First Command Financial Services, a leading seller of financial products to military personnel, agreed last Wednesday to pay $12 million to settle allegations that it used shady sales practices to pitch mutual funds to thousands of enlisted men and women over the last five years.
The Securities and Exchange Commission and NASD said that First Command failed to disclose to military officers the upfront sales charges on some of its high-cost fund products, many of which imposed sales loads of up to 50% of an investor's first-year contributions. In addition, sellers of the funds were accused of exaggerating the performance track record of these "systematic investment plans" and misled customers about cheaper alternatives while using their military credentials to manipulate soldiers. Fort Worth, Texas-based First Command neither admitted nor denied any wrongdoing but was censured for its actions. "We at First Command look forward to returning our full focus and attention to helping families pursue their financial goals," CEO Lamar C. Smith said. "We believe in the integrity of our company, our agents and the products we sell."
Under the terms of the settlement, the company must use a portion of the $12 million to reimburse thousands of customers who purchased contractual plans that carried a sales charge that exceeded 5% on investments made after January 1999. The remaining portion will be spent on a financial literacy program geared toward military families. First Command was also ordered to hire an independent consultant to review its sales practices.
What was particularly troubling in the case, regulators noted, was that former members of the military worked for and ran the firm. "Using misleading sales scripts [and] inappropriate comparisons, First Command sold hundreds of complicated and often enormously expensive plans to young members of our armed services," said NASD Chairman Nancy Schapiro.