    [House Hearing, 114 Congress]
    [From the U.S. Government Publishing Office]

                           PRESERVING RETIREMENT SECURITY
                             AND INVESTMENT CHOICES
                               FOR ALL AMERICANS

    =======================================================================

                                 JOINT HEARING

                                   BEFORE THE

                           SUBCOMMITTEE ON OVERSIGHT
                               AND INVESTIGATIONS

                                    AND THE

                      SUBCOMMITTEE ON CAPITAL MARKETS AND
                        GOVERNMENT SPONSORED ENTERPRISES

                                     OF THE

                        COMMITTEE ON FINANCIAL SERVICES

                         U.S. HOUSE OF REPRESENTATIVES

                        ONE HUNDRED FOURTEENTH CONGRESS

                                 FIRST SESSION

                                   __________

                               SEPTEMBER 10, 2015

                                   __________

           Printed for the use of the Committee on Financial Services

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                               Serial No. 114-49

                     HOUSE COMMITTEE ON FINANCIAL SERVICES

                        JEB HENSARLING, Texas, Chairman

    PATRICK T. McHENRY, North Carolina,  MAXINE WATERS, California, Ranking
        Vice Chairman                        Member
    PETER T. KING, New York              CAROLYN B. MALONEY, New York
    EDWARD R. ROYCE, California          NYDIA M. VELAZQUEZ, New York
    FRANK D. LUCAS, Oklahoma             BRAD SHERMAN, California
    SCOTT GARRETT, New Jersey            GREGORY W. MEEKS, New York
    RANDY NEUGEBAUER, Texas              MICHAEL E. CAPUANO, Massachusetts
    STEVAN PEARCE, New Mexico            RUBEN HINOJOSA, Texas
    BILL POSEY, Florida                  WM. LACY CLAY, Missouri
    MICHAEL G. FITZPATRICK,              STEPHEN F. LYNCH, Massachusetts
        Pennsylvania                     DAVID SCOTT, Georgia
    LYNN A. WESTMORELAND, Georgia        AL GREEN, Texas
    BLAINE LUETKEMEYER, Missouri         EMANUEL CLEAVER, Missouri
    BILL HUIZENGA, Michigan              GWEN MOORE, Wisconsin
    SEAN P. DUFFY, Wisconsin             KEITH ELLISON, Minnesota
    ROBERT HURT, Virginia                ED PERLMUTTER, Colorado
    STEVE STIVERS, Ohio                  JAMES A. HIMES, Connecticut
    STEPHEN LEE FINCHER, Tennessee       JOHN C. CARNEY, Jr., Delaware
    MARLIN A. STUTZMAN, Indiana          TERRI A. SEWELL, Alabama
    MICK MULVANEY, South Carolina        BILL FOSTER, Illinois
    RANDY HULTGREN, Illinois             DANIEL T. KILDEE, Michigan
    DENNIS A. ROSS, Florida              PATRICK MURPHY, Florida
    ROBERT PITTENGER, North Carolina     JOHN K. DELANEY, Maryland
    ANN WAGNER, Missouri                 KYRSTEN SINEMA, Arizona
    ANDY BARR, Kentucky                  JOYCE BEATTY, Ohio
    KEITH J. ROTHFUS, Pennsylvania       DENNY HECK, Washington
    LUKE MESSER, Indiana                 JUAN VARGAS, California
    DAVID SCHWEIKERT, Arizona
    FRANK GUINTA, New Hampshire
    SCOTT TIPTON, Colorado
    ROGER WILLIAMS, Texas
    BRUCE POLIQUIN, Maine
    MIA LOVE, Utah
    FRENCH HILL, Arkansas
    TOM EMMER, Minnesota

                         Shannon McGahn, Staff Director
                        James H. Clinger, Chief Counsel
                  Subcommittee on Oversight and Investigations

                       SEAN P. DUFFY, Wisconsin, Chairman

    MICHAEL G. FITZPATRICK,              AL GREEN, Texas, Ranking Member
        Pennsylvania, Vice Chairman      MICHAEL E. CAPUANO, Massachusetts
    PETER T. KING, New York              EMANUEL CLEAVER, Missouri
    PATRICK T. McHENRY, North Carolina   KEITH ELLISON, Minnesota
    ROBERT HURT, Virginia                JOHN K. DELANEY, Maryland
    STEPHEN LEE FINCHER, Tennessee       JOYCE BEATTY, Ohio
    MICK MULVANEY, South Carolina        DENNY HECK, Washington
    RANDY HULTGREN, Illinois             KYRSTEN SINEMA, Arizona
    ANN WAGNER, Missouri                 JUAN VARGAS, California
    SCOTT TIPTON, Colorado
    BRUCE POLIQUIN, Maine
    FRENCH HILL, Arkansas
      Subcommittee on Capital Markets and Government Sponsored Enterprises

                      SCOTT GARRETT, New Jersey, Chairman

    ROBERT HURT, Virginia, Vice          CAROLYN B. MALONEY, New York,
        Chairman                             Ranking Member
    PETER T. KING, New York              BRAD SHERMAN, California
    EDWARD R. ROYCE, California          RUBEN HINOJOSA, Texas
    RANDY NEUGEBAUER, Texas              STEPHEN F. LYNCH, Massachusetts
    PATRICK T. McHENRY, North Carolina   ED PERLMUTTER, Colorado
    BILL HUIZENGA, Michigan              DAVID SCOTT, Georgia
    SEAN P. DUFFY, Wisconsin             JAMES A. HIMES, Connecticut
    STEVE STIVERS, Ohio                  KEITH ELLISON, Minnesota
    STEPHEN LEE FINCHER, Tennessee       BILL FOSTER, Illinois
    RANDY HULTGREN, Illinois             GREGORY W. MEEKS, New York
    DENNIS A. ROSS, Florida              JOHN C. CARNEY, Jr., Delaware
    ANN WAGNER, Missouri                 TERRI A. SEWELL, Alabama
    LUKE MESSER, Indiana                 PATRICK MURPHY, Florida
    DAVID SCHWEIKERT, Arizona
    BRUCE POLIQUIN, Maine
    FRENCH HILL, Arkansas

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on:
        September 10, 2015...........................................     1
    Appendix:
        September 10, 2015...........................................    59

                                   WITNESSES
                          Thursday, September 10, 2015

    Bullard, Mercer E., MDLA Distinguished Lecturer and Professor of
      Law, University of Mississippi School of Law...................     9
    Callahan, Caleb, Senior Vice President and Chief Marketing
      Officer, ValMark Securities, Inc., on behalf of the Association
      for Advanced Life Underwriting (AALU)..........................     5
    McNeely, Juli, President, National Association of Insurance and
      Financial Advisors (NAIFA).....................................    10
    Stevens, Paul Schott, President and Chief Executive Officer,
      Investment Company Institute (ICI).............................     7
    Stolz, Scott, Senior Vice President, PCG Investment Products,
      Raymond James & Associates, Inc................................    12

                                    APPENDIX

    Prepared statements:
        Barr, Hon. Andy..............................................    60
        Maloney, Hon. Carolyn........................................    61
        Sinema, Hon. Kyrsten.........................................    65
        Bullard, Mercer E............................................    66
        Callahan, Caleb..............................................    95
        McNeely, Juli................................................   103
        Stevens, Paul Schott.........................................   241
        Stolz, Scott.................................................   267

                  Additional Material Submitted for the Record

    Garrett, Hon. Scott:
        Additional comments for the record submitted by Caleb
          Callahan...................................................   270
        Written statement of the American Council of Life Insurers...   272
        Written statement of Americans for Tax Reform................   275
        Written statement of the Credit Union National Association...   278
        Written statement of the Independent Insurance Agents &
          Brokers of America.........................................   280
        Written statement of the Insured Retirement Institute........   284
        Written statement of the Securities Industry and Financial
          Markets Association........................................   293
        Written statement of the U.S. Chamber of Commerce............   306
        Letter from various undersigned organizations, dated July 21,
          2015.......................................................   310
        U.S. Chamber of Commerce report entitled, ``Locked Out of
          Retirement, The Threat to Small Business Retirement
          Savings''..................................................   326
    Green, Hon. Al:
        Written statement of AARP....................................   339
        Legislative Alert of the AFL-CIO.............................   341
        Written statement of the AFL-CIO.............................   343
        Written statement of Americans for Financial Reform..........   350
        Written statement of Better Markets..........................   358
        Written statement of the Center for American Progress........   402
        Written statement of The Committee for the Fiduciary Standard   405
        Written statement of the Consumer Federation of America......   415
        Written statement of the National Council of La Raza.........   417
        Written statement of Save Our Retirement.....................   425
    Waters, Hon. Maxine:
        Written statement of the Consumer Federation of America......   432
        Written statement of Consumers Union.........................   547
    Wagner, Hon. Ann:
        Letter from Labor Secretary Perez, dated August 7, 2015......   554

                         PRESERVING RETIREMENT SECURITY
                             AND INVESTMENT CHOICES
                               FOR ALL AMERICANS

                                  ----------

                          Thursday, September 10, 2015

                 U.S. House of Representatives,
                              Subcommittee on Oversight
                                and Investigations, and
                    Subcommittee on Capital Markets and
                      Government Sponsored Enterprises,
                               Committee on Financial Services,
                                                       Washington, D.C.
        The subcommittees met, pursuant to notice, at 10:06 a.m.,
    in room 2128, Rayburn House Office Building, Hon. Sean P. Duffy
    [chairman of the Oversight and Investigations Subcommittee]
    presiding.
        Members present from the Oversight and Investigations
    Subcommittee: Representatives Duffy, Fitzpatrick, King, Hurt,
    Fincher, Mulvaney, Hultgren, Wagner, Tipton, Poliquin, Hill;
    Green, Cleaver, Ellison, Delaney, Beatty, Heck, and Vargas.
        Members present from the Capital Markets and Government
    Sponsored Enterprises Subcommittee: Representatives Garrett,
    Hurt, King, Royce, Duffy, Stivers, Fincher, Hultgren, Ross,
    Wagner, Messer, Schweikert, Poliquin, Hill; Sherman, Meeks,
    Lynch, Scott, Ellison, Perlmutter, Carney, and Foster.
        Ex officio present: Representatives Hensarling and Waters.
        Also present: Representatives Barr and Clay.
        Chairman Duffy. The Subcommittee on Oversight and
    Investigations and the Subcommittee on Capital Markets and
    Government Sponsored Enterprises will come to order.
        Without objection, the Chair is authorized to declare a
    recess of the subcommittees at any time.
        Today's hearing is entitled, ``Preserving Retirement
    Security and Investment Choices for All Americans.''
        I now recognize myself for 1\1/2\ minutes to give an
    opening statement.
        The Department of Labor's (DOL's) fiduciary proposal will
    limit Americans' investment choices. This proposal prescribes
    an unworkable framework for many lower-income Americans trying
    to save for their retirement. This is not a Wall Street issue.
    Millions of Americans in every State will find themselves the
    victims of this poorly designed regulation.
        I believe that Americans, not the government, should be
    able to make the investment choices that are right for them.
    Americans already face a retirement savings crisis, a point
    even Labor Secretary Perez has acknowledged. Why, then, would
    he want to make it even harder for Americans to save?
        This proposal would result in millions of Americans losing
    access to their trusted investment advisors as well as their
    existing retirement accounts, and make it harder for low-
    balance savers to access retirement products, receive
    affordable investment advice, and ultimately to do what we want
    them to do, which is to save.
        The rule is supported by the DOL's deeply flawed economic
    analysis that points to $17 billion in lost income to investors
    because of fees charged by advisors. Not only does the DOL rely
    on incomplete, outdated data as a basis for its proposal, it
    fails to consider the numerous unintended consequences should
    this proposal move forward.
        With so much hanging in the balance, the Obama
    Administration's sprint for the finish line in this rulemaking
    puts politics above people and it should be the other way
    around.
        I look forward to our witnesses' testimony today about how
    this proposal would hurt Main Street investors, first-time
    savers, and small businesses across the country.
        With that, I now recognize the gentleman from New York, Mr.
    Garrett, the chairman of the Subcommittee on Capital Markets
    and Government Sponsored Enterprises, for 2 minutes.
        Chairman Garrett. Of New Jersey, not New York. Yes, thank
    you.
        Every day, millions of Americans look to a broker-dealer or
    investment advisor for guidance as to what to do with their
    hard-earned savings and to help them to have a secure and
    prosperous retirement.
        This was once a privilege only of the wealthy. This
    personalized investment advice and access to financial markets
    is now enjoyed by Americans of all income levels.
        Back in 2008, the financial crisis and the current market
    turmoils highlighted the importance of such advice, as numerous
    studies show that investors who work with a financial
    professional receive better and more consistent returns on
    their investment, while those who invest on their own
    oftentimes make the mistake of buying high and selling low.
        In fact, the Department of Labor estimated in 2011 that
    people who invest without the benefit of professional advice
    make errors that can cost $114 billion a year. That makes it
    all the more curious that this same Department of Labor is now
    marching forward with a regulation that will upend the ability
    of Americans to receive such guidance and which threatens the
    retirement security of the most vulnerable within our society.
        When President Obama announced the rulemaking earlier this
    year, a release from the White House stated that the rule, ``is
    taking a step to crack down on those Wall Street brokers who
    don't put the best interests of workers and middle-class
    families first.''
        But if you look at the panel before us, the witnesses
    today, and in reading through some of the 2,000 comment letters
    received by the DOL, I think it is pretty clear that the
    biggest impact of this rule is going to be felt less on Wall
    Street and more so by the millions of middle- and lower-income
    households who may ultimately have no place to go for their
    advice.
        Moreover, the SEC continues to contemplate implementation
    of a uniform fiduciary standard rule under Section 913 of the
    Dodd-Frank Act, a rulemaking that remains unsupported by
    empirical data and which could actually directly conflict with
    this DOL rule.
        So it is clear that the time is now for Congress to act,
    and by that I would commend Mrs. Wagner of Missouri for her
    continued leadership on this issue and for, again, putting
    forth what I think most of us agree is a very thoughtful piece
    of bipartisan legislation that will help to preserve access to
    financial advice for Americans of all income levels.
        So thank you, Mrs. Wagner.
        And again, I thank the witnesses as well, and look forward
    to your discussion.
        I yield back.
        Chairman Duffy. The gentleman from New Jersey yields back.
        The Chair now recognizes the ranking member of the
    Subcommittee on Oversight and Investigations, Mr. Green, for 5
    minutes.
        Mr. Green. Thank you, Mr. Chairman.
        I would like to thank the witnesses for appearing today.
        And given that Secretary Perez has been mentioned, I would
    like to thank him for his work on this rulemaking process and
    this rule that he is attempting to promulgate. And I do so
    because I was here when we took on the yield spread premium,
    and I remember how difficult it was to take action with the
    yield spread premium, which is not the same as what we are
    doing today, but which is quite similar with the same effect,
    the yield spread premium.
        And it seems to me that when we know that there are
    conflicts of interest, some of which are invidious, onerous,
    some of which are harmful, it would just seem to me that we
    would want to correct this.
        So I commend President Obama for his effort to correct
    these conflicts and to provide small businesses and people who
    are trying to retire an opportunity to avoid conflicts of
    interest that can be harmful.
        By way of edification, let me just explain to you how this
    can work. An investor, a person with a 401(k), pays an advisor
    some amount of money to assist and advise. The advisor is also
    paid by a plan or some fund that the advisor recommends to the
    investor. On its face, probably not a problem.
        But when that advisor is incentivized to recommend a fund
    that may be a high-risk fund, by being paid a higher amount
    than if the advisor recommended a conservative fund, then you
    run into possible conflicts that can be harmful to the
    investor, the person who has a 401(k).
        Secretary Perez is making an effort to try to carve out
    exceptions so that business can continue, but he doesn't want
    the people who have to depend on advice to be hurt at some
    point in the distant future because that advice was not given
    properly. And he talks about the fiduciary relationship, the
    responsibility of the fiduciary to be loyal, to be a person who
    takes the interests of the investor and places that above his
    personal interests or her personal interests.
        Now, with reference to the $17 billion, it appears that
    this is from 2013; 2013 is not that long ago in my world, and
    $17 billion is not a small amount of money. We talk quite
    regularly about how we have decided that billions don't equate
    to large losses, but I am not in that club. I think that a $17
    billion loss is quite a bit of money. And my hope is that we
    will be able to remedy this circumstance.
        Another point: Dr. King talked about the ``paralysis of
    analysis,'' how we can literally take an issue and analyze it
    to the extent that we get nothing done.
        This is a different version of the paralysis of analysis,
    the bill that we will be reviewing, because the bill would
    require that DOL not act until the SEC has acted. My contention
    is if you want the SEC to act, allow the DOL to move forward,
    and as a result of moving forward that will encourage action by
    the SEC.
        I am absolutely convinced that what we are trying to do is
    appropriate in terms of rulemaking.
        And Mr. Bullard, I have read your testimony in its
    entirety, and I want you to know that I compliment you on the
    statements that you have made. You have given us a clear
    picture of what happens when we have these conflicts of
    interest, that some people call kickbacks by the way. They are
    known by a good many people as kickbacks, these conflicts of
    interest.
        In one of your statements on page 14 of what I have as your
    report, you indicate that it is economically irrational for the
    advisor to be paid more to recommend an aggressive asset
    allocation over a conservative one. I think that is a pretty
    strong statement, and I commend you for making the statement.
        Your statement in its entirety is one that I enjoyed
    reading, and I commend you for the strong stance that you have
    taken.
        Thank you, Mr. Chairman. I am going to yield back my time,
    but I will not yield on the question of making sure that we
    protect small investors.
        Chairman Duffy. The gentleman yields back.
        The Chair now recognizes the gentlelady from Missouri, Mrs.
    Wagner, the sponsor of H.R. 1090, the Retail Investor
    Protection Act, for 1\1/2\ minutes.
        Mrs. Wagner. Thank you very much, Mr. Chairman.
        And thank you all for joining us today to discuss this very
    important issue that could potentially jeopardize the access of
    millions--millions--of low- and middle-income Americans to
    receiving investment advice for their retirement.
        Make no mistake. The chairman mentioned a bit ago that
    America is in a retirement savings crisis today. Washington
    needs to be empowering individuals to save for retirement, not
    making it more difficult. This has been one of the most
    significant issues I have taken up since coming to Congress in
    2013.
        My legislation, the Retail Investor Protection Act, will
    help prevent Washington from interfering with the ability to
    save for retirement.
        I want to thank the Members across the aisle over the years
    who have made this a bipartisan issue. We had 30 Democrats vote
    for this legislation in the last Congress, many of whom sit on
    this very committee, and this year we have seen 12 Senate
    Democrats write letters outlining major concerns about the
    Rule.
        I was also pleased to have Representative David Scott and
    Lacy Clay join with Representative Andy Barr and so many others
    on a letter to the Department of Labor at the end of July
    asking for a re-proposal
        I look forward to working with even more Members from
    across the aisle, starting with this hearing today.
        I know many of us heard from our constituents over the
    August recess, and I hope that everyone asks the right
    questions that will help protect access to financial advice for
    those back home.
        I thank you, and I yield back my time.
        Chairman Duffy. The gentlelady yields back.
        I again want to welcome our panel, our witnesses today.
        By way of brief introduction, we have Caleb Callahan,
    senior vice president and chief marketing officer at ValMark
    Securities; Paul Schott Stevens, president and CEO of the
    Investment Company Institute; Professor Mercer Bullard, MDLSA
    distinguished lecturer and professor of law, University of
    Mississippi Law School; Mr. Scott Stolz, the senior vice
    president, PCG Investment Products, Raymond James & Associates;
    and we also have last but not least Juli McNeely, president of
    the National Association of Insurance and Financial Advisors--
    she is also from the great State of Wisconsin, a small town,
    has a great Member of Congress representing her in the
    committee and in the House.
        I am not biased.
        I just want to remind our witnesses that you do have three
    lights in front of you. You are going to be recognized for 5
    minutes. The green light means go, the yellow light means you
    have a minute left in your testimony, and the red light means
    your time is up.
        So with that, Mr. Callahan, you are recognized for 5
    minutes.

     STATEMENT OF CALEB CALLAHAN, SENIOR VICE PRESIDENT AND CHIEF
     MARKETING OFFICER, VALMARK SECURITIES, INC., ON BEHALF OF THE
           ASSOCIATION FOR ADVANCED LIFE UNDERWRITING (AALU)

        Mr. Callahan. Chairmen, Ranking Members, and members of the
    subcommittees, thank you for the opportunity to testify today.
    My name is Caleb Callahan, and I am a principal of ValMark
    Securities. I am testifying today as a member of the AALU and
    on behalf of the 2,200 life insurance professionals it serves
    nationwide.
        Our firm has roughly $14 billion in assets under care.
    These assets are split evenly between the fee-based regime and
    the brokerage regime. This is relevant because we build
    numerous financial plans which call for solutions from both of
    these models as being regularly needed and regularly used.
        My purpose today is to provide feedback on the Department
    of Labor's rule based on real-world experience, working
    directly with advisors and clients.
        I also want to convey that while well-intended, this rule
    will likely have the very opposite effect that it intends to
    have on savers.
        And finally, I want to express my strong support for
    Representative Wagner's Retail Investor Protection Act. This is
    a thoughtful piece of legislation that will lead to better
    rulemaking and avoid the unintended consequences which include
    average savers losing choice and access to professional advice.
        The first main point I want to make is that the Department
    of Labor chose not to build on the existing regulatory
    framework. Members of this committee are well aware that the
    SEC has long-tenured experience with standard-of-care issues.
    And FINRA itself commented in its own letter to the Department
    that this proposal does not reflect marketplace realities and
    will lead to a ``fractured approach'' in the market.
        But most importantly, the Department did not build on its
    own great work. Recently, it finalized final 408(b)(2)
    disclosure regulations. These regulations require advisors to
    disclose the services they provide, whether or not these
    services are provided in a fiduciary capacity, and the fees
    associated with those services.
        I can tell you in analyzing our own business data, the
    commission-based brokerage plans under this disclosure regime
    grew by a rate of 26 percent where the fee-based regime grew by
    a rate of 114 percent, nearly 4 times that.
        And in talking with advisors, they say that these metrics
    are directly the result of these final disclosure rules. So the
    bottom line is the data shows a movement towards fee-based
    plans, and yet there is a need to preserve the choice for
    access to commission-based plans.
        And so the question is, why would we not build on this new
    and great work rather than forge into uncharted waters with
    this regime?
        The second point is that the proposal conflicts with other
    key regulatory initiatives. A recent GAO study talked about the
    importance of savers analyzing whether or not they should delay
    Social Security. And I will just simply say that analysis is
    not general, it is not hypothetical; it is very unique. And the
    Department's proposal makes that advice less available in the
    market.
        In addition, for the last several years the Treasury has
    promoted the use of lifetime income annuities, but the DOL
    proposal will discourage the use of these important tools.
        And finally, the Department of Labor has not coordinated
    how expanding its own fiduciary standard into the space of
    IRAs, which already has a fiduciary standard under the SEC,
    will be harmonized.
        For example, the SEC has indicated that the fee-only regime
    is not always the best regime in all circumstances.
        The third and final point I want to make is that this rule
    will harm average savers. Small investors will lose access. And
    people want to politicize this point and question whether or
    not it is real; I am telling you, it will happen.
        In this, we are dealing with people, not just statistics. I
    was reminded of this: My mother called me a couple of weeks
    ago. Now, my mom's an incredible lady, but she has not saved
    much money. She has done a lot of volunteer work most of her
    life. Her and my dad have saved about $25,000.
        She asked me a series of questions, should I file Social
    Security? Should we file and suspend? And I was able to walk
    her through a number of scenarios.
        The point is that for 1 percent of $25,000, $250, with this
    rule professionals will not provide advice with unlimited
    liability. And my parents and people like them will lose access
    to the advice that they need.
        My final point is that consumers will lose choice. And
    consumers have the right to make informed choices, and we must
    protect this right.
        Here is a critical point: Other markets have shown us that
    clear and simple tools like standardized disclosures, good-
    faith estimates, and consumer reports can empower customers to
    make informed decisions. So I challenge the committee to help
    us preserve the right for retirement savers to make choices
    that are in their best interest, but as they determine that
    best interest to be.
        I want to thank the committee for the opportunity to
    testify this morning. And at the appropriate time, I welcome
    any questions on my oral or written remarks.
        Thank you.
        [The prepared statement of Mr. Callahan can be found on
    page 95 of the appendix.]
        Chairman Duffy. Thank you, Mr. Callahan.
        Mr. Stevens, you are recognized for 5 minutes.

    STATEMENT OF PAUL SCHOTT STEVENS, PRESIDENT AND CHIEF EXECUTIVE
              OFFICER, INVESTMENT COMPANY INSTITUTE (ICI)

        Mr. Stevens. Thank you, Chairman Duffy, Chairman Garrett,
    Ranking Member Green, and members of the subcommittees. I am
    grateful for the opportunity to discuss the Department of
    Labor's proposed new definition of fiduciary duty for
    retirement advice and services.
        ICI and its members strongly support the principle that
    underlies the Department's proposal. All financial advisors
    should be held to act in the best interests of their clients.
        The proposal itself, however, is deeply flawed.
        Were the rule adopted in anything like its current form, it
    would harm retirement savers by drastically limiting their
    ability to obtain the guidance, products, and services they
    need to meet their retirement goals. It also would increase
    costs, particularly for those retirement savers least able to
    afford them.
        You have my very detailed written testimony. And in this
    statement, I would just like to make four points.
        First, supporters of the proposal claim that retirement
    savers are suffering $17 billion a year in harm due to broker-
    provided advice. This claim is false. It is an exercise in
    storytelling.
        The claim relies on academic studies using outdated
    statistics that simply don't reflect today's fund marketplace.
    And the Department of Labor relying upon these studies, not
    doing its own analysis, then misapplies the studies actually to
    overstate their findings.
        The Department also assumes that broker-sold funds are
    under-performing other funds and thereby harming investors. In
    fact, a simple review of publicly available data shows that
    investors who own front-end-load funds have concentrated their
    investment dollars in funds that outperform, not under-perform,
    the Morningstar category that they are part of by about one-
    quarter of 1 percent each year.
        Second, the Department ignores the significant social harm
    that its proposed rule would cause. Its economic analysis takes
    no account, for example, of the costs the rule would impose on
    investors by forcing them to move from commission-based advice
    to fee-based accounts. We calculate that the higher costs of
    these fee-based accounts will total $47 billion over the rule's
    first 10 years.
        The Department also ignores the harm that investors with
    small accounts will suffer when they lose access to advice.
        Fee-based advisors typically require minimum balances of
    $100,000 or more. But three-quarters of individual retirement
    accounts hold less than $100,000. In fact, half hold less than
    $25,000. That is 20 million savers.
        Chairman Garrett, I asked my research team how many would
    that mean in New Jersey? We estimate about 120,000 people in
    your State are in that category.
        We estimate that bad decisions by investors as a result,
    who can't obtain the advice that they need, will reduce their
    returns by $62 billion over the rule's first 10 years.
        The analysis that we have done, and it is spread out on the
    record for all to see, indicates that far from reducing costs,
    the rule would increase fees and lower returns, resulting in
    $109 billion in increased costs to American workers over 10
    years.
        To make matters worse, rather than grandfathering existing
    relationships, the rule would compel many investors to pay
    twice for the same advice and services by incurring fees to
    manage assets on which they have already paid commissions.
        Such a massive overhaul of the marketplace for retirement
    investment advice should be supported by a solid analysis that
    clearly identifies a substantial problem and convincingly
    demonstrates that there are no easier or better remedies
    available. By this standard, the Department's justification
    fails utterly.
        My third point is the Department's overly expansive and
    ambiguous fiduciary definition will impede commonplace
    interactions that retirement savers now take for granted.
        In my written statement, I describe my adult son's recent
    experience consulting with the call center of a major mutual
    fund company about rolling over his 401(k) balance to an IRA.
    Following the adoption of the proposal, I believe it is highly
    unlikely that fund providers will be able or willing to provide
    the kind of help or information that he received and that is
    most needed by young people starting into their working lives,
    people of limited financial expertise, and those with modest
    retirement savings balances.
        Fourth, the best-interest-contract exception will not
    mitigate the harm caused by this expansive and ambiguous
    fiduciary definition. It is laden with burdensome contract
    requirements, an array of compliance and liability traps. In
    fact, it is quite useless.
        What is certain is that financial firms are unlikely to
    subject themselves to the BIC exemption strictures and our
    members have told us that they will not.
        As you will see in my written statement, we have offered
    the Department detailed suggestions about how to repair the
    proposal. We share with this committee and the authors of H.R.
    1090 the goal of getting this goal right. And if the Department
    continues on its current course, it will get the rule
    disastrously wrong.
        Thank you very much.
        [The prepared statement of Mr. Stevens can be found on page
    241 of the appendix.]
        Chairman Duffy. Mr. Bullard, you are recognized for 5
    minutes.

    STATEMENT OF MERCER E. BULLARD, MDLA DISTINGUISHED LECTURER AND
       PROFESSOR OF LAW, UNIVERSITY OF MISSISSIPPI SCHOOL OF LAW

        Mr. Bullard. Thank you. Chairman Duffy, Chairman Garrett,
    Ranking Member Green, and members of the subcommittees, it is
    an honor and a privilege to appear before you today. Thank you
    for this opportunity.
        And I especially appreciate Ranking Member Green's astute
    reading of congressional written testimony.
        I am the founder and president of Fund Democracy, a
    nonprofit advocacy group for investors, and a professor of law
    at the University of Mississippi's School of Law.
        I will briefly discuss H.R. 1090 and then discuss the
    Department's fiduciary rulemaking.
        Section two of H.R. 1090 would require that the Department
    delay rulemaking until the commission has adopted fiduciary
    rules. In my view, the Department's rulemaking is long overdue
    and any further delay will continue to allow broker-dealers to
    provide improper financial incentives to financial advisors,
    making the Department's rulemaking contingent on SEC actions
    particularly inappropriate.
        One reason is that the legal standards that the Department
    and the SEC apply are quite different. Financial advisors'
    standards of conduct are lower than the standards applied under
    securities laws and the standards applied under ERISA.
        Another reason is that their jurisdiction is different. The
    Department has jurisdiction over all retirement assets,
    including non-securities, whereas the SEC has jurisdiction only
    over securities.
        In my view, Section 3's requirement for further SEC study
    and findings as a condition of rulemaking is also
    inappropriate. Such requirements create unnecessary and
    redundant regulatory burdens and undermine notice and comment
    process under the APA while not creating any material benefits.
        There are two facts about the Department's proposal that I
    suggest the subcommittees consider foremost. First, financial
    advisors have significant incentives to make recommendations in
    order to maximize their own compensation. Second, industry
    claims that the proposal is not workable are not based on how
    the proposal would actually work.
        The adverse effect of conflicted compensation is
    undeniable. If you pay more for an activity, you will get more
    of it. Financial advisors are paid more for recommending stock
    funds than for bond funds and short-term bond funds. As a
    result, more stock funds are sold than short-term bond funds.
        To put some numbers on the conflict of interest, a stock
    fund would typically charge a 5\3/4\ percent commission, of
    which 5 percent would go to a broker-dealer, and the broker-
    dealer would then typically pay about 2 percent to the
    financial advisor. So that would be about $200 to the financial
    advisor for a $10,000 investment.
        If the financial advisor recommended a much safer, short-
    term bond fund, the advisor would be $80. The advisor would be
    paid more than twice as much for recommending a risky stock
    fund over a safe, short-term bond fund.
        Advisors selling incentives can actually be far more
    distorted. For example, broker-dealers often pay advisors a
    substantial bonus if they reach a certain level in commissions,
    say $300,000. On the first $299,000 they would be paid 30
    percent, but if they reached $300,000, they might be paid 40
    percent. In other words, one small $10,000 investment can
    result in additional payment of $29,000.
        The advisor might recommend a short-term bond fund and be
    paid only $80 or a stock fund that gets them the $300,000 in
    commissions and be paid more than $29,000--$80 or $29,000?
        It would be helpful to know if my fellow panelists think it
    is appropriate to be paid twice as much for selling a stock
    fund than a short-term bond fund, or whether it is appropriate
    to choose between a recommendation that would pay you $80 than
    $29,000.
        My understanding is that Raymond James does not pay
    retroactive commissions. Why did Raymond James make that
    decision? Or more importantly, does Raymond James find its own
    policy to be unworkable, that avoids the conflicts of interest
    that are created by retroactive commissions?
        The Department's rulemaking is eminently workable. The
    proposal would affect compensation paid only at the advisor
    level, not at the broker-dealer level. Even then, it would not
    affect higher compensation paid to advisors, for example, for
    selling variable annuities. Advisors could be paid more for
    selling platform funds.
        The industry claims the proposal would prohibit
    commissions. There is nothing in the proposal that prohibits
    the payment of commissions.
        The industry claims that small investors will be harmed by
    the proposal. They are correct that the Department's rulemaking
    will affect small investors differently. It will provide
    greater benefits to them than to any other group. Conflicted
    compensation harms small investors more than any other group of
    investors. Small investors are paying the highest price for
    indefensible compensation practices that I have already
    described.
        Thank you again for the opportunity to appear. I would be
    happy to answer any questions.
        [The prepared statement of Mr. Bullard can be found on page
    66 of the appendix.]
        Chairman Duffy. Thank you, Mr. Bullard.
        Ms. McNeely, you are recognized for 5 minutes.

     STATEMENT OF JULI MCNEELY, PRESIDENT, NATIONAL ASSOCIATION OF
                INSURANCE AND FINANCIAL ADVISORS (NAIFA)

        Ms. McNeely. Thank you, Chairmen Duffy and Garrett, Ranking
    Members Green and Maloney, and members of the subcommittees.
        I am Juli McNeely, NAIFA president, and owner of McNeely
    Financial Services in Spencer, Wisconsin.
        NAIFA members like me are in every congressional district
    in this country. I personally have 25 small-business clients,
    most with fewer than 25 employees, and 484 individual clients
    with an average account size of approximately $71,000.
        Most of my clients started out as new savers and most
    likely would not have started a systematic retirement savings
    without my encouragement and advice.
        The DOL proposal is well-intended, but unless substantially
    changed, it will hurt middle-income savers. People of modest
    means either cannot afford or are not comfortable with fee-for-
    service advice.
        I compared the costs of commissions versus asset management
    fees for a small retirement saver and found the saver would pay
    twice as much over a 20-year period for an asset-based service
    arrangement. If left with less choice and less advice, fewer
    will take the steps needed to put in place a long-range plan to
    fund their retirement. They need more, not less, advice on
    whether and how to save for the long term.
        The best-interest-contract exemption, which almost all
    NAIFA members will need to use to provide fiduciary advice to
    middle-income clients, not only adds significant implementation
    costs, but it also will add costs due to considerable increase
    in the risk of litigation.
        The DOL minimizes the likelihood for lawsuits based on poor
    investment performance, but there will be more lawsuits. And
    while many will be resolved in favor of the advisor who behaved
    appropriately, the cost of defending and insuring against that
    risk will be substantial.
        The BIC exemption creates a barrier by requiring a signed
    contract acknowledging fiduciary responsibility both by the
    advisor and all financial institutions offering products before
    the advisor makes any recommendations. The cost to explain it
    to a client with whom the advisor is still building trust is
    likely to be prohibitive.
        The DOL proposal is complex and requires the creation and
    implementation of an entirely new compliance regime. There will
    be massive market disruption and many middle-income retirement
    savers will suffer without advice on their retirement planning
    decisions.
        Additional complexity will also adversely impact the use of
    annuities. Different sets of rules will govern fixed and
    indexed as compared to variable annuities.
        Annuities, with their lifetime income guarantees and
    ability to manage longevity risks, are the retirement planning
    vehicle of choice for many middle-income savers. Unlike their
    wealthier counterparts who can afford and are comfortable with
    fee-for-service investment accounts, middle-income savers
    cannot use their modest account balances to self-annuitize.
    They need the guarantees provided by annuities.
        And the DOL proposal governing annuities makes it more
    difficult and, for some, impossible to give advice on
    annuities.
        Many NAIFA members are agents or affiliates of insurance
    companies who primarily offer their own products or may have
    limitations on sales of other companies' products. The DOL must
    make clear that advisors who offer annuities and/or proprietary
    products do meet the impartial conduct and best-interest
    requirement of the rule.
        NAIFA supports H.R. 1090, which would prevent the DOL from
    writing new rules to govern retirement saving vehicles until
    after the SEC has studied and reported to Congress whether the
    imposition of new duties and obligations is advisable and until
    the SEC has the opportunity to issue any such rules.
        It is imperative that the rules governing investment
    products and advice in the retirement space, including IRAs,
    not conflict with the rules that govern the same products
    outside the realm of retirement savings. Only the SEC can issue
    rules that would impose a uniform standard in both contexts.
        Secretary Perez has repeatedly noted how helpful
    stakeholder input has been to date. The DOL agrees extensive
    changes need to be made. And to be sure that any such changes
    will be workable in the real marketplace, it is critical that
    we have an opportunity to comment on the revisions, and for the
    Department to incorporate that feedback into final rules if it
    proceeds.
        Thank you.
        [The prepared statement of Ms. McNeely can be found on page
    103 of the appendix.]
        Chairman Duffy. Thank you, Ms. MeNeely. The Chair now
    recognizes Mr. Stolz for 5 minutes.

    STATEMENT OF SCOTT STOLZ, SENIOR VICE PRESIDENT, PCG INVESTMENT
               PRODUCTS, RAYMOND JAMES & ASSOCIATES, INC.

        Mr. Stolz. Thank you, Chairman Duffy, Chairman Garrett, and
    members of the subcommittees for giving me the opportunity to
    testify here today.
        I am Scott Stolz, senior vice president for Private Client
    Investment Group for Raymond James.
        On behalf of the 6,500 advisors and 10,000 employees who
    work hard every day to take care of the financial needs of our
    1 million clients, I want to express our appreciation for
    giving me the opportunity to share our thoughts on this very
    important topic.
        From our home base in St. Petersburg, Florida, Raymond
    James has grown to a national firm based mainly on a retail
    business model that serves the individual investors. Our firm's
    core principle is service first. We believe that if you take
    care of the client, everything else will take care of itself.
        This emphasis on taking care of the client, along with our
    focus on long-term results as opposed to the next quarterly
    earnings cycle, has served us very well.
        Now, most of those in favor of the Department of Labor's
    proposal want to frame this debate solely on whether or not a
    financial advisor should put their clients' best interests
    first. After all, who could possibly argue with that?
        But this debate is really about the road we take to get
    there. Once one fully understands the hundreds of pages of
    proposal the Department has put forth to achieve this mutually
    agreed-upon goal, there is only one possible conclusion, which
    is that the rule, as written, is overly complex, would be
    incredibly expensive to implement, and would expose the
    hundreds of thousands of trusted and well-meaning financial
    advisors to unfair legal liability.
        On more than one occasion, Secretary Perez has cited the
    case of the Toffels as an example of why this rule is
    necessary. The Toffels had accumulated much of their savings in
    Vanguard mutual funds. Their bank recommended they cash out
    their mutual funds and purchase what the Secretary has called a
    very complex variable annuity with $650,000 of the proceeds.
        This recommendation has been criticized for being too
    costly. According to Secretary Perez, this conflicted advice
    most certainly caused the advisor to put his interests before
    that of the Toffels.
        Whether or not the advice the Toffels received was in their
    best interests is open to debate. But what I do know is the
    Toffels case can actually be used as an example of the flaws of
    the current proposal.
        Subsequent to the recommendation the Toffels received, Mr.
    Toffels' health unexpectedly deteriorated. Not surprisingly,
    financial flexibility became their biggest financial need. It
    seems obvious to me that the annuity recommendation didn't work
    out, not because it wasn't in the Toffels' best interest, but
    because their circumstances significantly changed.
        Yet here we are not only second-guessing the
    recommendation, but condemning it and labeling it a tragic
    story, to use the Secretary's words.
        And this is exactly what will play out time and time again
    if the DOL proposal is adopted as is. The complexity,
    ambiguity, and legal requirements of the rule will ensure that
    well-meaning advisors who work hard to put their clients' best
    interests first will be subject to Monday-morning
    quarterbacking.
        Faced with this potential, advisors will make investment
    recommendations based in part on how they can best limit their
    potential future liability. It is inevitable, therefore, that
    they will move to a one-size-fits-all pricing model so they can
    avoid any possibility of being accused of making a
    recommendation based on how they were compensated.
        Under such a model, many will either pay more than they do
    today or will get no advice at all. This is particularly true
    for the smaller investors, the very ones the Department of
    Labor is trying to protect.
        Current security laws and regulatory practices protect
    advisors from unwarranted Monday-morning quarterbacking to some
    degree. Unfortunately, the Department's proposal will strip
    these protections and open a Pandora's box of litigation based
    on investment outcomes that can never be predicted with
    certainty by even the best-intentioned advisor.
        We stand ready to continue to work with the Department of
    Labor to craft a final rule, and we believe that if the
    Department adopts the changes we have outlined in our comment
    letter, they can accomplish this goal with minimal disruption
    to the financial system.
        However, since they have indicated that there will not be a
    re-proposed rule, we are understandably concerned that the
    final rule will be no more workable than the current one.
        In addition, we believe that the SEC's deep industry
    knowledge puts them in a much better position to craft a
    workable rule. And for these reasons, we support the Wagner
    bill.
        In closing, I want to emphasize that Raymond James has long
    been a supporter of a common fiduciary standard. Long before
    the Department of Labor first proposed a rule, we instituted a
    client bill of rights that is given to every client when they
    become a client of Raymond James. Amongst these rights is the
    right to expect recommendations based solely upon the client's
    unique needs and goals, as well as the right to know all costs
    and commissions associated with a recommendation.
        We just don't think it takes a hundreds-of-pages proposal
    in order to accomplish this goal.
        I would like to thank the committee for this time. And I
    would be happy to answer any questions you may have.
        [The prepared statement of Mr. Stolz can be found on page
    267 of the appendix.]
        Chairman Duffy. Thank you, Mr. Stolz.
        The Chair now recognizes himself for 5 minutes for
    questions.
        Listen, I think we are all on the same page. We want to
    make sure that Americans are incentivized to save for their
    retirements, and we want to make sure they get good advice,
    that they invest well, and that they are able to pick products
    and services that best meet their needs.
        I have to tell you, I have been in this town for 4\1/2\
    years, and bureaucrats who sit in really fine offices and
    buildings don't always know what is best or what families
    consider best in Spencer, Wisconsin; or Wausau, Wisconsin; or
    Hayward, Wisconsin.
        And I think to have the opportunity to get good advice
    should be made by the individual investor.
        We have heard claims, not to bring up ``Obamacare'' but I
    will, that if you like your doctor you can keep your doctor, if
    you like your health insurance plan, you can keep your health
    insurance plan; and so, too, if you like your financial advisor
    and your financial plans, you can keep those as well after this
    rule.
        Both of them, all of them are wrong.
        What concerns me the most with the way this rule is crafted
    is that if you are wealthy, if you have a fat account, you are
    going to get great advice, you are going to be the one who can
    find professional help in how you invest to get the best return
    on your investment.
        But if you are a lower-income or smaller saver, this rule
    isn't going to allow you to get professional advice. You are
    going to be now relegated to robo-advisors. I am stuck with my
    computer, putting in random data and letting the computer print
    out what the computer through algorithms thinks is best for me?
        Ms. McNeely, in the last month you have see the markets
    swing, like the rest of us have. By chance, did you get more
    calls in the last month than you have in previous months?
        Ms. McNeely. Generally, I do. However, I have found that if
    I do proper planning with my clients, we have protected them
    from that downside with the use of annuities. But yes,
    absolutely, when the market fluctuates they call me, we talk
    through it, we calm them down, and they move forward.
        Chairman Duffy. When people see a large downturn in the
    market, do they sometimes become afraid and want to sell?
        Ms. McNeely. Without question.
        Chairman Duffy. And do you think that is the best thing for
    your clients to do?
        Ms. McNeely. It is the exact wrong time to be selling, sir.
        Chairman Duffy. And you are able to counsel them through
    that, right?
        Ms. McNeely. I actually call it, ``telling them not to jump
    off the bridge.'' So yes, we do counsel them through it.
        Chairman Duffy. I would have to argue that talking to a
    financial advisor in these downturns as opposed to getting a
    text through your robo-advisor on your computer is far more
    soothing and probably offers a little better advice and
    sounder, long-term strategic planning, yes?
        Ms. McNeely. Absolutely, and specifically because I know
    their entire situation. We have spent countless hours talking
    through their specific issues, and so I know them personally
    and can give them much better advice.
        Chairman Duffy. What happens to your clients if this
    Department of Labor rule goes through? Do they still, in the
    same capacity, get access to your advice, do you think?
        Ms. McNeely. As it is written right now, my feeling is that
    likely I would not be able to work with a large number of my
    clients because I do have a very small asset base with a lot of
    my clients, they are new savers, so it will likely preclude me
    from working with them because I will be subject to some asset-
    based limits.
        Chairman Duffy. Yes, we don't come from a very wealthy
    area, do we?
        Ms. McNeely. No, sir.
        Chairman Duffy. Yes, I would agree with that.
        Mr. Stevens, I was intrigued by the analysis that you all
    have done in regard to the true cost of this proposal. The cost
    isn't a $17 billion cost, it is much higher than that if this
    rule was to go through, is that correct?
        Mr. Stevens. Yes, Mr. Chairman. And I think we have spread
    this analysis on the record in comment letters, in testimony up
    here on the Hill and to the general public.
        And what I would say to you is that no one, no supporter of
    this proposal has yet to come to the ICI and said, here is why
    your numbers are wrong; that includes the people at the
    Department of Labor who have been working on the bill, as well
    as the academics whose studies the Department of Labor was
    relying upon.
        So if we have this wrong, we would like to know. But no one
    has challenged our numbers yet, and I think they are exactly
    right because the Labor Department process was deeply flawed.
        Chairman Duffy. So what are the biggest flaws of their
    analysis? And what are the biggest numbers that they missed, in
    your opinion?
        Mr. Stevens. First of all, as I say, they have predicated
    the whole thing on studies that were out of date, depicting a
    market that doesn't exist anymore.
        Chairman Duffy. How old?
        Mr. Stevens. One that is typical of 10, 15 or 20 years ago.
    In fact, that is one of the critiques I would have with
    Professor Bullard's analysis, as well.
        The truth is, over the past 10 years virtually every penny
    that has gone into a mutual fund has gone into a no-load fund.
    In fact, the funds that have sales charges associated with
    them, front-end sales charges which is the subject of what the
    Department of Labor talks about, have had outflows, very
    substantial ones, for all of the past 5 years.
        On average, for those funds that actually do have a load,
    and that is a small part of the market now, what an investor
    paid is .9 percent as a sales charge on a hybrid fund or a
    stock fund, that is the average, and on a bond fund .7 percent.
    So there is not this vast disparity, there are not these huge
    costs embedded here.
        All of this is publicly available information that the
    Labor Department didn't take into account.
        Chairman Duffy. The costs have not gone up in recent years;
    they have actually down, I think.
        Mr. Stevens. Oh, it has gone down. The costs of fund
    investing and 401(k) funds has gone down for a generation.
        Chairman Duffy. I have to interrupt you. I was going to try
    to run a tight gavel, which I talked to the ranking member
    about. We have a lot of witnesses today and I have violated the
    first rule by going over by 40 seconds. I apologize.
        The Chair now recognizes the gentleman from Massachusetts,
    Mr. Lynch, for 5 minutes.
        Mr. Lynch. Thank you, Mr. Chairman.
        I want to thank all the witnesses for your willingness to
    come before the committee and testify. This is an important
    issue.
        I do agree that the greatest danger here is leaving the
    small investor without advice. That is the greatest danger. And
    so I think the goal of the committee is to try to find that
    balancing point where the small investor, as Professor Bullard
    has described, is protected from the irrefutable conflict of
    interest that is out there to steer certain products because of
    the greater compensation afforded to financial advisors.
        This is especially important, I think, the private-side-
    retirement industry is so important because of the impending
    and long-term weakness in the Social Security system. So we
    have to try to optimize and maximize the benefits to retirees
    just because of the demographics here. We have to figure that
    out.
        And I know there are a lot of great financial advisors out
    there who do the right thing every single day. There are some
    bad actors and they get a lot of the attention, but look, I was
    an iron worker for 20 years and if we did not have financial
    advisors who helped us plan for the future, there would be a
    lot of families who wouldn't have that protection, so we have a
    really keen interest in finding the right balance here.
        The DOL, and a number of you have said it, I think their
    intent is, I think their incentive here is well-intended. There
    is a situation out there with conflict of interests that does
    disadvantage small investors and future retirees.
        And Professor Bullard, I want to ask you, there is a 2013
    GAO report that talked about IRA rollovers and that at least in
    that small instance that a lot of folks were getting bad advice
    and that it wasn't necessarily in their best interest about
    rolling over their IRAs.
        Can you tell me what type of retirement advice or services
    would be prohibited under the rule that the Department of Labor
    is now proposing?
        Mr. Bullard. I am glad you mentioned the GAO study. For
    those who are interested, you can actually listen to some of
    the calls that they recorded where registered representatives
    were essentially lying about IRAs not imposing fees. And that
    is exactly the kind of abuse that the DOL is trying to put an
    end to.
        Now, the effect will be that when somebody makes a call to
    one of these call centers and, subject to FINRA rules, they are
    already required to ensure the recommendations they make are
    suitable, that they are not allowed to make recommendations
    when those recommendations would result in the call center
    personnel being paid more for recommending one thing than
    another.
        There is no effect on what the broker-dealer gets paid, it
    has no effect on what the branch manager gets paid. You only
    have to make sure the call center employee does not have an
    incentive to get paid twice as much for selling the stock fund
    than the short-term bond fund, and that would be the effect of
    the rule. So they wouldn't have the incentive to misrepresent
    IRAs being cost-free.
        Now, there is still the problem that they have an incentive
    to move them out of the 401(k) and that is going to obviously
    put money in the pocket of the advisor, that they wouldn't
    otherwise get if the money was still in the 401(k).
        Ultimately, you can't address that conflict. That is
    inherent in asking for advice. And the Department's rule
    unfortunately would not prevent that. But there really isn't a
    way to prevent that. But at least it would make sure that you
    had to disclose fully what those conflicts are and how they are
    getting compensated and that you had to make sure that person
    did not have a direct financial incentive to recommend one
    thing over another.
        Mr. Lynch. What about a number of very good companies that
    have been in business for a long time and have done great work
    in helping individuals with retirement plans? A lot of those
    groups have come up with alternatives for this best-interest
    standard. Tell me why their approaches are inadequate?
        Mr. Bullard. In some cases, they have actually taken the
    same steps that the Department would require, while saying at
    the same time that they are unworkable. Raymond James has
    eliminated retroactive payout grids. Apparently, other firms
    think that is unworkable.
        Some have put caps on commissions paid, for example a 4
    percent cap on the amount that a financial advisor can be paid
    for selling a fund. The industry says that is unworkable.
        Some have product-neutral payout grids, in other words you
    don't get paid anything more for selling one product or
    another. The industry says that is unworkable, but there are
    broker-dealers that are currently out there doing that.
        There are some that actually have gone much further than
    what the Department would require. They have had neutral
    compensation for variable annuities versus non-variable
    annuities. The Department does not require that. They have
    neutral compensation for platforms and proprietary funds and
    other funds. The Department does not even require that, yet
    there are industry members whom FINRA has documented are
    already engaged in those practices.
        So when the industry says things are unworkable, what I
    would like to know is how is it that a number of broker-dealers
    are making them workable without even already being required to
    do so?
        Chairman Duffy. The gentleman's time has expired.
        Mr. Lynch. Thank you.
        Mr. Chairman, my time has expired. I thank you for your
    indulgence.
        Chairman Duffy. The gentleman yields back.
        The Chair now recognizes the gentleman from New Jersey, not
    from New York, Mr. Garrett, for 5 minutes.
        Chairman Garrett. Thank you. Right. Thanks again.
        I will start with you, Mr. Stolz. So you have heard the
    testimony that I have heard so far from the professor.
        Mr. Stolz. Yes.
        Chairman Garrett. Talking about the conflict of interest
    here, how does that actually play out in reality, however?
    There are other rules that you have to go by, right?
        So in other words, Mr. Callahan, you were talking about
    your parents, $25,000.
        I think, Mr. Stevens, you said there are over 100,000
    people in that category in the State of New Jersey, in that
    level.
        So you have somebody coming to you with $25,000. I am not
    going to guess how old your parents are, Mr. Callahan. My
    parents, my mom is 91, so if she comes to you with $25,000 and
    that is her life savings to invest, now, the professor is
    suggesting that the only thing that they are going to be
    looking at is the $80 versus the thousands of dollars. But
    aren't there other rules that apply? Isn't there, without
    saying what the rule is, well, I will, suitability that applies
    there that would counter any of those other incentives?
        Mr. Stolz. That is correct. The part or the piece of the
    puzzle the professor is leaving out is that there are
    procedures in place to make sure that the recommendations are
    based on the needs of the client and not on the compensation
    plans that the individuals have. And we have entire compliance
    Departments whose role is to oversee these things, then they
    will run reports that will indicate if any advisors are over-
    concentrated in different areas or going too far in one way, et
    cetera.
        Chairman Garrett. Right. And if there is a violation of
    that, don't we have years of case law to go and look at this to
    say what suitability is and what suitability isn't?
        Mr. Stolz. That is correct. And the example the professor
    gave where individuals lied about the IRAs, current law would
    take care of that. If somebody misrepresented the way that the
    product works or the plan works, that would be covered under
    current law. We don't need the Department's rule in order to
    add to that.
        Chairman Garrett. So we know what the rule is today, right?
        Mr. Stolz. Correct.
        Chairman Garrett. We know what the standard is today,
    right? We know the courts have interpreted this, right?
        Mr. Stolz. Correct.
        Chairman Garrett. But now we are going down a whole new
    road with the DOL, aren't we? They have something as far as
    what is reasonable instead as far as their proposal. Do we
    know--let us go down the road. Is reasonableness defined in the
    DOL-proposed rule?
        Mr. Stolz. The current proposal states that compensation
    must be reasonable. It is not defined.
        Chairman Garrett. Right.
        Mr. Stolz. And that will certainly be one of the issues.
    What is reasonable to you might be very different to someone
    else.
        Chairman Garrett. Right. And so if it is not in the
    statute, it is not in the rule, it certainly, therefore, has
    not been defined by any courts at this point in time, so it is
    just totally ambiguous to all parties involved. How does that
    play out then for the investor going into it?
        Mr. Stolz. Put yourself, I guess, in the shoes of the
    advisor. Knowing that any recommendation you make is subject to
    be second-guessed, you are going to make those recommendations
    in part on what is going to reduce the chances it could be
    second-guessed.
        It is kind of like a doctor submitting tests that may or
    may not be necessary in order to make sure that they cover
    their bases for any potential lawsuit.
        What that means is I am not going to be making the
    recommendation always solely on what is the right choice for
    the client because I have to consider what would happen if my
    recommendation is wrong and what would that lead to as far as
    potential litigation.
        Chairman Garrett. Exactly. And let me give you a real-life
    example. We are losing a good guy over at the SEC, Dan
    Gallagher. And he said recently, talking about the DOL rule,
    ``Their rule is grounded in the misguided notion that charging
    fees based upon the amount of assets under management is
    superior in every respect to charging a commission-based fee.''
        In the next 25 seconds, let me just give you a real-life
    example. And maybe I will go to Mr. Callahan. You gave the
    numbers.
        So you have a guy who is 30 years old, a young guy coming
    in with $25,000 to invest or something like that to his
    advisor. And he says, let's put it into a low-cost strategy,
    such as into a fund, and we will re-look at this every few
    years during the course of your life, if you get married or
    some other things or there is turmoil in the markets, what have
    you.
        If you are going on an assets-based manner of doing it, you
    will be paying, what, so much amount each year on that with the
    money basically just sitting, not in the bank, but sitting in
    the fund. Right?
        Mr. Callahan. Right.
        Chairman Garrett. Conversely, if you do it the way you
    might do it now on commission, you will be just paying it once.
    Right?
        Mr. Callahan. That is correct. So it depends on how long
    they are going to hold the investment. And let me take a step
    back just to show you how challenging this rule would be in
    practice in that scenario.
        Chairman Garrett. Okay.
        Mr. Callahan. So you took the ERISA framework of fiduciary
    definition and apply it to an IRA, just for the sake of
    argument, where there already is SEC oversight with the
    fiduciary. So you have two fiduciary standards competing that
    are not clear.
        Chairman Garrett. Yes.
        Mr. Callahan. The SEC has actually come out to us, we are
    regulated under a best-interest standard already with the SEC,
    and said, hey, there are times when you should not put a
    client's money in the fee-based account, you should put it in
    the commission account because over the long run it will cost
    them less money.
        Chairman Garrett. Right.
        Mr. Callahan. So here you are sitting--so the SEC with the
    best-interest standard is telling you, hey, you need to put it
    in this bucket and now this new rule under ERISA comes in and
    says, oh, no, you need to put it in that bucket. You say, okay,
    there is math, there is economics and now there is regulation
    and they are all saying different things.
        Chairman Garrett. Right. Bottom line, unworkable.
        Thank you.
        Chairman Duffy. The gentleman's time has expired.
        The Chair now recognizes the gentleman from Georgia, Mr.
    Scott, for 5 minutes.
        Mr. Scott. Okay, thank you, Mr. Chairman.
        Ladies and gentlemen, I see this rule as sort of like
    putting our financial system, our financial advisors in a
    straitjacket. That is what this does.
        And let me just point out some very salient points that
    disturb me about the rule. One, to remove and to replace the
    compensation package for financial advisors from being
    commissioned to a fee for service will directly have a
    devastating impact on those folks at the low- and middle-income
    ends of our economic stream.
        Secondly, this business about the best-interest contract is
    well-intended, but when you put the word ``contract'' out
    there, that has legal sanctions and it will bring untold
    lawsuits on the one hand, and on the other hand, it will
    frighten basically the very consumers that you are trying to
    reach, those with low and moderate incomes, who could be
    suspicious.
        For example, when you go and you approach a client and you
    say, well, we would like to work with you and your investments
    for retirement, they say, okay, fine. First of all, you have to
    pay me a fee before I can go any further. And then, oh, really?
    Yes.
        Then second, you have to sign a contract.
        Now, I would even run away from that because those things
    have a devastating impact, particularly in the African-American
    community.
        I was able to get a letter that was written to Secretary
    Perez at the Labor Department. And the letter was from the
    African American Chamber of Commerce. And here is what it said,
    ``We continue to be very concerned that the Department of Labor
    has proposed a rule that will severely restrict African
    Americans in this country and also low- to moderate-income
    Americans' ability to save for retirement. And the new
    regulation also will make it difficult for our members, as
    small-business owners, to sponsor retirement savings plans for
    themselves and for the benefit of their employees.
        And as a small-business owner myself, I relate so well to
    this.
        Ms. McNeely, you work with small businesses, small-business
    owners and helping them establish retirement saving plans. Do
    you agree with what the African American Chamber of Commerce is
    saying?
        Ms. McNeely. Wholeheartedly, sir. They definitely have hit
    it right on the head.
        Mr. Scott. Right. And let me go in my next time, I want to
    get to the best-interest contract.
        Mr. Stevens, was I correct in my analysis of what would
    happen with the best-interest contract? And I know that the
    Labor Department senses that as well and that is why they
    offered this exemption for the best-interest contract.
        But when you look at this exemption, it is an
    extraordinary, complex, complicated puzzle which requires an
    untold amount of work. Give us your opinion on this best-
    interest contract, the devastation it would have and also how
    unworkable this exemption is?
        Mr. Stevens. Congressman, I think you have hit the nail
    right on the head. The problem with this exemption is that
    every bell and whistle imaginable has been added to it. And for
    the life of me, as I look at it, I believe it is an exemption
    that perhaps the Labor Department doesn't think anyone will
    ever take advantage of.
        It will be so cumbersome, so expensive. It is not just the
    three-way contract they have proposed between the call center
    representative or the individual representative plus the
    customer plus the firm that has to be entered into, massive
    disclosure obligations are associated with it, some of which
    actually involve violations of the securities laws because you
    have to predict performance out into the future in order to
    provide those disclosures.
        There are massive potential liabilities, including new
    class action lawsuit potential brought under State law that
    does not exist now.
        Mr. Scott. Right.
        Mr. Stevens. In fact, in addition I would tell you that
    when they did the economic analysis, they essentially said one
    of the things that will be good about this rule is that there
    won't be anymore commissions paid.
        That signals to me that they really don't think anyone is
    going to use this best-interest contract exemption and they
    wrote it with that in mind.
        Mr. Scott. Right.
        I want to say in my conclusion, Mr. Chairman, if I may, a
    similar approach to this was taken in the United Kingdom and it
    resulted in 11 million people going without investment
    advisors. This is not something we want to see happen in the
    United States.
        Chairman Duffy. The gentleman yields back, and point well
    made.
        The Chair now recognizes the vice chairman of the Capital
    Markets Subcommittee, Mr. Hurt, for 5 minutes.
        Mr. Hurt. Thank you, Mr. Chairman.
        I thank you, sir, and Chairman Garrett, for hosting this
    important hearing.
        I represent Virginia's 5th District, a rural district in
    southern Virginia, central Virginia. Over the last month we
    have had the opportunity to travel across this large district
    and spend a lot of time on Main Street in all the localities
    that we represent.
        And I guess what I bring to the table today is certainly
    the idea that so much of what comes out of Washington, while
    well-intended, so often ends up making things more difficult,
    whether it is the President's health care law and the costs,
    the unimaginable costs that are being now imposed on so many
    Americans, whether it is the Dodd-Frank Act and the limiting of
    consumer choice and the rising costs of accessing capital.
        All these things hit our Main Streets particularly hard
    and, frankly, harder than places like Wall Street.
        And so what I hear from the people that I represent is we
    need to be looking for every way to make things easier, not
    more difficult. And I fear that this rule, as proposed, is
    going to do just that. It is going to make it more difficult,
    more costly, with fewer choices and less innovation.
        In August, after Mrs. Wagner led a letter to Secretary
    Perez, he responded. He said, ``We have received your letter of
    July 29th regarding the DOL's proposed conflict of interest
    rule which would require that retirement advisors put your
    constituents' best interests before their own profits.'' And
    then he goes on with a government-knows-best tone and says,
    ``This is a simple premise presented with an open mind.''
        And so I guess my first question would be to Mr. Stevens
    for your comments as it relates to the Secretary's statement
    that this is a simple premise and that it is presented with an
    open mind, because from everything that I have heard today and
    everything that I have read about this subject, it is neither
    simple, nor does it seem that the Department of Labor is
    approaching this with an open mind.
        Mr. Stevens. Congressman, I must say we have worried about
    the process that has been followed here. You must remember this
    is the second time a proposal of this sort came out. They
    worked on one, proposed it 4 years ago and it received enormous
    criticism and they withdrew it.
        And they then went back to their Department and for 4 years
    it was a black box. They weren't consulting with people about
    what the rule proposal would be. There was really no
    transparency into what then emerged after a 4-year period.
        Our members are very concerned that there is a march-to-
    the-sea potential here, despite what the Secretary may be
    saying. And remember, there is no grandfathering so every
    existing relationship between a financial advisor and a
    retirement saver is implicated in this proposal. And they have
    proposed an 8-month implementation period for a massive
    overhaul of this part of the retirement market. Why? Because it
    coincides with the end of the Administration.
        So there is an agenda at work here, we fear, and frankly
    that is why we have been positively inclined towards
    Congresswoman Wagner's bill.
        The worst possible thing that could happen is that this
    proposal be adopted in anything like its current form. And in
    order to forestall that, if we have to say let the SEC go
    first, we think that is infinitely preferable.
        Mr. Hurt. Excellent.
        Mr. Callahan?
        Mr. Callahan. I would echo Mr. Stevens' remarks so much so
    that I believe that letter was sent by Secretary Perez during
    the middle of the public hearings. And what could be more
    indicative of the mindset than during the middle of the hearing
    before you have gathered all the information, you have sent a
    letter making a conclusion?
        So I would agree that it is not a light touch, so much that
    the CEO of FINRA says this is not business-model neutral and
    will result in a fractured approach. That is the regulator of
    the existing regime disagreeing with Secretary Perez.
        But I go back to the nature of what we are doing. Does this
    sound simple to you? We are taking a framework of fiduciary
    duty that was established for ERISA plans, corporate plans,
    sponsored plans, where the main goal was saving money,
    minimizing fees in these big plans. We are parlaying that over
    into the individual retirement space, very different needs,
    very different needs of access.
        And we admit right from the beginning that a lot of the
    tools that we use are prohibited. That is why we need
    exemptions. So we are starting with a rule that says things are
    prohibited and from day one we begin peeling the onion
    backwards to fit it in an arena that it doesn't belong.
        I would just challenge the committee to help send a message
    to the Department that the problem that we are trying to solve
    is providing consumers more access, giving them this robust
    framework that is confusing and complex, that arguably could be
    strong on the back end for fixing remedies.
        Why would we not simplify it, follow the 408(b)(2)
    disclosures that the Department has modeled, give them on one
    piece of paper the key points of information they need to make
    better decisions up front to prevent decisions from needing to
    be unwound?
        Mr. Hurt. Thank you. Thank you, Mr. Callahan.
        My time has expired.
        Mr. Bullard. If I could just add to correct some of the
    actual misstatements and misrepresenting what the law is.
        Chairman Duffy. The gentleman's time has expired.
        The Chair now recognizes the gentleman from California, Mr.
    Sherman, for 5 minutes.
        Mr. Sherman. Thank you, Mr. Chairman.
        About 13 of us over on this side supported a similar bill a
    couple of years ago. And that bill was a little narrower in
    that it simply told the SEC to go first. It didn't then lay out
    a bunch of things that the SEC would have to do, which would
    make the SEC operate more slowly. It is a little harder to get
    support on this side of the aisle to tell the SEC to go first
    and then tell them to go slowly.
        This process has lasted, like everything in government, far
    too long.
        We have this bizarre circumstance where you have a choice
    between do we want to give investors freedom or protection. And
    one might argue for protection, one may argue for freedom. But
    what is absolutely absurd is to have one rule for my mother who
    inherited money from my father and is 86 years old, and one for
    a lot of people in this room who have IRAs and 401(k)s and
    similar programs.
        If you are going to provide more protection and less
    freedom, you would think you would do that for my 86-year-old
    mother rather than for me. But we have a circumstance where the
    Department of Labor is providing the least options, they would
    say the most protection, not for those who don't have IRAs and
    401(k)s and are 86 years old, but for people in this room.
        It is absurd for us to have two different rules. But if we
    had two different rules we should reverse it and have the
    greater protection for those in their most senior years.
        The other problem I have with this rule is it is written by
    economists who have this absurd belief that everyone else in
    the country is an economist and everybody they work with is an
    economist, and if everyone was an economist, I would be in
    favor of the rule.
        And so we have no hand-holding, no help, nobody gets paid.
    You get to save as much money as you decide to save if you call
    the 800 phone number and tell them which index fund to put the
    money in. That is going to lead to a decline in total savings
    for retirement because everyone in my district who is not an
    economist wants to invest where they can talk to a person, who
    does need to be paid, where they have options, they will save
    more if they are allowed to invest in this or that or to make
    changes.
        And to say that we are trying to sell ice cream, but we are
    only going to sell vanilla is not a way to sell a lot of ice
    cream.
        I am concerned about the smooth transition for existing
    customers.
        Mr. Stevens, I believe you have addressed that. You have
    talked about grandfathering, you have talked about the
    implementation period, and you have talked about existing
    clients. Are we supposed to have tens of millions of clients
    who have already, in many cases, paid the commission, be told
    that they have to jump through a bunch of hoops to see if they
    can still get what they have already paid for and to continue
    to save money for their retirement as they are successfully
    doing? What kind of implementation period and grandfather
    ruling would we need to be effective?
        Mr. Stevens. Congressman, was that a question for me?
        Mr. Sherman. Yes.
        Mr. Stevens. I am not sure that if the rule remains
    unchanged, any implementation period is going to solve the
    problems it creates. We would need a long implementation period
    for a good rule. Eight months is certainly going to be
    ridiculously short.
        Mr. Sherman. Let us say the rest of the rule was a little
    better than it is now. What grandfathering and implementation
    provisions would you call for?
        Mr. Stevens. I think one very simple approach would be to
    simply say existing relationships are not affected by this
    rule.
        Mr. Sherman. Okay.
        Mr. Stevens. That solves the double charging going forward.
        Mr. Sherman. At least with the amounts that have already
    been invested.
        Mr. Stevens. New relationships that are established could
    be affected by it. That would certainly narrow its impact.
        Mr. Sherman. I want to sneak in one more question. That is
    basically, is robo-advice going to work for the less-tech-
    savvy, for the elderly and for people who are just a little bit
    reluctant to save for retirement when that means they can't buy
    a boat?
        Mr. Callahan?
        Mr. Callahan. No, it will not. And the data supports that.
    You talk about a 1 percent cost in this $17 billion. If you
    look at the Dalbar study that says what does the average
    investor without advice earn compared to any single asset class
    that they could invest, it is far more than 1 percent, it is 4,
    5 or 6 percent depending on which asset class.
        And why is that? It is behavioral. It is behavioral finance
    and a robot is not going to deal in the emotional side that
    drives behavior of selling at exactly the wrong times and
    buying at the wrong times.
        Mr. Sherman. Thank you.
        Chairman Duffy. The gentleman's time has expired.
        The Chair now recognizes the chairman of the House Foreign
    Affairs Committee, the gentleman from California, Mr. Royce,
    for 5 minutes.
        Mr. Royce. Mr. Chairman, thank you very much.
        Last May I asked FINRA, the CEO there, Richard Ketchum,
    about the negative effects of the 2013 rule enacted by the
    British government that had such an impact on low- to moderate-
    income consumers in the U.K. and on whether enacting a similar
    rule, as the DOL has proposed, would have those impacts here in
    the United States.
        Now, this is a point that Mr. Scott referenced. But there
    is a study in the U.K. which found that during the first 3
    months of 2014, 310,000 British clients stopped being served by
    their brokers and the reason was because their wealth was too
    small for the broker to advise profitably, and an additional
    60,000 investors were not accepted for the same reason.
        And Mr. Ketchum concluded that, ``the statistics here are
    certainly concerning. Moving to an environment where only
    advisory accounts are the only effective way to operate in the
    United States is a very bad step. And that with respect to
    middle-class investors, the availability of the choice between
    fee-only and commissions is important.''
        And since I spoke with Mr. Ketchum, the British government
    embarked on an official review of the impacts of its rule, all
    while the DOL claims that there is little evidence that
    investment advice has decreased significantly in the United
    Kingdom. That is the Department of Labor's argument while the
    British are in the middle of trying to get to the bottom of
    this impact.
        And so, Mr. Stevens and Ms. McNeely, what caused the U.K.
    to initiate the review? Are they investigating whether the
    regulation has created an advice gap cutting off lower- and
    middle-income servers from investment advice? Is that your
    understanding of what they are looking at there?
        And let me ask you that question.
        Mr. Stevens. That is my understanding, Congressman, that
    they are looking at a species of the same problem that we
    predict might happen under the DOL proposal. Remember, in my
    opening statement I mentioned 20 million individual retirement
    account holders who have balances of $25,000 or less, that is
    20 million people for whom the economics of a fee-based model
    are highly questionable.
        It is interesting that Labor Department Secretary Perez has
    touted the idea of the robo-advisor as a solution here. The
    robo-advisors are a fairly new innovation. We love innovations
    in the marketplace and they may be delivering very good
    services, but it is hard for me to believe that an 8-month
    implementation period, this new approach to the provision of
    advice is going to suddenly be able to manage a 20-million-
    person-strong investor base that no longer has access to a
    commission-based model.
        The other thing to say about robo-advisors is this is the
    same Department of Labor placing its faith in that won't allow
    retirement plan sponsors or service providers to use email to
    deliver plan documents.
        So on the one hand we have this huge digital divide that
    requires us to continue to put out paper, and on the other
    hand, my gosh, let us have millions of people rely upon robo-
    advisors. It does not make sense.
        Mr. Royce. And Ms. McNeely?
        Ms. McNeely. I would concur and just say that I know
    advisors who are currently working in the U.K. and many of them
    had to let go of all of the small accounts that they had in
    their book of business simply because it wasn't allowed for
    them to be paid via commission.
        And quite frankly, the smaller accounts, the smaller
    retirement savers, without question, it is far more cost-
    effective for them to use a commission-based model. And if they
    don't have that choice, we will see some significant challenges
    in continuing to give advice to the very people, from my
    perspective, who need our advice the most.
        Mr. Royce. And Secretary Perez has stated unequivocally
    that the DOL's proposed rule would not have similar impacts to
    that of the U.K. rule. Let me ask you if you agree with that?
        Ms. McNeely. I do not agree with that.
        Mr. Royce. Okay. And I would ask the same question of Mr.
    Stevens.
        Mr. Stevens. I would not agree with it either, Congressman.
        Mr. Royce. Ninety-eight percent of IRA accounts with less
    than $25,000 are in commission-based brokerage accounts.
    According to FINRA's comment letter, ``Under the DOL proposal,
    many broker-dealers will abandon these small accounts. They
    will convert their larger accounts to advisory accounts and
    charge them a potentially more lucrative asset-based fee.''
        They will do so largely because of the ambiguity of the
    best-interest-contract exemption included in the DOL rule.
        Do you believe these smaller savers, investors will--I
    think my time has expired, Mr. Chairman.
        Chairman Duffy. Your time has expired, Mr. Chairman.
        Mr. Royce. Thank you. I will yield.
        Chairman Duffy. The gentleman yields back.
        The Chair now recognizes the gentleman from Missouri, Mr.
    Cleaver, for 5 minutes.
        Mr. Cleaver. Thank you, Mr. Chairman.
        And I thank the witnesses.
        Mr. Chairman, I share some of your concerns about the
    fiduciary rule, so I am not being argumentative. But I am
    concerned about the fact that for something of this
    significance, why we wouldn't have someone here from the Labor
    Department. I had hoped to be able to raise questions with the
    agency and individuals who are in fact designing this rule. And
    so I am not fully happy that we don't have someone here.
        This has nothing to do with those of you who are here. I
    just think that it would be infinitely more meaningful to me to
    be able to raise my questions with the folks who are in fact
    designing the rule.
        And I actually was so concerned about it I talked with the
    Secretary last evening because I thought maybe they had refused
    to come or that the Department is on vacation or something.
        So I don't understand why we couldn't have someone here,
    because I may have more concerns than you about this, but as
    eloquent as they are and nice and eloquent and very
    attractive--
        [laughter]
        Chairman Duffy. Will the gentleman yield?
        Mr. Cleaver. --but they can't answer the questions that I
    want answered by the Labor Department.
        Chairman Duffy. Would the gentleman yield?
        Mr. Cleaver. Yes, please.
        Chairman Duffy. Listen, I think the ask coming from your
    side of the aisle to Secretary Perez would have been maybe a
    little better received, and you did have an opportunity to
    invite him. And we would have been open to having you guys
    extend an invitation to him. You make a very good point. I
    don't dispute the claim.
        Mr. Cleaver. Thank you. I am not mad; I just wish I could
    ask him some questions.
        Professor Bullard, Mr. Callahan mentioned in his comments
    that it may not in fact be cost-effective to provide fee-based
    services to the smaller retail investors. So I am wondering if
    you believe that the impact of the rule will be an increase in
    the fee-based services as opposed to the commission-based?
        Mr. Bullard. The industry's criticism along those lines is
    premised on banning commissions, which is what the U.K. did,
    but what the Department decided precisely not to do. So the
    U.K. took a very different approach, and I disagree with, which
    is why the effect won't be the same.
        That is one reason that it will have no effect on asset-
    based fees, but those accounts have been growing relentlessly,
    regardless of the DOL's proposal.
        It is also false that the industry is unable to provide
    cost-effective fee-based accounts. Edward Jones has rolled out
    a plan that in the first 6 months of 2015, brought in more
    assets to its mutual funds than all but three mutual fund
    providers. Now, this is a broker-dealer based in St. Louis that
    is selling more funds than most fund complexes.
        The way that they are doing it is they have introduced a
    low-cost, fee-based account that charges 1\1/2\ percent and
    then puts you in funds from which they have removed all the
    traditional conflicts of interest that proprietary funds have
    that range from 31 basis points, .31 percent, to about .55
    percent.
        In other words, they are offering a full-in, full-service
    program, the total all-in costs of which are going to be less
    than 2 percent. And Edward Jones should get credit for that.
    But at the same time, they are arguing that it would be
    impossible to offer affordable fee-based accounts.
        In any case, the rule will have no effect on that because
    it doesn't ban commissions. But I do applaud the industry for
    continuing to show innovation and proving that yes, eventually
    there are going to be very affordable, full-service, fee-based
    accounts, and I think some other competitors in the same city
    really should be looking into that because Edward Jones is
    eating their lunch.
        Mr. Cleaver. With 27 seconds remaining, I am not going to
    have time to get to my next question, I don't think, Mr. Stolz,
    so I will yield back the balance of my time.
        Chairman Duffy. The gentleman yields back.
        The Chair now recognizes the gentleman from Ohio, Mr.
    Stivers, for 5 minutes.
        Mr. Stivers. Thank you, Mr. Chairman, for holding this
    important hearing, and for making sure that we got a chance to
    ask this panel some questions.
        I want to sort of take off on some of the questions that
    Mr. Royce from California asked when he talked about the U.K.
    proposal.
        So it is widely accepted from public data in the U.K. that
    advisors refused to provide services to individuals with about
    less than 20,000 pounds in assets, which is the equivalent of
    $31,000 in assets here in the United States.
        I am curious, and I will start with Mr. Stevens or Ms.
    McNeely, if you think that would happen here?
        Ms. McNeely. Yes, I do. Currently, my minimum required
    balance for a fee-based account is $50,000 through my current
    broker-dealer. So I would not be able to accept a fee-based
    arrangement with any client unless they have at least $50,000.
    There has already been some speculation that amount may go
    higher as a result of the added liability.
        Mr. Stivers. Yes, I was going to say with the additional
    liability won't that actually potentially go up?
        Ms. McNeely. There has been some talk of that, and I would
    expect that would happen to at least a hundred, I have even
    heard as high as 250.
        Mr. Stivers. And there were--so let me just tell you what
    some of the response in the U.K. was. HSBC only provided advice
    for folks with over $80,000 in assets, Lloyd's, over $160,000
    of assets, World Bank of Scotland charges $800 to set up and
    makes changes based on your net worth of what kind of services
    you get face-to-face versus non-face-to-face, and Barclay's
    only provides investment advice for people over $800,000 in
    assets.
        Avia ceased offering face-to-face investment advice. AXA
    ceased offering face-to-face investment advice; advisor firm
    AWD, deVere, clients over $80,000 in assets, and the advisor
    firm Towry was over $160,000 in assets.
        So that is what happened empirically in Europe. I know it
    is not exactly the same model, but it certainly has the same
    implications, and so the numbers may be a little less than that
    here, but it will have some of the same effect, in my opinion.
        Thanks for that.
        Mr. Stevens, I had a follow up on, do you think the
    Department of Labor's economic analysis justifies this re-
    proposed rule?
        Mr. Stevens. As I have explained, we actually think it
    results in a very substantial increase in costs over 10 years,
    both in terms of lost investment performance for people who
    won't be able to access the advice that they need. And we
    estimate the total to be in excess of $100 billion.
        So if that is the cost, you have to ask yourself, what is
    the benefit of this massive overhaul and its very expensive new
    set of arrangements?
        And I think that the kind of cost-benefit analysis that
    goes into does not suggest that there is any real benefit for
    it.
        I am struck by the comments from my friend, Professor
    Bullard, talking about innovations in our marketplace.
        Mr. Stivers. That was my next question.
        Mr. Stevens. People are trying to deliver these services in
    a different way, and I think we all ought to celebrate that.
    But recognize that under this new regime with the best-
    interest-contract exemption and the like, there is going to be
    a huge set of new costs and obstacles to that kind of
    innovation.
        Mr. Stivers. Thank you.
        So Mr. Stolz, I want to take off on that point a little
    bit. Professor Bullard just made an impassioned plea for how
    innovation is helping solve this problem. Doesn't that sort of
    make the point that this isn't necessary?
        Mr. Stolz. You could certainly, I could certainly agree
    with that. And I think it is important that we understand when
    we say that it is unworkable, what is unworkable. It is not
    about being able to change compensation packages and schemes.
    That's the easy part. It is the fact that when you have to sign
    an individual contract that you are going to be personally
    liable for and you have all these disclosures that you have to
    do is the part that is unworkable.
        And while advisors have an option under the proposal to
    have a commission option--
        Mr. Stivers. I want to do one more question, but I
    appreciate your innovation and Edward Jones and all the people
    who are innovating.
        And my last question is for Professor Bullard. I am really
    concerned. So the individual contracts, you have to sign before
    you provide advice. I am a soldier, and have been a soldier for
    30 years. I happen to use USAA for a few things. Their business
    model explodes under this plan, doesn't work because soldiers
    are deployed all around the world. What do you say to those
    soldiers who can't get advice because they can't sign a
    contract?
        Mr. Bullard. I agree on this issue, and I think the DOL has
    at least suggested, and I wish they would be more forthcoming,
    that they are not going to require you to send out the
    contract, they are not going to require that it be returned
    signed, and they are not going to adopt a number of the
    proposals they have made.
        This is a proposal. What H.R. 1090 would do is essentially
    prevent an administrative agency from making proposals. And I
    would like to see what they actually finally adopt before we
    decide to try to throw the SEC interference in front of it.
        Chairman Duffy. The gentleman's time has expired.
        Mr. Stivers. I yield back my nonexistent time, Mr.
    Chairman.
        Chairman Duffy. The Chair now recognizes the gentleman from
    Minnesota, Mr. Ellison, for 5 minutes.
        Mr. Ellison. I thank the chairman and the ranking member.
        Should retirement advisors be able to put their own profit-
    seeking before the best interests of their client?
        Ms. McNeely. I would be happy to answer that.
        Mr. Ellison. I wish you would answer it directly.
        Ms. McNeely. I promise I will.
        Mr. Ellison. Do you say yes or no?
        Ms. McNeely. They should not be. And they don't.
        Mr. Ellison. Okay, so you think best interest is the right
    thing.
        Ms. McNeely. Absolutely, and I already operate in the best
    interest.
        Mr. Ellison. Does everybody agree with that? Everybody is
    for best interest?
        Mr. Stevens. Yes.
        Mr. Ellison. Now, let me tell you. I talked to the people
    at DOL, and they told me that this thing about having to sign
    before you talk has been misrepresented. They said that you can
    talk, but before money starts passing then there is going to
    have to be a contract, which I am familiar with. I practiced
    law for a long time. We have retainer agreements. And you can
    talk to your client about the case, but then when they start
    talking about paying you, you have to sign up so they can know
    what they are getting and what they are not getting.
        So I really believe this thing about, oh, you have to sign
    up before you talk is a red herring.
        So let me ask you this question. Much has been said about
    the U.K. example. And is that fair, Mr. Bullard?
        Mr. Bullard. I don't believe it is. I quote, for the
    members of the subcommittees, the provision in the U.K.
    proposal in a footnote in my testimony. And it is very clear
    what they banned was product-set compensation--
        Mr. Ellison. Now, Mr. Bullard, let me ask you this
    question, too. So here is the other thing. You talked about
    Edward Jones offering products that were innovative. Does the
    fact that they are innovating in trying to meet the needs of
    certain market participants, is that somehow evidence that this
    rule, this fiduciary rule is unnecessary?
        Mr. Bullard. No, not at all. In fact, what I would like to
    see is more innovation such as attempts to mitigate or
    eliminate the conflicts that the Department is going after. And
    firms like Raymond James, to their credit have done that with
    respect to some products. They have eliminated retroactive--
        Mr. Ellison. Now, forgive my lack of being polite. But Mr.
    Stevens seemed to, and I don't want to mischaracterize Mr.
    Stevens' point of view, but it seemed that--I will scratch that
    one because I have so limited time.
        Let me ask you this question. What is the cost of not
    putting a best-interest standard in place? I am sure that
    most--Ms. McNeely makes the point that most advisors are great
    people, and I believe that. Certainly in the 5th Congressional
    District, they are all awesome.
        But my point is, what is the cost? Because the DOL says
    that there is a cost to people having hidden fees and all kinds
    of stuff and the status quo has its own cost. Could you
    elaborate on that?
        Mr. Bullard. Yes, there is no question the costs would be,
    and this is where an advisor makes a recommendation, in part or
    in whole, because it pays them more money and it is not in the
    best interests of the client. And there is plenty of data that
    show, for example, that is a motivation in some cases. It is
    empirically proved.
        There is a study of a retirement plan in Oregon that shows
    explicitly you can show that the allocations where there is
    additional compensation being made going more often to the ones
    that pay a higher compensation.
        But you don't really need a study to show you that. That is
    a rational requirement of economics that if you pay more for
    something you get more for it.
        The question is, how big is it? We could figure that out if
    the industry would provide the data. We know how many crib
    deaths there are in America because that industry will provide
    that data. The industry refuses not only to provide the data
    where we could determine the effects of the conflicts of
    interest, they won't even provide the data of the studies they
    put forward on which they base their analysis.
        Mr. Ellison. Mr. Bullard, forgive my interruption again. So
    back in the day when my dad and his dad were working at the
    auto plants, they could get into a pension and you had somebody
    who knew how to manage a portfolio for them as they were busy
    making cars. We don't have that. We have it today, but it is
    shrinking and it is changing to defined contribution, we are
    moving to that now.
        Who is helping you make good investment decisions now? You
    are basically on your own, right?
        Mr. Bullard. That is right. And a big impetus behind this
    is that the money has now moved from 401(k)s to IRAs where
    there is now more money than in 401(k)s.
        And Mr. Callahan says that it is the Department that is
    imposing ERISA to IRAs. That is not true. It is Congress that
    imposes ERISA standards on IRAs. And virtually all the
    criticisms is a question for Congress to take up with its own
    statute. The Department is simply doing what it is required to
    do, which is to impose a higher standard for retirement assets
    than on our other assets.
        Mr. Ellison. Thank you, I am out of time.
        Chairman Duffy. The gentleman's time has expired.
        The Chair now recognizes the gentlelady from Missouri, Mrs.
    Wagner, for 5 minutes.
        Mrs. Wagner. Thank you, Mr. Chairman.
        I have lots to cover, so we are going to do some rapid-fire
    here. And I thank you all for being here.
        Mr. Callahan, I would like to first start off with a quote
    that Secretary Perez stated at the Senate HELP hearing back in
    July, where he said that the DOL is listening to industry
    concerns and will make, ``material changes in a final rule.''
        Given your experience, would you say they are prepared to
    make the necessary and significant changes to prevent average
    retirement savers from losing choice and access to financial
    advice?
        Mr. Callahan. No. And when I testified at the public
    hearing they were very clear that they do not intend to do so.
    Their fixes would be tweaks operationally. And it is very clear
    that--
        Mrs. Wagner. Operational tweaks on a nearly thousand-page
    proposed rule. Thank you.
        The DOL has already said they wouldn't re-propose the rule,
    as we have talked about, which would seem to be necessary if in
    fact material changes were to be made.
        I have had numerous letters back and forth with all sorts
    of folks in the Department of Labor. I can't get Secretary
    Perez to return my call like Mr. Cleaver can.
        But Secretary Perez himself responded to me in a letter
    saying so before the public hearings at DOL even began.
        I want to submit this, Mr. Chairman, for the record. This
    is a letter that I received on August 7th saying they would
    consider no re-proposals, no material changes whatsoever.
    August 7th it is stamped as received in my office. I don't know
    when he sent it. But the hearings didn't begin until August the
    10th.
        So I ask unanimous consent to submit it for the record.
        Chairman Duffy. Without objection, it is so ordered.
        Mrs. Wagner. Would it seem from that response, that the DOL
    is in fact listening to industry and investors' concerns when
    they have completely ruled out a re-proposal of the rule before
    the comment period had even ended, Mr. Stevens?
        Mr. Stevens. It seems as though the issue has been
    prejudged. The agency is supposed to, under the Administrative
    Procedure Act, be sorting through what is a vast administrative
    record before them prior to making decisions of that nature.
        Mrs. Wagner. I agree. And is the Secretary's decision to
    that ruling out of a re-proposal during the comment period
    consistent with the Administrative Procedures Act, Mr.
    Callahan?
        Mr. Callahan. No.
        Mrs. Wagner. Mr. Stevens?
        Mr. Stevens. As a lawyer, I would say no.
        Mrs. Wagner. Mr. Bullard?
        Mr. Bullard. Yes, they can.
        Mrs. Wagner. I can't imagine how you can say yes.
        Ms. McNeely?
        Ms. McNeely. No.
        Mrs. Wagner. And Mr. Stolz?
        Mr. Stolz. I will make it the fourth no.
        Mrs. Wagner. All right.
        Ms. McNeely, if the DOL can't be counted on to produce a
    working final rule, given the significant comment and feedback
    they have received on their proposal, it seems that a
    legislative solution would be needed. How will the Retail
    Investor Protection Act help prevent these market disruptions?
        Ms. McNeely. I think it will hopefully eliminate some of
    the confusion out there, both for brokers and for consumers.
    And quite frankly, for me it will provide a lot of
    clarification as to how I can operate and continue to serve my
    clients.
        For 20 years, I have been doing this. And I would love to
    continue to serve every client who walks in the door,
    regardless of the size of the account that they have to invest.
        Mrs. Wagner. And we in fact have a ruling through Dodd-
    Frank in Section 913 that the SEC could move forward on this,
    not the Department of Labor, not in their lane, not their
    purview.
        Mr. Callahan, how will the Retail Investor Protection Act
    help prevent these market disruptions?
        Mr. Callahan. I think it empowers the agency that has a
    long-tenured experience with currently overseeing IRAs in a
    fiduciary capacity to take the lead and require them to do the
    analysis that will help quantify the problem in a way that the
    solution or the prescription is more clear and targeted in what
    exactly it is trying to solve as opposed to this blanketed
    approach with a number of unintended consequences, which my
    fellow panelists have testified to today.
        Mrs. Wagner. We have heard some discussion here, in my
    limited time, about the U.K. And considering that the
    implementation date for the rule is 8 months, when can we
    potentially start seeing signs of the same thing we are seeing
    in the U.K. right now, which is what they are calling the
    advisory gap, here in the United States, Mr. Stevens?
        Mr. Stevens. I think the nature of the proposal is such
    that if it were adopted without material change, you would
    begin to see that almost immediately, because firms will have a
    very short period of time in which to alter their business
    models with vast potential liabilities 8 months hence.
        Mrs. Wagner. I thank you very much.
        Mr. Chairman, I have so many more questions. I would only
    say to my colleagues that if anyone would like to yield me some
    time, I would be ever so pleased to accept it.
        With that, I will yield back my 5 seconds.
        Mr. Sherman. Mr. Chairman, I yield the gentlelady all of my
    remaining time.
        [laughter]
        Chairman Duffy. I think yours has expired.
        [laughter]
        Mrs. Wagner. Mr. Sherman.
        Chairman Duffy. The gentlelady yields back.
        The Chair now recognizes the ranking member of the full
    Financial Services Committee, the gentlelady from California,
    Ms. Waters, whom I am sure will consider yielding you some
    time.
        [laughter]
        Ms. Waters. Thank you very much, Mr. Chairman.
        This question I will address to Professor Mercer Bullard:
    H.R. 1090 requires that before the SEC can harmonize the
    fiduciary standard for brokers and dealers with that of
    investment advisors, the SEC must first publish a report
    finding whether retail investors are being harmed by the
    different standards of conduct.
        Can you discuss the level of confusion faced by investors
    regarding the duties owed to them by investment advisors versus
    financial advisors who work for broker-dealers? Do customers or
    consumers understand that these financial advisors aren't
    subject to the same fiduciary duty to act in their best
    interests? Has the SEC considered this question to date?
        And given your understanding of the evidence on this issue,
    can you describe what Congress did under Dodd-Frank related to
    this and why the SEC to move forward to raise the standard of
    care owed to customers by broker-dealers?
        Mr. Bullard. The source of confusion is that when you
    receive personalized, professional services from doctors, from
    lawyers, when you give a confession to your priest, they do not
    have a financial incentive, and are not allowed to have one, to
    change the advice they give you based on how much they get
    paid. But investors naturally assume that they would be
    protected by fiduciary duty. They are not.
        The confusion is exacerbated by the industry which
    consistently represents their representatives as financial
    advisors and they state that they hold themselves to a best-
    interest standard.
        But Payaba has produced an interesting document that shows
    time and time again that in arbitration the industry takes
    exactly the opposite position and it includes quotes where you
    will see in every single arbitration case where broker-dealers
    deny that they owe a best-interest standard or that they are
    fiduciaries.
        Now, the effect of that confusion is that they rely and
    have placed trust and confidence in broker-dealers that are not
    held to the standard that should apply to them.
        And I agree, the SEC should, some time ago, have done a
    rulemaking. And I think probably everyone on the panel agrees.
    But the SEC, as I document in my written testimony, for the
    last 15 years has exhibited a level of rulemaking paralysis
    that is unprecedented.
        And for the Capital Markets Subcommittee to want to delay
    anything while the SEC does rulemaking, I think is the height
    of hypocrisy. This subcommittee knows better than anyone that
    the SEC on these types of issues appears to be incapable of
    doing rulemaking and their only formal positions on this issue
    have been to oppose a fiduciary duty.
        They adopted a rule that stripped the fiduciary duty from
    broker-dealers that charge asset-based fees, and they take the
    position of the advisors that commission-based broker-dealers
    are not subject to fiduciary duty.
        So if you were going to delay rulemaking, at least the SEC
    is the last agency on earth for which you should be waiting for
    anything to be done.
        Ms. Waters. Well said. Having explained that very
    thoroughly, I will tell you what I am really worried about. I
    am worried about the wealth gap that exists between minorities
    and whites. And it is growing.
        And for those small investors who are depending on good
    advice and don't understand that they may be getting advice
    from people who are conflicted because they are steering them
    into investments that will harm them oftentimes. What else can
    be done except insist on fiduciary for all advisors or people
    who are literally saying to folks, I am helping you to
    determine your future, I am helping you to determine your
    retirement?
        And given what you have just described about the SEC and
    this committee, what other advice could you give to us and the
    public about how we can protect the most vulnerable people in
    our society?
        Mr. Bullard. I encourage the committee to support the
    Department of Labor's efforts. But otherwise, if it disagrees
    with the Department's approach, then to answer the question I
    posed earlier, which is, do you think it is appropriate to get
    paid twice as much for selling a stock fund than a short-term
    bond fund? If you think that is appropriate, do nothing.
        Is it appropriate to choose between getting paid $80 and
    $29,000 based on the recommendation you make? If that is
    appropriate, do nothing. But if you think that is not
    appropriate, then propose a fix.
        If you disagree with a higher standard for retirement
    assets than non-retirement assets, then change ERISA because
    that is the source of that law and it misrepresents what the
    Department is doing to claim it is the Department that is
    imposing that standard on IRA assets. That was Congress'
    decision and it is doing what it is required to do.
        And if we want to use examples of Mr. Stevens' son or Mr.
    Callahan's mother, let me tell you about my father-in-law. He
    was a Captain in the Navy, he served 30 years. He was put into
    non-traded REITs in his IRA. And I looked them up and they
    charged 10 to 15 percent in commissions right off the top. He
    was also put into about a dozen mutual funds, the amounts of
    which showed that the intent was to get below breakpoints that
    would have allowed him to get lower commissions.
        Now, I think he wanted to leave my wife more money than was
    allowed because of the standards that Congress has allowed to
    stay in place and that FINRA and the SEC have no problem with.
    But I think after 30 years serving this country, he deserved
    better.
        Chairman Duffy. The gentlelady's time has expired.
        Mr. Bullard. Excuse me for--I came to this hearing to be
    able to speak. And I know you are not interested in what I have
    to say, but I have never been cut off like this before in the
    22 times I have testified, Chairman Duffy.
        Chairman Duffy. The gentlelady's time has expired.
        Ms. Waters. Thank you very much. So what in essence you are
    saying is this deal or proposal makes good sense.
        Mr. Bullard. Absolutely.
        Chairman Duffy. The Chair now recognizes the gentleman from
    Illinois, Mr. Hultgren, for 5 minutes.
        Mr. Hultgren. Thank you, Mr. Chairman.
        Thank you all.
        We are limited to 5 minutes, and it is the only time we get
    to ask questions. So I appreciate all of you being here. This
    is a very important discussion certainly facing all American
    families. Almost 40 million households have not saved anything
    for retirement and 62 percent of Americans age 55 to 64 have
    less than one year's savings.
        As we have heard today, instead of appropriately
    coordinating with the SEC, the Department of Labor is
    aggressively pushing a flawed rule which might be a political
    win for the Obama Administration, but would come at the expense
    of retail investors trying to save for retirement.
        The proposal would restrict access to investment advice and
    put in place obstacles that would discourage hardworking
    families from preparing for the future.
        Furthermore, the Department has chosen to completely ignore
    the benefits of financial advisors, including relatively simple
    advice such as not making any irrational decisions in volatile
    markets like those we have recently observed.
        Less-sophisticated investors, the investors who would be
    most impacted by the rule, may not receive the advice they need
    if the Department's proposal goes into effect.
        In fact, many of my constituents tell me they save more
    because of the advice that they get.
        I want to first thank my 43 colleagues who signed a letter
    that I sent to the Labor Department, which underscores one of
    the many flaws of the proposal, listed options would no longer
    be permissible in retirement accounts, however they would
    remain permissible in non-retirement accounts.
        Subsequently, Democrats such as Congresswoman Maloney and
    eight Democrats in the Senate have made the same point. Options
    are an effective risk-management tool for people saving for
    retirement.
        The Department's treatment of options is just one of the
    many glaring mistakes that would not have been made by the
    financial regulator with primary jurisdiction over these
    products, the SEC.
        My first question I want to address to Mr. Stolz. Are there
    low-risk retirement investment strategies that make use of
    options?
        Mr. Stolz. Absolutely. Most options are used as a hedging
    strategy to protect against swings in markets, similar to what
    we have just seen. And so prohibiting those within IRAs would
    actually make the returns more volatile for clients.
        Structured contracts would be another product that is very
    similar in nature. They are more conservative investments and
    give individuals a way to participate in the market without
    some of the downside.
        So clearly, we have been in favor and our comment letter
    suggested that have wholesale product exclusions is not the
    appropriate way to go. If we just have the proper disclosures,
    that should do it.
        Mr. Hultgren. So Mr. Stolz, why would the Labor Department
    proposal discourage saving for retirement, other than that they
    simply do not understand this market and existing regulations
    as well as the SEC?
        Mr. Stolz. I guess it is up to interpretation. Did they
    leave these securities out because they didn't think they were
    appropriate? Or did they leave them out because they didn't
    understand how they were used? My guess is it was a little bit
    of both.
        And no matter which answer it is, I find it a little bit
    alarming because an agency that would understand our business
    would know that they should leave investments like that as
    available for individuals who want to use them.
        Mr. Hultgren. Thanks, I absolutely agree.
        I want to address this next question to Mr. Stevens. And I
    want to thank my colleagues from Illinois. I thank my
    colleagues, 43 throughout Congress, but also the Illinois
    delegation, which worked with me on a letter to Secretary Perez
    that underscores a number of the important points about access
    to investment advice and products such as making clear, as
    directed by Section 913 of Dodd-Frank, that the exclusive sale
    of proprietary products or services should not be viewed as a
    violation of any best-interest standards.
        I wondered, again, Mr. Stevens, do you think limiting the
    scope of investments is in the best interest of the people
    saving for retirement?
        Mr. Stevens. No, I certainly do not. And I think we are in
    a marketplace where choice and competition are important as
    disciplines.
        From where I sit, many aspects of this rule proposal are
    describing a marketplace that doesn't exist. If there were some
    massive failure in this market, you would not see mutual fund
    fees and expenses trending downward over 20 years as they have.
    You would not see the fees and expenses that people pay in
    401(k) plans for mutual funds going down even further to
    represent, in fact, a universe of the lowest-priced funds
    available for investors in any jurisdiction in the world,
    something that is working in this market that I think has been
    overlooked.
        Mr. Hultgren. Yes. I appreciate that. A follow-up question,
    if the SEC moves forward with rulemaking under its authority in
    Section 913 of Dodd-Frank, do you think the broker-dealer
    industry will be faced with two burdensome and redundant sets
    of rules that sometimes conflict?
        Mr. Stevens. There is no question about that. In fact, if
    you think about the ecosystem for advice here, you have the
    retirement tax-advantaged accounts that we are talking about
    through DOL. You actually have a somewhat larger universe of
    retail assets. And for many people, they are bringing to the
    same advisor or broker needs in both areas.
        And so in any rational policy universe, you would have a
    consistent regime proving appropriate protections to be sure
    that would apply to each.
        Mr. Hultgren. My time has expired. Thank you all for being
    here, again. We have to fight to protect families and help them
    save for retirement.
        I yield back.
        Chairman Duffy. The gentleman's time has expired.
        And I would just note again, you all on the panel can't see
    behind you, but there is a clock that we can see as the time
    runs down from 5 minutes to zero, then it starts to count
    backwards. And I have tried to allow the panel time to finish
    up their comments, but when we get near 40 seconds, I am
    starting to gavel you down. That has been my loose-gavel policy
    today to the whole panel.
        Mr. Bullard. I apologize, Mr. Chairman.
        Chairman Duffy. But just so you know, when it turns red the
    time has expired and please finish up your comments.
        With that, the Chair now recognizes the gentleman from
    Colorado, Mr. Perlmutter, for 5 minutes.
        Mr. Perlmutter. Thanks, Mr. Chairman.
        First, I would like to say thank you to the panel.
        I want to make a quick statement and then, Professor
    Bullard, let you finish your answer. And then I am going to
    yield my time to my friend, the gentlelady from Missouri,
    because I am sympathetic with her position, and I am
    sympathetic with the desire to have the SEC address this.
        But I have been waiting for 4 years for the SEC to address
    this and they haven't. So the train has left the station. And
    people need to understand that.
        I sent a letter to the Secretary of Labor and he did return
    my call. Last night, we talked for 20 minutes. We talked about
    the way this forces a change in business models on some
    companies and some industries. Exactly when do you present the
    contract to be retained, in effect? We went over a number of
    things.
        And I would urge interested parties to continue to reach
    out to the Department of Labor. I do think that they are
    listening, and I am happy to make that phone call with my
    friend from Missouri to the Secretary.
        So that is the first thing I would like to say, because he
    was not invited to participate in this panel despite his
    apparent desire to do so.
        So Professor, if you would take 1 minute to finish your
    answer, so then I can give the balance of my time to the
    gentlelady from Missouri, whom I sympathize with, and I have
    co-sponsored her bill in the past. That train has left the
    station. But I want her to finish her questions.
        Mr. Bullard. I was at the end of my comment when I was cut
    off.
        Mr. Perlmutter. All right.
        Mr. Bullard. And I agree. Representative Wagner has been
    more committed to this issue than probably anyone in Congress,
    so I would be happy to give her more time, too.
        But your point about the SEC, I think maybe everyone in the
    room agrees on this. We all would have been better off if it
    had dealt with this issue when DOL proposed a rule in 2010,
    which, as you know, I opposed.
        Mr. Perlmutter. Okay, it is 5 years, not 4 years.
        Mr. Bullard. Five years. And it is not just that. They have
    made proposals repeatedly that deal with exactly the same
    compensation practices that bothers the Department and they
    have done nothing. And I wish that they had addressed this
    issue and the Department probably would not be where it is now.
    But the SEC has failed to do so.
        Mr. Perlmutter. All right.
        Mr. Chairman, I would like to yield the balance of my time
    to the gentlelady from Missouri.
        Mrs. Wagner. I thank the gentleman very, very much.
        And I would like to direct this question to Mr. Stolz.
    Representative Ellison, I thought, brought up a point and said
    that advisors can still talk to clients before signing a
    contract. But I understand this proposal greatly limits
    ``investor education.'' And could you please elaborate on the
    effects of this provision of the rule?
        Mr. Stolz. Sure, I would be happy to. The contract has to
    come in place as soon as they move from education to
    recommendations. And the big question on the table is, where is
    that line drawn?
        Mrs. Wagner. Correct.
        Mr. Stolz. And we would love to see it drawn on the side of
    education, because clearly clients need way more education than
    they have. Right now, it looks like it is way too close on the
    recommendation side where I could get to a point as soon as I
    start saying, well, it looks like you should be 60/40, 60
    percent equities, 40 percent, I am now making a recommendation.
    And before I do that, I have to give you this contract to sign.
    And I am literally going to stop the conversation and say, all
    right, next, please sign this, and then I will talk to you some
    more.
        Mrs. Wagner. Given the faulty economic analysis with the
    DOL rule and it is beyond fuzzy math is all I can say for them
    to have taken $1.7 trillion in the entire value of mutual funds
    and annuities in 2013 and say that savers lose about 1 percent
    based on some academic literature that they don't even
    reference and is not found I any kind of study is beyond fuzzy
    math.
        But given this analysis with the DOL rule, is the
    additional analysis required of the SEC under the Retail
    Investor Protection Act appropriate?
        Mr. Stevens?
        Mr. Stevens. There should not be any agency rulemaking in
    this area that is not predicated upon sound economic analysis.
    The Department of Labor's proposal is not. Any SEC proposal
    certainly should be.
        Mrs. Wagner. I have said over and over again it is a
    solution in search of a problem.
        I probably don't have enough time to get into a couple of
    other areas that I have, so I will yield my time back to the
    gentleman, Mr. Perlmutter, and again, I am always in search of
    more time, so I thank you and yield back.
        Mr. Perlmutter. I yield back the balance of my time.
        Chairman Duffy. The gentleman yields back.
        The Chair now recognizes the gentleman from Colorado, Mr.
    Tipton, for 5 minutes.
        Mr. Tipton. I thank the gentleman, Mr. Chairman, for the
    time to be able to be here.
        My colleague and I from Colorado agree on a couple of
    things on this issue in support of the legislation that Mrs.
    Wagner is putting forward.
        I do have a question, Mr. Stevens, if you would maybe
    address this and it is regards to with DOL, just the amount of
    experience that they have in terms of regulating securities,
    putting forward these rules compared to the SEC, is there a big
    difference?
        Mr. Stevens. The Labor Department's focus is on a slice of
    this universe. The SEC's is more comprehensive; it is certainly
    longer established and they work with the SRO in this area and
    its rulemaking, as well.
        I would say, without intending to slight the Department of
    Labor at all, that there is deeper expertise at the SEC on
    these issues. And that having been said, I would agree with
    colleagues here they should have been to this ball more
    quickly.
        Mr. Tipton. And I would agree with that, along with my
    colleague from Colorado, to be able to get to it more quickly.
    But do you see a disturbing trend? We see it across-the-board,
    particularly as we see the expansiveness of Dodd-Frank
    implications, that we are seeing a broadening net of
    overlapping regulatory bodies moving into the space of
    investments.
        Mr. Stevens. What I worry is about a dynamic that demonizes
    an entire profession and an entire marketplace. We certainly
    have abuses in this market and they need to be rooted out. I
    think everyone should agree, we certainly do, that the clients'
    best interests needs to come first and we need appropriate
    standards in place that are rigorously enforced for that
    purpose.
        But as we look at the market at large and as we think about
    certainly our part of it, the mutual fund part of it, there is
    a lot that is working very, very well for ordinary Americans
    trying to save for retirement.
        So we need to size the problem, and we need to devise
    solutions that are appropriate to the problem, not demonize one
    and all associated with it.
        Mr. Tipton. I would agree with that.
        Ms. McNeely, in your experience--we had heard the professor
    talk about risky stock funds versus safe bond funds putting in.
    When you are working with your clients, is one of the first
    questions you ask, what is your risk tolerance? Is that a
    standard for the industry?
        Ms. McNeely. Absolutely. And not just the risk tolerance,
    but everything about them. We spend a significant amount of
    time gathering facts and data specifically about their
    situation. And I think the risk that we run, any regulation
    that causes us to use a one-size-fits-all simply based on
    product fees or product type is a mistake, because truly the
    only thing that we should be concerned about is what is in the
    best interest of the client.
        And if the best interest of the client is to use a broad
    approach and use multiple different products, I think that is
    what we need to continue to push for.
        And so, my experience has not ever been that I choose a
    mutual fund based upon the amount of money I get paid. I choose
    a group of mutual funds based upon what is right for the
    client.
        Mr. Tipton. And Mr. Stolz, maybe you would like to speak. I
    think that you had talked about some of the complexity, the
    liability, the expense that is going to be associated. And
    again, I will go to the professor's example of that risky stock
    fund versus the safe bond fund.
        We have a 25-year old who starts making investments,
    putting it in, and we go with that safe bond fund, and then 20
    years down the road, 30 years down the road, we compare that
    return to that risky stock fund which will more than likely
    outperform if statistics tend to hold.
        Would you have a lawsuit that 20-year old now 50 could file
    saying you did not work on my behalf to be able to get the
    highest, best-potential yield for me?
        Mr. Stolz. Very potentially true you could, because you
    would look at it after the fact and say you should have known
    that I as a younger individual should have been able to have a
    higher risk tolerance and, therefore, I should have been more
    heavily weighted into equities and, therefore, you put me too
    much into bonds, I was not able to accumulate enough money for
    retirement, and now I have a problem.
        ``Risk'' is a relative term. And don't confuse risk with
    volatility. Clearly, in the long run, equities will return more
    than bond funds do. And so you have to take that in
    consideration.
        Mr. Tipton. Ms. McNeely, your experience professionally
    representing and caring about your clients, do you take that
    into consideration as a client moves through their years to be
    able to make those sort of recommendations to look at for them?
        Ms. McNeely. Without question. And I would say that I think
    it is extremely important that they have an advisor. As they
    move through the years, we meet on a regular basis, in
    particular as they get closer to retirement. Their needs
    change, their scope changes. And the transition from the
    accumulation phase to the distribution phase is such a critical
    transition. And if you don't have an advisor moving you along
    the spectrum and potentially moving you from different products
    as you make that switch, you could make some real missteps.
        Mr. Tipton. Thank you.
        I thank the panel for being here.
        And I yield back, Mr. Chairman.
        Chairman Duffy. The gentleman's time has expired.
        The Chair now recognizes the gentleman from New York, Mr.
    Meeks, for 5 minutes.
        Mr. Meeks. Thank you, Mr. Chairman.
        Let me just say first off, coming from my background, the
    first thing I realize is that most Americans are not financial
    experts. And millions are often not even financially literate.
    And I think that becomes part of the problem that we are trying
    to get folks to become more financially literate. And so
    therefore, they must make some decisions that are complex
    financial products and try to steer them to what we want them
    to do, to be able to plan for retirement and choose from what
    is seemingly an infinite number of products. And it is hard for
    them to navigate what those products are.
        So on the one hand we need to make sure that Americans
    continue to have access to financial education on their
    retirement products and options, and thereby have access to
    financial professionals.
        And on the other hand, because these average Americans are
    vulnerable, we need to protect them from people who are just
    trying to sell them products so that they can make themselves
    more money.
        So we have to make sure that we have a balancing act here.
        As a result, for me, this DOL fiduciary rule is far too
    important and we must absolutely strike the right balance
    between access to financial services and consumer protection. I
    think if you tip the scale one way or the other we could try to
    do one thing and hurt the other. And we can't do it. We have to
    make sure that this is really a balanced situation.
        I looked at what took place and what happened recently in
    the U.K. And in the U.K., we saw how their new proposed rule or
    fiduciary rules greatly diminished access. I have to make sure
    that does not happen.
        So with that and some of the stuff that we are going back
    and forth, maybe I will address this question to Mr. Stevens.
    Some of the alternatives proposed by industry stakeholders
    claim to establish a more ``workable fiduciary duty.'' Can you
    please elaborate on what is workable and what is not workable
    under this DOL proposal?
        Mr. Stevens. Thank you, Congressman. We actually in our
    comment letters have outlined a whole series of things that we
    think could be done to the DOL proposal to make it workable, to
    make it a sensible regime that would serve investors
    effectively.
        You start with the need to draw a clear common-sense line
    between the provision of fiduciary advice on the one hand and
    information and education on the other, because there is a huge
    need among all sorts of people for information and education
    and help which is short of the fiduciary advice and the
    relationship of trust and confidence that implies.
        And we need to have a line between them. The one is held up
    to a very high standard, the highest under the law, the other
    ought to be encouraged if we are going to get that balance
    correct, as you had said.
        We need, in this BIC exemption, this best-interest-contract
    exemption, to do all sorts of things. Secretary Perez has said
    we need to take a principles-based approach to this. We would
    agree with that. But when we look at that exemption, it is
    anything but a principle-based approach. It is more like an
    Internal Revenue Code of all sorts of compliance requirements.
        We need to avoid retroactive application of any new rule,
    too, because of the huge disruption it has for existing
    relationships. That, it seems to me, is very sensible. As I
    have said before, we need a meaningful, orderly implementation
    period.
        So we go into greater detail in each of these in our
    comments, but those are some ideas about how to make this a
    workable proposal.
        Mr. Meeks. Thank you.
        Mr. Bullard, in your testimony you stated that many of the
    alternatives put forth by the industry do not address
    conflicted compensation arrangements. Can you discuss what some
    of those conflicted compensation arrangements are?
        Mr. Bullard. Some of the arrangements are the ones that I
    have outlined where, for example, rather than it being an issue
    of how you should allocate among funds, the question that I
    would like Ms. McNeely and Mr. Stolz to answer is, should you
    get paid more for selling a stock fund than a short-term bond
    fund? That is the straightforward question. There is no
    rational basis for paying somebody more for recommending one
    over the other. And I don't think they would defend that.
        I also think it is extremely abusive to have what I view as
    ratcheted payout grids where simply by making a very small
    additional sale you can literally go from choosing between an
    $80 commission to a $29,000 commission.
        And I mentioned this probably going over more than an hour
    ago, so no one has answered the question here as to whether
    they think it is appropriate to be paid twice as much for
    selling stock funds over short-term bond funds, or to have a
    choice between $80 and $29,000.
        And lots of broker-dealers, to their credit, have decided
    it is not appropriate and they have already put in place
    procedures to deal with those conflicts.
        And the DOL, they are trying to deal with those kinds of
    conflicts and they have been left unaddressed by FINRA and the
    SEC for decades.
        Chairman Duffy. The gentleman's time has expired.
        The Chair now recognizes the gentleman from Maine, Mr.
    Poliquin, for 5 minutes.
        Mr. Poliquin. Thank you, Mr. Chairman. I appreciate it very
    much.
        And thank you all very much for being here today. This is
    such an important issue.
        When I was in the pension management business 30 years ago,
    the business was so much different than it is today. Look at
    the different products that our investors have to choose from.
    And the costs have plummeted. And so markets go up, markets go
    down, but our broker-dealers and our financial advisors are
    always there to help our middle-class families who are trying
    to make it through this recession and save for their kids'
    college savings or their retirement.
        I don't worry about our workers at Bath Iron Works, which
    is part of General Dynamics, abutting my district, the Maine
    2nd District. I don't worry about the folks at L.L. Bean. These
    are big companies and they have access to the best investment
    advice that you could possibly want.
        What I worry about are the small-business owners in our
    district in Down East Maine, the fellow who pulls traps and is
    one of the best lobster men you could ever find in Down East
    Maine and provides a product that we all want, we all enjoy. If
    you haven't been to Maine, fall is a great time to go there.
        And I worry about those people. They are struggling through
    the worst recession we have had in 70 years. They are trying to
    put aside a little bit of money so they can retire on it. And
    they know deep down in their hearts somewhere, somehow, the
    government is not going to be there for them.
        Let's face it, Social Security is a $15 trillion unfunded
    defined benefit pension plan. So we should have a government
    here, all of us, that helps our small investors, a government
    that works for them, not against them.
        And so I really worry about that. We had a fellow coming in
    our office, a fellow by the name of Doug Curtis from Edward
    Jones down in Rockland, which is midcoast Maine. And he has a
    book of business of maybe 200 clients. And they are small
    investors just starting out and they are trying to make sure
    they have enough money to augment what they hope will be Social
    Security down the road.
        But he comes in and he says, ``Bruce, if this rule goes
    through in its current form, costs are going to go up, the
    product offerings are going to go down, the rates of return are
    going to go down for my clients, and I am not going to be able
    to offer them advice at all.''
        So here is my question. If you are a great logger or a
    trucker or you are working in a paper mill or you are a nurse
    or a teacher, you know your business really well, but you don't
    know the financial services business very well, as Mr. Meeks
    said. So do you put your money in stocks or in bonds or in
    cash? Do you buy annuities? What about the asset allocation?
    What about my age? How much should go in stocks, how much
    should go in bonds? What if I have a home mortgage, what if I
    paid it off? What if I have a second kid going to college, what
    if I don't?
        Who is going to provide this advice if the FAs and the
    broker-dealers do not?
        I am really worried about them. And I think that we ought
    to make sure that any rule that is passed is one that helps our
    small investors and not hurts them.
        So I frankly think that this is a classic example of big,
    intrusive government trying to create regulations that are not
    needed.
        Everything is based on trust in your industry, right? If
    your clients don't trust you, they are not going to hire you.
    They are certainly not going to trust you with their money. So
    that in itself is a very positive development in this industry,
    especially with all the competition out there.
        So Ms. McNeely, I would like to ask you a question. I get a
    little bit concerned when I hear about, well, if this goes
    through and all of a sudden the advice that we could give to
    the folks saving for their retirement is going to dry up and
    now you are going to have to rely on robo-advice.
        Now, can you imagine? My mother is 87, my dad is 85 and I
    love them to death. And they have a little bit of money saved
    aside. My parents don't log on, they barely can use a
    cellphone. So how is mom at 87 going to get robo-advice on
    maybe a mutual fund that she has and maybe she would have
    fixed-income investment, at her age maybe she will be in cash?
    But she is not getting anything in cash, so what does she do?
        So tell me, Ms. McNeely, in real life what that would look
    like?
        Ms. McNeely. They might actually come to you for advice. I
    hope you are prepared for that.
        Mr. Poliquin. I am not. I never give advice to my parents,
    but they give it to me all the time.
        [laughter]
        I will say that you have described exactly what my biggest
    concerns are. Those individuals are the very people who need
    our advice. And when you went through your list of all the
    questions that need to be asked and taken into consideration
    before you make any recommendations to your client, we do that
    each and every day with our clients back in Spencer, Wisconsin.
        So I will wholeheartedly agree with your concern. And I
    will also tell you that it would be extremely detrimental if
    your parents were not able to get the advice that they need at
    that time in their life.
        Thank you all very much. Keep pushing, let us get this
    right. It is a great thing we are trying to do. We have to make
    sure we get it right.
        Thank you, Mr. Chairman.
        Chairman Duffy. The gentleman's time has expired.
        The Chair now recognizes the gentleman from Delaware, Mr.
    Carney, for 5 minutes.
        Mr. Carney. Thank you, Mr. Chairman. Thank you for holding
    this hearing.
        And I thank all of the the panelists for being here today.
        I can't believe we are still talking about this issue,
    frankly. When I first came here in 2011 this was a big issue, a
    complicated issue for me, and we are still talking about it
    nearly 5 years later.
        In the small State where I come from, we would put all the
    people who had interest and knowledge about an interest like
    this, put them in a room, form a task force, get them to work
    together, and come up with a proposal that works best for
    everybody.
        This process that we have is beyond me. I don't think we
    should, with all due respect to my colleague from Missouri,
    kick the can down the road anymore. We need to come up with a
    solution.
        I hear some common themes here that it seems like people on
    both sides of the issue could agree around to get something
    where we can move forward.
        When I talked to the Secretary of Labor on this issue
    sometime ago when he presented to a group of us, he indicated
    that he was interested in giving the small investor a tax cut,
    if you will, or a reduction in fees and so that, in some ways,
    is an objective of his.
        I share the concerns that Mr. Lynch articulated sometime
    ago about the effect of this rule, where we are headed on the
    small investors. I think Mr. Stevens mentioned that there are
    20 million accounts out there of $25,000 or less.
        So let me focus my questions on those people.
        What do you expect will happen if this rule goes into
    effect, Mr. Stevens, Ms. McNeely, to those investors in those
    accounts? What is the worst-case scenario? And what are the
    potential unintended consequences for that?
        And then, Mr. Bullard, I will give you an opportunity to
    give your view of that.
        Because I think a lot of where you come down on this issue
    is what your expectation is about what is going to happen after
    it goes into effect. And a lot of that, in my view, is
    speculation.
        Mr. Stevens?
        Mr. Stevens. It will decisively affect business models of
    firms across the country who are trying to serve small
    investors.
        Mr. Carney. How so?
        Mr. Stevens. It is going to increase costs, it is going to
    increase liability. It will involve massive changes in the way
    they have to interact with their clients if we can negotiate
    this rule.
        Mr. Carney. Does that mean it won't be cost-effective for
    those clients to be served? Is that what you are saying?
        Mr. Stevens. You might incur substantially increased costs
    of doing business, but you would expect to be doing it on a fee
    basis for larger accounts because you will get more money. And
    so the idea of servicing a $25,000 account or a $10,000 account
    on 1 or 1/2 percent in light of the new requirements of the
    rule, it is just not economical.
        Mr. Carney. So they will be left without, that is what I
    have heard.
        Mr. Stevens. That is our fear. That is exactly right.
        Mr. Carney. Ms. McNeely?
        Ms. McNeely. I would concur with that statement and also
    let you know that we included a chart in our written comments
    that basically talks exactly about that person that you are
    discussing, a small saver putting away an amount of money on a
    monthly or an annual basis. And if they choose a current model,
    a commission-based model right now and we are forced to look at
    a fee-based model as a requirement of potentially getting moved
    to a different model, they would probably have to pay about
    double the amount that they would currently be paying if they
    stayed in that commission-based model.
        So my concern is that we may not be able to continue to
    serve those individuals. And if we could serve them, it would
    be at a much higher cost to them.
        Mr. Carney. Professor Bullard, your view of that?
        Mr. Bullard. I am getting paid by hedge funds to tell them
    what the effect of the rule is going to be, so I have been into
    the guts of the rule, and none of my analysis assumes that the
    people are moving to asset-based fees.
        Mr. Carney. So what is your assumption? My time is running
    out.
        Mr. Bullard. So my assumption is, well, first, what is
    going to happen is you are going to see a flattening of
    compensation across the short-term bond fund and the stock
    fund. That is inevitable, that will be at the financial advisor
    level. But the DOL is not affecting branch manager compensation
    at all, which I think is a problem. But it definitely does not
    affect the broker-dealer level where nothing will be changed.
        Another effect is going to be, under the current proposal,
    there is going to be a big shift of the people who are selling
    non-traded REITs to fixed indexed annuities, which is
    unfortunate because fixed indexed annuities are not even
    subject to the securities laws, and I hope that they will
    change that in their final proposal.
        Another change is you are going to see some shift in asset
    allocations. They are going to become a little more
    conservative, because at the margins it is inevitable that
    there are some recommendations that are probably a little more
    aggressive than they would be if you had flat compensation. So
    statistically that will happen, but we don't really know
    exactly what the magnitude is going to be.
        And then in the revenue-sharing space, that is where it is
    going to be fairly complicated because revenue sharing varies a
    lot. Even within broker-dealers, they have different revenue-
    sharing arrangements with different complexes. What will happen
    is, because revenue sharing trickles down to financial
    advisors--
        Mr. Carney. Okay, I have to stop you there because I have 8
    seconds.
        Thank you all for your participation. This has been a
    complicated and frankly frustrating exercise for somebody who
    comes from a State where my constituents expect us to get
    things done.
        Thank you, Mr. Chairman. I yield back.
        Chairman Duffy. The gentleman yields back.
        Without objection, members of the full Financial Services
    Committee who are not members of either subcommittee may
    participate in today's hearing.
        The Chair now recognizes the gentleman from Arkansas, Mr.
    Hill, for 5 minutes.
        Mr. Hill. Thank you, Mr. Chairman. Thanks for having this
    hearing. I appreciate the time and I appreciate what I have
    heard today. I come at this hearing from the fact that for 35
    years I have been in this business, both as an investment
    manager on the fiduciary side running a bank trust Department,
    being a CEO of a FINRA-registered broker-dealer, and so I have
    a lot of opinions, as you can imagine, on this topic.
        But I want to make some general comments first, and that is
    we should be encouraging savings in this country through public
    policy, and not have a war on savings like proposals that we
    have had in the past to do away with 529 plans that were beaten
    back, or to raise capital gains taxes, or to punish people who
    have saved their whole life and tax away their IRA benefit if
    it is over a certain amount.
        Fifty percent of Americans in this country don't have a
    will, 41 percent of Americans over 55 years old don't have a
    will. And more time should be devoted to planning. And I think
    we all know in the financial services industry that people
    spend more time planning their vacation than they do planning
    for retirement and saving every year.
        And so we should be supporting, as Mr. Meeks talked about,
    financial literacy. And one way we do that is consultative
    relationships between the financial advisory community and the
    client community. And anything that gets in the way of that
    conversation or tries to put it in a box is a bad idea.
        And my view is that the DOL should, at the very least at
    this moment, re-propose this rule based on the additional
    comments.
        Further, Secretary Lew and Director Donovan at the OMB, in
    my view, should carefully look at this rule. Is this in the
    interest of government efficiency, government accountability?
        And as my colleague Mr. Carney said, this has been working
    along for 5 years. It is absolutely not the way to run anything
    and it is an embarrassment to our country that we can't come
    together the way Dodd-Frank suggested, which was to have the
    SEC study this issue and put it out, put it out. And instead,
    we are trying to skip steps here and run around on the other
    side of the field and go through the DOL for retirement
    accounts.
        So to me, it is an example, it is a classic of Phil Howard,
    the famous New York lawyer, who wrote a book called, ``The Rule
    of Nobody.'' This is more--we have robo-rulemaking now, much
    less robo-investing, and that is not the way. We want managers
    to do their job by their clients and to adopt suitability
    standards and adopt fair-dealing standards and do things the
    right way.
        So I am distressed that this has taken this long. And I
    call on the SEC to do their job here and not waste people's
    time for another 5 years on this project.
        I would like to yield the balance of my time to my
    distinguished colleague, the gentlewoman from St. Louis.
        Mrs. Wagner. Thank you. I thank the gentleman from Arkansas
    for his consideration and for the time here.
        I wrote and introduced the Retail Investor Protection Act,
    the second Congress that I have put this forward because I care
    deeply about the retail investor, especially the low- and
    middle-income investor.
        I also care deeply about just about everyone that you all
    represent, which is an industry. And I am absolutely disgusted
    at the fact that we have an Administration that has villainized
    and disparaged an entire industry and even in public forum
    called them snake oil salesmen.
        My broker-dealers, my financial advisors, they are friends.
    They were there when my first baby was born. They were there
    when we baptized that child, when we put them in school, when
    we married that child. To villainize an entire industry is
    absolutely wrong.
        And I have to put that out there and say also that I love
    stories and I would love to have the time to tell a story about
    a Missourian in Blue Springs, Missouri, a story about a
    financial advisor who describes this married couple 15 years
    ago who were in their late 40s and 50s, IRAs of about $10,000
    conservatively invested. After providing financial advice to
    the couple, they now have over $100,000 in the account and the
    client is debt free, including the mortgage.
        Mr. Stolz, if DOL's fiduciary rule were final and effective
    today, would this married couple be able to receive the same
    financial advice that they did? In 2 seconds.
        Mr. Stolz. In 2 seconds, no.
        Mrs. Wagner. All right. I have more about this family. To
    be continued.
        I yield back my zero time.
        Mr. Fitzpatrick [presiding]. The Chair recognizes the
    gentleman from South Carolina, Mr. Mulvaney, for 5 minutes.
        Mr. Mulvaney. I thank the gentleman. I will move very
    quickly because I want to hear the end of the story.
        Mr. Stolz, it is already against the law for me to churn an
    account, isn't it?
        Mr. Stolz. That would be correct.
        Mr. Mulvaney. It is already against the law for me to put
    somebody in an unsuitable account, isn't it?
        Mr. Stolz. That would also be correct.
        Mr. Mulvaney. It is already against the law for me to lie
    to somebody about the funds in an IRA, isn't it?
        Mr. Stolz. Yes.
        Mr. Mulvaney. So all the horror stories we have heard today
    that we are trying to fix are already against the law, aren't
    they?
        Mr. Stolz. Yes.
        Mr. Mulvaney. Yes.
        Mr. Bullard, you have mentioned twice, I think, in your
    testimony that if you spend more on something, you get more of
    something. I happen to believe that is true. There are a couple
    of corollaries to that, which is if you spend less, you get
    less, and if you spend none, you get nothing.
        And my fear is what we are moving to is a circumstance
    where some people are not going to get any advice at all and
    other people are going to get really, really lousy advice. And
    I am glad to hear that there is some bipartisan pushback on
    moving down that road.
        The last thing I want to read is an article, very briefly,
    from 2014. The head of the Department of Labor's Employee
    Benefit Security Administration gave an interview and she
    talked about the advantages of regulation versus legislation.
    And I will read it very quickly.
        ``Back in the day when people wanted to make changes they
    passed legislation. And when a major bill like ERISA was passed
    there was always the opportunity to come back and make some
    technical corrections. Today you can't get Congress to pass a
    Mother's Day resolution.''
        This is Phyllis Borzi.
        ``So what we have done is we have shifted from the way that
    social change and legal change and financial change is
    accomplished through congressional action to two different
    avenues for making changes, the main one being regulation. One
    advantage of regulation is that the agencies writing the rules
    are able to receive input from the public, something that
    doesn't often happen with Congress.''
        The irony of getting a letter from the Department of Labor
    on their position before--
        Mrs. Wagner. Three days before.
        Mr. Mulvaney. --the input was received, in light of that
    comment from the same Department, is not lost on us.
        With that, I will yield my remaining 3 minutes to my good
    friend from Missouri.
        Mrs. Wagner. Thank you. I appreciate that very, very much.
        Mr. Stevens, regarding my story about the Blue Springs
    couple I described earlier, there clearly were some benefits to
    having access to financial advice. Does the Labor Department's
    economic analysis incorporate those benefits at all, sir?
        Mr. Stevens. I think the analysis is incorrect in important
    ways, Congresswoman. One is that if that couple or whomever has
    to go to a fee-based account, which is what we are talking
    about--
        Mrs. Wagner. Correct.
        Mr. Stevens. --migrating in that direction, that seems to
    be what the Labor Department's intent is, they are going to be
    incurring fees and as a substantial percentage year-on-year of
    what their account is.
        The Labor Department didn't consider any of those costs in
    coming up with their regulatory impact analysis.
        Mrs. Wagner. Does the Department of Labor factor in the
    costs of not having access, this is exactly what my next point
    is, to the financial advice in regard to retirement savings?
    That has not been put in the equation at all and I believe you
    just did elaborate.
        Mr. Stevens. And that is a somewhat different point. But to
    the extent that people don't have access to advice after the
    new rule is adopted, the likelihood is that they are going to
    make some bad investment decisions that will be costly to them.
    We actually estimate that is in the tens of billions of
    dollars.
        So if you add all of these things up, these new costs, it
    is about $109 billion in new costs to American investors and
    savers.
        Mrs. Wagner. A hundred-and-nine-billion dollars in new
    costs--
        Mr. Stevens. That is correct.
        Mrs. Wagner. --with them not having access to financial
    advice with regard to their retirement savings.
        Mr. Stevens. Or paying fees that they hadn't been paying
    before.
        Mrs. Wagner. Mr. Callahan, considering the extent that
    unintended consequences could result from this rule and the
    faulty economic analysis supporting the rule, how important is
    the Retail Investor Protection Act in preserving low- and
    middle-income access to financial advice?
        Mr. Callahan. It is critically important. And let me
    clarify a point. Congressman Carney asked Professor Bullard
    about what will happen to lower-income investors and he
    speculated about a number of things.
        I am not going to speculate; I am going to tell you what we
    have already done. We have met off-site as a firm. In light of
    this rule, we will form a separate business to serve IRAs and
    we will make the minimum of that somewhere between $100,000 and
    $250,000. That is what we are doing, not a speculation.
        The other point I would make--
        Mrs. Wagner. That is the answer I am looking for. Could you
    elaborate? You have the rest of my time, sir, 40 seconds.
        Mr. Callahan. The other point I would make is that I have
    heard about this perceived tradeoff between access and
    protection, and I don't believe that those are mutually
    exclusive. The whole idea that the choice is either this best-
    interest standard or nothing is a false choice.
        And Congressman Mulvaney made a great point in that the
    existing regulatory framework, the horror stories we hear, most
    of them are breaking existing law.
        I work under a best-interest standard with the SEC, I work
    under FINRA, and I can tell you on a day-to-day basis taking
    money and putting it into investments, the FINRA regime is far
    more rigorous.
        And I will leave you with one final question, and that is
    this. We are going to go to bed at night and think that this
    fiduciary standard is going to solve all the problems. There is
    not a world void of conflict and bad people will break the
    rule. And let me ask you, which regime was Bernie Madoff under
    when he stole money? The best-interest regime.
        Mrs. Wagner. I thank you all very, very much.
        Mr. Fitzpatrick. The Chair recognizes the gentleman from
    Indiana, Mr. Messer, for 5 minutes.
        Mr. Messer. Thank you, Mr. Chairman.
        I was raised by a working person, a single-parent mom, who
    just retired from the Delta faucet factory. I represent a
    district full of working people, the kind of investors who
    would be impacted by this law.
        And I am reminded of an adage in life: we are not just
    responsible for our intentions; we are responsible for our
    results. And as much as I respect the broker-dealers and all
    those who work within the industry, my concerns with this rule
    are, of course, related to that industry, but they are more
    importantly related to the individual investors and what the
    results of this could be for the working people who need this
    retirement to get to the finish line.
        And this Administration, often the policies that they are
    putting forward end up hurting the very people that they are
    designed to help.
        And so I wanted to explore with you a little bit, Mr.
    Callahan, Mr. Stevens, and Ms. McNeely, the Obama
    Administration has a stated priority of promoting policies that
    would make guaranteed lifetime-income products more widely
    available to help middle-class Americans save for retirement.
        Do you believe that this fiduciary rule standard that they
    are putting forward will make that more likely to happen for
    middle-class families or less likely?
        Mr. Callahan. As I said in my opening testimony, it will
    make it less likely. Those products are prohibited.
        I will give you an example. Treasury has talked about the
    importance of using lifetime-income annuities. We have been
    through volatile markets in 2008 and 2009. We have had a good
    run until a few weeks ago. People forget what it is like to see
    their account values go extremely up and extremely down.
        But what is interesting is that the Treasury issued final
    regulations last year on qualified longevity annuity contracts
    that were designed to put these lifetime-income annuities
    inside retirement plans, and yet this rule, on the face of it,
    would prohibit the very use of the products the Treasury just
    finalized the rule encouraging them to use 12 months ago.
        And that is a perfect example to me of why it absolutely is
    not encouraging; it is actually prohibiting.
        Mr. Messer. Mr. Stevens, Ms. McNeely?
        Mr. Stevens. Just very briefly, one of our recommendations
    is that if we do have this BIC exemption that it be expanded in
    its scope to include a whole range of products as opposed to
    the kind of legal list that the Department of Labor has come up
    with.
        Ms. McNeely. I would also just echo what has already been
    said, but also just to add that Mr. Ellison discussed the fact
    that pensions are really not much in existence any longer. And
    really, there are three things that provide guaranteed income
    stream that are available to any American. The first is
    pensions, which are going away; the second is Social Security,
    which has some issues; and the third is an annuity that can
    provide a guaranteed income stream.
        And the lower- and middle-income consumers are definitely
    the ones who are going to be best served to look at an annuity
    so that they can at the very least provide a guaranteed income
    stream to cover their basic living expenses.
        Mr. Messer. And again, under the theme you are not
    accountable only for your intentions, also for your results.
    All financial products are not the same, they offer different
    options, guarantees, benefits for consumers to choose based on
    their individual needs. For example, products like annuities
    have higher fees due to the guarantees they provide to
    consumers.
        Will the rule limit a consumer's choice in access to these
    products? Will it skew the market towards certain products
    based solely on fees, regardless of the overall benefit to the
    consumer?
        Mr. Stolz. I will take that one if that is okay.
        Mr. Messer. Yes. Yes, Mr. Stolz, sure.
        Mr. Stolz. There is no question that one of the criticisms
    of annuities in general, and we heard it in Secretary Perez's
    stories, is that they are costly. They come with guarantees, as
    you have said, that are important and those cost something.
        There will be a bias against any investment that has
    appeared to be costly, and by nature that is going to mean
    advisors are going to be less likely to recommend products like
    that.
        Mr. Messer. Who will be hurt most by that?
        Mr. Stolz. Clearly, the individuals who need that lifetime
    income. Nobody wakes up in the morning and says, hey, I have to
    go buy lifetime income today. They need to talk to an advisor
    who is going to say based on your current situation, here is
    how to solve that problem. And anything that gets in the way of
    that is going to be a problem for those individuals.
        Mr. Messer. Mr. Callahan?
        Mr. Callahan. Yes, I would just add the fact that we are
    even talking about a BIC exemption implies that it is
    prohibited from the beginning, and that is the idea of bringing
    this framework to IRAs.
        The SEC, in its fiduciary standard, you can do what is in
    the best interest, but bringing this other framework over has
    the prohibited transactions, one is self-dealing. And at face
    value the fact that you will be paid a commission for giving
    advice would make that prohibited, and then you need to use
    this door of an exemption to get there.
        And as we have testified, that exemption is unworkable. So
    by the very nature of the rule the way that it is written, it
    prohibits the use.
        Mr. Messer. In my limited time, I would just say we all
    want to see low-income and retail investors do well in this
    market. We want to see them protected. The reason we are
    concerned about this rule is it may give them less protection
    than they have in the current marketplace.
        I yield back the balance of my time.
        Mr. Fitzpatrick. The gentleman from Kentucky, Mr. Barr, is
    recognized for 5 minutes.
        Mr. Barr. Thank you, Mr. Chairman.
        I have heard from constituents throughout my district in
    central and eastern Kentucky time and again that this rule will
    negatively affect them, they are very concerned about the fact
    that employers would not be able to bring in financial advisors
    to provide kind of basic educational information to their
    employees, including not-for-profit organizations.
        Investors with small accounts will not be able to receive
    advice for 401(k) plans. No simple rollovers will be
    accessible. Middle-class investors are losing access to
    professional advice. More and more Americans will be forced to
    seek information on the Internet.
        And to me, when the Secretary of Labor says that robo-calls
    can fill the gap, are we serious about that? Do we really think
    that replacing flesh-and-blood advisors with robo-calls and
    Siri as a stock picker on your iPhone is really a better
    outcome with this rule? Is that really investor protection?
    That is the rhetorical question.
        Let me share with you four stories from my constituents and
    then have you react to them, about what they think this rule
    would preclude.
        The first example is a retired sheriff's deputy who made
    $38,000 a year for most of his professional life. He had a 403
    plan that was rolled over into an IRA, into diversified mutual
    funds. He watches the market, he calls his broker once a year,
    maybe twice a year about the asset allocation. He calls his
    stockbroker and he gets a tip and he says, should I move all of
    my diversified portfolio into this single grocery store stock
    market because my neighbor said this is a really hot tip?
    Thirty-eight-thousand dollars a year, rollover into an IRA.
        Obviously, the stockbroker prevented that kind of a
    misallocation of his retirement resources. And what the
    investment advisor or what the stockbroker told me is that he
    would no longer be able to serve that individual. That would
    have been a disaster for that retired sheriff's deputy.
        Another one. A working-class guy, very fiscally
    responsible, saved money every single year, and said I am going
    to retire when I have a million dollars in savings. Not a big
    income, but over the course of a fiscally responsible,
    financially responsible, working lifetime, he gets that million
    dollars. But because he has a lot of dependents, he needs a
    guarantee. So he goes to his stockbroker and he says I need a
    guarantee, I need an annuity. And he paid for the annuity, but
    he was satisfied because he needed that guarantee.
        The investment advisor, the stockbroker says to me if this
    rule goes into effect I would no longer be able to serve that
    client.
        Third example. Not-for-profit company, not-for-profit
    organization has a retirement plan, the proposed DOL rule would
    preclude the advisor from going in and providing individual
    investment advice for the employees of a very vanilla
    retirement plan for those not-for-profit employees.
        And finally, a fourth example. In rural Kentucky, a factory
    worker who goes into a stockbroker's office for free advice,
    basically gets free advice on the asset allocation of his
    retirement plan, in the anticipation that one day there will be
    a rollover. That kind of free advice based on accountability
    would no longer exist under this proposed DOL rule.
        In the minute remaining, comment on these vignettes and
    whether or not you agree that under the proposed DOL fiduciary
    proposal, you wouldn't have these scenarios where retail
    investors would have access to basic services where the rule
    would hurt the very people it is supposed to protect?
        And keep in mind, as we hear Professor Bullard talk about
    the cost of investment advice under current law being high,
    what my constituents are telling me is that if you think the
    cost is high now for professional advice, wait until you see
    the cost of amateur advice or no advice.
        Feel free to comment on that.
        Mr. Callahan. I would agree. And I would comment that
    Professor Bullard's analysis doesn't represent the funds that
    we use or the marketplace that we work in.
        But to your point on the stories, I would have to know more
    facts about each of them, but in general, yes, I would agree
    that will be the consequence, they will lose advice.
        And it goes back to the brilliance of Congresswoman
    Wagner's bill on requiring analysis, when you are quantifying
    what the problem is you are trying to solve you can build a
    better solution. We have proposed to the SEC those 408(b)(2)-
    like disclosures that put on one piece of paper what are you
    doing, what are you getting, what does it cost you.
        And I would say if you had two funds and on one piece of
    paper one was twice as expensive as the other one and the
    services that you were going to receive for that were the same,
    people are smart and they would look at that and say, wow, in a
    simple, one-page document I can see that versus thousands and
    thousands of pages on a website that they will never read.
        And make it practical, make it actionable, make it
    preventative, not how do we rig this thing to unwind it in the
    future.
        Mr. Fitzpatrick. The gentleman's time has expired.
        The Chair recognizes the gentleman from Texas, Mr. Green,
    for 5 minutes.
        Mr. Green. Thank you, Mr. Chairman.
        Again, I would like to thank the witnesses for appearing
    today.
        And I especially am grateful that, Mr. Bullard, you decided
    to come knowing that you would be outnumbered, understanding,
    however, that the rules permit this to take place, not because
    there are not others who would agree with your position who are
    experts, but because of the rules that we have here at the
    House.
        So I do understand some of the exasperation that you may
    experience. But notwithstanding this, I understand also that
    you are here because you care about small investors, and you
    care about small businesses. You care about them because you
    don't want them to make investments that are based upon a need
    or a desire by the advisor to put himself ahead of the
    investor, the people who are in need of good advice.
        So let us go back to the question that you wanted everyone
    to answer. Would you pose your question again, and that is the
    question of the $80 I believe versus $29,000?
        Mr. Bullard. It is whether it is appropriate to get paid
    more for recommending, for example, a stock fund or short-term
    bond fund, more than twice as much, or in some cases have to
    choose between an $80 payment or a $29,000 payment if you are
    on the brink of reaching one of those bonus-triggering payout
    grids.
        Mr. Green. My assumption is that all of you have understood
    this question. He has reiterated it several times. So let us
    just start with the person who is to my far left and ask, do
    you believe that the person that Mr. Bullard has referenced
    should be put in a position where he can get $80 versus
    $29,000? And I am going to ask for a simple yes or no. If you
    cannot answer yes or no, just simply say you pass.
        Mr. Callahan. I pass.
        Mr. Green. Thank you.
        Let us move to the next person.
        Mr. Stevens. I am not sure I understand the question, and
    so I can't answer yes or no.
        Mr. Green. Let us do this, then. I have a few seconds left.
        Mr. Bullard, explain the question one more time please.
        Mr. Stevens. Could I just ask what I don't understand? Mr.
    Bullard is talking about the compensation arrangements within a
    broker-dealer with respect to its own people. Is that correct?
        Mr. Bullard. Yes, it is a trickle down from what they are
    paid by the fund.
        Mr. Stevens. Okay. My own personal view, this is not an
    investment company institute policy issue, so I would agree--
        Mr. Green. I take it you will pass since you cannot answer
    yes or no, and I will go to the next person.
        Ms. McNeely. I would need more than one word, so I guess I
    will pass.
        Mr. Green. You will pass, yes.
        Mr. Stolz. I will say no because Mr. Bullard has said on
    numerous occasions that we have already fixed that at Raymond
    James.
        Mr. Green. You have fixed it at Raymond James, but you do
    agree that we have not fixed it industry-wide. Is that a fair
    statement?
        Mr. Stolz. I am going to limit my comments solely to
    Raymond James and our position.
        Mr. Green. I understand. So you have no knowledge of what
    is happening industry-wide.
        Mr. Stolz. I didn't say I didn't have any knowledge of what
    is happening industry-wide, but I am not familiar with the
    compensation structures.
        Mr. Green. Is it fair to say then that you are not going to
    answer because you are concerned about the response you might
    get from the rest of the industry?
        Mr. Stolz. I am simply not familiar with the compensation
    arrangements of the other broker-dealers.
        Mr. Green. I see. All right, well you have done well.
        Let us go back to Mr. Bullard. Mr. Bullard, you see what we
    are dealing with. Not all advisors are bad. But we do want
    those that are to know that they have a fiduciary
    responsibility and that they should put their clients above
    themselves. That is simply what this is all about, requiring
    investment advisors to put their clients first, not themselves.
        And my suspicion is that most Americans within the sound of
    my voice believe that is a pretty good idea to put the clients
    first.
        Mr. Bullard, what will happen if they don't put the clients
    first? Because we have had many people to talk about what
    happens if the rule goes into effect, what happens if we
    continue to allow them to not put the clients first?
        Mr. Bullard. There are two things that would happen. One is
    at the margins you will consistently have products that are
    sold that are not in the best interests of the client, and that
    will have a marginal, incremental, negative effect on all of
    those people.
        And then the other category will be some people will have
    devastating consequences. And Mr. Stolz used the example of the
    Toffels and defended the sale of that product. I looked up what
    that product was and this is the Prudential sheet that shows
    that was an L Series class of variable annuities. And this is
    one of the largest sellers of the annuities deciding it is
    getting out of the business because they are inherently abusive
    given the kinds of riders and the length of period for
    redemption.
        And this is an article that cites FINRA that specifically
    cited those L share series as being a target of their reviews.
    So that is an example that it is anecdotal, it doesn't really
    tell you much about the industry. But that was a case where, if
    you are a financial advisor and you could not have anticipated
    that an elderly person might get ill and that was unexpected,
    that is malpractice. You have to expect that an elderly person
    might get ill and need the liquidity that a variable annuity
    wouldn't provide.
        Mr. Fitzpatrick. The gentleman's time has expired.
        Mr. Green. Mr. Chairman, if I may, I have a statement that
    I would like to enter into the record, if there are no
    objections.
        Mr. Fitzpatrick. The statements will be admitted under
    general leave at the conclusion of the hearing.
        Mr. Green. I shall wait. Thank you, Mr. Chairman.
        Mr. Fitzpatrick. The Chair now recognizes himself for 5
    minutes, and I am going to yield my time to the sponsor of the
    Retail Investor Protection Act, the gentlewoman from Missouri,
    Mrs. Wagner.
        Mrs. Wagner. I can't thank my colleagues enough for their
    3- to 4-years' indulgence in my absolute passion on this issue,
    all those in industry and, most importantly, that retail
    investor, that low- and moderate-income investor who is every
    member of my family, every person in my cul-de-sac, every
    person with whom I go to church. They will be impacted by this.
        And yes, every single investor and saver for retirement
    deserves the best--the best--information, the best advice that
    they need.
        And I would remind the ranking member and others that there
    are rules and regulations currently already on the books that
    are dealing with many of these issues, problems and faults. But
    to put in another thousand pages of rules and regulations that
    does not harmonize with the SEC, that stands to run in
    different paths of the SEC is just simply wrong.
        Secretary Perez and the Department of Labor have framed
    this proposed rule as simply requiring advisors to work in a
    client's best interest. And if advisors are already doing this,
    then there should not be any problems, he says.
        Is this an accurate statement? And if not, can you please
    explain why the marketplace reality is much more complex?
        Mr. Callahan?
        Mr. Callahan. It is far more complex and goes to the point
    of this false choice, that the choice is this regulation or
    nothing. And even Professor Bullard testified FINRA took action
    under the existing regulatory framework--
        Mrs. Wagner. Correct.
        Mr. Callahan. --to correct something in the marketplace, a
    schedule that was approved and filed with the SEC, just to be
    clear. The advisors didn't make up these products. They are
    filed and in practice the rulemaking framework worked. FINRA
    came in and corrected the measure, as he testified.
        So it is far more complicated than that. And to think that
    our only choice is this standard as drafted by the Department,
    which pre-defines what is best and what is not best and takes
    some solutions off the table because they are prohibited and
    then begins to try to work them back in with exemptions, to me
    is so clear that it is a square peg in a round hole and far
    more complicated than the light touch that the Department
    claims that it is.
        Mrs. Wagner. Mr. Stevens?
        Mr. Stevens. If it were quite that simple it wouldn't have
    required hundreds of pages in the Federal Register.
        Mrs. Wagner. Correct. As I said, every investor deserves
    the best information they need. I care deeply about the retail
    investor and the low- and moderate-income investor. I care
    deeply about an industry that I think is full of good actors
    that help families save and invest for their retirement and for
    their future.
        Congress has already provided the avenue in Dodd-Frank to
    look at issues between different standards of care under
    Section 913. That analysis and rulemaking is being done by the
    SEC, which is the regulator that is familiar with current
    securities law and has a much better understanding of the
    stakeholders and the market.
        SEC Chair Mary Jo White hasn't directly criticized
    Secretary Perez, but this spring she said the SEC is working on
    its own rule. Commissioner Gallagher, a Republican on the SEC,
    says in a letter to Mr. Perez that the rule currently as
    proposed and as not willing to be re-proposed or changed in any
    way, shape or form, as my correspondence has demonstrated here,
    says that it is clear that the DOL rulemaking is a fait
    accompli and the comment process is merely perfunctory.
        This rulemaking from the Department of Labor makes their
    inexperience in this area crystal clear. And this hearing has,
    I think, today showcased and further demonstrated the proper
    avenue for further regulation, which is the Retail Investor
    Protection Act.
        I thank you all for your indulgence.
        I thank the Chair and so many of my colleagues for yielding
    their time. And we will fight on. Thank you.
        I yield back.
        Mr. Fitzpatrick. The gentlelady yields back.
        I would like to thank the witnesses for their testimony
    here today.
        Mr. Green?
        Mr. Green. Yes, thank you, Mr. Chairman. I would like to
    submit without objection a statement from the Honorable Ranking
    Member of the Capital Markets Subcommittee, Carolyn Maloney.
    And without objection, I shall submit it.
        Mr. Fitzpatrick. Without objection, it is so ordered.
        The Chair notes that some Members may have additional
    questions for this panel, which they may wish to submit in
    writing. Without objection, the hearing record will remain open
    for 5 legislative days for Members to submit written questions
    to these witnesses and to place their responses in the record.
    Also, without objection, Members will have 5 legislative days
    to submit extraneous materials to the Chair for inclusion in
    the record.
        The hearing is adjourned.
        [Whereupon, at 12:35 p.m., the hearing was adjourned.]

                                A P P E N D I X

                               September 10, 2015
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