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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 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

JEB HENSARLING, Texas, Chairman 

PATRICK T. MCHENRY, North Carolina, 

Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

STEVE STIVERS, Ohio 

RANDY HULTGREN, Illinois 

DENNIS A. ROSS, Florida 

ROBERT PITTENGER, North Carolina 

ANN WAGNER, Missouri 

ANDY BARR, Kentucky 

KEITH J. ROTHFUS, Pennsylvania 

LUKE MESSER, Indiana 

SCOTT TIPTON, Colorado 

ROGER WILLIAMS, Texas 

BRUCE POLIQUIN, Maine 

MIA LOVE, Utah 

FRENCH HILL, Arkansas 

TOM EMMER, Minnesota 

LEE M. ZELDIN, New York 

DAVID A. TROTT, Michigan 

BARRY LOUDERMILK, Georgia 

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 

MAXINE WATERS, California, Ranking 

Member 

CAROLYN B. MALONEY, New York 

NYDIA M. VELA ́ ZQUEZ, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

WM. LACY CLAY, Missouri 

STEPHEN F. LYNCH, Massachusetts 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JAMES A. HIMES, Connecticut 

BILL FOSTER, Illinois 

DANIEL T. KILDEE, Michigan 

JOHN K. DELANEY, Maryland 

KYRSTEN SINEMA, Arizona 

JOYCE BEATTY, Ohio 

DENNY HECK, Washington 

JUAN VARGAS, California 

JOSH GOTTHEIMER, New Jersey 

VICENTE GONZALEZ, Texas 

CHARLIE CRIST, Florida 

RUBEN KIHUEN, Nevada 

KIRSTEN SUTTON MORK, Staff Director 

(III) 

SUBCOMMITTEE ON CAPITAL MARKETS, SECURITIES, AND INVESTMENT

BILL HUIZENGA, Michigan, Chairman 

RANDY HULTGREN, Illinois, Vice Chairman 

PETER T. KING, New York 

PATRICK T. MCHENRY, North Carolina 

SEAN P. DUFFY, Wisconsin 

STEVE STIVERS, Ohio 

ANN WAGNER, Missouri 

LUKE MESSER, Indiana 

BRUCE POLIQUIN, Maine 

FRENCH HILL, Arkansas 

TOM EMMER, Minnesota 

ALEXANDER X. MOONEY, West Virginia 

THOMAS MacARTHUR, New Jersey 

WARREN DAVIDSON, Ohio 

TED BUDD, North Carolina 

TREY HOLLINGSWORTH, Indiana 

CAROLYN B. MALONEY, New York, 

Ranking Member 

BRAD SHERMAN, California 

STEPHEN F. LYNCH, Massachusetts 

DAVID SCOTT, Georgia 

JAMES A. HIMES, Connecticut 

KEITH ELLISON, Minnesota 

BILL FOSTER, Illinois 

GREGORY W. MEEKS, New York 

KYRSTEN SINEMA, Arizona 

JUAN VARGAS, California 

JOSH GOTTHEIMER, New Jersey 

VICENTE GONZALEZ, Texas 

(V) 

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 

(1) 

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 brokerdealer 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? 

2 

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. 

3 

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 

4 

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 abVerDate Nov 24 2008 13:36 May 01, 2018 Jkt 028748 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 K:\DOCS\28748.TXT TERI
5 

solutely 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 

6 

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, commissionbased 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 selfinterests. 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. 

7 

[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 responVerDate Nov 24 2008 13:36 May 01, 2018 Jkt 028748 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 K:\DOCS\28748.TXT TERI
8 

sibility 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 

9 

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 

10 

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 

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11 

vestment 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 bestinterest 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 priviVerDate Nov 24 2008 13:36 May 01, 2018 Jkt 028748 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 K:\DOCS\28748.TXT TERI
12 

lege 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 feebased 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. 

13 

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-yearold 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. 

14 

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. 

15 

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. HoltzEakin? 

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, 

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stitutions 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. 

17 

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 watereddown 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 classaction 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. 

18 

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 industrywide—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 

19 

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 

20 

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? 

21 

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 

22 

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. 

23 

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 

24 

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, 

25 

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. 

26 

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. 

27 

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. HoltzEakin 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 

28 

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? 

29 

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 21⁄2

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 

30 

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 brokerdealers, 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? 

31 

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. 

32 

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. 

33 

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 brokerdealer 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. 

34 

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. 

35 

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? 

36 

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 benVerDate Nov 24 2008 13:36 May 01, 2018 Jkt 028748 PO 00000 Frm 00042 Fmt 6633 Sfmt 6633 K:\DOCS\28748.TXT TERI
37 

efit 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. 

38 

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 

39 

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 roboadvice 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. 

40 

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 

41 

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 roboadvice 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 

42 

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 minuteand-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 

43 

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.] 

(45) 

A P P E N D I X 

July 13, 2017 

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28748.001

Real Possibilities 

STATEMENT FOR THE RECORD 

SUBMITTED TO THE 

HOUSE FINANCIAL SERVICES 

CAPITAL MARKETS SUBCOMMITTEE 

July 13, 2017 

AARP 

601 E Street, N.W. 

WASHINGTON, D. C. 20049 

Submitted By 

Cristina Martin Firvida 

Director, Financial Security and Consumer Affairs 

Government Affairs 

AARP 

For further information, contact: 

Cristina Martin Firvida 

(202) 434-6194 

Government Affairs 
47 


28748.002

On behalf of our 38 million members and Americans saving for their retirement, AARP thanks 

Chairman Huizenga, Ranking Member Maloney and members of the Capital Markets, Securities 

and Investments Subcommittee for the opportunity to testify today on the Impact of the DOL 

Fiduciary Rule on the Capital Markets. 

AARP is the nation's largest nonprofit, nonpartisan organization dedicated to empowering 

Americans so and older to choose how they live as they age. With nearly 38 million members 

and offices in every state, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands, 

AARP works to strengthen communities and advocates for what matters most to families with a 

focus on health security, financial stability and personal fulfillment. As a trusted source for 

news and information, AARP produces the world's largest circulation publications, AARP THE 

MAGAZINE and AARP BULLETIN. Nearly half of our members are employed full or part-time, with 

many of their employers providing retirement plans. 

A major priority for AARP is to assist Americans in accumulating and effectively managing 

adequate retirement assets to supplement Social Security. The shift from defined benefit plans 

to defined contribution plans has transferred significant responsibility to individuals for 

investment decisions that will directly impact the adequacy of the assets available to fund 

future retirement needs. Unfortunately, the state of America's retirement landscape is cause 

for great concern. According to calculations by the Center for Retirement Research at Boston 

College, only about half of households have retirement savings and the rest of Americans have 

no source of income other than Social Security and the "retirement income deficit" for 

American households continues to grow.1 According to recent analysis by EBRI, 47 percent of 

workers in 2017 reported the total value of their household's savings and investments, not just 

for retirement, was less than $25,000 and 24 percent had less than $1,000. 2 Given these trends, 

it is critical to do all we can to help Americans keep as much of their hard-earned nest egg as 

possible. 

AARP has enthusiastically supported the Fiduciary Rule ("rule") as a necessary protection for 

savers when they make investment decisions concerning their retirement monies. Without this 

protection, it is difficult for an individual to effectively plan for a secure and adequate 

retirement. The rule requires retirement investment advice in the best interest of the client 

saving for retirement-that is to say, advice that minimizes conflicts of interest, is solely in the 

interest of the client, and which is provided with the care, skill, prudence and diligence that a 

prudent person would use. AARP agrees with the simple and basic tenet that retirement plan 

advisers should act in the best interest of retirement savers, and not in their own best interest. 

1 Alicia H. Munnell, 401(K)/IRA Holdings in 2013: An Update from the SCF (Sept. 2014), http:f/crr.bc.edu/wpcontent/uploads/2014/09/1 B _14-15l.pdf. 2 Lisa Greenwald et al., The 2017 Retirement Confidence Survey: Many Workers Lack Retirement Confidence ond 

Feel Stressed About Retirement Preparations (Mar. 21, 2017). 

https://www.ebri.org/pdf/briefspdf/EBRI_IB _ 431_RCS.21Mar17.pdf. 
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1. The Public Has Demanded The Protections Of This Rule. 

AARP members and the public generally have demanded and supported the protections of this 

rule. In survey after survey, we have found that retirement savers overwhelmingly want advice 

that is in their best financial interest. In an AARP 2013 survey of over 1,400 adults who had 

money saved in either a 401(k) or a 403(b) plan, more than nine in ten (93 percent) 

respondents favored requiring retirement advice to be in their sole interest, and fewer than 

four in ten (36 percent) respondents indicated they would trust the advice from an adviser who 

is not required by law to provide advice that is in their best interests.3 A survey taken after the 

rule was promulgated demonstrated that an overwhelming percentage of respondents were in 

favor of the rule and believe it is important for financial advisers to give financial advice in a 

client's best interests." Among those individuals who have received professional financial 

advice, the support was the deepest, with nearly 8 in 10 (78 percent) strongly agreeing with the 

rule. 

In addition, plan sponsors generally favor the rule. In a survey of over 3,000 plan sponsors of all 

sizes, nearly nine in ten (89 percent) plan sponsors said that they would favor requiring giving 

advice that is in the sole interest of plan participants-' 

In the Committee room today are several AARP members who have traveled here today to 

attend the hearing and show their support for the rule. AARP members were actively engaged 

in voicing their support for this rule during the open comment period in 2015. Close to 100,000 

AARP members took over 200,000 actions in support of the rule in 2015, including submitting 

close to 60,000 messages to the U.S. Department of labor, and delivering over 26,000 petitions 

to the House Financial Services Committee. The 26,000 petitions we delivered to the 

Committee have been resubmitted to the Committee for the record. 

We are communicating with our members now about the Department of labor's current open 

comment period on modifications to the rule and further delay of its enforcement and expect 

that many of our members will write or call to support the rule. AARP has also used its own 

channels to inform our members and the broader public about the benefits of the rule, 

including multiple articles in AARP's Bulletin, which is mailed to all 38 million members. We 

have worked in collaboration with organizations such as Yahoo Finance to produce educational 

videos regarding the rule and its benefits. Finally, AARP is developing a tool that will walk 

investors through the questions they should ask a prospective or existing financial adviser, 

3 AARP, Fiduciary Duty and Investment Advice: Attitudes of 401(k] and 403(b} Participants (Sept. 2013), 

http:/ /www.aarp.org/research/topics/economics/info-2014/fiduciary-duty-and-investment-advice---attitudes-of401-k--and-4.html. 

4 5. Kathi Brown, Attitudes Toward the Importance of Unbiased Financial Advice 4, 6 (May 2016), 

http:/ /www.aarp.org/content/dam/aarp/ 

research/surveys_statistics/econ/2016/attitudes-unbiased-fin-advice-rpt-res-econ.pdf. 

5 AARP, Fiduciary Duty and Investment Advice: Attitudes of Plan Sponsors (Mar. 2014), 

http:/ /www.aarp.org/research/topics/economics/info-2014/fiduciary-duty-and-investment-advice---attitudes-ofplan-sponsor.html. 
49 


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including whether the adviser operates under a fiduciary standard. We developed the app in 

collaboration with the North American Securities Administrators Association and anticipate 

launching the tool this fall. 

In addition to the support of individuals saving for their retirement, many states agree the 

fiduciary rule is needed to protect residents and deter potential exploitative practices. In fact, 

earlier this year Attorneys General from across the country, including Hawaii, Illinois, New York, 

North Carolina, Iowa, Oregon, Pennsylvania, Washington, and the District of Columbia, issued 

letters urging the Department of labor to proceed with the rule that would require financial 

advisers to put their clients' best interests ahead of their own. Additionally, California, 

Missouri, South Carolina and South Dakota already impose a fiduciary standard on brokers in 

their states. In response to recent efforts to dilute the Department of Labor rule, Nevada 

enacted legislation to subject broker-dealers and investment advisers to a fiduciary standard, 

with the support of AARP Nevada. We expect more states to establish this standard going 

forward. 

The rule also has the support of personal finance columnists and reporters who have 

repeatedly touted the beneficial effects of the rule. In scores of articles, personal finance 

writers from diverse publications have informed their readers of the rule's requirements and 

protections. Many of them have provided their readers with questions to ask their advisers to 

ensure that their advisers are fiduciaries. 

I. Most of the financial services industry agrees that a fiduciary standard is the 

appropriate standard for providing retirement investment advice. 

The financial services industry generally agrees that investment advice should be provided in 

the best interests of the participant and retirement investor. Registered investment advisers 

and certified financial planners have for decades successfully provided fiduciary advice. Noting 

that the public demand for fiduciary advice has increased dramatically and that the market 

continues to move in the direction of providing fiduciary advice, the Certified Financial Planner 

Board of Standards last month issued for public comment proposed revisions to its Standards of 

Professional Conduct, which sets forth the ethical standards for CFP® professionals. The draft 

revision broadens the application of the fiduciary standard, effectively requiring CFP® 

professionals to put a client's interest first at all times. The current Standards require CFP® 

professionals to act in a fiduciary capacity only when providing financial planning. The CFP 

Board is expected to finalize its updated Standards later this year. 

Public comment letters to the Department of Labor also demonstrates the overwhelming 

consensus on the best interest standard. E.g., Transamerica Comment letter 894 ("The 

Company has consistently indicated its support for a best interest standard, transparency and 

treating customers fairly"); SIFMA Comment letter 506 ("The industry ... shares that goal" "to 

ensure financial services providers are looking out for their customer's best interest"); Plan 

Sponsor Council of America Comment letter 614 ("[W]e believe our retirement system will be 
50 


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greatly strengthened by ensuring that investment advice is provided in the recipient's best 

interest consistent with those fiduciary standards and that any financial conflicts are 

disclosed."); American Council of life Insurers Comment letter 621 ("We share the 

Department's interest in seeing that plan sponsors, plan participants and Individual Retirement 

Accounts (IRA) owners receive advice that is in their best interest."); American Bankers 

Association Comment letter 622 ("We agree with the Department that retirement service 

providers, when acting in their capacity as fiduciaries, should act in the best interest of 

customers and that such customers deserve to be protected from financial abuse."); Insured 

Retirement Institute Comment letter 626 ("Financial professionals should be held to a best 

interest standard when recommending investments to retirement investors."); Business 

Roundtable Comment letter 645 ("Financial professionals should be required to act in the best 

interests of employee benefit plan participants when providing investment advice to a 

retirement plan or its participants."); Wells Fargo Comment letter 647 ("[W]e remain 

supportive today of a "best interest" standard of care for clients."). 

There should be no surprise about this consensus since these statutory standards have been in 

place since the Employee Retirement Income Security Act (ERISA) was enacted in 1974. Indeed, 

treating those who provide investment advice for a fee as a fiduciary is consistent with both the 

statute and the common law of trusts upon which ERISA was based. Significantly, although 

there have been attempts to weaken the rule requiring those who provide investment advice 

for a fee to be treated as a fiduciary, Congress has never agreed to dilute the standard adopted 

over 40 years ago to protect and preserve employees' hard-earned retirement savings. 

II. Weakening The Fiduciary Rule Will Undermine The Financial Security Of Americans 

Saving For Retirement. 

Although AARP is extremely disappointed that enforcement of the rule has been delayed until 

January 2018, we appreciate that the Department of labor has decided to go forward with the 

applicability date for the fiduciary rule, beginning last month on June 9, 2017. To dilute or 

rescind the fiduciary rule is simply too costly to retirement investors. Retirement investors are 

at risk of a 1 percent drop in annual returns on retirement savings without the rule6 

Increasingly, the way that most Americans save and invest is through their employer sponsored 

retirement plans, most typically a 401(k) type savings plan. The Government Accountability 

Office (GAO) has estimated that $20,000 in a 401(k) account that had a one percentage point 

higher fee for 20 years would result in an over 17 percent reduction in the account balance, a 

loss of over $10,000.7 We estimate that over a 30-year period, the account would be about 25 

percent less. Even a difference of only half a percentage point 50 basis points would 

reduce the value of the account by 13 percent over 30 years. Conflicted advice resulting in 

higher fees and expenses can have a huge impact on retirement income security levels. 

6 U.S. Gov. Accountability Office, GA0-11-119, Improved Regulation Could Better Protect Participants from 

Conflicts of Interest 31 (Jan. 2011), http:/ /www.gao.gov/assets/320/315363.pdf. 7 U.S. Gov. Accountability Office, GA0-07-21, Private Pensions: Changes Needed to Provide 401{k) Plan Participants 

and the Department of Labor Better information on Fees 7 (Nov. 2006). 
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28748.006

Risks caused by conflicted investment advice are also increasing as the baby boomers retire and 

are encouraged to move their money from protected ERISA plans to IRAs. The Department of 

Labor (DOl) found that advice from conflicted investment advisers could cost these retirees 

between 12 to 24 percent in lost retirement savings over thirty years.8 The DOl found that IRA 

investors tend to be older as they are close to or at retirement. These IRA investors are more 

vulnerable to the negative impact of conflicted advice because the amount of assets available 

for rollover are large, many older investors do not have strong financial literacy skills, and they 

are making significant and often one-time decisions to move their retirement savings from 

more protected employer based plans into significantly less protected IRAs. 9 

lower and middle-income retirement investors need every penny of their retirement savings. 

"Among the 48 percent of households age 55 and older with some retirement savings, the 

median amount is approximately $109,000- commensurate to an inflation-protected annuity 

of $405 per month at current rates for a 65- year-old."10 DOl likewise has established that 

"small investors" (that is, those with low balances or those with modest means) are most 

negatively impacted by the detrimental effects of conflicted advice. Those with small accounts 

have fewer economic resources, and consequently any additional costs or losses diminish what 

little savings they have worked so hard to amass. 

Congress sought to protect the retirement savings of millions of workers, retirees, and their 

families when it enacted the Employee Retirement Income Security Act of 1974. ERISA, the 

result of a decade of legislative consideration, established far-reaching standards to protect 

consumers through timely disclosure of information, minimum standards for participation, 

funding rules, fiduciary duty over invested monies, and access to legal redress for violations of 

the law. ERISA specifically applies to financial service firms that handle retirement monies, 

including insurance companies, investment firms, and broker-dealers. All of these actors are 

subject to ERISA when they are providing retirement advice, even if they are also subject to 

standards promulgated by other agencies or self-regulating bodies. These entities have largely 

successfully complied with ERISA for over forty years. 

The rule could have important benefits for the broader economy. If households- especially 

lower and middle class older individuals - have more money in their modest retirement 

accounts because of lower fees, they will have more money to spend in the economy on goods 

and services. Conflicted advice may also impact the broader economy by misallocating capital, 

resulting in inefficiencies that do not promote economic growth. 11 

8 U.S. Dep't of Labor, Fiduciary Investment Advice: Regulatory Impact Analysis 3-4 (2015). 9 /d. at 59-60. 10 U.S. Gov't. Accountability Office, GA0-15-419, Retirement Security: Most Households Approaching Retirement 

Have Low Savings 11 (May 2015}, http://www.gao.gov/ 

assets/680/670153.pdf. 

11 Benjamin P. Edwards, Conflicts and Capital Allocation, 78 Ohio St. L.J. 1 (2017) at 21. 
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Regardless of the method used to calculate the losses, it is clear that repeal of the rule 

jeopardizes the retirement security of hard working Americans, and could have a negative 

impact on the economy more broadly. 

Ill. The Rule Has Not Reduced Access To Retirement Information And Financial Advice. 

While some disruption within the retirement services industry can be expected after updating a 

40-year old regulation to make it relevant to the current retirement marketplace, the disruption 

has overall been positive for retirement investors. The disruption has resulted in lower fees, 

advice in the best interest of the saver or retiree, and minimized conflicts in advice provided to 

individuals. Many investment firms and their advisers have also taken steps to meet the 

requirements of the regulation and already have incurred one-time, up-front compliance costs. 

Significantly, we have not seen prices increase for those companies that have significantly 

complied with the rule. In fact, repealing the rule, as this proposal seeks, will not only harm 

consumers but place these firms and advisers at a disadvantage. 

Under the rule, Americans will still be able to access a variety of retirement savings offerings. 

There is no prohibition in the rule against any type of retirement investment product. The rule 

does not require investment firms to abandon products, but instead allows 

the investment marketplace to evolve and innovate to provide investments and products that 

answer the needs of individuals who now shoulder greater responsibility for their retirement 

security as well as provide protection for their hard-earned retirement monies. Indeed, the 

market is responding already to the public demand for fewer conflicts of interest, greater 

transparency, and lower fees. The recent development of new investments with differentiated 

fees such as clean shares and T shares by leading investment firms demonstrate this point. 

Conversely, as individual firms respond to market signals, they may discontinue offerings that 

do not meet client demands. The choice to develop or discontinue an offering is up to an 

individual adviser, broker or firm. Because ERISA does not have an authorized or legal list of 

investments, the rule is consistent with Congress's design of ERISA's broad fiduciary rule. 

In addition, investment firms will continue to make business decisions on how to structure their 

customer relationships. Firms will determine whether to make use of the Best Interest Contract 

Exemption for certain products or particular fee arrangements. The decision of each firm may 

be different depending on an analysis of its business model and its client base. By way of 

example, three of the largest defined-contribution plan providers are reported to have chosen 

three distinctly different compliance strategies. 12 

Americans saving for retirement have the majority of their savings in defined contribution plans 

and IRAs. Given the nearly $8 trillion in assets in IRAs and the almost $5 trillion in 401(k) plans, 

there is neither evidence- nor any reason to believe -that financial service providers will 

12 Greg lacurci, Fidelity, Empower and T. Rowe take three different approaches to the DOL fiduciary rule, INVESTMENT 

NEWS (Mar. 7, 2017), http://www.investmentnews. 

com/ article/20170307 /FREE/170309941/fidel ity-empower -and-t -rowe-take-three-different -approaches-to-the 
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abandon this lucrative market.13 Thus, to the extent there are disruptions, retirement savers 

stand to benefit as the various players in the financial services industry adjust to maintain their 

competitive edge. AARP has every confidence that the financial services industry and the 

retirement advice market will continue to develop innovative new products and systems to help 

hard working Americans save for retirement. 

IV. Broker-Dealers, Investment Advisers, and the Fiduciary Standard 

Both broker-dealers and investment advisers play an important role in helping Americans 

manage their financial lives, and accumulate and manage retirement savings. Clients receiving 

investment advice should receive a standard of care that is in their best interest, regardless of 

whether the advice comes from a broker-dealer or an investment adviser. Any effort to dilute 

existing safeguards, whether through rulemaking or legislative channels, puts consumers and 

their savings at unacceptable risk. 

AARP appreciates that the draft bill under discussion today seeks to impose a best interest 

standard on broker-dealer recommendations. Advice in the best interest of individuals saving 

or investing is something AARP has long supported. However, by failing to identify the standard 

as a fiduciary standard and deviating from the standard applicable to all other advisers, the bill 

permits something short of full fiduciary protections. It could even suggest that compliance 

with the existing suitability standard, which makes reference to the best interest of the 

customer but does not require brokers to rein in conflicts or consider other investments, would 

meet this benchmark. If that is not the bill author's intent, we respectfully suggest that this 

point needs to be clarified. If this failure to impose a full fiduciary standard is intentional, 

however, that falls well short of the protections investors need and deserve. 

a. The draft bill does not strengthen the suitability standard, leaving investors 

confused and at risk. 

The regulatory imbalance between the duties of brokers and investment advisers has persisted 

for many years, even as evidence demonstrating that brokers have transformed themselves 

from salesmen into advisers has grown. Many brokers today call themselves "financial 

advisers," offer services that clearly are advisory in nature, and market themselves based on 

the advice offered. For example, one firm advertises that it "proudly strive[s] to embrace [its] 

own fiduciary responsibilities" and that its "highest value is to 'always put the client first,"'14 

even though its Form ADV brochure (a regulatory filing that the SEC requires to be given to 

clients after a transaction is completed) demonstrates otherwise, noting that "[d]oing business 

13 1(1 Research Report, Defined Contribution Plan Participants' Activities, First Three Quarters of 2016 at 2 (Feb. 

2017), https:/ /ici.org/ 

pdf/ppr_16_rec_survey_q3.pdf. 

14 Letter from Robert Reynolds, President and CEO of Putnam Investments, to u.s. Dep't of Labor (July 20, 2015), 

available at https://www.dol.gov/sites/default/files/ebsa/laws-and-regulations/rules-and-regulations/publiccomments/1210-ZA25/00077.pdf. 
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with our affiliates could involve conflicts of interest if, for example, we were to use affiliated 

products and services when those products and services may not be in our clients' best 

interests."15 As a result of such deceptive statements, the average investor cannot distinguish 

between brokers and advisers and does not recognize that their "financial adviser" operates 

under a lower legal standard than that to which an investment adviser is held. Nor is it 

surprising that investors expect that those who advertise themselves as a trusted adviser will 

provide financial advice in the best interest of the investor. 

Federal regulations have not kept pace with changes in business practice, and broker-dealers 

and investment advisers continue to be subject to different legal standards when they offer 

advisory services. According to the Commission's 2011 Study on Investment Advisers and 

Broker-Dealers, as of the end of 2009, FINRA-registered broker-dealers held over 109 million 

retail and institutional accounts and approximately 18 percent of FINRA-registered brokerdealers also are registered as investment advisers with the Commission or a state. 16 The draft 

bill is silent on the legal standards that will apply when a dually registered investment adviser 

and broker-dealer acts in both capacities and offers investment advice and/or executes sales. 

Ensuring all securities professionals who offer investment advice to retail investors are subject 

to a fiduciary standard is needed to ensure a level and transparent market for investors seeking 

advice. Investors deserve a regulatory system that is designed to promote the best interests of 

the investor and imposes comparable standards on investment professionals who are 

performing essentially the same function as financial advisers. Research has found investors 

typically rely on the recommendations they receive from brokers and investment advisers alike. 

The trust most investors place in financial professionals is encouraged by industry marketing, 

leaving investors vulnerable not only to fraud but also to those who would take advantage of 

that trust in order to profit at their expense. Investors who place their trust in salespeople who 

market services as financial advisers can end up paying excessively high costs for higher risk or 

underperforming investments that only satisfy a suitability standard, but not a fiduciary 

standard. That is money most middle-income investors cannot afford to waste. 

b. The duties of brokers must be clearly defined. 

As currently drafted, the draft bill focuses on what is not required of a "best interest standard" 

and what the standard does not preclude (e.g., transaction-based compensation, including 

third-party payments, principal trades and recommendations of proprietary products). 

However, the proposal does not illustrate what is definitively required of broker-dealers in 

order to meet the standard (other than a newly conceived comparison to the business practices 

of another broker or dealer). 

15 Putnam Advisory Company, LLC, SEC Form ADV Part 2A at 25 (Mar. 30, 2016), available at 

http://www .adviseri nfo.sec.gov /IAPD /Content/Common/ crd _iapd _Brach u re.aspx?BRCH R _ VRSN _10=3 75046. 

(Putnam Investments wholly owns Putnam Advisory Company through various subsidiaries.) 16 S.E.C, Study on Investment Advisers and Broker-Dealers (Jan. 11, 2011). 
55 


28748.010

In addition, the section on disclosures is concerning. As currently drafted, the bill lists three 

options for the handling of conflicts ··avoid, disclose, or manage. Disclosing conflicts is not 

adequate and does not shield investors from conflicts nor does it compel mitigation of existing 

conflicts. Furthermore, the draft bill is ambiguous as to whether disclosures are required only at 

initiation of the relationship between the broker-dealer and the investor, and as to whether the 

disclosures described in this bill supersede other disclosures that do not pose a material 

conflict. The bill also does not specify the ways in which a broker-dealer must manage conflicts 

of interest. Failure to address this flaw in the proposal would leave investors vulnerable to 

unscrupulous advisers. 

c. Agencies should retain authority to protect consumers and enforce rules under 

ERISA. 

The draft proposal could potentially preclude both the SEC and DOL from taking action to adopt 

stronger protections for investors and retirement savers, even if they find that this bill's 

approach is inadequate, or the market evolves with unanticipated consequences. In addition, it 

could substantially weaken the standard that applies under ERISA to advice from registered 

investment advisers. 

d. The draft bill raises numerous additional concerns. 

The draft bill raises numerous additional concerns. The draft bill does not ensure broker· 

dealers who provide investment advice meet minimum training and competency requirements. 

By contrast, fiduciaries are affirmatively required to obtain training on their duties and their 

legal obligations. The draft bill fails to require brokers to apprise investors in advance of a sale 

of the amounts of all compensation (only the types of compensation must be reported). The 

bill covers retail sales and exempts institutional sales, but fails to define either term. It permits 

broker-dealers to provide advice for "non-discretionary" roll-overs of retirement assets, but 

also fails to define what meets this standard. Finally, it broadly exempts investment advisers 

for variable annuities, which are costly and complex, from adhering to a fiduciary standard 

when recommending variable annuities to investors. 

We thank the Committee for the opportunity today 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 investment advice. Repealing the fiduciary rule as promulgated by 

the Department of Labor would significantly diminish retirement security, and we oppose its 

repeal. AARP stands ready to serve as a resource and partner in developing an effective 
56 


28748.011

standard for investment advice that will promote and protect the retirement security of 

American families. 
57 


28748.012

STATEMENT OFTHE AMERICAN COUNCIL OF LIFE INSURERS 

BEFORE THE HOUSE COMMITTEE ON FINANCIAL SERVICES 

SUBCOMMITTEE ON CAPITAL MARKETS, SECURITIES, AND INVESTMENT 

ON THE IMPACT OF THE DOL FIDUCIARY RULE ON THE CAPITAL MARKETS 

THURSDAY, JULY 13, 2017 

STATEMENT MADE BY MARK HALLORAN, SENIOR DIRECTOR, 

HEAD OF INDUSTRY AND REGULATORY STRATEGY, TRANSAMERICA 

Chairman Huizenga, Ranking Member Maloney, and members of the Committee, I am 

pleased to present this statement expressing the views of the American Council of Life 

Insurers on the impact of the DOL Fiduciary rule on the capital markets. Thank you for the 

opportunity to testify before you today. 

My name is Mark Halloran and I am the Senior Director, Head of Industry and Regulatory 

Strategy at Transamerica. Transamerica is one of the nation's leading providers of financial 

services and insured products, including annuities, to America's families and individuals 

working to build a solid financial foundation. For the past several years I have worked with 

the ACLI and many of its member companies on the difficult challenges confronting both 

retail investors and the financial professionals who serve them under the U.S. Department 

of Labor's Fiduciary Regulation. 

The American Council of Life Insurers is a Washington, D.C.·based trade association with 

approximately 290 member companies operating in the United States and abroad. ACLI 

advocates in federal, state, and international forums for public policy that supports the 

industry marketplace and the 75 million American families that rely on life insurers' 

products for financial and retirement security. ACLI members offer life insurance, annuities, 

retirement plans, long-term care and disability income insurance, and reinsurance, 

representing 95 percent of industry assets in the United States. 

ACU supports reasonable and appropriately tailored rules that require all sales 

professionals to act in the best interest of their customers. Prudential regulators such as the 

1 
58 


28748.013

SEC and state insurance regulators, not state courts and the plaintiffs' bar, are best 

positioned to apply and enforce a best interest standard of care. To meet their financial and 

retirement security needs, America's savers and retirees deserve rules that ensure 

continued access to a wide variety of retirement product offerings, retirement savings 

information and related financial guidance from financial professionals acting in their best 

interest. 

ACLI supports the Discussion Draft being reviewed by the Subcommittee at today's hearing. 

ACLI thanks Chairman Huizenga, Representative Ann Wagner, and other members of the 

Committee for their strong leadership on this issue. The Discussion Draft would establish a 

"best interest" standard of conduct to govern the relationship between broker-dealers and 

their individual representatives with retail investors. 

Perhaps most importantly, the best interest standard of conduct under the Discussion Draft 

would apply to the totality of the relationship between consumers and financial 

professionals; not just the one dimension of the relationship that involves ERISA plan or IRA 

assets. The bill also installs 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 investors 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 Discussion Draft at long last 

harmonizes the multi-faceted bodies of law and regulation applicable to the sale of 

insurance and annuity products at the retail level. 

My testimony today focuses on three key areas. First, I will briefly review the clear and 

present danger that the Department of Labor's Fiduciary Regulation poses to the financial 

well-being and retirement security of average working Americans. Second, I will address 

how the Discussion Draft addresses and resolves that threat by preserving retail investor 

freedoms of access and choice under a coherent "best interest" standard of conduct. Third, 

I will offer some final thoughts on why we at ACLI believe the Discussion Draft approach 

brings much needed regulatory harmony, stability, and certainty to the marketplace for retail 

investment advice. 

The Department of labor's Fiduciary Regulation Hanns Middle Income Savers and limits 

Consumer Choices 

However well-intentioned it may be, the DOL's Fiduciary Regulation poses a very real threat 

to the financial well-being and retirement security of working Americans. It is difficult to 

overstate the magnitude of that threat. The continued availability of what today is taken for 

granted - a vibrant and competitive marketplace for insured retirement solutions, readily 

available access to cost effective financial advice and true consumer choice about how to 

pay for that advice - is seriously jeopardized under the DOL's approach. 

The core problem with the DOL Regulation is that it re-characterizes virtually lill financial 

services and product sales activity directed to employer-sponsored retirement plans, 

including participants, or to individual retirement accounts ("IRA's"), as "fiduciary" conduct 

2 
59 


28748.014

within the meaning of ERISA and the Internal Revenue Code. That sweeping approach is 

enormously problematic for distributors of insurance and annuity products. ERISA's fiduciary 

standard, which strictly prohibits financial conflicts of interest and the receipt of payments 

(including sales commissions) from third parties in connection with a recommended 

transaction, renders the compensation structures that are best tailored for insurance and 

annuity sales distribution organizations illegal unless and except to the extent that a 

prohibited transaction exemption is available to cover the transaction. 

The Department of Labor has devised a prohibited transaction exemption known as the 

"Best Interest Contract" or "BIC" Exemption that, in theory, would exempt the receipt of 

sales commissions and other incentives by fiduciary advisers. As a practical matter it 

effectively forbids the use of sales commissions as a manner of payment. The conditions of 

the BIC Exemption are so exceedingly complex and technical as to present serious questions 

as to whether they can realistically be met. Moreover, the BIC Exemption contains an 

inherent, deeply-rooted bias that strongly favors the provision of investment advice on a fee 

for service basis and strongly disfavors the provision of products and services by those who 

are compensated on a commission, or transaction-based basis. It has retained this bias 

even though commentators have warned DOL that for all but the wealthiest segment of the 

retail investor community, fee-based advice is frequently uneconomical and unaffordable. 

To make matters worse, the BIC Exemption has been intentionally designed to expose 

distributors of financial services and products to a significant risk of widespread private 

plaintiffs' class action claims. 

The fee-based advice model that the DOL Regulation favors may meet the needs of active 

traders and the very wealthy, but not the needs of "buy and hold" investors or purchasers of 

annuity products, which are designed for long term retirement goals. Fee-based 

arrangements often carry hefty account minimums (typically between $100,000 and 

$250,000), and rarely include annuities, as these products do not typically necessitate 

continual advice and investment management. Retail investors with small or mid-sized 

accounts need continued access to experienced, knowledgeable transaction-based financial 

professionals who can inform them about the guaranteed lifetime income features available 

through annuity products and assist in fitting those products to individual investor needs. 

Under the DOL Regulation, an advice gap has developed for small and medium retirement 

account holders who do not meet higher account mini mums for fee-based arrangements. 

Small and medium retirement account holders are consequently left without any advice. 

For these savers, the DOL inappropriately relies on computer generated asset allocation 

platforms, commonly referred to as "Robo-Advisers". Yet, the DOL concedes that these 

automated asset allocation services likely do not offer the same benefits as financial 

professionals- benefits that include encouraging greater savings, responding to clientspecific questions, and dissuading emotional investing, such as liquidating assets during a 

downturn like the 2008 market crash. The DOL has failed to explain how computergenerated asset allocation platforms, given these crucial limitations, can serve as an 

adequate substitute for a financial professional. 

3 
60 


28748.015

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 Protects the Interests of Retail Investors 

The Discussion Draft takes a common sense approach to addressing and resolving the 

threats posed by the DOL Regulation and by doing so preserves access to investment advice 

for average investors and their families. It amends certain provisions of the Securities 

Exchange Act of 1934 (the "34 Act"), the Dodd Frank Act, ERISA, and the Code to weave 

together a coordinated and complete "best interest" standard for transaction-based 

financial professionals that protects Q)l dimensions of the retail investor client relationship, 

including but not limited to the portion of the relationship that concerns ERISA and IRA 

assets. By doing so, it renders moot the exceedingly complex, highly technical conditions of 

the BIC Exemption that today threaten to stifle retail investor freedoms of choice and 

access. 

At the centerpiece of the bill is an amendment to the '34 Act that enshrines a "best interest" 

standard governing the delivery of investment recommendations by broker-dealers and their 

individual representatives to retail customers. Best interest recommendations would need 

to reflect reasonable diligence, care, skill, and prudence in light of the client's investment 

profile. 

The Discussion Draft contains disclosure rules to complement the new standard. At the 

outset of the customer relationship, broker-dealers would need to clearly and concisely 

disclose the type and scope of the services to be provided, the standard that may apply to 

the relationship, the types of compensation that the broker-dealer and its representatives 

may receive, and any material conflicts of interest. Importantly, the bill safeguards the legal 

validity of traditional, transaction-based compensation structures by providing that the 

receipt of sales commissions, recommendations of principal transactions, recommendations 

of affiliated, unaffiliated or proprietary products or services, or limitations on the range of 

products and services offered would not, in and of themselves, constitute violations of the 

'34 Act's best interest standard of care. 

Since the Discussion Draft amends the federal securities laws, the new "best interest" 

standard would govern the totality of a broker-dealer's securities relationship with a retail 

investor; not just the portion of the relationship that pertains to ERISA plan and IRA 

recommendations. In regards to ERISA plan and IRA recommendations, the Discussion 

Draft would stay the hand of DOL by forbidding the promulgation of any regulations defining 

the circumstances under which a person is deemed to be a "fiduciary" if those regulations 

would impose any obligations on a broker-dealer or its representatives or on a life insurance 

company or its agents that is either inconsistent with or in addition to the obligations set 

forth under the '34 Act. In addition, the ERISA statute and its parallel Internal Revenue 

Code provisions would be amended to add a new statutory prohibited transaction exemption 

to cover any recommendations made by a broker-dealer or its registered representatives 

that are consistent with the '34 Act standard. Similarly, the exemptions would be available 

to registered investment advisers, banks, and other financial institutions who comply with 

4 
61 


28748.016

standards substantially similar to the '34 Act standard. This assures a level playing field for 

all financial professionals and financial institutions. 

Life insurance companies and their agents frequently distribute annuity and other insurance 

products through registered broker-dealer organizations. To that extent, the ERISA 

protections afforded by the Discussion Draft would be directly available. To cover those 

instances where annuity and insurance products are distributed other than through a 

broker-dealer, the same prohibited transaction exemption would be applicable where the 

manufacturer or distributor of insurance products adopts and implements practices on a 

nationwide basis that meet or exceed the '34 Act's standard and substantially complies with 

that standard. 

The Discussion Draft's straightforward approach protects the interests of retail investors. 

Sales recommendations of securities and annuity products will reflect the investors' best 

interests, in light of their customer profiles. At the same time, the preservation of 

transaction-based compensation structures will ensure that consumers have continued 

access to information and advice and freedom of choice about how to pay for advice. 

The Discussion Draft Facilitates Coordination By Prudential Regulators and Harmonization of 

the Regulation of Advice to Retail Investors 

The regulatory environment governing the delivery of investment advice to retail investors, 

which has already been de-stabilized by the DOL Regulation, threatens to become even 

more fractured unless Congress takes action. The bill sensibly places responsibility for 

issuing regulations in the hands of the primary regulators, the SEC and state insurance 

regulators. The bill would also place a statutory obligation on the SEC to coordinate and 

cooperate with state insurance regulators. 

Condusion 

The Discussion Draft's establishment of a unified standard of care to govern the delivery of 

financial advice to the retail investor community, its identification of the SEC as the lead 

regulator for purposes of implementing that standard for securities, and emphasis on 

coordination and cooperation with state insurance regulators reflects good policy, will 

stabilize the marketplace for the delivery of retail financial products and services to 

consumers and will benefit consumer interests by restoring freedom of access and choice. 

Thank you for the opportunity to testify today and for your consideration of the views of ACLI. 

5 
62 


28748.017

Impact of the DOL Fiduciary Rule on the Capital Markets 

United States House of Representatives 

Committee on Financial Services 

Capital Markets, Securities, and Investment Subcommittee 

Douglas Holtz-Eakin, President* 

American Action Forum 

July 13, 2017 

*I thank Meghan Milloy for her assistance in preparing this testimony. The views expressed here 

arc my own and not those of the American Action Forum. 
63 


28748.018

Chairman Huizenga, Ranking Member Maloney, and members of the Subcommittee, thank you 

for the opportunity to appear today and share my views on the impact of the Department of 

Labor's (DOL's) fiduciary rule on capital markets. And thank you for your efforts to repeal the 

rule and to enact a rule that is more workable and effective for both consumers and the 

retirement advice market. 

When the fiduciary rule was finalized in 2016, it was (and still is) the most expensive regulation 

that year, with $31.5 billion in total costs and $2 billion in annual burdens 1 on the companiesmany of which are small businesses- and advisors it affects. Although the rule has not yet been 

fully implemented, research from the American Action Forum (AAF) has found that several 

major companies have already left part of the brokerage business or are drawing down their 

business and/or switching to a fee-based arrangement. From these companies alone, reported 

compliance costs have already topped $100 million, affecting 92,000 investment advisors, $!90 

billion in assets. and at least 2.3 million consumers.2 

Advocates for DOL's fiduciary rule argue that it is necessary to prevent bad actors from 

prioritizing their own interests above those of their clients. They argue that without it, consumers 

will be short-changed in their retirement savings by being steered into investments that don't 

work for them. On its face, a fiduciary standard is widely supported throughout the industry. The 

only issue is the best way to implement a standard. The problem with DOL's fiduciary rule is not 

the requirement to act in a client's best interest, but the dissuasion of commission-based accounts 

and the imposition of the Best Interest Contract (BTC) Exemption, which exposes financial 

advisors to the risk of litigious clientele. 

Despite its length and complexity, the fiduciary rule can be broken down into two basic paths of 

compliance for advisors: 1) Moving to a primarily fee-based model or 2) Entering into the BIC 

with clients. The consequences resulting from each ofthese options are explored in detail below. 

I. Moving to a primarily fee-based model 

Created by the Employee Retirement Income Security Act of 1974 (ERISA), individual 

retirement accounts (lRAs) have become an integral part of Americans' retirement saving 

strategies. Based on data from the Internal Revenue Service (IRS), by the end of2014, 57.3 

million Americans owned at least one IRA, all totaling nearly $7.3 trillion in assets. 

1 See, 

http:l/regrodeo.com/?year%5b0%5d=2016®ulation-Definition%20of%20the%20Term%20%E2%80%9CFiduciar 

y%E2%80%9D;%20Conflict%20of%201nterest%20Rule--2016--31500000000 

2 ~www.americanactionforum.org/insight/fiduciary-rule-already-taken-toll-100-million-costs-fewer-options/ 
64 


28748.019

Table 1. Taxpayers with Individual Retirement Arrangement (IRA) Plans,. by Filing Status and Gender, Tax Year 2014 {AU r.g..,..,.,...,..,.,n!Gl,..~a!>El':l <>n""""k>o- <m<>ey woolri~"'"'nH<><$n:h<;>f ~"n"'") 

Taxpayers wrth lR!\ accounts repocted on Form5498 or Form 1099-R 

Filing status and gender 

All taxpayers 

""' Vl!>mn 

Taxpayers filing joint 

returns, total 

"'" 

"""""' 

Taxpayers filing non-joint 

returns, total 

Men 

Vl!>mn 

Total 

(1) 

202,530,196 

98,259,891 

104,270,305 

110,797,852 

55,447,186 

55,350,666 

91,732,345 

42.812,705 

48,919,640 

11\.illlpension 

coverage on 

FotTm W-2[1] 

(2) 

71,427,452 

36,501A18 

34,926,034 

41,879,949 

23,033.568 

18,845.381 

29,547,502 

13,467.850 

16,079,552 

S!gibletorreke Rothconversioos[3J 

!RA.contnbutionS 

{21 N:.Jrrberof Arrourrt taxpayers 

(3) (10) (11) 

155,481,150 488,827 8,255,152 

79,643.021 272,918 5,326,927 

75,838,129 215,009 2,928.225 

77,554,816 367,962 6,285,405 

42,299.478 207,034 4.366.251 

35,255,338 160,928 1,919,154 

77,926,336 120,865 1,959,747 

37,343,544 65,884 960,676 

40,582,792 54,981 1,009,071 

wthdraw a!s [4J 

"""""'"' taxpayers 

(12) 

17,985,606 

8,939,710 

9,045,896 

11,600.,461 

6,805,223 

4,795,238 

6,335,145 

2,134,487 

4,250.658 

'.'~""'' 

A"""'! 

(13) 

275,107,505 

'167,122,701 

107,984,804 

185,056,156 

134.236,273 

50,819,883 

90,051,348 

32,886,428 

57,164,920 

End-of-yearfalrrmrketvalue 

ofH'lA' 

-of 

taxpayers 

(14} 

57,279,386 

28,146,406 

29,132,980 

40,120,901 

21,140,438 

18,980,463 

17,158,485 

7,005,968 

10,152,517 

Arrount 

{15) 

7,291,587,418 

4,483,874,245 

2,807,713,173 

5,495,436,957 

3,809,952,218 

1,685,484.749 

1,796,150,451 

673,922,027 

1,122.228,424 

In 2011, a survey of25.3 million IRA accounts3 found that a large majority of IRA investors 

opted for a commission-based instead of a fee-based arrangement, and that those investors with 

lower IRA account balances opted for a commission-based arrangement at higher rates than 

those with higher account balances as seen in the chart below.4 

Proportion of IRAs Using Each Payment Model by Account Size 

100% 

90% 

80% 

70% 

60% 

50% 

40% 

30% 

20% 

10% 

0% 

< $10,000 $10,000. < 

$25,000 

$25,000. < 

$50,000 

$50,000· < 

$100,000 

Ill Commission-Based IRAs Dl Fee-Based JRAs 

Source, Oliver Wyman Study, 2011 

$100,000. < 

$250,000 

> $250,000 
65 


28748.020

In a 2014 study, the Investment Company Institute (ICI) found that nearly 23 percent of the 57.3 

million Americans with IRAs have balances less than $5,000, over 42 percent have less than 

$20,000, and almost 74 percent have less than $100,000.5 

Percentage of IRA Investors by Size of IRA Balance in 2014 

25 

20 

15 

10 

5 

0 I Less than $5,000 to< $10,000 to< $20,000 to< $30,000 to< $40,000 to< $70,000 to< $100,000 to $200,000 or 

$5,000 $10,000 $20,000 $30,000 $40,000 $70,000 $100,000 < $200,000 more 

II Percentage of IRA Investors 

All of this data is important in understanding the fiduciary rule's effects on consumers. The 

fiduciary rule will force many investment advisors to move away from a commission-based 

model to a fee-based model in order to avoid any possibility of an apparent conflict of interest. In 

fact, some firms have already announced6 that they are doing away with their commission-based 

IRAs entirely. This presents two major problems for consumers. First, fee-based accounts are 

much more expensive for investors. As Morningstar explains7

, fee-based accounts yield upwards 

of 50 percent more revenue for firms than commission-based accounts because "[f]ee-based 

accounts are already under a fiduciary standard of care that is defined by the Securities Exchange 

Commission (SEC). This SEC fiduciary standard requires increased monitoring, legal liability, 

and typically is accompanied with a higher service level than commission-based accounts, so 

clients are charged more." By way of background, the reason DOL is involved in a developing a 

fiduciary standard is because of its oversight of ERISA and the retirement plans under it, which 

are the only ones covered by this rule. 

One study found8 that advisors earn 0.54 percent on commission-based accounts versus 1.18 

percent on fee-based accounts. With nearly $7.3 trillion of assets in IRAs, that's a difference 

5 Source: ICI's IRA Investor Database 

• https://www.ml.com/articles/delivering-a-higher-standard-of-care.html 

7http:ljibd.morningstar.com/article/article.asp?id=733096&CN=brf295,http:ljibd.morningstar.com/archive/archiv 

e.asp ?in puts=days= 14;frmtld=12, %20brf295 8 http://www.pricemetrix.com/cms/wp-content/uploads/PriceMetrix-lnsights Transitioning-To-Fee English. pdf 
66 


28748.021

between consumers paying a total of $39.4 billion or $86 billion in fees each year. This is an 

average of$813 per IRA account holder- an unaffordable amount for many. 

The second major problem is that because fee-based accounts mean increased monitoring, 

liability, and servicing, advisors will be forced to require higher minimum balances in order to 

remain financially viable. For example, Edward Jones will require9 investors to have $100,000 in 

retirement assets to open a fee-based IRA, whereas other fmns will require 10 minimum balances 

of $20,000 or $30,000. Looking back at the third chart above, even with a minimum account 

balance requirement of $20,000, over 42 percent oflRA holders will be forced out of managed 

retirement accounts and almost half of all IRA holders will be forced out if that minimum is 

increased to $30,000. Even with a minimum balance requirement of just $5,000, over 13 million 

accounts will fail to qualify for managed advice. 

Number of IRAs Forced out of Managed Retirement Accounts 

at Various Miminum Balance Requirements 

45,000,000 

40,000,000 

35,000,000 

30,000,000 

25,000,000 

20,000,000 

15,000,000 

10,000,000 

5,000,000 

0 

$5,000 $10,000 $20,000 $30,000 $40,000 

JR Number of Accounts 

$100,000 

In 2013, the Retail Distribution Review initiative (RDR) was implemented in the United 

Kingdom. It's not an exact match of DOL's fiduciary rule, in that it explicitly forbids 

commission-based accounts, but it is a close-enough comparison to merit attention. Since the 

RDR was implemented, several studies 11 have looked at its effects on investment advisors and 

their clients. Without getting bogged down in the details because it is, in fact, an imperfect 

comparison, I would be remiss to ignore them completely. 

The UK's Financial Conduct Authority (FCA) conducted a review in 2016 of the changes in the 

retirement advice market as a result of the RDR. One of the more telling findings is that "over 

9 http:Utime.com/money/4459130/edward-jones-bans-funds-etfs-in-iras/ 

10 https://www. merrilledge.com/pricing#tab3 11 See, http://www.cass.city.ac.uk/ data/assets/pdf file/0016/202336/The-impact-of-RDR-Cass-version.pdf and 

https:Uwww.fca.org.uk/publication/corporate/famr-final·report.pdf and 

https:/lwww. fsb.co.za/Newslibrary/FSB%20Retaii%20Distribution%20Review%20Status%20as%20at%20Decembe 

r%202016.pdf, for example. 
67 


28748.022

the last two years, the proportion of firms who ask for a minimum portfolio of more than 

£100,000 has more than doubled, from around 13 percent in2013 to 32 percent in20!5. The 

FCA 's recent survey of advisors also supports this, suggesting that 45 percent of firms very 

rarely advise customers on retirement income options if those customers have small funds (i.e. 

less than £30,000) to invest." 

Another review of the RDR's impact on the UK's financial advice market conducted by the Cass 

Business School at the City, University of London found that the enhanced requirements on 

advisors would drive advisors out of the investment advice market completely. "Advisor 

numbers fell from 40,000 at the end of20ll to 31,000 by the start of20!3: we find that the 

remaining financial advisors are unduly optimistic about their own business prospects in the 

RDR world." Further, they found that "the average advisor expects to gamer around £1,500 from 

each of roughly 150 clients to sustain the £220,000 of gross revenue that they tell us they require 

to function as a business. With fees averaging approximately 1 percent of assets under advisory 

this means that the average client will need to have around £150,000 in investible assets on 

average." 

In sum, the fiduciary rule will force many IRA investors into fee-based accounts which, at a 

minimum, will noticeably increase the amount they pay their advisor each year, and, at a 

maximum, will cut them out of the investment advice market completely. Considering that the 

IRAs with the lowest account balances will be hit the hardest, it's reasonable to conclude that the 

fiduciary rule will do the most harm to those low- to middle-income retirement savers it was 

intended to protect. 

2. Entering into the BIC with clients 

The second option presented to investment advisors by the fiduciary rule is to enter into the BIC 

with their clients. Like the rule itself, on its face, the B!C sounds good a best interest contract 

between advisor and advisee. But in reality, the BTC will open the door to excessive litigation, 

especially class action lawsuits. Specifically, the BIC exemption purports to12 "allow entities 

such as registered investment advisors, broker-dealers, banks and insurance companies ... and 

their employees, agents and representatives ... that are ERISA or Code fiduciaries by reason of 

the provision of investment advice, to receive compensation that may otherwise give rise to 

prohibited transactions as a result of their advice to plan participants and beneficiaries, IRA 

owners and certain plan fiduciaries ... " 

In other words, the BIC exemption allows advisors to provide investment advice that may seem 

conflicted as long as they enter into a contract with their client stating that it is in the client's best 

interest, and, if the client decides that it's not, the client can sue them for breach of contract. And 

while it does allow for the inclusion of mandatory arbitration clauses, the BJCs cannot waive the 

client's ability to file or participate in a class action lawsuit. 

12 https://www. fed era !register .gov / d ocum ents/2016/07 /11/20 16-16355/best -interest -contract -exemptioncorrection 
68 


28748.023

In 2016 alone, consumers filed nearly 4000 arbitration cases 13 with the Financial Industry 

Regulatory Authority (FlNRA) alleging some wrongdoing by broker-dealers. However, yet only 

158 cases were decided in favor of the consumer. This means many broker-dealers spent 

significant time and money defending themselves, and perhaps unnecessarily. One could expect 

BIC litigation to fall along the same lines, but with the added threat of class action lawsuits and, 

at times, their resulting settlements. 

One study estimated the eosts 14 of class action lawsuits under the BIC using historical restitution 

data from wealth management firms, claims on implied errors and omissions insurance policies, 

DOL monetary estimates, and previous settlements on retirement plan class actions. It found that 

the long-term costs for class action lawsuits is between $70 million and $150 million each yearin addition to DOL's estimate of$1.5 billion in ongoing costs. The study also found that the 

near-term class action settlements could exceed the long-term estimates hy a multiple '·as firms 

try to figure out how to determine, demonstrate, and document best interest." Some strategic 

litigation could force targeted investment advisors into some extremely costly settlements- not 

as a result of their malpractice, but as a result of gray area in the law of the fiduciary rule and the 

BIC. The same study estimated that near-term class action settlements could decrease the 

operating margins on commission-based IRAs by 24 to 36 percent. 

In an effort to curb potential litigation costs, investment advisors may purchase liability 

insurance. DOL's cost estimates 15 identify the increase in premiums at approximately 10 percent, 

or $300 per year, but independent studies estimate that number to be much higher. In an Oxford 

Economics study' 6, researchers found that the potential cost of litigation stemming from the 

fiduciary rule was the greatest concern to investment advisors, largely because it is the area of 

the greatest unknown. Due to that uncertainly, the study does not give an exact estimate of the 

increase in the cost of insurance, but it does say, "importantly, from an economic perspective, the 

full cost of all this may be far larger than the ultimate amount spent on litigation although that 

could end up being quite large as well. The cost of the uncertainty caused hy the proposed rule 

could be far greater, as firms waste resources and forgo opportunities because of the risk of 

litigation ... DOL assumes that Error and Omission insurance costs for some representatives will 

increase by 10 percent. This appears to be a wild underestimation oftbe potential costs of 

litigation, and the uncetiainty it fosters as a result of the proposed rule." 

Morningstar estimates that, in the short-term, class action settlements could double the costs of 

the fiduciary rule for firms. 

of-interest-rule-retirement ·investment ·advice#h-10 16https://d2rpg8wtgka5kg.cloudfront.net/311980/open20150818044300.pdf?Expires-1491316097&Signature=eM 

4yKMJvLWy2Js24XLrWtFXiTWfuyaz2dl2dH7opibHCVrFhOV7Tv51ZrJrH48ClCYoqWgUf3eyla0d7NKvtou20LipKe4stRhasRYiNCrj5FSspBLgw-PpKdu-WGZwb38TLkT·--YzE9-EtdqwTNkw11RlA7BVUyNkFAYsGmmVnOMYoXAOx-S86-

6lyjP AHzol H FetJV9CG NoC7 Fv ZDn BGOVbMwtn61QdQB9MIA Yy 7GrSDvgS K7-

JMymZjlMzZRSlvlclcraAgtGugkytFTqFKAjpbskpeEXnGuikBVplcJ34geCQo9xWjbls9tjpnRJSekRjYMcs68SsgMNsVRg 

&Key-Pair-ld=APKAJVGCNMR6FQV6VYIA 
69 


28748.024

Class-Action Settlement Costs for Advisory Firms in Millions 

180 

160 

140 

120 

100 

80 

60 

40 

20 

0 

Bank of America Morgan Stanley 

llll Baseline Ongoing Costs 

Raymond James Stifel Financial 

Ill LongMTerm low-End Settlements 

111 Long-Term High-End Settlements 1!1 Short-Term High-End Settlements 

Conclusion 

Wells Fargo 

At the end of the day, the fact remains that the fiduciary rule is the most expensive regulatory 

action of2016 and the second most expensive non-environmental rule since 2005. Even DOL's 

own conservative compliance cost estimate is astronomical. 

Based on the above data, the fiduciary rule has the potential to increase consumer costs by $46.6 

billion, or $816 annually per account, in addition to the $1500 in duplicative fees for retirement 

savers that have already paid a fee on their commission-based accounts that move the same 

investments into a fee-based account. Worse, based on a minimum balance requirement of 

$30,000, the fiduciary rule could force 28 million Americans out of managed retirement accounts 

completely. Add that to $150 million in annual litigation costs and operating margins reduced by 

24 to 36 percent, which will ultimately be passed on to consumers, or will force firms out of the 

market, decreasing the supply of advice. 

In short, the DOL's fiduciary rule will end up doing much more harm than good. Despite its 

good intentions, the costs it imposes- especially to low- and middle-income consumers - are far 

too high to justify implementing the rule as it is currently written. 

Thank you, and I look forward to answering your questions. 
70 


28748.028

Testimony of 

David Knoch, CIMA 

President 

1st Global 

and 

Member, Board of Direclors 

financial Services Institute 

Before the 

United States House of Representatives Committee on Financial Services 

Subcommittee on Capital Markets, Securities, and investment 

On 

"Impact of the DOL fiduciary Rule on the Capital Markets" 

July 13, 2017 
71 


28748.029

Introduction 

Testimony of David Knoch, President, 1 st Global 

July 13, 2017 

Page 1 of 18 

Good morning, Chairman, Ranking Member and members of the Subcommittee. I om 

David Knoch, President of 1st Global based in Dallas, Texas. I om 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 nearly 400 Certified 

Public Accountant (CPA) and legal firms across the United States. The company was founded in 

1992 by CPAs who believe that accounting, tax and estate planning firms ore uniquely qualified 

to provide comprehensive wealth management services to their clients. 1st Global is a research 

and consulting partner that provides our affiliated financial advisors with the education, 

technology, business-building framework, and client solutions that make these firms leaders in their 

professions. 

I om here representing the Financial Services Institute (FSI). 1 I first become involved with 

FSI in 2005, one year after it was initially founded in 2004, by Dole Brown, the CEO of FSI and 

Tony Batman, the founder, Chairman and CEO of our firm, 1st Global. 

As President of 1st Global and a member of FSI's Executive Committee, I hove seen the 

power of having a voice in Washington, as well as the need for being a pragmatic participant in 

important conversations impacting our industry. FSI is the only organization advocating solely on 

behalf of independent financial advisors 2 and independent financial services firms3, representing 

the industry's interests before Congress, the SEC, FINRA, NASAA, other federal and state 

regulators, and, of recent note, the Department of labor (DOl). FSI engages in the state and 

federal legislative and regulatory process, working to create a healthy and thoughtful regulatory 

environment for their members so they can provide affordable, objective advice to hardworking 

Americans. Since 2004, FSI has successfully promoted a more responsible regulatory environment 

through advocacy, education, and public awareness, including on key programs to improve 

financial literacy and prevent elder abuse in communities across the nation. 

At 1st Global, our purpose is clear: 1st Global exists to enable intentional living. 

We believe in the virtue of personal responsibility and that all Americans must be 

accountable for their actions and must intentionally take total responsibility for all of their 

1 The Financial Services Institute is the only organization advocating solely on behalf of independent financial advisors 

and independent financial services firms. Since 2004, through advocacy~ education and public awareness, FSI has 

successfully promoted a more responsible regulatory environment for more than 100 independent financial services 

firm members and their 160,000+ affiliated financial advisors which comprise over 60% of all producing 

registered representatives. We effect change through involvement in FINRA governance as well as constructive 

engagement in the regulatory and legislative processes, working to create a healthier regulatory environment for our 

members so they can provide affordable, objective advice to hard-working Main Street Americans. For more 

information, please visit finonciolservices.org. 

2 The term "financial advisor" ls used to denote registered representatives of broker-dealers, investment advisor 

representatives of investment advisors, and persons who ore dually registered in both capacities. 3 FSI firm members operate as broker-dealers subject to SEC, FINRA, and state oversight; and registered investment 

advisers under SEC or state authority. 
72 


28748.030

Testimony of David Knoch, President, 1st Global 

July 13,2017 

Page 2 of 18 

decisions, the choices they make, the beliefs they carry, and what motivates them to live lives with 

dignity and humility. 

We believe in free enterprise as one significant essence of liberty, and economic freedom 

is grounded in large part in the opportunities we pursue through our vocations. Creating and 

building businesses provides opportunities for us and others to pursue happiness and live dignified 

lives. 

We believe in the virtue of moral courage and that we must always morally and 

courageously do only the right thing for ourselves and our clients, even if this means refusing what 

could be a lucrative financial opportunity. In addition, we must always boldly advocate for both 

the nobility of business enterprise and we must advocate for the protections of those who suffer 

injustice. 

We believe that honoring promises is at the core of our successful business. Whether to our 

partner CPAs and advisors, their clients, or each other, we are dedicated to enabling all 

individuals to make and keep their important promises. 

lastly, we believe that independence and objectivity are the key to providing the right 

financial solutions that meet every client's unique financial needs and independent financial 

advisors are particularly well-situated to provide advice and services to hard-working Americans 

with a wide range of incomes and needs. 

1st Global-affiliated advisors are knowledgeable and professional and, as CPAs, among 

the most trusted professions in America. In fact, according to a recent Gallup study, accountants 

are the eighth most trusted profession in America, 4 with 39 percent of respondents indicating that 

the honesty and ethical standards of individuals in this profession are "high" or "very high." 

Wealth management is a natural complement to the complex services and high practice standards 

of CPAs. As evidence of these high standards and "client first" principles of professional care, 93 

percent of 1st Global-affiliated advisors are CPAs, Certified Financial Planner® (CFP) 

professionals, or Accredited Investment Fiduciaries, and as such are already today held to 

varying levels of fiduciary duty to their clients. 

Our Regulatory Environment 

Independent financial services firms such as 1st Global play a critical role in American 

lives. However, the future of the independent firm is in question due to persistently expansive new 

regulations, such as the DOL Rule, creating an overly complex and increasingly burdensome 

regulatory environment. 

Furthermore, 1st Global-affiliated financial advisors are also unique in terms of the many 

layers of regulations to which they must comply in order to provide both tax and financial 

' http,/ /www.gollup.com/poll/18787 4/ americans-faith-honesty-ethics-police-rebounds.aspx 
73 


28748.031

Testimony of Dovid Knoch, President, 1st Global 

July 13, 2017 

Page 3 of 18 

planning services to their clients. As CPAs, our affiliated financial advisors are already subject to 

a separate and distinct duty to work in their clients' best interest as it relates to their accounting 

services, which include their wealth management and retirement planning practices. 5 In addition, 

our CPA financial advisors are also subject to the SEC standards and FINRA's standards of 

commercial honor and just and equitable l>rinciples of trade. 

I believe strongly that the DOL Rule adds unnecessary complexity to an already 

complicated regulatory environment for broker-dealers, investment advisers, financial advisors, 

and, in the case of 1st Global, CPAs. The DOL Rule's intricate regulatory framework raises new 

barriers to the availability of professional investment services for millions of Americans. More 

importantly, the DOL Rule requires already confused investors6 to understand several standards 

of care. In fact, the SEC's own study, performed in 2008 by the RAND Corporation, indicates that, 

"investors typically fail to distinguish broker-dealers and investment advisers along the lines that 

federal regulations define. Despite their confusion about titles and duties, investors express high 

levels of satisfaction with the services they receive from their own financial service providers."7 

Furthermore, I believe that, whether through the DOL Rule's intent, or the prevailing public 

view of the standard of care to which financial advisors should be held, there is no way for 

anyone who provides a service to another, financial advisor or otherwise, to be "conflict free." It 

is an impossibility in all businesses. The purpose of business and commerce is to make people's 

lives better. Any business or person who is selfishly motivated only by profit will perish in a society 

of fierce market competition to make people's lives better at a fair value which implies a fair 

price for the services and goods rendered. 

Conflicts of interest are inherent in democratic capitalism. Coupled with the temperance of 

a moral foundation, these conflicts of interest are what make America's commercial society 

function, make people's lives better, and has created widespread prosperity for employees, 

consumers, and producers for over 250 years. No alternate system has come close to improving 

the happiness of mankind as that of democratic capitalism. Every business and every consumer 

have something to sell or purchase, respectively, thus creating a conflict in each side attempting to 

maximize their own utility. The elimination of conflicts of interest effectively eliminates the 

frictional engine of all commerce and thus the engine that improves people's lives. A conflict is 

inherent in free market capitalistic societies in all services provided and all transactions rendered 

for profit. The paradox of conflicts of interest is essential to happiness for all. A society's moral 

foundation, its transparency of the market pricing mechanism, transparency of the inherent 

conflicts of both producers and consumers, and a fair system of justice can temper the occasional 

temptations of a few that may contemplate violating the happiness of others. 

5 See the American Institute of CPAs (AICPA) code of professional conduct oYoi/ab/e at 

http'/ /www .aicpo.org/ Research /Standards/ CodeofConduct jDownloodobleDocuments /20 14Dccembcr 1 5ContentAs 

of20 16August31 CodeofConduct.pdf. 6 https'/ /www.sec.gov/news/press/2008/2008-l_rondiobdreport.pdf 7 1bid 
74 


28748.032

Testimony of David Knoch, President, 1st Global 

July 13,2017 

Page 4 of 18 

In a recent Wall Street Journal article titled "Why Your Financial Adviser Can't Be Conflict 

Free," columnist Joson Zweig eloquently wrote, "All financial advisers-like all people who 

perform o service for anyone else, including journalists--hove conflicts of interest. That's true 

regardless of whether they work for someone else or for themselves, whether they earn fees or 

commissions, or whether they call themselves 'fiduciaries' who put clients' interests ahead of their 

own." Neither the DOL's rulemoking, nor any bill proposed by Congress, should expect to 

eliminate conflicts which ore inherent and unavoidable, nor should they propose excessive 

disclosure of conflicts, which will continue to odd to the already problematic epidemic of clients 

ignoring the enormous volume of regulatory disclosures they ore required to read. Instead, a 

more realistic approach is to require firms and financial advisors to effectively manage conflicts 

of interest to ensure that investors ore aware they may exist and con choose whether to work with 

the financial advisor or not. Managing conflicts of interest con also assure that the financial 

advisor is not incentivized to work in their own interest. The more practical approach of managing 

conflicts of interest con be done in a way that does not diminish customer protection and still 

effectively protects investors from harm. 

FSI supports the Draft Bill because it creates a uniform standard of core enforced by the 

SEC as the appropriate jurisdictional agency with the necessary expertise, and provides for 

reasonable and streamlined disclosures as a way to require industry participants to communicate 

their conflicts. In addition, 1st Global and firms like ours, ore already subject to their direct 

oversight and examination. My testimony will first answer the several questions you asked and 

then focus on how the Draft Bill will achieve what I believe is the true intention of the DOL Rule, 

and allow for independent financial advisors to continue to provide advice and investment options 

that ore tailored to their clients' needs, by establishing a simplified, uniform fiduciary standard in 

the correct agency. 

Questions specifically asked by the subcommittee 

In light of the partial implementation of the rule on June 9, 20 17, please discuss the ability of 

financial advisers including broker-dealers, to provide affordable and reliable investment advice to 

their customers. 

The DOL Rule reached its initial implementation dote on June 9, 2017, and is now port of 

the compliance responsibilities of financial services firms like 1st Global. Segments of the financial 

services industry hove expressed concern that the DOL Rule, even with the recent partial 

implementation, will reduce the willingness and ability of financial advisors to provide affordable 

retirement advice to their clients, particularly those working with o broker-dealer affiliated 

advisor. In our view and experience, this concern has merit. 

In many cases, the least expensive method for clients to hold mutual funds is to custody 

them directly with the originating mutual fund company (often referred to as "direct business," 

"direct-way business," or "retail direct.") Since the beginning of 2016, the number of accounts 

held by 1st Global clients directly with mutual funds companies has declined nearly 10 percent 
75 


28748.033

Testimony of David Knoch, President, 1 st Global 

July 13, 2017 

Page 5 of 18 

and the number of new accounts established dropped 19 percent during the first six months of 

2017. We expect this trend to increase and by the end of this year anticipate that the total 

number of accounts held in these programs will drop 35 percent from 2016 levels. In contrast, we 

have seen a l 23 percent increase in new accounts established using our "level-fee" 8 advisory 

programs since the beginning of the year. These are accounts offered through our Registered 

Investment Adviser (RIA), held to a fiduciary standard, supervised by the SEC, and expected to 

qualify for the level-fee exemption offered by the DOL Rule. 

There are two key drivers behind this trend and both are derived from compliance with 

the DOL Rule. The first driver is our affiliated financial advisors moving the accounts Ia our feebased advisory platform where the onerous requirements and legal risks of relying on the Best 

Interest Contract Exemption (BICE) are eliminated, and supervision of advice and aggregation of 

clients' assets is more manageable. The second is related to policy actions that 1st Global has 

enacted in response to both the DOL Rule and a need to modernize our firm. 

The DOL Rule has also required us to adopt the "level-fee" fiduciary exemption for our 

discretionary retirement accounts. These are accounts where the financial advisor has contractual 

authority to purchase or sell securities in the account without prior notification to clients. While 

previously we charged reasonable transaction fees, we will be removing these fees and charging 

a reasonable base platform fee instead. While this will largely be a re-characterization of 

existing costs to clients, it will nevertheless raise the costs for the median client. Moving from a 

"pay for what you use" method to a "level-fee" method, in order to qualify for the level fee 

exemption offered as part of the BICE, as well as by the Impartial Conduct Standards applicable 

on June 9, will mean that those clients who place trades less frequently will subsidize frequent 

traders as all clients on the platform will be assessed the same "level fee." 

Next, we have been particularly challenged to offer a viable solution for small employer 

retirement plans, particularly SIMPLE IRAs9 where account balances can be quite small, as low as 

$50 for a newly established plan. Even with new "level fee" advisory programs created by 1st 

Global, we have been challenged to find a viable, cost-effective solution. As a result, many of our 

affiliated firms are exiting this marketplace and will no longer offer these plans to small business 

clients, and in some cases, will end their client relationship with existing plans. Since the beginning 

of 201 6, we have seen the number of accounts in these programs decline by just over 20 percent 

and 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. These changes will negatively impact small 

8 A "level fee" is a fee or compensation provided to a financial advisor based on a fixed percentage of the value of 

the assets or a set fee that does not vary with the particular investment recommended. A level fee also does not 

include o commission or other transaction-based costs. 

9 Per the IRS~ "A SIMPLE IRA plan (Savings Incentive Match Plan for Employees) allows employees and employers to 

contribute to traditional lRAs set up for employees. It is ideally suited as a start-up retirement savings plan for small 

employers not currently sponsoring a retirement plan." More information available at https:!/www.irs.gov /retiremen~­

plons /plan-sponsor /simple-ira-plan. 
76 


28748.034

Testimony of David Knoch, President, 1st Global 

July 13, 2017 

Page 6 of 18 

businesses and their employees, who rely on these solutions to offer retirement benefits to their 

employees before they are large enough to consider the adoption of a 401 (k) plan. 

Additionally, we have seen our affiliated financial advisors increasing the minimum 

account size to serve clients and even ending relationships with clients whose accounts are not cost 

effective to continue to service. This is due in large measure to the increased paperwork and 

operating burden imposed by increasing regulation, as well as by the potential risks to their 

business posed through the utilization of the BIC, points I discuss in greater detail throughout this 

writing. Since the DOL Rule's announcement, our call center leaders estimate that inquiries on how 

to end relationships with clients have increased four-fold, a sentiment I hear expressed by my 

industry peers. 

Finally, we have worked over the past few years to lower the costs of more expensive 

commissionable solutions by lobbying product manufacturers 1 o to lower their costs, as well as 

decreasing ours. However, this change was not initially prompted by the DOL's rule-making, 

rather it was the result of a well-functioning, competitive marketplace, largely characterized by 

firms and financial advisors who do this work because they want to help people (first) and earn a 

reasonable living (second). 

As you can see through these examples, there is merit to the argument that the cost of DOL 

Rule compliance is being borne in part, or in whole, by the consumer. These examples also 

highlight that client access to investment products, solutions, platforms, and methods of 

compensation are also being restricted and that this is particularly pronounced for clients with 

smaller accounts. 

Finally, as a firm that has worked hard to be among the best in terms of preserving client 

choice, we believe strongly that as one expands their view of the market to include all financial 

services firms, particularly those like ours, the number, type, and impact of decisions such as those 

described above will grow substantially, as will the impact on smaller clients, typically not served 

by the RIA/fee-only marketplace. 

Discuss the impact of the DOL's fiduciary rule once if becomes effective on Jan. J , 20 1 8, as it relates 

to the ability of broker-dealers to continue to provide retirement investment advice to low and 

middle-income investors. 

While the DOL Rule has already gone into effect on June 9, 2017, the rule's full 

implementation has still yet to occur. On January 1, 2018, when the DOL Rule is fully applicable, 

the withdrawal from certain markets, products, and methods of compensation described above 

will be even greater than it is today. 

In our view, the most problematic aspect of the full DOL Rule is the myriad documentary 

requirements it imposes. In fact, streamlining the documentary requirements is at the forefront of 

10 See https://fingncloladvisorig.com/c/1457773/165863. 
77 


28748.035

Testimony of David Knoch, President, 1st Global 

July 13, 2017 

Page 7 of 18 

our recommendations, as detailed throughout this testimony, and one of the areas where we are 

in full support of the Draft Bill. These documentary requirements, in particular the utilization of the 

contract per the BICE, are at the forefront of an accelerated withdrawal by financial advisors 

across America from serving low- and middle-income investors, and they are at the forefront of 

the changes our firm has already seen. These documentary requirements lie at the heart of the 

debate about "can" vs "will." Yes, financial advisors gm use the Prohibited Transaction 

Exemptions (PTEs) to continue to offer commissionable solutions to smaller account holders. But will 

they accept the financial and reputational risks of doing so? We believe, and have seen through 

our experience, that the answer is no. 

Those who disagree would say that if financial advisors are doing nothing wrong, they 

have nothing to be afraid of, but that argument is overly simplistic and disconnected from reality. 

Before the DOL Rule became effective, clients did not need to suffer actual harm, receive poor or 

conflicted advice, or have a fraud committed against them to pursue legal recourse. And in fact, 

cases where no wrongdoing or negligence on the part of financial advisors are brought all the 

time and are often settled to avoid the exorbitant costs of defense. With class action lawsuits a 

possibility after January 1, a financial advisor no longer needs to have personally committed a 

fiduciary violation, they merely need to be part of a class where a fiduciary violation may have 

occurred or part of a class where attorneys, armed with the benefit of hindsight, opportunistically 

attack a marketplace. This will cause the legal and compliance costs of firms like ours and our 

associated financial advisors to increase, as well as our costs of insurance. In fact, while our Errors 

& Omissions (E&O) insurance carrier has not yet raised rates as they are waiting for claims to 

occur, we have felt compelled to raise our policy limits in anticipation of the DOL Rule, which 

increased our premiums by 7 percent, and was passed along to our affiliated firms despite no 

change in our pattern of claims, and despite making every effort to be compliant with the rule. 

Next, we have also heard our associated financial advisors discuss retirement from the 

financial services industry and the sale of their practices should the rule's impact be too great. 

These are, more often than not, sole practitioner CPAs who offer both tax preparation and wealth 

management services to small business owners and individuals in small rural communities. Given 

the geographic dispersion of these firms, it may be hard for them to merge with other larger 

practices and maintain service to their clients. We expect to see an acceleration in these 

retirements or sales after the rule's final implementation date on January 1, should the rule be 

enacted as written. The result will be fewer choices of affordable financial advice in smaller 

communities across the country. 

I can use our experience at 1st Global to put the impact of the DOL Rule in real terms. To 

date we have spent 35 percent of our profits on DOL Rule compliance, through both direct costs 

and increased payroll costs. In addition, we expect to incur future costs that will continue to erode 

these profits by over half the amount spent to date. So far, these costs have been borne by us 

and have not been passed along to clients or our affiliated financial advisors. However, this is 

likely to change as we are contemplating increased affiliation fees in the fourth quarter of this 
78 


28748.036

Testimony of David Knoch, President, 1st Global 

July 1 3, 20 17 

Page 8 of 18 

year to offset any ongoing costs of increased compliance. Additionally, should revenues decline 

as a result of the DOL Rule requirements, we would expect to increase these costs to offset some 

or all of these declines. An example of this is the restructuring of our pricing related to fee-based 

advisory accounts described earlier. The DOL Rule, as written, will no longer allow reasonable 

transaction-based costs in discretionary accounts, therefore we will apply a level, reasonable 

asset-based fee to investors in order to offset the elimination of these costs. 

In addition to these metrics about our own costs of implementation, FSI engaged Oxford 

Economics in 2017 to conduct another study, "How the Fiduciary Rule Increases Costs and 

Decreases Choice" (2017 Oxford Economics Study) to update their economic analysis on the 

impact of the final Fiduciary Rule. 11 The findings of the 2017 Oxford Economics Study are based 

on the actual experience of FSI member firms implementing measures to comply with the DOL 

Rule, not assumptions or projections, which makes these figures far more reliable than the DOL's 

Regulatory Impact Analysis figures. This new report found that even Oxford's own 2015 

predictions of the cost of the DOL Rule were significantly underestimated, as FSI members had 

already spent nearly half of the $400 million implementation cost the study predicted. 12 More 

specifically, the 2017 Oxford Economics Study found that FSI members have already spent $190 

million preparing for DOL Rule implementation and will continue to spend an additional $205 

million in preparation costs if the DOL Rule was to go into effect. 13 This means that start-up costs 

of the regulation are roughly 20 times higher than even the updated DOL Regulatory Impact 

Analysis estimated. 14 Whether because DOL's 2016 revisions to their 2015 proposed rules were 

not as effective at cost reduction as it thought, or because Oxford's original cost estimates were 

too low, the new estimates of total start-up costs are roughly 1.8 to 3.0 times higher than the 

DOL's most recent estimates. 15 If the FSI members' experiences were extrapolated to the universe 

of all broker-dealers, the total implementation costs to the industry will likely approach $1.8 

billion. 16 Once implemented, these firms expect to pay an additional $230 million per year in 

recurring costs complying with the DOL requirements. 17 The DOL's revised Regulatory Impact 

Analysis did not provide a new detailed estimate of recurring costs, relying on the 2015 

Regulatory Impact Analysis, while Oxford estimates the actual recurring costs to be 1 6.4 to 41.5 

times higher than what the DOL has estimated. 18 Based on these results for startup and recurring 

11 Oxford Economics 2017 Reportt "How the Fiduciary Rule Increases Costs and Decreases Choice" (April 2017), 

available at 

http://www.finonda!services.or~edFiles/FSI/Advocacy Action Center/The Fiduciary Rule Increases Costs 

And Decreases Choice.pdf. 

12 ld. 

l3 ld. 14 ld. 

15Jd. 

16 ld. 

l71d. 

18 ld. 
79 


28748.037

Testimony of David Knoch, President, 1st Global 

July 13,2017 

Page 9 of 18 

costs, Oxford calculated the total 1 0-yeor costs to the industry of the DOL Rule to be 

approximately $14.2 billion.19 

Comparison of Cost Estimates 

DOL adjUsted estimates (Apr 20!6) 

Current estimates (Apr 2017) 

Ratiq of cummt estimate to 2tl15 DOL estil"1l8te 

DOL original estimates (Apr 2015) 

DOL "high" estimates (Apr 2015) 

$!,!18,000 

$556,$0! $1,777.600 

$911,000 

$97,000 $265,000 

$2,407,000 

41.5 

Source: Oxford Economics and DOL Regulatol)' Impact Analyses 

Additionally, FSI's research indicates that there will also be other consequences of rising 

compliance and other costs. FSl members widely report that one consequence of the DOL Rule is 

that the economics of managing small accounts will cause these investors to lose access to 

retirement planning services and investment education, a concern I expressed as it relates to our 

firm above. The reality is that for many small accounts, the fixed cost of servicing the account will 

exceed revenue that will be earned. As a result, most FS! member firms indicate that smaller 

investors will be offered robe-investing type account services or be asked to move their accounts. 

These small (often entry level, novice investors) would lose access to the personalized retirement 

planning services to which they have become accustomed. This area of the market is already 

underserved when it comes to receiving professional financial advice. Only 32 percent of adults in 

the U.S. receive professional financial advice20 and only 8 percent of financial advisors focus on 

targeting and serving American households with less than $100,000 in investable assets.21 

Roughly 71 percent of American households (89.6 million) have less than $100,000 in investable 

assets. 22 Financial advisors play a critical role in the retirement investing process by counteracting 

one of the challenges to investors achieving this goal -their own behavior. A 20-year analysis 

19 ld. 20 Northwestern Mutual 201 6 Study available at https://www.northwestemmutualm[gQ.,qJJt: 

22 1d. 
80 


28748.038

Testimony of David Knoch, President, 1st Global 

July 13,2017 

Page10ofl8 

from DALBAR showed that voluntary investor behavior actions such os panic selling, excessively 

exuberant buying, and attempts ot market timing -was the single-largest contributor to long-term 

underperformonce.n 

While the definition of o small investor varies among our member firms, they generally 

estimate that the breakeven point for servicing a client's investment account ranges from $35,000 

to $7 5,000 in assets.24 Since the median IRA balance ranged from $23,785 to $33,185 between 

2010 and 2014, it is dear that without significant changes the DOL Rule will have a devastating 

impact on investor access to retirement planning services. 25 

Source ESRI.org "Individual Retirement Account 8alancesr Contributions, Withdrawals1 and Asset Afiocation 

longitudinal Results 2010-2014, The EBRIIRA Oatobase" (January 17, 2017). 

What additional interim actions should the DOL adopt as it continues to review the rule's 

implementation as pgrt of its Request for Information? 

The most meaningful interim action the DOl should toke is to immediately delay the DOL 

Rule's final applicability dote until April 10, 2019. This will allow one of three major actions to be 

undertaken. First, it would allow the DOL an appropriate amount of time to fully review and 

23 20th Annual Quantitative available at 

25 "Individual Retirement Account Balances, Contributions, Withdrawals, and Asset Allocation longitudinal Results 

2010-2014, The EBRIIRA 
81 


28748.039

Testimony of David Knoch, President, 1st Global 

July 13,2017 

Page 11 of 18 

consider the industry's input and make meaningful and necessary modifications. Second, it would 

allow Congress to fully analyze and adopt meaningful, comprehensive measures such as The Draft 

Bill. Third, should it be necessary, it would allow the industry additional time to implement sales 

and operating practices that incorporate industrywide changes being contemplated in response to 

the DOL Rule. 

Furthermore, while a clear and substantial delay is an appropriate interim action, it also 

does not address our overarching concerns with the DOL Rule. To that end, we make three 

recommendations. First, and most importantly, is the implementation of a uniform fiduciary 

standard of care by the SEC, as recommended by the Draft Bill. Second, if this outcome should 

fail to be achieved, it is our recommendation that the DOL discontinue all further implementation 

of the rule, leaving in place the existing implementation requirements that became effective June 

9. Third, failing both these outcomes we offer the following recommendations, taken from our 

response to the DOL's Request for Information: 

1. Streamline BICE documentation and disclosure. 

2. Create a single best interest standard applicable to all investors. 

3. Revise and broaden the reasonable compensation rules. 

4. Revise the rules for IRA rollovers. 

5. Expand the rule's grandfathering provisions. 

Please provide an overview of how the SEC is better equipped to update the standard of care for 

broker-dealers. 

FSI has long supported a uniform fiduciary standard of care applicable to all 

professionals providing professional investment advice to retail clients. 26 This uniform standard of 

care would require financial advisors to act in the best interest of their clients, consistent with the 

intent of the Draft Bill. 

While broker-dealers are already subject to a robust regulatory and enforcement regime 

designed to protect investors, FSI recognizes that multiple and differing standards of care 

between retirement versus non-retirement investments and transaction-based versus advisory-fee 

based advice leads to several negative unintended consequences for the client. These include but 

are not limited to overly complex disclosures, increased costs, limitations of investment choices, and 

reduced access to professional financial planning services. 

As such, FSI supports the creation of a uniform fiduciary standard of care that would be 

applicable to all financial advisors regarding all investment products, not just tax-deferred 

retirement savings. FSI is uniquely situated to provide input on such a standard because its 

26 See, e.g., letter from David T. Bellaire, Executive Vice President & General Counsel, Financial Services Institute, to 

Elizabeth M. Murphy, Secretary, U.S. Securities and Exchange Commission (Jul. 5, 2013) (commenting on Duties of 

Brokers, Dealers, and Investment Advisors, Release No. 34-69013; IA-3558; File No. 4-606), available at 

https' //www.sec.gov /comments /4-606/4606-31 38.pdf. 
82 


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Testimony of David Knoch, President, 1st Global 

July 13,2017 

Page 12 of 18 

members, including 1st Global, ore either dually-registered firms, or awn separately registered 

BDs and RIAs (as we do), that provide both brokerage (commission-based) and advisory (feebased) services to all types of American investors. 

The SEC has clear statutory authority to regulate all financial advisors and securities 

products and has done so since it was established by Congress in 1934 for the sole purpose of 

regulating the commerce in investment products. The SEC Office of Compliance Inspections and 

Examinations (OCIE) has designed existing examination and enforcement protocols and trained 

staff to perform these functions. The SEC divisions such as enforcement, corporate finance, 

investment management, trading and markets as well economic and risk analysis all work to 

regulate and enforce U.S securities regulations for the purpose of investor protection. 

The DOl lacks the expertise to effectively develop, implement, and regulate the standard 

of care afforded to the investing public. The DOl expertise lies in the development and 

implementation of regulations pertaining to wage earners, employment discrimination, employersponsored retirement accounts, workers compensation, and other legal and regulatory aspects 

pertaining to employment. Therefore, it is FSI's firm belief, and I fervently agree, that the SEC is 

the most appropriate governmental agency to regulate the standard of care afforded to the 

investing public. 

This Draft Bill achieves this necessary uniform standard of care by establishing the 

standard of conduct for broker-dealers and their registered persons when providing 

recommendations to a retail customer. The recommendation must be in the customer's best interest 

and reflect reasonable diligence, care, skill, and prudence. The Draft Bill also empowers the SEC 

to issue additional regulations with regard to the standard of care. The SEC has unique expertise 

in regulation of broker-dealers and investment advisers as evidenced by numerous studies the 

SEC has conducted as required by Congress since its inception and, unlike the DOl, has the ability 

and authority to examine for compliance with the standard and bring corrective actions when 

necessary. By establishing this standard for broker-dealers, investors will no longer have to 

wonder what the difference is between various financial professionals and what duty of core their 

financial advisors owes to them. 

What steps could the SEC take as oort of its June 1. 2017 request for public comment on standards 

of conduct for investment advisers and broker-dealers? 

FSI is still in the process of developing comments to the SEC in response to their request. Once the 

comments are complete, FSI will provide a copy to the Committee. 

Comment on the discussion draft to create a best-interest standard for broker-dealers 

In addition to the commentary already provided in support of the Draft Bill, I offer the following 

additional comments. 
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28748.041

Meaningful Disclosures 

Testimony of David Knoch, President, 1st Global 

July 13,2017 

Page 13 of 18 

The DOL rule creates a significant volume of disclosure that are cumbersome and 

expensive to create, will confuse investors with their sheer volume and complexity, and because af 

the private right of action created by the DOL Rule, could create immeasurable legal liability. 

Today, in our entry-level investment advisory programs for a fiduciary account with a minimum 

asset size of $5,000, the paperwork bundle that the client is required to sign is 1 91 pages in 

length. Of these 191 pages, 149 are disclosure, including the delivery of Form ADV and its 

required inclusions. This means that 78 percent of the paperwork a client signs in our "entry level" 

investment advisory program is disclosure. If you add the prospectus delivery requirement to the 

count, a client receives 503 pages of paperwork, totaling 461 pages of disclosure, or 92 percent 

of the paperwork. Additionally, after the January 1 applicability date, for a small commissionbased account, which can be opened with as little as $50 initial investment utilizing the Best 

Interest Contract Exemption, we expect the number of pages of paperwork to be 98 pages, with 

70 of those pages being disclosure. When prospectus delivery is added, the number swells to 

117 of the 145 total pages, or 81 percent of the total paperwork burden imposed on clients. 

The DOL itself acknowledged in their Regulatory Impact Analysis that disclosures are 

ineffective by stating, "Disclosure alone has proven ineffective to mitigate conflicts in advice. 

Extensive research has demonstrated that most investors have little understanding of their 

advisers' conflicts of interest, and little awareness of what they are paying via indirect channels 

for the conflicted advice. Even if they understand the scope of the advisers' conflicts, many 

consumers are not financial experts and therefore, cannot distinguish good advice or investments 

from bad. The same gap in expertise that makes investment advice necessary and important 

frequently also prevents investors from recognizing bad advice or understanding advisers' 

disclosures. Indeed, some research suggests that even if disclosure about conflicts could be made 

simple ond clear, it could be ineffective- or even harmful."27 

Furthermore, the DOL Rule's website and transaction level disclosure obligations are 

particularly burdensome and do not provide investors the type of information that they actually 

want, such as the fees they are paying and what they are receiving for those fees. Investors want 

and need relevant disclosures in a simplified way they can understand. The complicated and 

comprehensive nature of the DOL Rule disclosures makes it highly unlikely that they will be 

effective in achieving the DOL's goal of transparency and usability for investors. Investors do not 

need or want these voluminous and duplicative disclosures, and will not read, refer to, or rely on 

them. Especially when they drive up their investment costs and limit their access to solutions. The 

cost of complying with the heavy disclosure requirements vastly outweighs any marginal usefulness 

of them for the investor. 

27 See page 9 of the Regulatory Impact Analysis available at h!!ill_,ij_y;_lyw,<:J0 hgov /site2J®JQ1!!1)fil~s.Lscb_gu'Lqyv__;;: 

and-regulqtions/rules-ond~regulations /completed-rulemaking /1 21 0-AB32- 2 /conflict-of-interest-ria.pdf. 
84 


28748.042

Testimony of David Knoch, President, 1st Global 

July 13, 2017 

Page 14 of 18 

Additionally, as FSI firms, including 1st Global, have worked in the months since the DOL 

Rule was released to try to scope and begin building technological systems to comply with the 

transaction-level disclosures, it has become apparent that industry-wide changes must be 

considered, reviewed, structured, and implemented. This would necessitate considerable time and 

expense that are unrealistic with a January 1, 2018 implementation date. Further, these complex 

requirements make it possible, or even likely, that firms operating in good faith will make 

unintentional errors in their disclosures, which could further confuse clients and potentially have 

significant financial consequences for firms. For business leaders who partner with the owners and 

leaders of other businesses, the act of investing large sums of money and employee time into a 

likely source of increased liability and risk does not make business sense. Add in the likelihood for 

client frustration and you've got an excellent example of regulatory overreach. 

In contrast, this Draft Bill includes a disclosure requirement at the outset of the account 

relationship, when the information is the most relevant, and provides a workable format: a clear 

and concise disclosure with a description of the type and scope of services to be provided, the 

standard of conduct applicable to the relationship, the types of compensation that may be 

charged, and any material conflicts of interest. It also allows the SEC to require disclosure of fees 

received by the broker-dealer prior to the transaction. The Draft Bill allows the SEC to establish 

the timing and content of the disclosures, which is appropriate given that the SEC has expertise 

and knowledge about how financial advisors work with investors. 

Furthermore, the Draft Bill does not proscribe the medium for disclosure as the DOL Rule 

does. The provisions of the Draft Bill would allow firms the flexibility to deliver the disclosure in 

ways the investor wants to receive it, such as in writing, electronically, or both. 

Additionally, the North American Securities Administrators Association (NASAA) has 

recently established a voluntary model fee disclosure template which also offers a concise and 

cogent summary of account expenses. This template serves as a model for disclosing relevant 

information to investors via the Internet. In fact, 1st Global was one of the first firms to voluntarily 

adopt the template on our website as we felt the information it contained was useful to investors 

and the format of the template is easy to read and understand. 28 Finally, the Form ADV 

disclosure already used by investment advisers provides useful information for client disclosure in 

this context. 

Again, the SEC has jurisdiction over both investment advisors and broker-dealers and will 

have actual ability and expertise to examine for compliance with disclosure requirements and 

take corrective action where necessary. The common-sense disclosure requirements of the Draft Bill 

along with other already-available options will provide investors with the information they need 

to make intelligent decisions without confusion or information overload. 

za NASAA model template information available at: .b.!:!:ruLJ' ... Yt.:~.:t!:.!J.Q]:_aa.org /industry-resources/brokerQ&g~model-fee-disdosure-resource-center {. l st Global fee template available at; 

http://www.l stglobal.com/downloads/acctfees2.pdf. 
85 


28748.043

Material Conflicts of Interest 

Testimony of David Knoch, President, 1st Global 

July 13,2017 

Page 15 of 18 

The DOL Rule requires firms and financial advisors to avoid conflicts of interest or avail 

themselves to one of the PTEs and in any case, provide advice "without regard to the financial 

interest of the adviser." 

As FSI member firms, including 1st Global, have worked in the months since the DOL Rule 

was promulgated to try to comply with the vague standard of "reasonable compensation" and 

"eliminating" conflicts of interest, it has become apparent that industry-wide changes must be 

considered, reviewed, structured and implemented. Although the industry has worked diligently to 

consider how to implement these changes, more time is required for all parties in the product 

manufacturing and distribution chain to implement all the necessary adjustments. 

Some FSI member firms may choose to address the compensation and conflicts of interest 

challenges by becoming level fee fiduciaries. As stated earlier, "level fee" is a fee or 

compensation provided to a financial advisor based on a fixed percentage of the value of the 

assets or a set fee that does not vary with the particular investment recommended. A level fee 

also does not include a commission or other transaction-based costs. The DOL has indicated that 

such an approach may be a powerful means of reducing conflicts of interest with respect to 

mutual fund recommendations and correspondingly reduce the need for heightened surveillance 

around conflicts of interest. Broadening the availability of this option may be beneficial to FSI 

member firms that would like to offer institutional share classes (also known as "clean shares") and 

reduce their regulatory burden given this payment structure is likely to meet the current definition 

of "level fee." However, the success of this approach depends upon the availability of 

appropriate investment products. There has been considerable public comment from DOL about 

the development and availability of "clean shares" as a primary means of creating a levelized 

compensation structure for sales of mutual funds, but it does not appear these shares can be 

made fully operational for at least 1 8 months, if not more. 

As mutual fund, insurance, and other companies develop new share classes or other pricing 

options, clearing, as well as introducing firms such as 1st Global must wait to develop the 

necessary trading, surveillance, commission, and other systems to support their use. Once these 

products and resulting systems are finalized and implemented, firms will need to not only train 

their staff on the particulars of the products and how to supervise them but will also need to train 

financial advisors as well. The result is a sequential process of systems development that simply 

cannot be completed by the January 1, 2018 deadline. 

This Draft Bill takes a more practical and reasonable approach, requiring firms and their 

registered persons to "avoid, disclose, or otherwise reasonably manage" material conflicts of 

interest that may influence a financial advisor to make recommendations in their own interest 

instead of the best interests of their clients. The Draft Bill specifically states that transaction-based 

compensation, proprietary products, and principal transactions are not per se violations of the 

best interest standard nor does the standard does require advisors to recommend the least 
86 


28748.044

Testimony of David Knoch, President, 1st Global 

July 13, 2017 

Page 16 of 18 

expensive product. The least expensive product is not automatically the best product for every 

customer. Advisors take into account a wide range of factors when making a recommendation and 

the least expensive product may not have important features a more costly product can provide. 

Instead, the Draft Bill recognizes that it is essential to continue to allow investors to have 

several options for ways in which they can work with a financial professional and the means by 

which they choose to protect themselves and their families and plan for their future. In fact, it was 

Congress' expressed intent in section 91 3 of the Dodd-Frank Act that any uniform standard 

developed by the SEC should be reflective of various business models. 29 By providing for 

commissions and acknowledging that the lowest cost option is not always the best option, this Draft 

Bill avoids preferential treatment of one business model over another and recognizes that 

commissions and sales charges are acceptable ways to compensate investment professionals and 

even preferable to many investors. 

Most importantly, the Draft Bill clearly recognizes the value of advice. The language of 

the Draft Bill acknowledges the reality that investors need and flexibility in the means by which 

they have access to financial advice. 

Conclusion 

While the DOl no doubt had good intentions when it developed their fiduciary standard 

and requirements, the unintended consequences that many in the financial services industry have 

continued to raise are without a doubt already coming to fruition. I wish to emphasize that my 

concern and the concerns of FSI are not that the DOL Rule expands the ways in which we are held 

to a fiduciary standard of care. Both FSI and I agree that a carefully-crafted, uniform fiduciary 

standard of care would be beneficial for investors and reduce regulatory confusion. We believe, 

however, that this standard of care should be created and overseen by the SEC, which is what this 

Draft Bill accomplishes. We also believe that investors need and deserve clear and concise 

disclosures that provide them with useful information in an easy-to-read format of their choice. 

Again, the DOl Rule fails on this point while the Draft Bill accomplishes helpful disclosures for 

investors. 

Furthermore, we strongly believe that all investors must retain access to valuable advice in 

order to provide them the means and resources to plan for a dignified retirement. The DOl Rule's 

focus on eliminating conflict and reducing fees is miscalculated, misdirected, and misapplied. The 

result is that it threatens investor access to advice by creating favored means of working with an 

advisor. 

This Draft Bill makes the important distinction between low cost advice and valuable 

advice. The value of working with a financial advisor goes well beyond fees. A 2016 study 

conducted by Vanguard determined that the value of a financial advisor to a client is worth up to 

29 Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, § 913, 124 Stat. 1376 

(2010). 
87 


28748.045

Testimony of David Knoch, President, 1st Global 

July 13, 2017 

Page 17 of 18 

2.95 percent, net of fees, if the advisor focuses on relationship-oriented services such as 

providing cogent wealth management via financial planning, discipline and guidance rather 

than by trying to outperform the market. 30 Investors who hove access to and receive financial 

advice enjoy both tangible and intangible benefits that cannot be expressed in dollar terms. 

This Draft Bill will allow the financial advisors 1st Global serves, who ore already heavily 

regulated and, because of their high ethical standards, already working in their clients' interests, 

regardless of the regulatory framework they operate under, to focus on the investor rather than 

unnecessary and cumbersome regulatory requirements. 

Finally, my testimony would not be incomplete without dedicating at least one paragraph 

to defend the honor of the CPA wealth management firms I hove the privilege to work with doily. 

This DOL Rule has been hard on them, not just for the compliance burden which has been discussed 

here at length, but because their good work and honor has been needlessly attacked. I work with 

nearly 1,000 professionals, as well as 200 employees in our home office, who show up every day 

to serve their clients and their communities, and make their world just a little bit better each day. 

Every CPA financial advisor I hove ever spoken with is called to service for two reasons: they 

enjoy solving complex problems and they enjoy doing good for others, and offering wealth 

management services to their clients lies at the intersection of this calling. Without eschewing the 

need for reasonable regulation, what I see ore people who do what is right for their clients, not 

because of a regulatory requirement or a published standard of core, but because it is merely 

the right thing to do. It is a dishonor to the vast majority of our marketplace who ore called first to 

serve their communities, and happen merely to earn a living for doing so, to accuse them of 

putting selfish interests first. It is simply not what I see. What I see is the business owner who has 

worked her entire life to grow a business and is now graced with the sole of it, and has no ideo 

what do with the proceeds so that she con honor the promises she has mode. What I see is the 

family member suffering from cancer who con focus on his recovery because his financial affairs 

are completely and fully in order. What I see is the widow who relies on her financial advisor to 

transition to life without her spouse. What I see is the person entering retirement who con enjoy 

the fruits of their hard work, because they have on advisor who helped them plan and save, and 

who now guides them on living a dignified life, sustained by the power of choice. Where the 

authors of the DOL Rule see the financial services industry as populated with shadowy characters 

out for themselves, I see nothing but genuine concern and valuable expertise when I work with our 

financial advisors. My wish for you is to see what I see and help independent financial advisors 

like ours across America serve more clients, serve them better, and serve them more completely 

by reducing their regulatory burden without reducing the standard of core. 

I thank the Chairman, Ranking Member, and the rest of the Subcommittee for allowing me 

to share my thoughts on the major challenges and unintended consequences of the DOL rule and 

the ways in which this Draft Bill provides the same investor protections while applying practical, 

30 Putting value on your value: Quantifying Vanguard Advisor's Alpha®, September 2016 available at 

https' //www.vonguord.com/pdf /ISGQVAA.pdf. 
88 


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Testimony of David Knoch, President, 1st Global 

July 13, 2017 

Page 18 of 18 

common-sense requirements that will ensure that Americans can continue to receive professional 

financial advice while they work toward a dignified retirement. 
89 


28748.025

Written Testimony of Jerry Lombard, the President ofthe Private Client Group at Janney 

Montgomery Sf-"'tt, LLC 

On behalf of the Securities Industry and Financial Markets Association 

before the U.S. House of Representatives 

Committee on Financial Services 

Subcommittee on Capital Markets, Securities, and [nvestment 

Hearing entitled "Impact of DOL Fiduciary Rule on the Capital Markets" 

July 13, 2ll17 
90 


28748.026

Chairman Huizenga, Ranking Member Maloney, and distinguished members of the 

Subcommittee, I am Jerry Lombard, the President of the Private Client Group at Janney 

Montgomery Scott, LLC I greatly appreciate the opportunity to testify today on behalf of the 

Securities Industry and Financial Markets Association (SIFMA) 1 and share our perspective on 

the best path forward to establish a best interest standard for the broker dealer industry. SIFMA 

represents the broker dealers, banks and asset managers who play an active role in the capital 

markets and are dedicated to promoting investor opportunity, access to capital, and an efficient 

market system that stimulates economic growth and job creation. We are grateful for this 

Committee's willingness to consider legislation that would allow the Securities and Exchange 

Commission (SEC) to establish a best interest standard for broker dealers that would create a 

high standard of care for retail customers across all accounts, 

On June 9, 2017, some key provisions in the Department of Labor (DOL) fiduciary rule 

became applicable, and as an industry we are beginning to see its harmful impact on America's 

retirement savers- limiting product choice and access to advice, while raising costs. At Janney, 

we are already experiencing many of these issues, Our customers and advisors are very confused 

by the phalanx of new DOL rules applying to retirement plans. They do not understand why 

there are now two sets of rules one for retirement accounts and one for taxable brokerage 

accounts. Since June 91

h customers are restricted from making certain investments. Upwards of 

I 0,000 of our customer retirement accounts 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 place in an advisory account 

that would remove the supposed conflicts the DOL is trying to regulate. How switching small 

retirement savers from a full-service advisor to a "no advice" service desk is in their best interest, 

I wi II 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 

customers without a bifurcated compliance regime imposed on the same market participants by 

different regulators. 

We are greatly encouraged by the SEC's June !''request for public comment on 

standards of conduct for investment advisers and broker dealers. It is STFMA'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 Standard 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. 

1 "SIFMA IS the voice of the U.S. securities industry We represent the broker-dealers, banks and asset managers whose nearly ! million 

employees provide access to the capital markets, raismg over $2 5 tn!110n for husineo;se<:: and municipalities in the U.S, serving chents with over 

$18.5 tn!hon m assets and managmg more than $67 trillion m assets for mdtvtdual and institutional chents includmg mutual funds and retirement 

plans. SIFMA, with offices in New York and Washington, D.C. JS the U.S. regional member of the Global l'inancial Markets Assocmtion 

(GFMA). For more tnfonnatton, visit http./!\\'\.~}i._').lfill.!Lil!J;" 
91 


28748.027

Congresswoman Wagner's legislative draft provides this path forward by establishing a 

SEC applied principles-based standard to ensure that all broker dealer recommendations about 

securities are driven by the best interest of the retail customer. Specifically, the Suitability Rule 

would be amended to provide that when making a 'recommendation' to a 'retail customer' a 

broker dealer shall act in the best interest of such customer at the time the recommendation is 

made. Further, the recommendation shall reflect the ·reasonable diligence· and the reasonable 

care, skill, and prudence that a registered representative would exercise based on the 'customer's 

investment profile.' 

We finnly believe that Congresswoman Wagner's approach could provide a number of 

significant regulatory efficiency and investor protection benefits which would: 

• enhance the existing suitability obligation under FINRA rules, building upon them to 

create a heightened and more stringent best interest standard of conduct for the 

benefit of retail customers: 

• apply across all securities recommendations made to retail customers in all broker 

dealer accounts (not just limited to IRA accounts); 

• build upon. and fit seamlessly within, the existing and long-standing securities 

regulatory regime for broker dealers, coupled with robust examination, oversight, and 

enforcement by the SEC, FINRA and state securities regulators; and 

• be akin to, and well aligned with, the Investment Advisor standard under the Advisers 

Act insofar as the new standard would include a duty of loyalty and a duty of care, 

and an obligation to manage investment costs, and would require up-front disclosure 

to the customer 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 Advisor, 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 

arisen as a consequence of the DOL's misguided rule. 

Thank you. 
92 


28748.047

CHAMBER OF COMMERCE 

OF THE 

UNITED STATES OF AMERICA 

NEILL. BRADLEY l(i 1 S H NW 

SE0.'10R VICE PRESIDE~T & 

CHIEF POLICY OFFICER 

W.\SHJNGTO?'J, 2006::! 

The Honorable Bill Huizenga 

Chairman 

Subcommittee on Capital Markets, 

Securities and Investment 

Committee on Financial Services 

U.S. House of Representatives 

Washington, D.C. 20515 

(202) 463-5310 

July 12,2017 

The Honorable Carolyn B. Maloney 

Ranking Member 

Subcommittee on Capital Markets, 

Securities and Investment 

Committee on Financial Services 

U.S. House of Representatives 

Washington, D.C. 20515 

Dear Chairman Huizenga and Ranking Member Maloney: 

The U.S. Chamber of Commerce remains seriously concerned about the impact of the 

Department of Labor's (DOL) misguided "fiduciary duty" rule, and welcomes the hearing by the 

Subcommittee on Capital Markets, Securities, and Investment entitled "Impact of the DOL 

Fiduciary Duty Rule on Capital Markets." 

The fiduciary rule is hampering the ability of low and moderate income earners to save, 

and restricting the ability of small businesses to provide employees with retirement savings 

options. 

In May, the Chamber released a report, The Data L5 In: The Fiduciary Rule Will Harm 

Small Retirement Savers, which demonstrates the rising costs and limited choices the fiduciary 

rule is imposing on American workers. A survey by Investment News found that 35% of 

advisers will no longer serve accounts under $25,000 because of the rule, a large mutual fund 

provider reported that the number of abandoned or "orphaned'' accounts has nearly doubled in 

the first quarter of20 17 and 70% of insurance service providers report that they have exited or 

are considering exiting the market for small balance individual retirement accounts (IRAs). 

These arc real life consequences of a rule built on a faulty premise and inadequate analysis. 

We hope that this hearing will illustrate some of the challenges the fiduciary rule has 

imposed on American workers, businesses and capital markets. 

The Chamber also believes that the draft legislation by Representative Wagner and other 

bills currently under consideration can help alleviate these issues. The Chamber remains 
93 


28748.048

committed to working with the Congress, DOL. and the Securities and Exchange Commission to 

help craft a long-term solution to this important issue. 

Sincerely, 

Neil Bradley 

cc: Members of the Subcommittee on Capital Markets, Securities, and Investment 

2 
94 


28748.049

Credit Union 

National 

cuNA Association 

July 13,2017 

The Honorable Bill Huizenga 

Chairman 

Subcommittee on Capital Markets, Securities, 

and Investment 

Committee on Financial Services 

House of Representatives 

Washington, DC 20515 

Jim Nussle 

President ll: CEO 

The Honomble Carolyn Maloney 

Ranking Member 

Subcommittee on Capital Markets, Securities, 

and Investment 

Committee on Financial Services 

House of Representatives 

Washington, DC 20515 

Dear Chairman Huizenga and Ranking Member Maloney: 

On behalf of the Credit Union National Association (CUNA), I am writing to thank yon for holding the 

hearing entitled "[mpact of the DOL Fiduciary Rule on the Capital Markets." CUNA represents America's 

credit unions and their ll 0 million members. 

CUNA supports the underlying intent of the Department ofLabor (DOL) fiduciary rule to protect investors 

but sought clarity about the overly broad definition of investment advice in addition to other concerns with 

the DOL's rule, which was fiualized in April2016. We appreciate that the DOL provided some 

clarifications in its finalmle. However, we believe more time tor compliance and other changes to 

minimize the impact on low-to-moderate income investors could benefit credit union members. 

CUNA urged the DOL to delay the applicability oft.he Fiduciary rule and it has also supported efforts to 

conduct additional research to ensure that credit union members are not harmed by unintended 

consequences of overly broad mles. Additional analysis about whether choices may be limited for 

consumers is beneficial for all consumers, including credit union members. 

We nrge the Committee to examine unintended consequences of !.he mle in today's hearing. Furthermore, 

we appreciate that the Committee is further examining the fiduciary rule when considering Representative 

Wagner's legislation to amend !.he Securities Exchange Act of 1934 to establish standards of conduct for 

brokers and dealers that are in the best interest of !.heir retail customers. As Credit Union Service 

Organizations (CUSOs) and credit unions continue to navigate this mle, particularly the complexity 

surrounding whether it applies when offering certain investment products in individual retirement accounts 

(lRAs ), we appreciate further consideration about how it could impact credit union members. 

On behalf of America's credit unions and their 110 million members, thank you very much for your efforts. 

Sincerely, 
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28748.050

~ 

~ 

• 

* ' National 

The Honorable Bill Huizetl<>a 

House Financial Services Committee 

2129 Rayburn House Office Building 

Washington, D.C. 20515 

~ ~ 

The Honorable Carolyn Maloney 

House Financial Services Committee 

2129 Rayburn House Office Building 

Washington, D.C. 20515 

Dear Chairman Huizenga and Ranking Member Maloney, 

On behalf ofNTU and our members across the country, I would like to thank you for holding a 

hearing on the impact the Department of Labor's fiduciary rule. As you are keenly aware, the 

rule has already been partially implemented, and barring no legislative action, will be fully 

implemented at the start of2018. NTU opposes the rule and hopes this hearing will further 

highlight the disastrous and costly impact it will have on the ability for low and middle-income 

investors to receive financial advice. 

According to a study by American Action Forum, data indicate the fiduciary rule will disqualify 

up to 7 million IRA holders from investment expertise and reduce the number of IRA openings 

by 400,000 a year. Consumers will face an additional $46.6 billion in costs, or $813 annually per 

Americans could be deterred from saving and investing for retirement, especially in 

tax-advantaged vehicles. As Americans continue to retire at an unprecedented rate, the 

govemment should actively suppott policies that reduce the costs of saving tor retirement, not 

the opposite. 

Investment firms have stated that this rule will simply shift their business model from a 

commission-based system to a fee-based system. Many consumers, however, view this fee-based 

model less favorably. Unfortunately, this rule will hru111 those it was supposed to protect. When 

fin11S increase their price or choose to deal only with big money investors, lower and middle 

income investors will be priced out of the market. 

Already, businesses have seen compliance costs and man-hours skyrocket to implement this rule. 

A Department issued in April of last year estimates that brokerage finns will 

spend upwards of $35 billion on final rule compliance over ten years. The industry will also lose 

out on $11 billion in revenue by 2020 as more Americans exit the market. Even with tewer 

accounts, firms will see their compliance burden increase by 60,000 paperwork hours annually. 

Instead of complying with costly regulations, some firms like A!G, Metlife and Merrill 
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28748.051

Lynch have decided to exit the market completely. The decision to entirely avoid the rule affects 

billions of dollars in assets, countless customers, and has resulted in thousands of employee 

layoffs. 

The hearing will also focus on a draft of Congresswoman Ann Wagner's (R-MO) proposal to 

amend the Securities Exchange Act of 1934. In addition to repealing the fiduciary rule, the draft 

legislation would create a standards of conduct for brokers and dealers that are in the best interest 

of their customers. It would require brokers to make recommendations that "reflect reasonable 

diligence, care, skill and prudence" and provide protections to the consumer by requiring brokers 

to disclose any material conflict of interest. While this legislation is only a draft, I am optimistic 

that the full legislative text will be a more effective and consumer-friendly alternative to the 

fiduciary rule. 

Sincerely, 

Thomas Aiello 

Policy and Government Affairs Associate 

:25 Massachus~tts Avenue 1'\\V, Suite 140 *\\1

3Shmgton, DC 20001 * Pholle. {703) 299·86~0 * Fax (703) 683<1722 * ntu org 
97 


28748.052

The Honorable Bill Huizenga 

Chairman 

Capital Markets, Securities and Investments Subcommittee 

Committee on financial Services 

United States House of Representatives 

Washington, DC 20515 

The Honorable Carolyn B. Maloney 

Ranking Member 

Capital Markets, Securities and Investments Subcommittee 

Committee on Financial Services 

United States House of Representatives 

Washington, DC 20515 

Re: Hearing entitled, "The Impact of the DOL Fiduciary Rule on the Capital Markets" 

July 12, 2017 

Dear Chairman Huizenga and Ranking Member Maloney: 

My name is Phyllis C. Borzl and I served as the Assistant Secretary of Labor for the Employee Benefits 

Security Administration from 2009-2017. 

·I am writing to provide background information for the record on the coordination and cooperation 

activities between the U.S. Department of Labor (DOL) and the Securities and Exchange Commission 

(SEC) during the period of 2010-2017 in connection with the Department's development of its 2016 Final 

Regulation on Conflicts of Interest in the Investment Advice Marketplace, also known as the "COl Rule" 

or the "Fiduciary Rule," and the accompanying prohibited transaction class exemptions (PTEs). 

Throughout this document when I refer to the Rule, I intend to include these PTEs in my reference. 

Industry opponents of this Rule, as well as former Republican SEC Commissioners and the current 

Secretary of labor, have been repeatedly quoted in the press mistakenly characterizing these past 

efforts as perfunctory and not genuine efforts at coordination. The purpose of this letter is primarily to 

clarify the scope and extent of the actual interagency efforts during the approximately six-year process 

during which the rule was developed. 

Because I am no longer a government employee, the information I am providing has neither been 

shared with nor cleared by my former employer, the U.S. Department of labor, but represents my own 

thoughts, recollections and opinions about the process through which the DOL sought and received the 

input of the SEC staff as the COl Rule was developed. 

I understand that the Subcommittee on Capital Market, Securities and Investments of the House 

Committee on Financial Services will be holding a hearing entitled "Impact of the DOL Fiduciary Rule on 

the Capital Markets" on Thursday, July 13, 2017. 

I am providing this information on DOl/SEC cooperation and collaboration so that the hearing record 

will correctly reflect the long history that DOL and the SEC have had of working together on issues of 

shared interest. Those issues usually included enforcement matters, but more recently have focused on 

other consumer protections through coordination of regulatory projects, such as the DOL and SEC 

efforts that each agency undertook to improve consumer disclosure with respect to target date funds, 

DOL's fee disclosure rules for pension plans, and the COl Rule. My comments will be specifically directed 

toward the COl Rule since that is the focus of the July 13 Subcommittee hearing. 

I have recently learned, however, that the hearing will also consider the latest legislative proposal by 

Representative Ann Wagner to block implementation of the DOl COl rule. Among other things, I 

1 
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understand that proposal would strip jurisdiction from the DOL to define the term "fiduciary" with 

respect to brokers and dealers and their registered representatives as well as with respect to those 

individuals who sell annuities. The bill generally transfers that authority to the SEC, or, in the case of 

annuities, relies entirely on state insurance regulators without any Federal oversight, thus apparently 

stripping the SEC of its current authority over annuities that are treated as securities. 

The stated reason for these radical changes is to allow the SEC to develop a rule that could broadly apply 

to all segments of the investment marketplace (both taxable and tax-exempt investments), not just the 

tax-exempt retirement advice marketplace covered by the existing COl DOL rule, thus allegedly reducing 

consumer confusion. It is unclear why the insurance industry deserves separate and weaker standards 

for annuity sales, especially since the harm consumers have experienced with conflicts of interest 

regarding the sale of some of these products is well-documented. Later in this letter I will share my 

own preliminary observations regarding the new Wagner proposal. 

Stripping the DOL of its long-standing authority and relying instead on the SEC and state insurance 

regulators will expose retirement savers to continued abuses from conflicts of interest. 

Efforts to subordinate DOL regulatory authority to that of the SEC will not solve the problem caused by 

conflicts of interest in the retirement investment advice marketplace. 

For many years, opponents of the COl Rule have insisted that the best way to protect consumers is to 

assure a uniform set of standards for investment advisors that apply to all forms of investment advicewhether that advice is rendered with respect to retirement or non-retirement (or taxable or nontaxable) investments. The "solution" to this "problem" that COl Rule opponents tout is to allow the SEC 

to set these uniform standards and for the Department's statutory authority over retirement plans and 

individual retirement accounts (IRAs) to be subordinated to the SEC's efforts by nullifying the existing 

Final COl regulations and requiring any future DOL regulations to be consistent with and reflective of any 

SEC fiduciary rule. Alternatively, COl Rule opponents propose to eliminate DOL's authority to regulate 

investment advice fiduciaries entirely. 

Establishing a uniform standard for investment advisors with regard to both retirement and nonretirement advice is a laudable goal. However, given the SEC's history of inaction in this important 

consumer protection area and the limitation of its statutory authority to "securities," it is much more 

reasonable, protective of consumers/investors, and consistent with the varying statutory authorities of 

the DOL and the SEC for the Final DOL COl Rule and its accompanying final prohibited transaction class 

exemptions (PTEs) to be fully implemented as scheduled on January 1, 2018 and for the SEC to issue 

subsequent guidance within its own statutory authority that is consistent with the DOL rules. That 

would be the simplest and most cost-effective method of achieving the DOL's rule opponents' oft-stated 

goal of "uniformity" in the advice marketplace without further delay. 

The argument that the SEC has superior expertise to the DOL in regulating financial products generally 

is questionable at best, if not misleading. The scope of the SEC's statutory reach is at the same time 

broader than DOL's (because the SEC regulates securities in both the non-taxable retirement and 

taxable non-retirement contexts) and narrower than the DOL's {because the SEC regulates securities, 

not the entire range of investment products available to and utilized by pension plan sponsors and 

individuals saving for retirement). 

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Unquestionably, as result of its statutory mandate, the SEC has developed substantial expertise in 

regulating securities. However, the DOL has substantial expertise in regulating and analyzing the 

products sold in the retirement marketplace, through which most individuals save. Although securities 

are an important class of investment products purchased by ERISA·covered pension plans and 

individuals, both through their plan investments and individual retirement arrangements, many other 

types of investments, not subject to SEC regulation, are also an important component of current and 

future retirement savings. 

The SEC has neither the current expertise nor the authority to regulate these other investments, such as 

non-security insurance products, real estate, bank collective trusts, and many alternative investments. 

For decades, the Department has overseen and enforced ERISA and certain Internal Revenue Code rules 

for all retirement investments, including securities and non-security investments. To say that the 

Department lacks expertise in regulating and overseeing asset classes that are commonly found in 

retirement savings arrangements is simply incorrect. This is particularly true with respect to the many 

decades of experience the DOL has gained as it crafted and enforced prohibited transaction exemptions 

(PTEs) both on a class and individual exemption basis. The possibility that the financial services industry 

may be more comfortable dealing with the SEC does not mean that the DOL understanding of industry 

practices in the retirement marketplace is deficient. 

Clearly both the SEC and the Department possess considerable expertise in their own areas of authority, 

some of which may overlap and some of which may not. That is why neither agency acting alone can 

protect consumers from the well-documented economic harms that occur from conflicted investment 

advice in both the taxable and tax-exempt investment world. 

The legal basis underpinning the DOL COl/Fiduciary Rule is the Department's statutory authority to 

define the term "fiduciary." This authority is not new- it was included in the original enabling statute, 

the Employee Retirement Income Security Act of 1974 {ERISA). And the DOL's Final COl Rule simply is an 

exercise of the Secretary of Labor's broad authority to clarify and expand the category of individuals 

who are ERISA investment advice fiduciaries. The Rule replaces the Department's 1975 definitional 

regulatory guidance with an updated approach, drawing on the current definition of a 

"recommendation" utilized by the Financial Industry Regulatory Authority (FINRA) to distinguish a 

fiduciary communication from other forms of non-fiduciary consumer communication. Utilizing FINRA s 

definition was a deliberate decision on the part of DOL designed to minimize industry confusion. The 

three Federal courts that have addressed the legal challenges mounted by various industry trade 

associations challenging the Department's right to exercise this statutory authority have uniformly and 

unanimously rejected the arguments of industry opponents that the Department lacked such authority 

or exercised it in an unreasonable fashion.' 

1 See Chamber of Commerce v. U.S. Dep't of Labor, No. 17-10238, 2017 WL 1284187 (5th Cir. Apr. 5, 

2017) {"Chamber /II") (denying appellants' motion for inJU:1ction pending appeal and for expedited 

appeal); Chamber of Commerce v. Hogfer, No. 3:16-cv-1476·M, 2017 WL 1062444 (N.D. Tex. Mar. 20, 

2017) ("Chamber If') {denying appellants' motion for injunction pending appeal); Mkt Synergy Grp., Inc 

v. U.S. Dep't of Labor, No. 16-CV-4083-DDC-KGS, 2017 Wl 661592 (D. Kart. Feb. 17, 2017) {"Market 

Synergy II") (granting summary judgment to the Department of Labor); Chamber of Commerce v. Hugier. 

No 3:16-cv-1476-M. 2017 WL 514424 {N.D. Tex. Feb. 8. 2017) ("Chamber') {granting >ummarv judgment 

to the Department of Labor); Mkt Synergy Grp., inc. v. US Dep't of Labor, No. 16-CV-4083-DDCKGS, 

2016 WL 6948061 (D. Kan. Nov. 28, 2016) {"Market Synergy r) (denying plaintiff's motion for 

preliminary injunction); Nat'l Ass'n for fixed Annuitii's v. Perez. 219 F. Supp. 3d 10 (O.D.C. Nov. 23, 

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The statutory language of ERISA stands in marked contrast to the statutory framework of securities laws 

administered by the SEC. Securities law generally tolerates conflicts of interest among investment 

advisors as long as these conflicts are properly disclosed and mitigated, 

Among other things, ERISA requires fiduciaries to act with undivided loyalty and prudence and flatly 

bans fiduciaries who receive compensation either directly or indirectly for advice from providing 

investment advice to plans or individuals that is tainted by conflicts of interest (this would be is a 

"prohibited transaction" under ERISA). Certain conflicted behaviors may be permitted under ERISA, 

however, if the adviser's conduct falls within the conditions of a specific prohibited transaction 

exemption (PTE). Generally, in the IRA context, ERISA's fiduciary definition applies through the 

prohibited transaction rules contained in the internal Revenue Code. 

Industry opponents have asserted that DOL has no authority under ERISA to regulate investment advice 

fiduciary duties in the IRA context, but that is incorrect. The DOL authority to define fiduciary status for 

purposes of ERISA extends to the parallel prohibited transaction rules under IRC section 4975. This was 

explicitly established by transferring all interpretive, rulemaking, and exemption authority from the 

Secretary of the Treasury to the Secretary of Labor through the terms of President Carter's 

Reorganization Plan #4 (October 17, 1978}. That authority transfer was codified and ratified by Congress 

through a statutory provision enacted in 1984. 

Since ERISA's passage in 1974, the Secretary of Labor has exercised broad authority to issue 

administrative exemptions to the prohibited transaction rules, either on a class or individual basis. 

Because of the substantial statutory differences in the securities laws and ERISA, even if both the SEC 

and the DOL used the exact same definition of "fiduciary" (and under the DOL's Final COl Rule, they are 

very close), the duties to which an investment advice fiduciary would be subject in connection with 

conflicted investment advice under the two statutory schemes would be different. 

The DOL's collaboration and coordination with the SEC throughout the rulemaking process was 

sustained, high-level, and productive, leading to a better Final COl Rule. 

Turning now to the question of the collaboration and coordination between the DOL and the SEC, I will 

briefly outline the history of DOL/SEC interactions among the SEC staff, the Employee Benefits Security 

Administration (EBSA) staff at the DOL, and myself. This description is not intended to be an exhaustive 

list of all DOL/SEC contacts with respect to the COl Rule. 

The original proposal identifying changes to the definition of a fiduciary under ERISA was issued in the 

fall of 2010. At about that same time, I reached out to the then Chair of the SEC, Mary Shapiro, to 

discuss the problem caused by conflicted investment advice and the harm suffered by unsuspecting 

consumers because certain individuals in the investment advice marketplace were holding themselves 

2016) ("NAFA II") (granting motion for expedited n<ling and denying plaintiff's motion for preliminary 

injunction}; Not'! Ass'n for Fixed Annuities v. Perez, 217 F. Supp. 3d 1 (D.D.C. Nov. 4, 2016) ("NAFA !") 

(granting summary judgment to the Department of Labor}. 

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out as skilled financial, investment or retirement advisers without having to meet a fiduciary standard of 

care regarding the advice they were giving to their customers. 

I explained our proposal in very general terms but noted that because it was just a proposal, we planned 

to reach out to a variety of experts, including other government agencies with relevant expertise, and 

industry representatives, to seek comment and suggestions for improvement. 

When I met with Chair Shapiro, I had one request: that she authorize the SEC career staff to provide 

technical assistance to DOL career staff as we developed our rule because I was well-aware of the SEC's 

expertise regarding securities, an important component of many retirement investment portfolios. My 

major concern was simple: I wanted to be able to assure the regulated community that nothing in the 

rule we were developing would conflict with any other provision of law or any regulation administered 

by the SEC. In other words, my goal was to be sure that nothing we required under our rulemaking 

would create a situation where compliance with our developing rule would put a regulated entity or 

individual in the position where they were likely to violate an existing SEC or FINRA rule. 

Chair Shapiro readily agreed to this request and my career Deputy Assistant Secretary for Program 

Operations became the contact for the person{s) on her staff who would meet and work with us. Our 

staffs held several meetings during the next several months to discuss the 2010 proposal, until I 

announced in 2011 that the Department would withdraw the proposed rule and work toward a future 

reproposal. 

During the ensuing years, as DOL staff continued to work on the rule itself, the accompanying prohibited 

transaction exemptions, and a more comprehensive and robust economic analysis that would support 

the rule, staff discussions between DOL and SEC staff continued. When Chair Shapiro left the 

Commission and Acting Chair Elisse Walter took over, I met with her and renewed the request for 

continuing technical assistance by the SEC career staff. Acting Chair Walter was also supportive of my 

request and career staff level meetings between DOL and SEC staff picked up again and continued on a 

more frequent basis throughout the intervening years as we worked on a new proposal. I believe that 

then Secretary of Labor Hilda Solis accompanied me to one of the meetings with Acting Chair Walter. In 

addition, Seth Harris, in his capacity as the Acting Secretary of Labor after Secretary Solis' departure, 

also attended at least one of my meetings. I apologize for not being able to pinpoint the dates of these 

meetings with more specificity but I no longer have access to my calendar or files at the DOL, so I am 

relying on my memory to describe these events. 

When the Senate confirmed SEC Chair Mary Jo White, the new Secretary of labor, Thomas Perez, 

reached out to her to meet and discuss continuing our cooperative process on the COl rule. I was also 

present at that meeting and at a few subsequent meetings between the two agency heads. Secretary 

Perez also established a separate line of communication consisting primarily of periodic phone check-ins 

between himself and Chair White to assure that our staffs continued the cordial and constructive 

dialogue as we got closer to the publication of the new proposal. I believe that there were 

approximately 10 of these follow up contacts between the Secretary and the Chair. This level of 

involvement at the highest level of agency leadership was, in my experience, not at all typical, but does 

reflect the serious commitment that both agencies had to working together coflaboratively on the COl 

project. 

In describing these ongoing staff communications, I would note that my Deputy Assistant Secretary for 

Program Operations would arrange meetings and calls with SEC career staff through the point person 

identified by the Chair. Although I did attend a few of these staff-level discussion meetings, I was 

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typically briefed by my staff after the meetings about the topics covered, the additional research that 

might be necessary to enhance our decisionmaking, and the types of changes that were likely to be 

considered as a result of the discussions. Who from the SEC was present at each of these meetings was 

entirely within the control of the SEC Chair's office, although it is worthy to note that the meetings 

typically included representatives of both the Divisions of Investment Management and Trading and 

Markets, In my experience, the discussions were substantive, frank and robust, but everyone 

understood that they were staff discussions, not official Commission or DOL communications. 

In addition, DOL career staff freely shared drafts of possible sections of the rule or of proposed PTEs as 

they were drafted by DOL staff. 

The DOL staff working on research and economic analysis also met with their counterparts at the SEC. 

Participants in these meetings from the SEC were similarly individuals identified by the Chair's office. 

The research and analysis that DOL staff were examining to develop the economic analysis that would 

accompany the new proposed rule were also freely shared with SEC staff. Given the difficulty both we 

and the SEC had in obtaining relevant data from the financial services industry, the agency staffs also 

shared data and research as it became available. In each of these meetings, the input of the SEC staff 

was solicited and given. As previously noted, the primary goal continued to be to avoid developing a 

proposed (or final) rule that created regulatory conflicts for the regulated community. 

Following established interagency protocols, we made no attempt to reach out to individual 

commissioners or their staff- we simply followed the lead of the Chair's office. Ironically none of the 

other commissioners, even those most publicly and vocally critical of what the Department was doing, 

ever asked us for a meeting or a briefing on the substance of our developing proposal or the DOL/SEC 

coordination efforts. Yet they, like the industry opponents of the Rule, continued to assert that we were 

not really coordinating with the SEC. 

Both the Department and the SEC Chair and their respective staffs understood from the outset that this 

coordination was not designed to develop a joint rule. Nor were these efforts designed to determine 

what the SEC would have done were they drafting the COl proposal. As previously explained, given the 

statutory differences between the securities laws and ERISA, that task would have been at best 

extremely difficult, if not impossible. But the DOL staff welcomed and encouraged suggestions and 

comments by the SEC staff on what the DOL was thinking about proposing and the SEC's input was 

usually incorporated in some form in the ongoing drafts. The comments and input this cooperation and 

collaboration yielded were in addition to any comments provided by the SEC as part of the formal 

OMB/OlRA clearance process required of any rulemaking, in which various Federal agencies with a 

potential interest in the subject matter of another agency's rulemaking are given the opportunity to 

review and comment on the rule as a whole as submitted for Administration approval prior to 

publication. 

One feature of this ongoing coordination that was much appreciated by the DOL was the willingness of 

the SEC staff to predict and confirm the DOL staff's understanding of what the likely industry response 

would be to what was being developed in the rulemaking process. The DOL staff was well-aware that 

some segments of the financial services industry, particularly the insurance companies, would be 

required to make a number of changes in their policies, procedures and compensation practices to 

implement an enforceable best interest standard under ERISA so it was reassuring, but not surprising, to 

DOL staff when the SEC staff reached similar conclusions regarding the likely areas of concern to the 

industry. The SEC staff also provided valuable insight and advice on how best to structure the various 

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provisions of the Rule and the conditions of the PTEs to minimize industry disruption and maximize the 

effectiveness of the Rule. 

On balance, the input we received from the SEC career staff was extremely helpful and resulted in a 

better, more effective and efficient set of proposals and a final rule. More than once I have publicly 

expressed the deep appreciation I have for the cooperation and collaboration we received from the 

various SEC chairs and their career staff. This appreciation was widely shared during the Obama 

Administration by the DOL leadership and the DOL staff. 

In addition, during the COl rulemaking process, DOL staff also worked closely with other federal 

regulators, such as staff from the Treasury Department, particularly those under the purview of the 

Office of Domestic Finance (especially staff from the Federal Insurance Office) and the Office of Tax 

Policy (especially the employee benefits staff). In addition, the DOL worked with the Commodity 

Futures Trading Commission {CFTC) to be sure that swaps rules issued by the CFTC and the SEC under 

Dodd-Frank were not in conflict with ERISA so that pension plans that engaged in swap transactions 

could continue to do so without creating regulatory problems under either Dodd-Frank or ERISA. And, 

as noted in the preamble to the Final Rule, we also received valuable input from the National 

Association of Insurance Commissioners {from both their staff and several individual commissioners), 

FINRA staff, and the North American Securities Administrators Association {NASAA) (again from both 

staff and several individual state securities regulators). 

Ironically, although I continued to assure the regulated community that nothing in the Final CO! Rule 

would conflict with any other SEC rule, for all the close coordination we had with the SEC and the 

several instances where we changed our draft language in response to their specific concern about a 

possible regulatory conflict, when the new proposed rule was issued in April of 2015, FINRA staff 

immediately identified a component of the proposed notice requirements that had not been previously 

brought to our attention but would likely violate a FINRA rule. We immediately dropped that 

requirement. Unfortunately, while we had numerous staff discussions with FINRA during the latter two 

years of the process, because it is not a Federal government agency, but rather an industry selfregulatory body, while we briefed them on what we were doing and engaged in a helpful and 

substantive dialogue with FINRA staff, under the Administrative Procedures Act, we could not share 

actual draft language with them without having to make those drafts available to the public in general. 

But nonetheless, this is a simple example of the type of input that we received that allowed us to 

improve and strengthen the workability of the Final Rule. 

The Wagner bill is a thinly disguised attempt to protect and preserve highly profitable but seriously 

conflicted business models at the expense of ordinary Americans struggling to save for retirement. 

Finally, I offer a few personal observations and concerns about the latest version of the Wagner bill. 

Opponents of the Rule have proposed yet another legislative vehicle to thwart the implementation of 

the DOL COl/Fiduciary Rule. Like its predecessors, it purports to establish a statutory best interest 

standard that applies broadly to all recommendations: those involving both retirement investments and 

non-retirement investments. It nullifies the Final DOL CO! Rule and replaces it with a substantially 

weaker set of so-called "consumer protections." In fact, these are even less protective of consumers 

than the requirements that existed even before the Department of labor began to work on its 

COl/Fiduciary project in the first place; in some cases, they may appear to be a return to the pre-ERISA 

world. These "protections" would be administered by the SEC, not the DOL. A special set of even 

7 
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weaker rules would apply to those insurance brokers giving investment advice regarding annuities. 

These lower standards would be administered by state insurance departments, not the DOL or the SEC. 

In addition to taking a wrecking ball to the decades old statutory framework for oversight of investment 

advice provided to plans and individuals under ERISA and the Internal Revenue Code, a framework that 

was created alter more than a decade of study and careful analysis by various Congresses and several 

commissions with public and private sector members and substantial public input, the new Wagner bill 

will generate significant and extended litigation, not to mention exacerbate consumer and industry 

confusion over the applicable regulatory principles. 

Although its sponsors and supporters claim the statutory language is self-executing, substituting an 

entirely new and vaguely drafted statutory scheme for one that has been in place for nearly 45 years 

and providing broad new regulatory authority over investment products that have not traditionally been 

under their purview to an entirely different agency (the SEC) is likely to create havoc in the marketplace 

and great uncertainty for financial services companies, especially those that have been trying to do the 

right thing and prepare for compliance under the existing Final DOL COl Rule. Moreover, the weaker 

standards for annuity products administered by state insurance regulators that are established by the 

Wagner bill will create additional risk of harm from advisor financial conflicts for consumers, who will 

now be stripped of the important enforcement protections that the SEC has provided for annuity 

products that were treated as securities. 

To what end? As many in the financial services industry and their supporters have been asking with 

respect to the DOL efforts, "What's the problem you are trying to solve?" The only logical explanation 

for this radical approach is that some in the industry still are not willing to commit to a legally 

enforceable best interest standard, but, in order to preserve their highly profitable and highly conflicted 

compensation arrangements and business models, they are willing to create the precise effect on the 

investment advice marketplace - chaos, confusion and uncertainty- that they have continually alleged, 

without factual evidence to prove it, that the Final DOL COl Rule supposedly creates. 

For more than six years, while the DOL rule was in development, opponents of the Rule alleged, again 

without proof, that the so-called "unintended consequences" of the DOL Rule were to undermine access 

to investment advice for small savers, a market that actual data shows is not currently served by many 

of the Rule's opponents. But my concern today is not limited to the unintended consequences of the 

current version of the Wagner bill, but to the serious harm to all savers, and most especially retirement 

savers, that will result from the INTENDED consequences of the bilL 

The harm to investors and the market confusion and upheaval that will be caused by the bill are not 

unintended, they are fully intended to reward and protect those industry players and their 

representatives that are unwilling to be legally accountable to act in their clients' best interests. To 

achieve that end, the bill pays lip service to a best interest standard but by its very terms would return 

consumer protections for retirement savers to their pre-ERISA state and leave consumers even more 

confused and vulnerable to the harms caused by conflicted investment advice than ever before. 

Opponents of the COl Rule continually repeat the false charge that the Rule reduces "consumer choice." 

But the latest version of the Wagner bill makes it crystal clear that the only choice that some in the 

industry and their allies want to preserve is their own choice to continue their current reliance on 

conflicted compensation arrangements and the business models that reward investment 

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recommendations that maximize profitability at the expense of their customers who are struggling to 

save for retirement. 

I will leave it to others to critique in detail the technical shortcomings of this legislative proposal, but 

even a quick reading of the bill reveals the obvious: stripping away from the Department of Labor its 

long-standing role to define what it means to be a fiduciary, a position of trust that has existed in the 

law for centuries, and creating a separate and lesser standard of care for the very classes of people that 

individual savers need to rely on for solid, reliable financial advice they can trust, is more than a step 

backward. It flies in the face of the careful, measured and quite deliberate actions of Congress in 1974 

in enacting ERISA. 

The Congress that adopted ERISA was well-aware of the existence and the expertise of the SEC, but 

instead, it chose to place the responsibility for defining and overseeing fiduciary activities and 

investment advice in the context of retirement savings in a different agency- in the Department of 

Labor. That regulatory structure has worked well for more than four decades and is generally wellunderstood by the industry. Where is the evidence and thoughtful and deliberate analysis that 

documents that the decision made by Congress in 1974 was wrong and justifies the supposed need for 

the radical change proposed by the Wagner bill? And why must Congress rush to consider it now? I 

think we all know the answers to those questions. 

Thank you again for the opportunity to provide input for the Committee's consideration as it examines 

the DOL's COl/Fiduciary Rule. Please feel free to contact me if you have any further questions. 

Sincerely, 

Phyllis C. Borzi 

Former Assistant Secretary of Labor for the 

Employee Benefits Security Administration 

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Deregulators Must Follow the Law, So 

Regulators Will Too 

As the Labor Department acts to revise the Fiduciary Rule 

and others, the process requires patience. 

By 

Alexander Acosta 

May 22,2017 7:00p.m. ET 

117 COMMENTS 

President Trump has committed-and rightly so-to roll back unnecessary regulations that 

eliminate jobs, inhibit job creation, or impose costs that exceed their benefits. American workers 

and families deserve good, safe jobs, and unnecessary impediments to job creation are a 

disservice to all working Americans. As the Labor Department approaches this regulatory 

rollback. we will keep in mind two core principles: respect for the individual and respect for the 

rule of law. 

America was founded on the belief that people should be trusted to govern themselves. Citizens 

sit on juries and decide the fate of their fellow citizens. Voters elect their representatives to 

Washington. By the same token, Americans should be trusted to exercise individual choice and 

freedom of contract. At a practical level, this means Washington should regulate only when 

necessary. Limiting the scope of government protects space for people to make their own 

judgments about what is best for their families. 

The rule of law is America's other great contribution to the modem world. Engraved above the 

doors of the Supreme Court are the words "Equal Justice Under Law." Those four words 

announce that no one is above the law, that everyone is entitled to its protections, and that 

Washington must, first and foremost, follow its own rules. This means federal agencies can act 

only as the law allows: The law sets limits on their power and establishes procedures they must 

follow when they regulate--or deregulate. 

The Administrative Procedure Act is one of these laws. Congress had good reason to adopt it: In 

the modem world, regulations are akin in power to statutes, but agency heads are not elected. 

Thus, before an agency can regulate or deregulate, it must generally provide notice and seek 

public comment. The process ensures that all Americans-workers, small businesses, 

corporations, communities-have an opportunity to express their concerns before a rule is 

written or changed. Agency heads have a legal duty to consider all the views expressed before 

adopting a final rule. 

Today there are several regulations enacted by the Obama administration that federal courts have 

declared unlawful. One is the Persuader Rule, which would make it harder for businesses to 

obtain legal advice. Even the American Bar Association believes the rule goes too far. Last year 
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a federal judge held that "the rule is defective to its core" and blocked its implementation. Now 

the Labor Department will engage in a new rule-making process, proposing to rescind the rule. 

Another example of a controversial regulation is the Fiduciary Rule. Although courts have 

upheld this rule as consistent with Congress's delegated authority, the Fiduciary Rule as written 

may not align with President Trump's deregulatory goals. This administration presumes that 

Americans can be trusted to decide for themselves what is best for them. 

The rule's critics say it would limit choice of investment advice, limit freedom of contract, and 

enforce these limits through new legal remedies that would likely be a boon to trial attorneys at 

the expense of investors. Certainly, it is important to ensure that savers and retirees receive 

prudent investment advice, but doing so in a way that limits choice and benefits lawyers is not 

what this administration envisions. 

The Labor Department has concluded that it is necessary to seek additional public input on the 

entire Fiduciary Rule, and we will do so. We recognize that the rule goes into partial effect on 

June 9, with full implementation on Jan. 1, 2018. Some have called for a complete delay of the 

rule. 

We have carefully considered the record in this case, and the requirements of the Administrative 

Procedure Act, and have found no principled legal basis to change the June 9 date while we seek 

public input. Respect for the rule of law leads us to the conclusion that this date cannot be 

postponed. Trust in Americans' ability to decide what is best for them and their families leads us 

to the conclusion that we should seek public comment on how to revise this rule. Under the 

Obama administration, the Securities and Exchange Commission declined to move forward in 

rule-making. Yet the SEC has critical expertise in this area. I hope in this administration the SEC 

will be a full participant. 

America is unique because, for more than 200 years, its institutions and principles have 

preserved the people's freedoms. From administration to administration, respect tor the rule of 

law has remained, even when Americans have been bitterly divided. Some who call for 

immediate action on the Obama administration's regulations are frustrated with the slow process 

of public notice and comment. But this process is not red tape. It is what ensures that agency 

heads do not act on whims, but rather only after considering the views of all Americans. 

Admittedly, this means deregulation must find its way through the thicket of law. Casting aside 

the thicket, however, would leave Americans vulnerable to regulatory whim. 

The Labor Department will roll back regulations that harm American workers and families. We 

will do so while respecting the principles and institutions that make America strong. 

Mr. Acosta is secretary(}( labor. 

Appeared in the May 23, 2017, print edition. 
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As the Obama administration reached the end of its nearly six-year battle with financial firms over setting tougher 

rules for brokers who handle retirement accounts, an emissary went up to Capitol Hill to smooth the way for the 

rollout. 

MRP, in a meeting with Democratic congressional aides last month, stressed the policy's importance to its millions 

of retiree members, according to people briefed on the gathering. The more significant message, however, was left 

unsaid: lawmakers besieged by industry pushback should keep in mind there was an equally powerful lobby on the 

other side. 

MRP's leading role in advocating for the Labor Department rule that makes brokers put clients' interests ahead of 

their own was no accident. The administration, seeking to cement a legacy of being tough on Wall Street, spent 

months trading information and coordinating with the group as it campaigned for the plan, hundreds of pages of emails obtained from the department under public records law show. 

The collaboration ··which opponents decried as overly cozy- included MRP and labor staff discussing guest lists 

for events, writing questions for an appearance in Miami by Labor Secretary Thomas Perez and strategizing on how 

to plant positive media articles. President Barack Obama himself announced the policy's revival fast year at MRP's 

headquarters in Washington. And last week after the rule's completion, he wrote the group a thank-you note. 

'Own Country' 

The alliance helped resuscitate the regulation after many thought it was dead in 2011 due to vociferous lobbying by 

banks, brokerages and insurers. MRP's muscle will also be important going forward, supporters say, as the industry 

tries to get Congress or the courts to reverse one of its biggest losses since the Dodd-Frank Act passed in 2010. 

"The AARP is its own country," said Knut Rostad, president of the Institute for the Fiduciary Standard, who has called 

for the stepped up protections for years. 

The new rule, which brokers must fully adopt by January 2018, requires advisers to act in the best interests of their 

clients, an obligation known as fiduciary duty. Previously brokers could recommend investments that they believed 

were merely suitable. 

Labor Department spokesman Michael Trupo said input from a broad array of groups led to a strong regulation that 

also minimizes burdens on industry. 

Broad Group 

"The Department of Labor welcomed feedback on how to address conflicts of interest in retirement advice through 

meetings, hearings, phone calls and written comments from a broad range of stakeholders, including consumer and 

retirement advocates, representatives from the financial services industry, and others," he said. 

MRP (formerly known as the American Association of Retired Persons) carries great weight in washington 

because of its massive war chest and membership, a group of 38 million people over the age of 50 who tend to vote 

in great numbers. Non-partisan and non-profit, it has made financial issues a top priority and had been working in 

some capacity on getting the broker rule enacted since the late 1990s. 

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Cristina Martin Firvida, the group's director of financial security, said that while AARP was able to provide something 

of a counterweight to the finance industry's opposition, it still sees the fight more in David v. Goliath terms. 

"Certainly our 38 million members are very, very important," she said. "But there is no mistaking that the power of the 

lobbying on the other side of this issue is staggering." 

Calculated Move 

The Labor Department records, which cover the first six months in 2015 when the push to revive the rule kicked into 

high gear. provide a rare glimpse into how the Obama administration courts. and relies on. outside allies in tough 

policy fights. 

Opponents included big banks like Morgan Stanley, major mutual fund companies like Fidelity Investments and 

independent brokers across the U.S. Many see the Labor-AARP partnership as a calculated move by the 

government to use the retirees' group as its own de facto lobbyist. With the administration unable to persuade 

scores of congressional Democrats to support the nule, they say, it turned to AARP. 

The result, the industry says, is that a rulemaking impacting millions of investors and $12 trillion in retirement 

savings was marred by politics. The message of beating back Wall Street, they add, quickly took precedence over a 

deliberative process that could have led to a less-flawed regulation. In particular, they say the policy could lead to 

lower-income clients being shunted aside because of the increased compliance costs. 

"It is one thing to win a political race, it is another thing to make good policy," said Kenneth Bentsen, president of the 

Securities Industry and Financial Markets Association which represents hundreds of brokerage firms, banks and 

asset managers. "In this instance, the politics don't make it right." 

'Sea Change' 

Bentsen said he was especially struck when Obama appeared at AARP's offices in February 2015 to announce the 

rule's revival. 

The event left some wondering when a U.S. president last made a personal plea for an adjustment to the Employee 

Retirement Income Security Act of 1974. "That is just a sea change," Bentsen said. 

AARP wasn't the only advocacy group that worked with the White House. Some, like the Consumer Federation of 

America, have fought for a fiduciary rule lor years. Other backers included the AFL-CIO labor federation, Americans 

for Financial Reform and Better Markets. 

Also significant, people involved say, was Perez, who made the rule's enactment a priority when he became 

secretary in 2013. He personally briefed members of the House and Senate and called advocates before key 

developments, according to a copy of his daily appointment calendars lor the first half of last year. 

Democrats' Opposition 

With the White House interested in showing its support for Main Street, as opposed to Wall Street, the fiduciary 

regulation got fresh attention toward the end of 2014. lt had first been proposed in 2010 and then withdrawn by 

Labor the next year after industry lobbying sparked bipartisan complaints. 

This time, the rule was given a make-over. First, the term "fiduciary" was de-emphasized. Instead, an easier-tounderstand concept, brokers' conflicts of interest, was highlighted. Driving the point home, the president's Council of 

Economic Advisers claimed in a study that retirement savers lost up to $17 billion annually due to excessive 

commissions, high fees and other dubious practices. 

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A few weeks after the study was made public in January 2015, the White House reached out to AARP and other 

consumer groups to invite them to a "closed press and off the record" session with senior officials from the National 

Economic Council and Labor. The plan, an e-mail said, was to discuss "campaign efforts." 

The biggest of those came when Obama made his announcement. AARP and the Labor Department closely 

consulted about the 40 guests the association could invite, according toe-mails. 

Reid, Schumer 

Working throughout the weekend before the Feb. 23 event, AARP lobbyists e-mailed with senior Labor staff 

members, trading spreadsheets that ranked guests in two tiers of priority. The first level included Richard Trumka, 

head of the AFL-CIO, Cornell Brooks, CEO of the NAACP and Lee Saunders, president of the American Federation 

of State, County and Municipal Employees. 

Congressional aides were also considered. 

"My preference with any seats that open up is to make sure we can add Hill staff," wrote AARP's Martin Firvida, 

adding that her "top priority" would be somebody from Democratic Senate Leader Harry Reid's office, followed by an 

aide to Senator Charles Schumer of New York. 

Obama's appearance at AARP resembled a campaign rally. Appearing on a stage with Perez and Massachusetts 

Democratic Senator Elizabeth Warren, he fired up the crowd with references to financial advisers who "receive 

backdoor payments or hidden fees for steering people into bad retirement investments." 

26,000 Signatures 

Once the plan was released, AARP stayed in close touch with the Labor Department. 

In late April of 2015, for example, Martin Firvida reached out to senior Labor Department officials to discuss a 

petition drive in support of the rule. The group had generated 26,000 signatures backing the plan and wanted 

Labor's advice on how to maximize the visual impact of 52 reams of paper being dropped off at the agency by 

volunteers in AARP \-shirts. 

"We will take your direction on what type and size box in which you would like those," Martin Firvida wrote. 

In an e-mailed statement, Martin Firvida said AARP has made "countless petition drops" on a variety of different 

issues and closely coordinates with the government because many federal "facilities have understandably 

enhanced security." 

'Grassroots Support' 

Preparations were also extensive for a May 2015 conference in Miami, where Labor staff agreed to send Perez, 

hoping to "build grassroots support" for the initiative, according to one e-mail. 

Ahead of the event, AARP senior adviser John Cummings wrote to Perez's office that the crowd could be as large as 

1,000 people, and to ensure attendance it would advertise the speech "as well as offer refreshments to entice." 

AARP and Labor traded draft press releases as the meeting approached, with the trade group's representative also 

offering to send talking points to the agency. 

An AARP official also suggested Yahoo Finance might be a good place to get news coverage. "We typically have 

pitched the producer/writer and she pitches her editors and then does the soft piece," wrote Josh Rosenblum of 

AARP media relations on April 29 to a Perez spokeswoman. 

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Preparing Questions 

Rosenblum, in an interview, explained that his reference to "soft" pieces was about stories that help educate 

consumers, as opposed to hard-hitting, investigative journalism. 

As they prepped for an on-stage discussion between Perez and the MRP president in Miami, the two sides 

exchanged a four-page document of possible questions and answers. "How specifically are people being hanmed 

under the current regulatory environment?" read one. "Some may say that financial professionals are already well 

regulated. Are they really?" read another. 

"We are open to any and all suggestions and any questions your team may want to use instead," AARP's Cummings 

wrote to Labor. 

Perez's staff was also told in a memo from MRP dated April 29 that during an audience question and answer 

period, an executive from the group "would handle and deflect any questions that are not germane to the topics or 

are deemed inappropriate." 

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