Transcripts For CSPAN3 Politics And Public Policy Today 20240622

Other sister agency. Its a meritorious move. You said 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 tofels, 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 per verse 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. Im saying thats not right. And we can device a system and i underscore what i said in my testimony, theres a substantial number of people, including one of the witnesses who will come up on the next panel, that operate under a fiduciary model already. Theyve demonstrated that 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. So, we want to take in all 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 theres a theres Data Retention obligations. And we think you can do it differently. There is a best interest contract framework and weve heard feedback from folks saying its clunky. And theres 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 an enforceable best interest contract and do it better . And thats the feedback weve been getting and its been really, really helpful. And youve incorporated it . We havent made final decisions yet. We wont put out a rule until weve gotten all of the comments. Im quite confident, if history is a guide, the final rule will be materially different than and better than the proposal because you got to be a good listener in this business. We havent made any decisions and we continue to keep that open. And youre open to continued absolutely. Suggested fixes from were not only open, we have affirmatively reached out for it because theres a lot of folks who know a lot about this, and we want to get their insights. Darlene miller from minnesota and is going to be testifying next, in the next panel, 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 her ability to provide this important benefit to employees going forward. Can you assure us you will work with Business Owners like darlene to make sure that these rules dont have unintended consequences . I welcome the opportunity. I read ms. Millers testimony, and shes a very successful Business Owner, not to mention a minnesotan, and weve spent time with Small Business owners. Small Business Owners, what they tell me most frequently is im an expert at making my product, my widget. I have 10 or 15 people. I dont have expertise in 401 k s, but i know i want to offer it because i want to attract the best and the brightest. And what we have 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 ms. Miller is 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 status quo, if litigation ensues, the defendant is the business. Its not the adviser. Because under the current status quo, the person providing the advice is actually off the hook. I actually think thats kind of perverse. And i think it doesnt help people like ms. Miller. 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. 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 their 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. We 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 aportion your port foal yoeshgs how much is going to be in index funds, how much is going to be international, et cetera Asset Allocation. Asset allocation is totally education. You can run simulations about, you know, 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 so weve heard feedback to that effect. We attempted to be responsive the first time around and our proposed rule is quite 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 tive in the second panel, im going to be very strict on the fiveminute rule. And i appreciate you holding your answers to a concise answer so we can get five minutes 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. Okay. Senator scott. Thank you. Good to see you. Thank you. Good to see you too. Over the last 80 years or so, s. E. C. Has been the prime regulator of broker dealers and Investment Advisers, that is why dodd frank involved them in revisiting the standards of care that apply in Retail Security transactions. Nevertheless, your department has now stepped, and i would suggest overstepped into this area of regulation. Last month at a house hearing you used the phrase dramatic and extensive coordination to describe the relationship between d. O. L. And chairwide on this rulemaking. You refer to pages and pages of documentation about meetings and calls between d. O. L. Staff and chairman chair whites staff. N now, its one thing to coordinate but that verb does not tell us the whole story. I realize you cannot speak for chair white. She can speak for herself. But based on your private coordination meetings 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 feed back we got not only from chair white but from the career staff there has been extensive. Weve been talking to the House Workforce Committee and given them, i think, 800 pages 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 we have some overlap 3 we are the agency that congress has charged with enforcing erisa for over 40 years. And while we have some overlap, we have distinct jurisdictional responsibilities and that is why erisa is in our lane and we have gotten good feedback from them. And continue to incorporate it and we continue to have that responsibility. And that you guys are on the same page or you cant suggest you are on the same page at this point . Well, again, what ive heard from chair white, and she stated this a couple times, is that she thinks that the best interest standard is, in fact, 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 it was done so because, again, we heard a lot of feedback that we should try to harmonize to the best extent possible the work were doing between the d. O. L. And the s. E. C. In fact, the key definition is taken, in large measure, from that 2011 report. On the Fee Structure that you mentioned, on the example of the person you gave who had 600,000, 700,000, what would be an appropriate Fee Structure for an investment with a proper risk allocation Asset Allocation . I wouldnt be able to answer that question because i dont know all of the facts about their risk tolerance threshold and what they told their client. You have pardon . Im sorry. 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 was it no. It was a variable annuity. A very complex instrument. Did it have a Lifetime Income that was factored into the Fee Structure . It did. And it was given to a person in his mid to late 70s and who kept copious records. And what have i seen, senator did it had a Life Insurance component . I dont know if it did. What variable annuities try to do is help guard against the risk and help give you more reward. And what ive seen in the outreach we have 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 preventable, in my judgment. Part of the challenge i have with the fiduciary rule as we know it, while we have an opportunity today to discuss the success or failures of a representative that in the most part so Many Americans will be dependent on Social Security than on funds because they will have fewer advisers in the market for them. My thought is as we find this fiduciary rule going into force, youll have fewer folks playing at the most important level of access, which is the minimum level of access, somewhere 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 have an adviser there. But the fact of the matter is, too often, too many people will be making their own sdpigss. Not based on expertise, not based on background but based on what they hope is a good decision. Well, i would respectfully disagree, sir. Theres a witness on the panel whos doing a lot of work. Happy to continue the discussion. Senator murray. Thank you very much, chairman isaacson, and fror franken 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 families have a lot to worry about today, and questioning the advice they get for their retirement built shouldnt have to be one of those things. We should all be concerned that workers are losing their money out of their pensions that they were counting on for secure retirement and making sure retirement advisers are working in the best interest of their customers. Its essential for retirees as well as brokers. This best interest standard is important we get this rule right. I hope all sides are and i hope our debate can center on how to get the final language of this rule right. I know theres been an enormous amount of work put into this since the original version of 2010. And ive heard some critics say that this new rule is either worse than that or we didnt learn from the 2010 version. So i wanted 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 is that there wasnt sufficiently robust economic analysis. There is a much more robust economic analysis. One of the concerns that was echoed was about a provision we had to regulate esops and appraisals, and we heard from a number of people that should be removed. That has been removed from the proposed rule. We heard that 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. Thats another example, senator. And there are others. But in the interest of time ill cite those four. And again, what weve said is so give us feedback on how this works for you and how we can effectively implement. And if there are changes that can be made, were all ears. And senator franken asked you about what you were hearing and you cited a number of things, monkey, data enrollment, point of sale discussion and a lot of things. I assume that you are remaining open to making appropriate and necessary adjustments to the rule to ensure that it both works and is workable as you get these comments back at the end absolutely. And again weve gotten great feedback from all stakeholders but 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, that this is the right thing to do. And so, they have questions and concerns about how we do it and theyve given us some great feedback. Okay. I wanted to also just ask, the current rule was established about 40 years ago. How has retirement market changed . If you could define that for us, since then, that we should be conscious of. In the ozzy and harriet world of yesteryear, people worked 30 years at the same job. At the end they had their pension, pen, party, and it was a defined benefit plan. Now the world is shrinking. Its 20 of the market. You have defined contributions between i. R. A. S and 401 k s, thats an 11 trillion market. And you roughly 2. 8 trillion in the d. B. Market. And in a year from now, that disparity will continue to widen. So people have to own in the modern family universe, they have to own these decisions. Thats why a rule established 40 years ago, when 401 k was a rural highway in the midwest and i. R. A. Was your elderly uncle, today those are part of our lexicon. And thats why todays rule todays Consumer Protection framework needs to reflect todays realities. 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, i will yield back the remainder of my time. I know you have a second panel. Senator baldwin. Thank you, mr. Chairman. I was told you werent ready. Are you ready now . Senator baldwin. 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 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 that would have otherwise gone toward retirement in addition to any pension plan they had but isnt available anymore. 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 benefit to defined contribution plans. And that shift puts more responsibilities on workers shoulders to manage risks and to manage the decisions. Oftentimes without having investment expertise. Youve actually covered a lot of trt that i hope to cover 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 proud traditions in my home state of wisconsin. We actually have a real history of cooperatives 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. But i would say and i would just while tooting the horn of my state, say that a lot of those traditions root back to wisconsins progressive era when senators like senator robert la fallette sr. , fighting bob as hes know in the state, really laid the groundwork for the formation of a number of the companies. Now a lot of them have gained incredibly valuable experience that sort of imbedded into the products that they sell. And so i would 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 products as we move forward. Sure. Those are sometimes referred to as proprietary products. And the rule is the same. Whether you are northwest mutual which has a long and distinguished history, and again, i got married like a mile and a half north of their World Headquarters in milwaukee. And the rule is, again, putting your best interest putting your customers best interest first. And 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 you have those internal policies. For instance, youre ensuring, in the case of like a northwest mutual might want to sell a proprietary product, one thing i would suggest that might be a good idea to ask is it ought to be a product a reasonable, independent person would recommend to the customer. And one thing weve seen, and im not saying weve seen it as northwest mutual, but one thing weve seen in the course of our outreach is that sometimes sale incentives become perverse. If you sell x number of one product, you get a trip to hawaii. Ive even heard about a trip to the masters. You know, when that person walks in 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. Thats what were trying to address by making sure we have the best interest standard in place. What the best interest does not mean that you have to sell someone the lowest fee product. Because i dont buy a ugo because its a crappy car, even though its the lowest cost. Thats why its no longer on the market, i believe. But the point is its not about the lowest cost. Its about the north star is the best interest of the customer. And places like northwest mutual or the abc bank or the broker dealer or the person whos working with the Small Business owner like ms. Miller, the north star is the same for all of them. Senator warren. Thank you, mr. Chairman. It is hard really hard to save for retirement and the stats bear this out. 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. And that is why it is doubly important that every dollar that someone puts away for retirement is protected. Many americans rely on Investment Advisers for guidance on how to save for retirement. Most of those advisers have their savers best interests at heart. But not all advisers put their customers interests first and thats created a hole draining 17 billion a year in Retirement Savings. Money thats going into some Investment Advisers pocket instead of the pockets of people 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 customers 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, retirement advisers, arent actually required to put the clients interests first. They think if they go to someone that 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 clients savings . Well, we have folks who are operating under the fiduciary model, like my we go to a certified financial planner. That person is required to put our interests first. Very quick example. The first thing he said to me is keep your thrift savings plan, federal employee stuff, keep it in the thrift savings plan. I cant do any better. Thats an example of putting our interest first. Even though he wont make any money from that. Even though he didnt make a dime. But i referred a number of clients to him because he will put my best interest first. Its good for business. Let me stop you right there. I get the suitability standard. What i dont get is how do 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 . Well, we havent updated our laws in in earnest in 40 years. Okay. So, weve got a problem with 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 didnt matter because people had a guaranteed pension. All right. So, youve proposed some common sense rules to try to close these loopholes, to try to update laws. Just to make sure that all advisers are putting the customers interests first. But lobbyists for some of the biggest Financial Companies and Investment Advisers are fighting this proposal tooth and nail. So, help me out here, mr. Secretary. What is it theyre so worried about . Well, ill let them speak for themselves. I can tell you i guess ill say two points. Number one, i have been heartened by the remarkably constructive conversation ive had with so many interest stakeholders. As i said in my testimony, there has been an undeniable shift toward a recognition of the need for the best interest standard. And then there have been folks out there since the outset. Merrill lynch and b of a and others who are coming to us absolutely wanting to get to yes. And those who are, perhaps n a different place, they tell me that they would like to think they put their clients best interests first now. And my response to that is, 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 dualhatted. Depending on what part of the transaction it s sometimes theyre a fiduciary, sometimes theyre not. Its already confusing to begin with. Thats stunningly confusing. We need one standard and it ought to be the best interest. I love the one standard. I love the best interest test. I assume there are a lot of people, though, who are making a lot of money. That 17 billion is going somewhere. Its not staying with the retirees. So one seems like a nobrainer to me. Hardworking americans who manage to pull together some money for their retirement should be able to trust their retirement advisers are looking out for them. And besides that shouldnt have to compete against those unethical adviser who is dont. I understand why were in this fight. I understand there are people who are making money from keeping the game rigged, but we dont work for them. Time to level the Playing Field. Thank you, mr. Secretary. Thank you, mr. Chairman. In the interest of the four panelists that will testify afterwards, i want to introduce mr. Casey, who will be brief within his five minutes, and well have time to hear from everybody. Senator casey senator cassidy. Good afternoon, sir, secretary perez. Good to see you. I dont pretend to understand this as you do. So let me channel that of which people have ask me of. A fella came and said listen i have a complaint, hes pretty well off. I go into his office, help him with his Financial Planning and said, do you mind speaking to my employees and give them general advice about how to handle their money . He goes, i do it as a favor to my client. But i think under this rule, i would have to have each of those employees sign a contract before i would be able to give them the advice im giving them. Is that true or not . I dont know. Im asking. I dont think thats true for the following reason if youre sitting there telling workers what your risk heres what you need to think about, workers, to have a healthy retirement. You know, whats your risk tolerance threshold. If youre married, whats your wifes risk i think you may have got to the nuben where i was. You think so or know not . You need to give me more facts, senators. Im saying this not to be pedantic. Because unless he has clarity from d. O. L. , he wont have clarity in terms of how he conducts himself. Would he say, okay, i want you to sit here and i want to say, this is what you should do with your money. If youre younger, put it in this. If youre older, put it in that. First you have to assess your risk tolerance. Good to see. Hope youre all well. Thats general advice. Is that something they would need to sign a contract for or general advice that is not, pick this product or that product, but go into mutual funds, go into index funds, go into Something Like that, that is advice in the area of education or Asset Allocation, so that wouldnt cross the line of education. Sounds great. Next i am told that United Kingdom put in laws similar to this in 2013. And that banks stopped offering Investment Advice to customers with less than 80k in assets. Now, that you know, it may be that the answer to senator warrens question, this model works for those lower and moderate income people, all these socalled just your thoughts on that. Its not true. Let me give you the facts. After the uk put in place their regulation by the way, their regulation bans commissions. We dont ban commissions. There were advisers dropped 310,000 clients and 820,000 new clients came into the market. So there was a net delta increase after the regulation of over half a million. Investors with low balance accounts continued to be served because you were concerned about that. And heres the most Interesting Data point about the uk, and i traveled there personally to meet with them, because i heard that feedback a lot. The most interesting point about what happened in the uk, senator, is that more and more people are now getting in lower cost funds because the problem with our system in the u. S. Is it incentivizes complexity when simplicity is all too frequently what is called for. And it incentivizes complexity because complexity generates more fees. Just like the variable annuity i described. The uk experience, i welcome further inquiry into it because theres been a fair amount of Incorrect Information surrounding it. Okay. The last thing to say, d. O. L. Is estimating the cost of the rule be between 2. 4 and 5. 7 billion over the next ten years and yet im given a study by deloit saying it could extend 15 billion. Any thoughts on that discrepancy . I think our cost benefit analysis is quite strong. We estimate the benefit over the next ten years to be 40 billion. In an 11 trillion market, the cost of conflicted advice, when you have a 50,000 loss for the tofuls and 11 trillion market, it adds up fast. And these are folks who can illafford to lose this. And the benefit im hearing from employers, like one of our next panelists, has been that Market Forces are working to the advantage of small investors. So, i hope youll talk to some of these folks who are are already fiduciaries, senator, and doing great work. I yield back. Thank you. Now one of our members is grossly late, but hes my dear friend. His staff has been doing a good job of convincing me he only has two minutes worth of questions. Is that true . I am fully convinced, chairman. We have four other people to testify before the 4 00 vote, so im recognizing shelton whitehouse. Be very brief. And, mr. Secretary, can you be brief, too. And ive heard from companies who are major providers of services to investors who are totally on board with the notion that they should have the responsibility of meeting the fiduciary standard but are concerned that around the edges things like the way in which they communicate with vast numbers of customers, that might affected by this, probably in ways that none of us would intend. And i just want to make sure that you will be attentive to try to make sure there is not too much regulatory sprawl into areas outside of what we all expect, which is to keep them putting the interest of the client first. Absolutely. And we had that conversation earlier, and we certainly had a number of very constructive meetings with firms who have addressed concerns, i think similar to that. And it certainly wasnt our in intent. And, again, our question we always ask is, show us in the proposal where you think that concern arises. And then show us give us some potential solutions for that so that we can contemplate how to make sure that were getting to the right place. Very good. Thank you very much. And im well within my two minutes, mr. Chairman. Let the record reflect that Sheldon Whitehouse was brief. [ laughter ] you dont have to make it sound like that is a novelty. It was refreshing. Mr. Chairman, thank you for your courtesy as always. Its always a pleasure to be with you. Will our second panelists please come forward . In the interest of time, ill begin the introductions of our panelists so we can get straight to their testimony. First, peter snyder, president of primerca, which im proud to say is a georgiabased company, which i visited before. Thank you for being here, peter. Peter is a leader leader in Financial Services providing middle income marketplace, offering Retirement Savings options and insurance to millions of americans. Mr. Snyder became president and served as executive Vice President for primerca. We thank you for being here today. We also have scott puritz, is that correct . Correct. He is from rebalance riera in bethesda, maryland. A retirement expert having been referenced by the new york times, forbes and cbs and has a masters from harvard university. Thank you for being here. At this time i would like to turn it over to Ranking Member franken and introduce miller and mr. Littonen. It is my pleasure to introduce darlene miller, joining us today from my home state. Ms. Miller is the president and ceo of permac entries in byrnesville, minnesota, a Manufacturing Company that provides precision small part machines to other industries. Permac was named the chambers Small Business of the year in 2008 and in 2010 ms. Miller herself was named by byrnesville chamber of commerce as the business person of the year. Ive had the good fortune of meeting ms. Miller when we toured byrnesville Senior High School to discuss the importance of s. T. E. M. Education. We have also discussed my Community College career fund act which would create publicprivate partnership. To address the skills gap in manufacturing. Ms. Miller, thank you for being with us today and to discuss how you can best meet the needs of your employees. Thank you, mr. Chairman. Thank you. Well, thank you, mr. Chairman. It is my privilege to introduce bob litan, an impressive economist, attorney and native kansasen. Growing up in wichita, bob has become a notable figure in the economics community. He brings a balance perspective on this issue and he has been an executive in private, public and government sectors. His list of accomplishment, employment and memberships on adds vizry boards reads more like a collection of several highly accomplished people rather than one man. As a current nonresident senior fellow at brookings institution, of counsel to a law firm based in st. Louis and chicago, and is chief economic adviser at patton properties, i thank you for taking the time to come before this committee today to provide a viewpoint, unfortunately, which seems to be lost, if not solely ignored. In this conversation, we look forward to hearing your testimony. We hope that you can offer us some solutions on how we can maintain access for middle and lower income families and businesses in regards to Financial Guidance and Retirement Planning. Thank you, sir. I hope all the panelists will try to limit their testimony to five minutes. After that eloquent introduction, mr. Litan, i think you should be first. Thank you, mr. Chairman. Thank you also, senator roberts, for that very kind introduction. Turn your mike on. Turn the little switch there. So im thanking everybody again for their kind introductions and so forth, okay. Senator roberts, i dont want you to choke on these words but im a lifelong democrat and a former Clinton Administration official. But very proud to be from can. Well, that doesnt bother me one damn bit. Well, okay. But i say that because i come from a background where i was in the administration where we cared deeply about the kind of goals that the department is pursuing in this proposal. But i want to respectfully disagree with the way the proposals been outlined. And im going to make three quick points. Number one, the correctly estimated benefits of labors proposed rule do not outweigh the costs. This is because labor gives absolutely no credit or assigns no value to human Investment Advice. Namely, encouraging clients to avoid trying to time the market. One of the worst decisions a longterm investor can make. And also helping clients rebalance their portfolios over time. When these factors are taken into account, my colleague and i come to the conclusion that rather than generating 4 billion in annual benefits for investors, it would produce net harm of roughly 1 to 3 billion annually, depending on how many brokers are induced by the proposal to no longer serve the i. R. A. mutual fund market. During a future downturn dr. Singer and i estimate and we show this in our comments we submitted to d. O. L. Yesterday, that by causing current accounts to be uneconomic to serve the rule could cost investors as much as 80 billion, double the tenyear estimates claimed by d. O. L. I should also mention this connection that the 17 billion number thats been thrown about by the cea estimate n our opinion, is flawed, based on a flawed reading of the Academic Studies and we show this in our report. In fact, not even labor counts on the 17 billion. They only use a 4 billion figure. And even that figure, we point out, is incorrect. All right. Thats just important to keep in mind. Now, word about robo advice because i know its coming up. With all due respect to robo advice, which san important addition to the market, i think we have to be careful about drawing too much of a conclusion from online or tech messaging. While robo advisers can certainly help savers, an email or text message during a market rout is not an adequate substitute for a human being on the other end of a telephone reminding investors of the clear evidence that it pays to stay put if youre a longterm investor, which by definition Retirement Savers are. Number two, my second point. If you lose your broker, the only other source of human advice youre likely to go to is somebody who is providing advice on the basis of a fee, which is a percentage of your account. We show in our report that for investors that choose that option, theyll end up paying more than they do under the current regime. This is for small investors. By the way, i want to underscore something about small investors. Secretary perez started his testimony by talking about a 650,000 account. That is not a small saver account. There are millions of people here, and i think senator warren pointed this out, there are tons of people that have buiaccount balances of 10,000 or 20,000. Thats all theyve got. Brokage is a less expensive form of advice than a fee. Thats a fundamental fact. Third, my last point. The notion that all retirement Investment Advisers should be held to a best interest of client standard is not controversial. So lets just stipulate that as far as im concerned. Lets not argue about that. Its the way we enforce it. Should we enforce it by potential classaction litigation or by a body that we already have established to oversee the brokage industry, which is finra. My bottom line suggestion, just to cut to the chase for d. O. L. , is that what they ought to do, go back to the drawing board, go to finra and they offered comments recently saying the vul unworkable. In fact, a lot of brokers are going to leave the market. What labor ought to do is go back to finra and say, lets Work Together and find a way to actually administer a best interest rule that you, finra, could enforce. And, by the way, if the problem is insufficient disclosure about whos getting paid and how theyre getting paid, theres a simple solution to that. Better disclosure. Simple disclosure. Just put a great big, bold warning on the front of a document that says whos getting paid and how much. The only basis and then ill conclude, mr. Chairman. The only basis for rejecting that idea of better disclosure is one study that the department of labor cited thats based on experimental evidence. Not on real world market evidence. Im telling you,fy were in the government and i proposed to my superior, secretary, whoever it s that we ought to completely upend an entire industry on the study of of experimental i would probably be told to go back to my office and find another job. Theres absolutely no basis n my opinion, for at least at a minim minimum, not trying better disclosure before we go ahead with this massive undertaking. And so, i think that concludes my testimony. Thank you very much. Mr. Chairman, Ranking Member franklin and members of the subcommittee, i appreciate being here today. The department of labors proposed rule is of enormous consequence to the middle income families we serve every day and in each of your states. Please allow me to tell you about primerca. And i like talking about it. We were founded 40 years ago on a Central Mission that middle income families require someone to help them to focus on their financial needs. That was true then and its just as true today. We feel like at primercia we made some headway. We ensure 4 million lives with our term Life Insurance. This year we will pay 1. 2 billion in death benefits to families. Those checks, which we deliver every day and will deliver multiple checks today, keep a personal tragedy from becoming a financial one. Weve helped our clients save almost 50 billion in our investment accounts. Most of our accounts are very small by industry standards, but theyre hugely important to the families who open them. Investment choices with us are very simple and appropriate for our market. We do no individual stocks, we do no options, we do no commoditie commodities. Mainly mutual funds and annuities. You cant buy google from us but you can buy 700 mutual funds from Top Companies like invesco and legg mason. Our clients Household Income is between 30,000 and 100,000 a year. Theres usually two parents working in those homes. And, frankly, all too often the homes are headed by a single mother. We strongly believe in Retirement Savings. And our clients have opened 1. 2 million i. R. A. S with us. You can start one with primerica for as little as 50 a month. But even that amount is hard to find in the families that live paycheck to paycheck. What we sometimes say is, they have too much month at the end of the money. We provide facetoface help from licensed representatives who live and work in the communities. These representatives begin with education. They teach the fundamentals of how money works, dollar cost averaging, time in the market, emergency cash accounts. Thats all important. And oliver winemans study just released found that advised individuals accumulate 38 more assets than the nonadvised. And at age 65, they have 114 more. Our clients benefit from our presence in their financial lives. A comment letter was submitted by shelly rosen, one of our ou reps. 15 years ago she sat down with a Railroad Worker and his wife. They had a lot of debt and no savings and they were very generous. So generous that they ran up debt on credit cards buying gifts for their friends. We helped them teach them other ways to be generous. Today theyre debt free and financially independent. The department of labor rule will stop shelly rosen from helping folks like that railroad engineer. The proposal subjects our client interactions to the prohibited transaction rules in arisa and the irs code, which effectively make the brokerage model chosen by 98 of accounts under 25,000 illegal. The department tried to write, but its so complex, so onerous, so costly its unworkable. They attempted to make it principle based but instead introduced uncertainty, which makes the exemption unusable in a world of arisa where theres strict liability. No firm we know of intends to use it. That makes this rule more punishing than the one that was withdrawn in 2011. Prior testimony at the department of labor suggested these robo advisers will fill the gap and help the millions stranded by the rule. We disagree. Our Company Believes in biorhythms, not algorithms. They need a person, not a personal computer, to navigate a financial landscape thats unfamiliar to them. Without a helping hand, they worry about a mistake. And they wont hit the send button. In the households we serve there is a struggle going on. Its not between investment a or b or c, its a fight between saving and spending, a fight to put an extra 50 away. We all agree we must act in a clients best interests. But inadequate Retirement Savings is the overriding issue facing the middle class. And this rule is another obstacle. Dont doubt the d. O. L. s good intentions, but its such an important issue Everyone Needs to be involved. And we look forward to working with everyone. And were glad the senate is involved with this issue. Thank you very much for listening to me. Thank you, mr. Schneider. Ms. Miller. Thank you chairman isakson and Ranking Member franken. I am here representing myself and my employees and also the chamber of commerce of which i am a board member. And i chair the u. S. Chambers Small Business consul. Opened in 1966 and i purchased it in 1993 and 94 and started with seven employees. We now have almost 30. And were looking to expand. In order to expand, my company must be able to compete with much Larger Companies for talented employees. And one way were able to do so is by offering Employee Benefits including a Retirement Savings plan. And as an owner of a business, i am very focused on the details of my core business function. And i use outside professionals to help me with supplemental diz functions. For example, i use a cpa to assist me with tax issues, an attorney to assist me with legal issues and a Financial Adviser to help me with my Retirement Savings plan. And in 1999, permac implemented a zep ira. It was recommended to me by an adviser who i had worked with previously to provide medical benefits for my employees. And several years later my adviser advised me that i was in danger of violating the 25 employee limit. So at that point i worked with him to determine how to continue to provide Retirement Benefits for my employees. We decided a 401 k plan was the best option for my company. And in 2008 we implemented that plan. We have a 96 enrollment rate in our plan. Almost all of our employees participate in that plan. Of the eligible one theres only one close to retirement who does not participate or couple that are parttime are not quite yet eligible. Under the 401 k plan, employees receive a matching contribution equal to 100 of their first 3 . That they contribute. And then 50 of the next 2 of contributions. Also, and just as important, is permac provides substantial Investment Education to all of its employees. I look forward to continuing to provide competitive benefits. My current employees are like family to me. And i want to be able to help them especially with their retirement. Just as importantly i wanted to be able to attract new employees. 82 of our association precision Machine Products association, say that they also need to be able to provide this benefit to their perspective new employees. I am very concerned that the proposed rule will impact our ability to do so. Last week the chamber submitted a comment letter to the department of labor enumerating many ways in which the proposed rule is unworkable. In my testimony id like to highlight three issues that will have a particularly negative impact in Small Business plans. First, sellers carve out discriminates against Small Businesses and will decrease access to muchneeded guidance. Under the proposal theres a carve out for the advisers that are telling or marketing materials. However, that carve out does not apply to advisers to Small Businesses. The d. O. L. Seems to believe that Small Business owners such as myself are not as sophisticated as Large Businesses and therefore need additional protection. When i work with my Financial Adviser, i am aware that he is providing a service for a fee and selling a product. I wouldnt be able to run a successful business if i were not able to understand when im involved in a sales discussion. Second, the changes to the education carve out will restrict access to Investment Education for both Small Business owners and their employees. My employees really truly value the Investment Education provided to them, specifically providing investment recommendation in various asset classes. This information allows them to make informed investment decision. And many of my employees could not afford to pay for this Investment Education separately and might be discouraged from investing in the plan at all if my company did not provide this benefit. And third, the best interest contract exemption will increase the cost to services to Small Businesses. And possibly eliminate access. Theres some question about whether advisers to Small Business plans are even able to use the exemption sorry. Even assuming that there are that they are, there are certain to be additional costs associated with these changes. As a Business Owner who relies on outside professionals to help me manage my plan, any additional cost imposed by the regulation will be passed onto me. In conclusion, im very concerned that the proposal will not achieve the departments goals of better protecting workers and retirees, but will instead make it harder for Small Business employers and employees to access the Financial Advice and increase their retirement services. Thank you for the opportunity to testify before you today. And i look forward to any questions you might have. Thank you, ms. Miller. Before we go to mr. Peretz. I want to apologize, we have a Committee Hearing at 4 00, we have to be there. Showing the good natured spirit that i am and also bipartisanship i want to turn the hearing over to our acting chairman but Ranking Member al franken. Good grief. Unprecedented. Mr. Acting chairman, i dont know what to say. You again, may i help you. Okay. This is a whole jack bennie thing. Lets just go right to mr. Puritz. Thank you members of the committee for this opportunity to provide rebalanced ira views about the department of labors proposed views. My firm is a registered Investment Adviser with approximately 275 million of assets under management. And we serve about approximately 500 clients. Rebalance irss are relatively new National Investment Advisory Firm that combines top quality requirement expert and Investment Advisers, real human beings, with lowcost highly diversified retirement portfolios for Everyday Americans. Our Firms Investment Committee includes financial luminaries, professor from princeton, dr. Charlie ellis and jay vivian who managed ibms 100 billion Corporate Pension fund. Rebalance ira embraces fiduciary Legal Standard and we always put the interest of our clients front and center. We provide advice without commissions and without conflicts. This makes it very easy to embrace a fiduciary standard. Rebalance ira is part of a broad trend of Investment Advisory firms that seek to provide consumers with a fundamentally better set of retirement options. This new generation of firms is offering retirement Investment Advices to clients at all income levels for very modest fees. A group offi in vanovators incl new firms, well front and personal capital but also includes established industry players such as vanguard and schwab. This trend of retooling Financial Service industry is about three years old and met with considerable success in the marketplace. Tens of thousands of clients have switched over. This group of investment innovators is growing very fast and manages over 15 billion of client assets. Imagine what would happen if there was a level Playing Field. Imagine. These investment innovators have three common features, first we Harness Technology to make the process more efficient. Second, we harness new business models. And finally we deploy new investing vehicles, typically best of breed proven endowment style investing portfolios of lowcost etfs. The results are considerable. Lower cost, superior Asset Allocation, superior investment and profitable business models. At rebalance ira our clients seek our help because they need advice about how to manage their Retirement Savings and how to better understand thein cre ii e crease increasingly complex world. All cauwalks of life, professor police, firemen, government employees, regular americans, were in the marketplace everyday dealing with Everyday Americans as they struggle to find the best way to manage their retirement investment savings. If you will, we see how the sausage is made. Over 30 of our clients come to us directly from having, for lack of a better phrase, a suboptimal relationship with a broker firm. We sometimes refer to them as brokerage refugees. The story we see over and over again is all too familiar. A client at a Brokerage Firm stunned to find out their socalled trusted retirement Investment Adviser does not have a fiduciary responsibility. In addition, the vast majority of these clients are surprised, shocked to discover that theres almost always a second layer of fees at the Investment Management level which frequently adds 1 or more to the fee burden. The brokerage refugees that we see at our firm average 2. 37 of fees all in per year. Now, that may not sound like a lot of money, but over several decades that extra fee burden can eat away at over half, half, of a consumers retirement nest egg. Over half. When rebalance ira takes on these brokerage refugees as clients of our firm, we immediately reduce the retirement investment Fee Structure by an average of 68 . In addition we put in place for these clients a comprehensive Retirement Plan and provide our clients with best of breed endowment style retirement investment portfolios. And finally, we pair all of our clients with highly qualified twoperson real heartbeat retirement investing team. American inventiveness and entrepreneurial spirit are alive and well in the Financial Services industry. But for all consumers to reap the full benefit of this extraordinary, truly extraordinary surge of innovation, there needs to be three things, greater transparency, greater flow of information particularly regarding costs. And a greater alignment of economic interests. We believe that regulatory level Playing Field will dramatically accelerate the retooling the Financial Service industry and provide Everyday Americans with a fundamentally cheaper and fundamentally better way to save for retirement. Its time to hold all Financial Professionals accountable by consistently requiring them to act in the best interest of their clients and establish a level Playing Field. This is what the department of labors rule can do. Americans struggling to save for a dignified retirement should no longer be subjected to the conflicts of interest that are draining their retirement investmen investments. And if the traditional Brokerage Firms cannot live by a simple fiduciary standard and refuse to serve modest savers, so be it. So be it. Other firms who embrace this clientfirst approach mr. Puritz, i would ask you to wrap up. All americans at all income levels prepare for retirement. Thank you. Thank you. Since im, i guess, the acting chairman now, i will be here to the end. So ill go to senator warren to ask her your questions. Thank you, mr. Acting chairman. As we have discussed, it is now perfectly legal for retirement advisers to give advice that boosts their own incomes by selling lousy products to their clients. And according to the best available data, data that are not paid for by the industry, this bad advice costs americans about 17 billion a year. The department of labor has proposed a rule that would put a stop to this Retirement Savings drain and require all Investment Advisers to put their customers first. Level Playing Field. Mr. Schneider, youre the ceo of a large Investment Advisory firm. And youve testified today that the department of labors rule is, and i think these are your words, complex and burdensome. And youve said that one thing thats, quote, critical to your succe success, is that primerica always operates in its clients best interests. So i was reading an article outlines lawsuits brought against your advisers in florida. According to the article at least 238 firefighters, teachers and other career Public Workers who were near retirement age accused your company of providing bad advice that drained their Retirement Savings. And you did it by advising them to move their Retirement Savings out of a guaranteed government pension into riskier private investments. Now, primerica was poised to make a lot of money, but only if you could convince florida firefighters near retirement age to cashout their guarantee ed pensions. Mr. Schneider, i want to understand your companys advice in these cases. Do you believe people like these firefighters from florida who are near retirement and have secure pensions with guaranteed Monthly Payments should move their money into riskier assets with no guarantees just before they retire . First of all, senator warren, i appreciate the promotion. Im actually the president of the company, not the ceo. Oh, okay. And im familiar with the matter of which you speak. And it doesnt have any application actually to the rule before the committee because in that particular case none of those individuals were clients of primerica. They paid us no compensation. Whoa, whoa, wait lets just stop right there, mr. Schneider. The article didnt say the workers were your retirement clients. It says you gave them bad advice. Once these workers retired and moved out of their government plans, primerica agents stood to profit from managing their Retirement Assets had they stayed in the pension programs retirees would have simply collected their moonthly paymens leaving nothing for primerica to manage and no commissions for primerica agents to harvest. Now, my question is not how you were paid. My question is whether you think it is sound Investment Advice to encourage Public Employees to move their money out of their pensions and into riskier assets with no guarantees just before they retire . So, senator, in that particular matter first of all regulators looked at that. They found the firm and acted properly im going to stop you right there. The question about the regulators is the question about is it legal to do that. And thats exactly the problem weve got. It is legal to do that. And i think thats what the regulators say. Its legal. My question, once again, is about the advice that primerica agents gave. Is it a good idea for firefighters on the front edge of retirement to move out of a guaranteed benefit plan that was going to cover them for all their lives and move into a risky investment that would make a lot of fees for your agents . You know, each situation is really very different. If you are in a defined benefit plan, and youre sick, what happens is in the state of florida for example were you to retire and then die two or three weeks later, you had no ability to leave your money to your loved ones are you suggesting these 238 people were weeks away from dying and thats why they all got this advice . Well, senator, the courts dismissed those cases. And frankly because it is illegal activity. I think weve established that, mr. Schneider, no one broke the law. The question is whether the law should be changed. It illustrates one of the issues though with the rule. Because were here to talk about the rule. And one problem with the rule is as everyone in the Financial Services industry knows, especially after the financial crisis, you can be sued, sometimes appropriately, but also sometimes frivolously. And under the best contract exemption youve entered into a contract with the client. And they can sue you, and you can lose the benefit of the exemption. So its not just a contract i understand, mr. Schneider, you dont want to be sued. I totally get that. But the question i keep trying to ask is whether its generally a good idea for workers like firefighters and teachers on the eve of their retirement to move their money from guaranteed defined benefit plans into riskier investments. Let me ask you that question, mr. Puritz. Youre the managing director of rebalance ira. You have a large Investment Management firm. Would you advise 50yearold, 60yearold clients to cashout of a defined benefit pension plan and move money into an ira managed by your company . As a general rule, the answers no. Okay. So youd say no. Why not . In a traditional pension defined benefit plan theres safety and predictability. My answer would be different if it was a defined contribution plan. Okay. But thats not what we have here. We have a defined benefit plan that guarantees these people are going to be covered for their entire lives. Is that right . So theres a lot of research around this, i understand. Are there circumstances in which it is a good idea for someone right on the threshold of retirement to move from a defined benefit plan that will protect them from the rest of their lives to a much riskier plan . There are circumstances, but theyre very rare. Okay. Sir, if you could turn your microphone on please. So you described them as very rare. Well, im going to say i took a look at the research on this and wanted to get some more experts opinion on this. And it seems to me the research is pretty clear. Alicia minell, quote, only those with serious illnesses who believe they do not have much time left should even consider cashing out a defined benefit pension. And even that isnt obvious because, as she puts it, even sick people may live longer than they think. So, mr. Puritz, let me ask you one more question. Do you think it is, and i want to use the direct quote here, complex and burdensome, to offer advice that is in the best interests of the client as primerica claims . I didnt think so. So frankly the suggestion that its too expensive to provide people with sound Financial Advice is ridiculous. Millions of Financial Advisers do it every day. Hard working americans like the florida firefighters and teachers who dwoevoted their careers to protecting the public and who were targeted by primerica shouldnt have to wor write whether Financial Advisers are planning to get rich by playing with Retirement Savings. Im glad the department of labor is working to fix this problem. Thank you, mr. Chairman. Thank you, senator. Mr. Puritz, in both your spoken testimony, written testimony, you refer to something called a brokerage refugee. I think thats someone who fled a brokerage and had a bad experience i guess, right . Okay. You mentioned in your written testimony married 37yearold mother of three who was paying excessive fees on a new mutual fund recommended by a broker she inherited from her family. How do the services you provide and the fees you charge under your duty as a fiduciary differ from those this woman experienced with her inherited broker . By that it was her family had been using this broker for years or something . Okay. And what does that mean for Retirement Investors nest egg or their ability to retire after say 30 years of working and saving . [ inaudible ] she literally means raising the microphone to your lips or to your mouth. Not to your lips, but need to turn it on. Push the button. Thank you. There you go. Senator, thank you. Thats an excellent question. And really gets to the heart of this matter from an economic point of view, from a return point of view. In the example we cited of a client, were talking about an extra fee burden. And so charlie ellis, who is a member of our investment committee, has a phrase he says, the dirtiest word in finance is only. Only 1 . We think of 1 as whats the big deal we pay 15 for tips, 20 if youre generous, 1 seems inconsequential. But in the scenario weve run into consistently with clients who come from brokerage relationships that extra fee burden is 2. 37 . And if you trend line that out over 30 years thats additional or thats what theyre paying . Thats what theyre paying per year. Okay, i got it. And in the current environment with plenty of good lower cost alternatives its really unnecessary fee burden. That essentially is compounded . Fees compound just like return, exactly. And over time the give you an example. If someone had 100,000 and they were in an allgrowth stock, which historically is returns, our magic number is 7. 2 a year. At that number in a tax deferred account that account would double every ten years. So in the 30year timeframe 100,000 would become 800,000. Real considerable wealth creation. By contrast, if you reduce that down to 5 , which is really the fee delta we see in the marketplace, that 100,000 only grows to 400,000, or half the amount of money. So thats whats at stake here. Its about a doubling of the return. Okay. So how are you able to provide your service at such a lower my computations 32 of 2. 37 is about 0. 75 . Thats correct. How do you do that . We use technology to make everything we do more productive. We use exclusively lowcost etfs. Is that what was called disparagingly i think robo . Robo is a phrase for a new generation of Investment Advisers who use technology. Now, there are some advisers who are 100 computerized and thats where the term robo comes from. And there are some very successful ones including well front that is the market leader. And theyre really targeting millennial and people in their 20s and 30s for whom theyre familiar with working theyre familiar with computers. And their retirement is relatively small part of their overall life. Their whole careers ahead of them. By contrast theres other firms such as personal capital and my own firm rebalance ira where we have similar investment philosophies and similar use of technology, but we have real live Investment Advisers who deal extensively with clients. And match them with the right Asset Allocation, low cost underlying portfolios, very low cost, and rebalancing which is an essential Risk Management and return tool. Well, i have a lot of questions, but ill submit them for the record and we will keep this open. I would imagine i didnt come here thinking i would adjourn this. So when i say well keep it open for a certain period of time, and i imagine is that ten days, anybody . Ten business days. I was right. I was in the majority at one point. I thank you all for your testimony. And this hearing is adjourned. With congress on summer recess this month, were featuring our cspan cities tour which features literary and Historic Sites across the nation to hear from historic leaders. Today we travel to ft. Lauderdale. Watch that at 6 00 p. M. Eastern on cspan. And tonight at 8 00 the leader of canadas four major parties participate in a televised debate. Its the first and so far only televised debate scheduled with all four party leaders. The participates are Prime Minister Steven Harper of the conservative party, new Democratic Party leader thomas mulcar and Green Party Leader elizabeth may. Earlier this week Prime Minister harper called for the election to be held on october 19th kicking off one of the longest campaigns in modern canadian history. The debate hosted by macleans magazine will be hosted by cspan and cspan radio at 8 00 p. M. Sunday night on q a, former emergency manager of detroit kevin orr talks about Financial Issues and the largest bankruptcy in u. S. History. If detroit had taken that 1. 5 trillion borrowed in 2005 and 2006 when the stock market went down to 6700 and if it had just invested in an index fund, Dow Jones Industrial average, standard poors, stock market is now trading at 18,000 almost three times what it was. They not only would have tripled their money, they could have paid the pensions in full and gotten back in the business of declaring what was called a 13th check. Used to be a practice of giving pensioners a 13th check at the end of the year in addition to the 12 theyre due. So it could have fixed itself if there had been some sort of sober management going forward, just like any organization in the United States as well. If you have some strong leadership and some focus leadership, you can resolve this problems but it takes a lot of effort. Sunday night on cspans q a. Next, remarks from retired general john allen, special president ial envoy for the Global Coalition to counter isis. His keynote at the center for American Progress is followed by panelists discussing the process and challenges in combatting isis. Good morning, ladies and gentlemen. Welcome to the center for American Progress. Its amazing to see so many wonderful friends here. I see several distinguished members of the diplomatic corp. , and we are all here from caps perspective to launch this report, but from all of your perspectives to get an opportunity to hear directly from general john allen, the president s special envoy to the Global Initiative to defeat isis. They say isil and i say isis. And the general is one of the great patriots and Public Servants we have had in the country and i have had the privilege to know him several years, and he has been a man that would take on any difficult task for the United States, and hes been endlessly dedicated, dedicated to the troops, dedicated to the marines he led, and dedicated to the civilians that worked in the most difficult places, and i am really honored that we have him here today. Before being the president s special envoy of the Global Coalition to encounter isil, he took on the challenge to help lead the middle east process for two years, working back and forth with the israelis and palestinians and working what was a heroic effort to get a twostate solution, and he is somebody that applies a great deal of thought and reflection on how America Needs to handle its most difficult challenges. Most importantly, and i have seen him in this capacity wearing the uniform and out of the uniform, he understands the kinds of challenges we face are never strictly military, they are always political and always complex. We could have no better person to bring to this task to trying to figure out what are all of the pieces of the puzzle countering the threat isis poses to the countries it is currently decimating where its erasing borders, to the region, to the world, and how we can get a solution that isnt just going to rely on military force by us or by others. Because the only way forward is going to be something comprehensive, something sustainable, something led by the countrys most effected with the support of a Wide Coalition of partners. We dont have general allen for a very long time today, so i wont go into much detail. We will be hearing from him, and he and i will have a chance to do a short discussion and then we have a distinguished panel that will join us afterwards for followup discussion. Without further adieu, general allen, welcome to the American Center for progress and thank you for joining us. Good morning, ladies and gentlemen. Its really a great pleasure to be here, and i want to thank you for not just the introduction that you have given me this morning, but in your own right for the magnificent Public Service you have rendered on our country. As many of you know, he has had substantial contributions across a whole variety of ways, in a variety of ways to our diplomatic and Coalition Efforts in afghanistan, and i benefitted directly from those, and also your work in east asia, so we should all applaud your great work and benefit from the work that you have done not just there in the department of defense but certainly more broadly in this community that takes such a great interest here at cap in particular. For important and difficult conversations, so i thank you for that. And i want to thank the center as well, and so many other complicated issues facing our country today, and in particular i want to compliment you on the report that has come out recently and the three recommendations that we are digesting. I will tell you you will find a ready ear in the community in which im operating for the recommendations you have made in this report. We are digesting it and i want to thank you for the efforts from the center in bringing those about. Today we are here to talk about the coalition and the coalition as it deals with isil. As president obama said last september at the United Nations general assembly, this is a moment where the world is at a crossroads. We are living during a time of human history, when the older order is passing and the newer order is coming into being, and how isil has effectively used 21st century tools, the ease of world travel, and Global Financial networks and the internet, and we see some vulnerabilities and gaps in the global order that is, in fact, emerging, and gaps that can be exploited to the detriment of this emerging order. Indeed it is one of isils great ironies that they are so skilled using modern technologies to spread such an antimodern and medieval and dehumanizing theology. As somebody that spent four decades as a u. S. Marine, i have come closer than many to the face of inhumanity. I have never before seen the kind of deprivety and barbaric that isil represents and in fact celebrates every day. In my service as the president s special envoy to the Global Coalition to counter isil over the past ten months, the Global Response to isils calculated inhumanity has given me reason for optimism. Im continually impressed by the Diverse Group of partner who is have committed themselves and committed their states to counter isil and to contribute to the campaign. By their willingness to make substantial contributions of National Prestige and the blood and the treasure of their population, it is their genuine effort to mark a contribution to solving a complicated and complex problem. Indeed it has been a privilege to help to organize their efforts, the efforts of 60 nations and two organizations into a Coalition Campaign that matters profoundly to the security not just of this nation, but of the nations of the world. From the outset of this coalition, this coalitions campaign to counter isil, which i will henceforth refer to by its arabic acronym as daesh, we would persist and adapt and reassess our activities in the light of both victories and setbacks. Setbacks such as the one that was experienced in ramadi in may. At the same time its also imperative for all of us to understand the direction of our campaign, from a more expansive horizon than the ones set back or the one victory. Having been part of four previous coalitions over the course of my career, and having commanded a coalition of 50 nations in afghanistan, i see how important, how indeed, essential is it to see the ups and downs of a campaign within the context of longterm strategic objectives. As we mark one year from the horrific events in iraq which spurred the United States to act and convene a Global Coalition, we have an important opportunity to take stock of how far we have come and how much further we have to go. Its difficult to remember just how perilous a moment it was last june as daesh fighters crossed the Syrian Border and began to pour down the tigress river valley, and they massacred thousands of ethnic and religious minorities in its path and it was a moment when iraq was under siege and largely alone in the world. Not only did daesh win quick victories during those days, but they demonstrated an ability to use Information Operations as a force multiplier as daesh fighters took to social media to boast of the women they brutalized and they forced into a sex trade and these had a remarkable affect on the world. Immediately, ultimately, we will never know the complete impact these messages had on thousands of iraqi soldiers that fled their ranks, not just because of the weight of the Media Campaign against them but to defend their homes and families. We do know this, daeshs ability to define the information environment played a pivotal role, perhaps even a defining role as they began to emerge in this crisis, and our ability to delegitimize that narrative and the very idea of the organization will play just as pivotal a role in their demise. Nowhere has daeshs message mattered more than in the weeks after the capture of mosul, where they declared the existence of the socalled caliphate when al baghdadi proclaimed relief from the faithful. He proclaimed global ambitions, but it was also during those difficult days last summer as daesh fighters surrounded thousands of yazidis on mt. Sinjar, as they threatened the approaches to irbil and baghdad that the United States took a series of actions that would ultimately shift the momentum. And president obama, secretary kerry made critical decisions that would begin to lay the groundwork for a coalition, and a comprehensive effort to come. First, we searched intelligence assets over iraq from one isr Intelligence Surveillance and reconnaissance, from one a day to 60 a day, getting a more granular picture to daeshs movements. Second we established joint Operations Centers in irbil and baghdad restoring critical relationships between iraqs Central Government and kurdish commanders. Third, we deployed special forces teams to assess Iraqi Security forces. With a foi focus on baghdad. Fourth, and perhaps most critically for iraqs future, we redoubled our effort to support the iraqis in the political process following national elections. These actions were absolutely essential in the immediate term, but by no means sufficient to address the many grave dangers that we face. Indeed it was last summer that we began to understand that daesh was not simply a iraqi or syrian problem, but emerging as a regional problem with global and generational implications. It was out of a keen awareness of that reality and understanding of the unthinkable human implications if this emergency were to go unabated, that our president supported by the secretary resolve to build a Global Coalition. It was at that time last year when i was asked by the white house to assist the president and secretary as a special envoy to the Global Coalition. Since i began serving in the role, i had the opportunity to travel to 30 capitals, many of them repeatedly and during that time, as we have worked together closely with the leadership of the community, we have been able to establish a coalition of 60 nations and two partners, twopartner organizations. Unlike other Coalition Campaigns i have been a part of, we have had to build this coalition out of holed cloth. When i served as the commander of our nato forces in afghanistan, our legal authorities resided upon the United Nations Security Council resolution and the framework for our organization rested on the North Atlantic Council of nato. The unprecedented nature and urgency of this effort required we create an organizational framework that would sustain a longterm effort while simultaneously confronting the emergency that we faced. Last december in brussels, the coalition to address isil went to a joint statement that outlined our objectives and commitments to Work Together over multiple lines of effort. While its the coalitions kinetic actions that often do and usually do receive the most attention, its the aggregate effort of the coalitions activities across multiple lines of effort that will as was said in the beginning, in the end will determine the coalitions success. Thats why in every visit i have to a coalition capital, and every conversation i have with a Prime Minister or president or a king, i describe the coalitions campaign as organized around five multiple lines of effort. The first is the military component, to deny safe haven and to provide Security Assistance to our partners. The second is disrupting the flow of foreign fighters. Third is disrupting access to daeshs Financial Resources and their ability to access the International Financial system. Fourth, providing humanitarian assistance and relief and stabilization support, and the fifth is encounter messaging where defeating daesh is an idea. Let me provide an overview of the coalitions progress over the lines of effort, and the ways in which the coalition is evolving to confront an adaptable enemy. Our first line of effort is focused on providing security support to the partners on the ground. While these efforts are the purview of the Central Command and its partners, its essential the coalition activities over each lines of effort are synchronized and mutually supporting. As we evaluate that ramadi is a setback from which we must learn and understand, and if you have not been following, about 0500, the Iraqi Security forces are en route now to isolated ramadi and to take it back. We should also not forget while we think about this campaign that is unfolding against ramadi that daesh is also suffering setbacks in places like the babble province and kurkuk. With the support of our air power over top of determined fighters, they were soundly defeated, and that is an accurate term, soundly defeated from a military perspective, beyond kobani, and across a long stretch of the Syrian Border, maybing and across the border of syria and turkey, and twothirds of the border has been rested from the control of daesh in the last six weeks. In tikrit, Prime Minister abadi asked for Coalition Support, and Security Forces were able to recover the city, and today less than three months later hundreds of displaced families have now made a peaceful return to the city. This process gives us reason to be cautiously optimistic about the iraqi led efforts for stabilization and the stabilized support, deliberated populations and communities as they seek to prevent sectarian reprisals. While these important gains are a credit to our partners on the ground, the coalition has play add vital role in proving their capabilities as well. 15 partners are helping to build the Iraqi Security force capabilities at five training camps, and six partners are contributing to the coalitions advise and assist mission, and eight nations participated in air strikes over iraq and five over syria. Among them, more than 8,000 iraqi fighters that the coalition trained and many are now helping to secure borders and are in the attack to recover ramadi, and in the short period of time since ramadis fall, president obamas decision to locate our troops at a five training location has produced an additional 1,300 tribal fighters who are engaged in supporting the Iraqi Security forces in the attack on ramadi at this moment. So make no mistake, more iraqis, sunni and shia alike must be recruited, trained and engaged to take back their country. Building the capacity of iraqs Security Forces will be required an enduring commitment, one i believe this coalition has made. Others may not agree, but it is my belief that with each passing week as greater numbers of iraqis are trained and equipped and take to the field, we will see their increasing effort have effect. Success will inspire success as we have seen in other places. I believe we will see others enter the fight as time goes on. At the same time we must appreciate that the security gains could only be sustained if political reforms are made in parallel. Towards that end we must continue to encourage Prime Minister abadis pursuit of an inclusive path he has set for his country, one that begins to operationalize his approach of governance called functioning federalism. This vision of governance in decentralizing authorities to the provinces, and its in that approach we hope to test the plan that president Prime Minister abadi put in place, the fivepoint plan to recover al anbar and to solidify the spoth of the sunnis in this process. Success in anbar will depend heavily on baghdads ability and willingness to recruit and train and equip sunnis to take back their communities. This is an effort that will require Prime Minister abadi and others to assume risk. This will require Prime Minister abad i and others to assume Political Risk with their largely shia constituency. Weve seen him assume that risk and weve seen the sovereign decisions made in baghdad that are beginning to pay off. As we see the sunnis begin to organize and more tribal forces be produced, well begin to see the reality of that support as well. How we support iraqs efforts, we must avoid oversimplification of iraqs identity. Weve taken note of sunni leaders decisions, for example, of the Anbar Province council to endorse the contributions of pmf or Popular Mobilization force elements which are primarily shia in their orientation. Endorsing their presence in the province and their willingness to fight alongside Iraqi Security forces. They recognize theres a distinction that must be made between the shia hard line militias under the influence of iran and the large number of shia who answered the fatwa of grand ayatollah Ali Al Sistani call to defend iraq last summer and they came to the countrys rescue by the tens of thousands. And we have to understand the differences between the two. I believe im Better Qualified than most to understand the destructive and destabilizing role that sectarian militias can play. From our own experience in iraq before and as were seeing it unfold today, but as someone who is deeply committed to this coalitions campaign and to iraqs success, i also understand the error in seeing iraqs fighters and iraqs communities and iraqs future through a narrow and sectarian prism. In fact, enabling iraqis to move beyond these divisions is part of why stabilization efforts in the liberated communities are so important as the Campaign Continues to unfold and why the Coalition Support for these activities is one of our central lines of effort. As i see it, there are four components to the counteroffensive under way that require these efforts be closely synchronized. First, the clearing element. When the iraqi army and the Popular Mobilization committee and forces ultimately remove daesh from an urban location or center. Second, there is the security and policing element also known as the hold force that deals with crime and provides general security to the liberated population so that life can return to normal. This hold force will be a combination of reconstituted sunni police, local tribes and some militia elements. Third, in restoration of local governance, we find the effort by the Central Government in baghdad and provincial headquarters and capitals to extend governance and the writ of government to the populations that have recently been liberated and suffered so much under the heel of daesh. In the stabilization effort itself or provision of essential services, this includes immediate humanitarian assistance to address lifethreatening issues, as well as shortterm restoration of essential Services Like health care and fresh water and electricity. On each of these four elements the coalition is searching Technical Support and assistance to our iraqi allies and the iraqiled efforts. While the germans and emirates are helping organize these stabilization efforts, other Coalition Partners are providing significant support. The italians are playing a substantial role training the Effective Iraqi police force being reconstituted. And several coalition nations, including the United States have made sizable contributions to a u. N. Administered stabilization fund. And this fund will allow the iraqis to make immediate investments to meet the urgent needs of those who have suffered the daily dep depridations under daeshs heal for so many months and to restore Water Purification and electrical distribution. Through the support of baghdad, this provides populations what they need so badly. And it creates the opportunity to strengthen the connection between the capital and the people, in fact, being liberated. This can be considered and ought to be considered as reconciliation from the ground up. These kinds of stabilization efforts will eventually be just as critical to syria where Coalition Supported fighters have made a series of recent gains. The coalition is enhancing our cooperation to capitalize on such successes as kobani and are working to organize elements so we can create reliable partners on the ground in syria, which is essential ultimately to our coalition outcomes. At the same time, centcom is looking for ways to streamline our train and equipment programs vetting process so we can get more recruits into the training pipeline. We can plainly see the number of fighters currently enrolled is smaller than we anticipated. Because we will continue to require capable partners on the ground in syria to ensure isils lasting defeat, we must find ways to improve this aspect of our strategy. And we are. More generally we cannot afford to become desensitized to the level of violence in syria or the belief that nothing can be done for these people. We will continue to work this very hard. While it is not the place of the United States or coalition to dictate the future for the syrian people, each of us has a profound stake in creating the conditions where syrias people can begin to determine their own future. A future that is free of the brutality of the Bashar Al Assad regime as well as organized elements such as daesh or al nusra. Across syria and iraq one of the best tools the coalition can use to disrupt management and organization is our ability to squeeze its access to Financial Resources. These counterfinance activities led jointly by italy, kingdom of saudi arabia and the United States constitute another one of the coalitions central lines of effort. Were sharing information to block the access of daesh to Global Financial networks and systems and uncovering their points of access in the region and abroad for financial support. Acts in the region and abroad for financial support. And i must tell you what we have learned from the take off the objective in the raid two months ago is beginning to paint a clear picture for us in ways we can explain. The coalition has worked to degrade daeshs Oil Enterprise through our air campaign and others. But still daesh is resilient in the ability to bring infrastructure back online and were going to continue in this effort to directly attack the Oil Enterprise. And we also must recognize that daesh has other Financial Capabilities and resources that are diverse. Beyond the Oil Enterprise, they include a number of other measures, massive criminal extortion of the populations under its control. Looting, kidnapping for ran some, human trafficking, a slave trafd and a potential profit from the sale of plundered antiquities. And daesh operates where there is an extensive criminal infrastructure to support illicit criminal activity much dated back to the smuggling routes used by the sadam regime to defeel the oil for food sanctions of the 1990sch and then a recent raid, we not only recovered a great deal, the financial manager or the fco for daesh, we not only recovered a great deal of information about the financial activities, but weve also got much greater clarity in the organizational activities and the organization of daesh and this is helping us with further planning. The coalitions counter messaging line of effort is also contesting daeshs narrative across platforms and languages. Here is here it is important that key credible voices and scholars speak out and publicly reject daeshs ideology and in the arab word it is important that the muslim, and the face discredit is daesh is an arab face. Last week the United Arab Emirates and the United States coordinated for the region. This is a regional asset and were discussing messages centers that could be stabbed in europe and southeast asia. The efforts will remain an uphill battle. Still this is an area where the Coalition Must take more decisive action. The daeshs toxic message cannot be allowed to go unchallenged. The final line of effort that ill mention today is in the area that evokes the most universal concern in my conversation with Coalition Partners and that is the area stemming the flow of foreign fighters. Most of the foreign fighters enter the battle space along the turkeys 900 kilometer border from turkey. But the burden cannot rest with turkey alone. Other partners need to step up their own introduction intelligence cliks and sharing of information. In fact the Turkish Border should by the last line of defense in this equation. Last week i head a high delegation to arrange raw for extensive conversations. Weve seen substantial progress by engaging in a sustained and respectful dialogue on this and a variety of issues and i believe enhanced cooperation with turkey will present further opportunities for our two countries and the coalitions efforts to counter daesh as we enter the second year of this campaign. We need nations working together like this, working together at each link in the chain of becoming a foreign fighter or a daesh recruit. And the links of that chain are at the border between potential foreign fighters in the battle space, in home communities, at the point of recruitment and at the point of radicalization which is often frankly a cell phone or personal computer. To date over 30 Coalition Partners have enacted laws to create greater obstacles for those planning to become foreign fighters and those who support them. 26 countries have made arrests breaking up daesh affiliated networks but nevertheless stopping the flow of foreign fighters into iraq and sear continues to be a serious challenge. And as we assess our Coalition Strategy we must confront a new reality. Potential foreign fighters no longer need to leave their home countries. Or even their homes. To be radicalized or to be recruited and tasked to become lone wolf attackers. We me appreciate there is no one type of foreign fighter, no single method of recruitment and no one source to support them financially. One critical issue we need to address is how we manage to reach and to rehabilitation and reintegrate the thousands of young people who have become known to us and who we will need to help returning to their society to become productive members of the states against again, as either they have become radicalized or returned from being a foreign fighter. There is no debbieing denying that countries find the idea of rehabilitation and those who break our laws must be held accountable but longterm detention cannot be the sole means of dealing with returning phone fighters and we must strife to be strive to be a coalition of compassion at states. The promise of rehabilitation is one we ought to actively study and embrace. This year i i had the opportunity to meet with key Muslim Leaders and scientists in singapore who have been working to deradicalize young men and in so doing have supporting successful return to society. The numbers are not high. For singapore, for not as high as it might be for other states but the success is notable. Of the 57 releases they have pead, there has been only one recidivi recidivist. Belgium, austria, germany, other states in europe, and other states in the Coalition Including the kingdom of saudi arabia have developed a set of practices for the cultural and natural context to assist in this process of the reclamation of these foreign fighters back in society. Any successful approach will have to respond to uniquely local social conditions and reality. At the same time, some of the forces which compel young men and increasingly young women to become foreign fighters are thoroughly global and modern in their nature. Daesh is practiced as exploiting a sense of ruthlessness and separation that many young people feel in their communities, whether in arab communities in the west, in certain arab societies or in southeast asia, a feel of disenfranchisement is present and a powerful force for many. There is a separation between these young people. And what is defined by a mainstream culture as they perceive it. There is a separation between the opportunities young people see on the smartphones and those they believe are available to them in their own lives t. There is a separation between the richness and the depth of the fame of the islam. Frankly we must guard our children against the separation and anxieties they feel and at the same time working do address the root causes. This is not a small task. It is a matter of working together as a coalition and community of nations to ensure that the promise of modernity is available and achievable to all. And in my discussion with muslim scholars and imams and mullahs over the year im been told by embraced and connecting with the world not through the rejection, but that a muslim can fully achieve the richness of his or her faith. Developing this sense of muteure respect strengthens our ability to act in shared purpose. Which is absolutely essential in the fight in which we are now engaged. When daesh seeks to divide and conquer, we must draw streng from the diversity and the enorm and favorite diversity of our coalition. Which daesh succeeds only when men and women feel little connection to the government and to their societies, it is necessary for us all to Work Together to offer better models. When daesh defines itself by what it seeks to destroy, it is important to define our efforts by what we seek to build together. And when we see groups and individuals seeking to affiliate and align with daesh in several parts of the world, we see clearly how the challenges are not unique to one region. Indeed the growth of a number of daesh affiliated groups is a challenge the counter isil coalition is beginning to front. We must understand that not every group who raises the black flag of daesh represents the same threat. Many groups are criminal gangs or contained insurgency. We find it useful to ask a series of question. First what command and control does core daesh, being sear and iraq, does core daesh have over this group. Second, has daesh leadership decided to link itself spublly with this group and coordinate their propaganda and messaging campaign. Third can core daesh and this potential Affiliate Exchange resources, including funding and fighters. And fourth and most importantly, can this group threaten the coalition homelands. If the answer to most of the questions is yes, the coalition has weighed to mitigate the threat, on three lines of coalition, countering finances