HFSC Joint Subcommittee Hearing on DOL Fiduciary Proposal
House Financial Services Committee
Subcommittee on Capital Markets and GSEs
Subcommittee on Oversight and Investigations
“Preserving Retirement Security and Investment Choices for All Americans”
Thursday, September 10, 2015
Key Topics & Takeaways
- Wagner Bill: Rep.Wagner (R-Mo.) said that because the DOL cannot be counted on to produce a workable final rule, a legislative solution is needed. She asked how her proposed bill would help prevent market disruptions. McNeely expressed hope that it would eliminate confusion for advisors, and Callahan noted that it would empower the SEC to take the lead and ensure that the solution is more targeted and without negative consequences.
- DOL Process: Rep. Wagner (R-Mo.) noted that Secretary Perez wrote to her prior to the public hearings that there would be no reproposal or material changes to the rule. Given that this happened before the public hearings had even happened, she asked whether it seems that the DOL is not truly listening to industry and investor concerns. Stevens replied that “it seems that the issue is pre-judged.”
- BIC Exemption: Rep.Scott (D-Ga.) called the BICE “extraordinarily complex” and asked Stevens his opinion on its workability. Stevens explained that the problem with the exemption is that “every possible bell and whistle has been added” so that “no one will be able to take advantage of it.” He added that it would require “massive disclosures,” some of which require violations of securities laws.
- U.K. RDR: Reps. Royce (R-Calif.), Stivers (R-Ohio), Scott (D-Ga.) and Meeks (D-N.Y.) all pointed to the effect of the Retail Distribution Review in the United Kingdom as points of concern for the implementation of a similar rule in the U.S.
Witnesses
- Caleb Callahan, Senior VP and Chief Marketing Officer, ValMark Securities; on behalf of the Association for Advanced Life Underwriting
- Mercer Bullard, University of Mississippi School of Law
- Juli McNeely, President, National Association of Insurance and Financial Advisors
- Paul Schott Stevens, President and CEO, Investment Company Institute
- Scott Stolz, Senior VP, PCG Investment Products, Raymond James & Associations, Inc.
Opening Statements
In his opening statement, Chairman Sean Duffy (R-Wis.) of the Subcommittee on Oversight and Investigations warned that the Department of Labor’s (DOL) fiduciary rule would limit Americans’ investment choices by imposing an unworkable framework. The “poorly designed regulation,” he said, would affect millions of Americans beyond just Wall Street. Duffy argued that rule is supported by “deeply flawed economic analysis” that relies on incomplete data that fails to consider the rule’s negative consequences.
Chairman Scott Garrett (R-N.J.) of the Subcommittee on Capital Markets and Government Sponsored Enterprises commented that the DOL is “marching forward” with a regulation that will upend the ability of Americans to access good financial advice. He noted that President Obama said the rule would “crack down” on Wall Street brokers who fail to put client interests ahead of their own, but argued instead that the biggest impact would be felt by millions of middle and lower income households that would lose access to advice. He commended H.R.1090, the Retail Investor Protection Act, as a “thoughtful piece of bipartisan legislation to preserve access to financial advice for Americans of all income levels.”
Subcommittee on Oversight and Investigations Ranking Member Al Green (D-Texas) expressed his gratitude to DOL Secretary Thomas Perez for his work on the fiduciary rule and commended the Administration as a whole for its efforts to “correct” conflicts of interests. He cited the DOL’s estimate that conflicted advice causes $17 billion in lost returns as he stressed the rule’s importance, and criticized H.R.1090 by arguing that allowing the DOL to move forward would encourage more rapid action by the Securities and Exchange Commission (SEC). He said he was “absolutely convinced” that the DOL’s efforts constitute an “appropriate rulemaking.”
Rep. Ann Wagner (R-Mo.) stressed that the DOL rule could jeopardize access to investment advice for millions of Americans at a time that the country is facing a retirement crisis. She said her bill would prevent Washington from “interfering with Americans’ ability to prepare for retirement.”
Testimony
Caleb Callahan, Senior VP and Chief Marketing Officer, ValMark Securities; on behalf of the Association for Advanced Life Underwriting
In his testimony, Caleb Callahan said the DOL’s rulemaking, while well-intended, would likely have the opposite effect of its goal. He offered strong support for Wagner’s bill, explaining that the SEC has long-tenured experience with standard of care issues while the DOL’s rule does not recognize market realities and would result in a fractured framework that conflict with other regulatory initiatives and ultimately hurt small savers and investor choice.
Paul Schott Stevens, President and CEO, Investment Company Institute
Paul Schott Stevens, in his testimony, said the Investment Company Institute (ICI) supports the principle that underlies the DOL’s proposal, but that the rule as written is flawed and would drastically limit the ability of savers to access advice while increasing costs for those most unable to afford it. He was very critical of the DOL’s impact study for relying on outdated data and ignoring the “significant social harm” of the rule, offering an estimate that the rule would in fact result in $109 billion in lost returns for investors. Stevens reiterated that ICI shares the DOL’s end goal, but said the current trajectory is “disastrously wrong.”
Mercer Bullard, University of Mississippi School of Law
Mercer Bullard, in his testimony, defended the DOL’s rulemaking and argued that only the DOL has jurisdiction over all retirement assets, whereas the SEC only has jurisdiction over securities. He pointed to the “undeniable” adverse effects of compensation incentives on financial advice and insisted that the proposal is workable and that it would not prohibit commissions. He criticized the Wagner bill as a way to further delay a long-overdue rulemaking that would allow brokers to continue with inappropriate standards of conduct.
Juli McNeely, President, National Association of Insurance and Financial Advisors
In her testimony, Juli McNeely cautioned that the DOL proposal would hurt small savers by leaving them with less choice and advice, which would result in fewer Americans having a long-term plan to save. She then turned specifically to the best interest contract exemption (BICE), stating that it would only add significant implementation costs and further costs from increased risks of implementation. McNeely said it is “imperative” that the rules governing investment products and advice in the retirement space not conflict with those outside the retirement space, and that only the SEC can enforce such a uniform standard.
Scott Stolz, Senior VP, PCG Investment Products, Raymond James & Associations, Inc.
In his testimony, Scott Stolz opened by saying that no one can argue that the principle that an advisor should put the interests of a client first, but that the proposal’s problem is with the way it is written. He said it would be incredibly complex and expensive to implement while subjecting advisors to “unfair legal liability.” He warned that the proposal could open a “Pandora’s Box of litigation” that would negatively affect the services advisors provide. He called for a reproposal of the rule, arguing that without one the rule cannot be made workable. He also expressed support for the Wagner bill, saying the SEC is in the best position to impose a uniform fiduciary standard.
Question and Answer
Effects and Costs of the Rule
Duffy asked what would happen to McNeely and her clients if the rule were finalized. McNeely answered that the rule as written would leave her unable to work with many of her clients because she is faced with an asset-based limit for fee-based accounts.
Duffy asked if the cost of the proposal would then be higher than the estimated $17 billion cost of conflicted advice. Stevens responded with his $109 billion figure of lost returns and pointed out that no one has come to ICI to refute its estimate of the rule’s costs.
Rep. Robert Hurt (R-Va.) warned that the rule, like many others from Washington, would hit Main Streets harder than Wall Street and would lead to higher costs, fewer choices, and less innovation.
Rep. Bruce Poliquin (R-Maine) said he is very concerned about the impact of the rule on small savers, stating that costs will go up while product offerings and rates of return will go down. He suggested that the DOL’s work is an example of “intrusive government creating a regulation that is not needed.”
Rep. Andy Barr (R-Ky.) commented that if supporters of the proposal think the cost of professional advice is high, they should “just wait until you see the cost of amateur advice or no advice.”
Robo Advisors
Duffy commented that the proposed rule will keep small savers from accessing professional advice, leaving them “stuck” with robo advisors. He expressed concern that especially in periods of volatility, investors need a professional advisor who can calm them down and keep them from selling low.
Poliquin said he is concerned that as people lose access to professional advice, they have to rely on robo advisors, but that seniors especially cannot be expected to turn to such tools.
DOL Regulatory Impact Analysis and Process
Duffy asked how the DOL’s Regulatory Impact Analysis (RIA) was flawed. Stevens repeated his earlier point from his testimony that the analysis is based on out of date studies that do not portray to the current market for retirement advice.
Hurt noted that Secretary Perez has called the proposal a “simple premise presented with an open mind.” However, he commented that the process has been neither simple nor conducted with an open mind. Stevens agreed, commenting that the proposal “went into a black box” for four years with no input after the DOL’s original proposal was pulled back. He added that he is concerned that the proposal does not offer grandfathered relief and only an eight month implementation period for such a massive overhaul of the market.
Rep. Brad Sherman (D-Calif.) said he is concerned about the transition and implementation of the new rule for existing customers. He questioned whether clients who have already paid commissions must now “jump through hoops” to see if they can still have access to a service they already paid for. He asked what kind of grandfathering and implementation timeline would be needed for the rule. Stevens answered that a simple fix would be that existing relationships not be affected by this rule, and that even a good rule would require a much longer implementation period.
Rep. Steve Stivers (R-Ohio) asked if the DOL’s economic analysis justifies the proposed rule. Stevens repeated his estimated figure of $109 billion in lost returns as a result of the rule, and argued that the rule does not provide enough real benefit to be justified.
Wagner asked if the DOL seems prepared to make necessary changes to the proposed rule based on industry input. Callahan answered that they do not, and that the DOL made it clear at its public hearing that it does not intend to make material changes, only “operational tweaks.”
Wagner then noted that Secretary Perez wrote to her prior to the public hearings that there would be no reproposal or material changes to the rule. Given that this happened before the public hearings had even happened, she asked whether it seems that the DOL is not truly listening to industry and investor concerns. Stevens replied that “it seems that the issue is pre-judged.” Stevens, Callahan and McNeely then all agreed with Wagner that ruling out a reproposal during the comment period is not consistent with the Administrative Procedures Act.
Rep. French Hill (R-Ark.) expressed his belief that the DOL should at the very least repropose the rule. He also suggested that Treasury Secretary Jacob Lew and Director Shaun Donovan of the Office of Management and Budget should also look carefully at the rule to consider whether it is in the interest of government efficiency and accountability.
Alternatives from the Private Sector
Rep. Stephen Lynch (D-Mass.) said the DOL had good intentions with the rule because there are conflicts of interests that do disadvantage small investors. He then pointed out that a number of companies have designed alternatives to the DOL’s best interest standard and asked why these are inadequate. Bullard said many of these proposals have taken the same steps as the DOL that others claim are unworkable. He was critical of the industry for calling provisions unworkable despite the fact that some firms’ and brokers’ practices already mirror them.
Current Rules
Garrett asked about other rules already in place, such as the suitability standard, and whether this helps to counter conflicted incentives for investors. Stolz replied that firms have procedures in place to ensure that recommendations are based on the needs of their clients, and that current law already addresses many of the DOL’s concerns.
Rep. Mick Mulvaney (R-S.C.) asked whether it is already against the law to churn an account, put someone in an unsuitable account, or to lie about the funds in an IRA. Stolz replied that all are illegal. Mulvaney concluded that “all the horror stories we hear” are already against the law even without the proposal.
Best Interest Contract Exemption
Rep. David Scott (D-Ga.) said he sees the proposal as “putting our financial advisors in a straight jacket” and added that he is disturbed that removing and replacing the compensation packages for financial advisors from commissions-based to fee-based will have a “devastating impact” on low and middle income savers. He further added that the best interest contract (BIC), while well-intended, “will bring untold lawsuits and frighten the consumers that can be suspicious.”
Scott called the BICE “extraordinarily complex” and asked Stevens his opinion on its workability. Stevens explained that the problem with the exemption is that “every possible bell and whistle has been added” so that “no one will be able to take advantage of it.” He added that it would require “massive disclosures,” some of which require violations of securities laws.
Rep. Keith Ellison (D-Minn.) said he has spoken with the DOL and that concerns regarding the BIC and having to sign a contract before talking to a client is misunderstood, and that signing is only required before money changes hands. He called the concern a red herring.
Wagner responded to Ellison’s point by countering that the rule puts restrictions on education. Stolz explained that contracts are required for the transition from education to recommendations, but the question is where the line is drawn.
Rep. Gregory Meeks (D-N.Y.) asked what is unworkable under the proposal. Stevens answered that the BICE must use a principles-based approach, noting that Secretary Perez claims is operates as such but does not in reality.
Scott noted that a similar proposal to the DOL’s was written in the United Kingdom and that it has resulted in 11 million people going without investment advice. He commented that this is “not something we want to see.”
Rep. Ed Royce (R-Calif.) also pointed to the United Kingdom’s experience, noting that over 300,000 British clients lost access to advice in just the first three months of 2014 while many potential new clients were not accepted. He noted that the British government has now begun a review of its rule and the “advice gap” that it may have created. Stevens commented that ICI is concerned the same result would come from the DOL proposal, and McNeely stated that she knows advisors in the U.K. that had to let go of their small accounts because they were not economically viable.
Ellison asked if comparisons to the U.K. rule are fair. Bullard answered that they are not. Bullard countered that the U.K. rule banned commissions, which the DOL rule would not do. He further commented that the industry’s claims that it cannot provide cost-effective fee-based accounts to small savers is false, and that it could find ways to innovate.
Stivers cited that U.K. advisors have refused to provide services to investors under a minimum account balance, and asked if the same would happen in the U.S. McNeely answered that her current minimum balance for fee-based accounts is $50,000, but that she expects the number would rise with the threat of increased legal liability.
Meeks said the proposal is far too important to not strike the right balance between access to advice and investor protection. He also pointed to the U.K., noting that its rule greatly diminished access and that the same must not happen in the U.S.
Wagner Bill and SEC Fiduciary Standard
Sherman explained that while he supported Wagner’s bill last Congress, the new proposal would also intentionally slow progress toward an SEC fiduciary standard. He said this would make it harder for Democrats to support the present version of the bill. He further commented that it is “absurd” to have conflicting rules for different savers.
Wagner said that because the DOL cannot be counted on to produce a workable final rule, a legislative solution is needed. She asked how her proposed bill would help prevent market disruptions. McNeely expressed hope that it would eliminate confusion for advisors, and Callahan noted that it would empower the SEC to take the lead and ensure that the solution is more targeted and without negative consequences.
Rep. Maxine Waters (D-Calif.) noted that the Wagner bill requires that the SEC publish a report finding whether retail investors are harmed by different standards of conduct prior to developing a harmonized fiduciary standard. She asked whether the SEC has considered this. Bullard answered that the source of confusion for investors stems from that fact that the industry frequently calls its representatives financial advisors, but then denies that it owes a best interest standard in arbitration. He said he agrees that the SEC should have acted “some time ago,” but that it cannot be counted on to act since it has suffered from a “rulemaking paralysis” for the past 15 years and is incapable of a rulemaking.
Wagner asked whether, given the DOL’s “faulty economic analysis,” the additional analysis her bill would require of the SEC is appropriate. Stevens replied that no rulemaking of this scope should be done without an effective analysis.
Rep. Randy Hultgren (R-Ill.) asked whether the broker-dealer industry would be faced with conflicting rules if the SEC also moves forward with a rulemaking. Stevens answered that there is “no question there,” and that any “rational policy universe” would have a consistent regime.
Rep. Ed Perlmutter (D-Colo.) stated that he is sympathetic with desires for the SEC to address this, but that he has waited four years and the agency has failed to act.
Rep. Scott Tipton (R-Colo.) asked about the difference in experience between the DOL and SEC in regulating the securities space. Stevens said the DOL “regulates a slice” while the SEC is much more comprehensive and has deeper expertise.
Product Specific Flaws
Hultgren said one of the flaws with the rule is that listed options would no longer be allowed in retirement accounts. He noted that options are an effective tool for risk management, and asked whether there are low-risk investment strategies that make use of options. Stolz replied “absolutely” and mentioned structured contracts as another product that should be allowed. He spoke against wholesale product exclusion, and instead argued for proper disclosures.
Hultgren asked why the DOL would discourage use of such products in saving for retirement, beyond the fact that they do not understand the market as well as the SEC. Stolz said the reasoning is up to interpretation, but that whether such securities are rejected because the DOL does not find them appropriate or because the DOL does not understand how they are used is “concerning either way.”
Hulgren asked if limiting the scope of investments serve the best interests of savers. Stolz answered that it does not, and choice remains important. He added that many aspects of the DOL’s proposal are “describing a market that does not exist.”
Rep. Luke Messer (R-Ind.) noted that the Obama Administration has a stated priority of making guaranteed lifetime income products more available for middle class families, and asked if the rule would help. Callahan said such products would be prohibited. Stolz added that annuities, because of their cost, would also become less common investments under the rule.
For more information on this hearing, please click here.
House Financial Services Committee
Subcommittee on Capital Markets and GSEs
Subcommittee on Oversight and Investigations
“Preserving Retirement Security and Investment Choices for All Americans”
Thursday, September 10, 2015
Key Topics & Takeaways
- Wagner Bill: Rep.Wagner (R-Mo.) said that because the DOL cannot be counted on to produce a workable final rule, a legislative solution is needed. She asked how her proposed bill would help prevent market disruptions. McNeely expressed hope that it would eliminate confusion for advisors, and Callahan noted that it would empower the SEC to take the lead and ensure that the solution is more targeted and without negative consequences.
- DOL Process: Rep. Wagner (R-Mo.) noted that Secretary Perez wrote to her prior to the public hearings that there would be no reproposal or material changes to the rule. Given that this happened before the public hearings had even happened, she asked whether it seems that the DOL is not truly listening to industry and investor concerns. Stevens replied that “it seems that the issue is pre-judged.”
- BIC Exemption: Rep.Scott (D-Ga.) called the BICE “extraordinarily complex” and asked Stevens his opinion on its workability. Stevens explained that the problem with the exemption is that “every possible bell and whistle has been added” so that “no one will be able to take advantage of it.” He added that it would require “massive disclosures,” some of which require violations of securities laws.
- U.K. RDR: Reps. Royce (R-Calif.), Stivers (R-Ohio), Scott (D-Ga.) and Meeks (D-N.Y.) all pointed to the effect of the Retail Distribution Review in the United Kingdom as points of concern for the implementation of a similar rule in the U.S.
Witnesses
- Caleb Callahan, Senior VP and Chief Marketing Officer, ValMark Securities; on behalf of the Association for Advanced Life Underwriting
- Mercer Bullard, University of Mississippi School of Law
- Juli McNeely, President, National Association of Insurance and Financial Advisors
- Paul Schott Stevens, President and CEO, Investment Company Institute
- Scott Stolz, Senior VP, PCG Investment Products, Raymond James & Associations, Inc.
Opening Statements
In his opening statement, Chairman Sean Duffy (R-Wis.) of the Subcommittee on Oversight and Investigations warned that the Department of Labor’s (DOL) fiduciary rule would limit Americans’ investment choices by imposing an unworkable framework. The “poorly designed regulation,” he said, would affect millions of Americans beyond just Wall Street. Duffy argued that rule is supported by “deeply flawed economic analysis” that relies on incomplete data that fails to consider the rule’s negative consequences.
Chairman Scott Garrett (R-N.J.) of the Subcommittee on Capital Markets and Government Sponsored Enterprises commented that the DOL is “marching forward” with a regulation that will upend the ability of Americans to access good financial advice. He noted that President Obama said the rule would “crack down” on Wall Street brokers who fail to put client interests ahead of their own, but argued instead that the biggest impact would be felt by millions of middle and lower income households that would lose access to advice. He commended H.R.1090, the Retail Investor Protection Act, as a “thoughtful piece of bipartisan legislation to preserve access to financial advice for Americans of all income levels.”
Subcommittee on Oversight and Investigations Ranking Member Al Green (D-Texas) expressed his gratitude to DOL Secretary Thomas Perez for his work on the fiduciary rule and commended the Administration as a whole for its efforts to “correct” conflicts of interests. He cited the DOL’s estimate that conflicted advice causes $17 billion in lost returns as he stressed the rule’s importance, and criticized H.R.1090 by arguing that allowing the DOL to move forward would encourage more rapid action by the Securities and Exchange Commission (SEC). He said he was “absolutely convinced” that the DOL’s efforts constitute an “appropriate rulemaking.”
Rep. Ann Wagner (R-Mo.) stressed that the DOL rule could jeopardize access to investment advice for millions of Americans at a time that the country is facing a retirement crisis. She said her bill would prevent Washington from “interfering with Americans’ ability to prepare for retirement.”
Testimony
Caleb Callahan, Senior VP and Chief Marketing Officer, ValMark Securities; on behalf of the Association for Advanced Life Underwriting
In his testimony, Caleb Callahan said the DOL’s rulemaking, while well-intended, would likely have the opposite effect of its goal. He offered strong support for Wagner’s bill, explaining that the SEC has long-tenured experience with standard of care issues while the DOL’s rule does not recognize market realities and would result in a fractured framework that conflict with other regulatory initiatives and ultimately hurt small savers and investor choice.
Paul Schott Stevens, President and CEO, Investment Company Institute
Paul Schott Stevens, in his testimony, said the Investment Company Institute (ICI) supports the principle that underlies the DOL’s proposal, but that the rule as written is flawed and would drastically limit the ability of savers to access advice while increasing costs for those most unable to afford it. He was very critical of the DOL’s impact study for relying on outdated data and ignoring the “significant social harm” of the rule, offering an estimate that the rule would in fact result in $109 billion in lost returns for investors. Stevens reiterated that ICI shares the DOL’s end goal, but said the current trajectory is “disastrously wrong.”
Mercer Bullard, University of Mississippi School of Law
Mercer Bullard, in his testimony, defended the DOL’s rulemaking and argued that only the DOL has jurisdiction over all retirement assets, whereas the SEC only has jurisdiction over securities. He pointed to the “undeniable” adverse effects of compensation incentives on financial advice and insisted that the proposal is workable and that it would not prohibit commissions. He criticized the Wagner bill as a way to further delay a long-overdue rulemaking that would allow brokers to continue with inappropriate standards of conduct.
Juli McNeely, President, National Association of Insurance and Financial Advisors
In her testimony, Juli McNeely cautioned that the DOL proposal would hurt small savers by leaving them with less choice and advice, which would result in fewer Americans having a long-term plan to save. She then turned specifically to the best interest contract exemption (BICE), stating that it would only add significant implementation costs and further costs from increased risks of implementation. McNeely said it is “imperative” that the rules governing investment products and advice in the retirement space not conflict with those outside the retirement space, and that only the SEC can enforce such a uniform standard.
Scott Stolz, Senior VP, PCG Investment Products, Raymond James & Associations, Inc.
In his testimony, Scott Stolz opened by saying that no one can argue that the principle that an advisor should put the interests of a client first, but that the proposal’s problem is with the way it is written. He said it would be incredibly complex and expensive to implement while subjecting advisors to “unfair legal liability.” He warned that the proposal could open a “Pandora’s Box of litigation” that would negatively affect the services advisors provide. He called for a reproposal of the rule, arguing that without one the rule cannot be made workable. He also expressed support for the Wagner bill, saying the SEC is in the best position to impose a uniform fiduciary standard.
Question and Answer
Effects and Costs of the Rule
Duffy asked what would happen to McNeely and her clients if the rule were finalized. McNeely answered that the rule as written would leave her unable to work with many of her clients because she is faced with an asset-based limit for fee-based accounts.
Duffy asked if the cost of the proposal would then be higher than the estimated $17 billion cost of conflicted advice. Stevens responded with his $109 billion figure of lost returns and pointed out that no one has come to ICI to refute its estimate of the rule’s costs.
Rep. Robert Hurt (R-Va.) warned that the rule, like many others from Washington, would hit Main Streets harder than Wall Street and would lead to higher costs, fewer choices, and less innovation.
Rep. Bruce Poliquin (R-Maine) said he is very concerned about the impact of the rule on small savers, stating that costs will go up while product offerings and rates of return will go down. He suggested that the DOL’s work is an example of “intrusive government creating a regulation that is not needed.”
Rep. Andy Barr (R-Ky.) commented that if supporters of the proposal think the cost of professional advice is high, they should “just wait until you see the cost of amateur advice or no advice.”
Robo Advisors
Duffy commented that the proposed rule will keep small savers from accessing professional advice, leaving them “stuck” with robo advisors. He expressed concern that especially in periods of volatility, investors need a professional advisor who can calm them down and keep them from selling low.
Poliquin said he is concerned that as people lose access to professional advice, they have to rely on robo advisors, but that seniors especially cannot be expected to turn to such tools.
DOL Regulatory Impact Analysis and Process
Duffy asked how the DOL’s Regulatory Impact Analysis (RIA) was flawed. Stevens repeated his earlier point from his testimony that the analysis is based on out of date studies that do not portray to the current market for retirement advice.
Hurt noted that Secretary Perez has called the proposal a “simple premise presented with an open mind.” However, he commented that the process has been neither simple nor conducted with an open mind. Stevens agreed, commenting that the proposal “went into a black box” for four years with no input after the DOL’s original proposal was pulled back. He added that he is concerned that the proposal does not offer grandfathered relief and only an eight month implementation period for such a massive overhaul of the market.
Rep. Brad Sherman (D-Calif.) said he is concerned about the transition and implementation of the new rule for existing customers. He questioned whether clients who have already paid commissions must now “jump through hoops” to see if they can still have access to a service they already paid for. He asked what kind of grandfathering and implementation timeline would be needed for the rule. Stevens answered that a simple fix would be that existing relationships not be affected by this rule, and that even a good rule would require a much longer implementation period.
Rep. Steve Stivers (R-Ohio) asked if the DOL’s economic analysis justifies the proposed rule. Stevens repeated his estimated figure of $109 billion in lost returns as a result of the rule, and argued that the rule does not provide enough real benefit to be justified.
Wagner asked if the DOL seems prepared to make necessary changes to the proposed rule based on industry input. Callahan answered that they do not, and that the DOL made it clear at its public hearing that it does not intend to make material changes, only “operational tweaks.”
Wagner then noted that Secretary Perez wrote to her prior to the public hearings that there would be no reproposal or material changes to the rule. Given that this happened before the public hearings had even happened, she asked whether it seems that the DOL is not truly listening to industry and investor concerns. Stevens replied that “it seems that the issue is pre-judged.” Stevens, Callahan and McNeely then all agreed with Wagner that ruling out a reproposal during the comment period is not consistent with the Administrative Procedures Act.
Rep. French Hill (R-Ark.) expressed his belief that the DOL should at the very least repropose the rule. He also suggested that Treasury Secretary Jacob Lew and Director Shaun Donovan of the Office of Management and Budget should also look carefully at the rule to consider whether it is in the interest of government efficiency and accountability.
Alternatives from the Private Sector
Rep. Stephen Lynch (D-Mass.) said the DOL had good intentions with the rule because there are conflicts of interests that do disadvantage small investors. He then pointed out that a number of companies have designed alternatives to the DOL’s best interest standard and asked why these are inadequate. Bullard said many of these proposals have taken the same steps as the DOL that others claim are unworkable. He was critical of the industry for calling provisions unworkable despite the fact that some firms’ and brokers’ practices already mirror them.
Current Rules
Garrett asked about other rules already in place, such as the suitability standard, and whether this helps to counter conflicted incentives for investors. Stolz replied that firms have procedures in place to ensure that recommendations are based on the needs of their clients, and that current law already addresses many of the DOL’s concerns.
Rep. Mick Mulvaney (R-S.C.) asked whether it is already against the law to churn an account, put someone in an unsuitable account, or to lie about the funds in an IRA. Stolz replied that all are illegal. Mulvaney concluded that “all the horror stories we hear” are already against the law even without the proposal.
Best Interest Contract Exemption
Rep. David Scott (D-Ga.) said he sees the proposal as “putting our financial advisors in a straight jacket” and added that he is disturbed that removing and replacing the compensation packages for financial advisors from commissions-based to fee-based will have a “devastating impact” on low and middle income savers. He further added that the best interest contract (BIC), while well-intended, “will bring untold lawsuits and frighten the consumers that can be suspicious.”
Scott called the BICE “extraordinarily complex” and asked Stevens his opinion on its workability. Stevens explained that the problem with the exemption is that “every possible bell and whistle has been added” so that “no one will be able to take advantage of it.” He added that it would require “massive disclosures,” some of which require violations of securities laws.
Rep. Keith Ellison (D-Minn.) said he has spoken with the DOL and that concerns regarding the BIC and having to sign a contract before talking to a client is misunderstood, and that signing is only required before money changes hands. He called the concern a red herring.
Wagner responded to Ellison’s point by countering that the rule puts restrictions on education. Stolz explained that contracts are required for the transition from education to recommendations, but the question is where the line is drawn.
Rep. Gregory Meeks (D-N.Y.) asked what is unworkable under the proposal. Stevens answered that the BICE must use a principles-based approach, noting that Secretary Perez claims is operates as such but does not in reality.
Scott noted that a similar proposal to the DOL’s was written in the United Kingdom and that it has resulted in 11 million people going without investment advice. He commented that this is “not something we want to see.”
Rep. Ed Royce (R-Calif.) also pointed to the United Kingdom’s experience, noting that over 300,000 British clients lost access to advice in just the first three months of 2014 while many potential new clients were not accepted. He noted that the British government has now begun a review of its rule and the “advice gap” that it may have created. Stevens commented that ICI is concerned the same result would come from the DOL proposal, and McNeely stated that she knows advisors in the U.K. that had to let go of their small accounts because they were not economically viable.
Ellison asked if comparisons to the U.K. rule are fair. Bullard answered that they are not. Bullard countered that the U.K. rule banned commissions, which the DOL rule would not do. He further commented that the industry’s claims that it cannot provide cost-effective fee-based accounts to small savers is false, and that it could find ways to innovate.
Stivers cited that U.K. advisors have refused to provide services to investors under a minimum account balance, and asked if the same would happen in the U.S. McNeely answered that her current minimum balance for fee-based accounts is $50,000, but that she expects the number would rise with the threat of increased legal liability.
Meeks said the proposal is far too important to not strike the right balance between access to advice and investor protection. He also pointed to the U.K., noting that its rule greatly diminished access and that the same must not happen in the U.S.
Wagner Bill and SEC Fiduciary Standard
Sherman explained that while he supported Wagner’s bill last Congress, the new proposal would also intentionally slow progress toward an SEC fiduciary standard. He said this would make it harder for Democrats to support the present version of the bill. He further commented that it is “absurd” to have conflicting rules for different savers.
Wagner said that because the DOL cannot be counted on to produce a workable final rule, a legislative solution is needed. She asked how her proposed bill would help prevent market disruptions. McNeely expressed hope that it would eliminate confusion for advisors, and Callahan noted that it would empower the SEC to take the lead and ensure that the solution is more targeted and without negative consequences.
Rep. Maxine Waters (D-Calif.) noted that the Wagner bill requires that the SEC publish a report finding whether retail investors are harmed by different standards of conduct prior to developing a harmonized fiduciary standard. She asked whether the SEC has considered this. Bullard answered that the source of confusion for investors stems from that fact that the industry frequently calls its representatives financial advisors, but then denies that it owes a best interest standard in arbitration. He said he agrees that the SEC should have acted “some time ago,” but that it cannot be counted on to act since it has suffered from a “rulemaking paralysis” for the past 15 years and is incapable of a rulemaking.
Wagner asked whether, given the DOL’s “faulty economic analysis,” the additional analysis her bill would require of the SEC is appropriate. Stevens replied that no rulemaking of this scope should be done without an effective analysis.
Rep. Randy Hultgren (R-Ill.) asked whether the broker-dealer industry would be faced with conflicting rules if the SEC also moves forward with a rulemaking. Stevens answered that there is “no question there,” and that any “rational policy universe” would have a consistent regime.
Rep. Ed Perlmutter (D-Colo.) stated that he is sympathetic with desires for the SEC to address this, but that he has waited four years and the agency has failed to act.
Rep. Scott Tipton (R-Colo.) asked about the difference in experience between the DOL and SEC in regulating the securities space. Stevens said the DOL “regulates a slice” while the SEC is much more comprehensive and has deeper expertise.
Product Specific Flaws
Hultgren said one of the flaws with the rule is that listed options would no longer be allowed in retirement accounts. He noted that options are an effective tool for risk management, and asked whether there are low-risk investment strategies that make use of options. Stolz replied “absolutely” and mentioned structured contracts as another product that should be allowed. He spoke against wholesale product exclusion, and instead argued for proper disclosures.
Hultgren asked why the DOL would discourage use of such products in saving for retirement, beyond the fact that they do not understand the market as well as the SEC. Stolz said the reasoning is up to interpretation, but that whether such securities are rejected because the DOL does not find them appropriate or because the DOL does not understand how they are used is “concerning either way.”
Hulgren asked if limiting the scope of investments serve the best interests of savers. Stolz answered that it does not, and choice remains important. He added that many aspects of the DOL’s proposal are “describing a market that does not exist.”
Rep. Luke Messer (R-Ind.) noted that the Obama Administration has a stated priority of making guaranteed lifetime income products more available for middle class families, and asked if the rule would help. Callahan said such products would be prohibited. Stolz added that annuities, because of their cost, would also become less common investments under the rule.
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