[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 [GRAPHIC NOT AVAILABLE IN TIFF FORMAT] U.S. GOVERNMENT PUBLISHING OFFICE 90-728 PDF WASHINGTON : 2016 ______________________________________________________________________________________ For sale by the Superintendent of Documents, U.S. Government Publishing Office, http://bookstore.gpo.gov. For more information, contact the GPO Customer Contact Center, U.S. Government Publishing Office. Phone 202-512-1800, or 866-512-1800 (toll-free). E-mail, [email protected]. 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 [GRAPHIC NOT AVAILABLE IN TIFF FORMAT] [all]