The House of Representatives has approved a bill that would stiffen rules governing the way mutual funds, high-cost loans and other financial products are marketed to military personnel.
The House bill, called the “Military Personnel Financial Services Protection Act,” would abolish so-called “contractual plans,” a form of mutual fund sold almost exclusively to military personnel. Sales charges on contractual plans consume half of an investor's first-year contributions, substantially reducing the funds' long-term performance. Investors who drop out before a prescribed date wind up paying a large percentage of their investment as fees.
Representative Geoff Davis (R-Ky.), the lead sponsor of the bill, told the House he had personal experience with deceptive marketing of expensive funds and life insurance as young officer in the Army. “I made the decision [to invest in the products] because a retired service member working as a salesman presented this, and he was using referrals from other service members.”
Back in April, a broker for First Command Financial Planning, a Fort Worth-based broker/dealer whose sales force consists primarily of former military personnel, was busted for unsuitable recommendations and sales involving the firm's contractual plans, called Systematic Investment Plans. In December 2004 First Command was ordered to pay $12 million in fines and restitution for misleading statements in those plans.
The bill also seeks to stem the number of high-cost loans being offered military personnel with annual interest rates that can approach 1,000 percent. One provision in the bill would prevent lenders from threatening to contact the borrower's commanding officer and ban language that suggests the Department of Defense or any federal entity endorses that lender.
