Transcripts For CSPAN3 Key Capitol Hill Hearings 20240622

Their own studies show the main drivers of default are loan devalue, borrower credit score. Everything else is literally a rounding error. And so of course, the final doddfrank rules essentially abandon the things that actually drive default. And endless servicing requirements, again making it near impossible to foreclose. My opinion is the rule increased foreclosures last time around rather than decrease them. And the harder it is and the mission has nothing to do with financial stability. The mission is to use the the regulatory system to force prudent borrows to subsidize imprudent. We all knew the crisis was quite costly. It also will provide a cover for massive expansion and government powers. One minute. Im not even go i think to need that. So i would say and would say avoid financial cryises. I think a repeal is not enough. The presystem was broken. It was flawed. And to me one of the real flaws of doddfrank is it extends the precrisis system. The theme of doddfrank is, lets expand bank like regulation to everybody else. So again, think about it that way. The notion of doddfrank, if only agi was regulated as well as city bank was regulated everything would have been fine. Thank you mark. Im going to let each of the panelists, in order add something if you would like or take up something somebody else said or reiterate a point. Maybe two minutes each. Peter peter . Thanks. There were a couple of things that occurred to me we might add a little bit. First of all, ive heard about the costs of swaps. You didnt cover that as much as we might have covered it, but that and also the question of hedging under the voca rule. Thats also a problem. We talk about market making. Market making is a problem. You cant distinguish it, but its also a problem with hedging. A lot of activity that banks engage in is hedging activity. That also looks a lot like prop trading. So how today i think is the day that the the doddfrank, that the rule goes into effect. How are banks going to deal with this . Well theyre going to hire a lot of lawyers in this room. Good. Thats always good. And a lot of them are done. And theres a political compromise inside of agencies. And this rule in particular had six different agencies working on it. And each one of them had to get a pound of flash at the last minute. And what we have is you will do hedging, if youre a bank, out of your bank account. But you could also be doing hedging because there is a reasonable anticipatory demand that your customer, who you know holds the same products as you, may also want to hedge. But then you have to explain the transaction and tell people why its not changing. So this is why i think youre going to see pullback and youre going to see flow out of the fixed income corporate markets and into the safe markets. Into the markets that are easy to value easy to collateralize, easy to mark on a daily basis, and when prices move up and down, you dont have a problem. Because you dont have to deal with that rule. And again, this is very bad for the real economy. Corporate treasurers need the hedge. They need these instruments and they need them and they also need to know that when they issue their debt into the Capital Markets that if the debt is not fully subscribed, that the banks will take the debt down and stand behind it to make a market whenever markets move up and they move down. And its not clear to me that if theres a bankruptcy or an issue with specific debts and we could have an issue coming very slowly here in the the High Yield Energy oil and exploration area coming in the next six to eight months, whether banks are going to step in and take on the liabilities that they used to for fear of Holding Inventory too long or being told theyre not hedging. That hedge turned out to be a prop trade because the customers reasonably anticipatory demand vanished. So i agree with you, peter. This is a very, very this is micro management. Of the Capital Markets. All right, chris. That took up peters time. But now you have another two minutes if you want to add something else. Well, i mean i wanted to agree very much with what mark said. I was an attorney during the crisis. And what we did, my entire industry was predicated upon taking advantage of rules. It was basically you took advantage of the risk weighted Capital Requirements in the banking book and changed that into an aaa rated security that got less, that you had to hold less capital against and put nit the trading book. And to me, that is again, thats government interference that created an incentive for people to act and create an asset bubble. And you accurately stated the Credit Rating Agency Reform didnt really happen. And to me i think the Basil Capital risk weighting rules are still a huge problem that havent been addressed. And i think what youre going to see because theres Global Growth stagnation all the sudden, the idea is going to be well, infrastructure bonds and emerging markets, United States frublgt bonds infrastructure bonds, all these things should get better capital. They should be treated more like government debt. I wonder what your comments are. Let me say i fully agree with that. So basil is out there ha has not been affixed. And lets keep in mind that basil told us greek debt was risk free. That fannie mae was risk free. Its only a small improvement of the same basic framework. Also take this as a moment to plug bipartisanship. We were very, very fortunate in this country that our banks did not adopt basil two before the crisis. I acontribute toe that being there and saying dont end this thing. You will end up with less capital. It gets to a different theme. One of the themes is to hand ever more discretionary power to the reserve m and you talk about a string of regulatory failures. Scholess paradox named after my friend professor bernie schole is no matter how much the fed messes things up and no matter how bad the blunders with each crisis it gains more power and authority. And its historically true. And doddfrank is the last example. Jw, further comments . Sure, i just want to touch on another issue that i see in doddfrank perpetuated perpetuating a problem that long proceeds doddfrank the inclusion of immaterial disclosures. Conflict minerals or minerals developed in the congo. They finance the bad guys. They finance the good guys and they finance people completely uninvolveded in the war. But they decided that we should stop purchases of conflict minerals in the west, and so theres a mandatory requirement for disclosure of conflict minerals for firms not only firms getting the actual hard commodities there, but also for firms well down the supply chain, who have no idea where the aluminum in the electronic parts came from. So i think its telling when a liberal law ultimately convinces the Washington Post Editorial Board that it was a bad idea, which they have come out against conflict minerals. Its time to revisit the motion all together of including immaterial disclosures in security laws. Both by legislative fiat and by the sccs own power. And republican and democratic chairmen have both been guilty of this. I think it should be a binding constraint on any rule making. And business round table stands for the proposition. How is a mandatory immaterial disclosure going to provide benefit to investors . None. By definition fails cost benefit analysis. We have ways to measure immateriality. Methodology that has gotten great in the last ten years. I think it should be a binding constraint, the same way for litigants trying to sue under the 34 act. That means we need to relook at everything we have done. Not only do we excise the bad things in doddfrank, but i think thats important. Good point. And mark, you have another chance here. Two minutes, if you want them. I will try not to take too much, a little more than that. First let me comment on, jw mentioned the pay ratio. And i think partly got it right in that its an attack on executive compensation. Of course, many labor groups prefer you increase the income in the middle. Aworry about one of the other potentials, is that you can increase the ratio by hiring fewer workers on the left side of the distribution. So i do really worry this is going to have a tremendously adverse impact. And as somebody who started this war on the lower rungs of the job ladder can have substantial impacts and within that i worry about significantly. I want to pick up on let me first also note the number of institutions in the past, longterm Capital Management of course signature trade was the treasury market, and i believe in pennsylvania in the 80s blew itself up trading treasuries as well. So plenty example. If you go back and look at the bear assets that were transferred to new york fed, half of those with fannie and freddie securities. So go back and look at those. Absolutely institutions have blown themselves up with treasuries and agency trading. We could add Orange County to that. Blew itself up on agency securities. So i want to end with a question for peter to parse out. And to go back to his first chart about the share. As peter is well aware. They were the single largest purchasers. And to a side ive done digging around too and found for instance german dscs were large purchases of u. S. Subprime securities, too. It was european gses. And so the question is is that included in the number or is that in the subprime . That was included in the number. And they in order to understand the risks that they were taking you have to include also the purchases of the subprime Mortgage Backed securities, and the problem is that they created the market because in order to comply with the Affordable Housing goals, they could get credit for the subprime mortgages in these private Mortgage Backed securities. And so they told wall street deliver these things to us were happy to buy them. And thats how we got such a gigantic market in Mortgage Backed securities backed by subprime loans. And that i agree is understood by very, very few people. Unfortunately everyone in the room understands it. Were making progress. Its doubled or tripled. Thank you for an excellent discussion. Now its time were going to take your questions. Let me remind you of aei rules. First you have to wait for the microphone because were being recorded. Tells your name your affiliation, and then ask your question shortly and briefly. If you forget to keep it short, the chair will remind you. Lets start right here and then well come over and pick up. Thank you for this presentation. This seems left sided. The problem is i havent heard in particular what is bad. Too big to fail. [inaudible] is there any day today that data to tell you what was accomplished. They didnt do a good job because the data is not there. Thank you. Why dont you go ahead . I think you touch upon a really important observation about too big to fail. So much of it relies on discretionary decisions of decision makers. Whether its a doj. So to me nothing is too big to fail. Too big to fail is a political decision. And when eric holder says somebody is too big to jail, that preinforces the perception. So on the data point, so again, i would start with data can be suggestive at best. I think we saw suggestion data the funding had expanded. Yes, that is contracted. You would expect that to contrast post crisis. I think its important to compare the costs today versus precrisis over time. So for instance, people forget that before the crisis, say in 2006. The largest banks paid more to borrow than the smaller banks. The funding advantage was completely flipped. Today the largest banks still get 25, 30 basis point advantage. Of course, there could be a number of reasons for that. But to me, the data suggests that too big to fail as not ended. Yes, just on a couple of points you made. One with respect to enforcement and prosecution, in the role that should or could play in the aftermath of the crisis. I worry about the the muddling of actual fraudulent culpable action with bad business decisions. I dont think we want to be a nation that prosecutes bad business decisions. I think a plausible explanation of the crisis is a lot of people believed in bernanke when he said theres no housing crisis. I think a lot of the disclosures that have been prosecuted as fraudulent in mortgagebackeded security deals have involved disclosures that mirrors things bernanke was saying. So im having trouble sees thf perpetrated with fraud. Where theres instances of fraud otherwise, certainly we should prosecute it. But another problem is we dont have enough clear doctrine followed by charging decisions. This is a concept developed in laws that actually go to trial. Most of these things settle. When it goes to trial and theres a good doctrine here. We should do more work on. When do you attribute bad action by individuals to the corporation. When the board and the ceo decide to do something bad, thest the corporations fault. When some distant you know employee in a division overseas does something wrong, thats not necessarily corporate action, and so i think the the sec should do about collectively entering the policy. That would resolve a lot of bad act or exemption debates going on right now. When former fed chairman bernanke said the crisis there was no housing crisis, the housing crisis was already started, that was an incredible mistake, but not a crime. I have a question here and a gentleman over here. Well wait for the microphone, please. Hi. Thank you for this fascinating panel discussion. I understand this is quite complex given the number of too big to fail banks and regulation and the number of agencies with oversight power. My question to you is if you look at the advanced countries which advanced country do you think has come up with reasonable regulations that encourage Economic Growth in order to finish the products. But at the same time have reasonable tools and measures in place to prevent the financial crisis effectively manage a financial crisis, where you would be like, yeah, i think this is good enough, that were satisfied. Anybody wan to take that . I guess i start with the qualification. Im not sure anybody lives up to my standard. That aside, canada and switzerland both do a reasonably well job with making regulation. Other thoughts . I would tend to agree with mark on switzerland especially because of the Capital Requirements that they impose on their Banking System. And since the peso crisis since the 90s the security regulators have taken significant steps to shore up the integrity of the Financial System and to make sure that they are that system is not susceptible to massive downward price movements in oil. I would like to make a comment about the Housing Systems others have used too. Because we want to keep the focus on what caused the financial crisis here in the United States. And it was not the inadequacy of regulation of the private sector. It was the policies of the u. S. Government. For example, many other countries had large bubbles as we did in housing. And when those bubbles collapsed, as we know i the United States the results were catastrophic because there was so many subprime and other very risky loans in our Housing Finance system, as i pointed out, more than a majority. It was 56 of all the loans in our Housing Market were subprime or rirvgy loans. In other countries that was not true. So when theirs collapsed their losses were much smaller. In the United States the losses for fannie and freddie were 13 and some other institutions were higher than that so there wasnt really a need to redo the entire regulatory system here. It was a need to redo the the Housing Finance system. If i can add because chris got me thinking about this the example of mexico is fascinating in that it went from 15 , provided by foreign banks to 80 or so today. You could say it is the canadian Banking System. My point being is reform was essentially pushed because the domestic banks fail sod badly you were not going to have Banking Services unless you opened up the borders and so you had extensive competition. And the benefit is domestic constituencies feel less strongly about bailing out foreign banks. And so i think its fair to say that this bank will not be bailed out by the government at any point. Sew i raise this because i worry that many of our discussion is really a pulling up of the drawbridge where we dont want european banks here. I think we should have more foreign competition on u. S. Banks is my bottom line there. Thank you. Take a question here. This will be our last question for the panel. No . Anybody . Okay, were going to wrap up the panel and lets show our appreciation for their excellent comments. More now on the anniversary of the doddfrank regulations bill. Coming up well hear from the chair at this event hosted by the American Enterprise institute. [ applause ] well, peter, thank you for your very, very kind words. U i believed about half of them. Im told cspan is filming this live. If so, i think my wife and children are watching back in dallas, and they probably believed even fewer of them, but nonetheless, thank you for those very kind words. We know those on the left having known to occasionally travel into factfree zones. And for them, occasionally story telling has replaced trooult tell truth telling but not with my dear friend peter. His work on the true causes of the financial meltdown is really a paradigm of scholarship, if you have not read his work hidden in plain sight, i highly recommend it and it is required reading to be a member of the House Financial Services committee. We need more of this solid research. So peter, thank you for everything you do. And thank you for helping us on the Financial Services committee so much. Im sorry Arthur Brooks could not be here today. Im a huge fan of his. I love the title of his new book. And on my desk, the conservative heart. I assume it was designed to be intentionally ironic since we know conventional wisdom is a that conservatives have no heart and liberals have no brains. So should that be true, there might be very little arthur can do to help those on the other side of the political spectrum, that there is much he has done to change the misperception of conservatives and create or restore a conservative language that speaks to the heart and not just the head. As we all know, the founders spoke a personal laj waj of worth and happiness. And sparked and evolution of equal rights and liberty under the law that is still transforming the world today. Baa its the conservative movement that lays down the foundation for meaningful work and family and community and faith. The institutions that make it possible for every human being to pursue their god given right to happiness. Now im told this is arthurs 11th book. Clearly im not keeping up. Hes writing them much faster than i can read them. But nonetheless there is the august district work period coming, which is traditionally when i catch up on my reading. I look forward to catching up on his latest work at that time. Again, thank you for inviting me to aei. I have been long an admirer of the work that has been done here and for your noble purpose. I have already thanked peter, but other scholars like alex pollack who is here. Paul kubiak, frequent contributors to the majority and House Financial Services committee. Their works are very very admired. And wearing a different brand welcome to you. Ladies and gentlemen regrettably something is changing in america, and not changing for the good. The animal spirits of Free Enterprise and entrepreneurial risk changing in dream chasing are now regrettably being tamed. This corresponds not only to the challenging Economic Times that we continue to see, but to the perceptible loss of freedom in america today. Modern marks are focused on the unhappy results of the doddfrank act. The socalled wall street reform and Consumer Protection act which was signed into law five years ago today. No need to be the first one in your neighborhood to throw a celebration. Weighing in at 2300 pages. Promulgating 400 new rules. I want represents the most dramatic sweeping rewrite of the financial laws since the new deal. At the time its proponents including the president promised it would lift the economy in too big to fail to promote financial stability. Yet five years later the evidence continues to mount that our society is now less stable. Less prosperous, and less free. The financial panic of 2008 clearly caused much anger against Financial Firms and bailouts, courtesy of the taxpayer they received. The alchemy of wall street greed outsized and almost blew up the planet. This in the narrative enormous taxpayer bailouts and a functional occupation of the Capital Markets by federal regulators courtesy of doddfrank. Although faults the narrative has permeated the body politic. I am reminded of churnlchills remark. History will be kind to me, for i intend to write it. For our detriment, we have allowed the left to write the first history of the 2008 financial panic. Thankfully peter has written a definitive history of the 2008 financial panic. Other scholars at aei and other good committed conservatives have followed as well. Stz clear now that the financial crisis did not result from deregulation, but instead resulted from dumb regulation. In fact, statistically total restrictions grew every single year in the decade leading up to the financial crisis including such landmark laws held for stopping abuses. Yet washington not only failed to prevent the financial crisis. In many ways it led us into it. They encouraged bad wounds supported by fannie mae and freddie mac to meet their Affordable Housing goals which were put on steroids. Lets remember that more than 70 of the subprime and mortgages that led to the crisis were backed by fannie freddie, the fha and other taxpayer backed programs. Liberals asked them, fannie and freddie, lets roll the dice just a little bit more. They did. And the taxpayer lost. We all lost. If you have to point to a root cause of the financial crisis, this was it. Government housing policies. Additionally the Federal Reserve did its part by maintaining a highly accommodative Monetary Policy that dramatically lowered Interest Rates and kept them low for a very long time and inflated a housing bubble. Sound familiar to anyone . Lets any examine another part of the lefts narrative of the financial crisis, and the claim regarding quote unquote, outsized risk being taken by Financial Institutions. The willingness to bear risk is one of the central ideas upon which society rests. Risk is an essential element, not only of personal liberty, but of market prosperity as well. To take away risk from the Financial System is to take away innovation, to take away opportunity for the common man to succeed. Ladies and gentlemen, if we ever lose our ability to fail in america we will one day soon lose our ability to succeed. For those who want washington to be the final arbitor, they should first consider if washington is competent to manage risk. A review of the federal governments track record does not inspire confidence. The National Insurance program is 24 billion under water, and yes, the pun is intended. The pimpbl and guarantee corporation is running a total asset deficit of approximately 62 billion. And fairly recently the federal Housing Administration received their first taxpayer bailout courtesy of the obama administration. Now lets turn to greed. Its an article of faith on the left that it was wall street greed that really caused the crisis. My question to them is when hasnt there been greed on wall street . How could that possibly be the determining factor . Theres a much greater threat, and that is washington greed. The greed of the ruling elite for more power over an ever increasing share of our economy our lives and our liberty. And ladies and gentlemen doddfrank is the epitome of washington greed. The doddfrank architecture first of all has indeed made us less financially stable in many ways. The big banks are bigger, the small banks are fewer. But because washington can control a handful of large established firms much easier than many small zealous competitors, this is likely an intended, not unintended consequence of the act. Doddfrank concentrates greater assets in fewer institutions. It cotifies too big to fail and taxpayer bailouts. Title one dangerous allows the federal government to designate too big to fail firms in turn, they create a bailout system that the Nonpartisan Congressional Budget Office estimates will cost taxpayers over 20 billion. Now from wall streets point of view doddfrank may not prove such a bad deal after all. They can help shape regulations, guaranteeing taxpayer bailouts for themselves while grabbing increasing market share. This is bad policy and worse economics. It erodes market discipline and risks further bailouts. To be paid mostly by lower and middle income taxpayer families. It helps to make firms bigger and riskier than they otherwise would be. Lets look at two other prime examples of doddfrank risks. First, the derivatives market. They were perceived to be at the heart of the financial crisis. Doddfranks scheme to regulate them is to mandate. Certain derivatives claim to be Systemic Risk to be cleared through centralized clearinghouses. It designates the clearinghouses as a new class of institutions it calls systemically important Financial Market utilities. Also known as fmus since washington excels at acronyms. In return by the Federal Reserve, guess what the fmus receive, immediate access to the feds discount window. You might expect these private firms to resist this type of socialization. Sheila bayer said some were drooling at the aspect. So doddfrank did not lessen risk in this regard, it just centralized it and placed it on the taxpayer balance sheet. Next is the 932page con pound, confusing, con va luted regulation that hits mainstream businesses at the heart. Its a bureaucratic solution in a problem. It severely limits Financial Institutions proprietor trading. Of the institutions that fell during the 2008 financial crisis, not one was due to proprietary trading. Not one. In fact, Financial Institutions that varied Revenue Streams were better able to weather the storm, keep lending and support job growth in our economy. While they still search for a problem that does not exist it is creating a new problem that didnt exist before, and that is dramatically reduce liquidity in the Corporate Bond markets. Many economists believe the next financial crisis could result from the ill e equality. Recently some of you may have seen an opinion piece pinned by the ceo of blackstone, who wrote locked up markets and rapidly following Security Prices will force them to horde liquidity. To satisfy regulatory tests. With individual suffers losses and companies not able to raise capital, the economy will contract with layoffs lower tax revenues and pain for middle income and lower income americans. I agree. Now in addition to making our economy in many ways less stable, doddfrank has made us less prosperous. Thats what i will discuss next. Under the obama economic strategy, of which doddfrank is a main pillar are anemic recovery has createded 12. 1 million fewer jobs than the average recovery in the post world war ii era. For more than a year now, the ablebodied american has hovered at the lowest level in over a generation. Small business startups are at the lowest level in a generation as well. Had this recovered merely been as strong as the average recovery in the post war era middleincome American Families would have 12,000 more in income and 1. 6 million more americans would have escaped the trap of poverty. But more than the numbers my constituents angst tells me what i need to know. One wrote there are parttime jobs in my area but jobs with no benefits. My son is a disableded iraqi freedom combat veteran who has lost hope of a decent fulltime job. Another wrote, quote our Small Business has recently laid off 25 of workers. The repaining of us have taken a 15 pay cut, and thats probably not going to be enough without more layoffs for tenured people. Ladies and gentlemen, every member of congress is still receiving letters just like these. The painful truth is, that doddfrank and the hyper regulated obama economy are failing low and moderate income americans. Who simply want their fair shot at Economic Opportunity and financial security. Free checking at the local bank. 75 of banks used to offer free checking. But just two years into the doddfrank regime only 39 did so. A trend that many attribute to the price controls imbedded in doddfranks amendment. This is brought up in Committee Just last week and the democrats at my committee sneered at this. But for low income struggling americans, the cost of banking is no laughing matter. How does doddfrank score with the Consumer Protection bureau or cfpb impact the prosperity of minority borrowers. Within a few years roughly onethird of all black and hispanic borrowers may find themselves disqualified because of the cfpbs qualified mortgage rule based solely on the the rigid debt to income rules. One size fits all. Furthermore, more than 9 million households dont have a checking or savings account principally because account fees are too high or unpredictable. Yet another consequence of doddfrank. The next 2300 pages launched consequences that have crippled growth. Supposedly was aimed at wall street. But it has hit main street. And it has had efgtsfects on Small Businesses and Financial Institutions, the life blood of mainstream america. Community banks and Credit Unions combined give the bulk. But the combined weight is dragging them down. In fact we are now moving a day in america. One wrote me my major risk is threat. Risk of a robber coming in with a gun in my office. My number one risk is federal regulatory risk. And dodd franks rules go far beyond. They hit every Public Company in america. Grocery stores, Bowling Alley chains, they didnt cause the financial meltdown, but still they must comply with regulations that have functionally imposed wage control, salary ratios and private compensation disclosures all that were written for wall Street Investment firms. Every dollar that a main street business has to invest in lawyers and accountants to explain this gibberish, is taken out of workers wages in capital investment. Is it any wonder our economy is limping along 40 below the historic norm . No wonder low and moderate income americans lose sleep at night, worrying about their stagnant wages, their smaller Bank Accounts and their childrens future. L most ominously, doddfrank has made us less free. Today americans are less governed by the rule of law and more and more governed by the discretion of regulators. It is osha now, not congress, that governs over Workplace Safety. It is the epa, not congress, that coverages the air quality. It is hhs, not congress that governs over our health care and most of all, for Economic Opportunity and economic liberty, its now doddfrank that rules over the Financial Markets. John macey noted that, quote, laws classically provide people with the rules. Doddfrank is an outline directed at bureaucrats and instructs them to make still more regulations and to create more bureaucracies. To the worryisome entities are the aforementioned cfpb and efsoc. Both operate largely out of public view, and both are subject to virtually no checks and balances. And both have been granted sweeping unilateral powers to fundamentally control huge swa the, ths of the u. S. Economy. They have almost absolutely discretionary power to find any consumer product, quote, unfair or, quote, abusive, and thus functionally outlawed. Ft so when it comes to credit cards, auto loans, mortgages of hard working taxpayers, the cfpb not only has unbridled power to make them less available and more expensive but has the power to absolutelilyy lyilyy lyily take them away. Now fsoc is heading agencies that either help caused the financial crisis or were largely negligent in preventing it in the first place not withstanding they had the Regulatory Authority to do so. Doddfrarng a doddfrank allows them to vague terms like, quote, Financial Stress and quote financial stability. And by defining these terms, fsoc can deck date capital standards, products and lending activities of any major Financial Firm within our economy. Should firms not bow down to fsocs will, fsoc is even empowered to break them up. This is nothing short of the functional occupation of the commanding heights of our economy by federal regulators who have now been empowered to be central planners. With the exception of agencies dealing in classified information relating to national security, fsoc may have well be the nations least transparent federal agency. They consistently advocate for more regulation of the Financial System said, fsocs proceedings make it look open by comparison. And with the risk of the shadow Banking System yet a far greater danger is imposed by the regulatory system, which operates beyond checks and balances, as enshrined in our constitution. When our founder set up a system of governments, they included constitutional protections for the the Great National economy under the rule of law. They wanted a society of commerce and of frad, of industry, of work, of entrepreneur ship and dismantled high government barriers to these activities. They had a noble purpose. They wanted all citizens includeing those in the old world, at the bottom of the ladder, the poor, the needy, the oppressed to rise in the new land of promise. It wasnt arrogance that made america the new land of promise for they knew there was a contradiction between this land of and the millions in bondage. As lincoln told us later, the founding generation could not find a way to free them at the start, but they did boldly proclaim that all human beings are entitled to their god given rights. They had to foresight to lay down an open ended economy under government and when the time of liberation came at last, the opportunity to rise would be theirs as well. T for generations afterwards, there was an opportunity for the poor and oppressed to realize their dreams in our land of promise. Accomplishment and happiness. Never, never in the history of an Economic System have so many been so successful and so prosperous for so long. In america we understood we dont need free markets to create private riches because material possessions can never substitute for meaning and purpose in ones life. But Economic Freedom means more than wealth. It means achievement. It means productive work. It means savings. It means imagination, and it means enterprise. All of these are entitled to their just reward. When government taxes away the fruits of your work and smoothers your imagination with a thick web, they havent just taken your wealth, they have robbed you of your purpose. They have stolen your right to pursue your dream. Even worse although the progressive version of government by the rule of regulators claims to cut the rich down to size it is the poor, those who are struggling at the bottom to better their lives, who are pulled down by uncompassionate policies. The american idea, this unique idea unites liberty law and the goal of happiness and a bond that cannot and must not be severed. America is unique. And being called upon to restore the promise of liberty under the rule of law a promise that we have even shed blood to defend. So ladies and gentlemen, tomorrow is another day, and as i look to tomorrow i see an america with the most competitive, innovative, transparent, competitive Financial Markets the world has ever known. Tomorrow i see an america with economic liberties of every citizen are truly respected. Tomorrow i see an america with boundless opportunity in a surging economy for anyone willing to work hard and dream big dreams. To reach that tomorrow today we must commit ourselves to nothing less. Than replacing doddfrank. With this first step togethertogether. We can win back americas promise, thank you very much. [ applause ] thank you, chairman, hensarling for those very clear and pertinent points of discussion. Chairman hensarling has kindly agreed to take a few questions. He has to leave at 3 10 and so that is when we will adjourn but in the meantime, if you have a question, tell us your name first, your affiliation and then ask your question and well keep going until 3 10. I have questions here. Yes, sir. Wait for the microphone here please. Right here. Im sorry. Right in front of you. There you go. I should have kept my hand up. Could you give us your name. My name is rob trickenely with bloomberg bna. With in terms of changes democrats are pretty dug in. You think. What is the legislative way for you forward if there is that much opposition. Are there bipartisan talks going on or are we at a complete bipartisan impasse . I hope not. Particularly when it comes to regulatory relief for Financial Institutions, we have attempted to work with democrats. In fact im proud that our committee has put forth already two dozen bills that have passed the floor, many of which are by definition modest regulatory relief provisions. Unfortunately dodd frank again appeared to be sacred text among some democrats. I do not believe barney frank to be among them. He has indicated half a dozen areas where he would amend his own law. There is very little i agree with Elizabeth Warren on but she doesnt believe that dodd frank hasnt solved too big to fail. So hope spurs eternal. But if democrats feel dodd frank is a legacy to be protected, not extending the bills and the 400 rules to be promulgated, i dont think well have twothirds of the rules finalized as of yet then yes, well be at a loggerheads. Having said that im thoroughlio convinced the left was working on obama care before obama was even born. And so this may be a long labor and im a patient man and by washington standards relatively young. And do you have a question right here next no. All right. Right over here, please. Court macos. Our future. Org and my question is that being being declared significantly Important Financial Institution youre basically codifying too big to fail. And if this is true, then why is our is met life suing its designation as too big to fail . Well, you would have to ask met life. I suppose as an Insurance Company they dont want to have a bank a bank capital standard imposed upon them. It is a completely different business model. The fed has absolutely no experience in applying capital standards to an Insurance Company. So again youd have to speak to them. Listen, it is a mixed bag to have the federal bailout imper modder behind you but i suspect they dont want those capital standards imposed upon their business and im quite sure Asset Managers dont either. Again, these are not banks. These are completely different types of Financial Institutions. And maybe they know what ive said in my speech the federal government doesnt have a particularly good track record in managing risk in the first place. Right here, please. Yes. This lady in the yellow there. Thank you. Elaine middleman. Attorney. And im from indiana and my family has had interest in a small bank in indiana for many years. What can the local bankers do if dodd frank is not refeeled to amealy ate the problems that youve described that theyre facing . Well im a legislator not a banker. They have to hold on and in hopes that help will get here. The good news is i feel fairly confident there will be an election next november and i believe that now we have five years of data and five years of an incredibly strong anecdotal evidence that again dodd frank is making us less free and prosperous and the data is undeniable at the rate of the Financial Institutions. We are losing the relationship banking model in america today. They are losing their competitive advantage. And so when you say what is it they can do . Well they can have their voice heard. The right to petition your government for the redress of grievances is still enshrined in the constitution. I would continue to have them appeal to the reasonable democratic minds in this city and believe it or not i do not consider that to be an oxymoron. But im afraid that too many of them are intimidated today by the voices it is a trugle between the left and the far left. And sometimes the left hand doesnt know what the far left hand is doing and the far left hand is choking off any reasonable debate about the fate of our community Financial Institutions be they bank or credit union. So through he adjust under this regime im not sure im qualified to say. But House Republicans are doing everything we can to get them there as get help there as soon as possible. And any time the democrats are willing to work with us no matter how modest the regulatory relief is, there is an open door to try to save the banks and the Credit Unions. Mark and then well get to you. Can we get a microphone up here please. Now before you ask the question, remember i did say nice things about you. Well, absolutely. This is helpful. First i want to address the question that was asked about why met life and others dont want to be too big to fail and the advantage is you get to borrow at a lower rate because the debt markets perceive that as such. So if you look at the jap pell of j. P. Margon versus met life as in determines to places like pnc. And we run the risk that we are encouraging met life to become more leveraged and my question for you is other than repealing title two what would you do to end too big to fail. I think you can make a case after 08 that capital and liquidity standards were insufficient. I do not think you can make a case they were insufficiently complex. And so i think the key, mark, is to focus on what are those appropriate levels but as you well know, it is the classic goldy lox tradeoff. If you get the poorith too cold, you have 2 Economic Growth when history tell us we averaged 3. 5 and with the right Public Policy we could do 4. 5 to 5 . If you get it too hot, then maybe youre looking at more cascading failures. One again right now, the danger is that were allowing credit to be politically allocated in america by federal regulators who brought us to the press pis of the crisis in the first place by deciding prudent under writing standards in real estate should be thrown on the sheep and we can live in this bold new world that anybody can own a home. I want anybody to have the opportunity to own a home but federal policy and regulators did nobody a favor by putting them in homes they could not afford to keep. So number one again, i dont know if i can get rid of title one or title two or probably not in the shortterm but i hope there could be Common Ground on trying to work for more simplified capital and leverage ratios based upon historic norms, then that on the one hand cant be gained by the participants and does not empower federal bureaucrats to be central planners. Thank you. Youve been waiting here and then well get to you. Thank you. Wait for the microphone, please. Thanks. I just wonder will you remind us your name and affiliation. My name is young. [ inaudible ]. I just wonder if congressmen can really do something about our system . Our system when you say conservatives, when you say it is a problem the system has neither heart nor brain so i wonder if you can really fix the system because when you have a misinterpretation and misprint pretation of free economy and Free Enterprise that just means free for those who can rob other public, including families or businesses so there is no way to have a Good Economic Development growth. So unless the department of justice or congress think were going to stop there. Chairman, the question is how do we fix the system . How many hours do you have . Well we have six minutes. Well i dont have a short fifty answer, there is the answer if there is fools in office, it is fools that put them there. My experience is that politics is not so much governed by numbers but by intensity and what it will take is people becoming more aware and more politically active in the system and part of that is the work of aei to empower people with knowledge and facts and arguments but you know i understand that the congressional Approval Rating stands spare between head lice and bubonic plague and i get that and so people are concerned about the system as they well should be but american is polarized. And congress is polarized as well. Listen i have very strong thoughts about what is right and wrong in america but i never let my principals interfere with trying to compromise policies. Again jefferson said the ground of liberty is gained in inches. So ill negotiate with any democrat and ask myself is this piece of legislation taking me in a direction i want to go or dont want to go, is it more or good or more bad. But more important how do we improve the system. The American People have to hold their elected officials accountable and they have to educate themselves about the process and decide ultimately what values do they believe in. And i still believe that the American People believe in the core values of economic liberty well of liberty period. Economic, religious and political liberty that brought people to our shores in the first place is bringing them to our shores today. There is something unique about it. I believe in american exceptionalism but people have to take time to understand the policies and hold the members of Congress Accountable and they could start by talking to democrats about the plight of community banks. Were going to have a question here and this is our last question for the day. Unless it is difficult and then well make time for two. Thank you for that wonderful speech. I was on senator dodds staff during the process and i didnt understand it then and im even more puzzled now. More importantly, did he understand it. It had to do with process. But why couldnt the bill be a compromise bill, why couldnt is sarbanesoxley was a bipartisan bill and why didnt dodd frank attract enough thoughtful leaders like you to make it a different product . Well you would have to talk to them. I cannot climb inside of their inner most thoughts. What obviously suggested itself is that the Democrat Party was enjoying a rare supermajority status in the house in the senate at the time and because of that they didnt need a single republican vote to pass their agenda and they were not interested in doing something that that the whole of the American People might be able to embrace. I mean they had a supermajority that a party might enjoy once or twice in a century. I recall the cynical words of now whichg mayor rahm emanual, never let a serious cite is go to waste. It allows you to do things you other wise could not do. And dodd frank was a grabbag wish list from the left that had nothing to do with the financial causes of a financial crisis and let us remember and im sure peter is well aware of this because he was on the commission, the commission that reports on the what the root cause of the financial crisis were came out after dodd frank was already passed. So it is kind of like playing basketball and the other team hasnt shown up on the court. You are dribbling and dunking and they decided to dribble and dunk and unfortunately the American People, i think have again suffered less freedom less prosperity, and less stability because of it. And my hope still is that in divided government there will be at least enough democrats to say we can clarify dodd frank, maybe there are ways that we can improve dodd frank. Im not going to give up my quest for replacing it. But i can walk and chew gum at the same time so i can work with democrats and find Common Ground and try to keep a few more community Financial Institutions alive, and try to improve our gdp just a little. But any way that is a better question for them and i havent seen either of them in a while. Any way. Thank you very much for this rare privilege to speak to you. Thank you very much. [ applause ] ladies and gentlemen, thank you all for coming and for being with us today. On the next washington journal, democratic congressman beto orourke of texas. He is on the Veterans Affairs committee and will preview the v. A. Budget shortfall and talk about the shooting last week in the recruiting center in chattanooga, tennessee. And then tom rice on highway and mass transit funding. The current funding bill expires next week. And john forty a with the bipartisan policy centerond groups recommendations for making congress work. Wash journal washington journal is live every morning at 7 00 a. M. On cspan and commit your questions on facebook and twitter. It is almost as if they were matter and antimatter. There is always to the right and always in the wrong. Anything complicated confuses him. Filmmakers Robert Gordon and morgan nevell talk about their documentary best of enemies on the debates between william f. Buckley and gore vidal over war, politics, god and sex. There is not someone in their ear unlike today. Today i believe there is someone saying the numbers are dwindling, talk about hot topic, top salacious topic number two whereas then i dont think that was the norm in tv at the time and i dont think these guys needed as morgan said they didnt need this. Howard k. Smith was the moderator, a distinguished newsman who i think was really kind of embarrassed by this. He was moderating but he disappeared for sometimes five or more minutes at a time. Today you wouldnt have a moderator not jumping in every 30 seconds. So i think really, everybody at abc just stood back and let the fire burn. Sunday night at 8 00 eastern and pacific on cspans q a. Next, secretary of labor thomas perez testifies about a proposal to change investor adviser standards for savings accounts. It is aimed at eliminating conflict of interest for advisors. Welcome to our visitors and welcome to our secretary of labor. Secretary perez and our other members who will testify in a little bit and glad to have my Ranking Member franken here. He keeps me straight all of the time. If not straight, at least he keeps me laughing. You keep me laughing too. Is that the proper thing to say. That sounds good. No were good friends we are. And you are the cosponsor of my very first bill. Which you mentioned on television, which i appreciate. Youre very welcome. That was the second comment i didnt like very much but well talk about that later. Were not going to reharbour personal history here, were going right to the hearing right. Only good friends talk like this. Let me welcome you and ill start with an Opening Statement and turn it toefr to senator franken. A comfortable retirement is part of the american dream. Unfornt natally the fine print in Department Regulations which seek to define fiduciary would deny millions of americans a chance to invest for one. For the families that need it most and in my opinion is a solution in problem of a problem. By way of example in terms of that one word being defined by pages of regulation, that is the regulation and the comments of the department of labor on the fiduciary rule change, just to give you some idea of how much paperwork it took to explain it. Is that a gift for me . Im going to let you take that home. You can take it home and read it tonight, or do whatever else you would like to do with it. The regulation intentions are commendable to ensure that low and middle income families receive the same quality of advice about their investments as wealthy people do. Those who give advice must act in the best interest of their investors or forfeit their fees. Ira as and 401 k has market as a fiduciary and benefit only the investor but the problem is the regulations would severely limit Product Available for retirement accounts and increase fees so much so that low and moderate income people would le less and more moderate income and less informed. The rule requires disclosure of more information than is reasonable or often even time provided possible to provide. Advisers must estimate the cost and level of fees to pay over multiple fees. Because fees fluctuates as do returns, such estimates are wrong and they are considered misleading and banned by the securities and exchange commission. And i might insert here in my private life i determined with real estate and mortgage information and expressing annual percentage rates and other rates of return at new one point in time can be very nature be wrong the next day because of markets and you can penalize people for spg this was no fault of their own. It would also restrict ira to a list of products that the department of labor deems appropriate. While the Labor Department should meddle in Investment Decisions defies all logic but there is one a size fits all that prevent investors to diversify and protect from the down side risk. The hundreds of options would be reduced to a mere handful for most americans. This seems entirely counter intuitive for planned citizens of our country. And worst because investors must have a contract to receive recommendations about which to put in their investment accounts the millions of existing iras and 401 k would be blocked from getting on going advice because those contacts werent in place when the accounts were created. Millions of people will receive letters from their brokage firm telling them they will not be able to get assistance. Onethird would be forced to leave the because buzz they couldnt be properly licensed and having a perm representative matters. According to the 2012 study, three quarters of nonretired contribute to an ira and fewer that than half save for retirement. In other words many working families will not be able to guess the advice they need to feel comfortable about the decisions that are made. Studies have shown that that losing personal assistance could be for Retirement Savings could be reduced by as many as 40 saved by low and moderate income people. As i told secretary perez on the phone im as interested as he is to see that people get quality advice and those that are accountable for that advice and that we do everything to improve the access low and moderate income families have. The matter is not the goal, it is how to you get to the goal and define it. In my opinion that much regulation is too much and too restrictive on the acres so free advice these people need to get. With that said ill turn it over to Ranking Member senator franken from minnesota. Thank you, senator isakson. This is my first hearing as Ranking Member of the employment and Workplace Safety subcommittee and i look forward to working with my friend chairman isakson and members of the committee on the Important Role the subcommittee plays with jurisdiction over a variety of employment issues including Work Force Education and training the health and safety of americas work force, wage and hour laws and workplace flexibility. In today as hearing were discussing a very important issue, protecting americas workers Retirement Savings and in particular a review of the department of labor proposed rule to fix conflict of interest and retirement advice americans receive which managing their retirement nest eggs. We have red the headline time and time again that americans are not saving enough for retirement. Ive heard it many times from hard working minnesotans about how hard they are working just to keep up. And to provide for their families, let alone save for retirement. Saving for retirement is hard and investing can be intimidating for those without any experience leaving many to rely on advisers to help guide them through retirement planning. Now most advisers and brokers put the interest of their clients first and ive heard from a number of them who have sent me letters recently in support of the department of labors proposed rule including charlie im going to mispronounce his name, but Something Like blogginnino i think it means meat sauce in some language. But he is a side by side Financial Planning in plymouth minnesota, and the best meat sauce comes with the western suburbs of mills. Charles buck of buck Financial Advisers in minnesota another minnesota financial advise who has gotten ahold of me in support of this rule. Well also hear from scott puritz later today. He is a managing director of rebalance ira and he will be testifying. Mr. Pureitz offers his client custom portfolios for iras and offers oneonone consultation all while embracing the fiduciary standard and charges some of the lowest fees in the industry. But there are also those who charge much higher fees and sometimes lower returns for the retirees and when that happens it is hard for working americans who are planning for retirement and they pay the price. These hardworking people shouldnt work have worry about the fact that some advisers dont have their best interest in mind. I think we can all agree to that. The department of labors proposed conflict of interest rule seeks to address this issue. Some groups are supportive of d. O. L. S rule but there are those that believe it will result in unintended consequences and that is what this hearing is about and that is why it is so important. This is a process. And well hear from a range of perspectives today to help us understand the benefits and short comings of the proposed rule and that is why i was a little taken aback by the title of todays hearing which is restricting advice and education, d. O. L. S unworkable investment proposal for American Families and retirees. If i was naming it, i would have named it d. O. L. Fiduciary proposal what a great rule but i dont think that would have helped much. Right . Now . No of course not. See, youre in agreement. I think the department s intent with proposed rule is very clear, to help american investors keep more of their hardearned money for retirement and the saying goes the devil is in the details and the 400 plus pages gift wrapped beautifully, there are many details in this rule and i look forward to hearing from secretary perez to better understand how this proposed rule will work and from other witnesses on how we can make this rule even better. Thank you, mr. Chairman. Thank you senator franken. Well turn to secretary perez, dept of labor. Thank you. If you could hold your remarks to five minutes. Ill do my best. Thank you chairman Ranking Member, members of the committee, it is none honor to be here with you. I wouldnt that talk about a person. Mer lib tofl was an electrician and they did everything raise. They built a sollin middle class life and they saved their money and built up an impressive portfolio with vanguard and when merlin was stricken with alzheimers and would no longer arrange their finances elaine made a appointment at the local retail bank. The broker told her to liquidate the vanguard portfolio and sold them a complex, variable annuity to the tune of 650,000. Merlin was Something Like 75 or 78 years old at the time of the sale of this variable annuity. Elaine trusted this advice, thought it was in their best interest. The annual fee on the annuity the fee was 26,000. And if the tofls needed to access the money right away, a surrender charge would cost more more than 45,000 and in the end it cost a hard worker family more than 50,000. This story is tragic but not unique. It is also not illegal because someone concluded that the advice was suitable. Conservative estimates by the council of economic advisers place the cost at more than 17 billion annually. Arizza is over 4 decades old. In my grandparents generation, when you retired you got a pension and a party. And that was a defined benefit pension. Today we have a 11 trillion market of contributions and iras and 401 k and 11 trillion. Times have changed. Consumers have to make critical decisions about how to invest these funds that they have so hard earned. And three of the most important decisions people now make are medical, legal and financial. When you go to a doctor or a lawyer, they have a medical and legal obligation to put your best interests first. The Labor Departments conflict of interest rule making is about making sure that the same set of rules, best interest of the consumer apply to when you are getting help in retirement. Most people assume actually that the standard already exists. And that is indeed the case for many advisers like the one my wife and i use who is a fiduciary and he does so and puts our best interest first. But the majority who operate under this commitment, in this space, are under in such commitment but although in many cases the marketing suggests that they are. It is important to make one thing clear and senator franken alluded to this, while there are some bad apples this is not a case about bad people doing bad things. The majority of folks in this space are trying to do the right thing every day. The number of the problem is the nub of the problem is good people operating within a structurally flawed system. A market that sees personal financial interest of the adviser and the firm all too frequently misaligned from the best interest of the customer. The result is what happened to the tofls. So our goal in the proposed rule making is straightforward, to align the best interest of the customer with those of the adviser and the firm. And this proposed rule has been the product of a significant amount of out reach to a wide array of stakeholders. I appreciate the support from those in the industry. People like Brian Moynahan the ceo of bank of america who said we believe doing what is in the best interest for our customers is absolutely the right thing to do. Jack vogle the founder of vanguard, a supporter of the rule, well hear from a witness who plays in some space every day as a fiduciary working with small investors who tells you when you put your customers interest first it is great for your customers and for your business in addition. And i invite you to look at the transcript at a recent hearing we had in the house because there is a really interesting thing happening right now. The conversation is shifting from whether to have a best interest standard to enshoeing that a best interest standard can be effectively implemented. Im heartened by that shift. And you know what, we welcome any and all suggestions on how to improve the proposed rule to ensure that it can be effectively implemented. Weve heard and understand concerns raised about issues such as point of sale disclosure, date after tension and the mechanics of implementing the best interest standard. And as long as we dont loose sight of our north star a best interest commitm we are flexible on how to get this work done. This is about providing guard rails, not straight jackets. And it is important to remember as we go through this rule making that a substantial subset of the advisers already operate under a fiduciary model, they serve a wide array of customers including Small Businesses and small investors and they do it well so we know it can be done because it is already being done by so many businesses. A number of folks have raised concerns that the proposed rule will shutout the small saver from Investment Advice. Entities such as the Consumer Federation of america, entities such as aarp they take a backseat to in one and theyre concerned about small investors and they support this rule. And weve consulted with several profitable firms that is all concerned about the little guile. Well front owl in palo alto say living proof it is not only able to provide fiduciary Service Low Cost nationwide but the market greatly rewards this effort. And when i talk to firms like this and tell them about the argument on the other side that our rule making will make it impossible to serve the small saver, the most the most frequent advice i get is give them my phone number. Give them my email. Because you know what, ill take their business any day of the week. I know that the industry can adapt to serve this 11 trillion market. And im confident that we can work with them. Weve reached out in addition to small savers to Small Businesses who want to ensure that their employees have access to retirement plans so they can recruit the best and the brightest. Our proposed rule has a number of safeguards and safety valves so they can access retirement plans options for their employee is. As a Small Business owner from new jersey told us im all for from they prosal. I dont have a big firm with in house Financial Team to advise me. I want the Financial Advisers i work with to be required to represent my interests. And that is precisely what were trying to do, build a big table and invite everyone up. I believe one of the most important thing you can do when making rule making is build a big table and listen have have a healthy dose of humility. And that is our approach. Humility, faith and open mind and keen ear. Our best interest standard is in the line of ronald reagan. Trust but verify. Your marketing material says that you look out for your customers best interest this standard is memorializing what is in the marketing materials. Were open to different routes to getting to that enforceable best interest standard and we look forward to continuing to hear from as many voices as possible. Weve expended the Comment Period. Were convening three days of public hearing next month and then well reopen comment after we public the transcript of those hearings. We look forward to the engagement. And we have gotten so much good feedback from so many businesses who have come in with a get to yes attitude. And they have challenges, they have questions, they have concerns, but they have a get to yes attitude because they recognize like jack vogle said when you put your customers first it is great for your kwuft and it is great for business. This is about middle class security and one of the pillars is Retirement Security and i look forward to working with this committee and all of the stake holders to continue the process of producing a rule that will work for american savers and will work for American Business and work for all stakeholders. So mr. Chairman, thank you for your time. Thank you, secretary perez, we appreciate your attendance and service to the country. What if your rule was implemented, as it is currently contained in this stack of papers here, what would have happened differently to merlin tofl and his wife for the 650,000 they cashed in and bought a variate annuity, what would your rule done with the 26,000 fee or the 7 early withdraw fee or any other thing you might determine was wrong. What would happen differently is the person advising them would have an obligation to look out for their best interest. In a suitability standard. Excuse me for interest rupting. I understand who they went to was a bank correct. Yes. Would a bank be considered to meet the fiduciary standard you require. They went to a broker dealer at a bank. So a broker dealer has a had a suitability obligation, which is less which creates part of the challenges that we have in this situation. So the broker dealer in under the proposed rule would have an obligation to look out for the best interest of the consumer. And the challenge that we see, and the 17 billion annual cost of conflicted advice is bourne out of the fact there are multiple products that can be suitable and that broker dealer is totally within his or her bounds to then take four or five suitable products and steer the customer toed product that generates more fees for him or her at the expense of the customer. We think that isnt right and we think it should be changed. In your vision, how would they be able to remedy the situation with this broker dealer, what would have been the broker dealers obligation to the ladies and gentlemen who bought the variable annuity . To put the customers best interest first. How do you do that . What if he said that was the best interest of the customer . What penalty is there what do you do to the broker dealer or the person offering the advice to penalize them for what you consider bad advice . You would file a claim for excessive fees to recover the losses that were incurred as a result of the conflicted advice. So it basically creates a cause of action for an individual. The fee is like theyve been aggrieved to be remedies is that correct. Right. And the proposed rule has a provision in an individual claim like this that the particular bank could have an arbitration cause so they clause so they could require if there is any claim that arises out of the service we provide it would be resolved through arbitration. That is one of the proposals in the rule that is in the red gift wrapping. The adviser would do that or the individual would no, the institution that is working with this individual could, as part of the agreement, working with that individual, would be able to include an arbitration clause. So it says if we have a problem you cant go and file a claim and in state or federal court vurks to go through you have to go through arbitration. I understand. And that is a proposal taken from we spoke to a lot of other agencies involved in this issue, s. E. C. And other regulators and that is basically parallel to the procedures that are used in another sister agency. It is a meritorious move. You said i wrote fast so if i missed it tell me. The rub of the problem is, quote, good people operating in a flawed system. Would you explain that. Sure. There is a misalignment between the incentives that a person giving advice has and the best interest of the consumer. So for instance again getting back to the tofls if you have four or five different products under the current suitability rule that are suitable, and product the first product the variable annuity generates 26,000 a year in fees and another product which would have a comparable return has a fraction of those fees you have perverse incentive to steer them to the product that generates the most fees and again that is totally permissible so im not casting aspersions on the person that does it but im saying thats not right and we can device a system. And i understore what i said in my testimony there is a substantial number of people including a witness on the next panel that operate nor a fiduciary model already. They demonstrate this can be done, this is being done. Senator franken. Thank you mr. Chairman. Secretary perez, i know today is the last day of the official Comment Period and next month a public hearing is scheduled followed by a second Comment Period. Ive heard from stakeholders who said they are participating in this process and are thankful for the department that the department has provided opportunities for feedback. Can you share with us how the department has incorporated this feedback in the rule that we have before us today . Well, i can talk about the feedback that we have gotten. We havent made any decisions, yet, senator, on what to do, because the Comment Period is still open and so we want to take in all of the comments that we get during that Comment Period. What i can say to you with confidence is that weve gotten some great advice. And again, there have been a number of people who have come in from industry who have talked about how we agree that there should be a best interest standard. We want a level Playing Field as you said from your testimony. We have concerns about things like there is a some Data Retention obligations and we think you could do it differently. There is a best interest contract framework and weve heard feedback from folks saying that it is clunky. And there is a more streamlined way to do it. We have a point of sale disclosure requirement and people have said that that is not necessary. And so what weve done in every circumstance when someone said that the best interest contract is clunky our response is tell us how to do it better. How do we retain that north star of a enforceable best interest contract and do it betterment and that is the feedback weve been getting and it is really helpful. And you have incorporated. Well we havent made final decisions because we wont put out a formal rule until woof gotten all of the comments but im quite confident if history is a guide the final rule will be materially different than and better than the proposal because you have to be a good listener in this business. We havent made any decisions and we continue to keep that open mind. And you are open to continued absolutely. Suggested fixes from industry. Not only open, we have affirmatively reached out for it because there is a lot of folks who know a lot about this and we want to get they are insights. Darlene miller from minnesota who is going to be testifying next in the next panel she is president of Permac Industries in byrnesville, minnesota. Shell be talking about being a Small Business owner. She offers a 401 k plan on roughly 30 employees. Darlene is helping her employees prepare for retirement and setting the right example for many other businesses but she has some concerns that the proposed rule will jeopardize they are ability to provide this to her employees going forward. Can you ensure us you will continue to work with Business Owners like darlene to make sure that these rules dont have unintended consequences . I welcome the opportunity. I read miss millers testimony and shes a very successful business owner, not to mention a minnesotan and weve spent time with Small Business owners. What they tell me most frequently is im an expert at making my product, my widget and i have ten people and i dont have expertise in 401 k s but i want to offer it because i want to attract the best and the brightest and what weve done in this proposal is include a number of carveouts for Small Businesses so they can continue to do that. And actually what we do to help protect people like miss mill ser were changing the status quo because the status quo right now and shes had a very good experience with her adviser. Others havent. And when you have a bad experience with your adviser under the at the us quo if litigation ensues the defendant is the business. It is not the adviser. Because under the current status quo quo, the person providing the advice is actually off the hook. I think that is kind of perverse. And i think it doesnt help people like miss miller so i would love to sit down and explain to her the carveouts that help her and other Small Business owners as well as why the status quo actually presents challenges for Small Business owners and we look forward to doing that with her and other Small Business owners. Okay. Running out of time but let me end with this. Some have said this proposed rule may limit their ability to market their services and products to their clients or even limit Small Business employers and employees from access to education and financial advice. How would you briefly respond to that . Sure. Weve sought to clarify the line between education and advice. Education is critical. The educated consumer is the best customer. And what weve done here is clarify that for instance, if you want advice on how to apportion your portfolio how much is going to be in index funds, how much will be International Asset allocation. It is totally education. Can you run simulations about different Asset Allocation models and that is education. Those are the critical nuts and bolts of advice. And what weve told people who have said to us we feel the line between education and advice is either blurred or should be drawn differently, again our response is how would you do it better and what ideas do you have . And weve heard feedback to that effect. We tempted to be responsive the first time around and our rule is different from the 2010 rule in the educationadvice context and we continue to look forward to hearing more advice. Okay. Thank you. For the benefit of the panelists who are going to testify on the second panel, im going to be strict on the five minute rule and i appreciate you holding your answers to a concise answer because were on a definite hard stop at 4 00 and i dont want to cut our other testimony short by running out of time. Senator scott. Thank you mr. Chairman. Good afternoon, secretary perez. How are you doing today. Good. Good to see you again. Thank you. You too. Over the last 80 years or so s. E. C. Has been the regulator of advisers why dodd frank charged the s. E. C. With having significant involvement in any effort in revisiting the standard of care of security transactions and now your department has stepped and i would suggest overstepped last month at a house hearing you used the phrase dramatic and extended coordination to describe the relationship between d. O. L. And chair white on this document. And you talk about meeting and calls between d. O. L. Staff and chair whites staff. It is one thing to coordinate but that verb doesnt tell us the whole story. I realize you cannot speak for chair white. She can speak for herself. But based on your private coordination with chair white and the s. E. C. Is it your impression that there is no daylight between your thinking and their thinking on this issue . Well i cant speak for chair white on this. What i can certainly say is that the feedback we got not only from chair white but from the career staff there has been extensive. Weve been talking to the house and Work Force Committee and given them i think 800 pages of documents showing the extent of the coordination. In short, i think the proposed rule is a better proposal as a result of our coordination. I would note that we have some overlap. We are the agency that congress has charged with enforcing erisa for over 40 years and while we have overlap we have distinct jurisdictional responsibilities and that is why it is in our lane and weve gotten some good feedback from them and have incorporated it but continue to have that responsibility. So you suggest then that because of the amount of coordination that you guys are on the same page or you cant suggest you are on the same page at this point. What ive heard from chair white and shes stated this i think a couple of times is they thinks the best interest standard is the right standard for the s. E. C. Purposes. The definition of best interest that we used in the proposed rule is actually taken from the 2011 s. E. C. Report that was prepared in the followup to the dodd frank law and done so because again we heard feedback we should try to harmonize to the best extent possible the work were doing between the d. O. L. And the s. E. C. And in fact the key definition is taken in large measure from that 2011 report. On the Fee Structure that you mentioned on the example that you gave on the person that had 700,000 and annual what would be an appropriate free structure for a fee Asset Allocation . I wont be able to answer that question because i dont know about their risk threshold and what they told their client. So you cant really answer that question. Do you have any idea what went into the actual Fee Structure in the product that was sold . Was it just a basically a mutual fund or dish no, it was a variable annuity. A very complex instrument. Did it have a Lifetime Income factored into the free sfrur. It did. And it was given to a person in his mid to late 70s. And who kept very copious records. And what i have seen did it have a Life Insurance component. I dont know whether it had a Life Insurance. Variable annuity help guard against the risk and give you more reward. And what ive seen in the outreach weve done is that weve had a number of significant challenges in the variable annuity context and this family, 50,000 is what they lost. And i believe the soninlaw came and testified because mr. Tofl passed away a few months ago but there was a hearing in one of the committees here and it was a sad story and it was preventible in my judgment. Part of the challenge that i have with the fiduciary rule as we know it today is that i do believe while we have an opportunity today to discuss the success or the failures of a representative that in most part so Many Americans will be more dependent on Social Security and less dependent on their own funds because they are fewer advisers in the market for them. My thought is that as we find this fiduciary going into force that youll have fewer folks playing at the most important level of access which is the minimum level of access around the 100,000 to 200,000 accounts. I think youll have more folks making their own Investment Decisions hopefully on the internet where they can get their advice. But too often people will base her expertise not on background but on what they hope is a good decision. I would disagree but there is a witness on the next panel that is happy to do work happy to continue the discussion. Sure. Thank you for holding this important hearing. Thank you to the secretary for coming to testify today as well as our second panel. It seems to me that families have a lot to worry about today and questioning the advice that they get for their retirement account shouldnt have to be one of those things. So we should all be concerned that workers are losing money out of their pengs, that they were counting on for a secure retirement and making sure retirement advisers are working in the best interest of their customers is essential for retirees and for advisers and brokers and this best interest standard is best for the economy to make sure for seniors have access to a secure retirement. So it is important that we get the rule right. And i hope that all sides will participate in this process and submit their comments and we make sure that the final rule reflects the important feedback that you have heard and i hope that our debate can really center on how to get the final language of this rule right. I know there has been an enormous amount of work put into this since the original version of 2010 and ive heard some critics say that the knew rule is either worse than that or we didnt learn from the 2010 version. So i want to ask you while you were here, can you walk us through some of the changes youve made since the 2010 proposal, to make this one better . Sure. One of the critiques we heard was there wasnt sufficiently robust economic analysis. There is a much more robust economic analysis. One of the concerns that was echoed was about provision we had to regulate esops and appraisals and that has been removed. We heard we need to establish a vehicle to enforce the best interest requirement and so the best interest contract vehicle is that vehicle. It was not there in the 2010 rule. We made a number of changes in response to feedback that we got from people about where the line between education and advice should be. And that is another example, senator. And there are others. But in the interest of time, ill cite those four. And again, what we said is so give us feedback on how this works for you and how we can effectively implement it and if there are changes that can be made, were all ears. And senator franken asked what you are hearing and you cited a number of thirvegs, clunky, data enrollment point of sale discussion, and a lot of things. I assume you are remaining open to making appropriate and necessary adjustments to the rule to make sure it works and is workable as you get the comments back at the end absolutely. And again, weve gotten great feedback from all stakeholders. Weve had probably 50 meetings since the proposed rule came out with different industry stakeholders and ive been impressed by the get to yes attitude. They understand, as Brian Moynahan and others have said from the industry, this is the right thing to do. And so they have questions and concerns about how we do it and theyve given us some grade feedback. Okay. And i wanted to also just ask the current rule was established about 40 years ago. How has retirement market changed. If you could just define that for us, that we should be conscious of. In the ozzie and harriet world of yesteryear again, people worked 30 years usually at the same job and at the end they had their pen, their pension, their party and it was a defined benefit plan and now today you have the defined benefit world is shrinking, about 20 of the market. You have between defined contributions, between iras and 401 k s, that is an 11 trillion market. And you have roughly 2. 8 trillion in the d. B. Market. And in a year from now, that disparity will continue to widen. And so people have to own in the modern family universe, they have to own these decisions an that is and that is why a rule established 40 years ago when 401 k was a rural highway in the midwest and ira was your elderly uncle today those are part of our lexic on and that is why todays Consumer Protection framework needs to reflect todays realities. Okay. Thank you. Thank you for all of your hard work on this and for your continuing work to make the rule work at the end of the day, i really do appreciate it. Mr. Chairman, ill yield back my time. I know you have thank you. Thank you, mr. Chairman. I was told you werent ready. Are you ready now . Well, thank you. Senator, for yielding and i want to thank the chairman and Ranking Member both for convening todays discussion. Secretary, you just outlined some of the significant changes in the retirement marketplace. If you think about the ways in which its changed since erisa was passed in 1975 its quite significant. I worry about what the future looks like for those you know, trying to achieve the american dream, living in the middle class, worked hard their entire life. But perhaps in the recession, lost work needed to dip into savings, needed to do so for sending their kids to college. All it would have otherwise gorn towards retirement in addition to any pension plan they have, but isnt available any more. We know that workers are not saving enough for their retirement. We know as youve outlined that there has been a real shift from defined benefits to defined contribution plans. And that shift puts more responsibilities on workers shoulders who manage risks and who manage the decisions. Oftentimes without having investment expertise. Youve covered a lot of territory that i hope to cover in my questions with you in particular about how workers with smaller accounts those who arguably need the retirement protection the most will have access to high quality and affordable advice. So im going to move to something a little bit more specific given some of the crowd conditions in my home state of wisconsin. We actually have a real history of cooperative and mutual ownership companies. So companies that are owned by northwest mutual, for instance. For instance. I got married two miles north of their headquarters. And i had a very good visit not too long ago. I would say a lot of those traditions root back to wisconsins progressive era when people like senator robert m. Thallic sr. , fighting bob, as hes known in this state, really laid the groundwork for the formation of a number of these companies. Now, a lot of them have gained incredibly valuable experience thats sort of embedded into the products that they sell. And so id like you to talk about what assurances you can give to these sort of companies that they will continue to be able to sell their own retirement product as we move forward. Sure. I i those are sometimes referred to as proprietary rights. I got married 2 miles north of their headquarters, norther western. The rules putting your customers best interests. Part of that is making sure you have policies and procedures in place to oversee your sales force. Thats true in whether its northwest mutual thats true whether its the abc bank. A big part of what the best interest standard means is that the you have those internal policies. For instance, youre ensuring in the case of a northwest mutual that might want to sell a proprietary product one thing i would suggest that might be a good thing to ask is it ought to be a product a reasonable independent person might recommend to the customer. And one thing weve seen and im not saying weve seen it at northwest mutual but one thing weve seen in the course of our outreach is that sometimes bail incentives become per verse. So if you sell x number of one product, you get a trip to hawaii or ive even heard about a trip to the masters. When that person walk necessary to give me advice i dont want them looking at me thinking, youre the only thing between me and hawaii with my family. That is when you have a misalignment of incentives. And thats what were trying to address by making sure that you have the best interest standard in place. I wont by a yugo because its a crappy car even though its the lowest car. Thats why its no longer on the market i believe. But the point is, its not about the lowest cost, its all about the north star t best interest of the customer. And i think places like northwest mutual or the abc bank or the broker dealer or the person who is working with the Small Business owner like ms. Miller the north star is the same for all of them. Senator warren. It is hard to save for retirement. Almost onethird of americans on the edge of retirement have zero savings and another third have less than a years worth of income put away. Thats why it is doubly important that every dollar that someone pits away for retirement is protected. Many americans rely on Investment Advice or guidance on how to save for retirement. Most of those advisers have their savers best interests at heart. But not all advisers put their commerce interest first and thats created a hole thats draining 17 billion a year in Retirement Savings. Money thats going into some Investment Advisers pocket instead of into the pockets of the people who are trying to save for retirement. Thankfully, that hole may soon be plugged with the new rules that would require brokers and advisers to put their commerce interests first, so i have just two quick questions about this, secretary perez. So as i understand it several studies and many of them most americans dont even realize that their Investment Advisers their retirement advisers arent actually required to put the clients interests first. They think if they go to someone who advises them, that their interest will be first. So can you explain, just very briefly, why is it legal today for advisers to steer clients into products that line the advisers pockets while draining away the client savings . Well we have folks who are operating under the financial model. The first thing he said to me was keep your thrift savings plan, your federal stuff from your federal employment. Keep it in the thrift savings plan. I cant do any better. Thats an example of putting our interests first. Even though he wont make any money from that. He didnt make a dime off of that, but ive referred a number of clients to him because he looks out for me. Thats why its good for business. The personal who is under a suitability standard, again, there are a number of products let me stop you right there. I get the suitability standard. What i dont get is how did it turn out to be legal . What went wrong . Why is that legal, mr. Secretary . Well, it shouldnt be and thats why were trying to change it because i think the suitability standard is facilitating this when was the last time we updated these laws . We havent updated our laws in earnest in 40 years. Okay. So weve got a problem of outdated laws, loopholes in the laws and thats how we end up with these two different standards . Right. Again, we didnt think about i. R. A. S and 401 k s back in 75. We were in the defined benefit world. This stuff just kint matter. Okay. Because people had a guaranteed pension. So you proposed some common sense rules to try to close these loopholes, to try to update the laws just to make sure that all advisers are putting the customers interests first. But lobbyists for some of the biggest Financial Companies and some Investment Advisers are fighting this proposal tooth and nail. So help me out here, mr. Secretary. What are they so worried about . Well, ill let them speak for themselves. Number one, i have been heartened by the remarkably constructive conversations ive had with so many industry stakeholders. As i said in my system, there has been an undeniable shift towards a recognition for the need of the best interests standards. Nos who are, perhaps in darchbt place, they tell me that they would like to think that they put their clients best interests first now. And my response to that is then theres good news for you. This will be easy to comply with if you are, in fact, putting your customers best interests first. I think it is something that can be done. I hear from so many folks who are playing in this space day in and day out. We need a level Playing Field because people go to their adviser and actually, there are some advisers that are dual headed depending on what part of the transaction it i