From James Hohman with the Washington Post in the Daily 202 newsletter:
THE BIG IDEA:
— EXCLUSIVE: Sen. Elizabeth Warren today takes her ongoing crusade against the outsized influence of the financial services industry to one of Washington’s most respected think tanks. The Massachusetts Democrat is questioning the independence of the Brookings Institution and one of its longtime scholars over a study that criticizes a proposed regulation aimed at reining in conflicts of interest among retirement advisers.
Post reporter Tom Hamburger obtains letters that Warren sent this week to Brookings and the Labor Department. The Massachusetts Democrat blasts a report by non-resident scholar, Robert Litan, which predicted high costs for a measure backed strongly by progressives, consumer groups and President Obama.
Citing the $85,000 combined fee that Litan and a co-author received from a leading investment firm, Warren calls their report “highly compensated and editorially compromised work on behalf of an industry player seeking a specific conclusion.”
Litan, who held senior positions in Bill Clinton’s administration, confirmed that the outline for his study was reviewed by its sole sponsor, The Capital Group, which offered some comments. The investment firm has more than $1.4 trillion under management in its American Funds and other products. The company, like others handling retirement investment assets, has made opposition to Labor’s rule one of its top priorities.
The scholar forcefully rejects Warren’s criticism, arguing that he disclosed the funding arrangement repeatedly, including in July testimony before a congressional committee on which Warren sits. He stressed that the funding did not influence his study or its conclusions.
But Litan acknowledges one mistake: His testimony overlooked a relatively new Brookings rule prohibiting non-resident scholars—who are generally not paid by the institution—from associating their congressional testimony with the think tank.
Industry says this is common practice: Capital Group spokesman Tom Joyce downplayed complaints about the company’s support of research by Litan and his colleague, Hal Singer. “It is typical for organizations to sponsor academic studies,” Joyce said, noting that in this case “no pre-conditions or pre-determined conclusions were imposed. … They were paid for their work as any professional should be. They clearly disclosed the source of this compensation and, as they have stated, their conclusions are their own.”
Brookings distanced itself from Litan’s work after Warren complained: A Brookings official says Litan’s study and testimony on the new rule are not connected with the institution. “His congressional testimony was in his private capacity, not connected with Brookings in any way,” said David Nassar, vice president for communications.
Warren is demanding more details from Brookings, including specific information about the institution’s rules for scholarship and testimony. Many think tanks, including Brookings, have faced growing questions about the extent to which their agenda-driven donors shape research priorities. (Read Tom’s story from last fall on this issue here).
Labor’s rule on retirement advisers is the subject of an increasingly intense lobbying campaign. A public comment period ended this past week, and the administration and its allies expressed new resolve to implement it. The central thrust is to require that investment advisers put consumers’ “best interest” first by acting as “fiduciaries.” Consumer advocates argue that without such a standard, financial-services providers routinely put themselves before their customers. “Some advisers and brokers recommend investments based on the free vacations, cars, bonuses, fees and other kickbacks that the adviser can earn from selling a lousy product,” Warren writes in her letter to Labor Secretary Thomas Perez.
House Republicans who want to kill or delay the rule have scheduled two hearings for this week. Former SEC Chairman Arthur Levitt told a convention of state securities regulators yesterday that the lack of congressional support for the rule is a “national disgrace” and urged attendees to “push back.”
There is a colossal gulf in estimates about the impact this rule would have, which is why the Warren-Brookings fight is so important:
- The White House Council of Economic Advisers says industry rewards to retirement advisers cut $17 billion from the annual potential retirement savings of middle-class families. They estimate that investors could save more than $200 billion over ten years with the rule.
- Litan’s study, touted by industry, estimates that the rule “could cost investors as much as $80 billion” during a future market downturn. He argues that advisers would raise fees and costs to comply, making it harder for lower-income people to get any personalized advice at all.