Company Settles Charges on Funds Sold to Soldiers
By DIANA B. HENRIQUES, NY TIMES, December 16, 2004

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First Command Financial Services, one of the best-known companies marketing financial products to military families, agreed yesterday to pay $12 million to settle accusations that it used misleading information to sell mutual funds to thousands of military officers over the last five years.

NASD and the Securities and Exchange Commission said that First Command exaggerated the track record of its high-cost fund products - with fees that ate up 50 percent of an investor's first-year contributions - and misrepresented the costs and availability of cheaper investment alternatives.

The company neither admitted nor denied the accusations, but accepted the punishments, which included a formal censure.

"We at First Command look forward to returning our full focus and attention to helping families pursue their financial goals," the chief executive, Lamar C. Smith, said. "We believe in the integrity of our company, our agents and the products we sell."

The settlement requires First Command to compensate any customer who paid an effective sales charge of more than 5 percent on investments made since January 1999. The remaining money, estimated by regulators at $8 million, will be spent on a financial education program for military families. The company also agreed to hire an independent consultant to review sales practices.

"It is important to note," said Lanny J. Davis, a lawyer for the company, that the regulatory complaints focused on sales practices "and not on the financial investment product that First Command sold."

The company announced this month that it would no longer sell the products, called contractual plans or systematic investment plans. Such plans allow investors to contribute a fixed monthly amount over 15 years or more, but require them to pay the sales fees upfront - and the fees consume half of their first-year investment. Investors who drop out early pay effective sales fees as high as 30 percent, but even those who stay in earn less than they would have if fees had not eaten up so much of their first-year contributions.

Stephen M. Cutler, enforcement director of the S.E.C., said First Command had "targeted members of our armed forces" with sales pitches "that didn't tell the full story."

The conduct raised special concerns, said Mary L. Schapiro, the vice chairwoman of NASD, because of First Command's use of affinity marketing techniques to win the trust of its customers.

"You had former military personnel selling to current military personnel for a brokerage firm controlled by former military personnel," Ms. Schapiro said. "That makes the omissions and misleading statements all the more troubling."

According to regulators, First Command consistently exaggerated the staying power of its military customers and the merits of contractual plans. For example, the company claimed that at least 76 percent of its customers successfully completed their plans. In fact, regulators said, 43 percent of the plans sold from 1980 to 1987 were completed.

Regulators said the company also failed to fully inform investors about the lower long-term returns of contractual plans.

First Command was also accused of misleading customers about cheaper investment alternatives, specifically no-load mutual funds and the government's Thrift Savings Plan, which is similar to a civilian 401(k) plan.

"First Command informed its customers that only speculators invest in no-load mutual funds and that no-load mutual funds have high costs," the NASD complaint noted. In fact, neither statement is true, regulators said.

Mercer Bullard, a securities law professor at the University of Mississippi and president of Fund Democracy, an advocacy group for mutual fund shareholders' interests, said he thought the misrepresentations warranted much stiffer penalties.

"In none of the cases that regulators have brought against mutual funds over the past year was behavior as egregious as this," Professor Bullard said. "And these weren't exaggerations by some rogue agent in the field, these were lies from the very top."

The settlement is an embarrassment for First Command, which has boasted of an unblemished regulatory record. In August 2003, the company demanded and received a public apology from the Air Force's top military lawyer after his staff circulated a request for information about company sales practices.

Contractual plans, which have long been prone to sales abuses, are nevertheless legal under federal mutual fund law. The House adopted legislation in October that would have abolished them, but the Senate did not act before Congress recessed.

First Command Financial Planning of Fort Worth Shows How Power Can Corrupt
And how power can create liaisons of influence that should be held accountable for their actions...but are not.


UPDATE:

Email Received November 1, 2004:

I commend you for your item regarding the company First Command ("First Command Financial Planning of Fort Worth Shows How Power Can Corrupt").

This is a great example of unethical behavior and includes:

- using retired generals as executives to get access to current active duty leaders
- using retired generals and senior noncommissioned officers to form a sham "board of advisors" that is nothing more than a marketing ploy
- using retired and former military members as agents to gain access to bases and potential clients and to gain the trust of these potential clients
- gaining the trust of people and then selling them high commission investment and insurance products
- offering "free investment seminars"that are nothing more than a way to identify clients
- dropping names of other clients to sway new clients (e.g. Colonel Schmuck is one of our clients, he trusts us, you should too.)
- sponsoring all sorts of awards within the military that are nothing more than a method to gain an implicit endorsement from the military
- gaining the cooperation of military leaders in getting access to groups of servicemembers to include attendance at mandatory "financial planning briefings" given by First Command agents.

The sad thing is that military leaders let this happen and that retired officers cashed in on their rank and reputation.

Another element of this is that the Army Times, Navy Times, and the Air Force Times--whose readership is primarily active duty military--gave very soft treatment to First Command. I surmise this had something to do with the half page First Command ads that appear in nearly every issue of these weekly newspapers. I commend Diana Henriques of the NY Times and Steve Goldberg of Kiplingers for their efforts in exposing First Command.

If the Senate passes the Miltiary Personnel Financial Services Protection Act then our system of government will have worked. The House already passed it 396-2. I am sure First Command is lobbying hard right now to protect the cozy niche they enjoyed in the past.

RM

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