Brokerage firm that caters to military personnel ordered to pay $12M fine
Stars and Stripes December 18, 2004
WASHINGTON — A brokerage firm that caters almost exclusively to military personnel agreed this week to pay a $12 million fine to settle claims it misled customers about their investment fees and returns.
First Command Financial Planning will refund about $4 million to certain customers who bought mutual funds from the firm between 1999 and this year, in a settlement with the U.S. Securities and Exchange Commission and the National Association of Securities Dealers, the brokerage industry’s self-policing organization.
The remainder of the fine will go into a military education fund run by NASD, according to the association’s head of enforcement, Barry Goldsmith.
The firm’s customer base includes over 297,000 current and former military families. According to SEC estimates, about 40 percent of the current active-duty general officers, about one-third of the commissioned officers, and about 16 percent of noncommissioned officers are customers of First Command. The majority of its sales agents are retired military officers.
The company employs about 1,000 sales agents — mostly retired military officers — in some 200 branch offices near military bases in the United States and several foreign countries, including Germany, England, Spain and Italy.
United States and several foreign countries. A statement from the company noted that the settlement did not involve any of the firm’s life insurance policies or banking services, and only involved how investment plans were sold, not concerns over the mutual funds themselves. The company neither admitted nor denied wrongdoing as part of the settlement.
Before the settlement, First Command had announced it would stop offering its systematic investment plans, the focus of the investigation. In addition to the fine, the firm will also have all of its advertising preapproved by an independent consultant for two years.
Goldsmith said sales agents for the broker dealer misled customers in saying their high up-front costs of the funds — in some cases 50 percent of the money being invested — encouraged clients to stay in the plan because they would face large losses at first, which would diminish over time. Company data showed otherwise.
Agents also said the systematic investments had lower long-term costs than other mutual funds. Goldsmith said in many cases the opposite is true, and clients didn’t fully understand the fees associated with First Command’s plans.
“We found it very troublesome that the people who were sold these plans had a lot on their minds and were not given all the appropriate information,” he said. “And the median age of their investors was 25, which meant [First Command agents] were dealing with people without much investing background.”
The investigation also resulted in a $25,000 fine and a 30-day suspension for First Command district supervisor James Provo, based in Charleston, S.C., who responded to an Air Force officer’s e-mail complaint about the company by telling the officer that he could lose a permanent change of station assignment and informing his squadron commander that the company might file a grievance against the officer.
Payouts will be available only to First Command clients who purchased and ended their investment plans within the last six years. Goldsmith said customers with active plans can try to recoup their losses through arbitration, and in light of the settlement he expects many clients to do so.
For more information: www.nasdfoundation.org/.
Servicemembers and families who feel they may be entitled to a refund as part of this settlement are urged to go to www.nasd.com beginning Saturday morning.
“There will be a First Command investor restitution page on the Web site,” according to National Association of Securities Dealers spokeswoman Sarah Bohn. “It will clearly state who is eligible, what you should do, when restitution will be available, and what options will be made available to investors who are not eligible.”
Wayne M. Secore, a lawyer with Secore and Waller, Llp., a Dallas-based law firm, will administer the restitution program.
Anyone who is having problems with the Web site can call him at (972) 776-0200.
The NASD Foundation will also be developing plans to educate investors, as part of the settlement, but plans have not been finalized for how that will work, Bohn said.
— Patrick J. Dickson