▶ 0:09:26Good morning, everyone. We'll get started here on time. The Subcommittee on Capital Markets will come to order. Without objection, the chair is authorized to declare recess of the committee at any time. Today's hearing is titled from Wall Street to Main Street, the future of how America invest. Without objection, all members will have five legislative days within which to submit their extraneous material to the chair for inclusion in the record.
▶ 0:09:56I now recognize myself for 4 minutes for an opening statement. Good morning again and thank you all for joining us. Today's hearing will examine the changing dynamics between active and passive investing and whether our regulations are keeping pace with market Whether saving for a child's tuition, a first home, or retirement, Americans deserve investment opportunities that fit their unique circumstances and provide
▶ 0:10:26steady, long-term returns. We're not here today to pick winners or losers. Our goal is to understand what these trends mean for retail investors and retirement Today, people can choose from a wide variety of investment products tailored to match their specific time horizons, risk tolerances, and financial goals.
▶ 0:10:53Americans can now pick from hundreds of types of index funds, ETFs, and mutual funds covering nearly every sector of our economy. Much of this investor choice can be attributed to actions taken by the SEC under the first Trump administration.
▶ 0:11:13The Commission's 2019 ETF rule modernized how these products come to market, speeding up timelines and eliminating red tape. After the rule's enactment, the total number of ETFs grew significantly with a increase between 2020 and 2024.
▶ 0:11:39This demonstrates how sound regulation can promote innovation and competition. as passive investing continues to grow, we must understand how different investment strategies affect market Healthy markets depend on effective price discovery, the process where investors evaluate information, assess risk, and determine the value of companies.
▶ 0:12:08Active investors play an important role in that process by researching companies, analyzing fundamentals, and incorporating new information into market prices. At the same time, passive investment products have delivered substantial benefits to investors by providing low-cost diversification and broad market exposure.
▶ 0:12:32Understanding how active and passive strategies interact is essential to ensuring our markets remain efficient, competitive, and resilient while continuing to deliver strong outcomes for investors. This conversation would not be complete without talking about the importance of capital formation. The role of active and passive funds ties directly into access to capital in public offerings.
▶ 0:12:58An initial public offering is at its core a price discovery event. While index inclusion remains a vital milestone for mature companies, our public markets are most vibrant when they also include smaller, high-growth companies.
▶ 0:13:15To keep America's capital markets the envy of the world, we need we and we must ensure capital formation is supported across the full life cycle of public companies, not nearly or merely when it has reached the size and the scale necessary to attract significant index-based investments. To conclude, this hearing is first and foremost about improving the outcomes of individual investors.
▶ 0:13:46Understanding how and where Americans invest is crucial to crafting policies that support them. Today's witnesses bring a wealth of experiences in investments, markets, and fund management. I want to thank you all for your time and for your expertise, and I look forward to our discussion. I now recognize the ranking member of the subcommittee, Mr. Sherman, for 5 minutes for an opening statement.
▶ 0:14:14I'm thrilled to be at a hearing or subcommittee hearing that has nothing to do with crypto.
▶ 0:14:24Under capitalism, if you uh through the sweat of your brow and your frugality, you accumulate you're encouraged to invest in the American economy and to become a
▶ 0:14:39This is important for two reasons. First, it is the lifeblood of our and making sure the capital markets work well as markets for the entire country is of critical importance. And second, it is important to save for your retirement. This Congress needs to do something with regard to Social Security, but Social Security has never been uh the answer uh the sole answer to retirement.
▶ 0:15:09And in fact, this Congress and all of its predecessors have put our money or the taxpayers' money where our mouth is when it comes to saving for retirement. We have forgone hundreds of billions of dollars of tax revenue by giving tax incentives to people who will save for their retirement.
▶ 0:15:28So, it's important that we make sure that these savings are efficient both to achieve the individual goal and the goal of the overall economy. And a critical role in that
▶ 0:15:45is played by mutual funds, whether it be the traditional mutual funds or the Uh these products have strong regulatory protections and allow Americans to without having to become experts the um balance sheets and income statements, etc. of every public company. So, if we want to encourage something, we should learn from Baskin-Robbins.
▶ 0:16:16If you want to encourage something, give people Imagine how much less ice cream would be consumed if Baskin-Robbins had only one So, we need to offer mutual funds that are across the economy and those that pick a sector. And we need to have a choice between index funds and active funds.
▶ 0:16:41Now, it's true that index funds management fees, but if you have an economy exclusively with index funds, how do you know what stocks are worth? And do you just calcify the index?
▶ 0:17:06Index funds can't be effective if if there are not also uh selective, well-educated investors, and much of that comes from managed mutual funds. Now, uh two other points I want to make. One is about the investing in China. I do not believe that index funds, and perhaps mutual funds in general, should be just indexing in China, especially according to an index. Couple of reasons for that.
▶ 0:17:36The first is we've got a lot of index funds that are not even buying the companies that fit the index. They're instead buying not Huawei, but a variable interest entity in the Cayman Islands that has a similar name to the big Chinese company. That is not investing in the large company. And in fact, doesn't come with the rights that actual shareholders have.
▶ 0:18:08a second issue is whether the unique risks of investing in China can be dealt with uh by Pete by numbers index funds. And finally, I am concerned that there are 144 sanctioned companies and their that have made their way into emerging markets funds. Uh most of these companies have been found guilty of violating human rights. Some of them play an integral role in the Chinese military industrial complex.
▶ 0:18:39So, while I'm all for uh index funds, I'm all for uh managed funds, I am not for blindly investing in Chinese companies, let alone Cayman Island entities that share the name of a Chinese company. And finally, and I know we'll get this this with the witnesses, we need to allow shareholders to vote. Management doesn't own the company, shareholders do.
▶ 0:19:05And to have a system that says that all the shares in a mutual fund are not voted at all unless uh the individual shareholder uh of the mutual fund decides to exercise that right individually, ignores the fact that if I want somebody to manage my investments, I may choose to also have them manage the voting rights. With that, I yield back.
▶ 0:19:31I now recognize the chairman of the full committee, Mr. Hill from Arkansas, for 1 minute for an opening statement.
▶ 0:19:37Thank you, Chairwoman Wagner, and thank you to our panel for being here. The way Americans invest has evolved over the past five decades since I had my first summer job typing confirmations for a T+5 settlement. I've always felt like the five days necessary were due to my bad typing. But it is amazing to think back over the transformation for retail investors in that period. Last year, record highs.
▶ 0:20:08Last year, retail flows in the stock market, 53% increase from Passive investing and index investing have grown significantly with the number ETFs having surged. This growth means individual investors have more options than ever to tailor a financial strategy to their exact timeline and risk tolerance, and that's a good thing.
▶ 0:20:28And this hearing is really going to explore the impact of that in the mix of active and passive investment strategies and how they both contribute to our markets. I look forward to it, and I yield back.
▶ 0:20:48And today we welcome the testimony of Ms. Jody Johnson, the vice chair of Capital Group. Welcome. Dr. Matthew Ringgenberg, the Emma Eccles Jones Professor of Finance at the University of Utah. Mr. Jeffrey Ptak, managing director of Morningstar, and Mr.
▶ 0:21:11Tom Cloudman for repeat performance, three-peat, four-peat, the chief of government affairs and public policy at the Investment Company Institute, and Ms. Natalia Renta, associate director for corporate governance and power at the Americans for Financial Reform. Welcome. We thank each of you for taking the time to be here. Each of you will be recognized for 5 minutes to give your oral presentation of your testimony.
▶ 0:21:40Without objection, your written statements will be made part of the Ms. Johnson, you are now recognized for 5 minutes to give your oral testimony.
▶ 0:21:51Chairs Hill and Wagner, ranking member and members of the subcommittee. Good morning, and thank you for today's I'm Jody Johnson, vice chair of Capital Group. I have nearly 40 years experience as an investor in global equity markets. Capital Group is one of the world's largest active investment managers and the home of the American Funds. More than 20 million American households from every congressional district invest in our funds.
▶ 0:22:20We serve 370,000 US businesses and tens of millions of participants in retirement plans. Capital Group's funds have a long record of strong results. 79% of our equity and 74% of our fixed income funds have beaten their benchmark since inception net of fees. We do this at low cost.
▶ 0:22:4390% of our funds are in the lowest quartile of active manager fees, and nearly half are in the lowest decile of their Morningstar fee categories. This proves you can have both strong results and low fees. Capital Group believes investor choice among active and passive investments is essential. Here's why. Our mission is to improve people's lives through successful investing. This means our North Star is meeting the specific needs of individual investors.
▶ 0:23:14While passive funds only track a market, our active solutions meet individual investor needs considering their stage of life, risk appetite, and investment goals. Too often discussions of the type and cost of investment vehicles obscure the fact that the goal simply should be achieving optimal outcomes for individual savers.
▶ 0:23:36For instance, a 25-year-old saver and a 70-year-old retiree have very different They should not be limited to a government-imposed one-size-fits-all I want to address the common misperception that index funds somehow are safer for most investors. It's true that passive funds are cheaper on average than active funds. But cheaper is not the same as safer. Nor does cheaper always equate to better investor outcomes.
▶ 0:24:04The actual cost to an investor is the return of an investment net of fees. A low-cost, poorly performing index fund may be more expensive to the investor than a higher-cost, better-performing active fund. Here's a real-life example. If you had invested $10,000 in one of our flagship equity strategies on the last day of 1933, and it was around in it would have grown to more than $508 million today versus $196 million in the S&P 500.
▶ 0:24:36A 1% annual excess return would have compounded into more than $312 million of additional wealth. That's the difference sound active management can make. Another reason passive funds aren't necessarily safer is that a passive fund in a declining market fully participates in that decline. In 2000 and 2008, passive investors wrote declines of up to 50% all the way down, locking in their losses.
▶ 0:25:06An active manager with a mandate to protect capital or generate income can manage around this and mitigate the downside risk. A passive fund cannot. This is important for those in or near retirement, especially if they're taking regular distributions from their accounts, as they cannot always ride out a downturn without permanent loss of A few words about the importance of active management in the US capital markets. Simply put, active management is the linchpin of the whole system.
▶ 0:25:36Without active managers, there is no price discovery. When we make buy and sell decisions based on our view of a company's prospects, we help market prices reflect economic realities. Index funds provide no such price discovery to markets.
▶ 0:25:52Active managers also play a direct role in capital formation, including funding innovation through initial public We provide a long-term stable source of capital for all types of firms in all market conditions, often leaning against the trend. For instance, our funds provided more than $12 billion to recapitalize US banks during the financial crisis, benefiting both the banks and the investors we serve.
▶ 0:26:19In closing, I want to thank the committee for recognizing that healthy capital markets and durable retirement outcomes are closely connected. We also commend the administration for promoting retirement savings and investment. To provide optimal outcomes for American savers, we respectfully urge Congress and the administration to craft policies that first, preserve investor choice by allowing both active and passive investment strategies to compete, and second, to focus on
▶ 0:26:49investor outcomes rather than simply fees. Thank you very much.
▶ 0:26:56Uh Ms. Johnson. And now Professor Ringelberg. You are now recognized for 5 minutes for your oral testimony.
▶ 0:27:04Chairs Hill and Wagner, ranking member Sherman, and distinguished members of the subcommittee, thank you for inviting My name is Matthew Ringelberg. I'm a finance professor at the University of Utah, and I study how institutional investors, both active and passive, affect financial markets and the broader My testimony draws on peer-reviewed academic research, including several papers I have co-authored. I wish to make three main points today.
▶ 0:27:30First, the financial system of the United States serves several crucial functions, including allocating capital to its most productive uses, aggregating information through price discovery, and enabling households to accumulate wealth. These functions are interconnected, and all three depend on markets being competitive, transparent, and well-designed.
▶ 0:27:51Second, the investment landscape in the United States has been transformed over the past three decades by the rise of passive index investing, the rise of exchange-traded funds, ETFs, and the recent rise of retail trading. The rise of passive index investing has been one of the greatest financial innovations for ordinary Americans. By dramatically reducing fees and trading costs, index funds have transferred hundreds of billions of dollars from Wall Street to investors' accounts.
▶ 0:28:18The concurrent growth of exchange-traded funds has given investors more investment options. However, my research with Elena Patel shows that because mutual funds and ETFs are taxed differently, not all investors capture the same benefits. This is a gap policy makers should consider closing. The more recent rise of retail trading, beginning with the elimination of brokerage commissions around 2019, has brought more Americans into the market than ever before, which is a positive development.
▶ 0:28:46The research documents that retail traders on average trade more than is optimal and are susceptible to sentiment-driven behavior that can be harmful to their own long-run wealth. Third, and most importantly, I wish to convey that active investors, passive investors, and retail traders each play a crucial role in our financial system, but they have different incentives and thus play different roles.
▶ 0:29:10Understanding those differences is essential for sound On market efficiency, active investors perform a crucial public service. When a fund manager researches a company and trades on that information, prices become more accurate and capital is allocated to its most productive use in the economy.
▶ 0:29:28My research with Jeffrey Coles and Davidson Heath finds that the rise of passive investing has reduced aggregate information production, though active investors continue to have a strong incentive to gather enough information to ensure that prices have remained The market ecosystem needs both active and passive participants to function On governance, the rise of passive investing raises important questions about the monitoring of corporate Unlike active investors, index funds cannot sell a company's
▶ 0:29:58stock to express displeasure with the management of a company. They must hold every stock in their benchmark. That means their influence comes almost entirely from engagement and voting, not from the ability to sell. My research with Davidson Heath, Daniele Macchiocchi, and Ronnie MacKay finds that passive investors are less likely to vote against management, suggesting that passive ownership may have weakened corporate governance.
▶ 0:30:23On shareholder voting specifically, new research I have conducted with Ronnie MacKay, Silvina Rubio, and Irene Yi reveals a critical and underappreciated Fund families do not always vote as unified blocks. Between 40 and 60% of fund families in our sample exhibit internal voting disagreement, and this can have real consequences. We find that director turnover following shareholder descent is significantly lower when a fund family's vote is internally divided.
▶ 0:30:51This finding is directly relevant to current legislative proposals on pass-through voting. And while such programs respond to legitimate concerns about concentrated institutional power, our evidence suggests they further fragment shareholder votes and weakening the monitoring of corporate governance. So, policy makers should weigh this trade-off carefully. In closing, the United States has the most dynamic and innovative capital markets in the world, and this is a source of enormous economic strength. But, these markets are an ecosystem.
▶ 0:31:19Their health depends on maintaining conditions in which active investors can discover prices and monitor the governance of their portfolio companies. Passive investors can provide low-cost access to returns, and all investors, retail and institutional, have access to the wealth-building potential of American capital markets. Thank you, and I look forward to your
▶ 0:31:40Thank you, Mr. Weinberg. Next up is Mr. Patak. You're now recognized for 5 minutes for your oral
▶ 0:31:48Chairwoman Wagner, Ranking Member Sherman, distinguished members of the subcommittee, thank you for the opportunity to testify today. My name is Jeffrey Patak. I'm a managing director at Morningstar, and I've spent more than two decades studying how Americans Over that time, we've seen a clear and encouraging pattern. When costs fall, transparency rises, and investors have access to better tools, outcomes significantly improve.
▶ 0:32:15Today, I'll highlight six key observations about how the investment landscape is evolving and what those changes mean for First, cost drives outcomes. Our research has found cost is among the most reliable predictors of fund performance across asset classes and time periods.
▶ 0:32:35Over the 10 years ended December 31st, 2025, 31% of the lowest cost active funds outperformed their average asset passive peer compared with just 17% of the most expensive. Put simply, the smaller the fee that investors pay, the more they keep and the more wealth they can build over the long term. Second, investors are acting on the relationship between cost and outcomes.
▶ 0:33:01The average fee paid by fund investors has fallen dramatically from about 0.80% two decades ago to roughly 32 basis points in 2025. Our analysts estimate investors saved around $6.8 billion in fund fees last year. In 2025, investors moved nearly $694 billion into the lowest cost funds while pulling approximately $244 billion from higher cost funds.
▶ 0:33:30That nearly trillion-dollar cap reflects a sustained shift towards lower cost investing. Third, this shift is improving real-world outcomes. In many cases, investors are earning between 50 and 100 basis points more per year than they would have in the past. This is because investors are allocating capital more efficiently, favoring lower cost better performing funds and avoiding some of the mistakes that historically weighed on their returns.
▶ 0:33:59Fourth, low-cost and passive strategies now dominate the landscape. Over the past decade, low-cost passive funds have outperformed nearly 80% of active funds overall and roughly 90% of active US large-cap funds. That said, the story is not one of absolute replacement. Skilled active managers can and do add value in certain segments, most notably in fixed income as well as select equity categories where markets may be less efficient.
▶ 0:34:29Target date funds, which now hold approximately 4.8 trillion dollars in assets, combine low cost, diversification, and automation in a way that's well aligned with long-term investor needs. Because target date investors regularly contribute and generally stay the course, it's meant they've captured nearly all of the funds' returns. About 97%.
▶ 0:34:51That's considerably higher than what we measure in other types of funds where investors might have a propensity to trade more often, buying high and selling low to their detriment. Fifth, the industry is continuing to respond through innovation, particularly in the growth of exchange-traded funds. ETFs have expanded access to low-cost, tax-efficient, and transparent investment strategies at a scale that was far more limited a generation ago. More recently, we've seen the rapid rise of active ETFs.
▶ 0:35:19In 2025 alone, they attracted roughly 475 billion in new assets and accounted for about 1/3 of all new ETF investment. The framework that enabled ETFs to scale fostered competition and innovation while maintaining important standards around disclosure and transparency. That balance will be critical to preserve as the market continues to evolve.
▶ 0:35:43Finally, and importantly, policy The gains we've seen over the past few decades didn't happen by accident. They're the product of deliberate policy choices that created the conditions for investor success. For example, greater fee transparency, stronger disclosure standards, a level competitive playing field, and the expansion of accessible, low-cost investment structures.
▶ 0:36:07Maintaining robust, comparable disclosure so investors can clearly understand what they're paying and what they're getting in return is vitally New product structures and strategies will continue to emerge. The guiding principle should remain consistent. Innovation should enhance transparency, comparability, and cost efficiency, not undermine them. In closing, American investors today are paying less, capturing more of market returns, and achieving stronger outcomes than at any point in the past generation.
▶ 0:36:38The progress is real, and it depends on the continued stewardship of this subcommittee. Thank you, and I look forward to your questions.
▶ 0:36:46Thank you, Mr. Patach. Mr. Quadman, you are now recognized for 5 minutes for your oral testimony.
▶ 0:36:52Thank you, Chair Wagner, Ranking Member Sherman, and members of the subcommittee and Chair Hill. Thank you for your continued leadership on behalf of investors and for holding this hearing Mutual funds, exchange-traded funds, closed-end funds are regulated under the Investment Company Act of 1940. The 1940 Act provides a regulatory framework, protections, and disclosures to provide clear rules of the road for investors and the marketplace. Regulated funds are managed by fiduciaries and their legal responsibilities that are required in that role.
▶ 0:37:22The growth of regulated funds over 85 years is astounding. 125 million Americans, encompassing 76 million households, are invested in regulated funds with almost 45 trillion dollars in As an aside, this is also an a striking example of American competitiveness. The United States with 5% of the global population uh have American with those numbers, American investors hold 51% of asset in regulated fund vehicles worldwide.
▶ 0:37:53Regulated funds are not for the top 1%. These are critical vehicles that middle-class investors use to manage their finances and secure their future. Across all fund-owned households, the median income is $124,000, and the median income of the lowest fund owned households is $40,000. That cohort is actually one of the fastest-rising uh class of investors.
▶ 0:38:18Furthermore, over almost 30 years, the cost of regulated funds, both active and passive, have dropped by 61%. ICI encourages the subcommittee to consider how Congress and the SEC can allow this marketplace to continue to thrive through policies that expand investor choice, preserve access to the marketplace, and strengthen the retirement system for American savers. Investors need to have access to both active and passive options.
▶ 0:38:45This is especially important as regulated funds are undergoing marketplace evolution and technological innovations that benefit mainstream investors. ICI has pushed proposals to modernize the 1940 Act and supports the Invest Act to achieve these goals. Policy decisions such as the 2019 ETF rule and the granting of ETF share class are examples of policy making that has supported this goal. But no more needs to be done.
▶ 0:39:13The SEC should move forward with fund proxy reforms that cost investors well over billion dollars over the past 5 Congress should pass the Growth Act to give mutual funds the same tax treatment as ETFs. This bipartisan bill with 111 sponsors in the House addresses a tax disparity that harms middle-class investors.
▶ 0:39:33Passing the Growth Act will allow middle-class investors to have higher returns compounded over time and for the government to actually recognize greater The Senate should pass and send to the president legislation passed by the House and led by the Financial Services Committee on important reforms such as e-delivery, 403B and closed-end fund reforms, eliminate duplicative BDC reporting, and FSOC reform.
▶ 0:39:56I hope later today you get the chance to pass the Financial Exploitation Prevention Act and send it to the Senate for their Historic data also shows that the inclusion of alternative investments boost return for investors. With proper guardrails and based upon a long-term investing timeline, a modest allocation of alternative investments will allow regulated fund investors to have the same benefits as defined pension benefit pension beneficiaries.
▶ 0:40:24The creation of Trump accounts and fostering the future accounts under IRS code 530A are powerful examples of how the financial future of young people and families can be secured at an early age. In fact, ICI was the first trade association to provide a match for its employees for both of those accounts.
▶ 0:40:41ICI is also committed to working with the administration to help those without access to retirement vehicles while also strengthening the existing The role regulated funds play in deploying capital to fuel American economic growth cannot be overlooked. An expanding public capital market will increase investment opportunities while driving growth and job creation. We look forward to collaborating with you on these issues and I'm happy to take your questions.
▶ 0:41:10I thank you, Mr. Quadman. Ms. Renta, you are now recognized for 5 minutes for your oral testimony.
▶ 0:41:17Chairman Hill, ranking member Waters, Chair Wagner, ranking member Sherman, and members of the subcommittee, thank you for the opportunity to testify on behalf of my organization, Americans for Financial Reform. Formed in the wake of the 2008 financial crisis, we're working to lay the foundation for strong, stable, and ethical financial system, one that serves the economy and the nation as a My testimony focuses on the erosion of the passive investment infrastructure's ability to protect the millions of working people who invest their hard-earned money in low-cost
▶ 0:41:48index funds to secure a dignified retirement and meet other financial goals and what would be necessary to robustly protect these investors. To illustrate this erosion, I will use SpaceX as an example. SpaceX went public earlier this month at a sky-high valuation divorced from the company's fundamentals.
▶ 0:42:06However, it is expected to soon start appearing in index funds without a proper seasoning period due to recent rule changes by index providers, setting the stage for early investors to cash out while leaving retirement savers holding the To make matters worse, most SpaceX investors will have close to no tools for redress in the event they are harmed by wrongdoing on the part of the company, Musk, or other insiders.
▶ 0:42:28SpaceX is trying to ban class actions and enforce lawsuits into Texas business court or arbitration, both notoriously insider-friendly fora. SpaceX was able to include a forced arbitration provision due to the SEC making an about-face, effectively allowing companies to block a powerful tool to combat corporate fraud and SpaceX is also taking advantage of Texas corporate law provisions that make it exceedingly difficult to bring claims under state law to hold corporate insiders accountable for wrongdoing.
▶ 0:42:58In the meantime, regular shareholders are being shut out of providing meaningful input. Musk retains 85% voting power in a multi-class share structure where holders of one class of shares have 10 times the voting rights of shares available to the public along with special governance rights. One of the implications of the structure is that only Musk can fire himself. Meanwhile, the SEC has proposed rules that would permit SpaceX and other large companies to make significantly less disclosures compared to what large public companies are currently required to make.
▶ 0:43:28Investors and policymakers have expressed concerns about these Ranking Member Waters engaged with S&P on its proposals that would have allowed SpaceX and other recently public, unprofitable, large companies with small floats to be fast-tracked into the S&P The AFL-CIO and Americans for Financial Reform Education Fund had written in strong opposition to these changes. S&P ultimately decided against making these changes in a significant victory for the many workers saving for retirement whose investments track the affected indexes.
▶ 0:43:59Now, I'd like to make some recommendations. Given that the passive investment infrastructure is increasingly shutting off avenues for regular investors to get their voices heard and further their interests. Congress and future regulators need to step in. Despite index providers shaping how trillions of dollars are invested and the prominent role they play in many people's retirement security, they are largely unregulated.
▶ 0:44:20This needs to Additionally, it is important for asset managers of index funds that do owe fiduciary duties to the index funds they manage to be further regulated so they do not effectively outsource duties to largely unregulated index providers or use their voting power to rubber stamp management decisions. Because exchanges compete to attract listings and corporate insiders decide where companies are listed, market pressures structurally favor the interests of corporate insiders over regular investors.
▶ 0:44:47The same is true for state corporate law as insiders decide where a company is Congress needs to create a corporate governance floor to effectively disrupt the set of incentives and protect long-term investors. The SEC should recommit to its investor protection mission by requiring robust disclosures, disallowing forced arbitration, and having a more public thorough process for reviewing registration statements. Congress should consider setting more explicit and stringent requirements for the SEC to prevent the backsliding on its investor protection mission.
▶ 0:45:17Lastly, bailouts. Increasingly, passive investments, especially 401(k)s, are at risk of becoming exit liquidity as insiders and other powerful financial players sell at arguably inflated prices to workers saving for retirement. Regular investors are being put in a position to bear the losses in the event that there's a drastic market Should these events transpire, Congress must not bail out the powerful players that benefited from this arrangement and instead focus on protecting regular investors, families, and communities.
▶ 0:45:45Thank you for the opportunity to provide testimony on these issues and I look forward to your questions.
▶ 0:45:51Hi, thank you, Ms. Brenta. We'll now turn to member questions and I will recognize myself for 5 minutes for questioning, but first I have a letter to submit for the record from eight trade associations expressing support for the swift passage of capital formation policies including this committee's Invest Act. 22 marvelous bills bipartisan pulled together.
▶ 0:46:18These organizations include SIFMA, SIFMA AMG, American Securities Association, Financial Services Institution, Investment Investment Advisor Association, Investment Company Institute, Managed Funds Association, and the US Chamber of Commerce. Here is the letter and it is submitted. So ordered. And yes, Mr.
▶ 0:46:43Quaadman, since my first question is for you, I look very much forward to the Financial Exploitation Prevention Act being passed unanimously swiftly hotlined through the Senate, and being signed by the President. during President Trump's first term, the SEC adopted regulations that greatly expanded ETF choice for consumers. Uh as I mentioned in my opening, the total number of ETFs increased by 66% after the rule enactment.
▶ 0:47:13Mr. Quaadman, can you touch on the ways in which this rule ultimately benefited
▶ 0:47:21Yes, that uh the 2019 rule allowed for uh what had been a very cumbersome and slow approval process to be streamlined and has allowed for as as you cited those statistics for more ETFs to come to market. But what it's also done is in in allowing for that uh marketplace to develop, we've seen an evolution where you now start to see things like actively managed ETFs as well, which have both an active and a passive component, which then allows investors to have the benefit of both.
▶ 0:47:52Wonderful. There's no question that expanding access to capital and encouraging public offerings has been this sub committee's top priority. This applies especially to small and mid-size firms.
▶ 0:48:08Some critics argue that with more money being shifted into passive index funds, high-growth companies will gravitate towards private markets where capital is allocated based on companies' fundamentals and growth potential rather than public markets that rely heavily on passive strategies that use market cap Ms.
▶ 0:48:31Johnson, how might these undercurrents inadvertently hinder new IPOs? Are there Are there aspects of today's markets that make it more difficult for smaller companies to attract investors' attention and analysts' coverage?
▶ 0:48:51Well, thank you for the question. And yes, uh we are noticing that smaller companies are staying private much longer. They tend to be much larger market caps when they eventually join the public markets. And we feel that this is an area where active management has a very important role to play. Often these newer companies are under-researched. They don't get a lot of coverage from Wall Street.
▶ 0:49:12And active managers in particular can play a very important role in the price discovery, in the setting of the price in the initial public offering, and then also as those companies season and grow, uh the involvement of active managers in things like corporate governance and capital allocation is very important. Our firm has over $90 billion invested in smaller cap companies, so it's a very high priority for us.
▶ 0:49:36I hope so because we need more of these new IPOs. They are going to be the bread and butter of our small companies and um and analysts do need to properly cover them and put them out there. I think they're great opportunities for retail Both active and uh passive investment strategies offer benefits and trade-offs depending on an investor's goals, time horizon, and risk tolerance.
▶ 0:50:03We've seen how active funds set prices through trading and analysis and how passive funds act as price takers by investing in across broad swaths, I'll say, of the market. Uh Mr. Pathak, can you discuss this sym- symbiotic relationship, I'll call it, and how it leads to better outcomes for investors?
▶ 0:50:28Thank you for the question. That's a good way to put it, symbiotic. It's a tight handshake. You have active market participants who are trading with one another, aiding in price discovery, and as you point out, passively managed funds are price takers, essentially. So, it's critical that we have a vibrant trading infrastructure, a set of active participants that's sufficiently diverse that ensures that the prices that they are taking are efficiently set.
▶ 0:50:54They they reflect they approximate the value of those enterprises to a degree, and that way once people invest in passive funds, they can rest assured that to a degree the securities that they're getting exposure to are reasonably priced. And so, I I see the two as complements to one another rather than being pitted against one another.
▶ 0:51:15got a bit of time left here. Let me just ask, as passive assets continue to grow, is there any point at which that relationship becomes strained, do you
▶ 0:51:25So, right now in the US fund market, I'll keep this short, around 56% of assets are passive, but that's a a small piece of the global pie. If you were to back up, it's probably around 15 to 20%. We focus on assets, the limit could be maybe at 70 to 80% once you get to that with passive, then it begins to impede price discovery. We're nowhere near that. Also, I think it's a bit of a misnomer that assets are what matters. You actually have to focus on trading volume.
▶ 0:51:53You can get price discovery even among a marginal set of traders.
▶ 0:51:58My time's expired. I thank you. Uh and I now recognize the ranking member of the subcommittee, Mr. Sherman, for 5 minutes for questions.
▶ 0:52:07I ask unanimous consent that we enter into the record statements by Mr. Bob uh uh the famous uh CNBC correspondent, as well as Professor David uh Clayton Brown of the University of Arizona.
▶ 0:52:20Without objection. we're here to talk about protecting investors, but also, and perhaps even more importantly, to allocate capital in our economy. I think that uh Ms. Johnson has pointed IPOs are not in index funds.
▶ 0:52:47IPOs are perhaps, if not the largest, at least the most important transfer of capital to companies that are going to grow and employ. And it's not just the investors who are dependent upon our capital markets. It's everyone in our society.
▶ 0:53:07if we don't have active managed actively managed uh mutual funds, then mutual fund investors aren't going to be participating in IPOs, and IPOs are critical not only perhaps to their investment success, but more importantly to the economy.
▶ 0:53:24Uh and as I think you point out, if if we don't have active investors, we don't know what the price is, and also we don't have any anybody inspiring management to do the things that make the company more valuable if the value of their stock has nothing to do with the performance of the company and everything to do with the fact they happen to be in an index. I want to commend Mr.
▶ 0:53:54Quaadman for pointing out the importance of the Growth Act so that mutual funds will be treated in a similar tax manner as ETFs. And commend the gentle lady from Missouri, our chairwoman, for mentioning the Invest Act which is stuck in the Senate further proving the fact that we would do better with a unicameral legislature. I We want to save trees.
▶ 0:54:21The way to do that is not to send a lot of paper to a lot of people that don't read it. In fact, e-delivery is for many people, including myself, better because when I get the paper, I throw it away. Okay, I put it on the kitchen counter and then it gets stained with my tea and then I throw it away. Uh whereas what's in what what I can search for uh in the in email, I can read whenever I'm bored and that would never happen at a hearing of this So, Mr.
▶ 0:54:49Quaadman, why is it important that the SEC focus on e-delivery?
▶ 0:54:54For many of the reasons that you just said, it's you know, it's a little unbelievable it's 2026 and we're still arguing that about the need for e-delivery, but obviously this is the way that people communicate and in fact a survey that ICI released last year, 87% of senior citizens who are investors prefer e-delivery as their default mechanism of communication. So, it's time we get into the 21st century.
▶ 0:55:20Ms. Renta, thank you for bringing up among other things the importance of not having multi-classes of shares. Uh all shares should be equal, but unfortunately some are more equal than others. This needs to be uh the focus of a a law because otherwise you have a race to the bottom as every state tries to please management and disempower investors.
▶ 0:55:45We live in a capitalist society, but actually the most powerful people are not the owners of the capital, but the managers that they that control it. Um we have a bill proposed to us that would prevent mutual funds from voting shares unless they were told by their shareholders how to vote. Uh Ms.
▶ 0:56:09Johnson we recently passed unfortunately through this committee a bill that would differentiate between passive and active mutual fund managers when it comes to voting proxies. I can understand wanting to let the individual shareholder decide how their proportion is voted.
▶ 0:56:27The vast majority So uh should both active and index funds uh be able to cast uh the votes of the shares held in those funds in the absence of uh specific direction from uh their shareholders.
▶ 0:56:43We believe it's very important for both active and passive managers to vote their shares and to not delegate that responsibility whether that's to third-party proxy services or um even to individuals who are holding passive funds. There's very little take-up of those options and we think it's very important not to relinquish that right. Our firm takes the proxy voting process very seriously.
▶ 0:57:07We vote all of them individually based on our knowledge of the individual companies and the circumstances that pertain and we think that's one of the most important functions that a fiduciary provides.
▶ 0:57:17And without that there'd be no pressure on management to do what's in the interest of shareholders. Uh thank you for taking the time to individually uh vote uh the shares held in your funds and I yield back.
▶ 0:57:32Gentleman yields back and the chair recognizes the chair of our task force on monetary policy, Mr. Lucas of Oklahoma for 5 minutes.
▶ 0:57:40Thank you, Chairwoman Wagner, and to our witnesses for being here today. I want to start off discussion and a reminder of of all the great work Chairwoman Wagner did to secure bipartisan win for investors in the Invest Act. House overwhelmingly passed Invest last year to strengthen our capital markets, lower the cost of companies seeking to go public and increase investment access and choice for Americans saving for retirement. And I urge my colleagues in the Senate to take up that vital Mr.
▶ 0:58:09Quadman, beginning with you, why is it so important to get Invest over the finish
▶ 0:58:16The Invest Act has, you know, several different components to it, but one, obviously, um it it uh deals with a lot of the issues that will allow for growing public capital market, but more importantly, it also provides for uh different investor um opportunities as well. So, as an example, one of the bills that you have, Mr. Lucas, along with Mr.
▶ 0:58:38Gottheimer, on 403B reforms that would allow for teachers and firemen and nurses to have uh the benefit of CITs is a very common sense important evolution that would allow those investors to get the same benefits as 401k investors. So, I think it's a simple thing where getting uh the Invest Act passed would would help with that.
▶ 0:59:01Mr. Johnson, do you want to add any thoughts to that, and I wouldn't mind you touching on the 403Bs, too.
▶ 0:59:08Yes, uh we're we're also in favor of that. Uh I think it's very positive that non-for-profit um workers can participate in CITs. They tend to be a lower cost way of participating in retirement plans. And uh basically, the only difference is just a different governance structure of a board of directors for mutual funds versus a trustee for CITs that from a practical standpoint it's basically the same. So, we're in favor.
▶ 0:59:34Taking a broader view, Mr. Patak, what are the invest- investing trends the SEC should be mindful of as Chairman Clayton continues to improve the regulatory environment left by the previous
▶ 0:59:47Thank you for the question. I would say there are three things that ought to remain a focus. The first is pre- preserving and strengthening In a sense, this is the language of investors. It's how they identify risks and compare and contrast different investment opportunities available to them. The second is maintaining a level playing field when it comes to disclosing fees as I talked about earlier.
▶ 1:00:10One of the best predictors of future outcomes is fees and so the better they can identify and compare fees, the likelier they are to put themselves in a position to succeed. Thirdly, supporting innovation that would continue to contribute to the growth of low-cost vehicles. Again, we have seen that investors succeed more often with lower cost products than a higher cost and so innovations in that direction would be welcome.
▶ 1:00:35Ms. Johnson, what are the existing regulatory barriers that cause inefficiencies for actively managed investment strategies?
▶ 1:00:43Well, one of them would be mandating that investors in things such as Trump only can invest in passive. That would further exacerbate the problems that have been described on the panel this morning where our markets lose the ability to have price discovery and such. So, um give it I think the best thing that the administration and Congress and regulatory agencies can do is to make sure that the playing field is level between active and passive and that investors have choice.
▶ 1:01:10Mr. Rickenberg, can you expand on your testimony? What are the distinct roles both active and passive investing play in the safety and depth of our capital markets and why do we need to ensure Americans continue to have abundant choices when looking to secure their financial future.
▶ 1:01:26Both active and passive funds play distinct and important roles in the economy. Uh as uh Ms. Johnson said, active funds are crucial to price discovery, and in this sense they have a private incentive to provide a public good. Uh and uh the rest of us all benefit when active funds do that job. Similarly, passive funds play an important role. They help ac- uh investors access uh returns at low cost. And so all of these things work together to make capital markets succeed.
▶ 1:01:55Thank you very much. And with that, Madam Chair, I'll yield back the balance of my time.
▶ 1:02:00Gentleman yields back, and the chair recognizes the gentleman from Illinois, Mr. Casten, for 5 minutes.
▶ 1:02:07Thank you very much as I barely get ready in time. I So I I this is sort of picking up on some of the discussion you were just having. I want to talk about the fact that as of next week uh folks are going to be able to in- invest in these these Trump accounts. Um My name is Ozymandias. Look upon my works, ye mighty, and despair.
▶ 1:02:29the the Treasury Department selected Bank of New York as the financial agent for these to to run this program, and Robinhood as the brokerage and initial trustee for the accounts. My understanding is Bank of New York is building the app and the back-end infrastructure, and Robinhood is developing the user interface, customer support services. Mr.
▶ 1:02:50Quadman, last year ICI advocated for a competitive marketplace for Trump account trustees and expressed concerns about funneling millions in new retirement accounts to a single financial institution. Have you had any subsequent conversations with Treasury about the timeline to allow those rollovers to a couple of things with that. Number one, we've had extensive discussions with the Treasury Department, with the administration, on Trump accounts. One, we agree we don't uh necessarily like uh imposition of price controls.
▶ 1:03:19Number two, we think that there should be a broader basket of eligible investments. But third, to your point about Trump accounts are not designed to be cashed out at 18. They're to provide a lifetime of of financial security. So, the rollover issues are important and we believe, you know, that the that the administration is going to give some guidance on that shortly. But I would also say too, that's not a problem that's 18 years off.
▶ 1:03:46You're actually going to have 18-year-olds who are going to have Trump accounts that are going to start rolling over the next few years. So, these are really critical and important issues that need to be addressed for the success of that
▶ 1:03:58I mean, I I agree just from a free market perspective, you shouldn't you should have choice.
▶ 1:04:05Long before you turn 18, you should have
▶ 1:04:07Um are there mechanisms or safeguards you're specifically advocating for as far as the rollover so that you you know, I mean if a 6-year-old gets this, do they have Robin Hood for 12 years? What what sort of mechanisms do we need to have to give them that protection?
▶ 1:04:21Well, one is that we are in our discussions and comment letters with Treasury, we have outlined our thoughts specifically for how similar accounts are designed under the uh the 1940 Act. I would also say we're having discussions with the administration as well from the recent executive order for retirement opportunities as well for those that don't aren't currently in retirement vehicles also. So, this is actually a broader discussion we're having with the administration as well.
▶ 1:04:49Okay. There's there's this line on the on the website that I found a little bit confusing where it says additional investment options will be added. My understanding is this can only be in index funds, low-cost, you know, prudent, conservative stuff. Um do you have a sense that they're trying to expand beyond that definition and and if so, where do we need to steer them?
▶ 1:05:14Well, it as I as I mentioned, we would like to see an increased basket of investment opportunities there. What I would also say too, one of the arguments we've made is if you have transparency and disclosure, and then you allow that investor to make those decisions, that is I think going to be a big part of the solution with that. And we're having similar discussions as I mentioned with the portal that they're discussing regarding Trump IRAs as well.
▶ 1:05:43Um I I I I stay on the Robinhood thing because back before redistricting, um the young man who took his life after being led by Robinhood to invest in this is the whole Alex Kearns story was from my district.
▶ 1:06:00I've not seen that Robinhood has done anything to get away from this idea of let's gamify these apps to make it make it exciting to trade, tell you what your friends are trading, make stock markets look like casinos, and certainly their embrace of crypto and prediction markets is heading further down that path. And you know, as a parent myself, I would like to be able to protect my kid from that. Um and not go down that line.
▶ 1:06:24Miss Miss Rente, given that Robinhood is building the interface for the Trump accounts, do you share my concern with the exposure that might be there given their given their history of creating some pretty significant harm?
▶ 1:06:37Uh yes, Congressman. We we definitely share your concerns because Robinhood's business model is based on gamification of investments, and they're being trusted with setting up children for long-term financial success. And sadly, people can get hooked into increasingly risky, high-fee trading activity, uh sometimes with catastrophic consequences like you Um and we want to encourage investing, but Robinhood's focus is on trading, and uh not the same.
▶ 1:07:07Um and and though that we discussed those strict restrictions on the types of investments Trump accounts can make initially, those restrictions, uh, it seems will be lifted.
▶ 1:07:16I see we're out of time, so welcome your thoughts offline. One protection is giving parents choice. If there are other guardrails, please let us know.
▶ 1:07:23Yeah, I'm in time is expired and the chair now recognizes the gentleman from Texas, Mr. Sessions for 5 minutes.
▶ 1:07:29Madam Chairman, thank you very much. Uh, members I think are using this today to hear from a broad group of people about their ideas about the health, safety, use of, and how the stock market and investments work. And I hear, by and large, each of you talking in very positive, favorable perhaps about the things we can do to make things better.
▶ 1:07:58And I hear each of you say, and I've heard this, your evaluation about cost drivers on outcomes and over the years I've heard you express today about the, new, uh, uh, initiatives that are in the marketplace that would be for long periods of time. Uh, these are all great ideas and this is the stability of capitalism.
▶ 1:08:25It is the stability of and it is, uh, I think getting us the direction where we can build new people who have faith and confidence not just in the stock market, but in America that we're able to effectively grow jobs, we're able to grow investments, we're able to have stability, we're able to do these things that long-term build confidence not only by people, but give them the opportunity
▶ 1:08:56to have a foothold into a savings, uh, element that would prepare them for their future. Uh increasingly because we have been talking about it, uh not just as members of Congress, but a lot of other people, about Social Security and its reliability and where that might And I just want you to know that I'm taking today from each of you, notwithstanding I did hear about
▶ 1:09:26there could be risky investments, and I did hear that, and that's always been present in my life, uh that you think that we're at a sound point. That you think that you believe in your product. That you believe that we can do some things, especially with senior citizens and the way they want to do business.
▶ 1:09:48Uh and I will tell you that I believe that Ann Wagner has done a great job over the past few years to lead us to this, combined with legislation that we passed, combined with the direction necessarily of the president going to get $6 trillion uh to uh to dump into our markets that would be make things more available. My question, uh perhaps to you, Mr.
▶ 1:10:15Quaadman, is uh is this exuberance on my part or is this reality? What Talk me into or out of the the way I see things. And uh Mr. Pataki, I certainly interested in your opinion, also.
▶ 1:10:29I I think there are three separate things here, uh Mr. Sessions. Number one, um as um Ms. Johnson, I think uh very articulate articulately expressed, we need to expand the number of public companies and to have vibrant public capital markets. And that just provides more investment opportunities for Americans, and obviously it fuels economic growth. Two, we're seeing uh marketplace innovation.
▶ 1:10:53So, we're seeing the marketplace actually evolve, but that is also because there's on the third part there's a very firm regulatory structure. So, I think the direction that Chairman Atkins has taken has allowed those market innovations to continue with appropriate oversight. I think that is what has allowed for at least the optimism I have expressed and I think that the invest that American investors who we represent the middle class investor, how they are benefiting from that.
▶ 1:11:22And that is good. That's a positive thing. So, you would tend to support at least my viewpoint of how I take the market and your contributions to this
▶ 1:11:33I agree I agree, Mr. Sessions, and the work of this subcommittee over the last 15 years, but particularly with the Invest Act and getting that over the finish line is an imperative to keep that momentum going.
▶ 1:11:42Thank you, Mr. Pittack.
▶ 1:11:44Yeah, I thank you for the question. I I I would briefly add that I think that one of your questions, I think you used the word exuberance and whether that's crept in a bit. I I I would I would contrast between things that are very encouraging from a structural standpoint. We talked about the decisiveness of cost and how it's winning in the marketplace. That's leading to better outcomes. That seems durable. It's a more structural type of trend. We can also talk about the vicissitudes of markets. They gyrate around. We're coming off of an exceptionally strong period in capital markets, the US equity market in particular.
▶ 1:12:15Chances are that's not going to last indefinitely. We wish it would, but it probably won't. And so, you used the term exuberance. That's probably where I might characterize exuberance coming in a little bit more, notwithstanding the fundamental improvements we're seeing.
▶ 1:12:27you're not a political opponent. I think political opponents would say I'm too exuberant about this great economy. Oh, well, I wanted to have you check that box in your statement.
▶ 1:12:38time's expired.
▶ 1:12:39Always be careful. There's always a future, ma'am. Sir, thank you very much. Appreciate it. Madam Chairman, thank you very much. I yield back my time.
▶ 1:12:46you. And I love all this conversation about the Invest Act and how tremendous it's going to be for our capital markets and capital formation. Incredibly And uh let's hope we can get it across the Senate finish line and signed by uh into law. The chair recognizes the ranking member of our task force on monetary policy, Mr. Vargas of California, for 5 minutes.
▶ 1:13:11Thank you very much, Madam Chair and Ranking Member, for putting this hearing together. And of course, thank you for the witnesses. I would caution my colleagues that having exuberance over a bill or bills that have strong bipartisan bicameral support and pass will get a quick signature by the president, even if he supports it.
▶ 1:13:36We've seen that in the near past, where in fact, everyone seems to be dressed up at the altar and there's no wedding. So, anyway, I would caution us about having too much when it comes to that. I do want to talk a little bit and ask about this and with respect to ESG. Ms.
▶ 1:14:00Renta, in your testimony, you spoke about how in February 2025, the SEC changed guidance to suggest asset managers with more than a 5% ownership stake in public companies could be subjected to heightened regulation if they engage with companies on important issues such as workers' rights, climate, racial equity, political spending, and executive pay.
▶ 1:14:21Further, in November of last year, the SEC announced it would no longer review company the companies' request to exclude shareholder proposals from a vote at an annual meeting under the 14a8 rule. Meaning any proposal brought forward on those same important issues I mentioned earlier could just be tossed away. This concerns me greatly, as these repeated actions by the administration to kill any of these types of priorities that we should be allowing and encouraging people to do.
▶ 1:14:50Now, can you speak more about these SEC changes and what you see being the result of this change in the guidance, both currently and going forward?
▶ 1:15:00Absolutely. Thank you, Congressman, for the question. We are very concerned about those changes the SEC has been and we believe all of these changes add up to putting the thumb on the scale in favor of management and stifling the ability of regular shareholders to bring up important issues to their fellow shareholders as they are attempting to push management to address important risks.
▶ 1:15:24So, as you mentioned, there was guidance issued by the SEC last year on 13D and 13G, which there there was coverage in the news that it had a chilling effect on large asset managers engaging on important issues with the companies that they're in that that they're interested in, and as you mentioned, the the no-action process that has been the way to adjudicate
▶ 1:15:54whether or not companies can exclude these shareholder proposals was done away with with a stroke of a pen, and there's also reporting that the SEC is contemplating getting rid of the shareholder proposal rule altogether.
▶ 1:16:09That's what I was going to ask you about because that is a rumor I've heard that potentially that 14A rule would be completely done away with. Uh, what would happen? I mean, what would be the impacts of that happen?
▶ 1:16:22Well, it would it would prevent regular shareholders from from presenting important issues to management, and it also would provide more pressure on other avenues for for shareholders to get their voices heard. So, it might increase actually votes against directors. It might increase votes votes against say on pay. So, as as shareholders figure out how to get their voices heard and it would blunt, uh, you know, the instruments available uh for regular shareholders.
▶ 1:16:53Thank you. I guess lastly, I don't I have about a minute left. I'd like to comment on this that the financial system that we have is supposed to allocate capital to the most productive uses, but it seems more and more that the public sees that as allocating capital to the most productive uses for the very few. Now, we don't only have billionaires and billionaires that have a hundred billion, two hundred billion dollars. Now, we have a trillionaire.
▶ 1:17:20We have a trillionaire, and I think the when they see this, they say, "Well, wait a minute. I don't see the benefit in this system that I'm working so hard for benefiting me. It's benefiting just a few people. And I think that that's very problematic for our country. I think that's very problematic for our financial system. And I think it's something that no one seems to care too much about in the financial system, and you should. I think that's a real problem.
▶ 1:17:48And I I think you're going to see more and more of that because people feel They feel inflation. They feel like they're not getting ahead. They feel like they can't buy a house. It feels like they're worse off than their So, again, with that, I I thank you, and I yield back.
▶ 1:18:05Gentleman yields back, and the chair recognizes the chair of our subcommittee on national security, Mr. Davidson of the aisle, for five minutes.
▶ 1:18:12Uh, thank you, chairwoman. Thank you for your work in this space and and uh as as we'll talk about the Invest Act, and I certainly hope we get that across the finish line. You know, Mr. Quaadman, you highlighted one of the great stats for America. You know, with 5% of the world's population, we got about 25% of the world's GDP, over 50% of the world's invested capital. Things are pretty good. Healthy capital markets depend on competition, transparency, and accurate price signals. We want retirement savers to have access to low-cost investment options.
▶ 1:18:41We also want markets that continue to allocate capital efficiently, support innovation, provide opportunities for the next generation of Americans and the companies. It's interesting to hear some of my colleagues you know begrudge the people that found these companies actually making money while celebrating the fact that the stock price went up. So in a it it is an interesting time we live in today. And when I think about how things have changed Mr.
▶ 1:19:09I appreciate you know your observations as a long-time Morningstar subscriber and looking at data and in the through my MBA program reading Benjamin fundamental analysis. Um, is fundamental analysis dead? Is that even relevant anymore? Um, or is it is that something that now fund managers are doing maybe on behalf of less sophisticated investors?
▶ 1:19:35Thank you for the question. The short answer is no fundamental analysis is anything but that. I think that when you look at the universe of active investors, traders, it's vibrant. There's there's lots of fundamental analysis taking place that ensures the sort of efficient price discovery that I alluded to before. It ensures it's taking place.
▶ 1:19:56And so I think what you're seeing is to use the word again is a symbiosis where you have this cohort of active investors that are out there are employing fundamental analysis to try to price securities and trade with one another. And then on the other hand you have index funds and the investors that invest in them that are price takers that are set in essence by those active
▶ 1:20:16Yeah, I appreciate your observations on low-cost funds and everything like that. A lot of times here you know we talk about like it's some unknowable mystery where where where are the fees? How are people making money? And has Morningstar been able to capture and disclose all of the things? Is it just an expense ratio or is it all the ways with with different pools where margin is being made or captured by fund managers or trading strategies?
▶ 1:20:43Could you go on a platform like Morningstar and understand that?
▶ 1:20:47Thank you for the question. You're quite right that we are able to use the expense ratio that is set forth in documents like the prospectus and elsewhere in order to quantify the amount of expense that was paid by investors. In addition to that, there are other measures like brokerage commissions which are captured in certain of the filings that we can add to that total to get a picture of what the total cost is.
▶ 1:21:09There are however a segment of market impact costs that are basically absorbed into returns in the course of trading that aren't as directly observable and have to be inferred. So, we get a fairly complete picture of the expenses that are incurred but not a fully complete
▶ 1:21:24That that fully complete thing is a little bit of a void that I say why why leave a hook? And even if it's not mandated, I think it'd be a useful product. If it's not yours, something out there to say, "Well, okay, we know payment for order flow doesn't necessarily charge a fee. Are you getting best execution? Are you getting that?" We've had hearings on that. But if you at least disclose, "Here's where everybody's making money." I think it'd be in a company's best interest to do that, but at least at a mutual fund level being able to understand how everything down It'd change a lot in the market. Um so, thanks for that.
▶ 1:21:51And when you think about mutual funds and all the you know, passive active strategies, ETFs, and things like that, maybe Mr. Regensburg, you look at a couple dominant companies, maybe the big seven, some of the AI boom, things like that. Uh a recent a very popular IPO. funds are mandated to hold certain companies or certain placeholders.
▶ 1:22:12Does that somehow uh ultimately because it's automatically giving money in an index fund to some of if you form it, you automatically have to own these shares. And if it goes up, you buy more of those shares. Is is that a a feedback loop that just reinforces Um and how are how are funds addressing
▶ 1:22:35Because index funds have to mechanically hold what is in the index and those indexes tend to be value-weighted, there is in a sense more capital flowing to those larger companies. Uh and there is a little bit of academic evidence showing that those larger companies are getting larger as a result. Uh that having been said, I'll stress again that I do think the active funds are out there trying to uh do the job of price discovery to make sure that there is a balance in the
▶ 1:22:59Yeah, so it will Do you think the market will correct this or do we need legislation to correct it? What's the What's the best uh take from your research?
▶ 1:23:09To date, I think the active funds have continued to do their job and so um I think we should encourage them to keep doing so.
▶ 1:23:16All right. Thankfully, uh my time's expired and I yield back.
▶ 1:23:20Gentlemen, time's expired. The chair recognizes our ranking member of the full committee, Mrs. Waters of California for 5 minutes.
▶ 1:23:29Thank you very much, Madam Chair. I want those watching this hearing to know that Elon Musk is coming for your retirement account. Last month, stock index providers modified their rules so that Elon Musk's SpaceX could be included in their These are rules that have long kept investors protected from losing money in offerings of new untested companies.
▶ 1:23:59Index rules used to require that these companies stay out of stock indexes precisely uh because the price of these stocks are volatile and the companies' revenues are unpredictable. But, with these changes, we now have massive index funds which millions of American workers and pensioners rely on for their retirement to pursue millions of SpaceX's risky shares.
▶ 1:24:27Elon Musk was able to do this because he's a billionaire and a friend of Donald Trump's. These changes would put our working families nest eggs at greater risk of loss. I commend the S&P 500 for balking at this trend, but we still have our work to do to prevent billionaires and now trillionaires from bleeding American investors dry.
▶ 1:24:54Forcing American investors to own shares of companies that are untested is wrong and Congress needs to act in this regard. Ms. Renta, I commend you and AFR's efforts to get the S&P 500 to hold the line and stop companies like SpaceX from receiving a fast track. Your excellent written testimony discusses this issue.
▶ 1:25:20Can you talk more about the negative impact of Nasdaq and Russell's rules changes and whether it is a scheme to get as many retail investors as possible to hold the bag for company insiders and sophisticated Wall Street firms looking to profitably exit their original investments?
▶ 1:25:43Thank you so much Ranking Member Waters for your question and for your uh we are very grateful for your impactful engagement with S&P on this issue. Um and your question gets exactly to our concern uh that SpaceX and other recently public large companies will be fast-tracked into indexes at high at sky-high valuations largely divorced from these companies fundamentals allowing insiders to cash out at these arguably inflated prices while leaving retirement savers holding the bag.
▶ 1:26:11Um so as soon as tomorrow uh SpaceX is set to be included in the Russell indexes and on July 6th in the Nasdaq 100 and we're thankful that the S&P 500 held the line and that the millions of working people who are invested in index funds that track the S&P 500 are not going to be exposed to the risk of getting exposure to SpaceX shares before a proper
▶ 1:26:42seasoning period.
▶ 1:26:44Can you expand a little bit on who is at risk the most? Talk about investors. What are they at real risk and what can happen with all of this?
▶ 1:26:57Yeah, so the the concern is you know as we've discussed that index funds mechanically follow the index providers. So the concern is that there would there are trillions of dollars track tracking these indexes in index funds that will then buy shares while they're still volatile soon after the IPO.
▶ 1:27:23There's plenty of evidence it's common knowledge that after an IPO there's a period of a volatility in the in the stock. So the concern is that especially as these large companies are becoming public at at very very high valuations that are divorced from the company's fundamentals that eventually you know if there's a market correction so the share price is more closely reflect the company's fundamentals then all those retirement savers who are invested
▶ 1:27:53in low cost index funds will then bear bear those losses. So that is our concern and why we're grateful that the SEC the S&P held the line and for your leadership in that effort.
▶ 1:28:08Quickly, do you think this kind of modification is highly unusual.
▶ 1:28:13Uh yes.
▶ 1:28:15It is unusual and the timing is suspect as you know it all happened soon before the SpaceX IPO and before you know the expected other mega AI IPOs of Open AI and Anthropic that were expected.
▶ 1:28:30There's a lot more we could say about but my time is up and I have to yield back my time. Thank you very much.
▶ 1:28:37Thank you Ranking Member.
▶ 1:28:38The gentlewoman yields back and the chair now recognizes the gentleman from Montana, Mr. Downing for 5 minutes.
▶ 1:28:45Well, thank you Madam Chair and thank you for the witnesses for being here. I really appreciate having this hearing greatly impacts the investment and saving decisions of my constituents. You know, a little bit of background, you know, after a career in technology you know, I started investing in what I knew technology companies doing basically called an angel financing, seed level financing and our goal was always to you know, bet on a company that was going to have a public exit at some point.
▶ 1:29:11That was like the you know, the the brass ring and you know, later on you know, started kind of a boutique investment you know, investment banking group and did a lot of flavors like you know, real estate, a lot of reg D offerings and then it started to look different, you know, we've been looking at the you know, publicly trade or non-traded public REITs and looking at some of the other things and it's just been an interesting to see things evolve and trying to understand you know, what we can do to
▶ 1:29:41better you know, position constituents for opportunities on whether it makes sense for public offering or private offering and you know, all these different flavors. So, just a little bit of background there. But I'm going to you know, start on the active versus passive fund costs and I'm going to start with Mr. Pataki.
▶ 1:29:59You know, we we've discussed today that people have gravitated towards passive investing in large part due to the lower So, in response have you seen the fees associated with actively managed funds decrease or you know, what what what have you seen there?
▶ 1:30:14Thank you for the question, which is very a very good one. Yes, indeed. We have seen the cost of active funds come down and that's for a few reasons. One is and so if you're looking at something like an asset weighted average expense ratio for active funds, I think as of the end of last year it was 0.57%. I think that's about 30 basis points or so lower than it was 10 years ago and that's the product of two things.
▶ 1:30:39Fund managers have been lowering their fees and also investors have been responding by directing money towards cheaper active funds and so that's brought that asset weighted average expense ratio
▶ 1:30:50And do you see a shift back to active funds in the near term? You see where where do you see this moving?
▶ 1:30:55It's a fair question. You never say never. I would say as I observed before there have been some structural features to the shift to low cost. For instance, the delivery of advice is quite different today than it was say 10 or 20 years ago. Some advisers are less focused on security selection, more focused on asset allocation and for that latter job they'll turn to things like low cost passive trackers in lieu of active funds. That being said, active is vibrant and it is possible it could take share back.
▶ 1:31:22Right, thank you. I'm going to move on to Ms. Johnson. You know, active investors play an important role in price discovery. So, with the shift towards passive investment, are you concerned about negative impacts towards price discovery and if so, you know, what should be done?
▶ 1:31:40Well, as I've said before, I think the role of active in providing price discovery is something unique to active managers. That doesn't happen on the part of passive funds. And so, it's important that there not be incentives on the part of government to push people toward one or the other. Active should remain an option on platforms that the government is sponsoring as should passive and let the market decide.
▶ 1:32:04Thank you.
▶ 1:32:05And there are many There are many low-cost active ways to participate as
▶ 1:32:08Right. Thank you for that. Um Mr. Quadman, I'm going to move to Uh ETFs, you know, exchange-traded funds are usually associated with passive However, actively managed ETFs have grown in popularity over the last several years. So, why might someone choose to invest in an actively managed ETF versus an actively managed mutual fund?
▶ 1:32:29It gives them a vehicle that they can get the benefits of both active and passive. Um and uh it gives them some of the uh cost and diversification um attributes that that they could otherwise uh be shut out of if they're going into just one or the other. Right. And those are actually very attractive uh evolutions that have taken place in the
▶ 1:32:48Outstanding. Thank you. Uh finally, I'm going to move on to Professor Ringeberg. Um you know, big focus on this committee has been to make it more attractive for companies to go public. Uh passive investing focuses on major indices, which the vast majority of IPOs fall outside of. So, do you believe this decline in active investing is it playing a role in fewer early-stage companies going public?
▶ 1:33:15In in there's many dimensions to this. I think there's quite a few reasons why there's been a decline in IPOs, especially at the small end of the market. But, it is true that uh the rise of passive investing um has likely affected this in some capacity. Uh the indices for the most part don't include those small IPOs uh in in in the index, and as a result, they don't get that capital allocated from the passive funds.
▶ 1:33:37Well, thank you. In our last couple of seconds, what can be done, and does Congress or the SEC have a role?
▶ 1:33:44Uh I I think again, ensuring competition and promoting competition between active and passive funds.
▶ 1:33:49Outstanding. Well, I'm run out of time, unfortunately. So, on that, Madam Chair, I yield.
▶ 1:33:55Gentleman yields back, and the chair recognizes the ranking member of the subcommittee on digital assets, Mr. Lynch of Massachusetts for 5 minutes.
▶ 1:34:03Thank you, Madam Chair. Uh Ms. Ms. Renta, uh and this hearing is on how America invests, and I think it's important to to take a look at what's going on in the White House. Uh President Trump has issued full unconditional pardons to a number of crypto criminals.
▶ 1:34:24Uh Changpeng Zhao, who is the founder of Binance, he had pled guilty to money laundering and other crimes, and his company paid $4.3 billion in a penalty to the SEC. the Binance exchange allowed criminals to move money connected to child sex uh drug trafficking, and terrorism.
▶ 1:34:48Zhao and Binance uh were deeply involved in the Trump family Liberty World Financial, uh which was founded by Donald Trump's sons Eric and Donald Jr. And that pardon that that uh President Trump granted to Zhao uh allows him to reenter the industry. Uh President Trump also pardoned Ross Ulbricht, who is the founder of Silk Road, which is a a dark web marketplace.
▶ 1:35:20Uh the pardon that that President Trump granted to Ross Ulbricht uh erased a double life sentence plus 40 years without the possibility of parole. Trump pardoned uh Arthur Hayes, Ben Delo, Sam Reed, and and Greg Dwyer of BitMEX.
▶ 1:35:40Uh Uh those individuals had previously pled guilty to working, excuse me, to violating the the Bank Secrecy Act and laws.
▶ 1:35:54Uh the Trump administration has dropped 60% of the ongoing enforcement actions and which it inherited from the previous And now the SEC is proposing to allow companies to opt into semi-annual exempting an estimated 81% of public companies from full suite the full
▶ 1:36:24suite of disclosure requirements. How would reducing the frequency and scope of public company disclosures tilt the playing field further in favor of corporate insiders at the direct expense of the retail and index fund investors who rely on that information to assess risk of their investment?
▶ 1:36:47Thank you, Congressman, for your Yes, we're very concerned about several open proposals at the SEC that are currently open for comment affecting public companies. And one of them would allow companies to opt into semi-annual instead of quarterly reporting. And another rule, the reporting rule, would allow, as you said, 81% of companies to not provide the full suite of disclosures.
▶ 1:37:17Um and that includes companies that have been public for less than five years regardless of size. So, no matter how big the company is, for five years they could not disclose risk factors. They wouldn't have to have auditor attestation of internal control over financial reporting. They wouldn't have to provide a suite of executive pay disclosures like the CEO to median pay worker ratio, pay versus performance. They wouldn't have to have a vote on say on pay.
▶ 1:37:46So, the these are uh this would drastically increase the opacity of public companies. So, public companies would be benefiting from uh you know, the public shareholders or uh uh dispersed shareholder base without providing uh basic transparency.
▶ 1:38:06Um and if you have uh if you have disclosures every 6 months instead of every quarter, uh that increases volatility and also um increases the value of material nonpublic information. Um and it increases the ability uh of insiders uh and people who are privy to this information um to to do better in the stock market than regular investors, including uh you know, regular investors invested in index funds. So, we're very concerned about those proposals.
▶ 1:38:38You know, the the success of our markets has been based on trust. That that investors at every level feel like they're getting a fair deal. That that that the there's a level playing field out there. Even though there are some advantages for institutional investors. I think people generally feel uh you know, uh trust our markets. And and that's around the globe. That's around the globe.
▶ 1:39:02Uh what is what is this do to Well, I'm running out of time, so I'll I'll uh I'll submit my question to you in writing. Thank you. And I yield back, Madam Chair.
▶ 1:39:13Thank you, Congressman.
▶ 1:39:15Thank you. The chair recognizes the chair of the House Homeland Security Committee, Mr. Garbarino of New York, for 5 minutes.
▶ 1:39:23Thank you, Madam Chair. Uh thanks for holding this hearing. And thank you to all the witnesses for being here today. The United States remains the world's leading destination for investment, supported by deep and liquid capital markets, strong investor protections, transparent disclosures, and a long history of innovation and capital formation. Those strengths have helped American businesses access capital, fuel economic growth, and create investment opportunities for millions of retirement savers, and individual investors. Ms.
▶ 1:39:49Johnson, why do you believe US markets continue to lead the world in attracting
▶ 1:39:57I think there many reasons why US are the leading capital markets, but part of it is the role of active investors in that market. The valuable function of price discovery that active investors play, but also the way the markets are regulated. We're perceived as having fair, open, transparent markets with sound regulation and frequent disclosure. And all of that, back to the the point about trust, I think makes our capital markets highly trusted in the view of of of the eyes of the rest of the world.
▶ 1:40:24So, what recommendations would you give to the rest of the world or policy makers that are trying to emulate our I they could do more of of what we do, but I think we're here to talk about US capital markets.
▶ 1:40:37Much of that discussion around it active versus uh passive investing focuses on how capital is allocated throughout the economy. Um active managers often play an important role in researching emerging companies and directing capital toward businesses before they become large enough to be included in major indexes. Uh Ms. Johnson, without active managers, what would happen to small and mid-cap companies seeking to go public?
▶ 1:41:01I think it would be even more difficult than it is today. Uh if again, if passive were taking over the markets, there wouldn't be that opportunity for price discovery, and that's very important in the initial public offering process that the companies dialogue with active investors, get feedback on how their prospects compare with others in their industry, how their valuation might compare. And that back and forth, that dialogue is part of the price discovery process. Without that, it just wouldn't happen. A lot of companies wouldn't come
▶ 1:41:31Yeah, they we'd we'd lose out on IPOs.
▶ 1:41:33I think we would. I think the dynamism of the economy and the capital markets would be impaired.
▶ 1:41:37Thank you. Um setting aside the active versus passive debate, I think we can all agree that when investors are have meaningful choices among investment products, that's a good thing. Millions of middle-income households invest through the mutual funds, in part because they provide access to professional Yet, under current law, mutual fund investors can face tax liability on capital gains distributions even when they have not sold their shares. Mr.
▶ 1:42:03Patek, from the perspective of everyday investors trying to build wealth, would changes like those proposed in the Growth Act, uh which would allow investors to defer taxes on automatically reinvested mutual fund capital gains distributions until they sell their shares, improve fairness across investment
▶ 1:42:23Thank you for the question. I don't believe that we've taken a position publicly on that specifically. However, just speaking as an analyst and a fund investor, I know how unwelcome it is to be taxed on a distribution, particularly in a scenario where you have not transacted in the fund, which I think is the sort of scenario that type of legislation contemplates. And as you observe, it would bring the tax treatment, uh it would unify it.
▶ 1:42:49And so, I think from from the standpoint of investors more broadly who use mutual funds, uh I think it would help them, especially in after-tax accounts.
▶ 1:42:58Do you think it would allowing those gains to remain invested until the chooses to sell, uh ultimately improve long-term outcomes for middle-income households?
▶ 1:43:08It unquestionably would. Yes, because they would have an opportunity to further compound that capital. That process is arrested currently because they have to remit a payment to the IRS, and that's no longer part of their pot of capital that can compound.
▶ 1:43:24Ms. Jackson, did you have anything you wanted to add? I saw you nodding your head there.
▶ 1:43:27Yes, no, we would agree completely. Equalizing the treatment between mutual funds and ETFs is also a way to level the playing field and give people more access to choice.
▶ 1:43:37Wonderful. I appreciate that and I'm out of questions Madam Chair. I yield back.
▶ 1:43:42Gentleman yields back. Chair recognizes the chair of our subcommittee on digital assets, Mr. Steil of Wisconsin for 5
▶ 1:43:50Thank you very much Madam Chair. Appreciate holding today's Start with you if I can Mr. Quaadman. Tokenization offers a lot of opportunities. You got to manage downside risk. What should we be thinking about as we're adjusting our rules here? In speed of settlement is a massive opportunity near instant settlement true T0 0.0001. What what risk how do we mitigate that?
▶ 1:44:20Is there a risk there? How should I be thinking about that? first off you know, I think the leadership of Hester Peirce Commissioner of the SEC has been very important here and recognizing that tokens are also securities. I think we should also recognize though that a lot of activity in tokenization with US securities is actually happening in Europe. So I think we have to make sure that we're putting a rule structure in place to deal with that.
▶ 1:44:45But tokenization is also bringing forward a number of other issues that we need to have a serious discussion on including 24/5 trading and we're actually coming out with a white paper shortly on on some thoughts on that. But I would also say too in terms of T+0 while there in decreasing the time in terms of settlement obviously deals with certain efficiencies. There are also other consequences with that that we're trying to think through as well to make sure that we don't upend the system either.
▶ 1:45:14Thank you very much. Jump to you Ms. Johnson if I can. Tokenization real opportunity in the technology underlying a lot of this distributed ledger technology big uh lower costs uh for consumers. How should we be we be thinking about what the impact of that will be uh to uh Americans who are interested in engaging in this type of investment?
▶ 1:45:39It it's a topic that we are exploring and doing quite a bit of research on. I think it has yet to be very broadly adopted throughout the industry. And so, we're still in a bit of a wait-and-see
▶ 1:45:49think the timeline is for that adoption? Or do you think it's a true analysis or you think it's simply a matter of time until the distributed ledger tokenization comes to dominate the back
▶ 1:45:59I I think it's a matter of time. I don't have a good sense of exactly what the time frame would be, but it would it would require industry-wide adoption, I think, to be practical.
▶ 1:46:06But you think that it Does anybody want to give a comment as to what they think that timeline looks like where it will have that industry-wide adoption?
▶ 1:46:15I I think it um it could be sooner than we than we think. I think it's certainly going to be you know Scale that for us. 5 years or less.
▶ 1:46:235 years or less. Is that a reasonable Anybody else want to offer comment on that? Nobody likes predicting the future. Um that's great. Let's jump uh I'll keep it with you uh Ms. Johnson, if I can. Um active and passive investments merits on both sides. kind of if you could could you walk us through the what the active management um and specifically how it impacts retirement savings.
▶ 1:46:49There's a lot of conversations of passive investment active investment for retirement savers. I know you guys are at the cutting edge of this. What should policy makers be considering uh in that trade-off?
▶ 1:47:02The difference that active can make for retirement savers over the course of someone's accumulation period before retirement is massive. At the beginning of my testimony, I gave an example of if you'd held our fund for since 1933, you'd have $300 million more literally because you had 100 basis points more result through Active can also give different kinds of results for different kinds of investors.
▶ 1:47:28People's needs at retirement are very different than early in their accumulation period. And active management can offer different types of products at different stages of the retirees or soon-to-be retirees journey, financial journey. So, it's very important that it's not a one-size-fits-all proposition.
▶ 1:47:47Thanks. I I think there's real avenues to make sure that people have choices in their retirement savings. I think that's one of the broader things that I think we need to study more of. I appreciate your comments there. I'll I'll just stick with you here for the final 50 2019 ETF rule really [clears throat] opens up some interesting avenues in this space. Can you just comment briefly as to why why you think we're seeing such growth in light of in light of the rule change or other things that need to we need to be examining?
▶ 1:48:13Well, I think the rule change leveled the playing field between active and passive in ETFs. I think up to that point ETFs had been synonymous with passive. And basically passive was the only way to get exposure to a vehicle that was in some cases much more attractive for the investor. Now that you have an active ETF market as well, active ETFs are actually taking share from passive and growing much faster, which to us suggests that it isn't passive that was so attractive.
▶ 1:48:40It was that the vehicle was attractive because now you can get so many different types of active strategies through ETFs. So, we think that's an example of a piece of legislation that was really smart and in favor of the end investor.
▶ 1:48:51Thank you very much. I think that's that's a great comment. Madam Chair, yield back.
▶ 1:48:55Gentleman yields back, and the chair recognizes the gentleman from Indiana, Mr. Stutzman for 5 minutes.
▶ 1:49:01Thank you, Madam Chair, and uh thank you, panel, for being here. Um this is a a great topic, um and um kind of curious on couple of your comments, but one of the top priorities of this subcommittee, as well as President Trump's SEC, has been to you know, make IPOs great again. And we have of course we saw an IPO within the last couple of weeks that of course was incredible.
▶ 1:49:26And you know, I think it still shows that the great innovation, great leadership, uh companies that have a vision for the future again will all attract a lot of capital into it. And I want to ask Mr. Quadman, in your view, how has the dominance of passive investing changed the incentives for high-growth companies considering whether to go public? And who bears the cost if those companies stay private longer?
▶ 1:49:50Well, look, I I think there are there are a couple of things here. One is in terms of you know, you need to have both active and passive investing. Obviously, active investing is going to be much more important in terms of you know, what you're talking about as companies are going public. And as we've talked about in this committee for many years of how we can increase that pie because that just creates more investment opportunities.
▶ 1:50:13But I do think you know, when you're looking at it from the perspective of an investor, there are different things in terms of risk tolerance, fiduciary duties regarding return, material disclosures and all. And if you have the disclosure and transparency around that, it then allows the end invest the investor then to make that choice as to whether or not to go into passive or active. But obviously for the IPO issue, active investors are going to be a very important component.
▶ 1:50:37Maybe a little off topic, but you know, President Trump has done such a remarkable job of re-energizing you know, the the idea and investing in America. And so there's a lot of foreign investment that is lining up. How do you think that's going to affect what we're talking about today?
▶ 1:50:53The the United States is a magnet for capital globally. And that's for a number of different reasons that we've talked about today including the rule of law, you know, a very attractive marketplace. And I think keeping those pieces together is going to be very important because that is what fuels whether it's AI in Silicon Valley or if it's going to be a small business in, you know, Georgia that's, you know, trying to grow from small to large, those are the different elements we need to move forward on, but I also think in terms of disclosure reforms
▶ 1:51:23and other elements of the Invest Act, I think Congress in terms of setting public policy that then the SEC can follow, um, is also is an important factor in that.
▶ 1:51:33Yeah, it's going to be really remarkable to see what happens once that foreign investment really starts plugging in to the US economy. As I was talking to small business owners over the last week, you know, some of them they're having another great year, you know, they're kind of quiet about it. Um, you but but some of them are seeing even up towards a 30% um, increase. And so that's it feels like the fundamentals are really strong here and people, you know, are wanting to invest. They're wanting to see growth. Um, Ms.
▶ 1:52:00Johnson, Capital Group manages nearly $3 billion in retirement savings uh, in Indiana's 3rd District. So, thank you. Uh, much of these savings are actively managed 401(k)s. In a world in which more and more Americans are opting for passive investing strategies to save for for retirement, can you discuss the benefits that active investing still delivers for the investors in Indiana's 3rd District?
▶ 1:52:25Well, as I said in my opening statement, oftentimes passive investment is confused with safe.
▶ 1:52:32And we like to argue that active investment where we can make a decision about whether stocks are overvalued or not, and also the ability to offer more kinds of funds to people with different risk tolerances, that there's a very important role for active to play. Just because something is low cost doesn't mean that it's safe. And many, um, many of your constituents are probably concerned about preserving their wealth as well, not just maximizing it, but also keeping it.
▶ 1:52:59And so there may be actively managed strategies that are more appropriate to their risk tolerance. It's important that investors have that ability to choose and not be in a one-size-fits-all solution.
▶ 1:53:09Are there specific regulatory or structural barriers that disadvantage active managers compared to passive
▶ 1:53:19I think it's most important that government doesn't drive people to one or the other.
▶ 1:53:24We want a competitive marketplace where investors can have choice.
▶ 1:53:27Free markets. It's a great idea.
▶ 1:53:30It's a great idea. That's what makes America the greatest country in the world. We're celebrating 250 years this year and again, it's just remarkable to see how far America has come. I mean, even in the last several decades, the growth in technology, in health care, in agriculture, manufacturing, so many other spaces. But that's because of a free enterprise. So, I want to thank you all and Madam Chair, I'll yield back.
▶ 1:53:53Gentleman yields back and the chair recognizes the ranking member of our subcommittee on financial institutions, Dr. Foster of Illinois for 5 minutes.
▶ 1:54:02Thank you, Chairwoman and and thank you to our witnesses. In in recent months, several retail brokerage and crypto firms have announced automated agentic AI trading systems for their customers based on model context protocols that allow investors to give AI agents the ability to access their accounts and trade on their behalf.
▶ 1:54:23On Tuesday, Ranking Member Sherman and I sent a letter to Chairman Akens seeking answers to questions about how agentic AI affects investor protection, the responsibilities of broker dealers, market integrity, and the accountability of AI developers. Agentic tools are becoming rapidly accessible to everyone and I'm not sure our regulatory system has the clarity to show exactly how this these tools fit into the regulatory perimeter.
▶ 1:54:50Brokers and investment advisers are highly regulated with data privacy, record keeping, and auditability auditability requirements. They must also comply with regulations ensuring they act in their clients' best interest and many of them have a fiduciary duty to their clients. Now, there are many concerns here. Trading platforms, for example, might steer their customers into large language models with risk-loving YOLO in order to increase portfolio churn and turn up their platform profits.
▶ 1:55:20Or customers might just choose a cheap Chinese AI model, which might have poisoned data sets that it's been trained on to create behavior that can be profitably traded against. So, there's a lot to worry about here. So, first off, Mr. Ms. Renta, Mr. Quadman, Mr. Ringensberg, do you believe that the regulatory requirements for firms offering these tools or the developers of agentic models are sufficiently clear in terms of liability and consumer protection or is there work to do here?
▶ 1:55:52I would say, Congressman, there's a lot of work to do. And And we're thankful for your leadership on this issue and for sending that letter to Chair Atkins. You know, as as your letter mentioned, there are a lot of investor protection issues including conflict of interest concerns where brokers will have incentives to train agentic AIs in ways that might benefit them over over their customers. There's also concerns about legal compliance like you mentioned. Like how do we know these systems are complying with investor protection laws?
▶ 1:56:22And the models can evolve very quickly. So, even if you know, they might be compliant one day, like how do we make sure that they remain compliant? I think there there would need to be continuous auditing and we're concerned, of course, about privacy. It's It's unclear what access to sensitive data these agentic AI might get. And how that information may or may not be protected.
▶ 1:56:43And of course, there's broader financial risks if the agents are trained on similar data or programmed to prefer particular financial products, respond similarly to market signals, they may produce correlated trading decisions and and and may create unstable asset bubbles and crashes. And in less extreme cases, it might just create volatility and amplify market stress. So So we we we think there's a lot of work to do here and we're we're concerned we share your concerns that you outlined in the letter.
▶ 1:57:14Yeah, thank you, Mr. Quorum.
▶ 1:57:15Dr. Foster, thank you. We want to thank you and Ranking Member Sherman for asking, I think, what are are very legitimate and appropriate questions. A couple thoughts. Number one, we've been in the age of AI for a long time, right? We've had machine learning for decades, but I think obviously, as you're talking about agentic AI, that that starts to present a different set of issues.
▶ 1:57:34We sent a letter to the Treasury Department just a few weeks ago, where we outlined our thinking in terms of how FSOC, but also the component agencies of FSOC, should be going going through a policy-making approach with AI and looking at what activities are already covered by AI, what activities are not covered by AI, and then what the process is there, but I would also add to, in terms of technological changes, we also included with that letter that agencies should also be thinking about quantum computing as well,
▶ 1:58:05which is drafting along, and obviously, the speed that comes along with that is something we need to consider as well. So, I think this is a dialogue we need to be having.
▶ 1:58:12Yeah, thank you, Mr. Ringletsburg.
▶ 1:58:14I broadly agree with the with the panelists said so far, and I think at this point in time, we don't fully understand exactly how these AI models are actually deriving their trading recommendations. And so, as a consequence, I think we need to be very careful in terms of, you know, understanding the implications of this of this new tool.
▶ 1:58:32Yeah, it's a well, it's the legal liability that is one of the things that I think we really need to get moving on. Data privacy, you know, it's a huge concern here that, you know, it's obvious that usually you when you start using these models, they make you you scroll down and hit I accept to that allow them to train their AI model on everything you tell it. And if it's sitting there watching you trade, there's a lot of interesting training that can be done and traded against if you sell that data.
▶ 1:59:01So, no shortage of things to worry here. I I thank the the chair for letting me um raise these questions and yield back.
▶ 1:59:10Gentleman yields back, and the chair recognizes the gentleman from Florida, Mr. Haradopoulos, for 5 minutes.
▶ 1:59:16Thank you, Madam Chair. I wanted to ask Mr. Cloudman, if I could, first a question just in a broad stroke. Um what steps can policy makers make in order to strengthen capital formation to ensure that all companies of all sizes have the capital they need to invest, uh grow, innovate, you name it. What what can we do better up here on the dais?
▶ 1:59:37I I think there are there are a few things. I think that I think the subcommittee has already been doing a lot here. So, as I mentioned earlier, I think passage of the Invest Act deals with a lot of that. Um and disclosure reforms are an important part of that, as well. I also think the growth passage of the Growth Act is also very important, as well, because that that takes away a tax disparity that mutual fund owners have and allow for more investments. And uh just to follow up on something Mr.
▶ 2:00:01Garbarino was asking, uh we had uh submitted data to Congress a few months ago on the Growth Act, where a $10,000 mutual fund investment with a family that has a $140,000 in income, with the passage of the Growth Act, they'd have $1,300 more in return. Government would actually get $140 more in capital gains taxes as a result of that. So, I think increased opportunities like that for investment obviously also trickle down uh for that IPO machine.
▶ 2:00:30Thank you, Mr. Cloudman. Uh Mr. Pataki, if I could, um back in 2019, the the SEC passed a the ETF rule, and it was designed to increase competition, accelerate innovation, and broaden investor choices. Do you think that it has met its mark now, 6 years later?
▶ 2:00:47Yeah, thank you for the question. I think that that legislation has largely succeeded in its intent just judging from the sheer proliferation of ETFs that we have seen come out given the simplification of the rules and just a an overall uh move to make the process of launching an ETF more efficient and that's conferred benefits to investors because many of those products that have come out have been lower cost and so investors have been able to get exposure whether it's a passive strategy or an active strategy
▶ 2:01:18at lower cost and it seems like that will set up well for further innovation involving low cost vehicles which we're very supportive of.
▶ 2:01:26Thank you. And Ms. Johnson if I could, your company have have you seen that that uh what has allowed your company to reduce some of these costs in actively managed funds while preserving the research that people come to expect, the expertise and flexibility that they want to have for their long-term returns?
▶ 2:01:45So we have a commitment to giving the economies of scale back to our investors through lower fees. Breakpoints as the funds grow in asset size, fee waivers and other things have allowed us to return a lot to um but to to bring the average fee rate down over time as our funds grow. So we're very committed to that and we will continue to do that as the funds grow.
▶ 2:02:10And and one final question if I could Madam Chair, Mr. Acquirement again. I'd like to get your take in in broad strokes. I mean I I just came from the Science Committee and we're talking about AI and and what what are what are the people in your industry doing maximizing AI so that to the earlier question Ms. um Johnson is so that you're reducing some of those back room costs so that you can bring more value to the customers. What are y'all doing with AI that we can help understand it because there's so much negative talk about AI. I see it as an incredible and innovative tool as well.
▶ 2:02:39It's like the cell phone it can be incredibly constructive or destructive. How are you all using AI?
▶ 2:02:45So, we are the industry and companies are in different very in different levels here, but AI is a tool that could be used, right? In terms of as you're alluding to, different efficiencies that can be brought into, you know, back office work and and and other strategies as well. Um and I as I was mentioning my answer to Mr.
▶ 2:03:05Foster, is that, you know, when you take a look at, you know, an attempt to have blanket AI regulations, that's what the EU tried to do with the AI AI Act, right? And it it has backfired on them. So, that's why we have suggested an approach that is much more surgical. We're looking to see where the gaps are, right? And then and then trying to deal with it there. But I would also say too, and this is why I mentioned this as well, quantum computing is also coming, right?
▶ 2:03:32So, you know, there was a report yesterday in the Wall Street Journal that IBM is talking about a functional AI quantum computer by 2030. So, that also brings in a level of speed as well. So, I think we need to on a policy level be thinking about these things on a surgical way, but then also allowing for that technological development to take place because at the end of the day, these efficiencies that we're talking about within the industry, those pass those are savings that investors are going to have and it's going to help their return be even higher.
▶ 2:04:02Well, I I Madam Chair, I'll yield back just to say I I concur with the EU did as well. I think they're making a mistake and I think that we need to be leading the world in innovation and Madam Chair, I appreciate making the time for us on this important issue. Thank you.
▶ 2:04:15Gentleman yields back and the chair last but not least, the gentleman from Iowa, Mr. Nunn for 5 minutes.
▶ 2:04:25Well, thank you very much, Madam Chairwoman, and thank you very much for our witnesses being here today. We'll finish this up, but I think on a strong note here. I want to highlight some of the things I'm hearing back in the great Hawkeye state. Look, this is the middle of America, but it's also one that's very touched by this. I hear consistently from Iowans that they don't want special treatment, but they do want access to the same opportunities as those on the East and West Coast, whether it's access to markets, having the information they need to make the best decisions for their families.
▶ 2:04:52They deserve they have earned a level playing field here. And when markets are open to the heartland, Iowa families can invest, build wealth, and save for a secure retirement on their own terms, things we've all highlighted here. Too often though, I think Washington makes these things harder. For example, if an Iowan is considering a certain life insurance or an annuity product, they are handed the same disclosure forms designed for a corporate security offering.
▶ 2:05:17This is not only a burdensome and discouraging process, it's one of those things that is lengthy and filled with irrelevant information for the Madam Chair, as we've highlighted here, my discussion has drafted the Clear Forms Act, and it comes from financial advisers in places like my home state. It fixes the problem by directing the SEC to create a registration of forms tailored to those products, helping Iowans receive clearer and more useful information, while supporting innovation and consumer choice.
▶ 2:05:47Madam Chair, I'd ask for unanimous consent to enter into the record a letter of support on the Clear Forms Act at the American Council of Life Insurers and Insurers Retired Institute into the
▶ 2:05:58Without objection.
▶ 2:05:59Thank you, Madam Chair. To our witnesses today, um you know, Ms. Johnson, I'd like to begin with you. You're a leader here on investor choice and independence. Your testimony has emphasized that no single investment approach is right for everybody. It's why preserving choice between an active and a passive product could be crucial for everyday savers in my home state. Nowadays, it seems like you can go and open an investment account faster than you can fill up gas or in Iowa, get a Casey's pizza at the store.
▶ 2:06:24With all these options available, why does a professional financial advice um remain a critical I'll say, you know, choice but ultimately for an investor to be able to navigate a very complex market.
▶ 2:06:37Well, we believe very strongly in the power of advice, as you know. Um and we're pleased to serve 60,000 investors in your district as well.
▶ 2:06:45Even better. an advisor keeps the investor on their long-term path to achieve their goals. They help give financial education, they help with financial literacy, basically helping their client understand, but also understanding that client's particular needs and desires, and helping to put them in the right sorts of investments that will accomplish their long-term goals, whether that's retirement, children's education, what have you.
▶ 2:07:12And financial advisors are especially important in tricky markets, particularly in down periods, it's the role of an advisor to handhold that client and make sure that they stay on the path to achieve those goals, because the worst outcome would be to give up at the bottom and then never reach the goal that they're trying to achieve.
▶ 2:07:31Not only to bottom out, but to then put themselves in a harder situation whether you're investing for a family farmer or whether you're investing for your kids' future. And this is the reality, these are small business owners in many cases as well who have made a profession in trying to help folks in this place. Mr. Quaadman, I'd also like to talk a little bit about we just mentioned the Clear Forms Act. I saw you nod your head there. I think investor access is meaningless if investors can't understand the products they're actually getting. Folks on Wall Street can hire experts, they can help them navigate a complicated disclosure process.
▶ 2:07:59Teachers, farmers, retirees in Iowa, they usually don't have access to that. Would you agree that it's important that registration and disclosure requirements be appropriate tail- appropriately tailored for the products being offered?
▶ 2:08:13Yeah, and you know, Mr. Nunn, first off, thank you for your leadership for the hundreds of thousands of investors in Iowa and that they are Main Street investors that I've been talking about. You know, disclosures and transparency for investors, you know, to have a better understanding of the investment vehicles they're going to put their money in is a requirement of the 1940 Act and to have that tailored for them, I think is very important, but I also think some of the work that you're doing in terms of disclosures on the other side regarding corporations or businesses
▶ 2:08:43that are looking to go public, I think it's also important because that also then helps those investors have more opportunity for return.
▶ 2:08:50I would fully agree on this and tailoring it to those folks one to be successful as a small investor or two if you are a large corporate investor also giving you the guidance or the road map to be successful. This is mutually Treating everybody as a corporate Wall Street giant or as a small town farmer on the other side of this not helpful to anybody involved. I think the Clear Forms Act not only moves in the right direction it's a reflection of the good work of this committee.
▶ 2:09:14I want to thank the chairwoman for her leadership on capital markets and thank the panel for weathering through testimony in front of Congress today. Well done all. With that I yield my time.
▶ 2:09:23And I'm sure in your last three seconds you're going to say go invest act.
▶ 2:09:27Always. Go invest act. Thank you madam
▶ 2:09:32Gentlemen yields back and I would really like to thank all of our witness for their testimony today. I think this has been a very full some discussion and I appreciate it very very much. Without objections all members will have five legislative days to submit additional written requests for our witnesses to the chair. The questions will be forwarded to the witnesses for their response and witnesses please respond no later than July 30th, 2026.
▶ 2:10:04This hearing now stands adjourned.