COMMITTEE ON
EDUCATION AND THE WORKFORCE

RANKING Memeen, SUBCOMMITTEE ON
HIGHER EDUCATION AND WORKFORCE TRAINING

WASHINGTON OFFICE:

2262 RavauRN House OFFice BUILOING
WasHincTon, DC 20515
PHONE: (202) 225-2531

Fax: (202) 225-5688

SuBCOMMITTEE ON HEALTH, EMPLOYMENT,

LaBor AND PENSIONS EDINGURGIOFEICE:
2864 West TRENTON ROAD
Epinsuas, TX 78539
Prone: (956) 682-8545
Fax; (956) 682-0141

COMMITTEE ON FINANCIAL SERVICES

sno Goverment Sronsonasewrermnses —- House of Representatives

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS

SEGUIN OFFICE:

B oe porivemas
AND CONSUMER CREDIT Rubén Hinojosa Secu Tx 78118
. . PHONE: (830) 401-0457
15th District, Texas Fax: (830) 379-0984
September 18, 2015 Rep.Hinojosa@mail.house.gov

www.house.gov/hinojosa

The Honorable Thomas Perez
Secretary

U.S. Department of Labor
200 Constitution Ave, NW
Washington, DC 20210

Re: Proposed Conflicts of Interest Rule RIN 1210-AB32

Dear Secretary Perez,

A few weeks ago, I joined my colleagues, Representatives Robert C. “Bobby” Scott and Maxine
Waters in expressing my strong support for the Department of Labor’s (the “Department”)
proposal to update and re-define the definition of “fiduciary” under the Employment Retirement
Income Security Act of 1974 (“ERISA”). While the retirement planning landscape has changed
significantly since 1975, when the definition of “fiduciary” was last updated, the standard of
conduct for investment advisors has lagged behind. As increasing numbers of Americans now
manage their own retirement savings and rely on the expert advice of investment advisors for
their retirement security, it is vital that Americans have access to affordable and un-conflicted
retirement advice.

As a founder of the Congressional Financial and Economic Literacy Caucus — and as the only
member of both the Committees on Financial Services and House Education & Workforce,
which has jurisdiction over ERISA, I believe the Department’s proposal recognizes the need for
an updated standard and is a welcome step in the right direction. As one of the Rio Grande
Valley’s representatives in the U.S. House of Representatives, where the need to expand access
to resources and financial literacy is evident and widespread, I applaud the Department’s
commitment to crafting a universal best interest standard for all retirement advice, as well as in
the responsive, open and inclusive manner in which the Department has carried out its efforts.
There is no doubt that we share the same goal of increasing access to and the availability of cost-
effective and un-conflicted retirement investment advice that is in the best interest of the
consumer. While I reiterate my unwavering support for the Department’s efforts today, I also
write to share some of my suggestions with the rule as proposed. I trust the Department will
work diligently to review and address comments in response to the proposal as it works to
finalize and perfect the rule.

This mailing was prepared, published, and mailed at taxpayer expense
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Investment Education

The Department was wise to include an Investment Education Carve-Out providing investment
advisors with flexibility in distributing educational information to clients and potential investors
without such information constituting “investment advice”. At a time when nearly half of all
working-age households own no retirement account assets,' and 30 percent of all households do
not have a savings account,’ removing barriers to saving is a critical first step to increasing
financial security for Americans. A central stumbling block for many Americans is their lack of
financial literacy. Critically important financial tools such as tax-preferred retirement accounts
and fundamental investment product options such as securities, equities, bonds and mutual funds
can be overly confusing.

As more Americans nearing retirement age face the prospect of deep financial insecurity in their
later years, we need to expand financial literacy by providing Americans with easy access to
financial information from their trusted investment advisors. As the proposal currently stands,
the act of describing particular financial products and features, and how said features could meet
the needs of the investor may trigger contract requirements. I am concerned that by requiring a
contract to be signed prior to any investment decision being made, the rule could have the effect
of suppressing accurate information and good advice in an effort to avoid running afoul of the
tule’s prescriptions.

I suggest the Department allow for some flexibility with respect to the timing of an advice
conversation proceeding to the mention of investment products. Advisors and consumers must
be able to discuss together investment options prior to the point at which a recommendation is
made and a specific choice is contemplated. The contract should be executable once a full
review of the investor’s circumstances, goals, objectives and financial options have been
discussed and a specific recommendation is to be made as to a course of action.

Compensation Models

I strongly commend the Department adopting a flexible, principle-based approach, rather than a
prescriptive approach. There is much concern that the current proposal favors a fee-based or
investment advisory model rather than the more widespread commission-based / brokerage
model currently in use. The Department should not favor or dictate particular business models
that may not be in the best interest of the investors, especially small savers. There is no one-size-
fits-all compensation model that is best suited to all investors. While investment advisory
models may be in best interest of some investors, their up-front fee structure may prove to be
more costly for others.

1 Rhee, Nari PhD, “The Retirement Savings Crisis: Is it Worse Than We Think?”, National Institute on Retirement
Security, 2013.
? 2013 FDIC National Survey of Unbanked and Underbanked Households.



The strength in the Department’s proposal is its flexible approach that allows for a wide variety
of business models. I suggest the Department clarify and strengthen its guidance to ensure that
the rule is not interpreted to create a bias between commission-based and fee-based accounts
provided that investment advisors act in the investor’s best interest.

Contract Disclosure Requirements

The Best Contract Interest Exemption (BICE) is a flexible and innovative approach taken by the
Department, and I praise its ingenuity. However, I am concerned the BICE provides for
substantial and duplicative disclosure requirements that could prove to be quite difficult in terms
of compliance. Requiring advisors to provide all direct and indirect compensation for
recommended investments as well as costs for competing alternative products and projections for
all of these costs at one-, five- and ten-year intervals may prove quite burdensome and
impractical. Providing such voluminous information and projections of this sort would be very
difficult due to the varying compensation schemes for the thousands of different investments. I
suggest the Department explore simplifying the disclosure requirements while ensuring investors
are provided with the information necessary to make informed decisions.

Small Business

Small businesses make up 99 percent of all U.S. employers and are the lifeblood of my district’s
and our national economy. It is of paramount importance that in moving forward with the
proposal, the Department ensures the ability of small businesses to provide retirement savings
opportunities to their employees. The proposal provides a helpful Seller ’s Exemption Carve-Out
but limits its applications to plans with over 100 participants. I believe the Department should
carefully monitor the effect of the rule on the ability of small businesses to provide retirement
plans which do not meet the criteria for exemption under the Sellers ’s Carve-Out in order to
ensure the continued availability of, and growth of small-business sponsored retirement plans.

I thank and congratulate you as well as the Department for its leadership in working to ensure
investment advisors are held to the highest standard when acting in the best interest of their
clients. The proposed rule is a long overdue update. I look forward in working with you in
finalizing this important milestone.

Sincerely,

Rubén E. Hinojos:
Member of Congress