[Congressional Record Volume 147, Number 159 (Friday, November 16, 2001)]
[Extensions of Remarks]
[Pages E2120-E2121]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                 RETIREMENT SECURITY ADVICE ACT OF 2001

                                 ______
                                 

                               speech of

                          HON. JOHN J. LaFALCE

                              of new york

                    in the house of representatives

                      Thursday, November 15, 2001

  Mr. LaFALCE. Mr. Speaker, I rise in opposition to H.R. 2269, the 
``Retirement Security Advice Act of 2001,'' as reported by the 
Committees on Education and the Workforce and Ways and Means.
  Before explaining the reasons for my opposition, I want to first 
commend the Committees for recognizing the need for better education, 
professional investment advice and financial choice for tens of 
millions of our citizens who now participate directly in our financial 
markets--in unprecedented numbers--through their pension plans.
  Nevertheless, I must oppose the bill in its present form because it 
would remove and reduce fundamental anti-conflicts of interest 
protections in the Employee Retirement Income Security Act of 1974 
(ERISA) and the Internal Revenue Code of 1986. This bill would expose 
pension plan participants to the same conflicts of interest, and 
potential for abuse, that investors are facing elsewhere in the 
securities markets. The dot.com speculative bubble, fueled largely by 
the recommendations of firms with multiple conflicts of interest, 
enticed millions of normally cautious and conservative investors--as 
well as pension plan participants--to roll the dice with their 
investments and retirement savings and come out losers.
  We know now that this boom was based in considerable part on 
egregious and sometimes biased accounting irregularities, phony 
financial statements, and self-interested recommendations from 
investment banking and other financial services firms. The full 
magnitude of the violations of law and trust by investment 
professionals will not be known until the Securities and Exchange 
Commission completes the many investigations now underway, private 
litigation is completed, and Congress continues its oversight of 
industry excesses and regulatory breakdowns. But this much is known 
now--investors have seen trillions of dollars in savings vaporize. In 
human terms, the toll is immeasurable--retirements postponed, vacations 
cancelled, and weddings and educations delayed.
  By lowering the anti-conflict of interest safeguards in current law 
that have protected employees and retirees since 1974, I am afraid that 
H.R. 2269 may well open the door to similar problems for pension plan 
participant. ERISA has proved remarkably effective in protecting 
pension benefits for America's private sector employees as well as the 
integrity of privately managed benefit plans. This is particularly true 
for ``defined benefit plans'' that were the norm in 1974. Since then, 
particularly in recent years, there has been a dramatic shift toward 
``defined contribution'' plans in which workers and their employers 
contribute to individual accounts, and within a range determined by the 
pension plan sponsor, choose how to invest that money.
  An estimated 42 million employees now participate in defined 
contribution plans. This means the employees, not the employer, assume 
a high degree of responsibility for managing their funds. Retirement 
aspirations and plans depend largely on the prudence and wisdom of 
their investment decisions. Too often, individual plan participants do 
not fully understand the investment risks and rely heavily on others 
for advice, often to their financial detriment. The decline and 
volatility of the stock market, particularly the precipitous decline in 
the technology sector, has eroded the value of even the most 
professionally managed mutual funds. And everyone with a 401(k) 
retirement account, as well as Federal employees participating in the 
common stock fund of the Thrift Savings Plan, have seen the value of 
their accounts plummet by as much as 25 per cent or even more.
  H.R. 2269 is intended to address the real need of employees and 
workers for better investment advice and services. Unfortunately, the 
bill goes too far in attempting to accomplish this goal. By weakening 
ERISA's safeguards against conflicts of interest, this bill would 
remove some of the oldest, most effective and prophylactic protections 
ever enacted by Congress to protect employees and their retirement 
savings. H.R. 2269 would allow benefit plans to contract with one firm 
to both manage participant's investment funds and to provide those same 
participants with personalized investment advice. In other words, it 
would permit conflicted investment advice--which is now prohibited by 
ERISA--and substitute a disclosure regime, similar to the Federal 
securities laws.
  I find this feature of the bill very troublesome. Disclosure is 
inadequate. The Financial Services Committee held numerous hearings 
earlier this year on the shortcomings of disclosure as an investor 
protection device in the area of financial analysts. Regrettably, as 
even the SEC and many industry leaders have concluded, disclosure is 
more often used to conceal or obfuscate the existence of conflicts 
rather than to alert or forewarn consumers. In June, the Committee 
began examining the very important question of whether investors are 
receiving unbiased research from securities analysts employed by full 
service investment banking firms. We learned that investors have become 
victims of recommendations of analysts who have apparent and direct 
conflicts of interest relating to their investment advice.
  While apparently permitted by the SEC and the securities laws, 
boilerplate and tedious disclosures concerning conflicts leave 
investors often unaware of the various economic and strategic interests 
that the investment bank and the analyst have that can fundamentally 
undermine the integrity and quality of analysts' research. (The 
disclosure of these conflicts is often general, inconspicuous and even 
unintelligible. In addition, current conflict disclosure rules do not 
even reach analysts touting various stocks on CNBC or CNN.)
  Recognizing the magnitude of the problem, as well as the inadequacies 
of the current disclosure framework, several major investment banking 
firms acted aggressively to protect investors as well as attempt to 
restore the confidence of their customers in the quality and 
objectivity of their financial analysis. For example, Merrill Lynch and 
Credit Suisse First Boston banned their analysts from owning stock in 
companies they cover. And Prudential Securities actually exited the 
investment banking business and is using its lack of conflicts as a 
marketing tool to attract retail brokerage business.
  In my view, disclosure requirements, although positive, are still 
woefully inadequate to confront the systemic conflicts of analysts that 
necessarily taint advice, skew the market and ultimately harm 
investors. I continue to believe SEC rulemaking and direct SEC 
regulation is required to protect investors from serious conflicts of 
interest. And I am disappointed that new SEC Chairman Pitt, speaking to 
a securities industry trade association last week, said ``I don't think 
there is any inherent need for a prohibition against an analyst owning 
stock'' and then expressed his ``confidence that Wall Street firms will 
come up with solutions that are in the best interests of investors.''
  I don't think Wall Street firms are the best protectors of investors 
or other consumers or pension plan participants. History--recent 
history, not ancient history--teaches us otherwise.
  I agree with the premise of H.R. 2269 that investors, including 
employees participating in defined contribution plans, need better 
information, investment advice and alternatives. But I believe they 
need them from objective,

[[Page E2121]]

qualified and independent sources. Fortunately, it is already available 
in the marketplace without opening a Pandora's box to serious conflicts 
of interest by eroding ERISA's prohibited transactions safeguards. And 
there has been no showing to the contrary--there is a highly 
competitive and diverse market providing independent services to 
pension plan sponsors and participants.
  I do not question the motives of the many financial services firms 
that are interested in providing additional levels of service to 
pension plan participants and, therefore, support H.R. 2269. I only 
question why they support this radical approach when it is possible to 
develop a more measured approach that will continue important existing 
protections for plan participants and avoid some of the very serious 
conflict issues that are undermining the reputation of many financial 
services firms, angering customers and attracting the attention of 
regulators and policymakers.
  An alternative will be offered during this debate that will attempt 
to achieve a better balance of several important policy goals--more 
information and choice for plan participants from independent and 
professional sources and preservation of essential existing protections 
against conflicts of interest. I should note that this is the approach 
favored by groups that actually serve and represent workers and plan 
participants--AARP, AFL-CIO, Consumer Federation and the Pension Rights 
Center.

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