House Bill Prohibits Sale of Contractual Plans, Increases Regulation of Insurance Sales on Military Bases, October 2004

Washington, DC, October 7, 2004 - The Institute supports legislation recently approved by the U.S. House of Representatives that will prohibit the sale of contractual plans - plans that require an investor to make regular investments over a long period of time - and will increase the regulation of life insurance and other financial products sold on military installations.

Background
Contractual plans once served as a vehicle for investors to invest small amounts at regular intervals over an extended period of time. These plans set up formal agreements that enroll investors in a long-term investment program, often requiring monthly installments over 15 to 20 years, and charge up front the commissions that would be expected over the life of the contract. Thus, the plan collects all commissions in the first several years of the contract and does not begin fully crediting investors' accounts with contributions until after the commissions have been paid. Investors who drop out of contractual plans before the designated end of the contract sacrifice all of the prepaid commissions they have paid and often find that the number of shares they own is considerably less than what they could have purchased directly. The SEC currently requires a full refund of prepaid commissions if an investor cancels a plan within 45 days, and an 85 percent refund of prepaid commissions if the plan is cancelled within the first 18 months.

In September 2004, the House Financial Services Committee held a hearing to examine the sale of insurance and other financial services products on military bases. On October 5, the House approved H.R. 5011, the "Military Personnel Financial Services Protection Act." The legislation, introduced by Rep. Max Burns (R-GA), includes provisions that require the SEC to submit to Congress a report describing:

the measures taken by registered broker-dealers to voluntarily refund contractual plan payments made by military personnel and the amounts of such refunds;
the sales practices of such broker-dealers on military installations over the past five years and any legislative or regulatory recommendations to improve such practices; and
the revenues generated by such broker-dealers in the sales of contractual plans over the past five years.

Other of the bill's provisions require the SEC to create a toll-free telephone number to respond to inquiries about registration and disciplinary actions against investment advisers, and require the Department of Defense to create a registry of persons engaged in the business of securities or insurance who have been barred from military installations.

Companion legislation was introduced in the Senate the following day by Senators Michael B. Enzi (R-WY) and Hillary Rodham Clinton (D-NY).

ICI Position
The Institute supports H.R. 5011 and notes that there have been many innovations in investment products and services, many of them designed to encourage long-term investing among small investors, like military personnel and their families. "America's uniformed military personnel deserve the best possible financial advice," wrote ICI President Paul Schott Stevens in a recent letter to Speaker of the House Dennis Hastert (R-IL). "Modern investment alternatives do not have the sales charge structure associated with traditional contractual plans ... and we see no logic or need to perpetuate the sale of such plans."