House Moves to Protect G.I.'s on Finances

The New York Times
October 6, 2004

On a broadly bipartisan vote, the House of Representatives approved a measure yesterday aimed at preventing marketing practices that have exposed military personnel, especially young recruits and junior officers, to high-pressure or misleading sales pitches for financial products that may not fit their financial needs.

The bill, which easily passed the House, would abolish an archaic form of mutual funds sold almost exclusively to military personnel. The funds, known as contractual plans, impose sales fees that eat up half of an investor's contributions in the first year.

The measure would also give state insurance regulators clearer jurisdiction over sales on military bases, and would require the Defense Department to establish a central registry for tracking insurance agents who violate military rules and to report the agents to state licensing agencies.

As the bill was being approved in the House, matching legislation was being prepared for introduction in the Senate by Michael B. Enzi, Republican of Wyoming, and Hillary Rodham Clinton, Democrat of New York. Other influential senators who have expressed interest in the issue include the chairman of the Senate Banking Committee, Richard C. Shelby, an Alabama Republican, and the committee's ranking Democrat, Paul S. Sarbanes of Maryland.

Approval of the bill, on a vote of 396 to 2, came less than a month after it was introduced by Representative Max Burns, a Republican of Georgia, who said his initiative was largely prompted by a series that began in July in The New York Times documenting abusive sales practices and unsuitable financial products on several military bases, including Fort Benning in Georgia.

The bill's pace reflected the support of Representative Michael G. Oxley, the chairman of the House Financial Services Committee, who arranged a hearing on it within two days of its introduction. Mr. Oxley said yesterday that the measure would help "put an end to the longstanding problem of unscrupulous securities and life insurance firms who have been taking financial advantage of the men and women in our armed forces."

Representative Rahm Emanuel, the Illinois Democrat who had first requested hearings on the issues raised by the series in The Times, had proposed a broader bill that would have doubled, from $250,000 to $500,000, the amount of low-cost life insurance available to service members through the military. But Mr. Emanuel acknowledged that his proposal would have faced more legislative hurdles than the Burns bill.

"We made choices so that this bill wouldn't get bogged down,"he said of the committee's deliberations. "These were really parliamentary differences, not policy differences."

The measure has the support of state insurance regulators. "This is definitely something that needs to happen, and the House has shown real leadership in moving it as quickly as it did," said Gregory V. Serio, the superintendent of insurance for New York State and the chairman of the governmental affairs task force of the National Association of Insurance Commissioners. "I am hoping the same thing will happen in the Senate."

From a financial perspective, the most interesting feature of the Burns measure is its abolition of the high-fee mutual funds known as contractual plans, under which investors sign up to make small, monthly contributions to a mutual fund over a decade or more but pay their sales fees upfront.

The plans have been prone to sales abuses since their introduction in the 1930's. In 1966, after a string of scandals, federal securities regulators unsuccessfully urged Congress to abolish the plans. Instead, Congress imposed a grace period during which investors could cancel the plans and recover at least some of their sales charges, making the plans less attractive to brokers.

By the mid-1980's, contractual plans had virtually disappeared from the civilian market. But they continued to be promoted in the military market, most prominently by First Command Financial Planning of Fort Worth, which has sold hundreds of thousands of the plans to young servicemen and women.

The company has urged Congress to extend the grace period for investors, rather than ban the plan, said Paul Cozby, director of corporate communications for First Command. But it strongly supports the creation of a central registry to track predatory agents. And it has proposed as well that all junior enlisted personnel meet with a trained independent counselor on base before signing up for any financial products that would affect their take-home pay. It also favors a requirement that companies provide information on the rate at which their products lapse or are canceled as a condition of being allowed to sell those products on military bases.

The American Council of Life Insurers, which supported the Burns bill, has also urged that insurers that sell on military bases be required to join the Insurance Marketplace Standards Association, a voluntary industry organization that sets admission standards for its members and monitors their sales practices.

The Pentagon's own proposals for revising its rules for on-base insurance sales are expected to become public soon, Pentagon officials said. Congress, however, has blocked their implementation until the completion of a broad study of the military financial marketplace by the Government Accountability Office.

John M. Molino, the deputy under secretary of defense for military community and family policy, said there was "some dovetailing" between the bill and proposals he wants to implement, particularly in tracking rogue agents. "This will provide greater awareness across the department and among the services, and that is good news for service members and their families," he said yesterday.

Copyright © 2004 The New York Times Company

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