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Senate Passes Military Financial Antifraud Bill With Broader Provisions
By unanimous consent, the Senate passed a military
financial products antifraud bill that completely bans investment companies from
issuing periodic payment plan certificates, which are an outdated form of mutual
fund with high up-front costs. The House passed a similar bill last year by a
vote of 405-2. A conference committee can now be assigned to reconcile
differences between the House and Senate versions or the House can take up the
Senate version of the bill. As can be seen by the complete ban on contractual
plans, the measure is broader than its military origins. The broad bipartisan
support for this legislation argues strongly for its final passage this year.
The Military Personnel Financial Services Protection Act
(S. 418) amends section 27 of the Investment Company Act to forbid the issuance
and sale of periodic payment plan certificates, effective 30 days after the date
of enactment. The bill preserves preexisting rights related to existing plans,
including administrative transactions, conversions, transfers or amount or name
changes. The bill also directs the SEC to submit a report to Congress on
refunds, sales practices and revenues from periodic payment plans over the last
five years.
These contractual plans represent an obscure investment
vehicle that has virtually disappeared from the civilian market due to its
unusually high and front-loaded sales charge. The hallmark of such plans is a
sales load of 50%, paid by the investor to the broker selling the plan, assessed
against the first year of contributions. The plans were created so that
investors who are 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.
In recent years, the contractual plan has fallen further
into disrepute. The GAO has identified three 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. Second, only 10% to 43% of investors that purchased
contractual plans between 1980 and 1987 had completed the full 15 years required
under the contract. As might be expected, 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.
Another provision of S.418 reorganizes and codifies in
section 204 of the Investment Advisers Act provisions of the National Securities
Markets Improvement Act, 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
the 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.
The bill codifies the SEC's designation of the 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 the NASD with immunity from liability for actions
taken in good faith in operating the investment adviser public disclosure
program.
The bill also clarifies that state securities laws apply to
securities activities conducted on federal land and facilities, including
military installations in the U.S. and abroad. The state in 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 would have jurisdiction.
The bill amends section 15A(i) of the 1934 Act, which
requires securities associations to maintain a toll-free telephone listing to
receive inquiries regarding disciplinary actions involving its members 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. Securities associations also will be required to adopt
rules relating to inquiries and responses, and to the establishment of an
administrative process for disputing the accuracy of registration information.
Consistent with current law, the associations and participating exchanges will
not be liable to any persons for actions taken or omitted in good faith under
this provision.
James Hamilton
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