    [House Hearing, 115 Congress]
    [From the U.S. Government Publishing Office]

                          IMPACT OF THE DOL FIDUCIARY
                          RULE ON THE CAPITAL MARKETS

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

                                    HEARING

                                   BEFORE THE

                        SUBCOMMITTEE ON CAPITAL MARKETS,
                           SECURITIES, AND INVESTMENT

                                     OF THE

                        COMMITTEE ON FINANCIAL SERVICES

                         U.S. HOUSE OF REPRESENTATIVES

                         ONE HUNDRED FIFTEENTH CONGRESS

                                 FIRST SESSION

                                   __________

                                 JULY 13, 2017

                                   __________

           Printed for the use of the Committee on Financial Services

                               Serial No. 115-29

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                     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
    STEVAN PEARCE, New Mexico            GREGORY W. MEEKS, New York
    BILL POSEY, Florida                  MICHAEL E. CAPUANO, Massachusetts
    BLAINE LUETKEMEYER, Missouri         WM. LACY CLAY, Missouri
    BILL HUIZENGA, Michigan              STEPHEN F. LYNCH, Massachusetts
    SEAN P. DUFFY, Wisconsin             DAVID SCOTT, Georgia
    STEVE STIVERS, Ohio                  AL GREEN, Texas
    RANDY HULTGREN, Illinois             EMANUEL CLEAVER, Missouri
    DENNIS A. ROSS, Florida              GWEN MOORE, Wisconsin
    ROBERT PITTENGER, North Carolina     KEITH ELLISON, Minnesota
    ANN WAGNER, Missouri                 ED PERLMUTTER, Colorado
    ANDY BARR, Kentucky                  JAMES A. HIMES, Connecticut
    KEITH J. ROTHFUS, Pennsylvania       BILL FOSTER, Illinois
    LUKE MESSER, Indiana                 DANIEL T. KILDEE, Michigan
    SCOTT TIPTON, Colorado               JOHN K. DELANEY, Maryland
    ROGER WILLIAMS, Texas                KYRSTEN SINEMA, Arizona
    BRUCE POLIQUIN, Maine                JOYCE BEATTY, Ohio
    MIA LOVE, Utah                       DENNY HECK, Washington
    FRENCH HILL, Arkansas                JUAN VARGAS, California
    TOM EMMER, Minnesota                 JOSH GOTTHEIMER, New Jersey
    LEE M. ZELDIN, New York              VICENTE GONZALEZ, Texas
    DAVID A. TROTT, Michigan             CHARLIE CRIST, Florida
    BARRY LOUDERMILK, Georgia            RUBEN KIHUEN, Nevada
    ALEXANDER X. MOONEY, West Virginia
    THOMAS MacARTHUR, New Jersey
    WARREN DAVIDSON, Ohio
    TED BUDD, North Carolina
    DAVID KUSTOFF, Tennessee
    CLAUDIA TENNEY, New York
    TREY HOLLINGSWORTH, Indiana

                      Kirsten Sutton Mork, Staff Director
          Subcommittee on Capital Markets, Securities, and Investment

                       BILL HUIZENGA, Michigan, Chairman

    RANDY HULTGREN, Illinois, Vice       CAROLYN B. MALONEY, New York,
        Chairman                             Ranking Member
    PETER T. KING, New York              BRAD SHERMAN, California
    PATRICK T. McHENRY, North Carolina   STEPHEN F. LYNCH, Massachusetts
    SEAN P. DUFFY, Wisconsin             DAVID SCOTT, Georgia
    STEVE STIVERS, Ohio                  JAMES A. HIMES, Connecticut
    ANN WAGNER, Missouri                 KEITH ELLISON, Minnesota
    LUKE MESSER, Indiana                 BILL FOSTER, Illinois
    BRUCE POLIQUIN, Maine                GREGORY W. MEEKS, New York
    FRENCH HILL, Arkansas                KYRSTEN SINEMA, Arizona
    TOM EMMER, Minnesota                 JUAN VARGAS, California
    ALEXANDER X. MOONEY, West Virginia   JOSH GOTTHEIMER, New Jersey
    THOMAS MacARTHUR, New Jersey         VICENTE GONZALEZ, Texas
    WARREN DAVIDSON, Ohio
    TED BUDD, North Carolina
    TREY HOLLINGSWORTH, Indiana

                               C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on:
        July 13, 2017................................................     1
    Appendix:
        July 13, 2017................................................    45

                                   WITNESSES
                            Thursday, July 13, 2017

    Firvida, Cristina Martin, Director, Financial Security and
      Consumer Affairs, AARP.........................................    10
    Halloran, Mark, Senior Director, Head of Industry and Regulatory
      Strategy, Transamerica, on behalf of the American Council of
      Life Insurers (ACLI)...........................................     7
    Holtz-Eakin, Douglas, President, American Action Forum...........    11
    Knoch, David, President, 1st Global, on behalf of the Financial
      Services Institute.............................................     5
    Lombard, Jerry, President, Private Client Group, Janney
      Montgomery Scott, LLC, on behalf of the Securities Industry and
      Financial Markets Association (SIFMA)..........................     8

                                    APPENDIX

    Prepared statements:
        Firvida, Cristina Martin.....................................    46
        Halloran, Mark...............................................    57
        Holtz-Eakin, Douglas.........................................    62
        Knoch, David.................................................    70
        Lombard, Jerry...............................................    89

                  Additional Material Submitted for the Record

    Huizenga, Hon. Bill:
        Written statement of the U.S. Chamber of Commerce............    92
        Written statement of the Credit Union National Association...    94
        Written statement of the National Taxpayers Union............    95
    Lynch, Hon. Stephen:
        Written statement of Phyllis C. Borzi, Former Assistant
          Secretary of Labor for the Employee Benefits Security
          Administration, dated July 12, 2017........................    97
        ``Deregulators Must Follow the Law, So Regulators Will Too,''
          dated May 22, 2017.........................................   106
    Stivers, Hon. Steve:
        ``How AARP Helped Obama Thwart Wall Street on Tougher Broker
          Rule,'' by Secretary of Labor Alexander Acosta, dated April
          12, 2016...................................................   108

                          IMPACT OF THE DOL FIDUCIARY
                          RULE ON THE CAPITAL MARKETS

                                  ----------

                            Thursday, July 13, 2017

                 U.S. House of Representatives,
                       Subcommittee on Capital Markets,
                            Securities, and Investment,
                               Committee on Financial Services,
                                                       Washington, D.C.
        The subcommittee met, pursuant to notice, at 10:03 a.m., in
    room 2128, Rayburn House Office Building, Hon. Bill Huizenga
    [chairman of the subcommittee] presiding.
        Members present: Representatives Huizenga, Hultgren,
    Stivers, Wagner, Poliquin, Hill, Emmer, Mooney, MacArthur,
    Davidson, Budd, Hollingsworth; Maloney, Sherman, Lynch, Scott,
    Himes, Foster, Sinema, Vargas, Gottheimer, and Gonzalez.
        Ex officio present: Representative Waters.
        Also present: Representative Delaney.
        Chairman Huizenga. The Subcommittee on Capital Markets,
    Securities, and Investment will come to order. Without
    objection, the Chair is authorized to declare a recess of the
    subcommittee at any time.
        Today's hearing is entitled, ``The Impact of the DOL
    Fiduciary Rule on the Capital Markets.''
        And I now recognize myself for 2 minutes to give an opening
    statement. Now more than ever, sound financial advice has
    become critical for every individual looking to invest and save
    for their future. Every day, millions of Americans are working
    to achieve financial independence by using an investment
    adviser or a broker-dealer to help them plan and prepare for a
    prosperous retirement.
        However, the Department of Labor's complex fiduciary rule
    not only fails to protect customers, it harms them by driving
    up costs and limiting investor choice. According to research by
    the American Action Forum, the DOL fiduciary rule is the most
    expensive regulatory action of 2016, and the second-most
    expensive non-environmental rule since 2015. The rule has the
    potential to increase consumer costs by $46 billion, or
    approximately $800 annual per account--$800 annually per
    account--in addition to the $1,500 in duplicative fees for
    retirement savers that have already paid a fee on their
    commission-based account.
        So not only is the DOL denying American savers and small
    business access to investment advice, and limiting their choice
    in investment products, but it is also crippling them with
    added costs. Why is the Federal Government paralyzing hard-
    working Americans who are trying to save for retirement?
        Like so many big government policies, this misguided rule
    hurts the very people it supports, claiming that it would help
    low- and middle-income families. By increasing costs, the
    fiduciary rule is having a direct effect on the marketplace and
    forcing advisers to limit their services to only those accounts
    that can handle higher costs. This ultimately prices out the
    low- and middle-income savers who would benefit the most from
    having access to this information and financial advice.
        How is this in the best interest of those trying to save
    for their retirement? The Federal Government should not be
    limiting consumers' choices as Americans work towards achieving
    retirement savings goals. Instead, the Federal Government
    should be providing these investors with the tools that they
    need to build a better future.
        As the numbers rise of the millions of American families
    who are unable to save for retirement, Congress should be
    making it easier for these families to save, not making it more
    difficult. This should be an issue where Members of both
    parties can stand together. Putting the interests of hard-
    working Americans first is the only way that the government can
    help all savers achieve financial security.
        I look forward to hearing from our witnesses today. And the
    Chair now recognizes the ranking member of the subcommittee--
    well, actually, I think we are going to have the ranking member
    do her opening statement and then I have a couple of other
    folks on our side of the aisle. So with that, the Chair now
    recognizes the ranking member of the subcommittee, the
    gentlelady from New York, Mrs. Maloney, for 5 minutes for an
    opening statement.
        Mrs. Maloney. Thank you for calling this hearing. And I
    thank our distinguished panelists for being here today.
        This hearing addresses a very important issue: the
    Department of Labor's fiduciary duty rule. I am a supporter of
    the rule because it provides critical protections to Americans
    who are saving for retirement. And I am glad that even the
    Republican Labor Secretary, Secretary Acosta, appears to agree
    that the fiduciary rule is an important protection that should
    not be tossed out.
        The fiduciary rule is a much-needed update of the rules
    governing investment advice to retirement savers. And it will
    plug some key holes in our regulatory system. The rule advances
    a very simple principle: If you are giving investment advice to
    our retirement savers and you are being compensated for your
    advice, then you have to put your customers' interests first.
    This is just common sense and no one would oppose this
    principle.
        We should also remember that most investors already think
    it is the law, even though it isn't. So really, the DOL rule is
    simply updating the law to reflect what investors already
    believe is the law.
        When President Trump took office, he required the Labor
    Department to conduct a review of the fiduciary rule to
    determine whether or not the start date for the rule should be
    delayed, either for a short period of time or indefinitely.
    After conducting the review, the Labor Department concluded
    that it could not justify delaying the start date for very long
    and ordered that the core aspects of the fiduciary rule would
    take effect on June 9th.
        This conclusion was based on the overwhelming benefits that
    investors will enjoy under the rule. According to the Council
    of Economic Advisers, this rule will save consumers roughly $17
    billion--that is ``billion''--per year. The Labor Department
    ran its own numbers again and concluded that delaying
    implementation of the rule past June 9th would simply be too
    costly for retirement investors.
        Now, I know there were some concerns about the
    implementation of this rule when it was first proposed back in
    2015. But instead of simply opposing the entire rule, some of
    us--particularly on the Democratic side--actually engaged with
    the Labor Department and got the vast majority of those
    technical issues fixed in the final rule. I wrote my own letter
    to the DOL on the proposed rule asking for six technical fixes
    and clarifications, and DOL made all six changes that I asked
    for in the final rule.
        And I was very pleased with the final rule because I
    believe that it properly balances the need to protect
    retirement investors with the need to streamline compliance
    costs. Unfortunately, this hearing will also address yet
    another legislative proposal that would repeal the fiduciary
    rule. I am disappointed that we are going through this exercise
    again.
        How many more times do these efforts to repeal the
    fiduciary rule need to fail before my colleagues on the other
    side of the aisle realize that this is not a productive use of
    time and that the only realistic way to make changes to the
    rule is to engage with the Labor Department on reasonable
    changes that don't harm investors? Believe me, they are
    responsible. Every issue that I am aware of that my
    constituents raised, the DOL addressed, and they took care of
    six that I raised myself.
        By repealing the fiduciary rule, this bill would leave
    millions of Americans saving for retirement without the
    protections that we have seen time and time again are
    necessary. According to a letter from the Consumer Federation
    of America, this bill will, ``dramatically weaken existing
    protections for retirement savers without providing meaningful
    new protections for investors in non-retirement accounts.''
        I would like to enter this letter into the record, and the
    letter that I wrote myself that achieved the changes.
        Chairman Huizenga. Without objection, it is so ordered.
        Mrs. Maloney. So I am very concerned that by repealing the
    DOL rule, and replacing it with a watered-down vague standard
    that wouldn't even take effect for a year-and-a-half, this bill
    would undermine the retirement security of millions of middle-
    class Americans, but I look forward to a robust debate and to
    hearing from our witnesses. And I do want to note that this was
    one of President Obama's major goals, because he felt like it
    would help and protect people.
        I yield back. Thank you.
        Chairman Huizenga. The gentlelady's time has expired. The
    Chair now recognizes the gentleman from Illinois, the vice
    chairman of the subcommittee, Mr. Hultgren, for 1 minute.
        Mr. Hultgren. Thank you. I would like to thank Chairman
    Hensarling for his help in getting this hearing today, but
    especially Chairman Huizenga for all his work of convening this
    and pulling together a great panel to be able to present to us.
    I have been proud to work with them and others to fight for
    retirees in my district and across the country to protect their
    access to retirement advice and the investment products that
    will help them build their nest egg that they will need.
        As someone who is a licensed financial adviser, I am
    extremely concerned with the overly prospective regulatory
    framework that the Department of Labor has proposed for
    retirement accounts. As I said before and as we have discussed
    in this committee over and over, the Obama Administration's
    fiduciary rule is not workable. My constituents, especially
    those with low retirement account balances, cannot afford for
    this rule to go into effect as currently proposed.
        If we are going to institute a fiduciary standard, we need
    to do it right. That is why I have supported efforts such as
    the legislation sponsored by my colleague, Ann Wagner, for the
    Securities and Exchange Commission, the primary investor
    protection regulator, with the proper expertise and resources
    to act first and be generally more engaged in this process.
        I look forward to the witnesses' testimony today so this
    committee can understand the compliance challenges that are
    underway and so we can hear recommendations on what actions
    Congress can take now that the Labor Department's rule is
    finalized.
        Chairman Huizenga. The gentleman's time has expired. I now
    recognize the gentlelady from Missouri, Mrs. Wagner, for 2
    minutes. She is the author of the discussion draft that in the
    first article repeals it, but in the second then puts in an SEC
    regime. And with that, the gentlelady is recognized for 2
    minutes.
        Mrs. Wagner. Thank you, Chairman Huizenga. This is a very
    important hearing today focusing on a critical issue that
    threatens the access of affordable and reliable retirement
    investment advice for millions of low- and middle-income
    Americans.
        America is in a retirement savings crisis today. And
    Washington needs to be empowering individuals to save for
    retirement, not making it more difficult. The current
    Department of Labor fiduciary rule will leave Americans who are
    just starting to build their retirement savings without access
    to financial advice or paying more for fewer options and
    decreased service.
        Republicans on this committee have for years been warning
    about the harmful effects this rule will have. And
    unfortunately, we are starting to see those with the rule now
    partially in effect on June 9th. I look forward to hearing our
    witnesses discuss their experiences and observations of the
    market leading up to and after the rule's implementation.
        To remedy these issues we have seen develop, I have
    prepared, in fact, a discussion draft as the chairman has
    noted, for consideration that would apply a workable best-
    interest standard for broker-dealers when providing investment
    advice without losing access for such advice for millions of
    low- and middle-income investors.
        This legislation would also keep this issue under the
    jurisdiction of the SEC, the expert regulator who has the
    experience of overseeing the industry. Broker-dealers should
    provide advice that is in their customers' best interest. And
    this draft bill will make that absolutely clear with a standard
    that applies to both investment and retirement accounts, unlike
    the Department of Labor's rule.
        Mr. Chairman, this has been a bipartisan issue in the past,
    and I would like to thank my colleagues on this committee
    across the aisle who have worked with me in the past on this.
    And I hope that we can all work on this draft bill together
    going forward. I yield back.
        Chairman Huizenga. The gentlelady's time has expired.
        Today, we welcome the testimony of a great panel in front
    of us here. First, we have Mr. David Knoch, president of 1st
    Global, on behalf of the Financial Services Institute.
        Second, we have Mr. Mark Halloran, senior director, head of
    industry and regulatory strategy for Transamerica, on behalf of
    the American Council of Life Insurers.
        Third, we have Mr. Jerome Lombard, president, Private
    Client Group at Janney Montgomery Scott, LLC, on behalf of the
    Securities Industry and Financial Markets Association.
        Fourth, we have Ms. Cristina Martin Firvida, director of
    financial security and consumer affairs for AARP.
        And last but not least, we have Dr. Douglas Holtz-Eakin,
    president of the American Action Forum.
        Each of you will be recognized for 5 minutes to give an
    oral presentation of your testimony. And without objection,
    each of your written statements will be made a part of the
    record.
        With that, Mr. Knoch, you are recognized for 5 minutes.

     STATEMENT OF DAVID KNOCH, PRESIDENT, 1ST GLOBAL, ON BEHALF OF
                    THE FINANCIAL SERVICES INSTITUTE

        Mr. Knoch. Good morning, Chairman Huizenga, Ranking Member
    Maloney, and members of the subcommittee. I am David Knoch,
    president of 1st Global based in Dallas, Texas. I am a
    certified investment management analyst with nearly 20 years of
    experience in the financial services industry.
        1st Global is the largest independently-owned wealth
    management partner to CPAs and legal firms across America. I am
    here representing the Financial Services Institute, which
    advocates on behalf of independent financial advisers and
    independent financial services firms, and is a strong supporter
    of a uniform fiduciary standard.
        I am here today to discuss the DOL fiduciary rule and its
    impact on retirement savers. I believe strongly that the DOL
    rule adds unnecessary complexity to an already complicated
    regulatory environment. The DOL rule's intricate regulatory
    framework raises new barriers to serving millions of Americans.
    Let me start by sharing some examples of problems with the
    rule, beginning with its impact on investors. In many cases,
    investors with small account balances are losing access to
    lower-cost, commission-based solutions due to the DOL rule.
        For example, one of the lowest-cost methods for clients to
    own mutual funds is to custody them directly with the mutual
    fund company, often known in our industry as direct business.
    Since 2016, the number of accounts held by our clients directly
    with mutual fund companies has dropped nearly 10 percent, and
    the number of new accounts established has dropped 19 percent
    during the first 6 months of 2017. We expect this trend to
    accelerate and by the end of this year anticipate that the
    total number of accounts held in these programs will drop by
    more than a third.
        We are also challenged to offer a viable, cost-effective
    solution for small employer retirement plans, particularly
    simple IRAs, where account balances can be as low as $100. Many
    of these accounts are offered on a commission basis and will be
    subject to the best-interest contract. Due to the threat of
    class-action lawsuits, many of our affiliated firms will no
    longer offer these plans to small-business clients and some
    will end their existing relationships. In fact, since the start
    of 2016, we have seen the number of simple IRA accounts drop by
    over 20 percent. We project that these accounts will shrink
    from the 2016 levels by 28 percent before the end of this year
    and by 41 percent by the end of 2018.
        Furthermore, the DOL rule creates significant new
    disclosures that are cumbersome and expensive to create, will
    confuse investors with their sheer volume and complexity, and
    are simply not necessary to hold financial advisers to a
    fiduciary standard of care. As of the January 1st applicability
    date for a small, commission-based account which can be opened
    with as little as a $50 initial investment utilizing the best-
    interest contract exemption, our clients will receive nearly
    100 pages of paperwork, with 70 of those pages being
    disclosures.
        When the prospectus is added, disclosure pages grow to 81
    percent of the total 145-page paperwork burden imposed on
    clients, all to open a $50 account.
        Now, finally, my testimony would not be complete without
    dedicating at least one paragraph to defend the honor of the
    CPA financial advisers I have the privilege to serve. Every CPA
    financial adviser I know was called to serve for two reasons:
    they enjoy solving complex problems; and they enjoy doing good
    for others. And offering financial services to their clients
    lies at the intersection of this calling.
        These people do what is right for their clients, not
    because of a rule or a standard of care, but because it is
    simply the right thing to do. Clients in our industry need
    reasonable and effective regulation, and it is a dishonor to
    the vast majority of our profession who are called to serve
    their communities first and happen to earn a living for doing
    so to assume they are only acting in their own self-interests.
    It is simply not what I see.
        What I see is the family member suffering from cancer who
    can focus on his recovery because his financial affairs are in
    order. Or the widow who relies on her financial adviser to
    transition to life without her spouse. Or the person entering
    retirement who can enjoy the fruits of their hard work because
    they have an adviser who helped them plan and save and who now
    guides them on living a dignified life sustained by the power
    of choice.
        My wish for you is to see what I see and help independent
    financial advisers like ours all across America serve more
    clients, serve them better, and serve them more completely by
    reducing their regulatory burden without reducing the standard
    of care. I thank the chairman, the ranking member, and the rest
    of the subcommittee for allowing me to share my thoughts on
    this matter, and I look forward to answering your questions.
        [The prepared statement of Mr. Knoch can be found on page
    70 of the appendix.]
        Chairman Huizenga. In a rare move, the gentleman yields
    back with additional time. So, thank you.
        Moving on, Mr. Halloran, you are recognized for 5 minutes.

     STATEMENT OF MARK HALLORAN, SENIOR DIRECTOR, HEAD OF INDUSTRY
        AND REGULATORY STRATEGY, TRANSAMERICA, ON BEHALF OF THE
                AMERICAN COUNCIL OF LIFE INSURERS (ACLI)

        Mr. Halloran. Chairman Huizenga, Ranking Member Maloney,
    and members of the subcommittee, thank you for the opportunity
    to testify before you today on behalf of the American Council
    of Life Insurers.
        As was stated, I am the senior director of industry and
    regulatory strategy at Transamerica. Transamerica is one of the
    Nation's largest providers of financial products, insurance,
    and annuities. And we work with Americans to help them save for
    retirement, insure against risk, and build solid financial
    foundations.
        ACLI supports reasonable and appropriately tailored rules
    that require all sales professionals to act in the best
    interests of customers. Rules impacting savings and in
    particular retirement savings must be appropriately tailored,
    effective, straightforward, and consistent, and provide
    America's savers and retirees with the ability to achieve their
    financial and retirement security goals.
        A best-interest standard should protect the interests of
    retail investors and ensure consumers can access the full range
    of financial advice and products. A best-interest standard
    should be administered by the prudential regulators that have
    the most expertise and experience in investor protection and
    financial markets. The SEC and the State insurance regulators
    are best-positioned for that role and are the appropriate
    authorities for oversight of financial professionals.
        The SEC, state insurance regulators, and the Department of
    Labor should work together to establish a harmonized standard
    of care that applies across the entire relationship between
    financial professionals and consumers. We are very encouraged
    by the recent statements in this regard by the SEC and the DOL
    with respect to their plans to work together in this regard, as
    well.
        ACLI supports a discussion draft being reviewed by the
    subcommittee at today's hearing. ACLI thanks Chairman Huizenga,
    Representative Ann Wagner, and the other members of the
    subcommittee for their strong leadership on this issue.
        The best-interest standard under the discussion draft would
    apply holistically to recommendations regarding any asset, not
    just the one dimension of the relationship that involves ERISA
    plan and IRA assets. The standard would be consistent across
    all aspects of consumers' finances, providing clear and
    consistent rules for both financial professionals and
    consumers.
        The discussion draft harmonizes the various bodies of law
    and regulation applicable to the sale of insurance and annuity
    products at the retail level. To harmonize the regulation of
    advice to retail investors, the discussion draft facilitates
    coordination by the appropriate prudential regulations. The
    draft bill sensibly places responsibility for issuing
    regulations in the hands of the primary prudential regulators:
    the SEC; and the State insurance regulators.
        Importantly, the draft bill would also place a statutory
    obligation on the SEC to coordinate and cooperate with State
    insurance regulators. The draft would also install important
    statutory safeguards to permit transaction-based financial
    professionals, including broker-dealer registered
    representatives and insurance agents, to continue to offer
    products and services to retail customers under traditional
    compensation models. These safeguards would effectively
    preserve retail investor access to information, freedom of
    choice over how to pay for financial advice, and a robust
    competitive marketplace for insured retirement solutions.
        The Department of Labor's fiduciary rule is the wrong
    approach because it harms middle-income savers and limits
    consumer choices. However well-intentioned the rule is, it
    makes it much harder for the average American family to access
    financial advice and save for retirement.
        The fee-based advice model favored in the DOL regulation
    may not always be the right model for the small and medium
    account holders. That is particularly true for buy-and-hold
    investors and purchasers of annuity products that are designed
    for long-term retirement goals. Many fee-based arrangements do
    not include options of the purchase of annuities, which are the
    only products available to consumers and retirees that
    guarantee lifetime income.
        Furthermore, the DOL regulation is diminishing access to
    advice at a time when financial advice is more important than
    ever. An advice gap has developed for small and medium
    retirement accountholders who do not meet the higher account
    minimums for fee-based arrangements. Less advice from financial
    professionals can contribute to reduced savings on the part of
    working Americans and diminished retirement security for
    retirees in need of guaranteed lifetime income through
    annuities.
        The discussion draft would ensure that consumers have more
    access to information and advice and more choices about how to
    pay for advice. Thank you for the opportunity to testify today,
    and I look forward to answering any questions you may have.
        [The prepared statement of Mr. Halloran can be found on
    page 57 of the appendix.]
        Chairman Huizenga. Thank you. I appreciate that.
        Mr. Lombard, welcome. We appreciate you being here and your
    time here. And with that, you are recognized for 5 minutes.

     STATEMENT OF JERRY LOMBARD, PRESIDENT, PRIVATE CLIENT GROUP,
       JANNEY MONTGOMERY SCOTT, LLC, ON BEHALF OF THE SECURITIES
           INDUSTRY AND FINANCIAL MARKETS ASSOCIATION (SIFMA)

        Mr. Lombard. Thank you, Chairman Huizenga, Ranking Member
    Maloney, and distinguished members of the subcommittee. I am
    Jerry Lombard, president of the private client group at Janney
    Montgomery Scott.
        I greatly appreciate the opportunity to testify today on
    behalf of the Securities Industry and Financial Markets
    Association (SIFMA), and share our perspective on the best path
    forward to establish a best-interest standard for the broker-
    dealer industry. We are grateful to this committee for its
    willingness to consider legislation that would allow the
    Securities and Exchange Commission to establish a best-interest
    standard for broker-dealers that would create a high standard
    of care for retail clients across all accounts.
        On June 9th, some key provisions in the Department of
    Labor's fiduciary rule became applicable. And as an industry,
    we are beginning to see the harmful impact on America's
    retirement savers, limiting product choice and access to advice
    while increasing costs. At Janney, we have already experienced
    many of these issues. Our customers and advisers are very
    confused by the phalanx of new DOL rules applying to retirement
    accounts. They do not understand why there are now two sets of
    rules, one for retirement accounts and one for taxable
    brokerage accounts.
        Since June 9th, clients are now restricted from making
    certain investments in their retirement accounts. By years-end,
    we estimate upwards of 10,000 of our client retirement
    accounts, about 1 in 8, will be relegated to a no-advice
    service desk as they are too small for the risks imposed by the
    DOL or too costly to be placed into an advisory account that
    would remove the supposed conflicts the DOL is trying to
    relegate. How switching small retirement savers from a full
    service adviser to a no-advice service desk is in these
    clients' best interest, I will never understand.
        It is the position of SIFMA that the right answer for
    investors is a consistent best-interest standard that could
    apply across all types of accounts, but does not have the
    additional onerous conditions created by the DOL rule. A best-
    interest standard done right by the SEC, the expert agency
    responsible for broker-dealer standards of conduct, would
    provide protection for retail clients without a bifurcated
    compliance regime imposed on those same market participants by
    different regulators.
        We are greatly encouraged by the SEC's June 1st request for
    public comment on standards of conduct for investment advisers
    and broker-dealers. It is SIFMA's intention to share with the
    SEC our desire that they consider establishing a best-interest
    standard for broker-dealers that mirrors the elements of the
    impartial conduct standards under the DOL rule, but unlike the
    DOL rule would apply across all broker-dealer accounts, not
    just retirement accounts. For that reason, the DOL should at a
    minimum delay the January 2018 applicability date to allow the
    SEC to lead the effort to put in place a standard that works
    for all accounts.
        Congresswoman Wagner's legislative draft provides this path
    forward by establishing an SEC-applied principles-based
    standard to ensure that all broker-dealer recommendations about
    securities are driven by the best interest of retail clients.
    We firmly believe that this approach would provide a number of
    significant regulatory efficiencies and investor protections,
    benefits which would enhance the existing suitability
    obligation under FINRA rules to create a heightened and more
    stringent best-interest standard for the benefit of retail
    clients, apply across all security recommendations made to
    retail clients in all broker-dealer accounts, not just limited
    to IRA accounts, build upon and fit seamlessly within the
    existing and longstanding securities regulatory regime for
    broker-dealers, coupled with robust examination, oversight, and
    enforcement by the SEC, FINRA, and state securities regulators,
    and be akin and well-aligned with the investment adviser
    standard under the Advisers Act, insofar as the new standard
    would include a duty of loyalty and a duty of care, an
    obligation to manage investment costs, and would require
    upfront disclosure to clients of important information.
        Thus, we greatly appreciate Congresswoman Wagner's work on
    this legislative discussion draft, and we look forward to
    continuing to work with her and this committee on language that
    ensures the best-interest standard established in the bill
    operates in harmony and consistency with all existing standards
    of conduct, including the current broker-dealer, investment
    adviser, and DOL rule regulatory frameworks, as well as any
    future rulemaking by the SEC or FINRA.
        In doing this, we will help relieve America's retirement
    savers from the burdens that have already arisen as a
    consequence of the DOL's misguided rule. Thank you.
        [The prepared statement of Mr. Lombard can be found on page
    89 of the appendix.]
        Chairman Huizenga. Thank you.
        Ms. Firvida, you are recognized for 5 minutes.

       STATEMENT OF CRISTINA MARTIN FIRVIDA, DIRECTOR, FINANCIAL
                  SECURITY AND CONSUMER AFFAIRS, AARP

        Ms. Firvida. On behalf of our 38 million members and
    Americans saving for retirement, AARP thanks Chairman Huizenga,
    Ranking Member Maloney, and the members of the subcommittee for
    the opportunity to testify today. AARP has enthusiastically
    supported the fiduciary rule requiring retirement advice that
    minimizes conflicts, is solely in the interest of the investor,
    and which is provided with the care, skill, and diligence that
    a prudent person would use.
        Today, we are joined by several AARP members who are here
    to show support for your rule. In 2015, AARP members submitted
    close to 60,000 messages to the Department of Labor and
    delivered over 26,000 petitions to the House Financial Services
    Committee. You have those petitions before you today.
        We are frequently communicating with our members about the
    rule, including in multiple articles in the AARP bulletin,
    which is the world's largest circulation publication. In
    surveys, we have always found that people overwhelmingly want
    fiduciary advice. In collaboration with the North American
    Securities Administrators Association, we have also developed a
    tool to help investors determine if their adviser is a
    fiduciary.
        Many States also agree that the fiduciary rule is needed.
    Earlier this year, nine attorneys general, including the AGs
    from New York and North Carolina, sent supportive letters to
    the Department of Labor. Additionally, five States, including
    Missouri, already impose a fiduciary standard on brokers in
    their States. Most recently, Nevada established a fiduciary
    standard with the support of AARP.
        The financial services industry itself generally agrees
    that investment advice should be provided in the best interests
    of investors, which is unsurprising, given that these standards
    have been in place since ERISA was enacted in 1974. Indeed,
    registered investment advisers and certified financial planners
    have for decades successfully provided fiduciary advice.
        Repealing the fiduciary rule would be very costly to
    retirement investors. Savers could lose 17 percent of their
    401(k) account over 20 years and close to 25 percent of the
    account over 30 years as the result of conflicted advice. That
    is the equivalent of 5 years of retirement income.
        The risk of loss is greatest for IRA investors who are
    moving their life savings from a more protected 401(k) to a
    significantly less protected IRA. Small accounts are especially
    vulnerable to conflicted advice because they have fewer
    economic resources to replace lost savings.
        The rule has overall resulted in lower fees and better
    financial advice for savers. Many firms have already incurred
    compliance costs, but we have not seen prices increase for
    investors served by those companies. New products and services
    have developed to meet consumer demand for lower fees and
    greater transparency, and the rule does not prohibit any type
    of product or service.
        Given the nearly $8 trillion in assets in IRAs and the
    almost $5 trillion in 401(k) plans, AARP is confident that
    financial firms will continue to innovate and compete for
    America's nest egg.
        AARP does agree that the Securities and Exchange Commission
    should act in addition to, but not in lieu of, the Department
    of Labor. We appreciate that that draft bill seeks to impose a
    best-interest standard on broker-dealers, but the bill fails to
    define that standard as a fiduciary standard, which the bill
    does not strengthen and which may even meet the bill's
    benchmark.
        Many brokers market themselves today as financial advisers,
    and investors can bear high costs for investments that satisfy
    a suitability standard but not a fiduciary standard. The bill
    does not specify how conflicts should be managed. Disclosure
    alone is not adequate and neither compels mitigation of nor
    shields investors from conflicts of interest.
        Finally, the draft bill could potentially preclude both the
    Securities and Exchange Commission and the Department of Labor
    from taking action to adopt stronger protections for investors
    even if the market evolves with unanticipated consequences.
        We thank the committee for the opportunity to share AARP's
    views on the Department of Labor's fiduciary rule and on the
    draft bill which would repeal that rule and replace it with a
    discretionary best-interest standard for broker-dealers. AARP
    remains committed to the strongest possible fiduciary standard
    for retirement investment advice and recommends a similar
    standard for all other advice that will promote and protect the
    financial security of American families.
        [The prepared statement of Ms. Firvida can be found on page
    46 of the appendix.]
        Chairman Huizenga. And with that, Dr. Holtz-Eakin, we
    recognize you for 5 minutes, and welcome you here.

     STATEMENT OF DOUGLAS HOLTZ-EAKIN, PRESIDENT, AMERICAN ACTION
                                 FORUM

        Mr. Holtz-Eakin. Thank you, Chairman Huizenga, Ranking
    Member Maloney, and members of the subcommittee for the
    privilege to be here today to discuss the implications of the
    DOL fiduciary rule for capital markets.
        I would like to note at the outset that there is a
    consensus about the desirability of a standard of conduct to
    protect small retirement savers against any bad actors that
    might short-change them in their desire to protect their
    lifestyle. The only issue is whether such a standard is
    workable, and I believe the DOL rule is not workable, and I
    applaud efforts to replace it with something that is more
    effective.
        I am going to make three very simple points briefly, and
    then I look forward to answering your questions. The first is
    that the DOL fiduciary rule is very expensive, and this expense
    derives from changes in business practice that the rule will
    force on the retirement industry and those changes in the end
    will be most harmful to small retirement savers, and they will
    bear the brunt of the costs of this rule.
        First of all, the rule is very costly. The chairman noted
    at the outset, the American Action Forum has an ongoing effort
    to track the costs of Federal regulation, not just financial
    regulation but across-the-board in all agencies, and the
    fiduciary rule was the single most expensive rule in 2016. Our
    estimate is $31.5 billion, plus another $2 billion annually to
    comply with the rule. This is the second most expensive non-
    environmental rule since 2005. And so it stands out as an
    extremely costly enterprise.
        Those costs derive really from two main things. The first
    is the move to primarily fee-based accounts. If you look at the
    data for the 57 million individual retirement accounts, two
    facts jump right out. The first fact is, the vast majority of
    them are quite small--74 percent are under $100,000--and the
    other fact is that they are largely in commission-based
    accounts.
        And so this rule which would eliminate the capacity to do
    those commission-based accounts, by and large, and would move
    people into the fee-based world, which is much more expensive.
    Our estimate, as the chairman noted, is this amounts to about
    $800 per year per account, an amount that many people simply
    will not be able to come up with.
        For those who are already in somewhat of a fee-based
    account, there will be an additional $1,500 in duplicative
    fees. And so these are costs that these individuals are going
    to bear. It is also quite likely that because of the nature of
    the service required in this fee-based world, minimum account
    balances will be raised. And if they were raised even to
    $20,000, you would lose about 40 percent of the accounts. And
    so the threat of pricing people out and the threat of having
    them dropped from investment advice is very real in the data.
        This is also not a hypothetical from two other
    perspectives. Number one, we have seen this experiment run
    roughly in the same fashion in the United Kingdom, where
    commission-based accounts were, in fact, banned in 2013, and
    the result, as I note in my written statement, was a more than
    doubling of the number of the fraction of firms that required
    100,000 pounds as the minimum account balance, about 45 percent
    firms report that they provided very little advice to any small
    accounts. They just didn't do that anymore. And you saw people
    get less and less retirement advice.
        It has also begun to happen in the United States. We have
    seen companies like MetLife and AIG exit the business. And we
    have seen companies like Raymond James move to a fee-based
    model. So the notion that these changes would occur, I think is
    very real.
        The second route for these costs is the potential for
    litigation. The best-interest contract is in the eyes of most
    people a real opening for additional litigation. If you look at
    the data for FINRA, there were 4,000 complaints filed in 2016.
    Only 158 were found in favor of the complainant, the consumer.
    That suggests there is going to be a lot of litigation at high
    cost with no particular benefit to the individuals. And that is
    a concern.
        Obviously you could insure against that litigation cost,
    but that is a cost of doing business that is going to show up
    in these accounts. And so between the litigation, which the DOL
    recognized in doing its cost estimate, but only put at $150
    million a year--most people think that is too low--and the
    movement to fee-based accounts, you are going to see additional
    costs. Those costs are going to hurt the small retirement
    saver. They are going to price some people out of the market.
    There are going to be some increases in minimum balances, which
    are going to preclude people from getting advice. And a
    ballpark estimate of the number of people affected looks like
    28 million, a number equal to half of the number of IRA
    accounts right now. So this is a substantial threat to the
    actual advice that we want small retirement savers to get, and
    I encourage the committee to move to a more workable approach
    to standards of conduct.
        Thank you.
        [The prepared statement of Dr. Holtz-Eakin can be found on
    page 62 of the appendix.]
        Chairman Huizenga. Thank you. I appreciate all of your
    testimony. And with that, the Chair will recognize himself for
    5 minutes for questions.
        I just want to quickly jump on what you were talking about.
    Obviously in your experience with the Council of Economic
    Advisers and then head of the CBO, you have certainly been
    through this. I have had conversations with those companies,
    some who have shifted to fee-based regimes, and they freely
    acknowledge that they are going to make more money doing this
    with fewer clients.
        It is a marketing tool that some are using. And what is a
    little frustrating to me is that this is being somehow
    portrayed that if you don't like this Department of Labor
    fiduciary rule, then you must not like savers. Well, I can tell
    you this. My nearly 86-year-old mother--please don't tell her I
    told you how old she is--doesn't have a broker on Wall Street.
    It is Bruce and Brandon on 8th Street in Holland, Michigan.
    That is who her advisers are. That is who my advisers are.
        These are the people that we go to. It is not some massive
    building in New York or some other place. And I think that it
    is important to note that the reason why the Obama
    Administration did what it did is it could not get a bipartisan
    board of the Securities and Exchange Commission to agree on a
    fiduciary rule, but they were able to get a political appointee
    at the Department of Labor to move ahead with a politically
    driven rule, who ironically and interestingly enough is now
    head of the DNC.
        I think it is just fascinating when this is getting
    portrayed as somehow political when this is really about making
    sure that people like my mom, and people like me coming up, and
    others are going to have the ability, and my constituents are
    going to have the ability to get the advice that they need.
        So as you had pointed out, 41 percent of the U.S. working
    households ages 55 to 64 have no retirement savings, 55 percent
    of households age 55 to 64 have less than $25,000 in savings,
    and only 23 percent of Baby Boomers believe their savings will
    last them through retirement. Even more disturbing is that many
    experts believe that this figure is, frankly, optimistic.
        Rather than put forward a rule that would expand retirement
    saving opportunities for hard-working Americans, the
    Administration pushed through these regulations with costs that
    far outweigh any marginal benefits. Equally troubling is the
    fact that the data released in response to the Department's
    recent July 6th request for information shows that the Obama
    Administration significantly underestimated the negative
    effects of the rule, in particular in reducing access to advice
    for small retirement savers and small businesses.
        So very quickly, I am going to go through the panel, and I
    would like yes-or-no responses on a couple of quick questions.
    Do you support the delay of the applicability date of the DOL
    fiduciary rule beyond January 1st? Mr. Knoch?
        Mr. Knoch. Yes.
        Chairman Huizenga. Mr. Halloran?
        Mr. Halloran. Yes.
        Chairman Huizenga. Mr. Lombard?
        Mr. Lombard. Yes.
        Ms. Firvida. No.
        Chairman Huizenga. No.
        Mr. Holtz-Eakin. Yes.
        Chairman Huizenga. Okay. Do you support the best-interest
    standard as outlined in the Wagner discussion draft? Mr. Knoch?
        Mr. Knoch. Yes.
        Mr. Halloran. Yes.
        Mr. Lombard. Yes.
        Ms. Firvida. It is too vague, but we don't think so.
        Chairman Huizenga. I think that is a ``no.''
        Ms. Firvida. It might be a ``no.''
        Chairman Huizenga. Okay.
        Ms. Firvida. I think it is a ``no.''
        Mr. Holtz-Eakin. Yes.
        Chairman Huizenga. All right. And then do you agree that
    the Securities and Exchange Commission is the expert regulator
    in this space and should act as the lead agency crafting an
    applicable rule regulating the standards of care for
    individualized investment advice? Mr. Knoch?
        Mr. Knoch. Yes.
        Mr. Halloran. Yes.
        Mr. Lombard. Again, yes.
        Ms. Firvida. No, there is a rule for both, the DOL and the
    SEC.
        Mr. Holtz-Eakin. Yes.
        Chairman Huizenga. Okay. So you don't agree that the SEC is
    the actual expert regulator in this? Because Secretary Acosta
    has said that they don't have that expertise.
        Ms. Firvida. We believe that both agencies have expertise--
        Chairman Huizenga. They have a role.
        Ms. Firvida. --that investors benefit from when both sets
    of expertise--
        Chairman Huizenga. All right, reclaiming my time for this
    last minute, do you believe that robo-advisers are better for
    investors than real people giving advice? Mr. Knoch?
        Mr. Knoch. No.
        Chairman Huizenga. Mr. Halloran?
        Mr. Halloran. Absolutely not.
        Chairman Huizenga. Mr. Lombard?
        Mr. Lombard. No.
        Chairman Huizenga. Ms. Firvida?
        Ms. Firvida. We do not believe that it is wrong to get
    advice from robo-advisers and other new technologies.
        Chairman Huizenga. Okay, so I guess that is a ``no.'' Mr.
    Holtz-Eakin?
        Mr. Holtz-Eakin. No.
        Chairman Huizenga. Okay. Well, I am very concerned about
    how this flawed rule will impact the U.S. capital markets, as
    well. I am even more concerned with its impact on small-
    business owners. And Mr. Knoch, I would like you to address
    really quickly, how has the DOL fiduciary affected businesses'
    abilities to offer services for small employer retirement
    plans, such as simple IRAs? And will there be a loss of access
    for retirement services for small businesses that have not
    grown large enough to even consider a 401(k) plan?
        Mr. Knoch. Yes, thank you for the question. This is where
    we have seen probably the largest impact so far of the rule and
    where the financial advisers I work with are most concerned
    about how to comply. It is particularly with simple IRAs. As I
    mentioned in my opening testimony, we have seen the number of
    accounts in those programs drop by 20 percent, and looking
    forward 18 months, we expect those to continue to drop to a
    little over 40 percent.
        I am concerned. And I don't today have a workable solution
    for simple IRAs that our financial advisers are willing to use
    under the DOL rule as currently written.
        Chairman Huizenga. My time has expired, but I will note
    that a study conducted by the U.S. Chamber of Commerce found
    that small-business owners through SEP and simple type IRA
    plans provide roughly $472 billion in retirement savings for
    over 9 million households. And I am afraid that in light of
    this DOL rule, those small-business owners will stop providing
    those plans to their employees.
        My time has expired. The Chair recognizes the ranking
    member for 5 minutes.
        Mrs. Maloney. Thank you, Mr. Chairman, for calling this
    hearing and assembling such a distinguished, outstanding panel
    on a critically important issue for retirees and in protecting
    investors.
        Regrettably, most of us have had the experience in their
    offices, even though we represent very honest and wonderful
    financial institutions and wonderful honest people in the
    business, that as one of you said, there are bad actors out
    there. And we have all had the experience where people come to
    me and say, I put all of my savings with this adviser. They
    said they would be protected. I have lost everything. What do I
    do? There is nothing you can do for them.
        So the reason this rule was put in place was to protect
    people. And President Obama felt passionately about it. And the
    principle is very simple, that you have to put your customers'
    interests first. In other words, you can't put making money for
    yourself over a retiree looking for advice. And it is a higher
    standard because they are retirees, many of whom have very
    little money and it needs to be protected. Maybe that is why
    President Obama felt so passionately about this rule.
        And he told me that often in the negotiations--we are in a
    political body; we negotiate all the time--the opposing side
    wanted the fiduciary rule thrown out, and they would give him
    XYZ, and he would say, no, I want the fiduciary rule. It is
    important to protecting people.
        Now, many of you have said that the regulation is terrible
    and it should be more regulation efficiency. I know firsthand
    that they will work with you. I took six different problems and
    had them removed and changed because it made it honestly better
    and more efficient. And I put the letter in the record. You can
    read it. Every single recommendation I made after much
    negotiation, we got it changed. So they will work with you.
        If you think you can make it more efficient and faster,
    fine. Go to DOL. They will work with you. And by the way, it is
    a Republican leader now at DOL who has called for the rule to
    go in place and says that it will preserve savings for millions
    of Americans. And also, you say you are for investor
    protections. Do you have any ideas for more investor
    protections? I am sure DOL will respond to them.
        This is an important rule that will save people's savings
    and will have professionals--most of whom have that same goal
    anyway--we are just protecting against bad actors. That is what
    this rule does.
        So my question first is to Cristina Martin Firvida. Can you
    talk about the differences between the DOL's fiduciary rule and
    this bill's watered-down standard? And are the protections that
    are included in the DOL rule but not this bill important to
    protecting retirement savers?
        Ms. Firvida. Thank you, Congresswoman. So a big concern we
    have about the discussion draft--and we recognize it is a draft
    only--is that the standard as described is quite vague. We are
    concerned that the current suitability standard could even
    satisfy the benchmark that is described in this bill.
        And if that would be the case, perhaps that is not correct,
    but if that would be the case, we don't see how this bill is an
    improvement on the current situation before the fiduciary rule
    went into place. The fiduciary rule very specifically directs
    how to manage conflicts. It is more than just disclosure. And
    disclosure alone is inadequate.
        We know that when we have done surveys, people who are
    saving for their retirement, if they understand, they hear
    someone say, look, I have conflicts of interest, I will earn a
    commission based on what I recommend, ironically that leads
    someone to trust that adviser more, even though the conflict is
    not managed, even though the conflict is not avoided.
        So disclosure alone is not enough. And the concern we have
    with this bill is, disclosure alone could satisfy the
    benchmark, suitability could satisfy the benchmark. There is
    $40 billion that the DOL estimates for IRA investors alone that
    could be lost to conflicted advice. They have a very strong
    rule, it helps investors, and we strongly support it.
        Mrs. Maloney. Okay. Now, following up on this bill's
    watered-down standard for broker-dealers, it wouldn't even take
    effect for 18 months after the bill is enacted, even though the
    repeal of the DOL rule would be immediate. And that means for
    the first 18 months under this bill, brokers would have no duty
    to act in their clients' best interests.
        The Labor Department, under a Republican Labor Secretary,
    concluded that the cost to investors of delaying this rule for
    even half this long would be absolutely overwhelming. So is it
    fair to say that the cost to retirement investors of this 18-
    month gap would be substantial?
        Ms. Firvida. The cost would be substantial. And something
    that I would like to address in statements that have been made
    this morning, when we talk about the cost of the regulation and
    we talk about that in the absence of the cost of conflicted
    advice to savers, is we are missing the big picture. Conflicted
    advice is not free. It is costing people saving for their
    retirement, people like the AARP members who are here today in
    support of the rule.
        So, yes, a delay of 18 months would be very significant on
    the nest eggs of people saving for their retirement.
        Mrs. Maloney. My time has expired.
        Chairman Huizenga. The gentlelady's time has expired. The
    Chair recognizes the vice chairman of the subcommittee, Mr.
    Hultgren, for 5 minutes.
        Mr. Hultgren. Thank you, Mr. Chairman, again. And thank you
    all for being here.
        Mr. Knoch, I represent a district just--the far west
    suburbs of Chicago, with many small communities in that area.
    It's a wonderful place to represent. You talk about this a
    little bit in your testimony, but I wondered if you could
    elaborate a little bit further about why the Department of
    Labor's rule will result in fewer choices of affordable
    financial advice in smaller communities across the country?
        Mr. Knoch. Thank you, sir. As I talk to the CPA financial
    advisers I work with, perhaps the greatest concern they have
    today is twofold. The biggest one is being exposed to the
    possibility of class-action lawsuits, which is part of the
    utilization of best-interest contract. A number of people on
    the panel here today have discussed a move to fee-based
    accounts. As they correctly mention, fee-based accounts are
    typically for larger investors, which means smaller investors
    will be in relationships with their financial advisers using
    the best-interest contract.
        There is some concern about having that standard applied.
    It is not that our financial advisers are worried about
    accountability. They are worried about being part of class-
    action lawsuits. And they are exiting the marketplace.
        Mr. Hultgren. Mr. Knoch, do you believe M&A to absorb
    compliance costs across economies of scale could contribute to
    monopolies or at least greatly reduce competition in some
    areas? And what will this mean for investors, my constituents
    saving for retirement?
        Mr. Knoch. I'm sorry. Would you repeat that?
        Mr. Hultgren. Yes, I wondered if you believe M&A would
    absorb compliance costs across economies of scale, could
    contribute to monopolies or at least greatly reduce competition
    in some areas, and ultimately what the cost on smaller
    investors would be?
        Mr. Knoch. Yes, I do have some concern about that. Some of
    our financial advisers that we work with have indicated--
    especially ones who are working with smaller investors--that
    they may choose to leave the financial services industry, try
    to sell their practice.
        I think the biggest concern I have with that may be less
    about monopolies--at least in our case. I can certainly see it
    industry-wide--but a lot of times these are small financial
    advisers who are serving small communities. There isn't
    somebody else in that community in a number of cases to take
    over services. So that is where my M&A concern is for our
    organization.
        Mr. Hultgren. Dr. Holtz-Eakin, we all agree that cost-
    benefit analysis is important to policymaking. It doesn't
    happen very often around this place. But especially
    economically significant rules like that finalized with the
    Department of Labor. You are an economist. Do you believe
    President Obama's Administration conducted a credible cost-
    benefit analysis before this rule was put out? And what do you
    think are the most significant flaws in the analysis?
        Mr. Holtz-Eakin. I think there are some concerns on both
    sides of the equation. On the cost side, we think that the DOL
    rule underestimates the litigation costs significantly. And
    that is a concern. I think on the benefit side, the widely
    cited $17 billion number produced by the Council of Economic
    Advisers is not an estimate that I think stands up to close
    scrutiny. We have written on this in the past. There have been
    other critiques of it.
        But it was incomplete in the assets that it surveyed and
    covered. It took rates of return that weren't risk-weighted and
    sort of conventional measures of, what is a real financial
    return. And I think if you poke hard at that, you are not going
    to find $17 billion worth of loss.
        Mr. Hultgren. Okay. Would you agree that the SEC would have
    better perspective for weighing benefits and costs for
    investors than the Department of Labor?
        Mr. Holtz-Eakin. I think they are the primary regulator.
    They are the perfect entity to be doing this.
        Mr. Hultgren. Thanks. Mr. Knoch, back to you. It would be
    helpful if you could speak directly to the merits of the draft
    legislation from Mrs. Wagner from Missouri that we are
    discussing today. What will happen if the DOL's rule goes into
    effect before the SEC is able to implement its own standard?
    And from an investor protection standpoint, wouldn't my
    constituents be better served by a uniform standard that
    applies to both retirement accounts and investment accounts?
        Mr. Knoch. Thank you. I think the biggest thing that will
    happen if the rule is finalized before this bill is enacted is
    the trend that I was describing in my oral testimony will
    continue. We will continue to see a decline in utilization of
    the platforms most often offered to investors with small
    account balances. Direct business, simple IRAs, as I mentioned
    will continue to shrink.
        I do believe that the rule--that the draft bill has merits
    in that it will provide a uniform standard of care. It will
    cover more than just retirement accounts. I think everyone on
    this panel would agree in a best-interest standard being
    applied to financial advisers working with clients. We would be
    in favor of seeing that applied across not just retirement
    accounts, but all of investors' accounts. The financial
    advisers I work with work with the entire person.
        Mr. Hultgren. Thank you. I just have a few seconds left and
    many more questions, and so maybe we will follow up in writing.
    With that, I yield back.
        Chairman Huizenga. The gentleman yields back. The Chair
    recognizes the gentleman from Georgia, Mr. Scott, for 5
    minutes.
        Mr. Scott. Thank you very much, Mr. Chairman.
        We are in this shape that we are in today because, as an
    original co-sponsor of Dodd-Frank years ago, we told the SEC
    that they needed to come up with a rule that would raise the
    broker-dealer standard and, more importantly, harmonize that
    standard with the obligations investment advisers have to
    follow today. And not the Department of Labor. It is the SEC
    that is best suited to do that. Failure of them to take the
    initiative and to do that and recognize the true role that the
    Department of Labor plays, we are wondering here, because the
    great need is harmonizing it.
        Here is what the law said about this situation in terms of
    the fiduciary rule. It says that both the SEC and the DOL have
    jurisdiction over investment advice that must meet a fiduciary
    standard and advice that is exempt from such a standard.
    Specifically, the SEC has jurisdiction over advice to
    individuals, regarding both retirement and non-retirement
    accounts, but only if the advice relates to securities. In
    contrast, the DOL has jurisdictions over advice regarding
    retirement accounts, regardless of whether the advice is
    securities related.
        This means that in many circumstances, both the agencies
    share jurisdiction, while in others, only one agency has
    jurisdiction. And this is enough evidence to know that these
    two entities, DOL and SEC, need to harmonize. They didn't do
    it. So what were we left with?
        We are left with a bill and to move to define the
    fiduciary. And I worked with Mrs. Wagner before on several of
    her bills to do that, was the lead Democrat to do that. But
    because we told the SEC in those bills to do that.
        But right now, this bill that Mrs. Wagner has put before us
    is a very troubling bill. And let me tell you why. For
    starters, this discussion draft--I am glad it is just a
    discussion--will most certainly undermine the SEC's rulemaking
    authority in this space, because the bill says that no
    additional obligations related to the standard of care of
    broker-dealer can added on top of the ones set forth in this
    discussion draft.
        This is worrisome, because what if the drafters of the bill
    got something wrong? I noticed in my quick read through this--
    and keep in mind, I only got this bill yesterday--that dual
    registrants, those firms that dually registered as both broker-
    dealers and investment advisers, is not even mentioned in the
    discussion draft.
        I am also worried about this because what if the market
    evolves? We have seen in the past 10 years how retirement
    savings and investment advice has been flipped on its head
    because of technology. Imagine what it is going to be 5 years
    ahead. So tying the hands of the SEC, being overprescriptive as
    this discussion draft bill is, is dangerous.
        Additionally, this new bill creates an entirely new
    standard that isn't a fiduciary standard or a suitability
    standard. It is something entirely new. And so why are we being
    so prescriptive in drafting of this bill? Why don't we direct
    the SEC, who are the experts in this, to do their job instead
    of tying the hands of the SEC?
        And this bill reminds me of a straitjacket. It is like this
    bill is putting the SEC--it is almost like forcing them to do
    their job, but yet putting these overly prescriptive in here.
        Now, finally, this bill would be devastating to low-income,
    to middle-income, to senior citizens. When you add
    contrapulations and make it much more complex and complicated,
    where you can't even understand it, and you have no
    harmonization in the bill, and you have put on top of that
    prescriptive directions, it is harmful.
        With all due respect to Mrs. Wagner, but this is a very
    troubling bill. I hope we get a chance to work and iron out
    some of these to make it fair to everyone.
        Chairman Huizenga. The gentleman's time has expired.
        Mr. Scott. Especially those at the low-income and our
    seniors.
        Chairman Huizenga. The gentleman's time has expired. With
    that, we will turn to the author of the draft legislation, the
    chairwoman of our Oversight and Investigations Subcommittee,
    the gentlelady from Missouri, Mrs. Wagner, for 5 minutes.
        Mrs. Wagner. Thank you, Mr. Chairman.
        And I certainly appreciate Congressman Scott and the
    ability to work with you, sir. I will say that we have codified
    the standard, best-interest standard in this draft legislation,
    which I think is a key step forward. I want to thank all of you
    for appearing today and for your testimony on the DOL's
    fiduciary rule and the capital markets and how it impacts it,
    as well as the ability of millions of low- and middle-income
    American families to continue receiving retirement advice.
        Dr. Holtz-Eakin, in your testimony, you stated that the
    fiduciary rule as it stands right now was the most expensive
    regulation of 2016. I think you said even the most expensive
    since 2005, with $31.5 billion in total costs and $2 billion in
    annual burdens. You elaborated a little bit about those cost
    mechanisms. First of all, do you want to add anything to that
    in terms of how much of these costs would be passed on to
    customers, consumers, those retail investors? And second, would
    the cost burdens for firms and consumers be similar under the
    best-interest standard envisioned in the discussion draft?
        Mr. Holtz-Eakin. So, thank you, Congresswoman, for the
    question. The cost mechanisms, as I mentioned, really are from
    two sources. One is the increased likelihood of litigation and
    the costs that come from directly litigating, and then in some
    cases, choosing to purchase insurance against litigation costs.
    Those are costs of doing business. They will inevitably be
    passed along to customers in one form or another. That will
    price some people out of investment advice. And then that way,
    that cost is ultimately very much borne by the least affluent
    among the retirement savers. And that is a concern that comes
    through very clearly.
        The second cost really is this move to the more fee-based
    system. And as I mentioned in my testimony, the United Kingdom
    went to this entirely fee-based, eliminated the commission-
    based, and we saw a dramatic increase from 13 percent to 32
    percent in the fraction of firms that required a minimum of
    100,000 pounds.
        Mrs. Wagner. And to the discussion draft, would the cost
    burdens be the same?
        Mr. Holtz-Eakin. No, they will be lower. That is one of
    the--the litigation is clearly going to be a much lower
    standard and it doesn't drive people out of the commission-
    based model, and so you are not driven into a fee-based model
    that is far more expensive.
        Mrs. Wagner. Right. Mr. Knoch and Mr. Lombard, could you
    both please take some time to discuss how the best-interest
    standard described in the discussion draft improves upon the
    suitability standard currently subjected to broker-dealers? Mr.
    Knoch?
        Mr. Knoch. Thank you. I think one of the areas--and I
    marked it in here, and we have had a discussion about this--is
    it requires a broker-dealer to avoid, disclose or otherwise
    reasonably manage any conflict of interest. So there is a
    requirement for disclosure, which we would agree with, as well
    as attempts to avoid and manage conflicts of interest.
        We are also asking financial advisers to uphold a duty of
    loyalty and a duty of care. We have definitions that look
    substantially similar to what is expected in, let's say, fee-
    based investment advisory accounts, as well, under an SEC
    standard. I am particularly pleased with seeing that there and
    applying a standard.
        Mrs. Wagner. Mr. Lombard?
        Mr. Lombard. It is clearly a higher standard than the
    suitability, both duty of loyalty, duty of care, which includes
    the prudent management of client assets. I would also point out
    that this would apply to all accounts, not just retirement
    accounts, and that is important to our clients.
        Also, with the SEC's and FINRA's examination, oversight and
    enforcement capabilities, abilities that are limited at the
    Department of Labor, I think downstream you are going to get
    implementation of a best-interest standard much more
    effectively by having SEC and FINRA's oversight.
        Mrs. Wagner. Mr. Knoch, could you please explain how the
    discussion draft implements an effective and meaningful
    disclosure system--you did a little bit--and effectively
    mitigates material conflicts of interest?
        Mr. Knoch. Yes, this is actually one of the areas where I
    am most pleased with the discussion draft. I think one of the
    areas of disclosure that works very well in the fee-based
    accounts that we have a fiduciary standard today under the SEC
    is the utilization of the Form ADV. This appears to have a
    substantially similar disclosure requirement put at the
    beginning of the relationship. We think that form of disclosure
    works very well. While it adds some due paperwork burden, the
    paperwork burden of a form like this at the beginning of the
    process is far less than what is contemplated by the DOL rule.
        Mrs. Wagner. Quick yes or no, does the discussion draft
    provide a more comprehensive best-interest standard than the
    DOL fiduciary rule by applying to both retirement and
    investment accounts?
        Mr. Knoch. Yes.
        Mrs. Wagner. Mr. Halloran?
        Mr. Halloran. Yes.
        Mrs. Wagner. Mr. Lombard?
        Mr. Lombard. Yes.
        Mr. Holtz-Eakin. Yes.
        Mrs. Wagner. Ms. Firvida?
        Ms. Firvida. I think we answered previously that we feel
    that it is vague, so we don't think so.
        Mrs. Wagner. That is a ``no?''
        Ms. Firvida. I think that is a ``no.''
        Mrs. Wagner. Thank you, Mr. Chairman. I yield back my time.
    Thank you all.
        Chairman Huizenga. The gentlelady's time has expired. The
    Chair recognizes the gentleman from Texas, Mr. Gonzalez, for 5
    minutes.
        Mr. Gonzalez. This is to Ms. Cristina Martin Firvida. Often
    in this committee, my colleagues on the other side of the aisle
    complain about Washington's regulatory overreach with respect
    to the DOL's fiduciary rule. We have heard allegations that the
    Department of Labor has gone beyond its statutory mandate or
    outside its regulatory jurisdiction.
        Is there any indication that the DOL overstepped its
    statutory boundaries in promulgating its fiduciary rule?
        Ms. Firvida. Absolutely not. And multiple Federal courts
    have upheld that view.
        Mr. Gonzalez. Is regulation of investment advice in
    connection with retirement accounts within the scope of the
    DOL's mandate under the Employee Retirement Income Security Act
    of 1974 (ERISA)?
        Ms. Firvida. Yes, it is. And it has extensive expertise
    doing so and has developed dozens of prohibited transaction
    exemptions and enforces them, and through that has a lot of
    expertise that I think we are ignoring today in talking about
    the DOL's lack of expertise.
        Mr. Gonzalez. That is right. Thank you for your response. I
    yield back the balance of my time.
        Chairman Huizenga. The gentleman yields back. The Chair
    recognizes the gentleman from Maine, Mr. Poliquin, for 5
    minutes.
        Mr. Poliquin. Thank you very much, Mr. Chairman. I
    appreciate it. And thank you all very much for being here
    today.
        When someone is in the business of providing advice or
    services, it is common sense for all of us to realize that
    folks and firms are attracted to the biggest accounts. They
    just are. If you are an accountant, you want a larger business
    because they pay a bigger fee. If you are an attorney, you want
    a bigger client because they pay a bigger fee.
        And if you are in the business of selling real estate, you
    want to sell a $500,000 home instead of a $200,000 home because
    your commission is bigger. It is just common sense.
        Now, if you are in the business of providing insurance
    products, or retirement plan advice for savers, you are
    obviously still attracted to the larger accounts because they
    pay a bigger fee. This is common sense. I don't worry about
    folks who have large accounts. I really don't. They are going
    to do fine. They are going to get the best products. They are
    going to get the best advice. And they are going to do just
    fine.
        I will tell you who I worry about. I worry about the folks
    that I represent in northern Maine. We have a highly rural
    State. We have a small number of large businesses. But we have
    the most honest, hard-working, small savers, small investors
    that you could find anywhere in our country.
        I worry about a single mom with two kids who is trying to
    put aside $25 a week to save for her kids who might want to go
    to a community college, get an associate's degree. I worry
    about a teacher in Lewiston who is trying to make ends meet. I
    worry about a boat builder in downeast Maine who is trying to
    save for his or her retirement.
        Now, we know some of the facts here. We know that if you
    increase regulations in this part of our economy or any other
    part of our economy, the costs go up. And when the costs go up,
    it means the rate of return on your savings go down. It means
    your nest egg is smaller as you get older into the golden
    years.
        And we also know that the number of product offerings, the
    choices that you have go down, and we also know that the number
    of firms that provide retirement advice go down because they
    are leaving the market. We know this. The facts are in front of
    us. You can't argue the facts. They are what they are.
        Now, my mom is 89. My dad is 87. I am very close to my
    parents. I love them to death. They cannot use a cell phone
    anymore. So we heard today that if over-regulating this
    industry causes folks with small accounts, not the big folks,
    folks who have $25,000, $30,000 in savings, and they are
    counting on that so they can live in dignity for the remainder
    of their lives, they might have to go to a robo-call. You have
    to be kidding me.
        So, okay, let's say you are 70 and you have a small
    account. What should your asset allocation be? Should you own
    some stocks or should you be all in fixed-income because you
    don't have any more current income coming in, you are retired.
    Should you buy an annuity? Maybe all your money should be in
    cash and money market funds to pay those medical bills and you
    need access to that cash on a regular basis. Who is going to
    tell them that?
        Who is going to tell them? How about that single mom who is
    working 2 jobs at the diner and at the convenience store trying
    to save $25 a week? Who is going to tell her how to invest that
    money?
        Here is what I worry about, Mr. Chairman, is that we have a
    potential here of so over-regulating the people who provide
    good advice to our small savers in this country that you are
    driving away that advice. And if the advice is still there, you
    are driving up the costs so high that their rate of return over
    time is going down. That is who I worry about.
        Did I get this right, Mr. Holtz-Eakin?
        Mr. Holtz-Eakin. I think your concern is entirely well-
    placed, sir.
        Mr. Poliquin. Mr. Knoch, am I pronouncing it right? You are
    in this business. Mr. Halloran, you are in this business. Have
    you folks started to increase your minimum account size such
    that the folks at the bottom aren't going to get advice, your
    advice? Or are your costs going up so far or is the liability
    so great because of these increased regulations that you say,
    ``I'm out of here?'' And who is going to provide that advice to
    the little guy? Tell us. You are in the business.
        Mr. Knoch. As I mentioned, we have seen our financial
    advisers discontinuing service or serving the small
    marketplace--
        Mr. Poliquin. Okay, Mr. Halloran, how about you?
        Mr. Halloran. So, we are on the manufacturing side. And the
    way I could speak to that is we like large accounts, but our
    wheelhouse is not there. We provide income products to people
    who need lifetime products.
        Mr. Poliquin. And does this regulation hurt you providing
    that advice to small savers?
        Mr. Halloran. They are not getting that advice about our
    products.
        Mr. Poliquin. There you go. Mr. Lombard?
        Mr. Lombard. So one of the ways to avoid the more onerous
    aspects of this is to move to a level fee account. Level fee
    accounts at my firm average 0.95 percent. Brokerage accounts
    average 0.55 percent. That is almost double the cost by
    sidestepping more onerous aspects.
        Mr. Poliquin. Thank you, sir. Thank you, Mr. Chairman.
        Chairman Huizenga. The gentleman's time--
        Mr. Poliquin. Let's all get on the same page and agree with
    the facts.
        Chairman Huizenga. The gentleman's time has expired.
        Mr. Poliquin. We do not want to over-regulate our small
    savers such that they lose the ability to plan for their
    retirement. Thank you, Mr. Chairman.
        Chairman Huizenga. The gentleman's time has expired. The
    Chair recognizes the gentleman from Massachusetts, Mr. Lynch,
    for 5 minutes.
        Mr. Lynch. Thank you, Mr. Chairman. And I want to thank the
    panelists for helping the committee with its work.
        Mr. Chairman, I would ask unanimous consent to submit for
    the record a Wall Street Journal opinion and commentary by
    Secretary of Labor Alexander Acosta supporting the fiduciary
    rule, and also a letter to you and to Mrs. Maloney of New York
    authored by Phyllis Borzi, a former Assistant Secretary of
    Labor for the Employee Benefits Security Administration from
    2009 to 2017.
        Chairman Huizenga. Without objection, it is so ordered.
        Mr. Lynch. Thank you, sir.
        I appreciate the comments of my friend from Maine, the
    beautiful State of Maine. However, it is a two-edged sword in
    this case, where you would also like the advice that is given
    to the most vulnerable investors, AARP members, many of whom
    are here, and it is a good thing you are here. It is a good
    thing you are here to try to hold people accountable to make
    sure that future retirees, and current retirees, as well, are
    treated fairly under the law.
        But we want vulnerable investors, those at the lower end of
    the investment scale, to get advice that is in their best
    interest, and that is what the fiduciary standard requires.
    Under the proposed standard in Mrs. Wagner's draft, a broker
    adviser could simply give advice to purchase or recommend the
    purchase of whatever product gives the highest commission, as
    long as it is ``suitable.'' That is a very loose standard. And
    we have seen abuse in that regard.
        This has been a 6-year process. And it has been a long
    fight. It has been a long fight. And I just want to point out
    the simplicity of this. Those on our side, we would like
    investors--especially retirees--to get advice that is in their
    best interest. We would like to compel those who advise them to
    do so in a way that is in the investor's best interest.
        Also, people in my district think this is already the law.
    They are shocked when they find out that brokers and advisers,
    financial advisers are not required to act in their best
    interests and there is no fiduciary duty to do so.
        So the visceral opposition to implementing a simple
    fiduciary duty that requires advisers to act in the best
    interest of their clients, the opposition to that sort of makes
    our argument. We are asking for something very, very simple
    here. We are asking that we maintain the integrity of our
    financial markets. We are asking to persuade Americans to
    invest in their retirement especially.
        And we should do so in a way that actually is protective of
    those interests and protective of our retirees. And right now,
    that is not the case. Now, there has been a 6-year discussion
    between the SEC and the Department of Labor. They have worked
    together on this. The Department of Labor has had the statutory
    authority to define fiduciary, what that means, since 1975. I
    am a former labor lawyer. I worked in ERISA quite a bit. This
    is the first time in the country's history that we are changing
    this standard, and it is in response to the way the industry
    has evolved and the way products have evolved.
        The SEC does not have any of the authority to manage or
    oversee many of the products that are being sold to our
    retirees each and every day. So the Department of Labor is the
    proper agency to rule on this. I know that folks are asking for
    a delay, but I think we have had 6 years of discussion. The
    American people have gone without this protection for some time
    now. And I think it is entirely reasonable that we go forward
    with this. I oppose Mrs. Wagner's bill. I think it strips
    Americans of a basic protection that they need for their
    retirement.
        And with that, Mr. Chairman, I yield back the balance of my
    time.
        Chairman Huizenga. The gentleman's time has expired. The
    Chair recognizes the gentleman from Ohio, Mr. Stivers, for 5
    minutes.
        Mr. Stivers. Thank you, Mr. Chairman. And I applaud the
    sponsor of the discussion draft for this bill. I think it will
    provide some needed relief for a lot of investors.
        We saw this play out in Great Britain. Mr. Holtz-Eakin
    alluded to that earlier. Essentially, what this fiduciary rule
    says is, if you are rich, it is okay, you will be able to talk
    to a person. If you are poor or middle-class, you are at risk.
    You have to get what is called robo-advice. That means you talk
    to a computer. And it means you are not going to really get
    real advice. Imagine getting your investment advice from Siri.
    That is what is going to happen to a lot of poor and middle-
    class people.
        The other thing that Mr. Holtz-Eakin brought up is that
    millions of dollars of middle-class and lower-class investment
    savings are going to be eaten up by fees and minimum balance
    requirements that they can't meet. There will be extra fees.
    And the cost of compliance is going to really hurt them.
        This is an issue for people of lower means in this country
    who are being hurt and trampled on by a giant government. I do
    want to admit to the record an article in Bloomberg about the
    AARP's role in this standard and what they did. I think it is
    important that we admit it to the record, without objection.
        Chairman Huizenga. Without objection, it is so ordered.
        Mr. Stivers. Thank you. My first question is to Mr.
    Lombard, to follow up on something the chairman asked earlier
    about the differences between the Securities and Exchange
    Commission and the Department of Labor. Can you help us
    understand the difference in their expertise with regard to
    investment, just in a brief explanation?
        Mr. Lombard. I can comment on the SEC's role. They have
    worked as our primary regulator since I have gotten into this
    business 35 years ago. During that period of time, I headed our
    advisory services. They audited our advisory activities
    probably on an every 3-year cycle. So I have seen them. I have
    never had the Department of Labor in as an auditor or an
    overseer in the 35 years I have been with Janney Montgomery
    Scott.
        Mr. Stivers. Thank you, Mr. Lombard. And that speaks mostly
    for itself. Why is it that they have never come in and audited
    you? What is their role in investment?
        Mr. Lombard. Their role, up until this point, has been
    limited to investment retirement plans, not individual
    retirement accounts.
        Mr. Stivers. Let me be more specific. Do they have any role
    in regulating investments and appropriateness of investments?
        Mr. Lombard. On the retirement plan side, I believe they
    do.
        Mr. Stivers. For individual investments and the choosing of
    investments, does the Department of Labor have any expertise in
    that?
        Mr. Lombard. I think that is what is being argued right
    now.
        Mr. Stivers. The answer, I believe, is ``no,'' but I don't
    think that they have a big experience in that.
        Mr. Halloran, can you tell me--
        Chairman Huizenga. Will the gentleman yield on that point
    briefly?
        Mr. Stivers. I would be happy to yield.
        Chairman Huizenga. I know in conversations that Mr. Acosta
    has had at various times out publicly, he has said that the
    Department of Labor is ill-suited to do this and that the
    Securities and Exchange Commission does have that expertise. So
    I just wanted to make note of that.
        Mr. Stivers. I will let the Secretary speak for himself.
    And thank you, Mr. Chairman. Reclaiming my time--
        Ms. Firvida. If I may, however--
        Mr. Stivers. No, ma'am. This is my time. You were asked
    some questions. Mr. Halloran, I am curious if you believe the
    current DOL fiduciary rule disadvantages annuities compared to
    other investments?
        Mr. Halloran. Significantly, actually. As I was stating
    before, we don't typically serve the wealthy. At least they
    don't have as great a need for this kind of product as middle-
    class Americans do. We are talking about people with smaller
    balances who need to--one of the easiest things to do in
    investing is to invest, is to accumulate. That is not the hard
    part of the job, typically.
        And actually, in that respect, Americans have done a pretty
    poor job. But then to take that money and stretch that over the
    rest of your retirement life, and potentially two lives, that
    is a very difficult task. And that is precisely what annuities
    with living benefits do.
        Mr. Stivers. Thank you. So this rule essentially
    disadvantages a tool that many middle-class and low-income
    people can use to preserve their retirement and their quality
    of life in retirement? Is that correct?
        Mr. Halloran. Without question. We have already seen that.
        Mr. Stivers. Thank you. I will just finish by allowing Mr.
    Holtz-Eakin maybe to expand on what I talked about at the
    beginning about how this rule impacts poor and middle-class
    people and what it means to their future. Mr. Holtz-Eakin?
        Mr. Holtz-Eakin. I think it is a very simple story, which
    is the rule was intended to provide high-quality advice, but
    that is only going to work if you get some advice at all. And
    the net impact of the rule is to put many of the lower-income
    smaller savers out of the ability to get any advice at all.
        Chairman Huizenga. The gentleman's time has expired.
        Mr. Stivers. Thank you, I yield back.
        Chairman Huizenga. And at the request of the ranking
    member, we do have a guest here who is a member of our full
    Financial Services Committee, but is not on this subcommittee.
    And without objection, the gentleman from Maryland, Mr.
    Delaney, is permitted to participate in today's subcommittee
    hearing. Mr. Delaney is a member of the full committee, as I
    had pointed out, and we appreciate his interest on this topic.
        And with that, I am willing to recognize you for 5 minutes.
        Mr. Delaney. Thank you, Mr. Chairman, for permitting me to
    participate in this hearing. And thanks for calling it.
        The reason I asked to participate is because I have been a
    strong supporter of the fiduciary rule. And you know I found
    this conversation very interesting because if you didn't know
    better, you would think the fiduciary rule prevents people from
    owning annuities. It, in fact, doesn't prevent people from
    owning annuities, for example. It discourages people from
    selling annuity products if when you include all the fees it is
    deemed to be not in the best interest of the client.
        And I think there is somewhat of a broad agreement here
    that investment products that are in a client's best interest
    is a more important standard than the current standard, the
    suitability standard. I think in a perfect world, everyone here
    would agree that we would love for every client to receive
    investment advice that is in their best interests as opposed to
    just suitable.
        So the issue seems to be that because of this rule, which--
    trust me, I agree that it would be terrific if the SEC would
    have put forth this rule. They do probably have more expertise
    in the area, but they didn't do it. And I think a future where
    the SEC comes up with a rule for all investment advice and we
    synchronize the fiduciary rule from the Department of Labor
    with that could be a great outcome. But I wouldn't want to
    delay the Department of Labor fiduciary rule, because it seems
    to be the forcing function to get the SEC to finally try to do
    something on this.
        So I think that is a false choice. I think we can have the
    SEC do something on this, and then we can see what they come up
    with, and we could look at the fiduciary rule, and we could
    synchronize them in one standard.
        But what I find amazing about this discussion is, the
    notion is that the current business model of, say, your firm,
    Mr. Lombard--and I am sure most of the--the overwhelming
    majority of your advisers do a terrific job for their clients.
    Your firm has a great reputation. It has a good brand. The name
    is on the door. And people wake up every day and do the best
    thing for their clients.
        But the issue with the fiduciary rule in the eyes of three
    of the four guests here seems to be that for some reason
    because of this rule we will be left with a world that it is
    all robo-advisers and there is no innovation and there is no
    adaptation to this new standard. And that just seems so
    contrary to how we think about our capital markets and our
    entrepreneurial economy.
        Because as someone who started two financial services
    companies from scratch and took them public on the New York
    Stock Exchange prior to being here, and specifically started
    companies that focused on opportunities that were created by
    larger financial institutions who weren't adapting to the
    market's needs, either because they had legacy systems or
    legacy compensation structures or some legacy practices that
    made them hard to respond to the model, I guess my question for
    Mr. Lombard and Dr. Holtz-Eakin is--and I am a huge admirer of
    your work, by the way, so thank you for being here--why do you
    think for some reason that suddenly the private economy, the
    entrepreneurial economy of the United States won't take this
    new standard, and if your firm can't respond with a high-
    quality product where human combined with technology allows
    people to get advice at a best-interest standard, why don't you
    think all kinds of entrepreneurs raising all kinds of private
    capital won't start all kinds of new businesses to exactly meet
    that need and outcompete you if you are stuck throwing your
    clients out of your firm or putting them on some automated
    Siri-like system?
        I just don't understand why you would bet against the
    entrepreneurial economy of the United States. Mr. Lombard?
        Mr. Lombard. So, we have already made the innovation. We
    have brought down our minimums on advisory fees fivefold, from
    $25,000 to $5,000. We still have upwards of 10,000 accounts
    with balances less than $5,000. We have certain fixed costs
    that those clients, if we charge those fixed costs to them,
    would pay an unreasonable fee.
        Mr. Delaney. All right, so reclaiming my time back, so
    hearing that, I would say, okay, I am going to start a new
    company without those fixed costs and out-compete you and
    provide great service to these people. Why don't you think that
    will happen? Because that is how it happens everywhere in this
    economy.
        Ms. Firvida. And it is happening.
        Mr. Delaney. Right, Dr. Holtz-Eakin.?
        Mr. Holtz-Eakin. I have two responses to this. First of
    all, it is a fantastic question. It is right on the mark. And
    there is a broad concern which is also going on in the
    financial services about the birth rate of firms in the U.S.
    economy, which has been declining steadily, and which a few
    years ago actually fell below the death rate of firms. And that
    is a troubling trend.
        Mr. Delaney. There are other reasons for that.
        Mr. Holtz-Eakin. So I worry that the regulatory burden
    contributes to the inability to enter and provide the
    competition you are describing.
        Mr. Delaney. I agree with you in other markets.
        Mr. Holtz-Eakin. And I say this lovingly: I hope you are
    afraid of going out of business every day. You want that kind
    of competition.
        The second thing I am worried about is exactly the mirror
    image of the concern that has been expressed earlier, which is,
    how long does that take? And in the interim, what happens to
    everybody who had advice and is now gone?
        Mr. Delaney. Transitions are tough, I acknowledge that. And
    we ought to be smart about that. But I just think people
    innovate out of this issue.
        Chairman Huizenga. The gentleman's time is--
        Ms. Firvida. And if we could add, it is that innovation
    that is serving the small accounts.
        Chairman Huizenga. I'm sorry, the gentleman's time has
    expired. The Chair recognizes the gentleman from Arkansas, Mr.
    Hill, for 5 minutes.
        Mr. Hill. Thank you, Mr. Chairman. And thanks to the panel
    for being with us today.
        And this is a subject--I am relatively new to Congress,
    only 2\1/2\ years, but I spent 35 years in the financial
    services business. And a good part of that 35 years was doing
    business with individual retail investment clients, both in a
    capacity of being a trustee and running a trust bank operation,
    as well as a broker-dealer. So I am somewhat familiar with this
    issue and account sizes of all sizes, including the young
    family starting out with just a few dollars a month.
        I have sort of grown irritated with the previous
    Administration and now this Administration on this topic. And I
    really associate myself with many of the comments made by my
    friend from Georgia, Mr. Scott. At its heart, this is a failure
    of governance because the statute was quite clear, asking the
    Commission to do a study on this matter and then recommending
    action. And it is a failure of the previous Administration
    through its Treasury and OMB regulatory function to insist that
    the SEC and the DOL work this out and create one uniform
    standard in this arena instead of creating the mess that we
    have now of expensive, duplicative, conflicting regulation.
        And to me, I have just called it--it is part of the war on
    savings. DOL has done that by watering down the importance of
    long-term investment returns by muddying up the definition of
    what is preeminent in looking for long-term returns.
        The previous Administration proposed a tax and did tax
    investment income. They proposed to cap IRA balances, claiming
    that you couldn't save unlimited money in your IRA. People
    propose still today forcing people to Roth their IRAs, which I
    think is a bad idea. And ultimately, because it has been so
    hard to save, even propose that the government set up savings
    accounts and cut out the private sector completely.
        So it has been a disturbing trend in trying to encourage
    retirement savings. We should be doing everything we can to
    remove regulatory paperwork, cost barriers to faster and better
    retirement.
        And to also say that people aren't concerned about our
    seniors, I think FINRA in the early 2000s led that work with
    notice to members and sweep examinations across the whole
    investment industry on breakpoints, on mutual funds, and
    educating consumers about that, variable annuity product sales,
    how those should be done, what kind of accounts they are
    appropriate for, what kind of accounts they are not appropriate
    for, and then sweep exams on investor sales practices for
    seniors.
        So this is not a new issue in the investment industry, and
    it should be done in the right way, which is through the SEC
    and the investment regulatory environment, coordinated with
    whatever views Labor has on ERISA-based accounts.
        There are a couple of things I am concerned about. One,
    think of all the small broker-dealers out there, small
    investment managers who are now told they were going to get a
    good delay of this rule and get improvements to it, have maybe
    the commission take a look at it with the incoming
    Administration, our Trump Administration, and then told, no, it
    is going to go forward.
        So I have heard from a lot of small investment advisers in
    Arkansas that if the fiduciary rule is not delayed by the end
    of August, companies will have to start millions of dollars to
    prepare for provisions to the rule that may actually go away or
    be changed. And I don't think that is fair. That is what I call
    the failure of governance to get this right on the front end.
        And then I am concerned about this State law trend that was
    mentioned earlier. And Mr. Halloran, I think on July 1st,
    Nevada has a law going into effect on fiduciary standards on
    broker-dealers for all accounts, and other States are
    considering that. Again, that is going to create even more
    conflict in this space when we are trying to get a uniform
    standard that applies to investment broker-dealers, insurance
    people and others in this space.
        Can you talk about how these State actions are inconsistent
    with the Federal securities laws and what your concerns are on
    that?
        Mr. Halloran. Yes, sure. So we don't actually know
    everything about Nevada that we should. It is kind of vague in
    itself, as well. But the greater concern here is that if you
    are looking for harmonization, which we think is a very good
    thing from a regulatory standpoint, then having 50 States doing
    50 different things really doesn't help that in any regard at
    all.
        Certainly that increased cost--we deal with that from the
    insurance aspect all the time. We have 50-plus insurance
    regulators that we have to deal with on a State-by-State basis,
    every time we do something from an insurance product, and so
    forth. So we know the difficulty in doing that. It works. And
    it works slowly. But adding on legislative State actions to
    that just mucks up the water that much more.
        Mr. Hill. Thank you. And I yield back.
        Chairman Huizenga. The gentleman's time has expired.
        The gentleman from Minnesota is recognized for 5 minutes.
        Mr. Emmer. I thank the Chair, and I thank the panel for
    being here today.
        I want to focus on one specific area probably because of my
    professional background. And why don't we start with Mr.
    Halloran? Would you agree with Secretary Acosta that the
    private right of action, the right to sue advisers and their
    firms, is the biggest flaw with the rule, the DOL rule?
        Mr. Halloran. It is certainly, if not the biggest, among
    the biggest, yes.
        Mr. Emmer. There appears to be some misunderstanding of the
    litigation risk under the DOL fiduciary rule. Many people say
    that the litigation risk will not arise until January 1st of
    2018, but I have heard this may not be correct. My
    understanding is that a lack of clarity and certainty regarding
    the rule has created concern about a very substantial
    litigation risk for advisers starting on June 9th.
        Again, Mr. Halloran, can you explain?
        Mr. Halloran. This doesn't get a lot of press or publicity,
    but the actions by class has always been present in ERISA rule.
    By taking ERISA law and applying that to IRA accounts, as an
    example, you are now exposing financial advisers even as of
    June 9th to a potential class-action litigation, because just
    giving rise to advice of moving out of a 401(k), for example,
    rolling over to an IRA. So, yes, that is a real and present
    concern, absent any private right of action that arises from a
    best-interest contract.
        Mr. Emmer. You believe it is a real concern starting on
    June 9th?
        Mr. Halloran. Oh, yes.
        Mr. Emmer. Also, as long as I have focused on you, why is
    the litigation risk so great under the rules, as it is
    constructed? I am just going to tell you, as a lawyer, 1,000
    pages makes it a huge litigation risk to have a rule that long.
        Mr. Halloran. Yes, so that is a great point. It sounds very
    simple, we want a best-interest standard, we want to act in the
    best interests of our clients. The rule is 1,000 pages. The
    preamble was 204 pages. There are many, many ambiguities we are
    still going to deal with, notwithstanding changes that have
    been made, with, frankly, not a whole lot of guidance yet,
    either.
        So there is more concern about what we don't know
    necessarily than what we do know. We don't really have case law
    to look to right now to understand the actual consequences of
    this private right of action and these kinds of actions. All we
    can look to is what we see in other businesses. And it is of
    significant concern.
        Mr. Emmer. And unfortunately, in order to get that body of
    case law, you are going to have to have a lot of people suffer
    in courts of law, and you are going to have to pay a lot of
    attorneys, which I suppose the bar is probably not too
    disappointed with.
        Mr. Lombard, my understanding is--and I am hoping because
    of your relationship with the current Chair of SIFMA--my
    understanding is that SIFMA has conducted a survey of its
    members about the effects of the rule. Are you familiar with
    that at all?
        Mr. Lombard. I am aware that there have been surveys. There
    have been several of them. I am not sure I can quote their
    exact findings.
        Mr. Emmer. Can you give me an idea? Do you know what the
    client experience has been to date and what effect the rule has
    had on their ability to serve their clients?
        Mr. Lombard. As I said, there has already been disruption.
    There is limited product selection in certain areas,
    specifically fixed-income. Some of the members of SIFMA have
    stopped selling mutual funds. Some have stopped offering
    commission-based brokerage accounts in their retirement space.
        As I also pointed out, costs are rising as many firms ask
    their clients to move into fee-based accounts, which are more
    expensive than traditional brokerage accounts.
        Mr. Emmer. I think a lot of people agree that the time has
    come for some kind of fiduciary best-interest rule in this
    industry. But the rule as it is drafted--and I covered one area
    that is of big concern to me, and there are others--and
    unfortunately, the way it works around here is we have to step
    in and out, so I am assuming that people have covered some of
    these.
        But I guess I would like to ask the panel, if the rule
    stays in effect, what changes would you like to see to make it
    more workable to allow advisers to sell products and services
    that they offer their clients? And for me, it is the lower end,
    the entry-level folks that we are all concerned with. We want
    to make sure they get the right advice.
        Why don't we just start on this end?
        Mr. Knoch. So if the rule remains in effect, there are five
    specific things that the FSI would want to see changed in the
    rule. One would be streamlining the advice documentation and
    disclosure. Two, is creating a single best-interest standard
    applicable to all investors. Three, is revising and broadening
    the reasonable compensation rules. Four, is revising the rules
    for IRA rollovers. And five, is expanding the rule's
    grandfathering provisions.
        Mr. Emmer. And my time has run out, it looks like, so I
    will be in touch with the rest of the panel. Thank you.
        Chairman Huizenga. The gentleman's time has expired.
        The Chair recognizes the gentleman from New Jersey, Mr.
    MacArthur, for 5 minutes.
        Mr. MacArthur. Thank you, Mr. Chairman.
        I really appreciated Mr. Scott's remarks earlier. There are
    not that many issues where both parties actually want the same
    outcome around here. We debate a lot of things back and forth.
    This may be one of those areas. I don't see that much daylight
    between what any of us want. We want investors to be protected
    with the optimal outcomes and the least costs. I don't think
    there is anybody on either side of the aisle who wants anything
    different. So if there is ever an issue for us to work together
    on and figure out the best way to get there, it seems to me
    this is one of them.
        I have a very basic question first for Mr. Lombard. You
    mentioned in your opening remarks that your clients are
    confused by different sets of rules applying to investment
    accounts and retirement accounts. They are not alone in being
    confused. I like to think I am a pretty sophisticated investor.
    I have made my living on investments for some years now. I
    don't understand the different kind of rules that apply.
        I don't think I have a good grasp on what the actual legal
    standard is for different kind of advisers. So if you could
    help my ignorance, for starters, I would appreciate it. What
    are the current rules that apply to different kinds of
    investors, briefly?
        Mr. Lombard. There is the suitability rule that applies to
    broker-dealer activities. There is the SEC fiduciary standard
    that applies to investment advisory activities. And now there
    is the ERISA Department of Labor rule that applies to the
    retirement space that heretofore applied to retirement plans if
    you were deemed a fiduciary.
        Mr. MacArthur. Do you think most advisers are crystal-clear
    on what their duties are as they deal with different kinds of
    clients?
        Mr. Lombard. It is not just clients, sir. It is also
    advisers, people who have been in the business for decades are
    just coming to grips with these new regulations.
        Mr. MacArthur. I asked maybe 2, 3 months ago my own
    advisers--I asked three of them what the standards were that
    applied to them. None of them gave me a clear answer, which is
    why I am asking you, none of them. They are all very smart. I
    rely on these people to not make too many mistakes with my
    investments.
        So we clearly need a clearer standard. Is there anyone on
    the panel who doesn't support a single standard?
        Ms. Firvida. We support--AARP certainly supports a single
    standard as long as the standard is a fiduciary standard. And I
    would agree that there is confusion, and that confusion is
    creating the demand for a single standard. I think that is
    absolutely where the market is headed and where consumer demand
    is at.
        Mr. MacArthur. Okay. Then it is obviously incumbent on all
    of us up here to figure out that standard with the most clarity
    and without the potential for litigation, because let's face
    it, that is a real issue. A single standard that does nothing
    but line the pockets of trial lawyers, either with individual
    lawsuits or class-action lawsuits, isn't good for anybody. That
    is not good for anybody.
        It is not good for--so I had a question, Ms. Firvida, for
    you, too. You mentioned before that you were okay--I think you
    were the only one who suggested you were okay with robo-
    advisers. And forgive me if you have addressed this. I had to
    step out.
        Ms. Firvida. No, I would be very happy to.
        Mr. MacArthur. I just want to better understand where you
    think robo-advisers are a better--and maybe I am putting words
    in your mouth, tell me if I am--but do you think that is equal
    to or better than live advice?
        Ms. Firvida. We really appreciate the opportunity to expand
    on that, on that question especially, since the question of
    robo-advice has come up several times in this hearing. The
    point that we would like to make is related to the point that
    Congressman Delaney made. There is a lot of innovation
    happening in the products and services that are being offered,
    and some of those are technological in nature. So robo-advisers
    is part of the innovation that is helping serve Americans
    saving for retirement, especially at small-dollar accounts. It
    can provide a lot of value, and it can provide fiduciary
    services.
        And I will add, I understand that everyone here except for
    myself said, no, they don't believe robo is a good idea. But
    many traditional firms are adopting robo-services. The record
    is replete with examples of this. And those are traditional
    firms that many of the organizations testifying today are--
    those are firms--
        Mr. MacArthur. I hate to cut you off--
        Ms. Firvida. --that are members of those organizations. So
    I think robo-services will be a part of the landscape even for
    traditional firms.
        Mr. MacArthur. My time is--
        Mr. Halloran. May I respond to that, as well?
        Mr. MacArthur. My time has expired, but I will say--I just
    want to add this. There probably is a place for that, but let's
    not drive people away from human interaction where a human
    being can really understand the needs of another human being.
    Let's not force people into that because we have ruled out the
    other type.
        Just one last thing, Mr. Chairman, if I can beg your
    indulgence. Mr. Lombard, I didn't write down your answer to my
    question. I would be grateful if you would send that to my
    office in writing.
        Mr. Lombard. I would be happy to.
        Mr. MacArthur. Thank you. I yield back.
        Chairman Huizenga. The gentleman's time has expired.
        The gentleman from Ohio, Mr. Davidson, is recognized for 5
    minutes. And I am wondering if he would briefly yield to the
    Chair?
        Mr. Davidson. Thank you, Mr. Chairman. And I yield to the
    Chair.
        Chairman Huizenga. Thank you. I just wanted to--I know that
    there was an answer to that, and I was hoping that you would be
    able to allow that and indulge it. Because I have to tell you,
    again, I love my mother, but she is not going to be on a
    computer to figure out how in the world she is going to manage
    her investments. She is not going to go through a voicemail
    tree when she is having a hard time and difficulty hearing it.
    It is tough enough getting prescriptions, much less
    investments.
        So with that, I would yield back to the gentleman.
        Mr. Davidson. Thank you, Mr. Chairman. And thank you all. I
    have really enjoyed the dialogue that we have had here today.
    And I think it is an important issue that we address, because
    we really do have to protect the ability of people to save for
    their retirement.
        I guess my question is really basic, in the sense that the
    premise--it seems to me that the premise of why you would
    invest in the market is you believe the market works. You
    believe that there is a path that would produce better
    investment alternatives than--and therefore, what is in the
    best interest of the saver is something that could be discerned
    through the forces of the market.
        And I just wonder if the premise of this assumes that these
    people who have money--I think we can agree, without going down
    the line, that it is their money that they are saving--that
    they can't know who they should trust without the Federal
    Government in this case, particularly the Department of Labor,
    telling them who they can trust, and saying, hey, we are adding
    another layer of regulation in this.
        So we need the Federal Government to tell us that it is
    okay to invest with these sorts of investors. We already have a
    lot of regulation from the SEC. This rule adds a layer. And as
    has been shared by a number of folks, the concerns of what
    happens to those savers--I talked with some investment advisers
    in the Eighth District of Ohio. And here is a story.
        Darrell and Cynthia are a dual-income family, a young
    couple in their early 30s with 2 small children. Both have
    solid careers and are making ends meet. A year earlier, Cynthia
    lost her job, and because she didn't have a solid financial
    understanding, she withdrew roughly $20,000 from her 401(k),
    rather than rolling it over to an individual retirement
    account. After taking huge Federal and State tax hits, they
    parked the money in a savings account at a bank and left it
    there for several years because they didn't know how or where
    to invest it.
        The couple knew a financial adviser from their church
    activities and they sought his help after becoming frustrated
    with the very low return their money had earned in the bank.
    The financial adviser shared basic financial concepts with that
    couple that they had never heard about, compound interest, the
    benefits of tax-deferred IRAs, and why parking retirement
    savings at a bank savings account is not as good of a path as
    something with better yields.
        Darrell and Cynthia were frozen in fear because they lacked
    fundamental financial knowledge and made a bad decision by
    cashing out the 401(k). They have now moved their money into a
    retirement option that is right for them, and they are making
    smart financial decisions with the input from their financial
    representative.
        Under DOL's fiduciary rule, millions of Americans like
    Darrell and Cynthia would be forced to fend for themselves and
    likely make similar mistakes, like cashing out their retirement
    savings too soon, and paying high fees and fines, which really
    alludes to some of the problems with ERISA in the first place
    and puts DOL already at too central of a role in how people
    manage their money.
        As a former small business guy, we use simple and separate
    IRAs, simple IRAs. And one of the concerns I have is that many
    savers have this from small employers. Small businesses are a
    huge part of the growth in employment in our country. Mr.
    Knoch, how does the DOL fiduciary rule affect a business's
    ability to offer services for small employer retirement plans,
    such as simple IRAs?
        Mr. Knoch. Thank you, sir. I share the same concern you
    share, as well. This is the area where we have seen the largest
    impact based on the prospect of the rule, as well as its
    initial implementation. Simple IRA accounts at our firm are
    down 20 percent since 2016, and we forecast that simple IRA
    accounts will be down over 40 percent over the next 18 months.
        Mr. Davidson. Thank you for that. And that is a big
    concern. I will mention, as time flies by, that in 2011, DOL
    estimated consumers who invest without professional advice make
    investment errors that collectively cost them $114 billion per
    year. To anyone's knowledge on the panel, has DOL factored
    these statistics into its economic analysis for the rule? And
    how would those costs affect the rule?
        Chairman Huizenga. And this has to be very quick.
        Mr. Knoch. I will answer that. I do not believe they have.
    And in fact, I think it is the single biggest flaw in the
    calculation.
        Mr. Davidson. Thank you. Mr. Chairman, I yield back.
        Chairman Huizenga. The gentleman's time has expired. At
    this time, we welcome the ranking member of the full Financial
    Services Committee, the gentlelady from California, Ms. Waters,
    who is recognized for 5 minutes.
        Ms. Waters. Thank you very much, Mr. Chairman. I am sorry I
    was not able to be here earlier. But it is very important for
    me to be here because of the terrific fight that we had to put
    up on fiduciary. This is a very important issue. And of course,
    we had to go through quite a bit in order to make sure that the
    work that had been done at DOL could be realized following an
    Executive Order that was put forth by this resident that
    delayed it.
        So I did not think that we were going to have to come back
    and have this fight all over again, but it looks as if we have
    to. So I want to thank all of the red shirts out there--AARP, I
    understand, is here. I am so glad you are here to remind folks
    what this is all about.
        So with that, I would like to pose a question to Ms.
    Cristina Martin Firvida. As you know, before DOL promulgated
    the fiduciary rule, rules governing investment advice on
    retirement accounts had not been meaningfully updated in 40
    years. As a result, there are many loopholes or gaps in the law
    that allowed--that were that allowed individuals to avoid
    fiduciary status and provide conflicted investment advice that
    cost our Nation's workers and retirees $17 billion each year.
        Can you explain what those loopholes or gaps are and how
    they harm investors?
        Ms. Firvida. Thank you, Congresswoman. So as we stated in
    our statement earlier, there has been a standard in ERISA for
    over 40 years now to require fiduciary advice, but over the
    years, there have been many exemptions developed by the
    Department of Labor itself. And those are the loopholes that
    the rule that was finalized last year--those are the loopholes
    that were closed, in essence. Those were the loopholes that
    were revisited.
        And we asked ourselves, in the current environment, where
    so many individuals need to make so many decisions about their
    own nest egg, because we no longer have the prevalence of
    defined benefit plans, do these continue to make sense? And the
    answer was no.
        And to your point, we have estimated that the conflicted
    advice that could result from those loopholes was costing
    savers 5 years' worth of retirement income, which is
    unacceptable, because conflicted advice, again, is not free.
    There is a cost to regulation. We recognize that. There is a
    cost to enforcement. We recognize that. But there is also a
    cost to conflicted advice. It is not free.
        There are two additional things that I would just like to
    add briefly, because we have talked a lot about the litigation
    risk in this rule. And I would like to make sure that we say
    today, reminding everyone that the litigation that is permitted
    in the rule is class-action litigation. And there are two
    things about that we need to remember. First, there has to be a
    systemic problem before a class-action cause of action can be
    brought, and I think that we can all agree that if there is a
    systemic issue in advice that is being provided, we would want
    to address that. So this is not about individual rights of
    action. This is about a systemic problem that affects a class.
        And second, it is extremely difficult to certify a class,
    extremely difficult and more so in recent years after certain
    Supreme Court cases have been decided. So I really just wanted
    to make sure that we were all clear on what is the scope of the
    litigation risk.
        Ms. Waters. Thank you very much. To any of our other
    witnesses who are here today, prior to the DOL's fiduciary
    rule, if an employee sought advice on a one-time basis to roll
    over the assets in their employer-sponsored 401(k) to an IRA,
    the person from whom she sought that advice would not owe her
    any fiduciary duty. Tell me, if you were transferring your life
    savings from your 401(k), would you want your adviser to give
    you advice that is merely suitable? Or would you want that
    person to be held to a higher standard, like the DOL fiduciary
    rule, where they would be required to act in your best
    interests? Who would like to answer that question? Mr. Mark
    Halloran?
        Mr. Halloran. I would answer it by, first of all, it is not
    necessarily the case that the person giving the advice would
    not be a fiduciary. They could be under the 1940's Act. It
    could be an IRA, RIA.
        Secondly, I do think the suitability standard has been--it
    is a pretty high standard. That suitability standard has
    changed 6 times from 1992 to 2002, another 4 times, most
    recently in 2011. What I want is a trusted adviser to give me
    sound advice, regardless of the suitability standard--
        Ms. Waters. Reclaiming my time, since you think--
        Chairman Huizenga. The gentlelady's time has expired.
        Ms. Waters. --suitable is fine, do you think that fiduciary
    is better?
        Mr. Halloran. The fiduciary standard is a higher standard
    under the law.
        Ms. Waters. Thank you very much. I yield back the balance
    of my time.
        Chairman Huizenga. The gentlelady's time has expired.
        With that, the gentleman from Indiana, Mr. Hollingsworth,
    is recognized for 5 minutes.
        Mr. Hollingsworth. Good afternoon. Thank you all for being
    here. I really appreciate all of the conversations and
    dialogue.
        I am reminded of a cartoon I saw a few years ago that made
    me chuckle. It is a gentleman sitting across from his financial
    adviser with a big desk in between them. And he says, ``I am
    retiring next Friday. I have nothing in savings. This is your
    chance to become a legend.''
        And I am worried with this rule that too many individuals
    will find themselves in that same situation. And what is the
    reason? The reason we have talked about so frequently during
    the course of this hearing, which is we are not able to get
    people started early saving small amounts because of the way
    this rule change in how the regulatory burden impacts small
    account holders, and they will be pushed out.
        And I have just a couple of examples of that that I have
    continued to hear from constituents, both financial advisers as
    well as those seeking out financial advice. One talks about how
    as a financial adviser he has always prided himself on helping
    people getting started into retirement savings as early as
    possible and applauds individuals who come into his office. And
    just recently, he had the experience of having to turn away a
    young client who at 27 had the foresight to think he needed to
    start saving for retirement. But all he could put away was $100
    to $150 a month.
        And this financial adviser, much to his chagrin, had to
    turn it away, because his firm said that the new account
    minimum is going to be set at $5,000 on account of this,
    because it didn't make any sense for somebody to save in
    retirement $100 to $150 a month if fees were going to eat up
    that entire principal, not the earnings on that, but that
    entire principal each and every month.
        And so the problem is, we have created this system now
    where people had to have significant funds and be able to have
    a significant account balance in order to get advice. And I
    think that is the great fallacy of over-regulation. The people
    we are most trying to help, those that are most on the fringe
    and margin of the financial system, we want to bring them in,
    but regulation continues to push them further and further away
    from getting good and reasonable advice. I want those people to
    participate.
        My second example comes from a financial adviser in my
    district who has talked about how he has always worked hard to
    get people in the door, even goes to local fairs and tries to
    advertise how people should be saving for their retirement.
    Even if they don't choose him, he sees it as his mission across
    the district to increase awareness for retirement savings,
    because he doesn't want to see individuals come in and be that
    person and that gentleman in that cartoon.
        And he talks about how he has recently had to give up some
    of his licenses because he is worried about the potential
    liabilities, because he doesn't know everything about every
    single customer who walks in the door. They are trying to save
    $300 or $500, what they might have outside that they don't
    disclose to him, and what that defense might look like. And he
    wanted me to ask a few questions.
        I know most of them have been reviewed already. But for Mr.
    Holtz-Eakin, does it make sense to have a rule become effective
    while that rule continues to still be under review? There has
    been a lot of confusion in his mind about whether this rule is
    going into effect or not going into effect, what he has to mail
    out and what he doesn't have to mail out. And he finds the
    situation really troubling for himself and his business, but
    also for the many clients. And so does this make any sense?
        Mr. Holtz-Eakin. There are a lot of things about the
    current situation that doesn't make a lot of sense. That is
    one. The fact that the SEC hasn't moved is another. There is a
    litany of failures that bring us to this point. The best thing
    would be to go forward with a single standard and clean that
    standard up.
        Mr. Hollingsworth. All right. The other thing that is
    really important to people back home in my district, which is a
    very rural district where there is very little access to
    broadband and there is very little access to the Internet, is
    this idea that robo-advice is going to fill the gap for these
    small individuals, and even without encouragement they will go
    out and seek robo-advice and rely on robo-advice. These
    individuals don't have access to the Internet. They don't have
    access to robo-advice.
        And so they wanted me to ask you, are you concerned that
    robo-advice won't be able to fill the gaps for those who don't
    have access to the Internet, who come in to see me face-to-
    face? Either they are in rural areas or they might be one of
    our senior citizens, but they don't have real and general
    access to the Internet and thus need the in-person advice that
    I can provide, but I am being forced not to provide through
    this rule. Yes?
        Mr. Holtz-Eakin. I think the chief concern is not robo-
    advice. It is choice. People should get the advice which is
    best suited for them.
        Mr. Hollingsworth. Right.
        Mr. Holtz-Eakin. And pushing people away from having that
    choice is what I am concerned about.
        Mr. Hollingsworth. Are we currently barred from offering
    fiduciary products right now? Does the law prevent us from
    offering products that have a fiduciary standard right now? No.
        Mr. Holtz-Eakin. No.
        Mr. Hollingsworth. Right, that is correct.
        Ms. Firvida. No product is barred under the DOL rule.
        Mr. Hollingsworth. Or before the DOL rule, we can certainly
    offer fiduciary advice right now and people can have that. It
    is about choice. What I think Hoosiers back home are most
    concerned about is that bureaucrats in Washington more and more
    are telling them what products they can use, what products they
    should use, and what products are best for their futures and
    families when they are the ones who know what is best for
    themselves and their own futures. And so, I appreciate the
    panel.
        Ms. Firvida. But to be clear, in every survey we have ever
    done--
        Chairman Huizenga. The gentleman's time has expired.
        Ms. Firvida. --9 out of 10 respondents want fiduciary
    advice.
        Chairman Huizenga. Sorry, the gentleman's time has expired.
    So you may ask the next speaker for your time.
        The gentleman from California, Mr. Sherman, is recognized
    for 5 minutes.
        Mr. Sherman. We got this rule from an exhaustive process.
    The DOL considered and then withdrew its 2010 proposal, went
    back to the drawing board, published an updated proposal in
    April 2015. For its updated proposal, they had a comment period
    of 5 months, receiving feedback, including 3,000 comment
    letters, 300,000 signatures on petitions. They had more than
    100 meetings with stakeholders, including the financial
    services industry, worker retirees, and consumer
    representatives.
        The DOL also held 4 days of public hearings, which included
    25 panels of witnesses and an opportunity for those not on a
    panel to submit written testimony. And there was an attempt
    consistently to consult with the SEC. So it was a good process.
        On the other hand, it was absolutely absurd that we have
    one rule for the SEC and a different rule for the Department of
    Labor. Either consumer protection is necessary or free-fettered
    Wild West choice is necessary, but we actually ended up with
    the absurdity of greater restrictions and/or greater
    protections on Baby Boomers with their IRA and rollover
    accounts than with people in the greatest generation who are in
    their 80s and 90s whose accounts are not in Department of
    Labor-regulated provisions.
        So we have a hard-working process that led to a bifurcated
    consumer protection system. Economists and some of the
    Democratic think groups are focusing on reducing cost, and that
    does make sense. But if you wanted to just reduce the cost of
    ice cream, then require that only vanilla ice cream be sold.
    That is efficient. You don't need an ice cream counselor. It is
    vanilla ice cream. That would get ice cream to everybody as
    cheaply as possible, as efficiently as possible, but people
    would eat an awful lot less ice cream because it is pretty
    boring.
        By providing 31 flavors, Baskin-Robbins demonstrates that
    if you want people to save, you have to give them interesting
    choices as to how to save. And the focus here ought to be on
    how to get people to save more for their retirement, because
    Social Security is not sufficient.
        Now let's get more to the details here of how we apply a
    rule. I will ask Ms. Firvida. Do you have any concerns that the
    fiduciary rule could have an unintended consequence of
    eliminating the ability of small financial institutions, small
    banks, credit unions, to provide IRA rollovers and other
    savings opportunities?
        Ms. Firvida. Thank you, Congressman. Our biggest concern,
    really, is not from the perspective--given who we are--of who
    is offering the services, but from the perspective of the
    client. And so I think what we understand is there are going to
    be some disruptions to the marketplace, and some of those
    disruptions are beneficial--many have been--for those saving
    for retirement.
        So we would say small account holders, which is what I
    worry about--and many of them are going to smaller vendors--are
    coming out ahead in this rule. And that is beneficial to them
    and to their retirement and is one of the reasons why we
    support this rule.
        Mr. Sherman. Okay. Dr. Holtz-Eakin?
        Mr. Holtz-Eakin. I have repeatedly said exactly the
    opposite, which is my concern is for those same small account
    holders, and that the combination of the fee-based accounts and
    the litigation costs will, in fact, make investment advice
    unavailable to them.
        Mr. Sherman. And are people going to be subjected to just
    robo-advice under this rule? Or are they going to be able to
    talk to a human being?
        Mr. Holtz-Eakin. That will depend on what kind of person
    you are and the size of your account. As has been noted, if you
    are an affluent investor with a very large account, this is not
    going to change your ability to get that advice. The people
    most at risk are the smaller savers.
        As I noted in my testimony, if you set the threshold at a
    $20,000 minimum balance in an IRA, about 42 percent of people
    would not be able to qualify for that. I am deeply concerned
    about that.
        Mr. Sherman. People would be able to get a bank account
    IRA, but they might not be able to get other flavors.
        Mr. Holtz-Eakin. So we know that they would not get the
    current advice they get, and they would be thrown into an
    unknown regime. And that is the concern. They chose this set of
    advisers, and the rule does not allow them to keep them.
        Ms. Firvida. And I think as regard to robo, we had a
    discussion a little bit earlier where we do understand that
    many traditional firms are adopting robo-services, in addition
    to what they already offer, and that we believe the landscape
    in the future will include a combination of both, even at
    traditional firms. So we think that is probably where this is
    going.
        Mr. Sherman. There is the argument that if you are only
    saving $10,000 and you get $500 worth of advice every year,
    maybe that is too much advice for the amount of money you are
    saving. But if you get $500 worth of advice every year, you are
    going to pay $500 one way or another.
        Ms. Firvida. And we have also discussed, of course, that
    conflicted advice is not free.
        Chairman Huizenga. The Chair was not paying attention. Your
    time has expired.
        Mr. Sherman. The comments were scintillating.
        Chairman Huizenga. Yes, they were.
        Mr. Sherman. I distracted you from the clock. You were
    paying attention to the--
        Chairman Huizenga. Yes, I actually was, Representative. The
    gentleman from California often does have insightful questions.
    And with that, last but certainly not least, we will recognize
    the gentleman from West Virginia, Mr. Mooney, for 5 minutes.
        Mr. Mooney. Thank you. I am pleased to have an opportunity
    to participate here. This is a big issue in my district. I have
    had several town hall roundtables about it.
        So under the final rule, this final fiduciary rule, one-
    size-fits-all from the Federal Government, if an investor likes
    their broker, they can keep their broker. Will the DOL rule
    harm investors?
        Mr. Halloran. May I answer that question?
        Mr. Mooney. Sure.
        Mr. Halloran. My dad likes his broker. My mom likes his
    broker. My mom and dad received a letter about 3 weeks ago
    saying that they are no longer eligible to work with their
    broker. I am probably eligible for AARP; certainly they are.
    That is the crux of this issue here for us, is it is--robo-
    advice is not bad. Robo-advice, frankly, was introduced many
    years before the DOL. Firms are embracing robo-advice. If you
    don't do that, you do it at your peril, frankly. It is a matter
    of choice.
        My parents would love to continue to working with that
    trusted adviser who has been working for them for the last 15
    years. They can't. Not unless that adviser leaves that firm.
        I received a similar letter, if not the same letter. And in
    my case, I actually qualified for the fee-for-service. But what
    I would have to do is I would have to take my account, which I
    am averaging about 25 basis points paying for right now getting
    advice, and for the same advice from that same adviser, pay at
    least 75 basis points more. That is my choice right now.
        This is not about--these are interesting academic
    arguments, frankly. The argument that Mr. Delaney put forward
    that annuities are permitted, sure, they are permitted under
    this rule. Are they going to be sold? No. They are not being
    sold, because they are disadvantaged by the rules bias towards
    fee-for-service.
        It is about what is happening. It is about what is
    happening today, not what is potentially going to happen. We
    are seeing it every single day.
        Mr. Mooney. Thank you. I would like to kind of--as a
    follow-up related question, I would like to direct this one to
    Mr. Lombard. In your opinion, has the DOL--or just factually,
    has the DOL substituted its judgment, its own judgment, the
    DOL's judgment, for that of the expert regulator of the broker-
    dealers? And as a follow up, will the end result for investors
    be a loss of choices in product services of financial
    professionals?
        Mr. Lombard. It is my opinion that the Department of Labor
    chose one business model--that of level fee advice advisory--
    over the traditional brokerage account, even though that
    doesn't fit for every client. And it is not just a matter of
    size. There are clients of substance who prefer, as my
    colleague here does, to keep their costs low, and that is not
    possible in advisory programs.
        So again, it comes down to choice. And the DOL is forcing
    the hands of investors and providers to offer one in favor of
    the other, whereas before, investors had choice.
        Mr. Mooney. Dr. Holtz-Eakin, I see you nodding your head
    there, and so one more follow up here in the remaining minute-
    and-a-half that I have. You referenced the U.K. retail
    distribution review in your testimony as a comparison to the
    DOL fiduciary rule and how the U.K. financial conduct authority
    in 2016 conducted a review of that rule. What caused the U.K.
    to initiate the review?
        Mr. Holtz-Eakin. There was concern about the fallout from
    the 2013 decision to ban commission-based accounts. And when
    they looked, they found probably three striking results. The
    first was about a quarter of the advisers had exited the
    industry. And we have seen some exits in the U.S. already. They
    found that about 45 percent of the firms no longer provided
    advice to small accounts at all, or very rarely, so there was a
    clear departure from advice, either because the advisers were
    gone or because those who remained weren't talking to small
    account holders.
        And we saw minimum balances go up. As I said, 13 percent of
    firms initially required 100,000 pounds or more. That moved up
    to 32 percent in only 3 years. That is exactly the kinds of
    concerns that have been expressed about the DOL rule.
        Mr. Mooney. But supporters of the rule have stated that the
    DOL rule will not have a similar impacts to that of the U.K.
    rule. Do you agree with that? Why or why not?
        Mr. Holtz-Eakin. We have seen some of the early evidence--
    some of the members of this panel have talked about it, and I
    mentioned some examples in my testimony where, for example,
    MetLife and AIG have exited the business. And we have seen
    Raymond James move to fee-based accounts. And this is exactly
    the sort of early indicators of the pattern that emerged in the
    United Kingdom. So I don't think these are hypothetical or
    academic or theoretical arguments. This is an experience that
    we saw in the U.K. and we are beginning to see in the United
    States.
        Mr. Mooney. Thank you. I think the facts show that some of
    these rules are well-intended, but they have the exact opposite
    effect. They hurt the very people you are trying to help. It is
    a shame we do that.
        Chairman Huizenga. The gentleman yields back. And I guess I
    will just note that this strikes me as just fewer advisers
    giving less advice with greater government control and less
    choice for consumers. And that ultimately we have to make sure
    that consumers are protected and that they have the ability to
    do what is best for them.
        So I deeply appreciate the time and effort of all of our
    panelists here. This was, I felt, a very informative and great
    panel. Without objection, I would like to submit the following
    statements for the record: a letter from the U.S. Chamber of
    Commerce; a letter from the National Taxpayers Union; and a
    letter from the Credit Union National Association (CUNA).
    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.
        And again, I want to say thank you to our panelists, and I
    appreciate them being here today. And with that, we are
    adjourned.
        [Whereupon, at 12:18 p.m., the hearing was adjourned.]

                                A P P E N D I X

                                 July 13, 2017
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