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

November 2005: 

Financial Product Sales: 

Actions Needed to Better Protect Military Members: 

GAO-06-23: 

GAO Highlights: 

Highlights of GAO-06-23, a report to the Committee on Banking, Housing, 
and Urban Affairs, U.S. Senate. 

Why GAO Did This Study: 

In 2004, a series of press articles alleged that financial firms were 
marketing expensive and potentially unnecessary insurance or other 
financial products to members of the military. To assess whether 
military service members were adequately protected from inappropriate 
product sales, GAO examined (1) features and marketing of certain 
insurance products being sold to military members, (2) features and 
marketing of certain securities products being sold to military 
members, and (3) how financial regulators and the Department of Defense 
(DOD) were overseeing the sales of insurance and securities products to 
military members. 

What GAO Found: 

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

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

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

What GAO Recommends: 

Matters that Congress should consider include banning contractual 
plans, requesting that insurance regulators conduct reviews to ensure 
that products being sold to military members meet existing insurance 
requirements, and ensuring development of appropriateness or 
suitability standards for such sales. GAO also recommends that DOD and 
financial regulators work cooperatively to help improve the oversight 
of such products. DOD and the financial regulators provided comments 
generally agreeing with this report and its recommendations. 

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact Richard Hillman at (202) 
512-8678 or hillmanr@gao.gov. 

[End of section] 

Contents: 

Letter: 

Background: 

Results in Brief: 

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

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

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

Conclusions: 

Matters for Congressional Consideration: 

Recommendations: 

Agency Comments: 

Appendixes: 

Appendix I: Objectives, Scope, and Methodology: 

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

Appendix III: Performance of Contractual Plans Compared to Alternative 
Investments: 

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

Appendix V: Comments from the Department of Defense: 

Appendix VI: Comments from the Securities and Exchange Commission: 

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

Appendix VIII: Comments from the National Association of Insurance 
Commissioners: 

Appendix IX: GAO Contact and Staff Acknowledgments: 

Tables: 

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

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

Figures: 

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

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

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

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

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

Abbreviations: 

DFAS: Defense Financial and Accounting Service: 

DOD: Department of Defense: 

DOJ: Department of Justice: 

IMSA: Insurance Marketplace Standards Association: 

NAIC: National Association of Insurance Commissioners: 

NASAA: North American Securities Administrators Association: 

NASD: National Association of Securities Dealers: 

PCS: Permanent Change of Station: 

SEC: Securities Exchange Commission: 

TSP: Thrift Savings Plan: 

SGLI: Servicemembers' Group Life Insurance: 

VGLI: Veterans' Group Life Insurance: 

Letter November 2, 2005: 

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

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

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

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

Background: 

Members of the U.S. military serve in different branches in locations 
across the country and around the world. The various branches within 
DOD include the Department of the Air Force, the Department of the 
Army, and Department of the Navy, which also incorporates forces of the 
Marine Corps. DOD also oversees the members of the Coast Guard along 
with the Department of Transportation. As of 2004, approximately 1.4 
million active duty military personnel served in the various branches 
in more than 6,000 locations. In addition, 2 million retirees receive 
pay and benefits from the department. DOD is also the largest employer 
and trainer of young adults in the United States, recruiting about 
200,000 individuals into active duty in 2004--the majority of them 
recent high school graduates. As shown in figure 1, the pay of typical 
junior enlisted staff--grades E-1 through E-3--ranges between $1,143 
and $1,641 per month. 

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

[See PDF for image] 

[End of figure] 

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

Various aspects of the military life can increase the challenges that 
service members face in managing their finances. According to the 
private research report, factors that appeared to increase the 
financial distress among military members were the family separations 
resulting from changes in duty stations and deployments away from home. 
According to our report on military relocations, DOD reported that 
about one-third of all military members make Permanent Change of 
Station (PCS) moves every year.[Footnote 4] The average length of time 
spent at each location can also be brief, with 20 percent of such 
relocations lasting less than 1 year and about 50 percent lasting 2 
years or less. Leaving or retiring from the service also represents the 
last major transition in a service member's career, with data 
indicating that most enlisted personnel leave after their initial duty 
commitment.[Footnote 5] 

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

The federal government offers service members life insurance as part of 
their total benefits package. Each member is eligible for inexpensive 
coverage under Servicemembers' Group Life Insurance (SGLI), which 
provides group term life insurance. Until September 1, 2005, service 
members were automatically covered for the maximum amount of $250,000 
of insurance on their first day of active duty status, unless they 
decline or reduce their coverage, but Congress has now increased this 
amount to $400,000.[Footnote 6] Service members leaving the military 
can also opt to continue coverage through the government-sponsored 
coverage provided to veterans. Although many life insurance policies 
exclude coverage for deaths resulting from acts of war, these 
government-sponsored policies do not contain this exclusion. 

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

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

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

Securities--and the firms that market them--are overseen by various 
regulators. At the federal level, the Securities and Exchange 
Commission (SEC) oversees securities issued by public companies. The 
firms that market securities to investors, known as broker-dealers, 
must also register and subject themselves to SEC oversight. This 
includes complying with various requirements for regulatory reporting, 
financial soundness, and sales practice regulations designed to protect 
investors. In addition to oversight by SEC, broker-dealers also are 
overseen by private entities known as self-regulatory organizations. 
The New York Stock Exchange and NASD (formerly called the National 
Association of Securities Dealers) are two examples of such 
organizations. State regulators also oversee securities activities. 

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

In response to concerns over the sale of questionable financial 
products to military members, the House of Representatives passed 
legislation in 2004 and 2005 requiring additional protections for 
service members.[Footnote 11] In February 2005, a similar bill was 
introduced in the U.S. Senate.[Footnote 12] Both bills contain various 
congressional findings, including the finding that military members are 
being offered high-cost securities and life insurance products by some 
financial services companies engaging in abusive and misleading sales 
practices. According to the bills, Congress finds that the regulation 
of these products and their sale on military bases has been clearly 
inadequate and requires congressional legislation to address these 
issues. These bills have been referred to the Senate Committee on 
Banking, Housing, and Urban Affairs for further consideration. 

Results in Brief: 

State regulators in various states have found that a small number of 
insurance companies have been marketing a type of high-cost insurance 
product to thousands of low-ranking service members at military 
installations across the United States and around the world. According 
to state insurance regulators, at least six companies were targeting 
military members and selling a product that combines life insurance 
with a savings or investment fund that promises high returns but 
includes provisions that reduce the likelihood that military purchasers 
will benefit. Although military members already receive considerable 
low-cost life insurance as part of their government benefits, these 
companies' products usually provide small amounts of additional death 
benefits and survivors of some service members that died have received 
millions in death benefit payments from these companies. However, the 
products sold by these companies had much higher premiums than those 
that military members pay on policies offered by the government or 
other companies. In addition, these products raise concerns because 
they have a provision that depletes any accumulated savings to pay the 
insurance premiums if the military members, many of whom move 
frequently and leave the service within the first few years, ever stop 
making the scheduled payments. With state insurance regulators 
indicating that most military members halt their payments within the 
first few years and often fail to request refunds of their savings, 
most purchasers were left with little or no savings in exchange for a 
small amount of expensive insurance coverage. Insurance regulators and 
others have already taken actions to seek remediation on behalf of 
service members from several companies selling these products and 
additional investigations are underway in as many as 14 states. 
Regulators are examining allegations of whether representatives of 
these companies misrepresented the products as investments rather than 
insurance, including investigating cases in which premiums for the 
products were alleged to have been fraudulently identified as going 
into savings accounts on forms used to deduct premium payments from the 
military members' pay. Information from our work, DOD, DOJ, and other 
organizations have documented that these companies have frequently been 
found to have violated DOD restrictions on selling products on military 
installations for years. During the course of our work, we also 
referred several potential fraud-related concerns to our special 
investigators, who have initiated contacts with federal law enforcement 
authorities, state insurance regulators, and DOD criminal investigative 
organizations. 

Financial regulators have also found that a securities product known as 
a "mutual fund contractual plan" was also being widely marketed to 
military members.[Footnote 13] Although rarely marketed to civilians 
since less expensive products have become widely available, securities 
regulators found that a small number of broker-dealers have been 
selling contractual plans that expect the purchaser to invest a set 
amount for a set period, such as 15 years. Although 50 percent of the 
contractual plan's first-year payments represent a sales charge paid to 
the selling broker-dealer, its total sales charges are generally less 
than for other load funds if held for the entire period. However, 
securities regulators found that only between 10 to 43 percent of the 
military members that purchased contractual plan funds completed their 
plans, and as a result, the majority of service members purchasing this 
product paid higher sales charges and likely received lower returns 
than had they invested in other available products. In addition to 
being less beneficial for those that stop making payments before 
completing the full term, regulators have also found that firms 
marketing contractual plans were using inappropriate sales practices. 
In a settlement reached with securities regulators in late 2004, the 
largest marketer of these contractual plans, a broker-dealer with 
nearly 300,000 clients, was censured for, among other things, using 
market materials that misrepresented the advantages of these plans 
compared to other investments. Investigations at other firms are 
continuing. Because these contractual plans have been periodically 
involved in sales scandals for decades, regulators questioned whether 
they should continue to be allowed to be sold, particularly since the 
innovations of the last 20 years have resulted in wide availability of 
lower-cost alternatives, such as no-load mutual funds and a government- 
provided retirement savings plan. 

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

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

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

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

Small Number of Firms Are Targeting Junior Military Personnel with 
Expensive Insurance Products with Adverse Provisions: 

According to state insurance regulators we contacted, at least six 
insurance companies were marketing products combining insurance and 
savings funds with provisions that reduce the likelihood that military 
purchasers would accumulate any lasting savings with such products. 
These state insurance regulators are currently reviewing the operations 
of these companies. Several of these companies share common ownership, 
with three owned by the same firm and two others having key executives 
from the same family. These companies operate extensively throughout 
the United States, with four licensed to sell insurance in at least 40 
states, and the other two licensed in at least 35 states. In addition, 
as of July 2005, DOD approved five of these companies to conduct 
business at U.S. military installations overseas.[Footnote 14] 

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

Products Couple High-Cost Insurance with a Savings Component Promising 
High Rates of Return: 

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

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

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

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

[See PDF for image] 

Notes: 

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

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

[End of figure] 

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

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

[See PDF for image] 

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

[End of figure] 

These insurance products also cost significantly more than other life 
insurance coverage available to service members. Prior to September 
2005, all service members could purchase $250,000 of term life 
insurance through SGLI for $16.25 per month. Since September 1, 2005, 
the total coverage has increased to $400,000 for $26 per month. 
According to the Department of Veterans Affairs, which administers the 
SGLI program, 98 percent of all service members opt to receive this 
coverage. After leaving the service, service members can convert their 
SGLI coverage to a Veterans' Group Life Insurance (VGLI) policy which 
now also provides up to $400,000 of low-cost term life insurance for 
veterans, with rates dependent upon age. For example, veterans between 
the ages of 40 and 44 years of age can purchase $50,000 of life 
insurance for less than $10 per month. In addition to government- 
sponsored coverage, service members can also purchase similar coverage, 
including covering combat deaths, from other insurance companies. For 
example, according to officials of one company that sells insurance and 
other financial products to military personnel directly, they could 
provide a 20-year-old service member an additional $250,000 of life 
insurance to supplement SGLI for $15 to $20 per month. 

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

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

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

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

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

The characteristics of the military population that these companies 
were marketing to increases the likelihood that service members will 
stop making payments and not receive any savings they have accumulated 
in these products. Regulatory officials we spoke with said that one of 
the reasons so many service members discontinue making payments is that 
they leave the service and thus the automatic deductions of their 
premium payments to these companies also stop. Company officials we 
spoke with told us that service members ceasing payments can request 
and receive refunds of the amounts accumulated in their savings 
accounts. However, according to regulators we contacted, companies do 
not always receive such requests from service members at the time 
payments cease. According to these regulators, many service members may 
not have received refunds of any accumulated savings given that such 
funds are automatically depleted to pay for the insurance policy for an 
extended period until such amounts were exhausted. As a result, many of 
the service members who simply stop paying into the product likely did 
not receive any of the money they had paid into the savings portion of 
the product. As such, they obtained some extended life insurance 
coverage after their payments ceased that, as shown previously, was 
more expensive than insurance they already receive and that they would 
not likely have purchased except for the promised savings provision. 

According to our analysis, the amount of time that it takes for a 
service member's savings fund on the products these six companies were 
selling with a monthly payment of $100 to become totally depleted 
through the automatic payment provision varied. Figure 4 shows the 
impact on a service member that purchases the 20-year term life product 
with the 7-year premium period with $30,000 of insurance coverage, 
makes $100 monthly payments for 4 years totaling $4,800, and then stops 
making payments. As the figure shows, the money in this service 
member's savings fund would be totally depleted to pay the subsequent 
insurance premiums in just over 1 year. This occurs because the policy 
requires that the entire 20 years of coverage be paid for in the first 
7 years, which results in the monthly premium being larger than 
comparable policies. In addition, because almost all of the service 
member's payments during the first few years are allocated to the 
insurance policy, the accumulated value of the savings fund is modest. 
For the modified whole life product previously discussed, which 
required lower premium payments and larger savings accumulation after 
the first year, the savings fund of service members that ceased making 
their payments after 4 years would be sufficient to extend the $30,000 
of life insurance coverage for another 13 years. In contrast, a service 
member could have used the $100 monthly payment to instead purchase 
$30,000 of SGLI term coverage at a cost of only about $23 per year-- 
totaling $92 for 4 years--and invest the remaining $4,708 into the 
Thrift Savings Plan (TSP), which is the low-cost retirement savings 
plan available to military members and federal employees. Although 
ceasing payments on SGLI after 4 years would terminate the service 
member's life insurance, the money contributed to the TSP and left to 
earn just 4 percent interest would grow to about $9,545 in 20 
years.[Footnote 16] 

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

[See PDF for image] 

[End of figure] 

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

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

Insurance companies that market primarily to military members have been 
frequently accused of using inappropriate sales practices by 
regulators, DOD, and others. As part of our review, we identified at 
least 15 lawsuits or administrative actions that had been taken against 
companies that market primarily to military members. In many of these 
actions taken by state and federal regulators, federal law enforcement 
organizations, or others, the companies were accused of misrepresenting 
the products as investments or identifying themselves as 
representatives of independent benefit or fraternal organizations. 
(Appendix II lists these actions.) For example, in December 1998, two 
of the insurance companies that target military members settled a 
lawsuit filed by DOJ in Washington state that alleged that their agents 
had misrepresented their insurance policies as investment plans. As 
part of the settlement the companies had to offer refunds to 
approximately 215 service members in certain states who purchased life 
insurance polices between 1994 and 1997. In an agreement with the 
Attorney General's Office in the state in which one of the companies 
was domiciled, each of the companies also made $1 million donations to 
a university in that state. More recently, after the Georgia Insurance 
and Safety Fire Commissioner initiated investigations to review 
allegations of improper insurance sales practices at military 
installations in that state, two insurance companies have agreed to 
make refunds of about $2.4 million to soldiers who had purchased 
insurance products. 

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

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

The marketing materials for the companies that we examined also 
emphasized the savings component of the products. For example, a script 
from a sales presentation of one company mentions the insurance 
coverage third, after describing other product benefits. It also 
highlighted that the cost of the insurance was "free" if the service 
member completes the product terms. Insurance regulators with whom we 
spoke mentioned that such a sales presentation is designed to overcome 
objections from service members that they did not need any additional 
life insurance. In addition, examiners in one state reported in 2002 
that one of the companies' materials referred to the premium payments 
for the insurance product being sold to service members as 
"considerations" or "contributions," which were terms that they said 
were typically used when selling investment products. Our review of 
information provided by legal offices at Fort Benning, Georgia, and 
Great Lakes Naval Training Center, Illinois, also indicated issues 
related to insurance products being marketed and sold primarily as 
investment products. 

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

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

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

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

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

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

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

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

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

Concerns Exist over Whether Insurance Company Personnel Represent 
Themselves as Members of Other Organizations: 

Another sales practice issue that insurance regulators we contacted 
have been concerned about is whether some individuals that are selling 
insurance were not clearly representing themselves as insurance agents 
when marketing to military service members. In the past, DOD has found 
that insurance agents who have marketed to service members frequently 
identify themselves as counselors from benefits associations. Such 
entities provide counseling on obtaining government benefits or other 
services and may also offer their members discounts on other products, 
such as auto services. By representing themselves as benefits 
counselors, insurance agents may more readily gain access to service 
members. 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[See PDF for image] 

[End of figure] 

At one time, contractual plans were the only way for small investors to 
invest in mutual funds. Regulators told us that in the past, many 
mutual funds required large initial investments that prevented them 
from being a viable investment option for many individual investors. 
However, today, other lower-cost alternatives exist for small investors 
to begin and maintain investments in mutual funds. For example, many 
mutual fund companies now allow investors to open a mutual fund account 
with a small initial investment, such as $1,000, if additional 
investments--including amounts as low as $50 per month---are made 
through automatic withdrawals from a bank checking or savings account. 
According to a recent study by the mutual fund industry association, 
over 70 percent of the companies offering S&P 500 index mutual funds in 
2004 had minimum initial investment amounts of $1,000 or less, with 9 
having minimum investment amounts of $250 or less.[Footnote 29] 
Securities regulators saw the wide availability of such products as the 
reason that contractual plans were rarely being offered to most 
investors. Another alternative investment option available to service 
members since 2002 is the government-provided TSP. Comparable to 401(k) 
retirement plans available from private employers, service members can 
invest up to 10 percent of their gross pay into TSP without paying any 
sales charge. The various funds offered as part of TSP also have much 
lower operating expenses than other mutual funds, including those being 
offered as contractual plans. Service members could also choose to 
invest as many other investors do in mutual funds offered by companies 
that do not charge any sales load. Called no-load funds, these are 
available from some of the largest mutual fund companies through toll-
free numbers, the Internet, or by mail. 

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

Many Service Members Failed to Benefit from Contractual Plans: 

However, according to data obtained from securities regulators, many 
service members did not benefit from purchasing contractual plans. 
Although such plans can prove beneficial to an investor that makes all 
of the required periodic payments, regulators found that many service 
members were not investing in their plans for the entire term. For 
example, SEC and NASD found that only 43 percent of the clients that 
purchased plans between 1980 and 1987 from the largest broker-dealer 
had completed the full 15 years required under the contract. Instead, 
35 percent of these clients that bought during this period had 
terminated their plans early. Another 22 percent had not cancelled 
their plans but were not making regular payments. According to 
securities regulatory staff, most of the clients that stopped making 
payments into this broker-dealer's contractual plans ceased doing so 
after about 3 years. 

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

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

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

Contractual plans have long been associated with sales practice 
concerns and recently regulators have taken action against the largest 
seller of these products. According to an SEC study, contractual plans 
to sell mutual fund securities were first introduced to the public in 
1930.[Footnote 30] However, concerns over the sale of these products, 
including excessive sales charges, arose and, as a result, the 
subsequently-enacted Investment Company Act of 1940 included a 
provision that limited the sales load that could be charged on 
contractual plans. After the passage of the Act, sales of contractual 
plans declined, with most of the companies selling such plans halting 
their marketing of such products. 

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

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

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

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

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

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

A lack of routine complaint sharing between financial regulators and 
DOD was the primary reason that regulators did not identify problematic 
sales of financial products to military service members before such 
issues were raised in press accounts, although other limitations among 
regulators' practices also contributed. Insurance companies are 
generally required to submit products for regulatory approval before 
marketing them but the review processes in most states may not have 
addressed the appropriateness of their features for service members. 
Although insurance regulators in some states review sales activities 
periodically, insurance regulators in most states generally rely on 
complaints from purchasers to indicate that potentially problematic 
sales are occurring. One reason that insurance company sales activities 
are not reviewed more extensively is because most states lack any 
appropriateness or suitability standards for insurance products. 
Although some states had taken action, other state insurance regulators 
were not generally aware of problems involving military members until 
recent press reports, in part because DOD personnel were not usually 
sharing complaints or information about other inappropriate practices 
regarding the companies that targeted service members. However, we 
found evidence that concerns over inappropriate sales to service 
members exist widely at various military installations. Similarly, 
securities regulators also did not identify recent problems involving 
contractual plan sales to service members until such press accounts 
appeared. These regulators' ability to detect problems was also 
hampered by the lack of information on the extent to which broker- 
dealer customers purchasing contractual plans were successfully making 
their payments. In light of the problems surrounding sales of financial 
products to military members, DOD has efforts underway to revise its 
policies regarding such sales and has reviewed ways in which it could 
share additional information. However, DOD has not coordinated these 
efforts with military installation personnel or with regulators. 

Without Complaints, Regular Insurance Regulatory Processes Did Not 
Identify Problems: 

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

Additionally, insurance product approval processes may not necessarily 
reveal how a product is to be marketed or the target market for the 
product. According to officials in the state insurance departments we 
contacted, none of these states required insurance companies to provide 
descriptions of the target market for a particular product during the 
form filing process. As part of the investigations that state insurance 
regulators are conducting of the companies that target military 
members, some of the regulators are also reexamining the products these 
companies sell to ensure that they meet existing state requirements. 
For example, insurance regulators in Virginia issued an order in 
September 2005 to three companies to cease and desist from selling such 
products. However, the extent to which this review is occurring in 
other states is not clear. 

Insurance Regulatory Examinations Generally Focus on Financial 
Soundness: 

State insurance regulators may conduct various types of reviews of the 
insurance companies they oversee. Many of the routine reviews that 
these regulators conduct focus on insurance companies' financial 
soundness. During such examinations, the regulators assess the quality 
of insurance companies' assets and whether their income is sufficient 
to meet present and future financial obligations to their 
policyholders. 

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

Many States Lack Appropriateness or Suitability Standards: 

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

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

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

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

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

Concerns and Complaints Existed at Military Installations: 

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

At the two bases visited as part of work for this report, we also found 
evidence that service members had concerns or complaints about the 
marketing practices used by sales personnel from some of the companies 
that targeted military members. After complaints were raised by some 
service members at these bases, military personnel conducted 
investigations of the matters. For example, at Fort Benning, Georgia, 
statements were taken from several service members that were solicited 
insurance products between 2001 and 2004. Of the 41 statements in the 
investigative files that we were able to review, more than 70 percent 
indicated that the sales personnel had described the product as a 
savings or investment product. Additionally, almost all of these 
service members indicated that the insurance company sales personnel 
had taken actions that violated one or more of the restrictions in 
DOD's solicitation policy, such as making these sales presentations 
during group training sessions. 

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

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

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

In some cases in which military installations have reported concerns or 
complaints, regulators have been able to take action against insurance 
companies that conduct business with military service members. For 
example, regulators in Maryland were notified in the 1990s about 
potential improprieties involving sales of insurance products to junior 
enlisted personnel by a concerned official at one military training 
base in their state. In an examination report issued in January 2002, 
insurance regulators found that companies (including some of those that 
are currently being investigated by other states) marketing combined 
insurance and savings products to military personnel in Aberdeen 
Proving Grounds and other locations had violated various state laws and 
regulations and had misled some service members about the nature of the 
products, including misrepresenting insurance products as 
investments.[Footnote 40]As noted previously, regulators in Washington 
state also became aware of problematic sales at military installations 
in their state in the 1990s. This state eventually took action to 
rescind approval of certain insurance products where the side savings 
fund did not meet the state's requirements for an annuity, a premium 
deposit fund, or a universal life product. In addition, regulators in 
Virginia have also ordered that some companies that target military 
members to cease selling certain products in their state However, 
regulators in the other states that are currently conducting 
investigations of the companies targeting military members were not 
generally aware of such sales until recent press reports because DOD 
personnel were not generally sharing information about any service 
member complaints or concerns they received. 

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

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

Securities regulators' ability to detect problems was also hampered by 
the lack of standardized data on the extent to which customers were 
completing contractual plans. For example, in response to an article in 
The Wall Street Journal in 2002 that raised questions about the 
appropriateness of the sales of such plans to military members, SEC 
staff reviewed the operations of the largest seller of contractual 
plans.[Footnote 41] According to SEC staff, their review did not raise 
any major concerns because they found no evidence that military members 
were complaining about their purchases from this firm. In addition, the 
firm provided the SEC staff with documents that purported to show that 
the persistency rate for the contractual plans--which represented the 
proportion of plans that were still open---was over 80 percent for the 
previous 3 years. The SEC staff told us that their examiners accepted 
these statistics as valid because they were also able to obtain data 
from one of the major mutual fund companies whose funds represented the 
majority of those in which this broker-dealer's customers had invested. 
The data showed that most of this broker-dealer's customers still had 
open plans with the company. 

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

However, these regulators were able to identify concerns after they 
required the firm to provide comprehensive data on all customers that 
purchased such products. According to SEC and NASD staff, they were 
able to determine how successful this firm's customers were being with 
their contractual plans only after they required the firm to provide 
specific data on all customers that purchased contractual plans 
covering a full 15-year period. After obtaining this data, regulators 
determined that the actual proportion of customers making all required 
payments for the 15-year term of the plans was only 43 percent. This 
percentage was about half of the persistency or success rate shown in 
documents that the firm had previously provided to the regulators 
during their prior examinations, because the previously supplied data 
had excluded any customer whose account remained open but had not made 
any payments in the last year. However, in the view of regulators, 
investors that were no longer making payments into their plans should 
be taken into consideration when determining the overall extent to 
which a firm's customers were successfully completing their plans. 

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

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

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

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

DOD Lacks Requirements to Comprehensively Share Violations and 
Complaints with Financial Regulators: 

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

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

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

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

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

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

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

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

Inadequate Financial Literacy and Lack of Jurisdictional Clarity Are 
also Concerns: 

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

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

Similarly, financial regulators have also begun working with DOD to 
increase financial literacy and awareness among service members, but 
these efforts have not been completed. For example, approximately $7 
million of the settlement that SEC and NASD reached with the largest 
broker-dealer selling contractual plans to military members will be 
used to fund financial education efforts among service members. Using 
the proceeds of the settlement, NASD staff told us that the staff of 
the NASD Investor Education Foundation plan to conduct research to 
determine current levels of service members' investment knowledge and 
use this to plan and develop its military education efforts. Among the 
efforts currently being designed are a military-specific online 
resource center to provide unbiased information on saving and 
investing. In addition, they plan to develop training to support the 
military's current personal financial management program by 
establishing a coordinated and uniform financial education program. 
They also plan to conduct a public outreach campaign to promote saving 
and investing to members of the military and their families. These 
efforts are anticipated to be publicly launched in late 2005 with many 
national and local activities taking place in 2006. 

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

Congress has also recognized the need for additional information to 
better protect military service members from inappropriate product 
sales. For example, both versions of the bill currently under 
consideration in Congress would require that, for any sales taking 
place on a military installation, insurance representatives disclose 
that subsidized life insurance may be available from the government to 
the service member and that the government has not sanctioned, 
recommended, or encouraged the sale of the product being 
offered.[Footnote 47] In addition, this legislation also would require 
that service members be provided with information about where to 
complain regarding any problems involving an insurance sale on a 
military installation. Specifically, both bills would generally require 
that, for any sales taking place on federal land or facilities located 
outside the United States, insurance sellers provide a disclosure that 
lists the address and phone number where consumer complaints are 
received by the applicable state insurance regulator.[Footnote 48] 

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

Another concern over whether military members are adequately protected 
from inappropriate sales stems from uncertainty over financial 
regulators' jurisdiction on U.S. military installations. Although most 
of the insurance and securities regulators we contacted believed they 
had jurisdiction over the sales of financial products on military 
installations, some regulators expressed uncertainty over their 
authority to regulate sales on military installations, where the 
federal government may have "legislative jurisdiction."[Footnote 49] 
For example, regulators from Maryland conducting work on a market 
conduct examination mentioned that they had asked an agent from the 
Federal Bureau of Investigation to accompany them when visiting the 
military installation in case installation personnel questioned the 
insurance regulators' authority to conduct an investigation on the 
installations. Further, according to a Texas insurance department 
official, he had trouble getting access to complaints information at a 
military installation because installation personnel question his 
authority to request such information. In addition, Georgia officials 
told us that a military installation in their state had an "exclusive 
federal jurisdiction" designation that could potentially present a 
jurisdictional issue. However, regulators in Virginia noted that they 
have been able to conduct examinations after seeking and obtaining 
written permission from base commanders. As part of the work on DOD's 
oversight of insurance sales that we reported on in June 2005, we 
surveyed the various state and territorial insurance 
commissioners.[Footnote 50] Of those that responded to the question 
regarding whether they had authority over sales of life insurance on 
military installations, four commissioners indicated that they did not 
have such authority. State insurance regulators also noted they lack 
jurisdiction over sales taking place outside the United States at 
overseas installations. 

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

Conclusions: 

Large numbers of military service members are being targeted by a few 
firms offering products that provide limited benefits unless held for 
long periods, which most military purchasers were failing to do. 
Thousands of service members across the United States and around the 
world are purchasing products from insurance companies that combine 
insurance and savings. Although some service members and their 
survivors have benefited from these products, many have not. Most of 
the purchasers of these products were unmarried individuals with no 
dependents and thus little need for any more coverage than that already 
provided by the low-cost government insurance service members receive. 
Instead, they were likely attracted to these products for their 
investment features. However, by being tied to expensive life 
insurance, these products appeared to be a poor investment choice for 
service members because they include provisions that allow the 
accumulated savings to be used to keep the life insurance in force if 
the service member ever stops making payments and does not request a 
refund of this savings. Given that military members move frequently and 
often leave the service within a few years, many did not continue their 
payments and failed to request refunds, and as a result, few likely 
amassed any savings from their purchase. The few companies that sell 
these products also have been accused of using inappropriate sales 
practices in the past, have been sanctioned, and are again being 
investigated by numerous federal and state regulatory and law 
enforcement authorities. 

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

Similarly, military members were also being widely marketed a 
securities product--the contractual plan--that has largely disappeared 
from the civilian marketplace. Although potentially providing returns 
equivalent to other products if steady investments are made over the 
required 15-year term, these products were likely less beneficial to 
the many service members that failed to make payments for that extended 
length of time. In the many years since contractual plans were first 
offered, a variety of alternative investments have become widely 
available for individuals with modest incomes, including other load 
funds, no-load funds, and TSP, which is now available to service 
members and likely offers the lowest investment expenses of any 
product. Given the longstanding history of sales practices abuses 
associated with the contractual plans and the availability of viable 
alternative investments, we believe that congressional approval of the 
legislation currently under consideration, which includes language to 
ban these products, would remove products that appear to have little 
need to continue to exist. 

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

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

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

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

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

Matters for Congressional Consideration: 

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

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

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

* Ban the sale of contractual mutual fund plans. 

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

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

Recommendations: 

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

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

* Include in the personal financial management training for all service 
members information and materials developed in conjunction with 
insurance and securities regulators that explains how and to whom 
service members should raise concerns or complaints about potentially 
inappropriate sales of financial products, including providing the 
information necessary for contacting these regulators. Such training 
should also periodically be offered to service members of all levels. 

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

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

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

Agency Comments: 

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

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

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

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

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

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

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

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

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

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

Signed by: 

Richard J. Hillman: 
Managing Director, Financial Markets and Community Investment: 

[End of section] 

Appendixes: 

Appendix I: Objectives, Scope, and Methodology: 

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

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

To identify the securities products being sold and how these were being 
marketed to military members, we interviewed staff from NASD (formerly 
called the National Association of Securities Dealers), Securities and 
Exchange Commission (SEC), and North American Securities Administrators 
Association (NASAA).[Footnote 52] We also interviewed officials from 
the largest broker-dealer firm that markets to military members, which 
represents 90 percent of the military market segment, and two of the 
investment management firms that manage mutual funds underlying the 
contractual plans sold to service members. To determine the cost and 
performance of the contractual plan product offered by this broker- 
dealer firm, we conducted analysis to illustrate a contractual plan 
product typically marketed to career service members using a $600 front-
end load. To illustrate how this product compared to other similar 
products we analyzed the cost and performance of a typical fund using 
the Investment Company Institute recommended 5 percent load and TSP C 
Fund with no load. We chose the TSP C Fund because it invests in common 
stocks and was therefore comparable to the contractual plan product. We 
analyzed these products for a 15 year--or "full term"-- period. We 
assumed a 7 percent annual return that we compounded monthly for all 
products. Further, we reviewed SEC and NASD investigation files of the 
sales of securities products to military service members. 

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

To determine the extent to which state insurance regulators received 
complaints from military service members or had any concerns about 
their jurisdiction on military installations, we relied on an E-mail 
survey to the insurance commissioners for the 50 states, the District 
of Columbia, and four territories: American Samoa, Guam, Puerto Rico, 
and the Virgin Islands administered as part of our June 2005 
report.[Footnote 53] We received completed surveys from 46 states, the 
District of Columbia, and one U.S. Territory, yielding an overall 
response rate of 87 percent. Further, to make the same determination in 
regards to the sales of securities products to military members, we 
relied on the results of a survey administered by NASAA. Additionally, 
we contacted DOD officials, conducted fieldwork at Fort Benning, 
Georgia and Naval Station Great Lakes, Illinois--two large military 
training installations--and reviewed findings from other recent work 
concerning supplemental life insurance sales conducted at several other 
military installations throughout the country. 

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

[End of section] 

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

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

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

Entity taking action: Virginia State Corporation Commission Bureau of 
Insurance. 
September 2005. 
Cease and Desist Settlement Order, Case No. INS-2005-00211, Sept. 29, 
2005;
Alleged violations: The regulatory 
forms for three insurance companies' combined insurance and savings 
product allegedly failed to comply with the state's insurance 
nonforfeiture laws;
Resulting actions: The companies agreed to stop marketing or soliciting 
the particular products which failed to comply. 

Entity taking action: Georgia Commissioner of Insurance. May 2005. 

Commissioner of Insurance Press Release, May 25, 2005; 

Alleged violations: An insurance company was investigated when 
allegations surfaced that certain agents violated various DOD and state 
insurance regulations by identifying themselves as disinterested 
financial advisors while selling policies to soldiers in training; 

Resulting actions: The company agreed to refund about $1.1 million in 
premiums to soldiers who were solicited and sold term life insurance 
policies while they were training at two Army bases in Georgia. 

Entity taking action: Georgia Commissioner of Insurance. January 
2005. 
Commissioner of Insurance Press Release, January 7, 2005;
Alleged violations: An insurance company was investigated when 
allegations surfaced that certain agents violated various DOD and state 
insurance regulations by identifying themselves as disinterested 
financial advisors while selling policies to soldiers in training; 

Resulting actions: The company agreed to issue refunds totaling about 
$1.3 million to certain soldiers at an Army base in Georgia. 

Entity taking action: U.S. Securities and Exchange Commission and NASD. 
December 2004. 
SEC Administrative Proceeding File No. 3-11770, December 15, 2004. 
NASD News Release, December 15, 2004; 

Alleged violations: 
 broker-dealer allegedly:
* offered and sold contractual plans by, in part, making misleading 
statements and omissions;
* violated NASD rules when one of the company's supervisors 
inappropriately confronted a former customer who had made negative 
comments about the company; and 
* violated requirements to maintain books and records in connection 
with the retention and accessibility of certain E-mail communications; 

Resulting actions: Without admitting any wrongdoing, the firm agreed to:
* accept a censure from NASD;
* pay a fine of $12 million, including about $4 million for customer 
restitution and about $8 million for an investor education program for 
members of the U.S. military and their families; and
* hire an independent consultant to oversee the payment of restitution 
and review its sales practices. 

Entity taking action: Washington Office of Insurance Commissioner. 
October 2004. 
Office of Insurance Commissioner Letter, October 21, 2004; 

Alleged violations: The regulatory forms for four insurance companies' 
combined insurance and savings products allegedly failed to comply with 
the state's insurance laws; 

Resulting actions: As a result of the withdrawal of approval of the 
forms, these companies' products could no longer be sold in the state 
of Washington. 

Entity taking action: Department of Justice. December 2002. 
DOJ 
Press Release, December 19, 2002; 

Alleged violations: 
The government alleged that an insurance company engaged in a scheme to 
defraud military members who purchased life insurance policies from the 
company between 1991 and 1998. 

Resulting actions: The company agreed to settle the claims without 
admitting liability under the terms of a settlement agreement that the 
company:
* pay a $1 million civil penalty;
* pay the U.S. $505,965 to cover the costs of its investigation;
* increase the face amount of all in-force coverage by 6.5%, for a 
total in-force increase in death benefits coverage of approximately 
$160 million;
* pay $2.7 million to all policyholders who canceled their policies 
during the relevant time period; and
* never again sell another insurance policy or reapply to DOD for 
permission to conduct business on military installations. 

Entity taking action: Maryland Insurance Administration (Commissioner). 
January 2001. 
Insurance Administration Market Conduct Examination Report No. 490-01, 
January 25, 2002. 
Maryland Insurance Administration Consent Order, Case No. MIA-360-7/00 
(January 7, 2001); 

Alleged violations: 
The agents for one insurance company allegedly:
* did not disclose to military personnel that the products being sold 
were insurance; 
* did not disclose to military personnel that they were insurance 
agents; and 
* misrepresented the product sold as something other than insurance. 

Resulting Actions:
The company generally disputed the allegations but voluntarily agreed 
to, among other things:
* submit to the Commissioner the policies and procedures material for 
approval; 
* distribute the approved policies 
and procedures manual to its Maryland agency force; and 
* pay an administrative penalty to the state of Maryland in the amount 
of $100,000, with $50,000 suspended. 

Entity taking action: 
Florida Department of Insurance. February 2000;
Florida Department of Insurance Consent Order, Case No. 23227-97-CO, 
February 17, 2000. 
Florida Department of Insurance Letter, April 5, 2000; 

Alleged violations: 
Two insurance companies allegedly:
* failed to provide their customers with Buyers Guides and Policy 
Summaries; 
* failed to properly refund or escheat significant amounts of funds 
misdirected to the companies from the pay of military service members; 
and 
* improperly made unilateral reinstatements of lapsed policies. 

Resulting actions:
The companies generally denied the allegations but each voluntarily 
agreed to: 

* look for and refund certain military members military pay allotments 
received by the companies;. 
* set up and run a special Complaint and Alternative Dispute Resolution 
Program; 
* make a mandatory payment of $200,000 to cover the costs of the 
investigation; and 
* contribute a gift of $1 million to a Florida university. 

Entity taking action: 
Department of Justice. December 1998. 

Complaint, U.S. Dist. Ct., W.D. Wa., Case No. C98-5211(Apr. 21, 1998). 

Settlement Order, U.S. Dist. Ct., W.D. Wa., Case No. C98-5211RJB (Dec. 
7, 1998); 

Alleged violations: The government alleged that two insurance companies:
* committed mail and wire fraud;
* made false statements; and 
* conspired to defraud the United States; 

Resulting Action:
The companies denied the allegations but agreed to:
* not sell or market the life insurance product other than as life 
insurance; 
* abide by and observe all DOD directives and military regulations 
related to commercial solicitation on military installations;. 
* conclude a comprehensive and final accounting of all funds paid to 
the companies in error, and provide a copy to the United States;. 
* offer refunds of any unallocated moneys to payers who can be located 
through the exercise of due diligence; and 
* refund the full amount of all premiums paid by 215 specific 
individuals who requested a refund. 

Entity taking action: 
Washington Office of Insurance Commissioner. 
June 1997. 
Office of Insurance Commissioner Letter, June 10, 1997; 

Alleged violations: The product of an insurance company allegedly did 
not comply with the state's insurance laws. 

Resulting actions:
Withdrew approval to sell the policies within the state of Washington 

Entity taking action: United States Court of Appeals, Ninth Circuit. 
February 1997. 
108 F.3d 1123, (9th Cir. 1997); 

Alleged violations: 
Private claimants alleged that an insurance company violated the 
Racketeer Influenced and Corrupt Organizations Act (RICO) and committed 
fraud, and misrepresentation to facilitate sales of insurance as part 
of a tax avoidance scheme. 

Resulting actions: 

Appeals court affirmed jury verdict that the firm was liable for 
conspiracy to violate a provision of RICO in connection with a tax 
avoidance scheme. The jury awarded the plaintiffs:
* $259,366 in actual damages (which were trebled pursuant to RICO);. 
* $87,000 in damages for fraud and negligent misrepresentation; and 
* $500,000 in punitive damages under state law. 

Source: GAO analysis. 

[End of table] 

[End of section] 

Appendix III: Performance of Contractual Plans Compared to Alternative 
Investments: 

Because of the structure of their sales charges, contractual plans are 
not likely to offer superior returns to a long-term investor compared 
to other alternative products. Table 1 illustrates that investing $100 
per month for 15 years in a contractual mutual fund plan that earns a 7 
percent return would result in an account worth less than one in a 
conventional mutual fund with a 5 percent sales load in which the same 
payments were made and the same projected return was earned. As shown 
in the table, the amount that would be accumulated in a contractual 
plan does not exceed that of a conventional mutual fund until after 16 
years. The contractual plan's accumulated value lags behind the 
conventional fund because its high up-front sales charge reduces the 
amount of money that is invested and available to earn the return of 
the underlying mutual fund from the beginning. In contrast, investing 
$100 monthly in TSP and earning a 7 percent return would result in an 
account worth $1,600 more than that accumulated in the contractual plan 
after 15 years.[Footnote 54] 

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

Payment contributions: Policy year: 1;
Payment contributions: Yearly payments: $1,200.00;
Contractual Plan: (50% load): Sales load: $600.00;
Contractual Plan: Total value: $623.24;
Conventional mutual fund (5% load): Sales load: $60.00;
Conventional mutual fund (5% load): Total value: $1,184.16;
Thrift Savings Plan C Fund: (No load): Sales load: $0.00;
Thrift Savings Plan C Fund: Total value: $1,246.49. 

Payment contributions: Policy year: 2;
Payment contributions: Yearly payments: 1,200.00;
Contractual Plan: (50% load): Sales load: 0.00;
Contractual Plan: Total value: 1,914.79;
Conventional mutual fund (5% load): Sales load: 60.00;
Conventional mutual fund (5% load): Total value: 2,453.93;
Thrift Savings Plan C Fund: (No load): Sales load: 0.00;
Thrift Savings Plan C Fund: Total value: 2,583.08. 

Payment contributions: Policy year: 3;
Payment contributions: Yearly payments: 1,200.00;
Contractual Plan: (50% load): Sales load: 0.00;
Contractual Plan: Total value: 3,299.69;
Conventional mutual fund (5% load): Sales load: 60.00;
Conventional mutual fund (5% load): Total value: 3,815.49;
Thrift Savings Plan C Fund: (No load): Sales load: 0.00;
Thrift Savings Plan C Fund: Total value: 4,016.30. 

Payment contributions: Policy year: 4;
Payment contributions: Yearly payments: 1,200.00;
Contractual Plan: (50% load): Sales load: 0.00;
Contractual Plan: Total value: 4,784.72;
Conventional mutual fund (5% load): Sales load: 60.00;
Conventional mutual fund (5% load): Total value: 5,275.47;
Thrift Savings Plan C Fund: (No load): Sales load: 0.00;
Thrift Savings Plan C Fund: Total value: 5,553.13. 

Payment contributions: Policy year: 5;
Payment contributions: Yearly payments: 1,200.00;
Contractual Plan: (50% load): Sales load: 0.00;
Contractual Plan: Total value: 6,377.09;
Conventional mutual fund (5% load): Sales load: 60.00;
Conventional mutual fund (5% load): Total value: 6,841.00;
Thrift Savings Plan C Fund: (No load): Sales load: 0.00;
Thrift Savings Plan C Fund: Total value: 7,201.05. 

Payment contributions: Policy year: 6;
Payment contributions: Yearly payments: 1,200.00;
Contractual Plan: (50% load): Sales load: 0.00;
Contractual Plan: Total value: 8,084.58;
Conventional mutual fund (5% load): Sales load: 60.00;
Conventional mutual fund (5% load): Total value: 8,519.70;
Thrift Savings Plan C Fund: (No load): Sales load: 0.00;
Thrift Savings Plan C Fund: Total value: 8,968.10. 

Payment contributions: Policy year: 7;
Payment contributions: Yearly payments: 1,200.00;
Contractual Plan: (50% load): Sales load: 0.00;
Contractual Plan: Total value: 9,915.50;
Conventional mutual fund (5% load): Sales load: 60.00;
Conventional mutual fund (5% load): Total value: 10,319.75;
Thrift Savings Plan C Fund: (No load): Sales load: 0.00;
Thrift Savings Plan C Fund: Total value: 10,862.90. 

Payment contributions: Policy year: 8;
Payment contributions: Yearly payments: 1,200.00;
Contractual Plan: (50% load): Sales load: 0.00;
Contractual Plan: Total value: 11,878.78;
Conventional mutual fund (5% load): Sales load: 60.00;
Conventional mutual fund (5% load): Total value: 12,249.93;
Thrift Savings Plan C Fund: (No load): Sales load: 0.00;
Thrift Savings Plan C Fund: Total value: 12,894.66. 

Payment contributions: Policy year: 9;
Payment contributions: Yearly payments: 1,200.00;
Contractual Plan: (50% load): Sales load: 0.00;
Contractual Plan: Total value: 13,983.99;
Conventional mutual fund (5% load): Sales load: 60.00;
Conventional mutual fund (5% load): Total value: 14,319.64;
Thrift Savings Plan C Fund: (No load): Sales load: 0.00;
Thrift Savings Plan C Fund: Total value: 15,073.31. 

Payment contributions: Policy year: 10;
Payment contributions: Yearly payments: 1,200.00;
Contractual Plan: (50% load): Sales load: 0.00;
Contractual Plan: Total value: 16,241.38;
Conventional mutual fund (5% load): Sales load: 60.00;
Conventional mutual fund (5% load): Total value: 16,538.97;
Thrift Savings Plan C Fund: (No load): Sales load: 0.00;
Thrift Savings Plan C Fund: Total value: 17,409.45. 

Payment contributions: Policy year: 11;
Payment contributions: Yearly payments: 1,200.00;
Contractual Plan: (50% load): Sales load: 0.00;
Contractual Plan: Total value: 18,661.96;
Conventional mutual fund (5% load): Sales load: 60.00;
Conventional mutual fund (5% load): Total value: 18,918.74;
Thrift Savings Plan C Fund: (No load): Sales load: 0.00;
Thrift Savings Plan C Fund: Total value: 19,914.46. 

Payment contributions: Policy year: 12;
Payment contributions: Yearly payments: 1,200.00;
Contractual Plan: (50% load): Sales load: 0.00;
Contractual Plan: Total value: 21,257.52;
Conventional mutual fund (5% load): Sales load: 60.00;
Conventional mutual fund (5% load): Total value: 21,470.54;
Thrift Savings Plan C Fund: (No load): Sales load: 0.00;
Thrift Savings Plan C Fund: Total value: 22,600.57. 

Payment contributions: Policy year: 13;
Payment contributions: Yearly payments: 1,200.00;
Contractual Plan: (50% load): Sales load: 0.00;
Contractual Plan: Total value: 24,040.71;
Conventional mutual fund (5% load): Sales load: 60.00;
Conventional mutual fund (5% load): Total value: 24,206.81;
Thrift Savings Plan C Fund: (No load): Sales load: 0.00;
Thrift Savings Plan C Fund: Total value: 25,480.86. 

Payment contributions: Policy year: 14;
Payment contributions: Yearly payments: 1,200.00;
Contractual Plan: (50% load): Sales load: 0.00;
Contractual Plan: Total value: 27,025.11;
Conventional mutual fund (5% load): Sales load: 60.00;
Conventional mutual fund (5% load): Total value: 27,140.89;
Thrift Savings Plan C Fund: (No load): Sales load: 0.00;
Thrift Savings Plan C Fund: Total value: 28,569.36. 

Payment contributions: Policy year: 15;
Payment contributions: Yearly payments: 1,200.00;
Contractual Plan: (50% load): Sales load: 0.00;
Contractual Plan: Total value: 30,225.24;
Conventional mutual fund (5% load): Sales load: 60.00;
Conventional mutual fund (5% load): Total value: 30,287.07;
Thrift Savings Plan C Fund: (No load): Sales load: 0.00;
Thrift Savings Plan C Fund: Total value: 31,881.12. 

Payment contributions: Policy year: 16;
Payment contributions: Yearly payments: 1,200.00;
Contractual Plan: (50% load): Sales load: 0.00;
Contractual Plan: Total value: 33,656.71;
Conventional mutual fund (5% load): Sales load: 60.00;
Conventional mutual fund (5% load): Total value: 33,660.69;
Thrift Savings Plan C Fund: (No load): Sales load: 0.00;
Thrift Savings Plan C Fund: Total value: 35,432.30. 

Payment contributions: Policy year: 17;
Payment contributions: Yearly payments: 1,200.00;
Contractual Plan: (50% load): Sales load: 0.00;
Contractual Plan: Total value: 37,336.25;
Conventional mutual fund (5% load): Sales load: 60.00;
Conventional mutual fund (5% load): Total value: 37,278.18;
Thrift Savings Plan C Fund: (No load): Sales load: 0.00;
Thrift Savings Plan C Fund: Total value: 39,240.19. 

Payment contributions: Policy year: 18;
Payment contributions: Yearly payments: 1,200.00;
Contractual Plan: (50% load): Sales load: 0.00;
Contractual Plan: Total value: 41,281.77;
Conventional mutual fund (5% load): Sales load: 60.00;
Conventional mutual fund (5% load): Total value: 41,157.19;
Thrift Savings Plan C Fund: (No load): Sales load: 0.00;
Thrift Savings Plan C Fund: Total value: 43,323.36. 

Payment contributions: Policy year: 19;
Payment contributions: Yearly payments: 1,200.00;
Contractual Plan: (50% load): Sales load: 0.00;
Contractual Plan: Total value: 45,512.52;
Conventional mutual fund (5% load): Sales load: 60.00;
Conventional mutual fund (5% load): Total value: 45,316.61;
Thrift Savings Plan C Fund: (No load): Sales load: 0.00;
Thrift Savings Plan C Fund: Total value: 47,701.69. 

Payment contributions: Policy year: 20;
Payment contributions: Yearly payments: 1,200.00;
Contractual Plan: (50% load): Sales load: 0.00;
Contractual Plan: Total value: 50,049.12;
Conventional mutual fund (5% load): Sales load: 60.00;
Conventional mutual fund (5% load): Total value: 49,776.71;
Thrift Savings Plan C Fund: (No load): Sales load: 0.00;
Thrift Savings Plan C Fund: Total value: 52,396.54. 

Source: GAO analysis. 

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

[End of table] 

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

[End of section] 

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

Alabama;
Missouri. 

Alaska;
Montana. 

Arizona;
Nebraska. 

Arkansas;
Nevada. 

California;
New Jersey. 

Colorado;
New Mexico. 

Connecticut;
North Carolina. 

Delaware;
North Dakota. 

District of Columbia;
Ohio. 

Florida;
Oklahoma. 

Georgia;
Oregon. 

Hawaii;
Pennsylvania. 

Idaho;
Rhode Island. 

Illinois;
South Carolina. 

Indiana;
South Dakota. 

Iowa;
Tennessee. 

Kansas;
Texas. 

Kentucky;
Utah. 

Louisiana;
Virginia. 

Maryland;
Washington. 

Massachusetts;
West Virginia. 

Michigan;
Wisconsin. 

Minnesota;
Wyoming. 

Mississippi. 

Source: NAIC data. 

[End of table] 

[End of section] 

Appendix V: Comments from the Department of Defense: 

Office Of The Under Secretary Of Defense: 
4000 Defense Pentagon: 
Washington, D.C. 20301-4000: 
Personnel And Readiness: 

Mr. Richard Hillman:
Director: 
Financial Markets and Community Investment: 
U.S. Government Accountability Office: 
441 G Street, NW: 
Washington, DC 20548: 

Dear Mr. Hillman: 

This is the Department of Defense (DoD) response to the GAO draft 
report, GAO-06-23, "FINANCIAL PRODUCT SALES: Actions needed to Better 
Protect Military Members," dated September 29, 2005 (GAO Code 250166). 
The Department's responses to the report's two recommendations are 
enclosed. 

Sincerely, 

Signed by: 

Gail H. McGinn:
Performing the Duties of the Principal Deputy: 

Enclosure: 
As stated: 

GAO DRAFT REPORT DATED SEPTEMBER 29, 2005 GAO-06-23 (GAO CODES 250166): 

"FINANCIAL PRODUCT SALES: Actions Needed to Better Protect Military 
Members" 

DEPARTMENT OF DEFENSE COMMENTS TO THE GAO RECOMMENDATION: 

RECOMMENDATION 1: The GAO recommended that the Secretary of Defense 
revise the DoD solicitation policy to require that information on 
servicemember complaints related to financial product sales be provided 
to relevant state and federal financial regulators. 

DOD RESPONSE: Concur. Existing DoD policy requires installations to 
report matters concerning the eligibility of an agent or company to 
hold a State license or to meet other regulatory requirements to 
appropriate authorities. The revised Directive will include a 
requirement for installations to report concerns or complaints 
involving the quality or suitability of financial products and concerns 
or complaints involving marketing methods used to sell these products 
to DoD personnel to the appropriate regulatory agency. ECD: January 1, 
2006: 

RECOMMENDATION 2: The GAO recommended that the Secretary of Defense 
include in the personal financial management training for all 
servicemembers information and materials developed in conjunction with 
insurance and securities regulators that explains how and to whom 
servicemembers should raise concerns or complaints about potentially 
inappropriate sales of financial products, including providing the 
information necessary for contacting these regulators. Such training 
should also periodically be offered to servicemembers of all levels. 

DOD RESPONSE: Concur. DoD Instruction 1342.17 on Personal Financial 
Management Programs for Service Members, requires all entry-level 
Service members be able to demonstrate competency on several topics 
concerning personal finance, to include insurance, savings and 
investing. DoD has developed a strategic plan to develop programs and 
systems designed to assist them in becoming capable of discerning what 
is appropriate and inappropriate for their needs and how to remedy 
concerns or complaints arising from suspect sales of financial 
products. An important aspect of the proposed approach will be 
evaluating their competency to ensure the intended lesson has been 
learned. DoD Instruction 1342.17 further instructs the Military 
Services to make information and instruction available to support the 
life events of Service members and their families. The intent of this 
policy is to support Service members and their families in making 
decisions affecting their personal finances as their individual/family 
circumstances change, based on the basic competencies obtained at entry 
level. DoD has obtained the assistance of several federal agencies and 
nonprofit organizations in accomplishing this information and education 
requirement, to include the National Association of Securities Dealers 
Foundation. As part of this on-going effort, DoD will approach state 
regulatory agencies to assist in providing awareness and educational 
materials to assist in making Service members and their families aware 
of their rights and opportunities to seek remedy. Among other 
opportunities for increasing awareness, installation-level new comers 
orientations and the Military OneSource toll free assistance line will 
be used to enhance awareness and direct Service members and their 
families to assistance resources. ECD June 30, 2006: 

[End of section] 

Appendix VI: Comments from the Securities and Exchange Commission: 

United States Securities And Exchange Commission: 
Washington, D.C. 20549: 
Office Of Compliance Inspections And Examinations: 
October 20, 2005: 

Richard J. Hillman: 
Director, Financial Markets and Community Investment: 
United States Government Accountability Office: 
Washington, DC 20548: 

Dear Mr. Hillman: 

Thank you for the opportunity to comment on your draft report 
concerning Financial Product Sales, Actions Needed to Better Protect 
Military Members. We share your concerns that securities products be 
properly marketed and sold to members of the military. As your report 
describes, SEC examinations and enforcement investigations have 
revealed unsuitable sales of financial products to members of the 
military. As a result, the SEC and the NASD brought an enforcement 
action against First Command Financial Planning, Inc. (Admin. Proc. 
File No. 3-11770). The SEC staff has also established ongoing contact 
with the Department of Defense, and initiated two examination sweeps 
focusing on broker-dealer firms that sell securities products to 
military personnel and that maintain sales offices located near large 
military facilities. These examinations are ongoing. 

We wish to emphasize the level of productive cooperation in our 
dealings with personnel in the Department of Defense. Staffs of the SEC 
and Department of Defense have established regular meetings to share 
information and discuss issues as they relate to securities sales to 
the military. As part of this cooperation, Department of Defense staff 
has provided us with key information that has helped us target 
particular securities firms for examination. This cooperation has also 
extended to base commands, including overseas base commands. Finally, 
Department of Defense and base staff have been working with us to 
identify complaints regarding abusive securities sales and to establish 
procedures whereby future complaints can be brought directly to our 
attention. 

Your report also recommends that, in the event that contractual mutual 
funds are not banned by Congressional action, the SEC and NASD consider 
various means of better ensuring that regulators have adequate 
information to assess the sales of contractual plans. We will certainly 
consider this recommendation. 

We appreciate the GAO's attention to these important issues. 

Sincerely, 

Lori A. Richards:
Director: 

[End of section] 

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

Robert R. Glauber: 
Chairman and Chief Executive Officer: 
October 18, 2005: 

The Honorable David M. Walker: 
Comptroller General of the United States: 
U.S. Government Accountability Office: 
441 G Street NW: 

Washington, DC 20548: 

Dear Mr. Walker: 

NASD appreciates the opportunity to comment on GAO Report 06-23, 
"FINANCIAL PRODUCT SALES: Actions Needed to Better Protect Military 
Members." Men and women of the U.S. armed forces deserve the same 
protection from inappropriate sales of financial products as their 
civilian counterparts. This report will help NASD, other financial 
regulators, and Congress ensure that such is the case. In addition to 
the technical comments we have already provided, NASD would like to 
make the following more general comments. 

Background on NASD: 

NASD is the leading private-sector provider of financial regulatory 
services, dedicated to investor protection and market integrity through 
effective and efficient regulation and complementary compliance and 
technology-based services. NASD touches virtually every aspect of the 
securities business - from registering and educating all industry 
participants, to examining securities firms, enforcing both NASD rules 
and the federal securities laws, and administering the largest dispute 
resolution forum for investors and member firms. 

Summary of First Command Investigation and Settlement: 

In December 2004, NASD censured First Command Financial Planning Inc., 
a Fort Worth, TX broker-dealer, and imposed a fine of $12 million for 
making misleading statements and omitting important information when 
selling mutual fund investments. In particular, the misleading 
statements and omissions were made in connection with Systematic 
Investment Plans sold primarily to commissioned and non-commissioned 
military officers. Under Systematic Investment Plans, an investor makes 
monthly payments for a fixed term, typically 15 years, and those 
payments are invested in underlying mutual funds. The purchaser is 
charged a 50 percent sales load on the first twelve payments. Over the 
remainder of the term, payments are not subject to sales charges so 
that the effective sales charge decreases so long as the purchaser 
continues to make additional investments. However, if the investor does 
not terminate within 45 days, and then fails to complete the term, he 
or she will pay a sales charge of up to 50 percent of the amount 
invested. 

NASD found that First Command emphasized in its sales scripts that the 
50 percent sales load would decrease to 3.3 percent upon completion of 
the term and that the high up-front sales charges increased the 
likelihood that an investor would complete the plan. However, the 
firm's own data showed that only 43 percent of its customers completed 
the 15-year term. First Command also failed to inform its customers of 
the lost earnings potential as a result of the sales charges deducted 
from the customer's first 12 months' investments. First Command also 
made misleading statements when comparing the Systematic Investment 
Plan with other mutual fund investments. 

From the $12 million fine, First Command was ordered to pay restitution 
to thousands of customers who purchased a Systematic Investment Plan 
after January 1, 1999 and who terminated the plan and paid an effective 
sales charge greater than 5 percent. As of today, over $4.3 million has 
been returned to this class of customers. The remainder of the $12 
million dollar payment, after restitution payments have been completed, 
is payable to the NASD Investor Education Foundation, to be used for 
financial education needs of United States military personnel and their 
families. In addition to making these payments, First Command was 
required to hire an independent consultant to oversee the payment of 
restitution and review its sales practices. 

NASD would like to comment on the statement in the report that 
"financial regulators did not identify the problems occurring with 
sales to military members until they were brought to light by press 
reports for various reasons." As the report notes, securities 
regulators including NASD often rely on customer-initiated complaints 
to undertake investigations and enforcement actions. In this case, NASD 
began investigating potential misconduct by First Command and its 
representatives in August of 2003, immediately after an article about 
First Command appeared in Kiplinger's and before receiving any 
complaints from military personnel or the Department of Defense about 
investment products sold by First Command. NASD initiated this 
investigation well before a series of articles was published in the New 
York Times in July 2004 regarding sales of insurance products and 
securities products to military personnel. 

Summary of Military Financial Education Campaign: 

First Command has made payments to the NASD Investor Education 
Foundation, to be used for the financial education needs of members of 
the military and their families. Established in 2003, the NASD Investor 
Education Foundation supports innovative research and educational 
projects that give investors the tools they need to better understand 
the markets and the basic principles of saving and investing. To date, 
the Foundation has granted more than $5 million to non-profit 
organizations for educational programs and research projects targeting 
underserved segments of the population. 

The Foundation is using the funds it receives in connection with the 
First Command settlement to support educational programs, materials and 
research to help equip members of the military community with the 
knowledge and skills necessary to make informed financial decisions. We 
anticipate that the Foundation will receive approximately $7 million. 

These funds will be used to mount a comprehensive financial education 
program with the goal of improving the saving and investing knowledge 
of military families. This will include a Web site devoted to financial 
education issues for the military, a continuing investor education 
program for base installation personal financial managers, financial 
counselor certification for military spouses, and development of 
materials such as a guide to the financial decisions surrounding 
deployments. Beginning early next year, the Foundation will hold 
investor forums and other educational events at three or more primary 
military installations, at which specially prepared educational 
materials will be distributed. As the year progresses, this will be 
supplemented by events and activities at installations across the 
country. Not only does the Foundation intend to educate active duty 
military personnel, it intends to provide organizational and technical 
assistance targeted to spouses and military family service 
organizations so that financial education can be provided on an ongoing 
basis to future personnel. Finally, all military installations will 
receive materials to help them organize their own financial education 
events and provide guidance for distributing investor education 
information. Public service announcements regarding the importance of 
saving and investing, on media outlets that serve military personnel in 
the United States and overseas, will supplement this effort. 

Conclusion: 

NASD appreciates the diligence with which the GAO has researched and 
prepared its report. We are confident that the recommendations made to 
Congress and to financial regulators will help ensure that military 
personnel receive the level of protection they deserve as investors. 
NASD is committed to that goal and to providing them and all investors 
with the tools necessary to make informed investment decisions. 

Sincerely, 

Signed by:
Robert R. Glauber: 
Chairman and Chief Executive Officer: 

[End of section] 

Appendix VIII: Comments from the National Association of Insurance 
Commissioners: 

NAIC: 
National Association Of Insurance Commissioners: 

October 19, 2005: 

Mr. Richard Hillman:
Managing Director: 
Financial Markets and Community Investment: 
U.S. Government Accountability Office: 
Room 2A28: 
441 G Street, N W:
Washington, DC 20548: 

Dear Mr. Hillman: 

Thank you for the opportunity to comment on the proposed report titled 
"Financial Product Sales: Actions Needed to Better Protect Military 
Members." State insurance regulators believe military personnel should 
be afforded the highest level of consumer protection when purchasing 
insurance. To this end, the NAIC would like to address the matters for 
congressional consideration and recommendations. 

The first matter for congressional consideration directs states to 
review currently approved products that are being marketed primarily to 
military members to ensure that all such product provisions are in 
compliance with existing state laws. As the GAO report points, 
thousands of junior military personnel have purchased a product that 
combines life insurance with a savings fund promising high returns. In 
recognition of this issue, the NAIC's Life Insurance & Annuities (A) 
Committee has established the following proposed charge for 2006: 

Review life insurance sold with a side fund to recommend a position on 
the products being offered in the marketplace. 

In addition, a number of states are actively examining the small number 
of companies that have engaged in questionable marketing practices 
involving these products. 

Another matter for congressional consideration is for state insurance 
regulators to have full access to persons and information necessary to 
oversee the sales taking place on military installations. State 
insurance departments can take corrective action sooner rather than 
later if timely and complete information is available for review. 
Coupled with this consideration is the congressional consideration that 
the U.S. Department of Defense (DoD) and insurance regulators work 
cooperatively to develop mechanisms to share information about 
insurance activities. Since becoming aware of the sales issues to 
military personnel, state insurance regulators have reached out to the 
DoD. Diane Koken, the NAIC President, has made two personal visits with 
the DoD and continues to foster a relationship of ongoing cooperation 
with the DoD. More specifically, the NAIC is in the process of 
accomplishing the following: (1) compiling a list of insurance 
department contacts for the DoD to ensure the DoD has the proper 
contact information for further state assistance; (2) updating the 
NAIC's Complaint Database System (CDS) form to identify complaints that 
are submitted by military personnel; and (3) providing the DoD with a 
state-by-state premium volume summary for those companies that state 
insurance regulators know are soliciting or have solicited insurance 
products on military bases. 

The NAIC also notices that the final recommendation of the report is 
for the DoD and state insurance regulators to work cooperatively to 
develop financial management training materials for military personnel. 
To this end, the NAIC, in conjunction with the DoD, developed a 
consumer brochure specifically addressing life insurance information 
for military personnel. The NAIC also developed the following Web link 
for military personnel [Hyperlink 
http://www.naic.org/consumer_military_insurance.htm] and is working 
with the DoD to update this Web link, as needed. Not only does this Web 
link contain information on life insurance, this Web link also contains 
information about other lines of insurance and how to electronically 
file a complaint with a state insurance department. Moving forward, the 
NAIC remains committed to working with the DoD to develop other 
insurance consumer brochures, which the DoD believes are necessary to 
fill any financial literacy needs of military personnel. 

Finally, state insurance departments already have strong prohibitions. 
against misleading and deceptive sales practices and will continue to 
enforce these prohibitions when inappropriate activity is identified. 

Again, we appreciate the opportunity to comment on the draft report and 
provide an update on the activities of state insurance regulators. 
Please do not hesitate to contact us if we can be of further 
assistance. 

Sincerely, 

Signed by:
Catherine J. Weatherford: 
Vice President and Chief Executive Officer: 

Attachment: 

[End of section] 

Appendix IX: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Richard J. Hillman (202) 512-8678: 

Staff Acknowledgments: 

In addition to the individual above, Cody Goebel, Assistant Director; 
Joseph Applebaum; Gwenetta Blackwell-Greer; Tania Calhoun; Rudy 
Chatlos; Lawrence Cluff; Barry Kirby; Marc Molino; Josephine Perez; 
David Pittman; and Amber Yancey-Carroll made key contributions to this 
report. 

(250166): 

FOOTNOTES 

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

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

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

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

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

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

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

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

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

[10] GAO-05-696. 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[26] DOD, Final Report: Insurance Solicitation Practices on Department 
of Defense Installations, Office of the Under Secretary of Defense for 
Personnel and Readiness (Washington, D.C. May 15, 2000). 

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

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

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

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

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

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

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

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

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

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

[37] S. 418, Sec. 9, and H.R. 458, Sec. 108. 

[38] GAO-05-696. 

[39] GAO-05-348. 

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

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

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

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

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

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

[46] GAO-05-348. 

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

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

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

[50] GAO 05-696. 

[51] S. 418, Sec. 6(a), and H.R. 458, Sec. 105(a). 

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

[53] See GAO-05-696. 

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

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