|Wednesday, December 15, 2004|
Nancy Condon (202) 728-8379
Herb Perone (202) 728-8464
NASD Orders First Command to Pay $12 Million for Misleading Statements in Sales of Systematic Investment Plans to Military Personnel
Washington, DC – NASD announced today that it has censured and fined First Command Financial Planning Inc., a Fort Worth, TX broker-dealer, $12 million for making misleading statements and omitting important information when selling mutual fund investments with up-front sales charges of up to 50 percent through a monthly installment method known as a “Systematic Investment Plan.”
From that $12 million, First Command is ordered to pay restitution to thousands of customers who purchased a Systematic Investment Plan between Jan.1, 1999 and the present who terminated the plan and paid an effective sales charge greater than 5 percent. All money remaining will be payable to the NASD Investor Education Foundation, to be used for the investor education needs of members of the military and their families. The Foundation will use the funds to support educational programs, materials and research to help equip members of the military community with the knowledge and skills necessary to make informed investment decisions. It is anticipated that the Foundation will receive approximately $8 million.
In the action announced today, First Command also settled NASD charges of inappropriately confronting a customer who complained, failing to maintain e-mail, failing to maintain adequate supervisory systems and procedures and filing an inaccurate Form U-5 regulatory report. In a related action, NASD fined a First Command supervisor $25,000 and suspended him from acting in any supervisory capacity for 30 days.
The Securities and Exchange Commission today instituted settled enforcement proceedings against First Command based on similar allegations relating to the firm’s sales of systematic investment plans.
“Using misleading sales scripts, inappropriate comparisons and omissions of important information, First Command sold hundreds of thousands of complicated and often enormously expensive plans to young members of our armed services, who are frequently inexperienced investors,” said NASD Vice Chairman Mary L. Schapiro. “These investors, like all others, are entitled to balanced and honest information about investment alternatives. And it is inexcusable that a First Command sales supervisor would try to stifle an airman’s complaint by suggesting, among other things, that sending his complaint violated Air Force regulations.”
Under Systematic Investment Plans, an investor makes monthly payments for a fixed term, typically 15 years, which are invested in underlying mutual funds. The purchaser is charged a 50 percent sales load on the first 12 monthly payments. Payments over the remainder of the term are not subject to sales charges so that the effective sales charge decreases so long as the purchaser continues to make additional investments. However, if the investor does not terminate within 18 months, and then fails to complete the term, he or she will pay a sales charge of up to 50 percent of the amount invested. At the conclusion of NASD’s investigation of this case, First Command informed NASD that it is eliminating the sale of new Systematic Investment Plans.
NASD found that First Command primarily sold the plans to commissioned and non-commissioned officers. The firm’s customer base includes over 297,000 current and former military families. Forty percent of current active duty general officers, one-third of commissioned officers and 16 percent of noncommissioned officers are First Command clients. First Command’s sales force consists primarily of former military personnel. Its executive officers, supervisors, managers and its Board of Advisors are primarily retired or separated military personnel.
NASD found that the firm sold the plans through the use of a three-step scripted sales process that contained misleading statements and omissions. For example:
NASD also found that First Command violated NASD rules when a First Command supervisor inappropriately confronted a former customer – an Air Force officer – who complained in an e-mail to an online publication that he had suffered losses and recommended that others not invest with First Command. The e-mail was in response to a negative article about First Command’s sales practices.
First Command District Supervisor James Provo contacted the customer, suggested that he might need an attorney, told him that the highest level of Air Force commanders were being contacted regarding the e-mail and told him his previously approved change in assignment might be delayed until the matter was resolved. NASD also found that Provo arranged a meeting with the Air Force’s legal assistance office, questioning whether the customer had violated Air Force regulations by using e-mail to send his message criticizing First Command. Provo also contacted the customer’s squadron commander and informed her that First Command might have a grievance against a member of her squadron. First Command eventually wrote a letter of apology to the former client, but otherwise took no steps to discipline Provo.
In a separate action, NASD fined Provo $25,000 and suspended him from serving in a supervisory capacity for 30 days. In settling the matter, Provo neither admitted nor denied the allegations, but consented to the entry of NASD’s findings.
In addition to making payments for restitution and investor education of military personnel and their families, First Command is required to hire an independent consultant to oversee the payment of restitution and review its sales practices. First Command must also pre-file its advertising materials with NASD for one year.
First Command agreed to the sanctions while neither admitting nor denying the allegations.
NASD today issued Systematic Investment Plans—Educate Yourself Before You Enlist, an Investor Alert aimed at informing military and other investors about the risks of investing in Systematic Investment Plans.
Investors may obtain information the disciplinary record of, any NASD-registered broker or brokerage firm by using NASD's BrokerCheck. NASD makes BrokerCheck available at no charge to the public. In 2003, members of the public used this service to conduct more than 2.8 million searches for existing brokers or firms and requested almost 180,000 reports in cases where disclosable information existed on a broker or firm. Investors can link directly to BrokerCheck at www.nasdbrokercheck.com. Investors can also access this service by calling 1-800-289-9999.
NASD is the leading private-sector provider of financial regulatory services, dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. NASD touches virtually every aspect of the securities business - from registering and educating all industry participants, to examining securities firms, enforcing both NASD rules and the federal securities laws, and administering the largest dispute resolution forum for investors and member firms. For more information, please visit our Web Site at www.nasd.com.