The NASD did its part for the U.S. troops today, fining Texas broker/dealer First Command $12 million for misleading its mostly military clientele about the costs of the 50 percent upfront sales charge attached to its systematic investment plan.
“Using misleading sales scripts, inappropriate comparisons and omissions of important information, First Command sold hundreds of thousands of complicated and often enormously expensive plans to young members of our armed services, who are frequently inexperienced investors,” said NASD Vice Chairman Mary Schapiro in a press release.
Under the firm’s systematic investment plans, an investor made monthly payments for a fixed term, typically 15 years, which were invested in underlying mutual funds. The customer is charged a 50 percent sales load on the first 12 monthly payments. So for example, after making $200 payments for a year, the investor was left with $1,200 in investments, half the input.
The firm told its clients the benefit of this potentially huge cost was “to instill discipline” in investors. If the investor made all 180 required payments over the 15-year period, the sales charge would be approximately 3.3 percent, according to the SEC.
However, failing to make all the payments increased the sales charge substantially. Most of First Command’s clients apparently made tardy payments: According to the SEC, 57 percent of First Command’s clients failed to make all 180 payments, resulting in comparably much higher sales charges than typical load equity funds—and a lot of revenue for the firm. From January 1999 through March 2004, First Command made roughly $175 million in front-end sales load revenue from these plans, which was approximately 70 percent of its total revenue.
How did the firm get investors to buy into the huge costs? According to the SEC, since 1999 the firm trumpeted their plans by telling investors that cheaper no-load funds were “speculative” and “frequently have some of the highest long-term costs”—both are patently untrue statements. The firm also used misleading statements and omitted information concerning the federal government-sponsored Thrift Savings Plan, which offers systematic plans at much lower costs to current and former military personnel.
One of the more egregious discoveries by the NASD was a training manual that said: “Don’t ask or suggest to a ‘termite’ [a person who purchases term insurance and invests the remainder in mutual funds] or ‘no loader’ [an individual who advocates the purchase of no-load mutual funds] who refuses to accept our philosophy that he talk with referrals. This is like voluntarily spreading a cancer in your market.”
And when a former customer emailed his grievances about the costs of the firm’s funds to an online publication that had written about them, First Command District Supervisor James Provo contacted the customer, saying his actions may result in legal action against him. The client was even told that his criticism of First Command jeopardized his previously approved request for assignment change and that the top brass were being contacted to discuss consequences. Provo was fined $25,000 and suspended for 30 days.
First Command, headquartered in Fort Worth, Texas, has 200 branches, primarily around military bases in the U.S. and abroad, and 1,000 registered reps—of which, most are retired military—that serve 297,000 current and former military families.
The firm agreed to the sanctions without admitting or denying guilt. First Command lawyers were unavailable for comment.