PUTTING INVESTORS FIRST? EXAMINING THE SEC’S BEST INTEREST RULE HEARING BEFORE THE SUBCOMMITTEE ON INVESTOR PROTECTION, ENTREPRENEURSHIP, AND CAPITAL MARKETS OF THE COMMITTEE ON FINANCIAL SERVICES U.S. HOUSE OF REPRESENTATIVES ONE HUNDRED SIXTEENTH CONGRESS FIRST SESSION MARCH 14, 2019 Printed for the use of the Committee on Financial Services Serial No. 116–10 ( U.S. GOVERNMENT PUBLISHING OFFICE 36–560 PDF WASHINGTON : 2019 VerDate Nov 24 2008 17:14 Aug 14, 2019 Jkt 095071 PO 00000 Frm 00001 Fmt 5011 Sfmt 5011 K:\DOCS\HBA073.160 TERRI HOUSE COMMITTEE ON FINANCIAL SERVICES MAXINE WATERS, California, Chairwoman CAROLYN B. MALONEY, New York PATRICK MCHENRY, North Carolina, NYDIA M. VELA´ ZQUEZ, New York Ranking Member BRAD SHERMAN, California PETER T. KING, New York GREGORY W. MEEKS, New York FRANK D. LUCAS, Oklahoma WM. LACY CLAY, Missouri BILL POSEY, Florida DAVID SCOTT, Georgia BLAINE LUETKEMEYER, Missouri AL GREEN, Texas BILL HUIZENGA, Michigan EMANUEL CLEAVER, Missouri SEAN P. DUFFY, Wisconsin ED PERLMUTTER, Colorado STEVE STIVERS, Ohio JIM A. HIMES, Connecticut ANN WAGNER, Missouri BILL FOSTER, Illinois ANDY BARR, Kentucky JOYCE BEATTY, Ohio SCOTT TIPTON, Colorado DENNY HECK, Washington ROGER WILLIAMS, Texas JUAN VARGAS, California FRENCH HILL, Arkansas JOSH GOTTHEIMER, New Jersey TOM EMMER, Minnesota VICENTE GONZALEZ, Texas LEE M. ZELDIN, New York AL LAWSON, Florida BARRY LOUDERMILK, Georgia MICHAEL SAN NICOLAS, Guam ALEXANDER X. MOONEY, West Virginia RASHIDA TLAIB, Michigan WARREN DAVIDSON, Ohio KATIE PORTER, California TED BUDD, North Carolina CINDY AXNE, Iowa DAVID KUSTOFF, Tennessee SEAN CASTEN, Illinois TREY HOLLINGSWORTH, Indiana AYANNA PRESSLEY, Massachusetts ANTHONY GONZALEZ, Ohio BEN MCADAMS, Utah JOHN ROSE, Tennessee ALEXANDRIA OCASIO-CORTEZ, New York BRYAN STEIL, Wisconsin JENNIFER WEXTON, Virginia LANCE GOODEN, Texas STEPHEN F. LYNCH, Massachusetts DENVER RIGGLEMAN, Virginia TULSI GABBARD, Hawaii ALMA ADAMS, North Carolina MADELEINE DEAN, Pennsylvania JESU´ S ‘‘CHUY’’ GARCIA, Illinois SYLVIA GARCIA, Texas DEAN PHILLIPS, Minnesota CHARLA OUERTATANI, Staff Director (II) VerDate Nov 24 2008 17:14 Aug 14, 2019 Jkt 095071 PO 00000 Frm 00002 Fmt 5904 Sfmt 5904 K:\DOCS\HBA073.160 TERRI SUBCOMMITTEE ON INVESTOR PROTECTION, ENTREPRENEURSHIP, AND CAPITAL MARKETS CAROLYN B. MALONEY, New York, Chairwoman BRAD SHERMAN, California BILL HUIZENGA, Michigan, Ranking DAVID SCOTT, Georgia Member JIM A. HIMES, Connecticut PETER T. KING, New York BILL FOSTER, Illinois SEAN P. DUFFY, Wisconsin GREGORY W. MEEKS, New York STEVE STIVERS, Ohio JUAN VARGAS, California ANN WAGNER, Missouri JOSH GOTTHEIMER. New Jersey FRENCH HILL, Arkansas VICENTE GONZALEZ, Texas TOM EMMER, Minnesota MICHAEL SAN NICOLAS, Guam ALEXANDER X. MOONEY, West Virginia KATIE PORTER, California WARREN DAVIDSON, Ohio CINDY AXNE, Iowa TREY HOLLINGSWORTH, Indiana, Vice SEAN CASTEN, Illinois Ranking Member ALEXANDRIA OCASIO-CORTEZ, New York (III) VerDate Nov 24 2008 17:14 Aug 14, 2019 Jkt 095071 PO 00000 Frm 00003 Fmt 5904 Sfmt 5904 K:\DOCS\HBA073.160 TERRI VerDate Nov 24 2008 17:14 Aug 14, 2019 Jkt 095071 PO 00000 Frm 00004 Fmt 5904 Sfmt 5904 K:\DOCS\HBA073.160 TERRI C O N T E N T S Page Hearing held on: March 14, 2019 ................................................................................................. 1 Appendix: March 14, 2019 ................................................................................................. 33 WITNESSES THURSDAY, MARCH 14, 2019 Baker, Lee, President, AARP Georgia State ......................................................... 10 Isola, Dina, Investment Advisor Representative, Ritholtz Wealth Manage- ment ...................................................................................................................... 5 John, Susan MacMichael, Founder and President, Financial Focus ................... 7 Pitt, Harvey L., CEO and Managing Director, Kalorama Partners; and former Chairman, SEC .................................................................................................... 12 Roper, Barbara, Director, Investor Protection, Consumer Federation of Amer- ica .......................................................................................................................... 8 APPENDIX Prepared statements: Baker, Lee, ........................................................................................................ 34 Isola, Dina, ........................................................................................................ 49 John, Susan MacMichael, ................................................................................ 53 Pitt, Harvey L., ................................................................................................. 68 Roper, Barbara, ................................................................................................ 77 ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD Maloney, Hon. Carolyn: Written statement of the Institutional Limited Partners Association ......... 118 Written statement of the National Association of Insurance and Financial Advisors ......................................................................................................... 125 Written statement of Michael S. Pieciak, President, North American Se- curities Administrators Association; and Commissioner, Vermont De- partment of Financial Regulation ................................................................ 130 Written statement of the Public Investors Arbitration Bar Association ...... 137 Written responses to questions for the record submitted to Susan John .... 143 Hill, Hon. French: Written statement of Christopher A. Iacovella, CEO, American Securities Association ..................................................................................................... 147 Huizenga, Hon. Bill: Written statement of the American Council of Life Insurers ....................... 149 Written statement of the Center for Capital Markets Competitiveness, U.S. Chamber of Commerce ......................................................................... 155 King, Hon. Peter: Written statement of Wayne Chopus, President and CEO, Insured Retire- ment Institute ............................................................................................... 159 Lynch, Hon. Stephen: Written statement of William F. Galvin, Secretary of the Commonwealth, Commonwealth of Massachusetts ................................................................ 169 (V) VerDate Nov 24 2008 17:14 Aug 14, 2019 Jkt 095071 PO 00000 Frm 00005 Fmt 5904 Sfmt 5904 K:\DOCS\HBA073.160 TERRI VerDate Nov 24 2008 17:14 Aug 14, 2019 Jkt 095071 PO 00000 Frm 00006 Fmt 5904 Sfmt 5904 K:\DOCS\HBA073.160 TERRI PUTTING INVESTORS FIRST? EXAMINING THE SEC’S BEST INTEREST RULE Thursday, March 14, 2019 U.S. HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON INVESTOR PROTECTION, ENTREPRENEURSHIP, AND CAPITAL MARKETS, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. The subcommittee met, pursuant to notice, at 9:35 a.m., in room 2128, Rayburn House Office Building, Hon. Carolyn B. Maloney [chairwoman of the subcommittee] presiding. Members present: Representatives Maloney, Sherman, Himes, Foster, Vargas, Gottheimer, Porter, Casten, Ocasio-Cortez; Huizenga, Stivers, Wagner, Hill, Mooney, Davidson, and Hollings- worth. Ex officio present: Representatives Waters and McHenry. Also present: Representative Barr. Chairwoman MALONEY. The Subcommittee on Investor Protec- tion, Entrepreneurship, and Capital Markets will come to order. Without objection, the Chair is authorized to declare a recess of the subcommittee at any time. Also, without objection, members of the full Financial Services Committee who are not members of this subcommittee are authorized to participate in today’s hearing. Today’s hearing is entitled, ‘‘Putting Investors First? Examining the SEC’s Best Interest Rule.’’ I now recognize myself for 5 minutes to give an opening state- ment. Today, we are examining the SEC’s proposed Regulation Best In- terest, known as Reg BI. This proposal addresses the legal stand- ard that brokers should be subjected to when they provide retail investors with personalized investment advice. This issue has roots going back decades. But for this rule, the story really starts in 2010 with the Dodd-Frank Act. When we were writing Dodd-Frank, there was a huge debate about whether bro- kers and investment advisers who provide advice to retail investors should be subject to a uniform fiduciary rule. And in the House bill, we did subject brokers to the same exact fiduciary rule that investment advisers are already subject to. We said that the SEC shall write rules ensuring that brokers who ad- vise retail investors are subject to the legal standard that ‘‘shall be the same as the standard of conduct applicable to an investment adviser.’’ (1) VerDate Nov 24 2008 17:14 Aug 14, 2019 Jkt 095071 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 K:\DOCS\HBA073.160 TERRI 2 But the Senate took a different approach. They said that the SEC should first conduct a comprehensive study of whether a uni- form fiduciary rule is appropriate for brokers and advisers. And then if the SEC’s study found that a uniform fiduciary duty is appropriate, the SEC would be required to write a rule imple- menting the results of the study within 2 years. And in fact, the author of that Senate provision was Senator Crapo, who is now the Chair of the Senate Banking Committee. The final version of Dodd-Frank required the SEC to conduct the study and then simply authorized the SEC to