The $12 Million Will Be Used to Reimburse Certain Military Customers and Fund Investor Education Programs for the Military
Washington, D.C., Dec. 15, 2004 – LAWFUEL – First with law news – The Securities and Exchange Commission today announced the institution of settled enforcement proceedings against First Command Financial Planning, Inc. (First Command), a registered broker-dealer whose customer base consists almost entirely of active-duty and retired U.S. Military personnel. The SEC alleges that First Command used misleading sales materials to offer and sell mutual-fund investments through an installment method called a systematic investment plan (systematic plan). The NASD today also initiated settled disciplinary proceedings against First Command based on similar allegations relating to the firm’s sales of systematic plans. In settlement of these actions, First Command has agreed to pay $12 million to be used to reimburse certain customers and to fund investor education programs for members of the U.S. Military and their families.
Stephen M. Cutler, Director of the SEC’s Division of Enforcement, observed, “First Command targeted members of our armed forces with investment sales pitches and comparative information that didn’t tell the full story. The SEC and NASD sanctions against First Command make clear that such practices aren’t acceptable. We hope that the investor education component of our settlement will provide a further check against those practices and help arm members of our military and their families with the knowledge and skills necessary to make informed investment decisions in the future.”
Headquartered in Fort Worth, Texas, First Command has sales offices near U.S. military bases worldwide, and counts as its customers approximately forty percent of the current active duty general officers and approximately one-third of the commissioned officers. The vast majority of its sales agents are retired military officers.
The systematic plans allowed investors to accumulate mutual-fund shares indirectly by making fixed monthly contributions – typically ranging from $100 to $500 – over a period of at least 15 years. The plans impose a unique sales charge or load that is equal to 50% of the plan’s first 12 monthly payments with no sales load thereafter. Should the military customer make all of the required payments (180) over the 15-year period, the effective sales charge is approximately 3.3%. On the other hand, should the customer fail to make all of the required payments, the effective sales charge may be substantially higher. Historically, approximately 57% of First Command’s customers failed to achieve the required 180 payments and, consequently, many of them paid a substantially higher sales charge than is customary for load equity mutual fund investments.
The SEC, in its Order, finds that since at least January 1999, First Command offered and sold systematic plans by making misleading comparisons between the systematic plan and other mutual-fund investments. For example, sales scripts utilized by the firm claimed no-load mutual funds “frequently have some of the highest long-term costs” and are primarily for “speculative” investors. In reality, the average long-term costs of owning no-load funds are substantially lower than the costs of owning load funds, and many long-term investors invest in no-load funds. The SEC Order also finds that First Command sales materials contained misleading statements and omissions concerning the availability of the Thrift Savings Plan, a Federal Government-sponsored retirement savings and investment plan, which offers military investors many of the features of a systematic plan at lower costs; and the efficacy of the upfront load in ensuring that investors remain committed to the systematic plan.
As part of its settlement with the SEC and NASD, First Command has agreed to compensate customers who purchased and terminated their plans after January 1999 and before the announcement of the SEC and NASD enforcement actions. By prematurely terminating their plans, these customers have incurred effective sales charges well above the average load charged by conventional-load equity mutual funds.
In addition to the $12 million payment, the SEC has ordered First Command to cease and desist from committing or causing violations of certain provisions of the federal securities law, and to comply with certain undertakings, including hiring an independent consultant to review and make recommendations concerning the adequacy of First Command’s sales scripts, sales training systems and procedures, and supervisory systems and procedures.
Investors can learn more about systematic plans by going to:
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For further information contact:
Securities and Exchange Commission
Harold F. Degenhardt (817) 900-2607
Spencer C. Barasch (817) 978-6425