Tom Philpott: CNJ columnist
An estimated 13,000 military investors who bought and later terminated a “Systematic Investment Plan” marketed by First Command Financial Planning Inc. of Fort Worth, Texas, are due restitution payments in the coming weeks that likely will average a little over $300.
Letters of explanation are being mailed to a list of qualified former First Command investors at last known addresses. An enclosed verification form must be signed and returned, said lawyer Wayne Secore, an independent consultant hired to distribute $4 million to eligible former investors.
The payments are part of a $12 million settlement First Command reached with the Securities and Exchange Commission and NASD, the private-sector regulator of the securities industry, after the agency found that the company had misled investors.
The remaining $8 million is to be used for investor education programs for service members and families, the population to which First Command has sold systematic plans for years.
Only a fraction of former First Command investors are eligible for restitution. They must meet all of the following criteria:
n Purchased a Systematic Investment Plan on or after Jan. 1, 1999
n Terminated the plan, in writing, on or before Dec. 15, 2004, the date the SEC settlement and
n Paid an effective sales charge greater than 5 percent, which presumably SEC views as reasonable for some higher-priced load funds.
Payments to individuals will vary. They are to get back any sales charge they paid that exceeded an effective rate of 5 percent, plus interest.
Year 1999 is significant because the SEC found that “at least” from that year forward, First Command used a “structured sales process” that included “misleading statements and omissions” to persuade military people, mostly officers and mid-grade or senior enlisted, to invest in systematic plans.
These plans, which the company stopped selling last December, allowed investors to buy mutual-fund shares indirectly by making fixed monthly contributions, from $100 to $500, over at least 15 years.
The plans impose a unique sales charge, or load, set at 50 percent of the first 12 payments, and no charges thereafter. If the investor makes the required 180 payments, the effective charge falls to 3.3 percent.
But the SEC said most systematic investors pay substantially higher sales rates than are customary, even for load mutual funds. That’s because, based on First Command’s own data, only 43 percent of investors make the required 180 payments.
The SEC censured First Command for misleading investors on how effective front-end sales loads are to customers committing to systematic investing, and on how systematic plans perform compared to other mutual fund investments.
The SEC said First Command also failed to advise prospective investors that the government’s Thrift Savings Plan, open to the military since 2001, has many features of a systemic plan at far lower cost.
As a result, First Command violated the Securities Act’s prohibition on making untrue statements or omissions in selling securities, the SEC said.
The SEC quoted from company sales scripts that said no-load mutual funds, which generally are popular, “frequently have some of the highest long-term costs” and are intended primarily for “speculative” investors.
“In reality,” said the SEC, “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 company did not admit to or deny the SEC allegations or findings. But accepted an SEC order to “cease and desist” violating provisions of the securities law.
As part of the settlement, the company agreed to hire an independent consultant to review sales scripts and agent training.
Tom Philpott can be contacted at Military Update, P.O. Box 231111, Centreville, Va. 20120-1111, or by e-mail at: