Military Personnel Financial Services Protection Act: H.R. 5011, 108th Congress

Military Personnel Financial Services Protection Act: H.R. 5011, 108th Congress

Order Code RS21957
October 19, 2004
CRS Report for Congress
Received through the CRS Web
Military Personnel Financial Services
Protection Act: H.R. 5011, 108th Congress
Janice E. Rubin and Michael V. Seitzinger
Legislative Attorneys
American Law Division
Summary
H.R. 5011, the Military Personnel Financial Protection Act, was passed by the
House on October 5, and is pending in the Senate Committee on Banking, Housing, and
Urban Affairs. The bill utilizes both Congress’ constitutional Commerce Power
authority to enact insurance legislation, and the states’ traditional regulation of the
insurance industry1 to create a scheme for regulating the sale of certain life insurance
products to military personnel that supporters argue is fairer and more transparent than
is currently the case. It amends three primary securities laws -- the Investment Company
Act of 1940, the Securities Exchange Act of 1934, and Investment Advisers Act of
1940; invests the states with regulatory authority over “insurance activities conducted
on Federal land or facilities in the United States and abroad”; requires sellers of life
insurance products on federal facilities to make certain written disclosures to, for
example, clarify that the products being offered are not recommended by the
government or may be alternatively available through the government; and mandates
that the Secretary of Defense maintain an easily accessible list of insurance and
securities producers barred from military installations .
A number of state and federal investigators and Members of Congress have become
concerned that problems exist in the sale of life insurance and mutual funds to military
service members. In particular, the concerns focus on high-cost securities and life
insurance products offered in a misleading manner and on excessive sales commissions
assessed against the first year of contributions.2
1 Although Congressional regulation of the insurance industry remains within the scope of the
Commerce Power, the 1945 McCarran-Ferguson Act (15 U.S.C. §§ 1011-1015) clarifies that
“regulation and taxation by the several States of the business of insurance is in the public interest
...” (15 U.S.C. § 1011). McCarran-Ferguson, however, allows Congressional acts that
“specifically relate ... to the business of insurance” to preempt state law or regulation in the area
(15 U.S.C. § 1012(b)).
2 “There is an extensive history of abusive and misleading marketing and sales of financial
(continued...)
Congressional Research Service ˜ The Library of Congress

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In response to these concerns, Representative Burns introduced H.R. 5011, the
Military Personnel Financial Services Protection Act, in the 108th Congress on September
7, 2004; the bill was referred to the House Committee on Financial Services, which
reported an amended version on September 29, 2004.3 The House passed a further
amended bill on October 5, 2004;4 it is presently pending in the Senate Committee on
Banking, Housing, and Urban Affairs.
Section 2 of the bill sets out Congressional findings. Among these are statements
that military personnel who perform great sacrifices in protecting the United States should
be offered only first-rate financial products and should be immune from abusive and
misleading sales practices and from exorbitant fees.
Section 3 of the bill would add a provision to the Investment Company Act of 1940,5
designated as section 27 of that act and codified at 15 U.S.C. section 80a-27, to prohibit
any registered investment company 30 days after enactment of the Military Personnel
Financial Services Protection Act from issuing any periodic payment plan certificate or
for the registered investment company or a depositor or underwriter for a periodic
payment plan certificate to sell a periodic payment plan certificate. Under the Investment
Company Act a “periodic payment plan certificate” is defined as:
(A) any certificate, investment contract, or other security
providing for a series of periodic payments by the holder, and
representing an undivided interest in certain specified securities or in
a unit or fund of securities purchased wholly or partly with the
proceeds of such payments, and (B) any security the issuer of which
is also issuing securities of the character described in clause (A) of
this paragraph and the holder of which has substantially the same
rights and privileges as those which holders of securities of the
character described in said clause (A) have upon completing the
periodic payments for which such securities provide.6
Despite the title of H.R. 5011, the Military Personnel Financial Services Protection Act,
section 3 of the bill would prohibit sales by registered investment companies of periodic
payment plan certificates to all persons, not just to military personnel. The reason given
for this general prohibition is that these plans have largely disappeared from the civilian
2 (...continued)
services products on military installations. Problems have included abusive and coercive sales
tactics, expensive and outdated products, and a lack of uniform regulatory oversight for
on-installation sales.” H.Rept. 108-725 at 7 (October 5, 2004). See also, reports, studies, and
articles in the NEW YORK TIMES cited in the House Report.
3 H.Rept. 108-725 (October 5, 2004).
4 Considered at 150 CONG. REC. H8104-H8110; vote at 150 CONG. REC. H8110 (October 5,
2004).
5 15 U.S.C. §§ 80a-1 et seq.
6 15 U.S.C. § 80a-2(27).

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market since the 1980's because of excessive sales charges and have been marketed in
recent years for all practical purposes only to military personnel.7
Section 4 would amend the Securities Exchange Act of 19348 to impose stricter
requirements upon a registered securities association concerning registration information
of its members. Subsection (i) of section 15A of the Securities Exchange Act9 would
require a registered securities association to establish and maintain a system for collecting
and retaining registration information, have a toll-free telephone listing and an electronic
process to receive and respond to inquiries concerning registration information on its
members, and adopt rules governing the process for making inquiries. The association
could charge persons, “other than individual investors,” reasonable fees for making
responses to inquiries; and would also be required to adopt rules establishing an
administrative process for disputing the accuracy of information provided in response to
inquiries. The association would not have any liability for actions taken or omitted in
good faith.
Section 5 would amend the Investment Advisers Act of 194010 to add to section 204
of that act11 a provision allowing the Securities and Exchange Commission (SEC) to
require an investment adviser to file with the SEC any required fee, application, report or
notice through any entity designated by the SEC and to pay the reasonable costs
associated with the filing. The entity designated by the SEC for these filings would be
required to have a toll-free telephone listing or readily accessible electronic process to
respond to inquiries concerning registration information about investment advisers.
Reasonable fees could be assessed against all persons “other than individual investors”
making inquiries. The entity designated by the SEC would not be liable for actions taken
or omitted in good faith. Section 306 of the National Securities Markets Improvement
Act of 1996,12 concerning a requirement that the SEC provide a readily accessible
telephonic or other electronic process to receive inquiries about proceedings involving
investment advisers, would be repealed.
Section 6 makes state laws regulating the “business of insurance” applicable to
“insurance activities conducted on Federal land or facilities in the United States and
abroad,” except those which “directly conflict” with applicable federal law, or would not
be applicable to “business of insurance” activities conducted on state land. Section 6(b)
mediates, in advance, the state v. state choice-of-law issue by declaring that the laws of
7 “One securities product being offered to our service members, the contractual plan, has largely
disappeared from the civilian market since the 1980s due to its excessive sales charges and the
emergence of low-cost products. A 50-percent sales commission is typically assessed against the
first year of contributions made under a contractual plan, even though the average commission
on other securities products such as mutual funds is less than 6 percent on each sale” (section
2(4)). Although “periodic payment plan” is not defined in the bill, the “contractual plan”
described in section 2(4) appears to be the same entity.
8 15 U.S.C. §§ 78a et seq.
9 15 U.S.C. § 78o-3(i).
10 15 U.S.C. §§ 80b-1 et seq.
11 15 U.S.C. § 80b-4.
12 15 U.S.C. § 80b-10, note.

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the state in which the subject federal facility is located shall govern, unless the facility is
located outside of the United States. In that case, if the subject of regulatory activity is an
individual, the law of the state in which that individual has been issued a resident license
shall be applicable; if the subject of regulatory activity is “an entity engaged in the
business of insurance,” the law of the state in which that entity is domiciled shall govern.
Section 7(a) expresses the intent of Congress that within 12 months from the
enactment of H.R. 5011 (1) the several states should work collectively with the Secretary
of Defense to promote “appropriate” standards that will “protect members of the Armed
Forces from dishonest and predatory insurance sales practices while on a military
installation”; and (2) each state should identify its own role in furthering the cited
protections. Within the same time frame, the National Association of Insurance
Commissioners (NAIC) is mandated to conduct a study, after consultation with the
Secretary of Defense, on the progress of the states in implementing the activities Congress
has urged, and to submit a report of its findings to the House Committee on Financial
Services and the Senate Committee on Banking, Housing, and Urban Affairs.
Section 8 imposes certain written (“in plain and readily understandable language”)
disclosure requirements on insurance entities and insurance agents who sell “any life
insurance product to any member of the Armed Forces on a military installation.” The
disclosure document must indicate that the product is in no way sanctioned or
recommended by the government, that alternative (and subsidized) life insurance may be
available through the federal government, and must contain, unless applicable state law
otherwise provides, the address and phone number of the state Insurance Commissioner
where consumer complaints may be directed. Insurers or insurance agents who
intentionally fail to make the required disclosures, as determined by either a state or
federal agency or in a final court proceeding, are to be prohibited from engaging in the
“business of insurance” with respect to “employees of the Federal Government on Federal
land,” except for activities with respect to existing policies or those “specifically”
contracted for by the federal or a state government. In the event that a majority of states
adopt materially identical standards13 concerning the required disclosures, those standards
are to supplant those set out in Section 8.
Section 9 expresses the sense of Congress that NAIC should, within 12 months of
H.R. 5011's enactment, conduct a study of ways in which the quality and sale of life
insurance products on military installations might be improved, and submit such study to
the House Committee on Financial Services and the Senate Committee on Banking,
Housing, and Urban Affairs. In the event that NAIC does not submit the requested report,
the Comptroller General of the United States is directed to submit a report on the subject
to the designated House and Senate Committees within the six months following the
expiration of NAIC’s 12-month time allotment.
Section 10(a) would, two years after enactment of H.R. 5011 prohibit insurers from
entering into or renewing contractual relationships with producers who solicit or sell life
insurance on military installations unless the insurer had implemented a system for
reporting to the Insurance Commissioners in both the insurers’ state of domicile and the
13 Defined in section 8(d)(3) as those which “require or prohibit identical conduct with respect
to the same activity.”

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producers’ states of residence significant disciplinary actions taken against the producer
by the insurer14 or any action the insurer knows has been taken by any government entity.
In addition, Congress expresses its intent that, within the same time period, the states
should collectively implement a system to receive reports of the disciplinary actions
described in section 10(a), and to disseminate them to all of the states and to the Secretary
of Defense (section 10(b)).
Section 11 mandates that the Secretary of Defense: (1) maintain a list (name, address,
other “appropriate” information) of persons in the securities or insurance industries who
have been barred, banned, or “otherwise limited in any manner” from engaging in those
businesses on military installations (section 11 (a)). The Secretary is further directed to
notify federal and state agencies responsible for securities and insurance regulation of the
inclusion or removal from the Defense Department list, which is to be kept “current and
easily accessible” (section 11(b)); and, within 60 days after the enactment of H.R. 5011,
to issue regulations concerning such list, submitting the proposed regulations to the House
and Senate committees noted previously prior to any publication in the Federal Register.
The final regulations are to become effective 30 days after being submitted to those
committees, which submission is to occur not later than 90 days after the enactment of
H.R. 5011 (section 11 (c)).
Section 1215 expresses the sense of Congress that the federal and state agencies
responsible for insurance and securities regulation should advise the “appropriate” federal
entities concerning the following three items: “significantly increasing” the availability
through the federal government of life insurance coverage to members of the Armed
Forces; encouraging members of the Armed Forces to become financially literate and to
obtain “objective financial counseling” before they purchase life insurance in addition to
that available though the federal government; and improving Thrift Savings Plan benefits
and matching contributions available to members of the Armed Forces.
Section 13 defines “entity” as including insurers; “individual” as including insurance
agents and producers; “state insurance commissioner” as that officer, agency, or “other
entity” with primary regulatory authority over persons engaged in the business of
insurance in a state. There is no definition of “state.”
14 “Significant” is not defined in the bill.
15 The designation of this section as “Sec. 11,” as well as the following section as “Sec. 12,”
would seem to be the result of typographical error, as they directly follow “Sec. 11" and “Sec.
12.”