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Week Ending September 22, 2006
S.418 A bill to protect members of the Armed Forces from unscrupulous practices regarding sales of insurance, financial, and investment products.
Following a GAO report on the range and quality and the marketing practices to sell financial products available to service members on military installations Congress responds in this bill to the investigations’ conclusions that service members are exposed to “widespread abuses and systemic regulatory failures relating to sales of financial products to service members.”
The accompanying report explained what was uncovered in by the GAO investigation: “Since the Vietnam War era, members of the Armed Forces have been targets of unscrupulous salesmen marketing costly financial products. A select number of small financial services companies, typically employing retired military personnel as sales agents and senior executives, have engaged in abusive practices to sell outdated and inferior insurance, securities, and banking products exclusively to service members. Those companies have directed their sales activities at junior grade enlisted personnel, who are often young, financially unsophisticated, and trained not to question authority figures.”
Selling more insurance than is needed is an example and one that has been documented frequently over the past 25 years. The insurance company exploitations have affected morale, recruitment and re-enlistment. “In addition, securities regulators have been aware of abusive sales practices involving an archaic securities product for decades” the report added. For many years, DoD has been aware of these predatory sales tactics yet has been incapable of curbing them.”
In 1986 Defense limited such sales to licensed and approved entities but misleading advertising and sales literature, giving the appearance that DOD endorses the products areas when it does not, unauthorized sales personnel, solicitation during duty hours, in barracks and other unauthorized are common techniques used although prohibited by DOD.
To protect the troops the bill bans the sale of mutual fund contractual plans that are known to be unusually high risk and has loaded sales charges of 50%.
Sales people must make a comprehensive series of written disclosures prior to making a sale that explains availability, amount and cost of term life insurance under the Servicemember’s Group Life Insurance program, the fact that the Federal government has not sanctioned, recommended of encouraged the sale of life insurance, terms stipulating that amounts accumulated in savings related insurance policies can be diverted to pay premiums due to continue coverage.
Military personnel or their dependents may cancel such policies if there is a violation of this act and “agents and companies intentionally violating or willfully disregarding the provisions of this section--as determined by a state or Federal agency or in a final court proceeding are banned from selling insurance to Federal employees on Federal land”
Sponsor: Senator Mike Enzi (R-WY)
Vote: Passed Senate by Unanimous Consent July 19, 2006. Passed House 418 to 3 September 20, 2006 (RC 463)
Cost to the taxpayers: “CBO estimates that implementing S. 418 would result in no significant cost to the Federal Government and would not affect direct spending or revenues.”
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(B) INCLUDED INSURANCE- The term `life insurance product' includes the granting of--
(i) endowment benefits;
(ii) additional benefits in the event of death by accident or accidental means;
(iii) disability income benefits;
(iv) additional disability benefits that operate to safeguard the contract from lapse or to provide a special surrender value, or special benefit in the event of total and permanent disability;
(v) benefits that provide payment or reimbursement for long-term home health care, or long-term care in a nursing home or other related facility;
(vi) burial insurance; and
(vii) optional modes of settlement or proceeds of life insurance.
(C) EXCLUSIONS- Such term does not include workers compensation insurance, medical indemnity health insurance, or property and casualty insurance.
Section 1. Short Title; Table of Contents
This section provides the short title, `Military Personnel Financial Services Protection Act,' and the table of contents for the Act.
Sec. 2. Congressional findings
This section asserts that regulation of high-cost securities and life insurance products marketed to members of the Armed Forces by some financial services companies engaging in abusive and misleading sales practices has been inadequate and requires Congressional legislation.
Sec. 3. Definitions
This section defines `life insurance product' as `any product, including individual and group life insurance, funding agreements, and annuities, that provides insurance for which the probabilities of the duration of human life or the rate of mortality are an element or condition of insurance.' The term includes the granting of (i) endowment benefits; (ii) additional benefits in the event of death by accident or accidental means; (iii) disability income benefits; (iv) additional disability benefits that operate to safeguard the contract from lapse or to provide a special surrender value, or special benefit in the event of total and permanent disability; (v) benefits that provide payment or reimbursement for long-term home health care, or long-term care in a nursing home or other related facility; (vi) burial insurance; and (vii) optional modes of settlement or proceeds of life insurance. The term excludes workers compensation insurance, medical indemnity health insurance, and property and casualty insurance.
Sec. 4. Prohibition on future sales of periodic payment plans
This section amends section 27 of the Investment Company Act of 1940 by banning the issuance and sale of periodic payment plan certificates, effective 30 days after the date of enactment of the Act. This section preserves preexisting rights related to existing plans. These preexisting rights, which existed prior to the effective date of this legislation on periodic payment plan certificates, might include administrative transactions, conversions, transfers, or amount or name changes.
It also directs the SEC to submit a report to Congress within six months of enactment on refunds, sales practices, and revenues from periodic payment plans over the five years preceding the date of the report.
Sec. 5. Required disclosures regarding offers or sales of securities on military installations
This section amends section 15A(b) of the Securities Exchange Act of 1934 by directing NASD to issue rules requiring brokers on military installations to clearly and conspicuously disclose that the securities offered are not offered or provided on behalf of, or recommended, sanctioned or encouraged by the Federal Government, and the identity of the registered broker-dealer offering the securities. The rules must also require brokers to perform an appropriate suitability determination, including consideration of costs to the potential investor and the potential investor's knowledge about securities, prior to making a recommendation to a member of the Armed Forces. Finally, the rules must prohibit referral fees or incentive compensation to persons not associated with a registered broker-dealer.
Sec. 6. Method of maintaining broker and dealer registration, disciplinary, and other data
This section amends section 15A(i) of the Securities Exchange Act of 1934, which requires a registered securities association to maintain a toll-free telephone listing to receive inquiries regarding disciplinary actions involving its members and their associated persons, and to respond to those inquiries in writing. The amended language requires the association to establish an easily accessible electronic or other process, in addition to the toll-free telephone listing, to respond to inquiries about registration information. The registered securities association also will be required to adopt rules relating to inquiries and responses, and on the establishment of an administrative process for disputing the accuracy of registration information. Consistent with current law, the association and participating exchanges will not be liable to any persons for actions taken or omitted in good faith under this provision.
Sec. 7. Filing depositories for investment advisers
This section reorganizes and codifies in section 204 of the Investment Advisers Act of 1940 provisions of the National Securities Markets Improvement Act of 1996, in which Congress directed the SEC to establish an electronic filing system, and mandated the creation of a public disclosure program, for investment advisers. Pursuant to this directive, the SEC designated NASD to operate the electronic filing system, which is called the Investment Adviser Registration Depository (`IARD'), and created an Internet-based public disclosure program containing investment adviser registration and disciplinary information.
This section codifies the SEC's designation of NASD as the operator of the IARD, although it requires a toll-free telephone listing, or electronic means, for receiving and responding to inquiries for registration information. It also provides NASD with immunity from liability for actions taken in good faith in operating the investment adviser public disclosure program.
Sec. 8. State insurance and securities jurisdiction on military installations
This section clarifies that state insurance laws and state securities laws apply with certain exceptions to insurance and securities activities conducted on Federal land and facilities, including military installations in the U.S. and abroad. The state within which the base is located would have primary jurisdiction in cases when multiple state laws would otherwise apply. With respect to overseas military bases, the state that issued the resident license of the agent in question and the state in which the insurance company in question is domiciled would have jurisdiction.
Sec. 9. Required development of military personnel protection standards regarding insurance sales; administrative coordination
This section states Congress' intent that the states collectively work with the Secretary of Defense to ensure implementation of appropriate standards to protect service members from dishonest and predatory insurance sales practices while on military installations in the U.S. and abroad. Congress also intends that each state identify its role in promoting these standards in a uniform manner, not later than 12 months after the date of enactment of this Act. This section includes a sense of Congress that the NAIC should conduct a study to determine the extent to which the states have met the requirement of developing such standards and report the results to Congress. It also includes a second sense of Congress that senior representatives of the Secretary of Defense, SEC, and NAIC should meet at least twice each year to coordinate their activities to implement this Act and monitor enforcement of relevant regulations relating to the sale of financial products on U.S. military installations.
Sec. 10. Required disclosures regarding life insurance products
This section requires the following information to be disclosed, in plain English and appropriate font size, prior to a sale or solicitation of life insurance to service members on a military installation of the U.S.: (i) that subsidized life insurance is available from the Federal Government under SGLI; (ii) the amount of insurance coverage available under SGLI and the costs to the member of the Armed Forces for such coverage; (iii) that the Federal Government is not offering or providing and has not sanctioned, recommended, or encouraged the sale of the life insurance product being offered; (iv) any terms stipulating that amounts accumulated in a savings component of the life insurance product may be diverted to pay, or reduced to offset, premiums due for continuation of coverage under such product; (v) that no person other than a licensed agent of the issuer of the product has received any referral fee or incentive compensation in connection with the offer or sale of the life insurance product; and (vi) in the case of solicitations on military installations outside the U.S., the address and phone number of the location where consumer complaints are received by the state insurance commissioner with primary jurisdiction over the sale of the products in question. This section also allows military personnel, or their dependents, to cancel the policy if there are violations of this section. Agents and companies intentionally violating or willfully disregarding the provisions of this section--as determined by a state or Federal agency or in a final court proceeding--are banned from selling insurance to Federal employees on Federal land.
Sec. 11. Improving life insurance product standards
This section expresses the sense of Congress that the NAIC should, not later than six months after enactment of the Act, after consultation with the Secretary of Defense, study and report to Congress on ways of improving the quality of and sale of life insurance products on military installations. The NAIC is directed to consider limiting such sales authority to persons that are certified as meeting appropriate best practices procedures, creating standards for products specifically designed for members of the Armed Forces, regardless of the sales location, and the extent to which life insurance products marketed to members of the Armed Forces comply with otherwise applicable provisions of state law. If the NAIC fails to submit the report within six months of the date of enactment, the GAO is to issue the report.
Sec. 12. Required reporting of disciplinary actions
This section requires insurers serving the military market to implement a system, within one year of enactment of the Act, to report to the appropriate state insurance commissioner any disciplinary actions that the insurer knows or in the exercise of due diligence should have known were taken against agents by government entities or insurers (only `significant' actions taken by insurers) with respect to the sale or solicitation of insurance on military installations. Also, this section expresses the sense of Congress that the states should collectively implement a system within one year to receive such reports of disciplinary actions and to disseminate such information to all other states and to the Secretary of Defense. This section defines `insurer' as a `person engaged in the business of insurance.'
Sec. 13. Reporting barred persons selling insurance or securities
This section requires the Secretary of Defense to maintain a list of the names, addresses, and other appropriate information relating to persons engaged in financial services activities that have been barred or otherwise restricted from military bases or have engaged in any transaction prohibited by the Act. The registry must be accessible to installation commanders and appropriate Federal and state securities and insurance regulators. These regulators shall be notified promptly upon the inclusion or removal of a person under their agencies' jurisdiction. The Defense Secretary shall submit proposed regulations implementing this registry to Congress within 60 days of enactment of the Act and draft final regulations within 90 days. The proposed regulations may not be published until the expiration of 15 days from the date of submission. The final regulations may not be published until 30 days from the date of submission.
Sec 14. Study and reports by Inspector General of the Department of Defense
This section requires DoD's Inspector General to conduct a study on the impact of DoD's Instruction 1344.07 (as in effect on the date of enactment of the Act) and the reforms included in the Act on the quality and sales of securities and insurance products marketed or otherwise offered to members of Armed Forces.
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