member of the House Financial Services Committee, yesterday asked Representative Michael G. Oxley, an Ohio Republican and the committee's chairman, to hold hearings ''as soon as possible'' to investigate products and sales practices in the military market. An aide to Mr. Oxley said the request was under review.

Senator Hillary Clinton, the New York Democrat, sent a letter on Tuesday to Defense Secretary Donald H. Rumsfeld asking him to start a Pentagon investigation into the issue. Mrs. Clinton, a member of the Senate Armed Forces Committee, said in an interview yesterday that she had forwarded that letter to the leadership of the committee and requested formal hearings on the issue as soon as Congress returns from its summer recess.

Both lawmakers said their requests were prompted by articles in The New York Times this week that showed how some financial companies used misleading and improper sales practices to persuade people in the military to buy products, like high-cost insurance and mutual funds, that were ill suited to their financial needs.

Congress already has several items on its agenda that deal with the sale of insurance on military installations.

In March, several influential members of Congress asked the Government Accountability Office to investigate insurance industry complaints that officers on some military bases were interfering with the sale of insurance policies to their troops, either discouraging them from buying the policies or holding up the paperwork for having the premium payments automatically deducted from paychecks. That study is expected to be completed by the end of the year, Congressional aides say.

And the defense appropriations bill, which could come up for final action in the Senate today, includes a provision introduced in the House that would prevent the Pentagon from tightening its rules for on-base insurance sales until at least a year after the delivery of the G.A.O. report. Similar language is in the defense authorization bill, which is awaiting action by a Congressional conference committee.

Senator Clinton's office said last night that she was trying to have that language stripped out of the appropriations bill before it comes to a vote.

Mr. Emanuel noted that the contractual plans and insurance policies being sold in the military market had been criticized by regulators and financial experts for years. ''When the Pentagon lets these things be sold on base, it's implicitly saying these products are O.K., and they're not O.K.,'' he said.

Senator Clinton also expressed concern about financial companies that cultivate credibility with military consumers by recruiting sales agents and corporate advisers who have military ties and relationships with active-duty officers.

Correction: July 23, 2004, Friday An article in Business Day yesterday about inquiries into the sale of investments to military personnel referred incorrectly to a provision in the defense appropriations bill related to an investigation by the Government Accountability Office. It would prevent the Pentagon from tightening its rules for insurance sales on bases for 90 days after the delivery of the G.A.O. report to Congress, not a year. (The yearlong restriction is included in another bill, for defense authorization.)

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