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                                                       Calendar No. 518
109th Congress                                                   Report
                                 SENATE
 2d Session                                                     109-282

======================================================================



 
          MILITARY PERSONNEL FINANCIAL SERVICES PROTECTION ACT

                                _______
                                

                 July 13, 2006.--Ordered to be printed

                                _______
                                

Mr. Shelby, from the Committee on Banking, Housing, and Urban Affairs, 
                        submitted the following

                              R E P O R T

                         [To accompany S. 418]

    The Committee on Banking, Housing, and Urban Affairs 
reported a bill (S. 418) to protect members of the U.S. Armed 
Forces from unscrupulous practices regarding sales of 
insurance, financial and investment products, and for other 
purposes. The Committee reports, favorably on the bill, as 
amended by the Committee, and recommends that the bill, as 
amended, do pass.

                              Introduction

    In 2004, Committee Chairman Shelby and Ranking Member 
Sarbanes directed the U.S. Government Accountability Office 
(``GAO'') to assess the range and quality of financial products 
available to service members on U.S. military installations, 
the manner in which such products were marketed and sold, and, 
in particular, whether the regulatory oversight of these 
offerings differs from the consumer protections provided to the 
civilian population. The GAO published its findings in 
``Financial Product Sales: Actions Needed to Better Protect 
Military Members,'' (GAO-06-23, November 2005).
    In its investigation, the GAO found widespread abuses and 
systemic regulatory failures relating to sales of financial 
products to service members and urged Congress to pass 
corrective legislation.

                       Purpose of the Legislation

    The purpose of the ``Military Personnel Financial Services 
Protection Act'' (``the Act'') is to protect service members 
from predatory sales practices for financial products and the 
sale of inappropriate financial products on U.S. military 
installations located in this country and overseas.

                                Hearings

    On November 17, 2005, the Committee held a hearing entitled 
``A Review of the GAO Report on the Sale of Financial Products 
to Military Personnel.'' The following witnesses testified at 
the hearing: Mr. Richard J. Hillman, Managing Director, 
Financial Markets and Community Investment, U.S. Government 
Accountability Office; Ms. Lori Richards, Director, Office of 
Compliance Inspections and Examinations, U.S. Securities and 
Exchange Commission; Mr. John Molino, Deputy Under Secretary of 
Defense for Military Community and Family Policy, U.S. 
Department of Defense; Ms. Mary Schapiro, Vice Chairman and 
President, Regulatory Policy and Oversight, NASD; and Mr. John 
Oxendine, Insurance and Safety Fire Commissioner, State of 
Georgia.

                  Background and Need for Legislation

    Since the Vietnam War era, members of the Armed Forces have 
been targets of unscrupulous salesmen marketing costly \1\ and 
superfluous \2\ 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.
---------------------------------------------------------------------------
    \1\ Diana B. Henriques, Basic Training Doesn't Guard Against 
Insurance Pitch to G.I.'s, The New York Times, July 20, 2004, at A1. 
See also the testimony of Lori Richards, Director, Office of Compliance 
Inspections and Examinations, U.S. Securities and Exchange Commission, 
before the Committee on Banking, Housing, and Urban Affairs, U.S. 
Senate, November 17, 2005, at 7-11.
    \2\ For example, many service members who are young and unmarried 
likely do not need to purchase additional life insurance to supplement 
the coverage available to them under the government-subsidized program.
---------------------------------------------------------------------------
    Numerous reports over the past quarter-century, many of 
them issued by or at the request of the Department of Defense 
(``DoD'' or ``Department''), have documented this longstanding 
exploitation affecting morale, recruitment, and re-enlistment 
of service members. A comprehensive report issued in 2000 by a 
retired general retained by DoD found that ``for nearly 30 
years the sale of life insurance on military bases has been the 
subject of controversy and repeated violations of [DoD] 
policies by insurance sales agents.'' \3\ An earlier report by 
the Navy Judge Advocate General Corps found similar abuses and 
violations.\4\ In addition, securities regulators have been 
aware of abusive sales practices involving an archaic 
securities product for decades.
---------------------------------------------------------------------------
    \3\ Insurance Solicitation Practices on Department of Defense 
Installations (the ``Cuthbert Report''), Final Report Presented to the 
Deputy Under Secretary of Defense for Program Integration, May 15, 
2000, p. iv. See also the Written Statement of Mr. John Molino, Deputy 
Under Secretary of Defense for Military Community and Family Policy, 
before the Committee on Banking, Housing, and Urban Affairs, U.S. 
Senate, November 17, 2005, at 3-4.
    \4\ Litigation Report, Investigation of NCOA Standard Procedures 
for Selling Insurance, November 19, 1997.
---------------------------------------------------------------------------
    For many years, DoD has been aware of these predatory sales 
tactics yet has been incapable of curbing them. A 1986 DoD 
Directive restricts personal solicitations to licensed and 
approved entities that have arranged meetings with particular 
customers.\5\ The Directive prohibits, among other practices, 
solicitation of recruits, trainees, and transient personnel in 
a ``mass'' or ``captive'' audience, using misleading 
advertising and sales literature, and giving the appearance 
that DoD endorses any particular company.\6\ Despite these 
prohibitions, solicitation violations occur routinely. For 
example, DoD's Inspector General randomly visited 11 military 
installations in a 1999 investigation and found violations of 
the Department's solicitation policies at all 11 bases.\7\ The 
violations included misleading sales presentations, 
presentations by unauthorized personnel, presentations to 
captive audiences, solicitations during duty hours, 
solicitations in the barracks, and solicitations in other 
unauthorized areas.\8\ Sanctions against violators have been 
rarely imposed, and when imposed, have been weak.\9\
---------------------------------------------------------------------------
    \5\ DoD Directive 1344.7, Personal Commercial Solicitation on DoD 
Installations, February 13, 1986, at Sect. 6.1. Revised policy 
guidelines, DoD Instruction 1344.07, will likely go into effect later 
this year.
    \6\ Ibid., at Sect. 6.4.
    \7\ Office of the Inspector General, Department of Defense, 
Commercial Life Insurance Sales Procedures in DoD, Report No. 99-106, 
March 10, 1999, at 5.
    \8\ Ibid., at 27-30.
    \9\ Henriques, op. cit., at A1.
---------------------------------------------------------------------------
    Rampant sales practice abuses continued unabated after 
1999, according to the GAO investigation ordered by Senators 
Shelby and Sarbanes. The GAO found that a half-dozen financial 
services companies target junior enlisted service members, even 
those in basic training, with a product that combines high-cost 
life insurance and a savings fund. Most of the purchasers of 
this product--unmarried individuals with no dependents--did not 
need the additional life insurance coverage.\10\ In addition, 
given the way the product was designed, few purchasers 
accumulated any savings due to the frequent relocations and 
short tenures that are a staple of military service.\11\ 
Moreover, the life insurance policy was often intentionally and 
misleadingly marketed as an investment product; salesmen failed 
to disclose that service members were actually purchasing life 
insurance. Many state regulators, prompted by GAO's 
investigation to review the insurance offerings available in 
their jurisdictions, subsequently held that the product, 
although previously approved, was in fact illegal under 
existing insurance laws.\12\
---------------------------------------------------------------------------
    \10\ U.S. Government Accountability Office, Financial Product 
Sales: Actions Needed to Better Protect Military Members (``GAO 
report''), November 17, 2005, at 12-20.
    \11\ One of the features of the product stipulated that, in the 
event a service member stops making payments and fails to request a 
refund, the money accumulated in the savings fund is directed to paying 
continuing life insurance premiums.
    \12\ GAO, op. cit., at 12-20. The explanation offered by the state 
regulators was that various features of the product in question had 
been submitted separately for approval.
---------------------------------------------------------------------------
    Addressing these longstanding abuses at this moment is 
particularly timely. Solicitation violations involving members 
of the Armed Forces may intensify during times of war, when 
service members' keen interest in life insurance provides 
increased selling opportunities for sales agents.
    As indicated above, it is beyond dispute that DoD's 
commercial solicitation rules, adopted to protect service 
members from unethical sales conduct, have failed to curb the 
well documented abuses.\13\ It is the Committee's hope and 
expectation that the revised policies will protect service 
members. But even if the results of the past three decades are 
reversed and the updated DoD rules are suddenly enforced 
effectively, the Committee believes that legislation is 
necessary to enact the important policy changes included in the 
Act.
---------------------------------------------------------------------------
    \13\ Even DoD acknowledges this point. See e.g., Molino, op. cit., 
at 3-4.
---------------------------------------------------------------------------
    To protect service members from unsuitable products, the 
Act bans the sale of the mutual fund contractual plan, an 
obscure investment vehicle that virtually disappeared from the 
civilian market 25 years ago due to its unusually high and 
front-loaded sales charge. The hallmark of contractual plans is 
a sales load of 50 percent, paid by the investor to the broker 
selling the plan, assessed against the first year of 
contributions. Created so that investors able to make only 
small monthly contributions could reap the rewards of stock 
market investing, contractual plans have been associated with 
rampant abuses since their introduction in 1930.\14\ In the 
1960s, the SEC asserted that contractual plans were likely to 
be unsuitable products for investors of modest means \15\ and 
recommended that Congress abolish the front-end load on 
contractual plans.\16\
---------------------------------------------------------------------------
    \14\ Securities and Exchange Commission, Public Policy Implication 
of Investment Company Growth, at 224 (1966).
    \15\ H.R. Doc. No. 95, 88th Cong., 1st Sess., at 207 (1963).
    \16\ H.R. Rep. No. 2337, 89th Cong., 2d Sess., at 246-247 (1966).
---------------------------------------------------------------------------
    In recent years, the contractual plan has fallen further 
into disrepute. In its report, released at the November 2005 
hearing, the GAO identified several reasons supporting its 
recommendation urging Congress to ban contractual plans. First, 
less-costly and widely accessible alternatives exist for small 
investors to begin and maintain investments in mutual funds, 
particularly no-load funds available to service members through 
the Thrift Savings Plan, the defined contribution retirement 
program for federal employees. Second, only 10 to 43 percent of 
investors that purchased contractual plans between 1980 and 
1987 had completed the full 15 years required under the 
contract. The investors who did not complete the contract paid 
much higher effective sales loads than investors in 
conventional mutual funds. Third, and perhaps most important, 
contractual plans have been associated with sales practice 
abuses for decades.\17\
---------------------------------------------------------------------------
    \17\ GAO, op. cit., at 12-13.
---------------------------------------------------------------------------
    Vanguard Group Founder John C. Bogle has stated that he 
would never recommend contractual plans to an investor.\18\ A 
Morningstar fund analyst agreed, asserting that ``there are 
really no advantages to these contractual plans; they are old 
fashioned, based on old ideas of how to force people to commit 
to systematic investing.'' \19\ NASD expressed support for a 
ban on contractual plans; its Vice Chairman, Ms. Schapiro, 
testified that ``[w]e agree with Senator Enzi that the 
excessive sales charges of these contractually-based financial 
products make them susceptible to abusive and misleading sales 
practices and that a small group of individuals have targeted 
these products almost entirely to the military.'' \20\ For 
these reasons, the Committee believes that service members will 
benefit from a prohibition on contractual plans.
---------------------------------------------------------------------------
    \18\ Henriques, op. cit., at A1.
    \19\ Gary S. Mogel, Congress Questions Sale of High-Fee Funds to 
Military: Contractual Plans Come Under Scrutiny, Investment News, Vol. 
8, Issue 34, Sept. 13, 2004, at 21.
    \20\ Testimony of Ms. Mary Schapiro, Vice Chairman and President, 
Regulatory Policy and Oversight, NASD, before the U.S. Senate Banking, 
Housing, and Urban Affairs Committee, November 17, 2005, at 6.
---------------------------------------------------------------------------
    To improve the quality of life insurance products offered 
in the military market, the Act directs the National 
Association of Insurance Commissioners (``NAIC'') to consider 
ways to ensure that such products comply with state laws and 
are appropriate for the particular needs and circumstances of 
service members. GAO supports this provision.\21\
---------------------------------------------------------------------------
    \21\ GAO, op. cit., at 59.
---------------------------------------------------------------------------
    In its report, the GAO concluded that inadequate 
information sharing between state and Federal financial 
regulators and DoD was the primary reason that regulators did 
not generally identify the problematic sales of financial 
products to service members.\22\ To address this issue 
identified by GAO, the Act requires the establishment and 
maintenance of a registry that lists all brokers and agents who 
have been barred or otherwise restricted from military bases 
and is accessible to installation commanders and state and 
Federal financial regulators. Regulators will be notified 
promptly whenever a person under their jurisdiction is added to 
or removed from the registry.
---------------------------------------------------------------------------
    \22\ GAO, op. cit., at 59. Insurance regulators in most states 
generally rely on complaints from purchasers to indicate that 
potentially problematic sales are occurring. Securities regulators 
suffered from a similar lack of complaint sharing from DoD personnel.
---------------------------------------------------------------------------
    To remove any legal and regulatory uncertainty relating to 
who has jurisdiction over financial product sales on military 
installations of the U.S., a problem identified by the GAO, the 
Act clarifies that state insurance and state securities laws 
apply to insurance and securities activities conducted on 
Federal lands and facilities, including military 
installations.\23\
---------------------------------------------------------------------------
    \23\ GAO, op. cit., at 59.
---------------------------------------------------------------------------
    To help ensure that military consumers make informed 
financial decisions, the Act requires insurance agents to make 
a comprehensive series of written disclosures prior to making a 
sale or solicitation of life insurance products on a military 
installation. The sales agent must disclose: the availability, 
amount, and cost of term life insurance under Servicemembers' 
Group Life Insurance program (``SGLI''); the fact that the 
Federal Government has not sanctioned, recommended, or 
encouraged the sale of the life insurance product being 
offered; 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; and the fact that no person has 
received any referral fee or incentive compensation in 
connection with the offer or sale of the life insurance 
product. The Act also authorizes military personnel, or their 
dependents, to cancel the policy if there are violations of 
this section. Finally, 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. The Committee believes that 
these provisions will help service members make better-informed 
decisions regarding life insurance products.

                        Committee Consideration

    On June 14, 2006, the Senate Committee on Banking, Housing, 
and Urban Affairs considered a Committee Print offered by 
Chairman Shelby that revised the base text of S. 418, the 
``Military Personnel Financial Services Protection Act,'' 
sponsored by Senator Enzi. In addition to the Chairman's 
substitute text, the Committee adopted one amendment, by voice 
vote. The amendment, offered by the Chairman, along with 
Ranking Member Sarbanes, Senator Enzi, and Senator Schumer, 
made conforming and other changes to the Committee Print. On a 
unanimous vote, the Committee reported the bill, as amended, to 
the Senate for consideration.

                 Section-by-Section Analysis of the Act


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.

                 Changes in Existing Law (Cordon Rule)

    On June 14, 2006, the Committee unanimously approved a 
motion by the Chairman to waive the Cordon rule. Thus, in the 
opinion of the Committee, it is necessary to dispense with the 
requirement of section 12 of rule XXVI of the Standing Rules of 
the Senate in order to expedite the business of the Senate.

                      Regulatory Impact Statement

    In accordance with paragraph 11(b), rule XXVI, of the 
Standing Rules of the Senate, the Committee makes the following 
statement concerning the regulatory impact of the bill.
    The Act seeks to protect members of the Armed Forces from 
unethical sales of superfluous financial products. It would 
result in no significant costs to either the Federal Government 
or state, local, and tribal governments. The Act's provisions 
banning contractual plans, requiring life insurance 
disclosures, establishing suitability rules for securities 
sales to military members, and providing Internet access to 
brokers' disciplinary records would impose mandates on the 
private sector resulting in de minimis costs.

                          Cost of Legislation

    Section 11(b) of rule XXVI of the Standing Rules of the 
Senate, and Section 403 of the Congressional Budget Impoundment 
and Control Act, require that each committee report on a bill 
contain a statement estimating the cost of the proposed 
legislation. The Congressional Budget Office has provided the 
following cost estimate and estimate of costs of private-sector 
mandates.

                                     U.S. Congress,
                               Congressional Budget Office,
                                     Washington, DC, June 23, 2006.
Hon. Richard C. Shelby,
Chairman, Committee on Banking, Housing, and Urban Affairs,
U.S. Senate, Washington, DC
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for S. 418, the Military 
Personnel Financial Services Protection Act.
    If you wish further details on this estimate, we wi1l be 
pleased to provide them. The CBO staff contacts are Gregory 
Waring (for federal costs), and Craig Cammarata (for the 
private-sector impact).
            Sincerely,
                                          Donald B. Marron,
                                                   Acting Director.
    Enclosure.

S. 418--Military Personnel Financial Services Protection Act

    Summary: S. 418 would ban the sale of mutual funds sold 
though contractual plans. The bill also would require insurance 
companies to provide certain notices about insurance policies 
offered by the U.S. government when selling an insurance policy 
to servicemembers or while marketing on military installations. 
The bill would require the Department of Defense to maintain a 
list of agents and advisors barred from doing business on 
military installations. Finally, the bill would amend 
securities law to require registered securities associations to 
provide public access to certain consumer information and to 
file certain financial information with the Securities and 
Exchange Commission.
    CBO estimates that implementing S. 418 would result in no 
significant cost to the Federal Government and would not affect 
direct spending or revenues.
    S. 418 contains no intergovernmental mandates as defined in 
the Unfunded Mandates Reform Act (UMRA); any costs to state, 
local, or tribal governments would be voluntary.
    S. 418 contains private-sector mandates, as defined in 
UMRA. related to the sales of mutual fund and life insurance 
products. Based on information provided by industry and 
government sources, CBO expects that the aggregate direct costs 
of complying with those mandates would fall below the annual 
threshold established by UMRA for private-sector mandates ($128 
million in 2006, adjusted annually for inflation).
    Estimated cost to the Federal Government: CBO estimates 
that implementing S. 418 would result in no significant cost to 
the Federal Government and would not affect direct spending or 
revenues.
    Estimated impact on state, local, and tribal governments: 
S. 418 contains no intergovernmental mandates as defined in 
UMRA. The bill would encourage, but not require, state 
insurance regulators to coordinate with the Department of 
Defense to protect military personnel from predatory life 
insurance schemes and to issue a report to the Congress. Based 
on information from state insurance commissioners, CBO 
estimates that the costs of such cooperation would not be 
significant.
    Estimated impact on the private sector: S. 418 would impose 
private-sector mandates as defined in UMRA on registered 
investment companies, registered securities associations, 
insurers and those selling life insurance products to members 
of the Armed Forces on military installations of the United 
States. Specifically, the bill would impose mandates by:
           Prohibiting the sales of periodic payment 
        plan certificates;
           Requiring insurers and producers of life 
        insurance products to make certain disclosures when 
        selling or soliciting life insurance products on 
        military installations;
           Requiring a registered securities 
        association to include new rules governing the sales of 
        securities on the premises of military installations; 
        and
           Requiring a registered securities 
        association to provide an electronic or other process 
        to receive and respond to inquiries about disciplinary 
        actions taken against brokers and dealers.
    CBO estimates that the aggregate direct costs of the 
private-sector mandates in the bill would fall below the annual 
threshold established by UMRA ($128 million in 2006, adjusted 
annually for inflation).
            Prohibition on the sales of periodic plan certificates
    Purchasers of periodic payment plan certificates make 
monthly investment payments into mutual funds, typically for a 
period of 15 years or more. Under current law, the Investment 
Company Act limits the sales load on such certificates to 9 
percent of the total payments to be made during the life of the 
plan, but allows that sales load to be significantly front-
loaded.
    Specifically, up to half of the monthly investment payments 
made in the first year may be deducted for sales load. 
According to industry sources, current practice is to charge a 
sales load that amounts to 3.3 percent of the total payments 
expected to be made over the life of the plan, and to collect 
that sales charge for the entire plan period by deducting half 
of the first 12 investment payments.
    S. 418 would impose a private-sector mandate on registered 
investment companies by prohibiting them from selling any more 
periodic payment plan certificates. The cost of complying with 
the mandate would be the income (sales load) forgone net of any 
operating expenses to generate that income. Based on 
information from industry sources on sales in 2003 and 2004, 
CBO estimates that the annual sales load that would be forgone 
by the prohibition of new sales of periodic payment plan 
certificates would range between $30 million and $35 million. 
CBO was unable to obtain sales data for 2005, but according to 
industry sources, sales decreased significantly from 2004 and 
are expected to continue to decrease in the future in the 
absence of this bill. Thus, the expected loss of income from 
the prohibition of sales of such products would be lower than 
the amounts presented using 2004 data.
            Disclosure and inquiry response requirements
    The bill also would impose private-sector mandates 
regarding additional disclosures by those selling life 
insurance or securities products on military bases, and 
responses to inquiries about broker or dealer registration 
information. Based on information from industry and government 
sources, CBO estimates that the direct cost to comply with 
those mandates would be small. Those mandates would:
           Require insurers and producers of life 
        insurance products selling or soliciting those products 
        on military installations to provide a written 
        disclosure to the consumer that subsidized life 
        insurance may be available from the Federal Government, 
        and that the U.S. government has in no way sanctioned, 
        recommended, or encouraged the product being offered;
           Require a registered securities association 
        to include provisions, within the rules of the 
        association, governing the sales, or offer of sales, of 
        securities on the premises of any military installation 
        to any member of the Armed Forces; and
           Require a registered securities association 
        to establish and maintain a readily accessible 
        electronic or other process to respond to inquiries 
        regarding registration information about brokers and 
        dealers and their associated persons, including 
        disciplinary actions taken against them.
    Previous CBO estimates: On April 4, 2005, CBO transmitted a 
cost estimate for H.R. 458, the Military Personnel Financial 
Services Protection Act, as ordered reported by the House 
Committee on Financial Services on March 16, 2005. S. 418 is 
nearly identical to H.R. 458. H.R. 458 does not include the 
mandate that would require associations registering as a 
national securities association to include new rules regarding 
the sales of securities on the premises of military 
installations. CBO concluded that the cost of the private-
sector mandates in both bills would not exceed the threshold 
established by UMRA.
    Estimate prepared by: Federal Costs: Gregory Waring; Impact 
on state, local, and tribal governments: Sarah Puro; Impact on 
the private sector: Craig Cammarata.
    Estimate approved by: Peter H. Fontaine, Deputy Assistant 
Director for Budget Analysis.