[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
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
U.S. GOVERNMENT PUBLISHING OFFICE
28-748 PDF WASHINGTON : 2018
----------------------------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Publishing Office,
http://bookstore.gpo.gov. For more information, contact the GPO Customer Contact Center,
U.S. Government Publishing Office. Phone 202-512-1800, or 866-512-1800 (toll-free).
E-mail, [email protected].
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
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
[all]