SPEAKERS CONTENTS INSERTS
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G.I. FINANCES: PROTECTING
THOSE WHO PROTECT US
Thursday, September 9, 2004
U.S. House of Representatives,
Subcommittee on Capital Markets, Insurance,
and Government Sponsored Enterprises,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to call, at 10:11 a.m., in Room 2128, Rayburn House Office Building, Hon. Richard H. Baker [chairman of the subcommittee] presiding.
Present: Representatives Baker, Ose, Bachus, Lucas of Oklahoma, Oxley (ex officio), Kelly, Ney, Ryun, Biggert, Kennedy, Brown-Waite, Kanjorski, Inslee, Moore, Hinojosa, Lucas of Kentucky, Israel, Ross, Baca, Matheson, Miller of North Carolina, Emanuel, and Scott.
Also present: Representative Max Burns.
Mr. OXLEY. [Presiding.] The committee will come to order.
Without objection, the gentleman from Georgia, Mr. Burns, may sit with the subcommittee during this hearing and participate in its proceedings. So ordered. The gentleman from Georgia will be recognized for any opening statement or questions only after all those members of the subcommittee have been recognized.
The chair would indicate that Chairman Baker has been delayed. And I would like to begin the proceedings with an opening statement.
I want to thank Chairman Baker for convening this important and timely hearing. I also appreciate the bipartisan interest among the members of this subcommittee in protecting our GIs.
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The men and women who protect our freedom by serving in the military are giving our country a precious gift. Through their dedicated service, this nation is successfully fighting terrorism and promoting democracy abroad, keeping America safe and strong into the future.
But as these young men and women risk their lives for our country, we have a responsibility to ensure their financial well-being and protection. New military recruits brought in for basic training are often young and relatively inexperienced on financial matters.
They are trained to obey commands without question and sometimes operate on little sleep. It is unconscionable, if true, that groups of recruits have been marched into compulsory briefings on veterans benefits by salesmen pretending to be financial planners that quick-step them into signing up for what turns out to be long-term life insurance.
It is also unconscionable, if true, that firms are using retired military officers to make on-base sales pitches to groups of young recruits for mutual funds with 50 percent first-year commissions—a product that has virtually disappeared from the civilian market. I have yet to hear any reason at all, let alone a good one, why these products are still being marketed to military personnel.
Perhaps most troubling, these reports are not isolated incidents from boiler-room operations. Some of the biggest names in the mutual fund business are sponsors of these contractual plans sold primarily to military personnel.
Problems with illegal sales practices by life insurance agents on military bases have been reported, studied and debated by the Pentagon going back at least to 1974 and more recently in 1997, 1999, 2000, and 2003. I do not support a complete ban of financial product sales on base, nor do I want to tarnish the good reputation of independent property-casualty agents or those life agents who are not involved in these sales.
But members of Congress can no longer pretend this is about a few bad apples. This is a systemic problem that needs to be fixed.
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I understand that NASD has been conducting a thorough investigation of contractual plans for more than a year and will have an announcement in the near future. The NASD is to be commended for its work to protect military investors. I look forward today to a thorough analysis of the problem and potential solutions for Congress to act on this year.
The time of the chair has expired. I will now turn to the ranking member, the gentleman from Pennsylvania, Mr. Kanjorski.
[The prepared statement of Hon. Michael G. Oxley can be found on page 66 in the appendix.]
Mr. KANJORSKI. Thank you, Mr. Chairman.
Thanks for the opportunity to offer my initial thoughts about the marketing of certain securities and life insurance products to military personnel before we hear from our invited witnesses. I want to commend you for swiftly focusing our committee on this important issue.
In recent weeks, several stories in the New York Times have once again raised concerns about allegedly abusive practices in the sale of financial products to the men and women who serve in our armed forces. These accounts have detailed problems with financial literacy, potentially overly trustful troops and business products and practices that have raised the concerns of many.
For example, many financial advisers point out that rather than committing to long-term contractual plans with large front-load fees, most investors would be better off setting up automatic savings programs with smaller fees and initial sales loads. Additionally, while many in the military may have greater life insurance needs than average Americans, we need to ensure that the products they purchase meet their needs and best serve their long-term purposes.
Without question, we need to work in Washington to protect those who protect us. As a result of today's proceedings, I hope that we will gain a better understanding of the military financial services marketplace.
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We already know that our soldiers are more mobile than average Americans. The recent news reports have also highlighted potential limitations faced by financial regulators on military bases, particularly on those installations located abroad. Both of these issues deserve better exploration today.
In recent days, we have also begun consideration of legislation that would ban the sale of mutual fund contractual plans. This bill also seeks to improve the regulation of life insurance and other financial products sold on military bases. In order to prevent unintended consequences, I must urge my colleagues to move deliberately and diligently in these matters.
As at least one witness points out in his prepared testimony, efforts to eliminate contractual agreements might have an effect on variable annuity market. It could also result in problems for those who have already purchased these plans.
Before we move ahead in these matters, I would therefore urge you, Mr. Chairman, to consult with the Securities and Exchange Commission, the National Association of Securities Dealers, the National Association of Insurance Commissioners, the Department of Defense and other interested regulatory entities to ensure that any bill we craft appropriately fixes these problems before we adopt them into law.
In closing, Mr. Chairman, we need to improve financial education for military personnel. We need to improve the enforcement of consumer protections for not only the men and women in our Armed Forces, but also for all Americans. We additionally need to have better supervision in the sales of financial products on military bases.
I want you to know that I am committed to addressing these matters. These are important discussions for us to have and important matters for us to resolve.
Thank you, Mr. Chairman.
[The prepared statement of Hon. Paul E. Kanjorski can be found on page 73 in the appendix.]
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Chairman BAKER. [Presiding.] Thank the gentleman.
Let me express my apology to members and our witnesses for my late arrival. I am usually very prompt about starting our committee hearings. And matters beyond my control kept me from being here at my usual hour.
Our hearing today is one that is unusual from several perspectives. We are here to review the effectiveness and desirability of not only an insurance product, but a securities product as well. Both matters are clearly within the jurisdiction of this subcommittee.
The products are unique. They were intentionally designed to serve the needs of military personnel.
Some of the products have been designed for civilian utilization in years past. And as long ago as 1966, the SEC suggested really rather radical reform of the manner in which these products were marketed; for example, in one such regulatory recommendation, that the first year load drop from 50 percent to 5 percent. I would consider that radical.
However, for whatever reasons, actions have not been taken with regard to those pending recommendations since initially forwarded. I think one of the reasons that we have seen these products, in all practical purposes, eliminated from the civilian marketplace is from competitive forces.
Why is that so? Basically, when you have a product which is priced at a very high end of the market, which provides at the same time benefits on the very low end of the market, anyone who has a choice simply will make another choice.
That being the case, the product has disappeared from the civilian marketplace. I have observed that when you have a choice between a no-load, a low-load or a what-a-load, you are probably not going to go for option 3.
Military personnel headed to a theater of war, however, do not find themselves focused necessarily first on matters of finance. They do, however, have concerns about the wife, the spouse, the kids, not sure of what the fortunes of war may bring.
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In these desperate hours before being assigned, who is there to help them make that decision? Regrettably, it is the marketing of the product in this case which also causes me some significant concern.
This is not a product marketed via the television, by mail or by someone knocking on the door in a three-piece suit. When you look across the table as an anxious young military person, you are met by a retired military officer, who assures you that this is the right decision for you personally, for your family and for your future. All that is required is for you to sign here, son.
That is probably more problematic than anything else about this circumstance. The product worth in relation to similar products in the civilian market is highly dubious. But the fact that these individuals are emotionally not centered on matters of finance, fully focused on military service and being told by senior retired military officials that this is the right thing to do is very troublesome.
I have spent a lot of time, as well as every member on this committee, in matters of Enron, WorldCom, dot-coms and everything else. At least in those instances where investors put money into what most members of this committee consider to be outrageous investments, those investors at least had a chance not to be swept up by the hype. In this case, I do not believe the victims had a choice.
The first legislative response posed to the identified concerns is that by Congressman Max Burns with House bill 5011, which I am advised by Chairman Oxley that the subcommittee and full committee will review and take action in due course, as is warranted.
And certainly, I join with my colleague, Mr. Kanjorski in welcoming the comments of all of those who have regulatory perspectives on the appropriateness of this product, the congressional response appropriate and ensuring that we take action that is in the best interest of all.
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It is troubling that those who have already invested, whether in active duty service or now retired, it may be the only remedy for them to date is to ensure the product remains a viable contract for its maturity in the hope of regaining some financial remuneration at the end of the contract. However, going forward, it is pretty clear, at least at this juncture, that these products do not offer what they hold out to the marketplace in the military.
And we have a direct responsibility, in light of all the other hardships our military personnel face. How can we stand by and not take corrective action in this clearly identified, what I consider to be abusive, practice?
Mr. Hinojosa? Mr. Hinojosa.
Mr. HINOJOSA. Mr. Chairman, I wish to yield at this time. I do not have a prepared statement.
Chairman BAKER. Mr. Israel?
Mr. ISRAEL. Thank you, Mr. Chairman. I appreciate your convening this hearing. And I also want to thank my ranking member, Mr. Kanjorski, for his participation in this.
Mr. Chairman, the process by which we insure our troops is simply dysfunctional. It is doing more harm than good in too many cases. And I want to share, in the time that I have allocated to me, just two cases in particular.
One is the case of Raheen Tyson Heighter, who lived in my district; 19 years old; enlists in the Army and wants to go to Iraq and fight for his country. He is told he needs life insurance.
He says, ''I am 19 years old. I really do not need life insurance.'' He is told, ''Well, you have to have it.'' And he says, ''What is the cheapest policy that I can buy?'' And they tell him a $10,000 policy.
He goes to Iraq. He is the first Long Islander killed in action in Iraq. And his mother gets a call from the Army saying, ''All your son bought was a $10,000 policy. We are sorry.''
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That is dysfunctional. That is doing more harm than good.
The second case is a member of my own staff here in Washington who graduated West Point, also served in Iraq. He sat through a sales pitch in the officer's club at an Army base where he was clearly exposed to explicit deceptive coercive marketing practices.
Now we owe Raheen Tyson Heighter and my staff and all the members of our armed forces much better than that. We owe them the best and not the shoddiest of protections.
And I wish that Congress would pass the bipartisan legislation that I have introduced as a member of the Armed Services Committee. I serve on the Armed Services Committee and the Financial Services Committee.
And we have bipartisan legislation called the Raheen Tyson Heighter Life Insurance for America's Troops Act that would simply say this: that if we are going as a country to send young men and women into battle, we will take care of their life insurance for them.
We will not make them dig into their pockets in order to pay their premiums. We will take care of them. We ought to pass that bipartisan bill, sooner rather than later.
Those who are taking care of our national security should not have to worry about their financial security at home. And when it comes to insurance sales, we should not have to protect the protectors against coercive and deceptive marketing practices.
I appreciate the fact that we are having this hearing. And I intend to ask some questions when it is appropriate.
Thank you, Mr. Chairman. I yield back the balance of my time.
Chairman BAKER. I thank the gentleman.
Mr. Lucas?
Mr. Ney?
Mr. NEY. I will be very brief, Mr. Chairman, because I know we have witnesses and we want to get to the subject. I have a statement for the record I would like to submit.
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[The prepared statement of Hon. Robert W. Ney can be found on page 77 in the appendix.]
But I just wanted to say thank you to the chairman for having the hearing. We have issues in predatory lending and then also issues obviously of predatory practices that we have to look at.
I did want to point out that there is a young gentleman whose mother is in Athens, Ohio. And it is a very compelling argument as to why this should be looked at today.
Bottom line, he thought he was having $100 deducted out of his pay, which was going to be in some type of fund. The worst part is not only did he get back and find that that was not in some type of fund, but that he had paid $100 a month, according to this article, for less than $44,000 of insurance. About a $250,000 policy, young person's age, male or female, would be about $17, I think, or maybe $20 or so a month. So these are not good practices.
Also, I wanted to point out too—and this might have been said before; I apologize if it has been—but you know, these are young men and women that are being trained. And they are trained to observe the military order. And all of a sudden, they are in a military setting. And I think that could also influence them just to do this.
So thank you, Mr. Chairman, for the hearing.
Chairman BAKER. I thank the gentleman for his statement.
Mr. Emanuel?
Mr. EMANUEL. Thank you, Mr. Chairman, for holding the hearing and for following the request I asked for this hearing.
I think the question we need to ask ourselves is, at least about the contractual mutual fund instrument, is: if it is such a great product, why is it not marketed to the general public? And if it is not good enough for the general public, why are we allowing it to be sold to men and women in uniform and on our bases?
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The mutual fund industry is about $7 trillion; about $15 billion worth of contractual mutual funds, one-eighth of 1 percent. And it is almost all of that is held by people in uniform.
It is not sold to the general public because of what the SEC had recommended in the 1960s and 1980s. And it basically fell out of favor in the market. And we should not encourage this—if not outright ban it—on our bases and to our men and women in uniform.
Many of our troops are of modest financial means and do not need to be spending those types of resources in this type of account. And I do not think those in the industry should view the men and women in uniform as a fee machine, where they literally turn them on as an ATM machine to generate fees for themselves, especially given the—I think—high, high, high, high costs of 50 percent upfront in the first year in the sense of the fee that the agents receive.
I also think it is important, as we deal with the life insurance issue, that we have adequate disclosure, so it is crystal clear to our servicemen and women what they are buying and what they have available to them. It is important that the companies give recruits plain English documents, telling them the U.S. government does not endorse, recommend or encourage them to buy this type of life insurance.
As I think everybody in the industry agrees, informed investors or informed consumers is a good thing. So let's inform them and give them all the information.
The clear disclosure and informed consent are the keys here to success. That is why I am going to introduce legislation with the Virginia senator from New York.
It would ban contractual mutual funds. And if we could not succeed in doing that, as has been tried in the past and recommended by the SEC, we give what is the equivalent of a surgeon general's warning, an SEC warning, warning that: they are harmful to your financial health; there are 50 percent commissions; they are not sold to the civilian or general public anymore; and that the SEC recommended that Congress, back in the 1960s or earlier, ban them.
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For troops whose families feel that they need to purchase more than $250,000 in life insurance, my bill would allow them to buy up to $500,000 in insurance from the government at the same low cost that the government already provides at the $250,000 level.
It also requires new disclosures, tightens the guidelines for base access and clarifies the role of state insurance regulators. So that would be the legislation I will be introducing.
I look forward to today's panel and appreciate the fact that the subcommittee and the full committee will look at legislation and are holding this hearing today.
Thank you, Mr. Chairman.
[The prepared statement of Hon. Rahm Emanuel can be found on page 69 in the appendix.]
Chairman BAKER. Thank the gentleman.
Mr. Ryun?
Mr. RYUN. Mr. Chairman, I want to thank you and the subcommittee for scheduling this hearing. The issue of protecting the men and women of our military from abusive sales practices is one that should receive our careful attention, as it is today.
As we consider how to best govern the sales of financial service products to our military installations, let me be very clear about one thing: the first priority of this committee should be protecting our servicemembers from those who would prey on them for financial gain. Standing by while our servicemembers are taken advantage of is not an option.
This goal must also be shared by those in the business of providing financial services to our men and women in uniform.
The abuses that have been recently publicized are extremely disturbing. This committee must determine what actions are necessary to put an end to these abusive practices.
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These actions must not be a mere gesture, but must provide sound protection for our soldiers. It is important that the bad actors be rooted out, not only to eliminate predatory practices, but also to allow those doing business with integrity to better service our servicemembers.
Among the practices that we must take a look are the sales of investment plans with large front-end fees. These plans are almost nonexistent in the civilian market, as we have already talked about, yet remain prevalent on the military bases.
It is important to ask why a product that is not available to the general public is sold to our servicemembers. While I generally oppose federal intervention on this sort of transaction, there is enough concern with the structure of these plans to warrant our consideration.
One word of caution though: it is important that we address the problematic plans without unintentionally affecting other non-offending financial products.
We must also do what we can to preserve the authority of our base commanders. These commanders already have the authority to prohibit access to their base. And we must be cautious that our efforts do not compromise their authority.
One of our base commanders' most fundamental responsibility is protecting those residing on the base. If a commander deems an agent or a company unfit to do business on the base, their decision must stand. We must also help the base commanders obtain the knowledge necessary to go ahead and make their decisions.
Next, it is necessary to improve interaction between state regulators and military bases. It is a significant problem when financial sales on military bases are not accountable to the same standards that govern similar sales made off the base.
We must also protect the right of our soldiers to have access to a competitive financial service marketplace. Some have proposed prohibiting outside providers from selling financial services products on our military bases.
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I oppose this proposal. It would essentially remove all competition, leaving our soldier with only on-base institutions for financial services. Surely, protecting our servicemembers must involve giving them the choice of where to conduct their financial affairs.
I do not have all the solutions to this problem that exists. However, I am pleased that this committee has recognized that there is a problem. And I hope that some real protection for our soldiers will result from our efforts here.
I am committed to working for changes that provide critical protection and that promote the most choices for our men and women in uniform. We are here today to find solutions for our soldiers. I look forward to the panel of witnesses. And I thank you, Mr. Chairman.
Chairman BAKER. Thank the gentleman for his statement.
Mr. Hinojosa, did you wish to make your statement now, sir?
Mr. HINOJOSA. Yes, thank you.
Chairman Oxley and Ranking Member Frank, thank you for holding this very important and timely hearing today. As we all learned this week, 1,000 U.S. men and women have lost their lives during Operation Iraqi Freedom. And each, including several from the Rio Grande Valley, which I represent, should be remembered for their courage and valor in defending our nation and the principles for which it stands.
Based on the information I have received in my office, it seems to me that more than 70 percent of the dead are soldiers in the Army. And more than 20 percent are marines.
More than half were in the lowest-paid enlisted ranks. On average, the servicemembers who died were about age 26. The youngest was 18; the oldest, 59.
About half were married, according to the death roll, which does not include a handful yet to be identified by the Defense Department and three civilians who worked for the military. Part-time soldiers, the guardsmen and reservists who once expected to tend to floods and hurricanes, were called to Iraq on a scale not seen through five decades of war.
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Increasingly, Iraq is becoming the conflict of the National Guard. And in growing numbers this spring and early summer, these part-time soldiers died there.
Ten times as many of them died from April to July of this year as had in the war's first 2 months. This past weekend, the Rio Grande Valley lost another of its soldiers while bravely serving our country during Operation Iraqi Freedom.
On September 6, United States Army National Guardsman Tomas Garces died in Iraq. Garces died when his convoy was attacked by enemy forces using an improvised explosive device.
Garces was assigned to the National Guard's 1836th Transportation Company from Fort Bliss, Texas. And his family resides in Weslaco, Texas, which is in my congressional district.
At just 19 years of age, Tomas' loyalty to the cause of freedom was steadfast and clear. A 2003 graduate of Weslaco High School, Tomas was a champion wrestler and took his lessons from the mat with him to the Guard. In July, he had been recommended for a Bronze Star for his actions during an ambush.
These brave troops in our nation's military are working every day to guarantee the safety, security and freedom for Americans and Iraqis. And Tomas was no exception.
My thoughts and prayers are with his parents, Rafael and Sonia, his brothers and sister and his entire family at this difficult time. Garces is the tenth soldier from the Rio Grande Valley to die in the line of duty in Iraq since the conflict began.
These individuals tend not to be well-versed in financial services issues. Some of them do not even have bank accounts. Unfortunately, this is not very uncommon in the United States in general, as financial literacy in this country is abysmal.
While I must condemn any company or industry that preys upon these brave individuals who risk their lives for our country and our democracy, I realize that sometimes the negative actions and sales are done by a few bad apples and do not represent the industry as a whole. Life insurance and mutual funds, when appropriately crafted and appropriately marketed to our military, are just that—very appropriate.
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In closing, I want to say that when someone goes after a financially unsophisticated, courageous youth headed into battle with a product that will not benefit his family if he does not return from his tour of duty alive, I have to draw the line.
Mr. Chairman, I hope today's hearing will shed light on the inappropriate sales of contractual mutual funds to our military personnel. And I would hope that all of you would pray for the families of our lost soldiers.
I yield back the balance of my time.
[The prepared statement of Hon. Rubén Hinojosa can be found on page 71 in the appendix.]
Chairman BAKER. I thank the gentleman.
Chairman Bachus?
Mr. BACHUS. Thank you, Chairman Baker. And I want to commend you for holding this important hearing. And I want to commend another member, Representative Max Burns.
Congressman Burns has taken the lead in this Congress on protecting the men and women in uniform from this practice. He was the first member I know of in Congress that spoke out about this matter. And he did so before publicity on this matter reached the press.
And I am joining him as a cosponsor on legislation that he is introducing this morning. And I would ask each member of this committee to take a look at that legislation.
It takes a reasoned approach. I am happy to say that independent property and casualty agents did not participate in this. And it was only a small minority of mutual funds and life agents.
And I think Congressman Ryun mentioned that these practices basically disappeared from the private market some 20, 25 years ago because they offered very little value. And what we are talking about here is in the first year of premiums, which is $1,200, $600 of that goes to commission.
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But probably the thing that shocks me the most is the Department of Defense, back in 1986, issued a directive that ought to prohibit this type of thing. This was done in direct violation of Defense Department regulations.
And I will close simply by quoting that. The directive ''prohibits solicitation of recruits, trainees and transient personnel in a mass or captive audience, using misleading advertising or sales literature or giving the appearance that the DOD endorses any particular company.''
Now despite that, there is at least reports in the media that these recruits were brought in and that insurance agents posing as counselors on veterans' benefits and independent financial advisers then advised them to purchase this product. They did it while they were on duty. They did it in their barracks, violating two more Defense Department regulations.
And apparently—and this disappoints me—their commanding officers arranged all this, which I think, as a former enlisted man, sounds to me like an abuse of the chain of command and an abuse of the enlisted men.
But I do think this: I am surprised that the state regulators and those who regulate our regulators have not stepped in and done something about this. It should not have gone on this long.
I commend Congressman Burns. And I think his bill takes a reasoned approach.
It does not blast everybody. It allows your state insurance and your security regulators to do their job.
And I think the Pentagon also needs to get back involved and engaged on this issue. But I want to thank you, Congressman Burns.
Chairman BAKER. I thank the gentleman for his statement.
Mr. Scott?
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Mr. SCOTT. Thank you very much, Mr. Chairman. I too want to thank the committee for this very, very important hearing.
What we have before us today is scandalous. It is shameful and, especially at a time of war, taking advantage of young, impressionable soldiers.
What bothers me more than anything else about this is that there is apparent collusion going on within the military itself. It is shameful that these unscrupulous, shall we say, ''insurance agents'' are allowed to even go into barracks and to confront soldiers who are under pressure, the pressure of their lives being flashed before them, as they are being trained and prepared to go overseas to risk their lives.
Eighteen-, 19-, 20-year-old kids are being swamped with very complex financial details of life insurance and contractual plans whose practices have been outlawed in the public sector many, many years. And yet this activity has been going on for over 30 years.
And to have military personnel, high-ranking generals serving on the boards of directors of these companies. And what is so disturbing is that these are veterans who are taking advantage of these young enlisted men.
There is no more important assignment than we can be faced with today, ladies and gentlemen, than correcting this mess. Harry Truman said it right, ''The buck stops here.''
The military has got some tall walking to do today because I think that there are some dirty hands here. The insurance industry has some tall walking to do today.
And I am looking forward to this Congress doing its rightful duty of oversight. There is indeed enough blame to go around to all of us.
Let us make our resolve this morning in this committee to right this tragic wrong and to give our young men and women in uniform the dignity and respect that they need. Maybe it is regulation; maybe it is outright banning of some of these products.
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I think there should be free exercise of enterprise, to have competitive products being on military bases. I do not think banning insurance companies from going on is the right thing.
But we can do a better job. And we have to do a better job.
And one thing we have to do, more than anything else: we have to understand the importance of financial literacy. Nowhere is there a greater example of the need for it than in preparing and equipping our men and women in uniform with the information that they can arm themselves with.
Chairman BAKER. The gentleman's time has expired.
Mr. SCOTT. I look forward to the rest of the hearing. Thank you, Mr. Chairman.
Chairman BAKER. I thank the gentleman.
Ms. Brown-Waite?
Ms. BROWN-WAITE. Thank you very much, Mr. Chairman.
You know, I think the title of this hearing is very appropriate, ''Protecting Those Who Protect Us.'' And when you read through the material and you read the newspaper articles—and believe me, I am not somebody who believes everything I read in the newspaper—but when you read through both the staff research and the newspaper articles, I am ashamed that we had to hold this hearing today.
You know, insurance companies should not have taken advantage of young men and women who are really fiscal neophytes. Most of them have never had a checking account.
So many of them join the military right out of high school, right out of college, where they really have no experience. They have no idea of what a mutual fund really is.
And equally important, I think that the Department of Defense needs to be called on the carpet as to why they have not abided by their own Rule 1344.7. I think the military was doing a ''wink and nod'' approach to this. And that is just wrong.
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Every one of us in Congress has lost young men and women in the war in Iraq and Afghanistan. And to think that these young men and women who do not understand had the Department of Defense let them down by having them be captive audiences, which is a direct violation of the Department of Defense's own rules.
I think, on behalf of the young men and women, on behalf of their families, who are making such sacrifices, that the Department of Defense has a lot of answering to do. It is absolutely shameful.
And I commend Mr. Burns and have agreed to go on his legislation. It is a measured approach and one that I am ashamed to say that we have to be here to even consider. Because if the Department of Defense had done its job and if some of the insurance companies had not been so damn greedy, we would not even be here today.
Mr. Chairman, I yield back the balance of my time.
Chairman BAKER. I thank the gentlelady.
Mr. Moore?
Mr. MOORE. Thank you, Chairman Baker. And I want to thank you and Ranking Member Kanjorski for convening this hearing. I think this is very, very important.
And I have learned a great deal already, just in hearing opening statements by some of my colleagues. I was not aware of Mr. Israel's bill, which has been pending for some time—I guess about a year now—and looks to be very good.
I also have seen Mr. Emanuel's bill. And that looks good. And I have heard about Mr. Burns' bill this morning. So I want to take a look at all those.
I want to take just a slight twist on this. And it gets just a little—it is collateral to this, but I think it is very important as well.
I was stunned when I learned that our troops, young men and women who might be killed in Afghanistan and Iraq, had a death gratuity benefit from our country of $12,000. I say ''stunned'' because to me that is almost like a slap in the face.
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We talk about how much we value our troops and the good job they do for us. And I think virtually everybody in Congress believes that.
But to pay $12,000 to the family of a young person who has been killed in Iraq or Afghanistan to me was just not showing value and appreciation for our troops.
I have a bill today and just started talking to my colleagues yesterday and have four Republicans and four Democrats on it right now. And it should not be partisan at all. It would provide a $50,000 death gratuity benefit to young people who are killed in Iraq or Afghanistan.
And whether it is a financial services product, such as life insurance, that we help them out with, or whether we provide a death gratuity is not as important to me as the fact that we somehow show a greater understanding and appreciation for the situation our young men and women face when they are in the military forces and that we provide some benefit to them—again, through life insurance payments, maybe or a death gratuity benefit. But I think we need to do a better job than what we have done in the past.
And again, Mr. Chairman, thank you for convening this hearing.
Chairman BAKER. I thank the gentleman for his statement.
Ms. Kelly?
Mrs. KELLY. Thank you, Chairman Baker, for holding this hearing to ensure that we are protecting the individuals who have made sacrifices for our nation. Since we do not teach financial literacy in our schools, we have to help our military personnel receive the financial shelter and guidance that they deserve and that the public needs to demand.
And this includes ensuring that the servicemen and women have access to clear and accurate financial information and advice that meets both their short-term and their long-term needs. I represent three military installations: Camp Smith in Cortlandt Manor, the United States Military Academy at West Point and Stewart International Airport at Newburgh, which is a large reserve air base.
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I have been deeply troubled by the recent allegations of the abusive practices in the sale of financial products to the military personnel. In spite of a directive from the Department of Defense restricting commercial solicitations, there have been reports of agents selling insurance and investment products that may not be in the best interests of the people in uniform.
This committee needs to learn more about the contractual plans, those that enable an investor to make gradual contributions to a mutual fund that may have steep front-end sales loads. It is my understanding that the contractual plans have more or less disappeared in the civilian market several decades ago because they are not widely marketed because of the pricey sales charges. And there is very little flexibility built into them.
We need to hear about some of the other insurance products that are marketed to military personnel. It is my understanding some of these products are not well structured for the unique needs of our servicepeople and that some of the policies offer very little more than high premiums and very low benefits.
More troubling than some of the misguided and inappropriate products being marketed toward our military personnel are some of the questionable and misleading tactics that have been reportedly used to sell these products to our military. There are reports of individuals posing as counselors on veterans' benefits and independent financial advisers, sometimes when the soldiers are in their barracks or even on duty.
And there are other accounts of individuals pressuring military personnel with the deceitful implication that their supervisors or government support products and services they are selling. While there are a lot of honest and helpful life agents and brokers with good intentions out there, our military personnel deserve better service.
And I believe that the agents and brokers not only have a fiduciary responsibility to their clients, but they have a personal responsibility to our service personnel.
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I look forward to hearing from our witnesses about the financial products marketed to military personnel and the sales practices that they employ, as well as the potential solutions to try to improve protections for military personnel. The men and women of our armed forces make sacrifices every single day. And they exemplify the best of American spirit.
They take care of us. We need to take care of them. We have to get them all the support, compensation, benefits and protections that they deserve.
This hearing is important. And I am happy that you have held it.
I also, Mr. Chairman, would like to insert in the record at this time a statement from the Insurance Marketplace Standards Association.
Chairman BAKER. Without objection.
Mrs. KELLY. Thank you very much.
[The following information can be found on page 164 in the appendix.]
[The prepared statement of Hon. Sue W. Kelly can be found on page 75 in the appendix.]
Chairman BAKER. I thank the gentlelady.
Mr. Ross?
Mr. ROSS. Thank you, Mr. Chairman.
It is a little loud this morning.
Thank you, Mr. Chairman and Ranking Member Kanjorski, for holding this hearing on our soldiers and finances and protecting those who protect us.
There has been a lot said. And I will be brief so we can hear from our panel of witnesses this morning.
I think we all know that one of the reasons we are here is these abusive practices in the sale of financial products to military personnel, which have been uncovered. I would particularly like to thank the 6-month examination that was done by the New York Times that found that several financial service companies or their agents are using questionable tactics on military bases to sell insurance and investments that may not fit the needs of people in uniform.
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I have a brother-in-law in the United States Air Force. I have a first cousin in the United States Army whose wife gave birth to their first child while he was serving our country in Iraq.
Today, we have some 3,000 Arkansas National Guard soldiers in Iraq. Last month, I was in Baghdad to visit with them.
These are people that I once taught Sunday school to, people I duck hunt with, people whose wives back home teach my children. It really puts a face on it.
And I believe their service and the service of all men and women in uniform is much greater than mine or any member of Congress or any president or vice president's could ever be. And I believe if they are going to go across the globe and protect America and our interests, the least we can do is protect them and their finances at home.
And that is why I want to thank the chairman and the ranking member for holding this important hearing today. I want to thank my colleague from Long Island, Mr. Israel, and Mr. Emanuel for their leadership on this issue. And hopefully, we can work together in a bipartisan manner to try and ensure that these practices stop and that our men and women in uniform and their families back home are protected from such fraudulent and deceptive sales pitches.
Thank you, Mr. Chairman.
Chairman BAKER. I thank the gentleman.
Ms. Biggert?
Mrs. BIGGERT. Thank you, Mr. Chairman. And thank you for holding this very important hearing today, for I believe it will send a clear message to our military personnel that we do care about their financial welfare. These men and women serve and sacrifice for America, and for the world, to ensure that all people dwell in freedom, liberty and justice.
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As you may know, financial literacy is one of my top priorities. And it has been brought to my attention that financial organizations have voluntarily met with servicemen and women to educate them about financial services.
While I encourage bona fide financial education programs that are conducted in a legal and ethical fashion, I am not an advocate for programs that violate Defense Department regulations or that are a sales pitch fronting as a financial education program. I am disturbed to read that young and impressionable members of our armed forces may be fooled into believing that they are being educated about finance, but are in fact being influenced by salesmen who pose as instructors.
I would encourage our witnesses today to fully disclose the accuracy of the report that ''several financial services companies or their agents are using questionable tactics on military bases to sell insurance and investments that may not fit the needs of people in uniform.''
Our military should know that we in Congress will not deny them access to the financial benefits of a free-market society, but we will take action, if necessary, to protect them from financial scam artists.
I look forward to hearing from the witnesses. Thank you and I yield back.
[The prepared statement of Hon. Judy Biggert can be found on page 68 in the appendix.]
Chairman BAKER. I thank the gentlelady.
Mr. Inslee?
Mr. Matheson?
Mr. Miller?
If there are no further members having opening statements, I would like at this time to ask unanimous consent——
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Mr. OXLEY. Already granted.
Chairman BAKER. Oh, then by prior agreement, at this time, I recognize Mr. Burns.
Mr. BURNS. I thank the chairman and the ranking member. I appreciate the opportunity to join the committee this morning for this certainly important hearing.
This past Tuesday, I was joined by colleagues—Mike Simpson, Charlie Norwood, Chet Edwards and Joe Wilson—in introducing H.R. 5011, which is the Military Personnel Financial Services Protection Act. The purpose of this act is quite simple: it would ban the sale of questionable financial products and insurance policies on military bases, both at home and abroad.
The bill would also provide a layer of oversight on unscrupulous insurance companies and their employees that have been using federal military property to evade the jurisdiction of state insurance commissioners and other state regulatory bodies. Those who sell products to our citizens, especially to our troops who sacrifice so much for the freedoms that we all enjoy, have a responsibility and a duty to be honest and clearly inform their potential customers.
Clearly, there have been transgressions in these areas that must be addressed. In the past weeks, I have become aware of numerous servicemembers, including those residing in Georgia's 12th congressional district—Fort Gordon, Georgia; Fort Stewart and Hunter Army Airfield, Georgia; the Navy Supply Corps School in Athens, Georgia, all of which are in the 12th—have suffered financially as a result of dubious financial products and questionable insurance policies.
I and my colleagues will not sit by and watch innocent members suffer from unscrupulous sales practices in our military installations. I look forward to the testimony of the witnesses. I look forward to working with the Financial Services Committee and congressional leadership in crafting an effective bill to deal with this challenging problem.
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I again thank the chairman and the ranking member for the opportunity to join you today. I yield back.
Chairman BAKER. I thank the gentleman for his good work and his participation here today. We now turn to our patient witnesses for their remarks this morning. And it is indeed an honor for me to introduce to the committee today Specialist Brandon Conger, United States Army, who has just returned from a tour of duty in Iraq.
Sir, I wish to extend to you my deep appreciation for your service. And we are honored to have you here with us to give us your concerns.
Please proceed as you would like. Normal practice requested by the committee is that all witnesses try to make their presentations within 5 minutes. Your full and complete statement will be made part of the official committee record.
Welcome.
STATEMENT OF SPECIALIST BRANDON CONGER, UNITED STATES ARMY
Mr. CONGER. Thank you.
Mr. Chairman, distinguished members of the committee, good morning. My name is Specialist Brandon Conger from Butler, Missouri. I am infantryman with headquarters in Headquarters Company, 2nd Battalion, 325th Airborne Infantry Regiment, 82nd Airborne Division.
Thank you for this opportunity to testify in front of the committee. I would like to give you a brief synopsis of my involvement with American Amicable Life Insurance.
In August 2002, during my third week of basic training in Fort Benning, Georgia, my drill sergeants held a briefing for my platoon concerning a group of financial advisers. The drill sergeants explained to us that a group of financial advisers were coming to speak with us about mutual funds.
The drill sergeants said that they were a good investment. And if we started now and stuck with them, that we would make lots of money.
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The next day, the financial advisers held a classroom briefing and specifically told us that by investing money in these mutual funds, it would only help us make money. They showed us charts on their laptops, showing each of us individually how much money we would make long term, depending on how much money we put in on a monthly basis.
They then passed out paperwork to sign an order for the money to begin coming out of our bank accounts. Neither the financial advisers nor our drill sergeants or the paperwork said anything about life insurance.
I had ACLI. I was putting in $20 a month for the insurance in the Army. I did not need life insurance.
After graduating basic training airborne school, I was assigned to the 82nd Airborne Division in January 2003. By then, I still had not received a statement of any kind from American Amicable.
In March 2003, my unit deployed to Iraq in support of Operation Iraqi Freedom. Late January of 2004, I redeployed back home to Fort Bragg, North Carolina.
In February of 2004, after still receiving nothing from the company, I decided to call them. Most of my calls were never answered. And those that were ended up with me being put on hold until I hung up the phone.
Finally, in April, a fellow paratrooper who had signed up with the same financial company told me that this group of financial advisers was a fraud. I then cancelled my allotment.
In May, a reporter from the New York Times who wanted to hear my story, contacted me. That same month, I informed my company commander and we called American Amicable and requested a copy of my insurance policy be mailed to the unit.
A couple of weeks later, after I still had not received the policy, my commander and I called and e-mailed American Amicable, requesting a policy again. Finally, on the 23rd of July, I received my insurance policy.
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This has been an extremely disappointing ordeal for me and for some of my fellow soldiers, not because I lost money, but because I was misrepresented by a former soldier working for American Amicable Life Insurance, who used his contacts to gain the trust and confidence of young soldiers.
Again, Mr. Chairman, I want to thank you and the committee for allowing me the opportunity to testify today. Thank you.
Chairman BAKER. Thank you, sir. And I assure you, we will take your testimony and review it very carefully and we will act accordingly. We appreciate your willingness to participate.
Our next witness is Ms. Elizabeth W. Jetton, president, the Financial Planning Association. Welcome, Ms. Jetton.
STATEMENT OF ELIZABETH W. JETTON, PRINCIPAL, THE FINANCIAL PLANNING ASSOCIATION
Ms. JETTON. Thank you.
Thank you, Chairman Baker and Ranking Member Kanjorski and members of the subcommittee for this opportunity to testify today on the marketing of certain insurance and investment products to our enlisted men and women on military bases.
My name is Elizabeth Jetton. I am a partner in an independent financial planning firm in Atlanta and hold the ''Certified Financial Planner'' designation. I appear before you today as the president of the Financial Planning Association.
FPA represents more than 28,500 members who provide professional advice to individuals and their families or to those who support the financial planning process. Recently, FPA began a national community services program to provide pro bono financial planning and education, delivered by certified financial planner practitioners to those in need and unable to pay for professional advice.
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As part of this program, we are currently in discussions with the Pentagon representatives to see how we can provide pro bono advice to reservists and National Guard personnel called to active duty in Iraq.
I have personally been in the financial services industry since 1980 and have previously held an insurance producers' license. For the past 14 years, I have been in the practice of comprehensive financial planning, registered with the State of Georgia Division of Securities as an investment adviser. I am also affiliated with a broker-dealer and am licensed to sell securities.
I was personally disturbed to read about the allegations of abusive sales practices to our men and women in uniform. And I am particularly concerned about those who are young and starting out in their first career, and who consequently may not the more complicated insurance and retirement needs or knowledge of an older person or even know how to ask the right questions to determine their need.
In providing financial planning advice to clients to help them achieve their goals in life, it is incumbent upon a professional adviser to review their insurance needs as part of an overall plan. With respect to any kind of life insurance product, there are basic questions that a consumer needs to ask about the product, particularly since life insurance agents are not required to comply with practice standards.
Unlike on the securities side of the business, where NASD suitability rules come into play, or as an investment adviser, where you actually have a fiduciary duty to place the clients' interests first, the insurance agent has no statutory obligation to the customer for determining the suitability of the product to the individual's need.
Some of the questions that I, as a financial planner, ask my clients: First, is there a need for insurance? Life insurance is recommended to replace the earned income of the insured for the benefit of his or her family, to provide funding for financial and life goals that that income would have provided for, perhaps such as college tuition.
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If a soldier is young and single, I am not sure a life insurance policy is necessary, unless he has dependents or aging parents who need help or is perhaps concerned about his own future declining health.
Second, if it is determined that there is a need for life insurance, how long is the coverage needed? Again, the answer depends on the age of the insured and their particular concerns, goals and financial priorities.
If there are small children, the insured probably would want to have coverage that would last until that child leaves home. A needs analysis would look at the family's circumstances, determine its annual needs and arrive at a lump sum that is sufficient to provide the required annual income to support that family if the insured died.
Generally, an insurance company will provide a death benefit of about 16 times an individual's annual income. Let's assume that a soldier is 30 years old and has been enlisted for 6 years, his income would be roughly around $30,000. He may already receive $250,000 of insurance, purchased at a reasonable price from the U.S. government.
Another $250,000 in 20-year term insurance with an A+ rated company could possibly be obtained for as little as $167 a year. And a $250,000 permanent universal life policy from a reputable company might cost $1,077 a year. In contrast, according to information provided FPA by this committee, a so-called ''seven pay term'' life insurance with a death benefit of just $29,949 has a premium of $900 per year.
There is a saying that if all you have is a hammer, everything looks like a nail; in other words, unscrupulous insurance salesmen who have only life insurance to offer will try to solve every financial issue with an insurance product.
A financial planner who must put the interests of their client ahead of their own considers what investment tools are most appropriate given the financial constraints and priorities of the client.
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I feel compelled briefly to talk about other investment products marketed on military bases. Very often, an annuity accumulation fund is connected to the insurance policy I described earlier that generates a negative return in the first 2 years and has a 5 percent early withdrawal penalty during the first 10 years. I wonder whether information is adequately disclosed about the costs and lack of liquidity of this annuity, as well as the fact that the funds are not generally available prior to age 59.5 without additional penalties imposed by the IRS.
We are concerned about the marketing of contractual plans on military bases to less sophisticated and lower ranking members of the military. This type of fund has the 50 percent sales charge on the first-year contributions and it is seldom the best investment product for these members of the military.
The NASD imposes limits on mutual fund sales charges to 8.5 percent. But these charges rarely exceed 6.5 percent. And in my experience, civilians working with reputable financial advisers typically pay no more than 5 percent of the first year's investment on a mutual fund purchase, including systematic investment plans.
When our soldiers are convinced to purchase inappropriate and excessively expensive life insurance and investment products, it may mean that other financial needs go unaddressed. If these news reports are accurate and those who most need basic financial services to protect their loved ones and their futures are being taken advantage of by companies that are getting access to these men and women in the guise of providing financial education seminars, FPA believes it would be prudent for Congress to consider restricting the sale of contractual plans and granting states the authority to regulate insurance sales practices.
I thank you for holding this important hearing. FPA looks forward to working with the committee on this issue. Thank you.
[The prepared statement of Elizabeth W. Jetton can be found on page 112 in the appendix.]
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Chairman BAKER. Thank you, Ms. Jetton.
Mr. Mercer Bullard, welcome again for your third time; founder and chief executive officer, Fund Democracy. Welcome.
STATEMENT OF MERCER BULLARD, PRESIDENT AND FOUNDER AND CHIEF EXECUTIVE OFFICER, FUND DEMOCRACY, INC.
Mr. BULLARD. Thank you. Thank you, Chairman Baker, Ranking Member Kanjorski, members of the subcommittee. It is again a pleasure to appear before you today to talk about these important issues.
Like this subcommittee, when reports of abusive sales practices and unsuitable investment advice on military bases were reported in July, I was appalled. But I cannot say I was surprised.
The abuses stem from a number of observable structural causes. And some of them are more easily addressed than others.
I am going to briefly survey what I believe to be the main causes of these abuses and suggest possible solutions. I will spend most of time talking about the one that I believe would be easiest to address through fairly simple legislation, and that is the most shocking abuse, which I find to be the amount and the structure of sales loads charged on certain investment products.
They are shocking because of the substantial losses that result from the excessive loads. But they are also shocking because the amount and structure have been expressly authorized by Congress. The Investment Company Act expressly permits sales loads on periodic payment plans of up to 9 percent.
This means that a $100 per month investment in a 10-year periodic payment plan would incur a total sales load of $1,080 on total investments of $12,000 over the life of the plan. What is worse is the act expressly permits sales loads to be collected on an accelerated basis.
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These are the upfront 50 percent of the early payments that we have heard mentioned in this hearing already. And those are specifically permitted under the Investment Company Act under federal law.
The distributor can deduct, on that basis, half of every $100 payment until the entire sales load has been collected. This means that, for example, after 22 months and $2,200 in contributions, only $1,120 will have been invested. The broker will have pocketed $1,080, again compared to the $1,100 actually in the investment.
If the investor cancels the plan, the broker gets to keep the entire sales load. And the investor is left with a 50 percent loss.
The act mitigates this exploitive structure somewhat by requiring that investors may cancel the plan within 45 plans of receiving a notice that describes their cancellation rights. And then they receive the value of their investment plus the total commissions paid.
If the investor cancels within the first 18 months, they have the right to receive the value of the investment, plus a refund of the commission, less 15 percent of the gross payments made. So this means that even if the investor cancels after 18 months, he will still be obligated to pay a commission of $270 on contributions of $1,800 to an investment plan that he did not even keep for 2 years.
If the distributor agrees to spread the sales load deductions over 4 years and deduct more than average of 16 percent of the contributions during that time, it does not even have to make available that 18-month cancellation option. So in this case, the investor would pay 16 percent in commissions, instead of 15 percent in commissions, on the 18-month investment.
At least the investor is better off if he cancels after 22 months. In that case, he will have paid only $352 in commissions, as opposed to $1,080, again on only $2,200 in contributions on an 18-month investment.
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What makes these rules particularly shocking is that the sales load limits for sales of mutual funds—and when I refer to mutual funds, I mean mutual funds not sold through periodic payment plans, because as you may know, mutual funds are usually the underlying investment vehicle of periodic payment plans—the sales load limits for mutual funds set by the securities industry is substantially lower than the standard set by Congress. Normally, the securities industry will argue for higher limits than legislators. But that is not the case in this situation.
Under NASD rules, as Ms. Jetton described, mutual fund sales loads cannot exceed 8.5 percent, with that limit being reduced in a number of situations where, as a practical matter, you can almost never charge the full 8.5 percent load. In practice, mutual fund sales loads rarely exceed about 5.75 percent. And there are some occasions in which, as she mentioned, they will reach about 6.5 percent.
More importantly, the load is deducted from contributions as they are made and cannot be accelerated. This means that if the investor cancels the investment, commission paid does not exceed 5.75 percent.
Compare that with a 9 percent or 15 percent or 50 percent commission paid by investors in periodic payment plans. To put the different treatment of mutual funds and periodic payment plans in perspective, if a mutual fund investor invests $100 per month in a mutual fund with a 5 percent load—and this will be typically known, what is often offered as a systematic investment plans that most mutual funds offer—and they redeem the shares after 2 years, he would have paid $120 in commissions, compared with the $1,080 in commissions paid by the investors in the periodic plan—virtually the same investment.
If the mutual fund shareholder invests in a class of shares that charge a 1 percent 12b1-fee instead of a front-end load—the front-end load being the 5 percent front-end load—he would pay only about $25 in distribution fees, again compared with $1,080 for the investor in the periodic payment plan. The commission paid by the investor in the periodic payment plan is 4,320 percent of the commission paid by the investor in the mutual fund.
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As you are well aware, the mutual fund industry has thrived, despite the lower limits imposed on sales charges. In fact, competition has driven down sales loads well below the limits imposed by the NASD.
There is no reasonable basis for subjecting periodic payment plans and mutual funds, which often offer their own systematic plans similar to period payment plans, subject to NASD limits, to different standards. I strongly recommend that Congress repeal the statutory restrictions on sales loads on periodic payment plans and direct the NASD to extend its rules to such plans.
This would be a deregulatory measure because it would shift to the securities industry authority for regulating sales loads on periodic payment plans. It would be more efficient because it would place the authority for regulating these sales loads in one place—that is the NASD—rather than two—the NASD and the statute. And it would be more flexible because the NASD would be in a better position than Congress to respond to changing business practices.
The other causes of sales abuses on military bases are also quite observable. But they are not nearly as susceptible to relatively easy solutions.
One problem is the inadequate and inconsistent regulation of investment advice mentioned by Ms. Jetton. The unsuitable recommendations made to military personnel are characteristic of the lower standards that apply to brokers and the even lower standards that apply to insurance agents.
Brokers who provide individualized investment advice often are not even regulated as investment advisers, pursuant to SEC positions, or subject to fiduciary standards. And insurance agents often are not even subject to minimal suitability standards.
Both categories of professionals are provided individualized investment and financial advice and, accordingly, should be held to a fiduciary standard of care. Most of the financial services industry is adamant, is adamantly opposed to being held responsible for acting only in their clients' best interests, even while they become less the sellers of products and more the purveyors of advice.
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Congress should conduct a bottom-up review of the regulation of financial advice.
Another problem is the special vulnerability of military personnel, especially junior personnel, to abusive sales practices, whether such practices involve periodic payment plans, life insurance, home financing or any other retail product you can think of. The isolated command nature of military life is a double-edged sword.
It creates unique opportunity for the government to protect our soldiers from abusive sales practices. But for salespeople, it provides the opportunity to more easily exploit unsophisticated investors.
Ideally, the military would regulate sales practices on military bases. But it is not well suited for this job, which is not its primary mission.
We would not ask the SEC Chairman Donaldson to direct the war in Iraq any more than we should seriously expect the Pentagon to be the most efficient regulator of financial services on bases.
But as long as the military continues to exercise some control over sales activities on bases, state and federal regulators will be justifiably reluctant to intervene and apply what may be a different set of rules and a different set of procedures. Congress probably should encourage the military to establish a central office for the regulation of sales practices on military bases. And that office should work closely with state regulators and the SEC to come up with consistent standards.
But even with such a structure, it will be difficult to enforce the same sales practices for the benefit of our soldiers as we do for our civilian population.
The broadest and last problem is that the financial services industry is regulated in a generally dysfunctional smorgasbord of rules, promulgated in force by a wide variety of state and federal regulators, each of whom takes a different approach to regulation and oversees arbitrarily defined product lines. The reports on sales abuses on military bases illustrate how this patchwork of financial services regulation compromises consumer protection, increases costs and suppresses competition.
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Our system of financial services regulation is a drain on capital formation and wealth creation. Congress should begin a systemic review of financial services regulation with the goal of efficient, functional regulation of all financial services providers and products.
These are the essential problems I see underlying the sales abuses documented in recent reports. Some are fairly intractable. And I hope only that there will be some progress in addressing them during my lifetime.
But some can be effectively addressed in the short term. I would again recommend strongly that Congress shift regulation of sales loads on periodic payment plans to the NASD. This is a simple deregulatory step that would have an immediate, bottom line impact on our soldiers' financial security and help them benefit from the free market system that they are fighting to defend.
Thanks very much. And I would be happy to take questions.
[The prepared statement of Mercer Bullard can be found on page 78 in the appendix.]
Chairman BAKER. I thank you for your testimony.
Our next witness is Mr. David Woods, chief executive officer, National Association of Insurance and Financial Agents.
Welcome, Mr. Woods.
STATEMENT OF DAVID WOODS, CHIEF EXECUTIVE OFFICER, NATIONAL ASSOCIATION OF INSURANCE AND FINANCIAL AGENTS
Mr. WOODS. Thank you, Chairman Baker, Ranking Member Kanjorski, members of the committee. It is our privilege this morning to spend a few minutes with you, sharing our view of this problem and some of the solutions that we think might be appropriate.
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I do represent the National Association of Insurance and Financial Advisers. We represent 65,000 insurance agents and financial advisers and another 150,000 of their employees across the United States.
The Life and Health Insurance Foundation, of which I am also the president, is a non-profit organization whose mission is to educate the public about the essential role of life, health, disability income and long-term care insurance in their financial plans and the value added by qualified and professional insurance agents and financial advisers.
NAIFA has worked closely with the Department of Defense and with Congress over many years to improve and to establish proper regulation of insurance sales on military bases, to improve financial education for these men and women, which many members of the committee have already established is of critical importance.
Let me start, however, by making it very clear that in our view, the vast majority of life insurance agents and financial advisers adhere to the very highest professional and ethical standards. And in doing so, we obviously condemn those who do not.
As our mission statement indicates, NAIFA's reason for being is: to promote professional, ethical business practices. Just as an aside and as a moment of personal privilege, I am sure Ms. Jetton did not mean to imply that those who are not members of the Financial Planning Association or who are not registered with the NASD are not ethical and are unscrupulous. In fact, as she well knows and all of you well know, life insurance—its policies, its marketing practices—are well regulated by every state and by insurance commissioners across this country.
All of us—Congress, the Department of Defense, NAIFA—we all have the same goal here and that is to educate military personnel about financial matters that are critical to them and to stop the deceptive and unfair sale of insurance products. We must be steadfast, obviously, in guarding against unethical and possibly illegal sales practices. And we believe that the importance of ensuring that military men and women have access to insurance products cannot be overstated.
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As I indicated, the sale of insurance of course is regulated by both the federal government through the Department of Defense and the states, which are our nation's primary regulators of insurance. The current regulatory structure establishes a workable mechanism for the supervision of insurance agents on and off military bases and strikes a proper balance between guaranteeing the right of military personnel to have meaningful access to insurance products and financial education and ensuring ample protection for these insurance consumers from predatory sales practices.
The problem, however, with the current structure is the lack of coordination and communication between the Department of Defense and state regulatory authorities and the lack of adequate enforcement of existing rules. To correct these problems, in our view, the Department of Defense and the state insurance commissioners need to work together to develop a scheme to improve communication, improve coordination and improve enforcement of both Department of Defense rules and state laws.
We are delighted and we applaud Representative Max Burns for your efforts, sir, to provide solutions to these problems with the introduction of your Military Personnel Financial Services Protection Act. We enthusiastically support the proposal's embrace of state insurance regulatory authority by clarifying current law regarding state insurance regulatory authority over insurance transactions on military installations, which is certainly less than clear at the moment, as you have said.
The bill supplements the authority of base commanders and improves the ability of the Department of Defense and state authorities to ensure that insurance sales are properly handled.
We would, however, point out that there is some language in the bill which does cause some concern to us because it could be interpreted more broadly and lead to unintended and perhaps problematic consequences for the insurance industry and insurance consumers. And our statement gets into it in greater detail.
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We would look forward to working with you, sir, and with the committee to refine the language so your intent is clear and it does not do some harm where it should not.
We recognize that the majority of military personnel are, like Special Conger, young, often have little financial background or formal financial planning education. This is true not only in the military, but in society as a whole.
We support the framework established under the directive by which military personnel can and do receive critical financial education. The Life Foundation, of which I am the president, provides crucial insurance-based financial information directly to a broad spectrum of society, including high school students.
In fact, we already provide educational programs and material to 25 percent of high school juniors and seniors throughout the country. The Life Foundation has offered and continues to offer—and do so here—to provide educational programs and materials that it has already developed to the Department of Defense for servicemen and women.
So in summary, Mr. Chairman, clarification of current law, improvements in communication, coordination in enforcement and financial education are all critical elements in ensuring that current laws work to provide military personnel with the consumer protections that they need. With these goals in mind, NAIFA and the American Council of Life Insurers developed a set of best practices, which we have submitted to you, for military sales and their functional regulation. And these are attached to our statement.
And thank you again, sir, for the opportunity and the privilege of appearing before you today.
[The prepared statement of David Woods can be found on page 146 in the appendix.]
Chairman BAKER. Thank you again, sir.
Our next witness is Mr. Frank Keating, president, chief executive officer, the American Council of Life Insurers. Welcome.
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STATEMENT OF FRANK KEATING, PRESIDENT, THE AMERICAN COUNCIL OF LIFE INSURERS
Mr. KEATING. Mr. Chairman and members of the subcommittee, I appreciate the opportunity to appear today and to discuss how best to address unscrupulous sales of financial services, including insurance, to our men and women in the military service.
You are to be congratulated on conducting this expeditious hearing. We at the ACLI are glad that the revelations of this summer have finally opened communications among those whose responsibility it is to solve the reported problems.
For more than a year, the ACLI has been aware of such allegations of misbehavior. As a matter of fact, before the New York Times articles appeared, I personally met with senior officials of the Department of Defense to discuss this issue with them.
We have sought attention at the highest levels. Today, we have solutions we wish to share with you.
We believed we had achieved a breakthrough earlier this year when we were able to sit down with representatives of the U.S. Government Accounting Office to help them plan their investigation into the accusations leveled by all sides. We encouraged the GAO to dig deep beneath its express mandate to get to the bottom of things.
But it was the stories published by The New York Times in July that rocked everyone out of complacency and into remedial action. And it is about time.
The telling thing about the newspaper's stories is that the news was old news. Many of the same allegations involving the same companies were reported 4 years ago in the Cuthbert Report, which is the unofficial name of the official Defense Department investigation into ''Insurance Solicitation Practices on Department of Defense Installations.''
While that report itself is controversial, it was clear long before it was published that something was amiss in the supervision of insurance sales to military personnel. It should have been clear that alleged insurance problems required something of state regulators as well as defense officials.
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Our military mobilization since September 11th accelerated personal financial planning for our newly enlisted, accelerated sales of insurance and perhaps accelerated incidents of coercive selling. But it did not accelerate communications between industry and defense officials and state insurance officials until now.
The ACLI and the National Association of Insurance and Financial Advisers—NAIFA—have shared with you for this hearing a dozen best practices for military insurance sales and their financial regulation. Our recommendations are divided into three areas.
The first addresses military installation market conduct by insurers and insurance agents. The second area recommends improved, standardized financial literacy opportunities for our servicemen and servicewomen. The third area recommends improvements in regulatory supervision of the military market for insurance sales.
Thus, we offer suggestions for improvement for both industry and regulators. We have more ideas to offer and we are actively soliciting suggestions from our member companies and agents.
We want to assure that our military servicemen and women have the education, information, safeguards and independent sources of advice necessary for their individual needs. No industry can endanger its fundamental enterprise by tolerating misconduct in its core activities.
We do not want our many good companies and agents unfairly tarred by a brush intended for a few. That is why ACLI is here today and anxious, on behalf of the companies, to help you sort out the regulation of military sales of life insurance.
We are convinced that the reason these issues continue to come up is because of the lack of clarity over who has the authority to oversee such sales and the absence of clear procedures to ensure the highest standards for dealing with men and women in uniform.
I might take a moment now to address remedial legislation drafted by Representative Max Burns of Georgia. I commend Congressman Burns for his authorship of this bill. I also commend Congressman Emanuel for what he has proposed.
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At the heart of it is the genuine solution to many of the problems reported in the press: state regulation. That solution involves the realization of genuinely functional regulation in both the technical and common sense terms.
We support the overall concept of both bills. But there are a few ancillary provisions to which I would like to make some suggested improvements.
First, the Burns bill intends, we believe, to prohibit a particular investment product known as contractual mutual funds. As this is not a life insurance product, ACLI has no opinion about the pros and cons of such an investment.
However, the description of the product in the legislation goes far beyond contractual mutual funds to prohibit all kinds of insurance and annuities that have a variable element in them. ACLI has communicated with the committee staff on how to refine the technical description in the bill to the controversial product under your review.
My second observation is that the notion of asking 50 state insurance regulators to implement new standards to protect military personnel from insurance sales misconduct is unnecessary and probably unwanted by all the regulators involved. It has been the absence of any kind of functional regulation of insurance sales on military installations that has created cracks through which misbehavior has reportedly taken root.
Further, it is in the complete absence of effective enforcement of all relevant rules that has caused some of our soldiers to become victims of scams. Fifty new state rules in addition to existing rules will not better protect our servicemen and women if neither the states nor the Defense Department can enforce any rule.
The military services are a unique environment. It is populated by highly mobile individuals who have special needs and a healthy respect for those in authority or who otherwise provide guidance.
The functional regulation of insurance by the states must be reconciled with the functional regulation of our military personnel by the Defense Department. We believe that the necessary balance can be achieved in two ways: first, by centralizing relevant financial services information for all military services within a particular command in the Defense Department; and secondly, by looking to that centralized defense command to serve as the liaison and coordinator of financial services sales supervision, the handling of complaints and regulatory assistance with the financial service functional regulators at the state level.
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Under this approach, an infraction by a sales agent or a company on a military installation is not an isolated incident receiving an arbitrary evaluation. Rather, it becomes an incident reported to multiple regulators and multiple installation commanders.
It is subjected to fair and certain adjudication. And it will result, in some cases, appropriately in license revocations or penalties that sting.
The cracks in the system become sealed and misbehavior is rooted out, not to find fertile ground on another installation or in another state or foreign country. Ignorance breeds ignorance. If there is no ability for commanders to communicate or for regulators to communicate and to have this system put in place here in Washington to provide information, corrective action will never be taken.
Thank you, Mr. Chairman, again, for allowing me to address these important topics and ideas. We at ACLI are eager to help address effectively the problems under investigation by the GAO. We very much believe we can be part of the solution and that our recommended best practices provide a path to success.
Thank you.
[The prepared statement of Hon. Frank Keating can be found on page 120 in the appendix.]
Chairman BAKER. Thank you for your participation.
Specialist Conger, at the time that you were first approached by the sales representative for the American Amicable investment, do you recall whether the words ''front loaded'' were used or that there was any disclosure made about fees that you would pay in that first or second year or financial penalties that might be associated with any premature actions on your part?
What can you tell me, from your memory, about the presentation, when they said, ''This is a good deal. This is what we need from you. And here is what you get?''
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Did they tell you where your money was going to go when they asked you to make that check out?
Mr. CONGER. They did not tell us exactly where it was going to go. They showed us on charts pretty much how much money we would make. And they told us the sooner we put our money into it and if we decided later on to take it out, that there would be a very big penalty, very big fine.
And that is about all I know.
Chairman BAKER. Do you recall did they tell you how long you had to leave it in to avoid paying that big penalty? Did they tell you that?
Mr. CONGER. They said, at the time, we had to leave it in up to 2 years, I believe.
Chairman BAKER. 2 years.
Mr. CONGER. I believe.
Chairman BAKER. That is interesting. Okay.
Thank you very much, sir.
Mr. CONGER. Yes, sir.
Chairman BAKER. Ms. Jetton, a contract plan with a 50 percent first-year commission, as American Amicable provides, starting with a $900 premium for a $21,000 death benefit, is that a good deal?
Ms. JETTON. Well, in the civilian marketplace, just to give you comparison, if we are talking about term life insurance, someone of a young age could get $250,000 of term insurance for $200 or less.
We have two different things here and I think even we are getting confused at times. On the contractual mutual fund plan, where you have the 50 percent sales charge on the first year's contributions as Mr. Bullard and I commented, in the civilian marketplace you cannot charge more than 8.5 percent front-end load. And that comes out only as you invest new monies.
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And typical practice is you do not really see front loads higher than 6.5 percent. And truly a very reputable financial adviser who is, by law, putting the interests of their client first, can find good quality investments in a commission front load product, where the commission might be between 4 to 5.75 percent.
Chairman BAKER. Well, let me state it a little different way, then. If you were sitting in the room with some of these young men and women, typically, as I understand the profile of most of the customers, they are about 24 median age, total annual compensation of about $30,000, very minimal net worth calculations not really any identifiable near-term financial needs because of their military obligation.
How does someone come to the conclusion that either of these products are professionally appropriate for their financial next step?
Ms. JETTON. Well, that is the question. I have met with young enlisted and officers in the course of my career and typically their primary concerns are living within their means, avoiding debt, having just some liquid reserves in a savings account to protect them from all the kind of uncertainties, such as a car breaking down or a child needing some medical attention. So I would in no way ever recommend this type of product.
What we are always looking to do is make their dollars stretch as far as we can to cover all of the financial issues that they are facing, both what they are facing today in their lives and, if there is a life insurance need, finding the most economically viable, quality insurance product possible with the highest death benefit that would be appropriate.
Chairman BAKER. Generally, I am just appalled that this level of advice was permitted to be given to frankly individuals who were not in a position or mental state to make judgments, in light of the exorbitant financial costs associated with the extraordinarily low benefit. I just keep looking for an explanation from somebody as to how this happens.
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And apparently, it has happened to a great extent over a considerable period of time because there are several companies that appear to be doing quite well selling this product. I am advised that this series of votes, commencing now, will be a series of three votes. I leave it to the gentleman's discretion whether we would like to just recess now and go for the votes, or would you care to proceed with your questions? If you would like to be recognized, sir?
Mr. KANJORSKI. Sure.
Chairman BAKER. I would recognize Mr. Kanjorski for his questions.
Mr. KANJORSKI. The testimony poses some disturbing facts. No one likes to see the armed forces, their personnel being taken advantage of. But it raises the other side of the issue on consumer protection generally and how far government and regulation should get involved, really.
It reminds me of a hearing the chairman participated with me several months ago in Monroe County in the purchase of homes and mortgaging and brokerage of homes. And the question was that people from the greater New York area were buying homes sometimes twice their value.
And as a result, once they purchased the home and they started to pay on their mortgage for a year or two and they went for a refinancing, they found out the value of their home was about half what they paid for it. And needless to say, hundreds of people either went into foreclosure or were very disturbed with that fact.
And it raises the question: just what should the role of government be in saving people from their own misjudgment or failure to exercise reasonable procedures in the marketplace? I keep thinking of: is Casablanca shocking, that there is gambling in the casino? Well, is it shocking that there is profiteering in business?
We are really going to raise the question here: just how much do we hold the hands of not only military personnel, but consumers generally? And what the constraints of that will be on the free enterprise system.
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In an ideal world, I would like every member of the armed forces to have a financial planner. I would like to be certain that they do not get charged any greater amount than the median amount in cost of investments.
But the reality and the practicality of that is we are going to have to block the military from having any activities with financial transactions while they are in the service because invariably, unless we are able to write some sort of regulatory provisions or legal provisions that guarantee that we will stand behind the failure to use good financial judgment and I do not think it is possible to do that.
The question is: do you find—and maybe I should direct this question to Ms. Jetton and Mr. Bullard—do you find that the practices are so outlandish that the government should, in a very heavy-handed way, step in and restrict any participation except for those that are qualified to be absolutely foolproof to potential armed forces personnel? Or is this just the risk we take?
Mr. BULLARD. As a general matter, we should step in only where there is some evidence of market failure. And sales practices on military bases, I think, would clearly qualify.
It is a closed market. It is controlled by the Pentagon. It is highly susceptible to affinity marketing, which is another word for using relationships to exploit consumers.
And therefore, given that some degree of market failure, I think it is appropriate to think about stepping in.
But another answer to your question would be we already regulate and impose price restrictions with respect to sales practices. The reason we do that and not, for example, impose price limits on mutual funds themselves is that the potential for abuse in sales practices is so much greater.
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You have someone who is very difficult to regulate on the ground, engaged in interpersonal reactions, where it is very hard to prevent sales abuses from occurring. And decades ago, Congress decided that it was appropriate to impose limits.
The mistake it made was that when it gave the NASD the ability to impose limits on mutual fund sales, it did not then also repeal the provisions for periodic payment plans and also send that along with the same package. So we have really answered the question as to sales loads.
They are regulated. They are regulated by imposing very specific restrictions.
But we have an archaic set of provisions that allowed accelerated payments that really would have gone by the wayside if the industry itself had been regulating these securities products. So I think the answer would be that in evidence of market failure and a long history of already providing those kinds of restrictions, that there is a very strong argument for having some more government oversight in this case.
Ms. JETTON. And I would agree. And I would also note that we do have fairly heavy-handed regulation in the civilian marketplace through the NASD and the SEC. And the military, in some ways, has been carved out as a niche, when in fact, it is probably an area that needs at least the same level of protection because of the very people we are talking about, who are so very often young, who are coming into it with a focus on serving their country.
And their lives are complex and chaotic as a result of that. And I think they need our very special care.
There is also a problem in that anyone can call themselves a financial planner in this country without having credentials. There is a credential, the Certified Financial Planner. There is a meaning to the term ''investment adviser'' that should mean—and does mean—that you are registered with the SEC and have a fiduciary relationship.
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But unfortunately, those terms are battered around. And there is no statutory regulation there, so that anyone can just use the language and be the wolf in sheep's clothing.
And I am certainly not denigrating the insurance profession overall. But again, there is a difference in our regulatory standard and professional standard. There is not a fiduciary standard in place for insurance. And therefore, I think Congress has a role.
Mr. KANJORSKI. Are you suggesting a special regulatory entity for defense personnel, as opposed to a more broadly regulated entity?
Ms. JETTON. I am not necessarily making that case. We have had so little time to really consider the issue. But we would be happy to consider and make more comments.
Mr. KANJORSKI. Thank you.
Gentlemen, I just want to get to you for a second. Are you full of scoundrels in your industry? Or is this an aberration?
Mr. KEATING. No, our industry is not full of scoundrels. But I disagree with this nice lady. If you are selling a product, you may almost have a fiduciary relationship to the person to whom you are selling the product.
But let me say this, as you know, Congressman, bad facts frequently make bad law. We have to reflect, before we take action or propose action, that an 18-year-old in this country is an adult. An 18-year-old can serve in the military. An 18-year-old can enter into a personal property contract.
Mr. KANJORSKI. They do not vote very often though, governor.
Mr. KEATING. The same thing with real estate; the same thing with serving on a jury and sending somebody to their execution or to a prison term. So what we propose is to say, look, this is an unusual environment.
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What we ought to have is a full, complete and utterly impartial financial services seminar for military personnel, because this is a family decision—their retirement, their savings, these are matters of real interest to them. It obviously is of real interest to the military: to not permit its people to sign unknowingly on the dotted line at those kinds of events. If there is a bad apple—and there are bad doctors; there are bad lawyers; there are bad insurance salesmen it is important to have that information provided to the Department of Defense, and shared among insurance commissioners.
There already is a system in place that can communicate, insurance commissioner to insurance commissioner, to all the agents and all the companies. So to bring together the regulators in an office at Defense and give the opportunity for base commanders to access that information so that they are not dealing with someone who has been booted off another base is readily available. I think it is rather simply handled.
But I think we do not need to patronize people. We need to give them the very best information and not permit abusive practices on bases.
Mr. BALLARD. Could I respond to one comment? It is factually and legally incorrect to say that sellers of life insurance have a fiduciary duty. They do not, never have. And Ms. Jetton is exactly right.
And the product you describe, Chairman Baker, would have been a violation of that seller's fiduciary duty. But because they are not subject to fiduciary duty, we have this issue in front of us today.
Mr. KEATING. That is not true.
Mr. BALLARD. We do not need to debate that.
Chairman BAKER. No, we do not. We are down to about 5 minutes on the vote. With everyone's tolerance, since there are two pending matters, I understand the second vote may now be a 15-minute vote, we will stand in recess until 12:30 to accommodate everyone.
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Thank you.
[Recess.]
Chairman BAKER. I would like to call this meeting of the Capital Markets Subcommittee back to order. We will certainly have members returning, as circumstances warrant. But in order not to delay our panel any longer, I wish to proceed in recognition of members for questions.
Mr. Kanjorski had been previously recognized prior to our recess. Mr. Lucas would now be in order.
Mr. LUCAS OF OKLAHOMA. Thank you, Mr. Chairman.
Governor Keating, you testified that ACLI had sat down with the GAO office to help them plan their investigation into the accusations leveled by all sides concerning military insurance sales. Could you describe to the committee a little bit the nature of some of those accusations and the inappropriate practices and then what ACLI's suggestions were to the GAO in regards to that?
Mr. KEATING. Congressman Lucas, as I alluded to in my formal testimony, I came aboard just after the first of last year, mid-January. And one of the first letters I wrote was to the Department of Defense after we heard about allegations of oppressive sales practices and inappropriate products being sold, asking for a meeting with the Department of Defense.
That meeting was declined. In the course of the inquiries from GAO, we have taken up with them these issues, as recently we did with the Department of Defense in a meeting with them. We have subsequently had a meeting with officials from the Department of Defense and taken the position that the answer must always be a regulatory scheme that works.
And it is very difficult if a state insurance commissioner who has responsibility over life insurance sales does not know about an accusation. It is very difficult for that insurance commissioner to take action against either the company or the agent.
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It is particularly difficult for the company if they do not know that there is a problem on a base with a particular agent. So with the GAO, as well as with the Department of Defense, our position has consistently been a clearing house at DOD, with access to the computerized information of all the agents and companies in the country.
Let's say an agent acts improperly at, let's say, Fort Sill in Oklahoma. That individual should not be able to just go on to Fort Lewis, Washington and begin business as usual because his name, the fact that he has been excluded from the base, would be in this national system, accessible by the Department of Defense, by state insurance regulators. And not only can action be taken by the department in the barring of that individual, but also the license can be suspended by the insurance commissioner.
The problem has been, as I indicated, there really has been no communication or very little communication. And we are representing the companies involved—some 400 life companies, most of whom do not do business, by the way, on military bases.
So we are very anxious and insistent that there be communication between the Department of Defense and the state insurance regulators, a consistent system of sharing information and taking action when those bad apples and actors do surface.
Mr. LUCAS OF OKLAHOMA. Understood. And clearly, in that kind of a scheme, situation, regulatory regime, where the state insurance commissioners were involved in the regulatory process, if there was a problem with a company, with an agent, it would be possible for the insurance regulators surely to report to the base commanders that those entities are no longer licensed to do business in that state, I would think.
In the long haul, governor, do you think that this is a situation that, granted it is a limited number of companies perhaps that specialize in this kind of a business, but is it a situation, based on your insights, you think, that has been a problem perhaps at a number of military bases across the country, as opposed to just a limited number of isolated incidents?
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Mr. KEATING. I only know, Congressman, anecdotally, because again there has not been a universal sharing of accusations and information. But certainly the information provided in the New York Times pieces would suggest there were more than just a few bases involved.
And that is why the timeliness and the urgency of action is upon us. And to the extent that we can make sure that bad actors are identified and removed by the companies, to the extent we can make sure that bad actors are identified and either fined or removed by insurance commissioners, we need to do that.
And as you well know, as long as life and casualty and medical insurance are state regulated, you are going to have a wide variety of interest in these things. But if the Department of Defense can collate the information and share it with the insurance commissioners and become the bully pulpit to insist that action is taken in a public way, I think you are going to see this problem moderate very dramatically and very quickly.
Mr. LUCAS OF OKLAHOMA. Thank you.
Specialist Conger, thinking back to the information that was made available to you, how much time was spent by anyone for that matter discussing the various options that could be available to you, all the way from buying savings bonds on down to not participating in things. How much time would you say, in your military experience, was actually devoted to this kind of information providing? Guesstimate?
Mr. CONGER. Congressman, I would say probably about three hours. There was a discussion on investing money into mutual funds and the options. There really were not any other options that they gave us.
They kind of hurried us up in this situation and never really gave us any options or anything.
Mr. LUCAS OF OKLAHOMA. Thank you, Specialist.
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Thank you, Mr. Chairman, for your time.
Chairman BAKER. Thank you, sir.
Mr. Scott, did you have questions?
Mr. SCOTT. Thank you very much, Mr. Chairman.
We are missing somebody at this hearing and that is the military. We have private insurance companies who are being given access to U.S. military bases, to sell young Americans in uniform expensive insurance that they do not need. And they are charging our soldiers high fees for investments that have been disgraced and outlawed in the civilian market.
And because these insurance salesmen have been given the military's permission to sell such products on their bases, many of our soldiers, like Specialist Conger, believe the products have their commander's stamp of approval. And we are having this hearing to come to a way to fix this problem. And we do not have a representative of the Pentagon or the military here.
And I was just wondering, Mr. Chairman, if you could share with us: were they invited? Is there any reason why they are not here? I do believe that they are an important part of getting to the core of this issue.
Mr. Chairman?
Chairman BAKER. I am sorry, I was not listening.
Mr. SCOTT. My question was: did we invite the military here? I was very concerned that we have a problem that expressly happens in an environment that the military controls, been happening for 30 years, being perpetrated by agents who themselves are retired military and by companies on whose boards the military is highly represented. And here we are, trying to come to a solution to this and the military and the Pentagon is not here to answer questions before this committee.
And I wanted to know: were they invited? And if they were, why did they not come? And certainly, I would certainly want to make the case that before we move further to try to come up with answers to a problem, we certainly need the input of the defense and the Pentagon here to help us with this.
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Chairman BAKER. I certainly understand the gentleman's concerns. The military would be the second tier level of concern, at least from my perspective at this time.
This is a free enterprise product, marketed through the approval or permission of the military administrations who allow a product to be brought to the attention of enlisted personnel for the enlisted personnel to be able to make independent financial decisions. However, it is clear to me, given the manner by which the marketing was conducted through retired officers to enlisted personnel in happy hour environments, that it was not a judgmental circumstance in which personnel could exercise independent financial judgments.
Therefore, at the appropriate time, I assure the gentleman that we shall engage military personnel responsible for authorization to explain to us their review processes. Now military personnel who allow private vendors on to military bases can not always be held accountable for unprofessional conduct.
If a private vendor was to come on to a military base with vending machines that took quarters on every occasion, that would not necessarily be an oversight of military personnel. However, given the longstanding practice, the excessive charges, the limited benefit, the reported incidences in which individuals reported their unwillingness to participate, there will be a requirement to have some thorough explanation as to how this practice and methodology was continued on such a longstanding basis.
But to the military's defense today, they were not extended an invitation to appear. We, rather, chose to focus on the financial aspects as a consumer product first.
Mr. SCOTT. Okay, Mr. Chairman. I certainly look forward to an opportunity, at the appropriate time, that I might be able to ask the military and the Defense Department.
Chairman BAKER. Oh, without question, the gentleman will reserve that right.
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Mr. SCOTT. Let me ask Mr. Bullard, in your opinion, can you explain to me how contractual mutual fund plans are better suited for the military when it is almost non-existent in the civilian market? And are these insurance products commonly sold by other firms?
Mr. BULLARD. The contractual plans you are talking about, I assume are the ones through which you can charge up to the 9 percent sales load and deduct the sales load, up to 50 percent of each contribution for the first couple of years. And those are not sold in the civilian marketplace simply because they cannot compete with other mutual fund products.
In the civilian marketplace, you have an open marketplace. There is a great deal of competition and information out there. And it is for that reason only are periodic payments that sell mutual funds not sold, but even mutual funds competing for business set their sales loads at levels that are substantially below what is allowed by the NASD.
So the obvious explanation is competition, which leads me to look at the military base environment and, not surprisingly, find a lot of examples of why the markets are not working efficiently. You have a command structure, which lends itself to officers and enlisted personnel who are vulnerable to influence by senior officers, senior retired officers.
You have an environment where you have a selective group of persons who have access, thereby creating high barriers of entry to that market. So there are a lot of market reasons why this is probably a fairly inefficient market and additional regulatory scrutiny is needed.
Mr. SCOTT. All right.
Governor Keating, let me ask you this. Are you familiar with First Command Financial Planning?
Mr. KEATING. Only from the news reports. That is correct, Congressman.
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Mr. SCOTT. Only from the news reports?
Mr. KEATING. Yes. They are not a member of our association.
Mr. SCOTT. What about American Amicable Life Insurance Company?
Mr. KEATING. From the news reports as well.
Mr. SCOTT. They are not a part of your organization?
Mr. KEAT