Financial Product Sales:

Actions Needed to Better Protect Military Members

GAO-06-23: Published: Nov 2, 2005. Publicly Released: Nov 17, 2005.

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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.

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 broker-dealer 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.

Matters for Congressional Consideration

  1. Status: Closed - Implemented

    Comments: In legislative deliberations leading to enactment of The Military Personnel Financial Services Protection Act on September 29, 2006, (Public Law 109-290), Congress noted that some of the features of insurance products that were being marketed to service members were not likely legal under state laws, but had been added to these products in a piecemeal fashion. To address this proliferation of problematic products, the Congress directed the National Association of Insurance Commissioners (NAIC) to include information in a report on the extent to which products being marketed complied with state laws. In March 2007, in the first of two reports that NAIC provided to Congress in response to this Act's requirement, NAIC summarized the various sales practices problems and problematic features of the products marketed to service members. To address these, it proposed a model regulation that, when adopted within a state, would ban products with these features, which the Act had also mandated be done to protect service members. As of June 2008, this new regulation, "The Military Sales Practices Model Regulation," has been adopted by 40 states. The regulation strengthens existing state product approval criteria by prohibiting certain product features altogether, including deceptive interest crediting methodologies and automatic premium payment provisions, which divert accumulations from the savings side funds sold as part of some insurance products to pay for the life insurance in the event of default. It also stipulates that an insurance product that includes a side fund is unsuitable for junior enlisted service members, and that the insurer must demonstrate that additional insurance is needed through a needs assessment analysis.

    Matter: To better protect military service members from financial products with limited benefits to them, the Congress may wish to 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 the National Association of Insurance Commissioners to relevant congressional committees on the results of these reviews within 12 months.

  2. Status: Closed - Implemented

    Comments: The Military Personnel Financial Services Protection Act, which was enacted into law on September 29, 2006, (Public Law 109-290), required the National Association of Insurance Commissioners (NAIC) work with Department of Defense (DoD) to develop suitability standards for insurance products sold to service members. According to NAIC's March 2007 report to Congress, the Military Sales Practices Model Regulation was drafted by NAIC's working group in consultation with the Department of Defense and is consistent with relevant DoD solicitation regulations. The Model Regulation also addresses Congressional concerns in Section 11 of the Act regarding suitability and product standards. In this regard, the Model Regulation requires insurers that market products with a savings fund to demonstrate suitability for junior enlisted service members in pay grades E-4 and below. Also, certain product features are prohibited altogether, regardless of suitability. These include deceptive interest crediting methodologies and automatic premium payment provisions, which divert accumulations from side funds to pay for the life insurance in the event of default.

    Matter: To better protect military service members from financial products with limited benefits to them, the Congress may wish to provide that state insurance commissioners work cooperatively with DOD to develop appropriateness or suitability standards for sales to military service members.

  3. Status: Closed - Implemented

    Comments: The Military Personnel Financial Services Protection Act, which was enacted into law on September 29, 2006, (Public Law 109-290), banned sales of contractual plans from the date of the enactment of this law.

    Matter: To better protect military service members from financial products with limited benefits to them, the Congress may wish to ban the sale of contractual mutual fund plans.

  4. Status: Closed - Implemented

    Comments: The Military Personnel Financial Services Protection Act, which was enacted into law on September 29, 2006, (Public Law 109-290), contained provisions that specified that insurance and securities sales activities conducted on Federal lands and facilities, including military installations, are subject to state insurance and securities laws.

    Matter: To better protect military service members from financial products with limited benefits to them, the Congress may wish to 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.

  5. Status: Closed - Implemented

    Comments: The Military Personnel Financial Services Protection Act (Act) was enacted into law on September 29, 2006 (Public Law 109-290), and addressed this recommendation that Congress direct DOD to develop mechanisms to share information concerning problematic insurance sales with state insurance and security regulators. Specifically, the Act directs the establishment and maintenance of a registry that lists all agents and brokers that have been barred from a military installation, which is accessible to installation Commanders as well as financial services regulators. In response, the Department of Defense (DOD) issued a revised regulation governing the sales of insurance products on military installations--DOD Instruction 1344.07, "Personal Commercial Solicitation on DoD Installations" (effective July 10, 2006)--which it states eliminates ambiguity concerning the sharing of information between DOD and state and federal financial services regulators in several ways. The DOD Instruction requires that installation commanders report any suspension or withdrawal of insurance or securities products solicitation privileges to the appropriate State or Federal regulatory authorities. To facilitate sharing with state insurance and securities regulators, the instruction directs installation commanders to ensure the agent's license status and complaint history are checked with the appropriate State or Federal regulators before granting permission to solicit on the installation. Installation commanders are also directed to report concerns or complaints involving the quality or suitability of products or concerns or complaints involving marketing methods used to sell these products to the appropriate State and Federal regulatory authorities. The DOD Instruction also instructs each Military Department to provide guidance to DOD personnel who have a complaint, including guidance on referral to the appropriate regulatory agency for processing the complaint.

    Matter: To better protect military service members from financial products with limited benefits to them, the Congress may wish to 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 for Executive Action

  1. Status: Closed - Implemented

    Comments: DOD issued a revised regulation governing the sales of insurance products on military installations. Effective July 10, 2006, this regulation--DOD Instruction 1344.07, "Personal Commercial Solicitation on DoD Installations"-- requires that the military installation commanders report any suspension or withdrawal of insurance or securities products solicitation privileges to the appropriate State or Federal regulatory authorities. Further, the DOD Instruction eliminates ambiguity concerning the sharing of complaints information between DOD and state regulators. Specifically, the Instruction directs installation commanders to ensure the agent's license status and complaint history are checked with the appropriate State or Federal regulators before granting permission to solicit on the installation. Further, the installation commander is directed to report concerns or complaints involving the quality or suitability of products or concerns or complaints involving marketing methods used to sell these products to the appropriate State and Federal regulatory authorities. The DOD Instruction also instructs each Military Department to provide guidance to DOD personnel who have a complaint, including guidance on referral to the appropriate regulatory agency for processing the complaint. Lastly, life insurance products marketed to DOD personnel on DOD installations must include disclosure information citing the address and phone number where consumer complaints for such products are received by the State regulatory agency that has licensed the sales agent.

    Recommendation: To better protect service members from unscrupulous sales of financial products, the Secretary of Defense should 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.

    Agency Affected: Department of Defense

  2. Status: Closed - Implemented

    Comments: DOD concurred with this recommendation and has taken steps to improve the guidance, training, and awareness at all levels related to servicemembers' concerns and complaints over financial product sales. Specifically, DOD has updated and conducted personal financial management training that includes information on where servicemembers can go to get help with financial issues and complaints. In a March 2007 testimony, DOD stated that they had obtained the assistance of several federal agencies and nonprofit organizations, including the National Association of Securities Dealers Foundation, in providing financial awareness training and education. In a February 2009 DOD Inspector General report, investigators noted that personal financial management classes were being conducted at installations they visited and reported instances where some complaints had been forwarded to military authorities. Further, recent GAO work revealed that financial management courses at selected installations did include a mechanism for servicemembers to obtain assistance on financial issues or complaints (including multiple cases where such complaints were forwarded to financial regulators outside DOD). Additionally, DOD has raised awareness and placed new responsibilities among more senior officers related to financial issues negatively impacting servicemembers, as evident by top-down DOD financial training outreach efforts and new responsibilities placed on commanders to forward complaints on financial issues to the appropriate federal or state regulators. Finally, we observed training materials from federal and state financial regulators that were developed in consultation with DOD.

    Recommendation: To better protect service members from unscrupulous sales of financial products, the Secretary of Defense should 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.

    Agency Affected: Department of Defense

  3. Status: Closed - Implemented

    Comments: This recommendation, which NASD (now FINRA) concurred with, has been accomplished through numerous outreach efforts that the regulators have conducted within the military community. This outreach also included information on specific contacts within NASD (FINRA) for servicemember concerns and complaints. In a testimony in FYO6, SEC staff reported that they and NASD have been conducting examinations and coordinating closely with the Department of Defense (DOD). NASD also noted that they had developed information and a brochure on periodic payment plans, which had become problematic in the military community. Currently, FINRA has financial information specific to the military community and contact information on its Web site, including information on submitting concerns or complaints (see http://www.saveandinvest.org/Military/ContactUs/index.htm).

    Recommendation: To better ensure that federal, state, and other financial regulators can oversee sales of insurance and securities products to military members, the heads of the Securities and Exchange Commission (SEC), the National Association of Securities Dealers (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.

    Agency Affected: National Association of Securities Dealers

  4. Status: Closed - Implemented

    Comments: This recommendation, which SEC concurred with, has been accomplished through numerous outreach efforts that the regulators have conducted within the military community. This outreach also included information on specific contacts within SEC to forward servicemember concerns and complaints. In an FY06 testimony, SEC reported, "Our program has included enforcement activity, extensive examination activity, close coordination with the Department of Defense (DOD) and the National Association of Securities Dealers (NASD), and investor education and other outreach activity." Specifically, SEC noted that "the Commission staff in the Office of Investor Education and Assistance have conducted an active investor education initiative targeted towards members of the military," noting that SEC was a charter member of the DOD's Financial Readiness Campaign, assisting in the presentation of financial education programs to the military, and that Commission staff had conducted several financial education workshops on military installations, including information on periodic payment plans. In a 2007 testimony, DOD again testified that they were working cooperatively with SEC to provide outreach and education to servicemembers. Currently, SEC has financial information specific to the military community and contact information for forwarding concerns or complaints on its Web site (see http://www.sec.gov/investor/military.shtml).

    Recommendation: To better ensure that federal, state, and other financial regulators can oversee sales of insurance and securities products to military members, the heads of the Securities and Exchange Commission (SEC), the National Association of Securities Dealers (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.

    Agency Affected: Congress

  5. Status: Closed - Implemented

    Comments: SEC, in conjunction with NASD, conducted further investigations and targeted examination sweeps of sales to military members, utilizing DOD lists of disciplinary actions, subsequent to our report, according to SEC officials. During these investigative efforts, SEC was in contact with GAO staff concerning areas of interest to focus on for their investigations, further confirming their efforts in accomplishing this work.

    Recommendation: SEC and NASD 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.

    Agency Affected: United States Securities and Exchange Commission

  6. Status: Closed - Implemented

    Comments: SEC, in conjunction with NASD, conducted further investigations and targeted examination sweeps of sales to military members, utilizing DOD lists of disciplinary actions, subsequent to our report, according to SEC officials. During these investigative efforts, SEC was in contact with GAO staff concerning areas of interest to focus on for their investigations, further confirming their efforts in accomplishing this work.

    Recommendation: SEC and NASD 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.

    Agency Affected: Congress

  7. Status: Closed - Implemented

    Comments: The Military Personnel Financial Services Protection Act (Act), which was enacted into law on September 29, 2006 (Public Law 109-290), banned the sale of contractual plans, eliminating the need for NASD to take any action.

    Recommendation: 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 Affected: National Association of Securities Dealers

  8. Status: Closed - Implemented

    Comments: The Military Personnel Financial Services Protection Act (Act), which was enacted into law on September 29, 2006 (Public Law 109-290), banned the sale of contractual plans, eliminating the need for SEC to take any action.

    Recommendation: 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 Affected: Congress

 

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