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Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations

SECURITIES AND EXCHANGE
COMMISSION
17 CFR Part 240
[Release No. 34–86031; File No. S7–07–18]
RIN 3235–AM35

Regulation Best Interest: The BrokerDealer Standard of Conduct
Securities and Exchange
Commission.
ACTION: Final rule.
AGENCY:

The Securities and Exchange
Commission (the ‘‘Commission’’) is
adopting a new rule under the
Securities Exchange Act of 1934
(‘‘Exchange Act’’), establishing a
standard of conduct for broker-dealers
and natural persons who are associated
persons of a broker-dealer (unless
otherwise indicated, together referred to
as ‘‘broker-dealer’’) when they make a
recommendation to a retail customer of
any securities transaction or investment
strategy involving securities
(‘‘Regulation Best Interest’’). Regulation
Best Interest enhances the broker-dealer
standard of conduct beyond existing
suitability obligations, and aligns the
standard of conduct with retail
customers’ reasonable expectations by
requiring broker-dealers, among other
things, to: Act in the best interest of the
retail customer at the time the
recommendation is made, without
placing the financial or other interest of
the broker-dealer ahead of the interests
of the retail customer; and address
conflicts of interest by establishing,
maintaining, and enforcing policies and
procedures reasonably designed to
identify and fully and fairly disclose
material facts about conflicts of interest,
and in instances where we have
determined that disclosure is
insufficient to reasonably address the
conflict, to mitigate or, in certain
instances, eliminate the conflict. The
standard of conduct established by
Regulation Best Interest cannot be
satisfied through disclosure alone. The
standard of conduct draws from key
principles underlying fiduciary
obligations, including those that apply
to investment advisers under the
Investment Advisers Act of 1940
(‘‘Advisers Act’’). Importantly,
regardless of whether a retail investor
chooses a broker-dealer or an
investment adviser (or both), the retail
investor will be entitled to a
recommendation (from a broker-dealer)
or advice (from an investment adviser)
that is in the best interest of the retail
investor and that does not place the
interests of the firm or the financial

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SUMMARY:

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professional ahead of the interests of the
retail investor.
DATES:
Effective date: This rule is effective
September 10, 2019.
Compliance date: The compliance
date is discussed in Section II.E of this
final release.
FOR FURTHER INFORMATION CONTACT:
Lourdes Gonzalez, Assistant Chief
Counsel—Office of Sales Practices;
Emily Westerberg Russell, Senior
Special Counsel; Alicia Goldin, Senior
Special Counsel; John J. Fahey, Branch
Chief; Daniel Fisher, Branch Chief;
Bradford Bartels, Special Counsel; and
Geeta Dhingra, Special Counsel, Office
of Chief Counsel, Division of Trading
and Markets, at (202) 551–5550,
Securities and Exchange Commission,
100 F Street NE, Washington, DC
20549–8549.
SUPPLEMENTARY INFORMATION: The
Commission is adopting new rule 17
CFR 240.15l–1 under the Exchange Act
to establish a standard of conduct for
broker-dealers and natural persons who
are associated persons of a broker-dealer
when they make a recommendation to a
retail customer of any securities
transaction or investment strategy
involving securities. The Commission is
also adopting amendments to rules 17
CFR 240.17a–3 and 17 CFR 240.17a–4 to
establish new record-making and
recordkeeping requirements for brokerdealers with respect to certain
information collected from or provided
to retail customers.
Table of Contents
I. Introduction
A. Background
B. Overview of Regulation Best Interest
C. Overview of Modifications to the
Proposed Rule Text and Guidance
Provided
D. Overview of Key Enhancements
II. Discussion of Regulation Best Interest
A. General Obligation
1. Commission’s Approach
2. General Obligation To ‘‘Act in Best
Interest’’
B. Key Terms and Scope of Best Interest
Obligation
1. Natural Person Who Is an Associated
Person
2. Recommendation of Any Securities
Transaction or Investment Strategy
Involving Securities
3. Retail Customer
C. Component Obligations
1. Disclosure Obligation
2. Care Obligation
3. Conflict of Interest Obligation
4. Compliance Obligation
D. Record-Making and Recordkeeping
E. Compliance Date
III. Economic Analysis
A. Introduction and Primary Goals of the
Regulation, Comments on Market Failure

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and Quantification, and Broad Economic
Considerations
1. Introduction and Primary Goals of the
Regulation
2. Broad Economic Considerations
3. Comments on Market Failure of the
Principal-Agent Relationship and
Quantification; Comments That the
Broker-Dealer, Commission-Based Model
Should Be Severely Restricted or
Eliminated
B. Economic Baseline
1. Providers of Financial Services
2. Regulatory Baseline and Current Market
Practices
3. Investment Advice and Evidence of
Potential Investor Harm
4. Trust, Financial Literacy, and the
Effectiveness of Disclosure
C. Benefits and Costs
1. General
2. Disclosure Obligation
3. Care Obligation
4. Conflict of Interest Obligation
5. Compliance Obligation
6. Record-Making and Recordkeeping
7. Approaches To Quantifying the Potential
Benefits
D. Efficiency, Competition, and Capital
Formation
1. Competition
2. Capital Formation and Efficiency
E. Reasonable Alternatives
1. Fiduciary Standard for Broker-Dealers
2. Prescribed Format for Disclosure
3. Disclosure-Only
IV. Paperwork Reduction Act
A. Respondents Subject to Regulation Best
Interest and Amendments to Rule 17a–
3(a)(35) and Rule 17a–4(e)(5)
1. Broker-Dealers
2. Natural Persons Who Are Associated
Persons of Broker-Dealers
B. Summary of Collections of Information
1. Disclosure Obligation
2. Care Obligation
3. Conflict of Interest Obligation
4. Compliance Obligation
5. Record-Making and Recordkeeping
Obligations
V. Final Regulatory Flexibility Act Analysis
A. Need for and Objectives of the Rule
B. Significant Issues Raised by Public
Comments
C. Small Entities Subject to the Rule
D. Projected Reporting, Recordkeeping, and
Other Compliance Requirements
1. Disclosure Obligation
2. Care Obligation
3. Conflict of Interest Obligation
4. Compliance Obligation
5. Record-Making and Recordkeeping
Obligations
E. Agency Action To Minimize Effect on
Small Entities
VI. Statutory Authority and Text of the Rule

I. Introduction
We are adopting a new rule 15l–1
under the Exchange Act (‘‘Regulation
Best Interest’’) that will improve
investor protection by: (1) Enhancing
the obligations that apply when a
broker-dealer makes a recommendation
to a retail customer and natural persons

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Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations
who are associated persons of a brokerdealer (‘‘associated persons’’) (unless
otherwise indicated, together referred to
as ‘‘broker-dealer’’) and (2) reducing the
potential harm to retail customers from
conflicts of interest that may affect the
recommendation. Regulation Best
Interest enhances the broker-dealer
standard of conduct beyond existing
suitability obligations, and aligns the
standard of conduct with retail
customers’ reasonable expectations by
requiring broker-dealers, among other
things, to: (1) Act in the best interest of
the retail customer at the time the
recommendation is made, without
placing the financial or other interest of
the broker-dealer ahead of the interests
of the retail customer; and (2) address
conflicts of interest by establishing,
maintaining, and enforcing policies and
procedures reasonably designed to
identify and fully and fairly disclose
material facts about conflicts of interest,
and in instances where we have
determined that disclosure is
insufficient to reasonably address the
conflict, to mitigate or, in certain
instances, eliminate the conflict.
Regulation Best Interest establishes a
standard of conduct under the Exchange
Act that cannot be satisfied through
disclosure alone.

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A. Background
Broker-dealers play an important role
in helping Americans organize their
finances, accumulate and manage
retirement savings, and invest toward
other important long-term goals, such as
buying a house or funding a child’s
college education. Broker-dealers offer a
wide variety of brokerage (i.e., agency)
services and dealer (i.e., principal)
services and products to both retail and
institutional customers.1 Specifically,
the brokerage services provided to retail
customers range from execution-only
services to providing personalized
investment advice in the form of
recommendations of securities
transactions or investment strategies
involving securities to customers.2
Investment advisers play a similarly
important, though distinct, role. As
described in the Fiduciary
Interpretation, investment advisers
1 See Regulation Best Interest, Release No. 34–
83062 (Apr. 18, 2018) [83 FR 21574] (May 9, 2018)
(‘‘Proposing Release’’) at 21574–75; see also Staff of
the U.S. Securities and Exchange Commission,
Study on Investment Advisers and Broker-Dealers
As Required by Section 913 of the Dodd-Frank Wall
Street Reform and Consumer Protection Act (Jan.
2011) (‘‘913 Study’’) at 8–12, available at
www.sec.gov/news/studies/2011/913studyfinal.pdf
(discussing the range of brokerage and dealer
services provided by broker-dealers).
2 See Proposing Release at 21574–21575; see also
913 Study.

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provide a wide range of services to a
large variety of clients, from retail
clients with limited assets and
investment knowledge and experience
to institutional clients with very large
portfolios and substantial knowledge,
experience, and analytical resources.3
As a general matter, broker-dealers
and investment advisers have different
types of relationships with investors,
offer different services, and have
different compensation models when
providing investment recommendations
or investment advisory services to
customers. Broker-dealers typically
provide transaction-specific
recommendations and receive
compensation on a transaction-bytransaction basis (such as commissions)
(‘‘transaction-based’’ compensation or
model). A broker-dealer’s
recommendations may include
recommending transactions where the
broker-dealer is buying securities from
or selling securities to retail customers
on a principal basis or recommending
proprietary products.4 Investment
advisers, on the other hand, typically
provide ongoing, regular advice and
services in the context of broad
investment portfolio management, and
are compensated based on the value of
assets under management (‘‘AUM’’), a
fixed fee or other arrangement (‘‘feebased’’ compensation or model).5 This
variety is important because it presents
investors with choices regarding the
types of relationships they can have, the
services they can receive, and how they
can pay for those services. It is also
common for a firm to provide both
broker-dealer and investment adviser
services.
Like many principal-agent
relationships—including the investment
adviser-client relationship—the
relationship between a broker-dealer
and a customer has inherent conflicts of
interest, including those resulting from
a transaction-based (e.g., commission)
compensation structure and other
broker-dealer compensation.6 These and
other conflicts of interest may provide
3 See Commission Interpretation Regarding
Standard of Conduct for Investment Advisers,
Advisers Act Release No. 5248 (June 5, 2019)
(‘‘Fiduciary Interpretation’’).
4 See Proposing Release at 21574–21575; see also
913 Study.
5 See 913 Study.
6 The investment adviser-client relationship also
has inherent conflicts of interest, including those
resulting from an asset-based compensation
structure that may provide an incentive for an
investment adviser to encourage its client to invest
more money through an adviser in order increase
its AUM at the expense of the client. See Fiduciary
Interpretation at footnotes 53–72 and accompanying
text for a discussion of how investment advisers
satisfy their fiduciary duty when conflicts of
interest are present.

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33319

an incentive to a broker-dealer to seek
to increase its own compensation or
other financial interests at the expense
of the customer to whom it is making
investment recommendations.
Notwithstanding these inherent
conflicts of interest in the broker-dealercustomer relationship, there is broad
acknowledgment of the benefits of, and
support for, the continuing existence of
the broker-dealer business model,
including a commission or other
transaction-based compensation
structure, as an option for retail
customers seeking investment
recommendations.7 For example, retail
customers that intend to buy and hold
a long-term investment may find that
paying a one-time commission to a
broker-dealer recommending such an
investment is more cost effective than
paying an ongoing advisory fee to an
investment adviser merely to hold the
same investment. Retail customers with
limited investment assets may benefit
from broker-dealer recommendations
when they do not qualify for advisory
accounts because they do not meet the
account minimums often imposed by
investment advisers. Other retail
customers who hold a variety of
investments, or prefer differing levels of
services (e.g., both episodic
recommendations from a broker-dealer
and continuous advisory services
including discretionary asset
management from an investment
adviser), may benefit from having access
to both brokerage and advisory
accounts. Nevertheless, concerns exist
regarding (1) the potential harm to retail
customers resulting from broker-dealer
recommendations provided where
conflicts of interest exist and (2) the
insufficiency of existing broker-dealer
regulatory requirements to address these
conflicts when broker-dealers make
recommendations to retail customers.8
More specifically, there are concerns
that existing requirements do not
require a broker-dealer’s
recommendations to be in the retail
customer’s best interest.9
B. Overview of Regulation Best Interest
On April 18, 2018, we proposed
enhancements to the standard of
conduct that applies when brokerdealers make recommendations to retail
customers.10 Specifically, the proposal
would have established an express best
interest obligation that would require all
broker-dealers and associated persons,
7 See

Proposing Release at 21579.
at 21577–21579.
9 Id. See also Section I.C, Overview of
Modifications to the Proposed Rule Text and
Guidance Provided.
10 Proposing Release at 21575.
8 Id.

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when making a recommendation of any
securities transaction or investment
strategy involving securities to a retail
customer, to act in the best interest of
the retail customer at the time the
recommendation is made without
placing the financial or other interest of
the broker-dealer or associated person
making the recommendation ahead of
the interest of the retail customer.
The Commission received substantial
comment on proposed Regulation Best
Interest. We received over 6,000
comment letters in connection with the
Proposing Release, of which
approximately 3,000 are unique
comment letters, from a variety of
commenters including individual
investors, consumer advocacy groups,
financial services firms (including
broker-dealers, investment advisers, and
insurance companies), investment
professionals, industry and trade
associations, state securities regulators,
bar associations, and others.11
The Commission also solicited
individual investors’ input through a
number of forums in addition to the
traditional requests for comment in the
Proposing Release. Among other things,
seven investor roundtables were held in
different locations across the country to
solicit further comment on the proposed
relationship summary,12 and the
Commission and its staff received inperson feedback from almost 200
attendees in total.13 The Commission
11 Comments received in response to the
Proposing Release are available at: https://
www.sec.gov/comments/s7-07-18/s70718.htm.
12 In a separate, concurrent rulemaking, the
Commission proposed to, among other things,
require broker-dealers and investment advisers to
deliver to retail investors a short relationship
summary (‘‘Relationship Summary’’). See Form CRS
Relationship Summary; Amendments to Form ADV;
Required Disclosures in Retail Communications and
Restrictions on the use of Certain Names or Titles,
Release No. 34–83063, IA–4888, File No. S7–08–18
(Apr. 18, 2018), 83 FR 23848 (May 23, 2018)
(‘‘Relationship Summary Proposal’’).
Along with adopting Regulation Best Interest, the
Commission is adopting Exchange Act Rule 17a–14
(CFR 240.17a–14) and Form CRS (17 CFR 249.640)
under the Exchange Act (‘‘Form CRS’’). See Form
CRS Relationship Summary; Amendments to Form
ADV Exchange Act Release No. 86032, Advisers Act
Release No. 5247, File No. S7–08–18 (June 5, 2019)
(‘‘Relationship Summary Adopting Release’’). The
Commission is also providing interpretations: (1)
Clarifying standards of conduct for investment
advisers, and (2) regarding when a broker-dealer’s
advisory services are solely incidental to the
conduct of the business of a broker or dealer. See
Fiduciary Interpretation; Commission Interpretation
Regarding the Solely Incidental Prong of the BrokerDealer Exclusion to the Definition of Investment
Adviser, Advisers Act Release No. 5249 (June 5,
2019) (‘‘Solely Incidental Interpretation’’).
13 The transcripts from the seven investor
roundtables, which took place in Atlanta,
Baltimore, Denver, Houston, Miami, Philadelphia,
and Washington DC, are available in the comment
file at https://www.sec.gov/comments/s7-08-18/
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also received input and
recommendations from a majority of its
Investor Advisory Committee (‘‘IAC’’)
on proposed Regulation Best Interest.14
After careful review and
consideration of comments received and
upon further consideration, the
Commission is adopting Regulation Best
Interest, with certain modifications as
compared to the Proposing Release. As
discussed below, while the Commission
The Commission also used a ‘‘feedback form’’
designed specifically to solicit input from retail
investors with a set of questions requesting both
structured and narrative responses, and received
more than 90 responses from individuals who
reviewed and commented on the sample proposed
relationship summaries published in the proposal.
The feedback forms are available in the comment
file at https://www.sec.gov/comments/s7-08-18/
s70818.htm.
Finally, the Commission’s Office of the Investor
Advocate engaged the RAND Corporation to
conduct investor testing of the proposed
relationship summary. Angela A. Hung, et al.,
RAND Corporation, Investor Testing of Form CRS
Relationship Summary (2018), available at https://
www.sec.gov/about/offices/investorad/investortesting-form-crs-relationship-summary.pdf (‘‘RAND
2018’’). See also Investor Testing of the Proposed
Relationship Summary for Investment Advisers and
Broker-Dealers, Commission Press Release 2018–
257 (Nov. 7, 2018), available at https://
www.sec.gov/news/press-release/2018-257. As
noted in the Relationship Summary Adopting
Release, the amount of information available from
the various investor surveys and investor testing
described in this release is extensive. We
considered all of this information thoroughly, using
our decades of experience with investor
disclosures, when evaluating changes to the
disclosure required by Regulation Best Interest, as
well as to the Relationship Summary. See
Relationship Summary Adopting Release.
14 Recommendation of the Investor as Purchaser
Subcommittee Regarding Proposed Regulation Best
Interest, Form CRS, and Investment Advisers Act
Fiduciary Guidance, Nov. 7, 2018, available at
https://www.sec.gov/spotlight/investor-advisorycommittee-2012/iac110718-investor-as-purchasersubcommittee-recommendation.pdf (‘‘IAC 2018
Recommendation’’). Generally, a majority of the
IAC made the following recommendations related
to Regulation Best Interest: (1) That the meaning of
the best interest obligation should be clarified to
require both broker-dealers, investment advisers,
and their associated persons to recommend the
investments, investment strategies, accounts, or
services, from among those they have reasonably
available to recommend, that they reasonably
believe represent the best available options for the
investor; (2) that the best interest obligation be
expanded to apply to the implicit ‘‘no
recommendation’’ recommendation that a broker
makes when reviewing an account and
recommending no change, to rollover
recommendations and recommendations by dual
registrant firms regarding account types; and (3)
that the best interest obligation should be explicitly
characterized as the fiduciary duty that it is, while
making clear that the specific obligations that flow
from that duty will vary based on differences in
business models. The Commission is statutorily
obligated to respond to the recommendations of the
IAC, which we are doing in this section and
throughout the adopting release in the relevant
sections, for example, in the discussion of the
General Obligation in Section II.A.1, the discussion
of recommendations in Section II.B.1,
Recommendation of Any Securities Transaction or
Investment Strategy Involving Securities, and the
Care Obligation in Section II.C.2.

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is generally retaining the overall
structure and scope set forth in the
Proposing Release, we are making
modifications to the text of the rule and
also providing interpretations and
guidance to address points raised during
the comment process.
The Commission has crafted
Regulation Best Interest to draw on key
principles underlying fiduciary
obligations, including those that apply
to investment advisers under the
Advisers Act, while providing specific
requirements to address certain aspects
of the relationships between brokerdealers and their retail customers.
Regulation Best Interest enhances the
existing standard of conduct applicable
to broker-dealers and their associated
persons at the time they recommend to
a retail customer a securities transaction
or investment strategy involving
securities. This includes
recommendations of account types and
rollovers or transfers of assets and also
covers implicit hold recommendations
resulting from agreed-upon account
monitoring. When making a
recommendation, a broker-dealer must
act in the retail customer’s best interest
and cannot place its own interests ahead
of the customer’s interests (hereinafter,
‘‘General Obligation’’).15 The General
Obligation is satisfied only if the brokerdealer complies with four specified
component obligations. The obligations
are: (1) Providing certain prescribed
disclosure before or at the time of the
recommendation, about the
recommendation and the relationship
between the retail customer and the
broker-dealer (‘‘Disclosure Obligation’’);
(2) exercising reasonable diligence, care,
and skill in making the recommendation
(‘‘Care Obligation’’); (3) establishing,
maintaining, and enforcing policies and
procedures reasonably designed to
address conflicts of interest (‘‘Conflict of
Interest Obligation’’), and (4)
establishing, maintaining, and enforcing
policies and procedures reasonably
designed to achieve compliance with
Regulation Best Interest (‘‘Compliance
Obligation’’).16
15 See

generally Section II.A, General Obligation.
discussed in further detail below, although
Regulation Best Interest identifies specified
obligations with which a broker-dealer must
comply in order to meet its General Obligation,
compliance with each of the component obligations
of Regulation Best Interest will be principles-based.
In other words, whether a broker-dealer has acted
in the retail customer’s best interest will turn on an
objective assessment of the facts and circumstances
of whether the specific components of Regulation
Best Interest are satisfied at the time that the
recommendation is made.
16 As

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Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations
First, under the Disclosure
Obligation,17 before or at the time of the
recommendation, a broker-dealer must
disclose, in writing, all material facts
about the scope and terms of its
relationship with the customer. This
includes a disclosure that the firm or
representative is acting in a brokerdealer capacity; the material fees and
costs the customer will incur; and the
type and scope of the services to be
provided, including any material
limitations on the recommendations
that could be made to the retail
customer. Moreover, the broker-dealer
must disclose all material facts relating
to conflicts of interest associated with
the recommendation that might incline
a broker-dealer to make a
recommendation that is not
disinterested, including, for example,
conflicts associated with proprietary
products, payments from third parties,
and compensation arrangements.
Second, under the Care Obligation,18
a broker-dealer must exercise reasonable
diligence, care, and skill when making
a recommendation to a retail customer.
The broker-dealer must understand
potential risks, rewards, and costs
associated with the recommendation.
The broker-dealer must then consider
those risks, rewards, and costs in light
of the customer’s investment profile and
have a reasonable basis to believe that
the recommendation is in the
customer’s best interest and does not
place the broker-dealer’s interest ahead
of the retail customer’s interest. A
broker-dealer should consider
reasonable alternatives, if any, offered
by the broker-dealer in determining
whether it has a reasonable basis for
making the recommendation. Whether a
broker-dealer has complied with the
Care Obligation will be evaluated as of
the time of the recommendation (and
not in hindsight). When recommending
a series of transactions, the brokerdealer must have a reasonable basis to
believe that the transactions taken
together are not excessive, even if each
is in the customer’s best interest when
viewed in isolation.
Third, under the Conflict of Interest
Obligation,19 a broker-dealer must
establish, maintain, and enforce
reasonably designed written policies
and procedures addressing conflicts of
interest associated with its
recommendations to retail customers.
These policies and procedures must be
reasonably designed to identify all such

conflicts and at a minimum disclose or
eliminate them. Importantly, the
policies and procedures must be
reasonably designed to mitigate
conflicts of interests that create an
incentive for an associated person of the
broker-dealer to place its interests or the
interest of the firm ahead of the retail
customer’s interest. Moreover, when a
broker-dealer places material limitations
on recommendations that may be made
to a retail customer (e.g., offering only
proprietary or other limited range of
products), the policies and procedures
must be reasonably designed to disclose
the limitations and associated conflicts
and to prevent the limitations from
causing the associated person or brokerdealer from placing the associated
person’s or broker-dealer’s interests
ahead of the customer’s interest. Finally,
the policies and procedures must be
reasonably designed to identify and
eliminate sales contests, sales quotas,
bonuses, and non-cash compensation
that are based on the sale of specific
securities or specific types of securities
within a limited period of time.
Fourth, under the Compliance
Obligation,20 a broker-dealer must also
establish, maintain, and enforce written
policies and procedures reasonably
designed to achieve compliance with
Regulation Best Interest as a whole.
Thus, a broker-dealer’s policies and
procedures must address not only
conflicts of interest but also compliance
with its Disclosure and Care Obligations
under Regulation Best Interest.
The enhancements contained in
Regulation Best Interest are designed to
improve investor protection by
enhancing the quality of broker-dealer
recommendations to retail customers
and reducing the potential harm to retail
customers that may be caused by
conflicts of interest. Regulation Best
Interest will complement the related
rules, interpretations, and guidance that
the Commission is concurrently
issuing.21 Individually and collectively,
these actions are designed to help retail
customers better understand and
compare the services offered by brokerdealers and investment advisers and
make an informed choice of the
relationship best suited to their needs
and circumstances, provide clarity with
respect to the standards of conduct
applicable to investment advisers and
broker-dealers, and foster greater
consistency in the level of protections
provided by each regime, particularly at

17 See generally Section II.C.1, Disclosure
Obligation.
18 See generally Section II.C.2, Care Obligation.
19 See generally Section II.C.3, Conflict of Interest
Obligation.

20 See generally Section II.C.4, Compliance
Obligation.
21 See Relationship Summary Adopting Release;
Fiduciary Interpretation; Solely Incidental
Interpretation.

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the point in time that a recommendation
is made.22
At the time a recommendation is
made, key elements of the Regulation
Best Interest standard of conduct that
applies to broker-dealers will be similar
to key elements of the fiduciary
standard for investment advisers.23
Importantly, regardless of whether a
retail investor chooses a broker-dealer or
an investment adviser (or both), the
retail investor will be entitled to a
recommendation (from a broker-dealer)
or advice (from an investment adviser)
that is in the best interest of the retail
investor and that does not place the
interests of the firm or the financial
professional ahead of the interests of the
retail investor.
There are also key differences
between Regulation Best Interest and
the Advisers Act fiduciary standard that
reflect the distinction between the
services and relationships typically
offered under the two business models.
For example, an investment adviser’s
fiduciary duty generally includes a duty
to provide ongoing advice and
monitoring,24 while Regulation Best
Interest imposes no such duty and
instead requires that a broker-dealer act
in the retail customer’s best interest at
the time a recommendation is made. In
addition, the new obligations applicable
to broker-dealers under Regulation Best
Interest are more prescriptive than the
obligations applicable to investment
advisers under the Advisers Act
fiduciary duty and reflect the
characteristics of the generally
applicable broker-dealer business
model.25
The Commission has been studying
and carefully considering the issues
related to the standard of conduct for
broker-dealers for many years, which
led to the development of Regulation
Best Interest.26 In designing Regulation
Best Interest, we considered a number of
options to enhance investor protection,
while preserving, to the extent possible,
retail investor access (in terms of choice
and cost) to differing types of
investment services and products. There
22 We believe each rule and interpretation stands
on its own and enhances the effectiveness of
existing rules, and is reinforced by the other rules
and interpretations being adopted
contemporaneously.
23 Specifically, an investment adviser’s fiduciary
duty under the Advisers Act comprises a duty of
care and a duty of loyalty. This combination of care
and loyalty obligations has been characterized as
requiring the investment adviser to act in the ‘‘best
interest’’ of its client at all times. See Fiduciary
Interpretation.
24 See Fiduciary Interpretation, Section II.B.3
(Duty to Provide Advice and Monitoring over the
Course of the Relationship).
25 See, e.g., Sections II.A and III.E.
26 Proposing Release at 21579–21583.

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were several options, including, among
others: (1) Applying the fiduciary
standard under the Advisers Act to
broker-dealers; (2) adopting a ‘‘new’’
uniform fiduciary standard of conduct
that would apply equally to both brokerdealers and investment advisers, such as
that recommended by the staff in the
913 Study; 27 and (3) the path we
ultimately chose, adopting a new
standard of conduct specifically for
broker-dealers, which draws from key
principles underlying fiduciary
obligations, including those that apply
to investment advisers under the
Advisers Act.28 The standard also
provides specific requirements to
address certain aspects of the
relationships between broker-dealers
and their retail customers, including
certain conflicts related to
compensation of associated persons.29
We have declined to subject brokerdealers to a wholesale and complete
application of the existing fiduciary
standard under the Advisers Act
because it is not appropriately tailored
to the structure and characteristics of
the broker-dealer business model (i.e.,
transaction-specific recommendations
and compensation), and would not
properly take into account, and build
upon, existing obligations that apply to
broker-dealers, including under FINRA
rules.30 Moreover, we believe (and our
experience indicates), that this approach
would significantly reduce retail
investor access to differing types of
investment services and products,
reduce retail investor choice in how to
pay for those products and services, and
increase costs for retail investors of
27 One of the staff’s primary recommendations
was that the Commission engage in rulemaking to
adopt and implement a uniform fiduciary standard
of conduct for broker-dealers and investment
advisers when providing personalized investment
advice about securities to retail customers. The
staff’s recommended standard would require firms
‘‘to act in the best interest of the customer without
regard to the financial or other interest of the
broker, dealer or investment adviser providing the
advice.’’ The staff made a number of specific
recommendations for implementing the uniform
fiduciary standard of conduct, including that the
Commission should: (1) Require firms to eliminate
or disclose conflicts of interest; (2) consider
whether rulemaking would be appropriate to
prohibit certain conflicts, to require firms to
mitigate conflicts through specific action, or to
impose specific disclosure and consent
requirements; and (3) consider specifying uniform
standards for the duty of care owed to retail
customers, such as specifying what basis a brokerdealer or investment adviser should have in making
a recommendation to a retail customer by referring
to and expanding upon broker-dealers’ existing
suitability requirements. See generally 913 Study.
28 See supra footnote 23.
29 In addition to these alternatives, we also
considered several other reasonable alternatives.
See Section III.E.
30 See also 913 Study at 139–143.

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obtaining investment
recommendations.31
We have also declined to craft a new
uniform standard that would apply
equally and without differentiation to
both broker-dealers and investment
advisers. Adopting a ‘‘one size fits all’’
approach would risk reducing investor
choice and access to existing products,
services, service providers, and payment
options, and would increase costs for
firms and for retail investors in both
broker-dealer and investment adviser
relationships. Moreover, applying a new
uniform standard to advisers would
mean jettisoning to some extent the
fiduciary standard under the Advisers
Act that has worked well for retail
clients and our markets and is backed
by decades of regulatory and judicial
precedent.
Our concerns about the ramifications
for investor access, choice, and cost
from adopting either of these
approaches are not theoretical. With the
adoption of the now vacated
Department of Labor (‘‘DOL’’) Fiduciary
Rule,32 there was a significant reduction

in retail investor access to brokerage
services,33 and we believe that the
available alternative services were
higher priced in many circumstances.34
Moreover, because key elements of the
standard of conduct that Regulation Best
Interest applies to broker-dealers at the
time that a recommendation is made to
a retail customer will be substantially
similar to key elements of the standard
of conduct that applies to investment
advisers pursuant to their fiduciary duty
under the Advisers Act, we do not
believe that applying the existing
fiduciary standard under the Advisers
Act to broker-dealers or adopting a new
uniform fiduciary standard of conduct
applicable to both broker-dealers and
investment advisers would provide any
greater investor protection (or, in any
case, that any benefits would justify the
costs imposed on retail investors in
terms of reduced access to services,
products, and payment options, and
increased costs for such services and
products).
We acknowledge certain commenters
urged the Commission to take additional

31 See, e.g., Section 913 Study. at 143–159 for the
study’s consideration of the potential costs,
expenses, and impacts of various regulatory
changes related to the provision of personalized
investment advice to retail investors. See also
Section II.A.1, Commission’s Approach.
32 As discussed in more detail in the Proposing
Release, on April 8, 2016, the DOL adopted a new,
expanded definition of ‘‘fiduciary’’ that treats
persons who provide investment advice or
recommendations for a fee or other compensation
with respect to assets of a plan subject to the
Employee Retirement Income Security Act of 1974
(‘‘ERISA’’) (an ‘‘ERISA plan’’) or individual
retirement account (‘‘IRA’’) as fiduciaries in a wider
array of advice relationships than under the
previous regulation and issued certain related
prohibited transaction exemptions (‘‘PTEs’’)
(together, the ‘‘DOL Fiduciary Rule’’). The rule was
subsequently vacated in toto by the United States
Court of Appeals for the Fifth Circuit. See Chamber
of Commerce v. U.S. Dep’t of Labor, 885 F.3d 360
(5th Cir. 2018).
We understand that in the absence of a PTE,
broker-dealers that would be considered to be a
‘‘fiduciary’’ for purposes of ERISA and the Internal
Revenue Code (the ‘‘Code’’) would be prohibited
from engaging in purchases and sales of certain
investments for their own account (i.e., engaging in
principal transactions) and would be prohibited
from receiving common forms of broker-dealer
compensation (notably, transaction-based
compensation). See DOL, Best Interest Contract
Exemption, 81 FR 21002 (Apr. 8, 2016) (‘‘BIC
Exemption Release’’). To avoid this result, the DOL
published, among other PTEs, the Best Interest
Contract Exemption (‘‘BIC Exemption’’), which
would have provided conditional relief for an
‘‘adviser,’’ as that term is used in the context of the
BIC Exemption, and the adviser’s firm, to receive
common forms of ‘‘conflicted’’ compensation, such
as commissions and third-party payments (such as
revenue sharing), provided that the adviser’s firm
met certain conditions. See id. Generally, the BIC
Exemption and other PTEs required that, among
other things, the advice be provided pursuant to a
written contract that commits the firm and the
adviser to adhere to standards of impartial conduct,
including providing advice in the investor’s best

interest; charging only reasonable compensation;
and avoiding misleading statements about fees and
conflicts of interest) (‘‘Impartial Conduct
Standards’’). See generally id. See also Proposing
Release at 21580–21582.
33 While the full effects of the DOL Fiduciary Rule
were not realized as it was vacated during the
transition period, a number of industry studies
indicated that, as a result of the DOL Fiduciary
Rule, industry participants had already or were
planning to alter services and products available to
retail customers. For example, of the 21 members
of the Securities Industry and Financial Markets
Association (‘‘SIFMA’’) that participated in the
SIFMA Study, 53% eliminated or reduced access to
brokerage advice services and 67% migrated away
from open choice to fee-based or limited brokerage
services. See SIFMA & Deloitte, The DOL Fiduciary
Rule: A Study on How Financial Institutions Have
Responded and the Resulting Impacts on
Retirement Investors (Aug. 9, 2017), available at
https://www.sifma.org/wp-content/uploads/2017/
08/Deloitte-White-Paper-on-the-DOL-FiduciaryRule-August-2017.pdf (‘‘SIFMA Study’’). Other
studies also saw shifts from commission-based
accounts to fee-based accounts. See infra footnote
1009. In addition, an industry study found that
some customers were shifted from commissionbased brokerage accounts to self-directed accounts,
while the same study observed that 29% of their
survey participants expected to move clients,
particularly those with low account balances, to
robo-advisors. See infra footnote 1010.
34 It was widely reported that a number of firms
responded to the DOL Fiduciary Rule by either
requiring customers to enter into more expensive
advice relationships or by passing through higher
compliance costs to customers, which altered many
retail customer relationships with their financial
professionals. See infra footnote 1007. From the
SIFMA Study, for those firms whose retail
customers faced eliminated or reduced brokerage
advice services, 63% of firms had customers that
chose to move to self-directed accounts rather than
fee-based accounts and cited the customers’ reasons
as ‘‘not wanting to move to a fee-based model, not
in the best interest to move to a fee-based model,
did not meet account minimums, or wanted to
maintain positions in certain asset classes
prohibited by the fee-based models.’’

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Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations
or different regulatory actions than the
approach we have adopted, including
the alternatives discussed above. We do
not believe that any rulemaking
governing retail investor-advice
relationships can solve for every issue
presented. After careful consideration of
the comments and additional
information we have received,35 we
believe that Regulation Best Interest, as
modified, appropriately balances the
concerns of the various commenters in
a way that will best achieve the
Commission’s important goals of
enhancing retail investor protection and
decision making, while preserving, to
the extent possible, retail investor
access (in terms of choice and cost) to
differing types of investment services
and products.36
The Commission’s staff will offer
firms significant assistance and support
during the transition period and
thereafter with the aim of helping to
ensure that the investor protections and
other benefits of the final rule are
implemented in an efficient and
effective manner. Further, we will
continue to monitor the effectiveness of
Regulation Best Interest in achieving the
Commission’s goals.
C. Overview of Modifications to the
Proposed Rule Text and Guidance
Provided
The vast majority of commenters
supported the Commission’s rulemaking
efforts to address the standards of
conduct that apply to broker-dealers
when making recommendations, but
nearly all commenters suggested
modifications to proposed Regulation
Best Interest.37 These suggestions touch
on almost every aspect of the proposal,
as discussed in more detail below. A
variety of commenters offered
suggestions on the overall structure and
35 See

supra footnotes 11–13 and accompanying

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36 If any of the provisions of these rules, or the
application thereof to any person or circumstance,
is held to be invalid, such invalidity shall not affect
other provisions or application of such provisions
to other persons or circumstances that can be given
effect without the invalid provision or application.
37 See, e.g., Letter from David Certner, Legislative
Counsel and Legislative Policy Director, AARP
(Aug. 7, 2018) (‘‘AARP August 2018 Letter’’); Letter
from Christopher Gilkerson, Senior Vice President
and General Counsel, and Tara Tune, Director and
Corporate Counsel, Charles Schwab & Co., Inc.
(Aug. 6, 2018) (‘‘Schwab Letter’’); Letter from
Barbara Roper, Director of Investor Protection, and
Micah Hauptman, Financial Services Counsel,
Consumer Federation of America (‘‘CFA’’) (Aug. 7,
2018) (‘‘CFA August 2018 Letter’’); Letter from
Joseph Borg, President, North American Securities
Administrators Association, Inc. (‘‘NASAA’’) (Aug.
23, 2018) (‘‘NASAA August 2018 Letter’’); Letter
from Kenneth E. Bentsen, Jr., President and Chief
Executive Officer, SIFMA (Aug. 7, 2018) (‘‘SIFMA
August 2018 Letter’’).

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scope of the proposed rule, including:
whether the standard should be a
fiduciary standard; 38 whether the
standard should apply to both
investment advisers and brokerdealers; 39 whether the standard should
be principles-based or more
prescriptive; 40 whether the standard
should define ‘‘best interest;’’ 41 whether
38 See, e.g., Letter from Jon Stein, Founder and
CEO, Benjamin T. Alden, General Counsel, and
Seth Rosenbloom, Associate General Counsel,
Betterment (Aug. 7, 2018) (‘‘Betterment Letter’’);
Letter from Kurt N. Schacht, Managing Director,
James Allen, Head, Capital Markets Policy, and
Linda L. Rittenhouse, Director, Capital Markets,
CFA Institute (Aug. 7, 2018) (‘‘CFA Institute
Letter’’); Letter from Jill I. Gross, Associate Dean for
Academic Affairs, Professor of Law, Elisabeth Haub
School of Law, Pace University (Mar. 11, 2019)
(‘‘Pace March 2019 Letter’’); Letter from Sharon
Cheever, Senior Vice President and General
Counsel, Pacific Life Insurance Company (Aug. 3,
2018) (‘‘Pacific Life August 2018 Letter’’); Letter
from Melanie Fein, Fein Law Offices (Jun. 6, 2018)
(‘‘Fein Letter’’); Letter from Elizabeth Warren, U.S.
Senator (Aug. 3, 2018) (‘‘Warren Letter’’); Letter
from Dean P. McDermott, McDermott Investment
Advisors (Jul. 7, 2018) (‘‘McDermott Letter’’); Letter
from Brian Hamburger, President and CEO,
MarketCounsel (Aug. 7, 2018) (‘‘MarketCounsel
Letter’’).
39 See, e.g., AARP August 2018 Letter; Letter from
Americans for Financial Reform et al. (Aug. 7, 2018)
(‘‘Americans for Financial Reform Letter’’); Letter
from Robert J. Moore, Chief Executive Officer,
Cetera Financial Group (‘‘Cetera’’) (Aug. 7, 2018)
(‘‘Cetera August 2018 Letter’’); Letter from L.A.
Schnase, Individual Investor and Attorney at Law
(Jul. 30, 2018) (‘‘Schnase Letter’’); Pacific Life
August 2018 Letter; Pace March 2019 Letter;
MarketCounsel Letter; Letter from Dennis M.
Kelleher, President and CEO, Stephen Hall, Legal
Director and Securities Specialist, Lev Bagramian,
Senior Securities Policy Advisor, Better Markets
(Aug. 7, 2018) (‘‘Better Markets August 2018
Letter’’); Letter from Attorneys General of New
York, California, Connecticut, Delaware, Hawaii,
Illinois, Maine, Maryland, Massachusetts,
Minnesota, New Mexico, Oregon, Pennsylvania,
Rhode Island, Vermont, Washington, and the
District of Columbia (Aug. 7, 2018) (‘‘State
Attorneys General Letter’’).
40 See, e.g., SIFMA August 2018 Letter; Letter
from Mortimer J. Buckley, President and Chief
Executive Officer, Vanguard (Aug. 7, 2018)
(‘‘Vanguard Letter’’); Letter from Chris Lewis,
General Counsel, Edward Jones (Aug. 7, 2018)
(‘‘Edward Jones Letter’’); Letter from Joseph E.
Sweeney, President, Advice & Wealth Management
Products and Service Delivery, Ameriprise
Financial (Aug. 6, 2018) (‘‘Ameriprise Letter’’);
Letter from Sheila Kearney Davidson, Executive
Vice President, Chief Legal Officer & General
Counsel, New York Life Insurance Company (‘‘NY
Life’’) (Aug. 7, 2018) (‘‘NY Life Letter’’); Letter from
Keith Gillies, NAIFA President, National
Association of Insurance and Financial Advisors
(‘‘NAIFA’’) (Aug. 2, 2018) (‘‘NAIFA Letter’’); Letters
from Tom Quaadman, Executive Vice President,
Center for Capital Markets Competitiveness, U.S.
Chamber of Commerce (‘‘CCMC’’) (Aug. 7, 2018)
(supplemented by letter dated Sep. 5, 2018)
(‘‘CCMC Letters’’); Letter from Dave Paulsen,
Executive Vice President, Chief Distribution Officer,
Transamerica (Aug. 7, 2018) (‘‘Transamerica August
2018 Letter’’).
41 See, e.g., Letter from Seth A. Miller, General
Counsel, Senior Vice President, Chief Risk Officer,
Cambridge (Aug. 7, 2018) (‘‘Cambridge Letter’’);
SIFMA August 2018 Letter; Vanguard Letter;
Edward Jones Letter; Ameriprise Letter; NY Life

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the standard is or should be a safe
harbor; 42 what should be considered a
recommendation, including whether
Regulation Best Interest should apply to
recommendations to roll over or transfer
assets or take plan distributions, and to
recommendations of particular account
types (i.e., brokerage or advisory); 43
whether Regulation Best Interest should
apply to account monitoring services
provided by a broker-dealer, or impose
a continuing duty; 44 and whether
Regulation Best Interest’s protections
should apply to a broader or narrower
set of ‘‘retail customers.’’ 45
Letter; NAIFA Letter; CCMC Letters; Letter from
Aron Szapiro, Director of Policy Research,
Morningstar (Aug. 7, 2018) (‘‘Morningstar Letter’’);
Letter from David Kowach, Head of Wells Fargo
Advisors, Wells Fargo (Aug. 7, 2018) (‘‘Wells Fargo
Letter’’).
42 See, e.g., CFA August 2018 Letter; Letter from
Anthony Chereso, President & CEO, Institute for
Portfolio Alternatives (‘‘IPA’’) (Aug. 7, 2018) (‘‘IPA
Letter’’); Letter from Heather Slavkin Corzo, AFL–
CIO et al. (Apr. 26, 2019) (‘‘AFL–CIO April 2019
Letter’’).
43 See, e.g., Letter from Jason Bortz, Senior
Counsel, Capital Research and Management
Company (Aug. 7, 2018) (‘‘Capital Group Letter’’);
Letter from Andrew Stoltmann, President, Public
Investors Arbitration Bar Association (‘‘PIABA’’)
(Aug. 7, 2018) (‘‘PIABA Letter’’); SIFMA August
2018 Letter; NASAA Letter; Letter from Robert K.
Shaw, President, Individual Markets, Great-West
Financial (Aug. 7, 2018) (‘‘Great-West Letter’’);
NAIFA Letter; Transamerica August 2018 Letter;
Letter from Tim Rouse, Executive Director, The
SPARK Institute (Aug. 7, 2018) (‘‘SPARK Letter’’);
Letter from Robin C. Swope, Director, Global
Product Governance & Support, Invesco (Aug. 7,
2018) (‘‘Invesco Letter’’); Letter from R. Keith
Overly, President, National Association of
Government Defined Contribution Administrators
(‘‘NAGDCA’’) (Aug. 7, 2018) (‘‘NAGDCA Letter’’);
Letter from Kevin R. Keller, Chief Executive Officer,
CFP Board, et al., Financial Planning Coalition
(‘‘FPC’’) (Aug. 7, 2018) (‘‘FPC Letter’’); Letter from
Dennis Simmons, Executive Director, Committee on
Investment of Employee Benefit Assets, Committee
on Investment of Employee Benefit Assets
(‘‘CIEBA’’) (Aug. 6, 2018) (‘‘CIEBA Letter’’).
44 See, e.g., SIFMA August 2018 Letter; Letter
from Lisa D. Crossley, Executive Director, National
Society of Compliance Professionals (‘‘NSCP’’)
(Aug. 7, 2018) (‘‘NSCP Letter’’); PIABA Letter; FPC
Letter; Better Markets August 2018 Letter; Letter
from Karen L. Barr, President and CEO, Investment
Adviser Association (‘‘IAA’’) (Aug. 6, 2018) (‘‘IAA
August 2018 Letter’’).
We also received comments addressing when a
broker-dealer’s advisory services are ‘‘solely
incidental to the conduct of his business as a broker
or dealer’’ under the ‘‘broker-dealer exclusion’’ from
the definition of investment adviser—and thus from
the application of the Advisers Act—provided in
Section 202(a)(11)(C) of the Advisers Act. We have
addressed these comments in the context of the
Solely Incidental Interpretation.
45 See, e.g., Letter from Carl B. Wilkerson, Vice
President and Chief Counsel, American Council of
Life Insurers (‘‘ACLI’’) (Aug. 3, 2018) (‘‘ACLI
Letter’’); Letter from Brian H. Graff, Executive
Director and CEO, Craig P. Hoffman, General
Counsel, Dough Fisher, Director of Retirement
Policy, and Joseph A. Caruso, Government Affairs
Counsel, American Retirement Association
(‘‘ARA’’) (Aug. 3, 2018) (‘‘ARA August 2018
Letter’’); Letter from Anne Tennant, Managing

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In addition, most commenters from
both industry and consumer advocate
groups requested modifications to each
of the Disclosure, Care, and Conflict of
Interest Obligations, and also called for
more specific examples of conduct that
would—or would not—satisfy these
obligations. With respect to the
Disclosure Obligation, most commenters
generally sought greater clarity or made
suggestions regarding what material
facts and material conflicts would need
to be disclosed, the form and manner
(e.g., written versus oral, individualized
versus standardized, and the use of
electronic and/or layered) and the
timing and frequency of the disclosure
(e.g., whether the disclosure should be
prior to, at the time of, or could be after
a recommendation), as well as whether
the Disclosure Obligation could be
satisfied by complying with other
existing disclosure requirements.46 In
Director and General Counsel, Morgan Stanley
(Aug. 7, 2018) (‘‘Morgan Stanley Letter’’); CCMC
Letters; Letter from Thomas Roberts, Groom Law
Group (Aug. 7, 2018) (‘‘Groom Letter’’); Letter from
Catherine J. Weatherford, President and CEO,
Insured Retirement Institute (‘‘IRI’’) (Aug. 7, 2018)
(‘‘IRI Letter’’); NSCP Letter; Letter from Raymond J.
Manista, Executive Vice President, Chief Legal
Officer and Secretary, Northwestern Mutual (Aug.
7, 2018) (‘‘Northwestern Mutual Letter’’); State
Attorneys General Letter; Letter from Mari-Anne
Pisarri, Pickard Djinis and Pisarri LLP (Aug. 14,
2018) (‘‘Pickard Letter’’); SIFMA August 2018
Letter; Invesco Letter; Letter from Tom Clark,
Managing Director, Sean Murphy, Vice President,
Blackrock (Aug. 7, 2018) (‘‘Blackrock Letter’’).
46 See, e.g., Ameriprise Letter; Great-West Letter;
Letter from Ram Subramaniam, Head of Brokerage
and Investment Solutions, David Forman, Chief
Legal Officer, Fidelity Investments (Aug. 7, 2018)
(‘‘Fidelity Letter’’); Morgan Stanley Letter; CCMC
Letters; Letter from Bret C. Hester, Senior Managing
Director, Head of Regulatory Affairs, Teachers
Insurance and Annuity Association of America
(‘‘TIAA’’) (Aug. 7, 2018) (‘‘TIAA Letter’’); Letter
from James Sonne, Assistant Vice President, Federal
Government Relations, Mass Mutual (Feb. 19, 2019)
(‘‘Mass Mutual Letter’’); Letter from Edmund F.
Murphy III, President, Empower Retirement (Aug.
2, 2018) (‘‘Empower Retirement Letter’’); IRI Letter;
Letter from Paul Schott Stevens, President and CEO,
Investment Company Institute (‘‘ICI’’) (Aug. 7, 2018)
(‘‘ICI Letter’’); SIFMA August 2018 Letter; Edward
Jones Letter; Letter from Michelle Bryan
Oroschakoff, Chief Legal Officer, LPL Financial
(Aug. 7, 2018) (‘‘LPL August 2018 Letter’’); NASAA
August 2018 Letter; AARP August 2018 Letter;
PIABA Letter; Letter from Ann M. Kappler, Senior
Vice President, Deputy General Counsel, Prudential
Financial (Aug. 7, 2018) (‘‘Prudential Letter’’), CFA
Institute Letter; State Attorneys General Letter; CFA
August 2018 Letter; Letter from Jason Chandler,
Group Managing Director, Co-Head Investment
Platforms and Solutions, and Michael Crowl, Group
Managing Director, General Counsel, UBS (Aug. 7,
2018) (‘‘UBS Letter’’), Letter from William F.
Galvin, Secretary of the Commonwealth of
Massachusetts (Aug. 7, 2018) (‘‘Galvin Letter’’);
Letter from David T. Bellaire, Executive Vice
President & General Counsel, Financial Services
Institute (‘‘FSI’’) (Aug. 7, 2018) (‘‘FSI August 2018
Letter’’); Mass Mutual Letter; Schwab Letter; Letter
from Michael F. Anderson, Senior Vice President
and Chief Legal Officer, CUNA Mutual (Aug. 7,
2018) (‘‘CUNA Letter’’); Transamerica August 2018
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particular, several commenters
recommended that the Commission
require broker-dealers provide ‘‘full and
fair’’ disclosure.47
Regarding the Care Obligation,
commenters from certain investor
groups supported incorporating a
‘‘prudence’’ standard,48 while a number
of industry commenters expressed
concern about including this standard.49
Numerous commenters requested
further clarity on what would be
required to meet the Care Obligation,
including what factors a broker-dealer
should consider in developing a retail
customer’s investment profile and when
making a recommendation, and in
particular the role of cost and other
relevant factors when making a
recommendation, and also asked for
more specific examples of how to weigh
costs against other factors when making
a recommendation.50 A majority of the
IAC and other commenters requested
clarification on how to consider
‘‘reasonably available alternatives’’
when making a recommendation and
suggested clarifying the scope of the
inquiry into potential reasonably
available alternatives when a brokerdealer offers a limited product menu
versus when the broker-dealer has an
‘‘open architecture’’ model.51 Several
industry commenters made
recommendations regarding the
application of proposed Regulation Best
Interest to recommendations of specific
categories of securities, such as variable
annuities or leveraged exchange-traded
products.52
47 See, e.g., CFA August 2018 Letter; Better
Markets August 2018 Letter; Pace Letter.
48 See, e.g., AARP August 2018 Letter; CFA
August 2018 Letter; FPC Letter.
49 See, e.g., Letter from Karen L. Sukin, Executive
Vice President, Deputy General Counsel, Primerica
(Aug. 7, 2018) (‘‘Primerica Letter’’); Transamerica
August 2018 Letter; IPA Letter; Cetera August 2018
Letter.
50 See, e.g., Letter from Felice R. Foundos,
Partner, Chapman and Cutler (Aug. 6, 2018)
(‘‘Chapman Letter’’); Vanguard Letter; ICI Letter;
Morgan Stanley Letter; Wells Fargo Letter;
Primerica Letter; Great-West Letter; NASAA August
2018 Letter; Cambridge Letter; Blackrock Letter.
51 See, e.g., IAC 2018 Recommendation; Fidelity
Letter; ICI Letter; SIFMA August 2018 Letter;
Prudential Letter; LPL August 2018 Letter;
Morningstar Letter. See also AFL–CIO April 2019
Letter (stating that the rule ‘‘must make clear that
brokers are required to recommend the investments
they reasonably believe are the best match for the
investor from among the reasonably available
investment options’’).
52 See, e.g., Letter from Brian Winikoff, Senior
Executive Director and Head of U.S. Life,
Retirement and Wealth Management, AXA (Aug. 7,
2018) (‘‘AXA Letter’’); Letter from Clifford Kirsch,
Susan Krawczyk, Eversheds Sutherland, Committee
of Annuity Insurers (Aug. 7, 2018) (‘‘Committee of
Annuity Insurers Letter’’); Pacific Life August 2018
Letter; Letter from Angela Brickl, General Counsel,
Rafferty Asset Management (‘‘Direxion’’) (Aug. 7,
2018) (‘‘Direxion Letter’’); Letter from Mark F.

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With respect to the Conflict of Interest
Obligation, many commenters
questioned the distinction between
financial incentives that would have to
be mitigated and other conflicts that
would only need to be disclosed, and
recommended generally that the
distinction be eliminated.53 In addition,
some commenters suggested that the
obligation to establish policies and
procedures to mitigate conflicts should
apply to material conflicts at the level
of the natural person who is an
associated person (as opposed to the
firm).54 Commenters also asked for more
clarity and examples of what conflicts
must be mitigated versus eliminated and
more guidance on appropriate
mitigation methods.55 Some
commenters also expressed the view
that by requiring mitigation of financial
incentives, proposed Regulation Best
Interest would require more of brokerdealers than what is required of
investment advisers under their
fiduciary duty, which could create a
competitive disadvantage for brokerdealers that could further encourage
migration from the broker-dealer to
investment adviser business model and
result in a loss of retail investor access
(in terms of choice and cost) to differing
types of investment services and
products.56
In addition, a number of commenters
agreed with the Commission’s statement
that it was not intended to create a
private right of action, but many
requested that the Commission
explicitly state in the final rule that
Regulation Best Interest does not confer
a private right of action.57 One
Halloran, VP Managing Director, Business
Development, Transamerica (Nov. 9, 2018)
(‘‘Transamerica November 2018 Letter’’).
53 See, e.g., CFA August 2018 Letter; SIFMA
August 2018 Letter; Primerica Letter; Letter from
Jeff Hartney, Executive Director, Bank Insurance
and Securities Association (‘‘BISA’’) (Aug. 7, 2018)
(‘‘BISA Letter’’); Committee of Annuity Insurers
Letter; IPA Letter; CFA Institute Letter; Morgan
Stanley Letter; CCMC Letters.
54 See, e.g., Primerica Letter; TIAA Letter; ICI
Letter; Letter from Craig D. Pfeiffer, President and
CEO, Money Management Institute (Aug. 7, 2018)
(‘‘Money Management Institute Letter’’).
55 See, e.g., AALU Letter; CFA August 2018
Letter; Letter from Quinn Curtis, Professor of Law,
University of Virginia School of Law (‘‘UVA’’),
(Aug. 3, 2018) (‘‘UVA Letter’’); Primerica Letter;
Committee of Annuity Insurers Letter; Cetera
August 2018 Letter; Wells Fargo Letter; NASAA
August 2018 Letter; Morningstar Letter.
56 See, e.g., Letter from Craig S. Tyle, Executive
Vice President and General Counsel, Franklin
Templeton Investments, (Aug. 6, 2018) (‘‘Franklin
Templeton Letter’’); Primerica Letter; LPL August
2018 Letter; CCMC Letters; UBS Letter; ICI Letter;
Letter from Christopher A. Iacovella, Chief
Executive Officer, American Securities Association
(‘‘ASA’’) (Aug. 7, 2018) (‘‘ASA Letter’’); Schwab
Letter.
57 See, e.g., Letter from Paul C. Reilly, Chairman
and CEO, Raymond James Financial (Aug. 7, 2018)

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commenter requested that the
Commission elaborate and make clear
the remedies available to investors
when broker-dealers violate Regulation
Best Interest and emphasize that
scienter is not required to establish a
violation of Regulation Best Interest.58
Finally, numerous commenters urged
the Commission to coordinate with
other regulators, in particular the DOL 59
and state securities and insurance
regulators,60 and several commenters
opined that the Commission should
preempt (or avoid preempting) state
law.61
After carefully reviewing the
comments on the proposed rule, we
have determined to retain its overall
structure and scope. However, we have
modified the proposed rule in a number
of respects and are also providing
additional interpretations and guidance
to address and clarify issues raised by
commenters. Summarized below are the
key modifications from the proposal, as
well as the interpretations and guidance
provided.
• Retail Customer Definition: We are
modifying the definition of ‘‘retail
(‘‘Raymond James Letter’’); NAIFA Letter; ASA
Letter; CCMC Letters; UBS Letter; LPL August 2018
Letter; Cambridge Letter. Contra Letter from Elise
Sanguinetti, President, American Association for
Justice (Aug. 6, 2018) (‘‘American Association for
Justice Letter’’).
58 NASAA August 2018 Letter.
59 See, e.g., ICI Letter; Franklin Templeton Letter;
Morningstar Letter; Wells Fargo Letter; Edward
Jones Letter; IRI Letter; Letter from Cynthia Lo
Bessette, Executive Vice President and General
Counsel, Letter from Oppenheimer Funds (Aug. 7,
2018) (‘‘Oppenheimer Letter’’); Vanguard Letter.
60 See, e.g., CCMC Letters; Letter from Robert
Reynolds, President and CEO, Putnam Investments
(Aug. 7, 2018) (‘‘Putnam Letter’’); Letter from Will
H. Fuller, Executive Vice President, President,
Annuity Solutions, Lincoln Financial Group (Nov.
13, 2018) (‘‘Lincoln Financial Letter’’); Cetera
August 2018 Letter; Great-West Letter; Letter from
Marc Cadin, Chief Operating Officer, Association of
Advanced Life Underwriting (‘‘AALU’’) (Aug. 7,
2018) (‘‘AALU Letter’’); IRI Letter; Pacific Life
August 2018 Letter; Vanguard Letter; Fidelity
Letter; Letter from Andrew J. Bowden, Senior Vice
President and General Counsel, Jackson National
Life Insurance Company (Aug. 7, 2018) (‘‘Jackson
National Letter’’); Invesco Letter; Lincoln Letter;
CUNA Mutual Letter; Great-West Letter.
61 See, e.g., Cetera August 2018 Letter; ICI Letter;
Franklin Templeton Letter; Putnam Investments
Letter; but see NASAA August 2018 Letter; PIABA
Letter; Letter from Teresa J. Verges, Director,
Investor Rights Clinic, University of Miami School
of Law (Aug. 2, 2018) (‘‘U. of Miami Letter’’); Letter
from Kayla Martin, Legal Intern, Christine Lazaro,
Director and Professor Clinical Legal Education,
Securities Arbitration Clinic, St. John’s University
School of Law (Aug. 7, 2018) (‘‘St. John’s U.
Letter’’); Letter from Kevin M. Carroll, Managing
Director & Associate General Counsel, SIFMA (Mar.
29, 2019) (‘‘SIFMA March 2019 Letter’’); Letter from
Michael Pieciak, NASAA President and
Commissioner, Vermont Department of Regulation,
NASAA (Apr. 25, 2019); Letter from Tom
Quaadman, Executive Vice President, CCMC (May
16, 2019) (‘‘CCMC May 2019 Letter’’); AFL–CIO
April 2019 Letter.

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customer’’ to include any natural
person who receives a recommendation
from the broker-dealer for the natural
person’s own account (but not an
account for a business that he or she
works for), including individual plan
participants.62 We are interpreting
‘‘legal representative of such natural
person’’ to include the nonprofessional
legal representatives of such a natural
person (e.g., nonprofessional trustee
who represents the assets of a natural
person).
• Implicit Hold Recommendations:
While broker-dealers will not be
required to monitor accounts, in
instances where a broker-dealer agrees
to provide the retail customer with
specified account monitoring services, it
is our view that such an agreement will
result in buy, sell or hold
recommendations subject to Regulation
Best Interest, even when the
recommendation to hold is implicit.63
• Recommendations of account types,
including recommendations to roll over
or transfer assets from one type of
account to another: We are modifying
Regulation Best Interest to expressly
apply to account recommendations
including, among others,
recommendations to roll over or transfer
assets in a workplace retirement plan
account to an IRA, recommendations to
open a particular securities account
(such as brokerage or advisory), and
recommendations to take a plan
distribution for the purpose of opening
a securities account.64 We are also
providing guidance under the Care
Obligation on what factors a brokerdealer generally should consider when
making such recommendations.
• Dual-Registrants: We are providing
additional guidance on how dualregistrants can comply with Regulation
Best Interest, and confirming that
Regulation Best Interest does not apply
to advice provided by a broker-dealer
that is dually registered as an
investment adviser (‘‘dual-registrant’’)
when acting in the capacity of an
investment adviser, and that a dualregistrant is an investment adviser
solely with respect to accounts for
62 As discussed in Section II.B.3.a, Retail
Customer, Focus on Natural Persons and Legal
Representatives of Natural Persons, to the extent a
plan representative who decides service
arrangements for a workplace retirement plan is a
sole proprietor or other self-employed individual
who will participate in the plan, the plan
representative will be a retail customer to the extent
that the sole proprietor or self-employed individual
receives recommendations directly from a brokerdealer primarily for personal, family or household
purposes.
63 See Section II.B.2.b, Interpretation of Any
Securities Transaction or Investment Strategy
Involving Securities.
64 See id.

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which a dual-registrant provides advice
and receives compensation that subjects
it to the Advisers Act.65
We are also clarifying the relationship
between the General Obligation and the
specific component obligations, and in
particular, what it means to ‘‘act in the
best interest’’ of the retail customer. As
is the case with the fiduciary duty
applicable to investment advisers under
the Advisers Act, we are not expressly
defining in the rule text the term ‘‘best
interest,’’ and instead are providing in
Regulation Best Interest and through
interpretations, what ‘‘acting in the best
interest’’ means.66 Whether a brokerdealer has acted in the retail customer’s
best interest in compliance with
Regulation Best Interest will turn on an
objective assessment of the facts and
circumstances of how the specific
components of Regulation Best
Interest—including its Disclosure, Care,
Conflict of Interest, and Compliance
Obligations—are satisfied at the time
that the recommendation is made (and
not in hindsight). In response to
commenters, we are addressing, among
other things, what the General
Obligation does and does not require
(for example, that it does not impose a
continuing duty beyond a particular
recommendation), providing specific
examples of what would violate
Regulation Best Interest, and its
application to certain scenarios,
particularly in the context of satisfying
the Care Obligation.
We are also modifying and clarifying
the component obligations that a brokerdealer would be required to satisfy in
order to meet the General Obligation:
Disclosure Obligation. We are refining
the treatment of conflicts of interest by:
(1) Defining in the rule text a ‘‘conflict
of interest’’ for purposes of Regulation
Best Interest (as opposed to interpreting
the phrase ‘‘material conflict of interest’’
as in the Proposing Release) as an
interest that might incline a brokerdealer—consciously or unconsciously—
to make a recommendation that is not
disinterested; and (2) revising the
Disclosure Obligation to require
disclosure of ‘‘material facts’’ regarding
conflicts of interest associated with the
recommendation.67 Similar to the
proposal, all such conflicts of interest
will be covered by Regulation Best
65 See Section II.B.3.d, Retail Customers,
Treatment of Dual-Registrants.
66 In the investment adviser context, an
investment adviser’s fiduciary duty under the
Advisers Act comprises a duty of care and a duty
of loyalty. This combination of care and loyalty
obligations has been characterized as requiring the
investment adviser to act in the ‘‘best interest’’ of
its client at all times. See Fiduciary Interpretation.
67 See Section II.C.1.b, Disclosure Obligation,
Material Facts Regarding Conflicts of Interest.

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Interest (e.g., subject to the Conflict of
Interest Obligation), however, only
‘‘material facts’’ regarding these
conflicts would be required to be
disclosed under the Disclosure
Obligation.
Furthermore, we are modifying the
Disclosure Obligation to explicitly
require broker-dealers to provide ‘‘full
and fair’’ disclosure of material facts,
rather than requiring broker-dealers to
‘‘reasonably disclose’’ such information.
We are providing the Commission’s
view regarding what it means to provide
‘‘full and fair’’ disclosure to retail
customers, including the level of
specificity of disclosure required, and
the form and manner and timing and
frequency of such disclosure.68 We are
explicitly requiring the disclosure of
material facts relating to the scope and
terms of the relationship that were
specifically identified in the proposal
(i.e., capacity, material fees and charges,
and type and scope of services).69 In
connection with disclosure
requirements regarding the type and
scope of services, we are also clarifying
that at a minimum, a broker-dealer
needs to disclose whether or not
account monitoring services will be
provided (and if so, the scope and
frequency of those services), account
minimums, and any material limitations
on the securities or investment
strategies involving securities that may
be recommended to the retail
customer.70 Also we conclude that the
basis for a broker-dealer’s
recommendations as a general matter
(i.e., what might commonly be
described as the firm’s investment
approach, philosophy, or strategy) and
the risks associated with a brokerdealer’s recommendations in
standardized (as opposed to
individualized) terms are material facts
relating to the scope and terms of the
relationship that should be disclosed.71
Below, we outline a method to address
oral disclosure and written disclosure
provided after the fact.72
Care Obligation. We are adopting the
Care Obligation largely as proposed;
however, we are expressly requiring that
a broker-dealer understand and consider
the potential costs associated with its
recommendation, and have a reasonable
basis to believe that the
recommendation does not place the
68 See Section II.C.1.c, Disclosure Obligation, Full
and Fair Disclosure.
69 See Section II.C.1.a, Disclosure Obligation,
Material Facts Regarding Scope and Terms of the
Relationship.
70 Id.
71 Id.
72 See Section II.C.1, Disclosure Obligation, Oral
Disclosure or Disclosure After a Recommendation.

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financial or other interest of the brokerdealer ahead of the interest of the retail
customer.73 Nevertheless, we emphasize
that while cost must be considered, it
should never be the only consideration.
Cost is only one of many important
factors to be considered regarding the
recommendation and that the standard
does not necessarily require the ‘‘lowest
cost option.’’ Relatedly, we are
emphasizing the need to consider costs
in light of other factors and the retail
customer’s investment profile.
We are also providing additional
guidance on what it means to make a
recommendation in a retail customer’s
‘‘best interest.’’ As in the Proposing
Release, determining whether a brokerdealer’s recommendation satisfies the
Care Obligation will be an objective
evaluation turning on the facts and
circumstances of the particular
recommendation and the particular
retail customer. We recognize that a
facts and circumstances evaluation of a
recommendation makes it difficult to
draw bright lines around whether a
particular recommendation will meet
the Care Obligation. Accordingly, we
focus on how a broker-dealer could
establish a reasonable basis to believe
that a recommendation is in the best
interest of its retail customer and does
not place the broker-dealer’s interest
ahead of the retail customer’s interest,
and the circumstances under which a
broker-dealer could not establish such a
reasonable belief.
We are clarifying that an evaluation of
reasonably available alternatives does
not require an evaluation of every
possible alternative (including those
offered outside the firm) nor require
broker-dealers to recommend one ‘‘best’’
product, and what this evaluation will
require in certain contexts (such as a
firm with open architecture).
Furthermore, we clarify that, when a
broker-dealer materially limits its
product offerings to certain proprietary
or other limited menus of products, it
must still comply with the Care
Obligation—even if it has disclosed and
taken steps to prevent the limitation
from placing the interests of the brokerdealer ahead of the retail customer, as
required by the Disclosure and Conflict
of Interest Obligation—and thus could
not use its limited menu to justify
recommending a product that does not
satisfy the obligation to act in a retail
customer’s best interest.
Conflict of Interest Obligation. We are
revising the Conflict of Interest
Obligation by: (1) Similar to the
proposal, establishing an overarching
obligation to establish written policies

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and procedures to identify and at a
minimum disclose (pursuant to the
Disclosure Obligation), or eliminate, all
conflicts of interest associated with the
recommendation; 74 and (2) setting forth
explicit requirements to establish
written policies and procedures
reasonably designed to mitigate or
eliminate certain identified conflicts of
interest, specifically:
• Mitigation of Associated Person
Conflicts of Interest. We are revising the
proposal’s mitigation requirement to: (1)
Eliminate the distinction between
financial incentives and all other
conflicts of interest; and (2) focus on
mitigating conflicts of interest
associated with recommendations that
create an incentive for the associated
person of the broker-dealer to place the
interest of the firm or the associated
person ahead of the interest of the retail
customer.75 We are providing further
guidance regarding the types of
incentives covered by this revised
obligation, in particular focusing on
compensation or employment related
incentives and other incentives
provided to the associated person
(whether by the broker-dealer or thirdparties). We are also confirming,
clarifying and expanding on the
proposal’s guidance on potential
mitigation methods to further promote
compliance with this obligation.
• Address Any Material Limitations
on Recommendations to Retail
Customers. To address the conflicts of
interest presented when broker-dealers
place any material limitations on the
securities or investment strategies
involving securities that may be
recommended to a retail customer (i.e.,
only make recommendations of
proprietary or other limited range of
products), we are requiring brokerdealers to establish, maintain and
enforce written policies and procedures
reasonably designed to: (1) Identify and
disclose any material limitations placed
on the securities or investment
strategies involving securities that may
be recommended and any associated
conflicts of interest; and (2) prevent the
limitations and associated conflicts of
74 This obligation achieves greater consistency
with the treatment of conflicts under the Advisers
Act. As discussed in the Fiduciary Interpretation,
in seeking to meet its duty of loyalty, an adviser
must make full and fair disclosure to its clients of
all material facts relating to the advisory
relationship. An adviser must eliminate or at least
expose through full and fair disclosure all conflicts
of interest which might incline an investment
adviser—consciously or unconsciously—to render
advice which was not disinterested. See Fiduciary
Interpretation.
75 See generally Section II.C.3.e, Conflict of
Interest Obligation, Mitigation of Certain Incentives
to Associated Persons.

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interest from causing the broker-dealer
or their associated persons to make
recommendations that place the interest
of the broker-dealer or associated person
ahead of the interest of the retail
customer (for example, a broker-dealer
could establish product review
processes or establish procedures
addressing which retail customers
would qualify for the product menu).76
• Elimination of Certain Conflicts. We
are requiring broker-dealers to establish
written policies and procedures
reasonably designed to identify and
eliminate any sales contests, sales
quotas, bonuses, and non-cash
compensation that are based on the sale
of specific securities or the sale of
specific types of securities within a
limited period of time.77 By explicitly
focusing on policies and procedures to
eliminate these incentives, it does not
mean that all other incentives are
presumptively compliant with
Regulation Best Interest. Rather, such
other incentives and practices that are
not explicitly prohibited are permitted
provided that the broker-dealer
establishes reasonably designed policies
and procedures to disclose and mitigate
the incentive created to the
representative, and the broker-dealer
and its associated persons comply with
the Care Obligation and the Disclosure
Obligation.
General Compliance Obligation. We
are establishing a new, general
‘‘Compliance Obligation’’ to require
broker-dealers to establish policies and
procedures to achieve compliance with
Regulation Best Interest in its entirety.78
Books and Records. In addition to
adopting Regulation Best Interest, we
are also adopting the record-making and
recordkeeping requirements largely as
proposed, with certain explanations and
clarifications regarding the scope of
these requirements and the extent to
which new obligations have been
created.79
Interaction with Other Standards,
Waivers and Private Right of Action.
Compliance with Regulation Best
Interest will not alter a broker-dealer’s
obligations under the general antifraud
provisions of the federal securities laws.
Regulation Best Interest applies in
addition to any obligations under the
76 See generally Section II.C.3.f, Conflict of
Interest Obligation, Mitigation of Material
Limitations on Recommendations to Retail
Customers.
77 See generally Section II.C.3.g, Conflict of
Interest Obligation, Elimination of Certain Conflicts
of Interest.
78 See generally Section II.C.4, Compliance
Obligation.
79 See generally Section II.D, Record-Making and
Recordkeeping.

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Exchange Act, along with any rules the
Commission may adopt thereunder, and
any other applicable provisions of the
federal securities laws and related rules
and regulations.80
Scienter will not be required to
establish a violation of Regulation Best
Interest. We note that the preemptive
effect of Regulation Best Interest on any
state law governing the relationship
between regulated entities and their
customers would be determined in
future judicial proceedings based on the
specific language and effect of that state
law. We believe that Regulation Best
Interest, Form CRS, and the related
rules, interpretations and guidance that
the Commission is concurrently issuing
will serve as focal points for promoting
clarity, establishing greater consistency
in the level of retail customer
protections provided, and easing
compliance across the regulatory
landscape and the spectrum of
investment professionals and products.
In addition, under Section 29(a) of the
Exchange Act, a broker-dealer will not
be able to waive compliance with
Regulation Best Interest, nor can a retail
customer agree to waive her protections
under Regulation Best Interest.
Furthermore, we do not believe
Regulation Best Interest creates any new
private right of action or right of
rescission, nor do we intend such a
result.
D. Overview of Key Enhancements
With these modifications and
clarifications, Regulation Best Interest is
designed to improve investor protection
by:
• Requiring broker-dealers to have a
reasonable basis to believe that
recommendations are in the retail
customer’s best interest, which
enhances existing suitability obligations
by: Requiring compliance not only with
the explicit Care Obligation, but also
with Disclosure, Conflict of Interest, and
Compliance Obligations; expressly
requiring consideration of cost in
evaluating a recommendation as part of
the Care Obligation; expressing our
views regarding the consideration of
reasonably available alternatives when
making a recommendation as part of the
Care Obligation; applying Regulation
Best Interest to recommendations of
account types and rollovers and to any
80 For example, any transaction or series of
transactions, whether or not subject to the
provisions of Regulation Best Interest, remain
subject to the antifraud and anti-manipulation
provisions of the securities laws, including, without
limitation, Section 17(a) of the Securities Act of
1933 (‘‘Securities Act’’) [15 U.S.C. 77q(a)] and
Sections 9, 10(b), and 15(c) of the Exchange Act [15
U.S.C. 78i, 78j(b), and 78o(c)] and the rules
thereunder.

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recommendations resulting from agreedupon account monitoring services
(including implicit hold
recommendations); and, applying the
Care Obligation to a series of
recommended transactions (currently
referred to as ‘‘quantitative suitability’’)
irrespective of whether a broker-dealer
exercises actual or de facto control over
a customer’s account;
• requiring broker-dealers to
establish, maintain, and enforce written
policies and procedures reasonably
designed to mitigate (and in some cases,
eliminate) certain identified conflicts of
interest that create incentives to make
recommendations that are not in the
retail customer’s best interest; these new
requirements are a significant and
critical enhancement as existing
requirements under the federal
securities laws largely center upon
conflict disclosure rather than conflict
mitigation;
• requiring disclosure under the
Disclosure Obligation of the material
facts relating to the scope of terms of a
broker-dealer’s relationship with the
retail customer and the conflicts of
interest associated with a brokerdealer’s recommendations, which will
foster retail customers’ understanding of
their relationship with the broker-dealer
and help them to evaluate the
recommendations received; and
• requiring broker-dealers to
establish, maintain and enforce written
policies and procedures reasonably
designed to achieve compliance with
Regulation as a whole, which will
further promote broker-dealer
compliance with Regulation Best
Interest.
Through these new requirements, we
believe that Regulation Best Interest will
improve investor protection by
enhancing the quality of broker-dealer
recommendations to retail customers
and reducing the potential harm to retail
customers that may be caused by
conflicted brokerage recommendations.
We also believe Regulation Best Interest
achieves these enhancements in a
manner that is workable for the
transaction-based relationship offered
by broker-dealers, thus preserving, to
the extent possible, retail investor
access (in terms of choice and cost) to
different types of quality investment
services and products. As discussed
above, Regulation Best Interest will
complement Form CRS and related
rules, interpretations, and guidance that
the Commission is concurrently issuing.

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II. Discussion of Regulation Best
Interest
A. General Obligation
As in the Proposing Release,
Regulation Best Interest is set forth in
two subparagraphs: (1) An overarching
provision setting forth a general best
interest obligation (‘‘General
Obligation’’); and (2) a second provision
requiring compliance with specific
obligations in order to satisfy the
overarching standard (discussed below
in Section II.C).81 Specifically, as in the
Proposing Release, the General
Obligation requires that a broker-dealer
‘‘shall act in the best interest of the
retail customer at the time the
recommendation is made, without
placing the financial or other interest of
[the broker-dealer] . . . ahead of the
interest of the retail customer.’’ 82
Most commenters, including a
majority of the IAC, expressed opinions
on this approach, and in particular on
the General Obligation, including
whether the obligation should be a
‘‘fiduciary’’ standard, whether it should
be a uniform standard for broker-dealers
and investment advisers,83 and whether
the standard should be more principlesbased or more prescriptive (in
particular, whether to define ‘‘best
interest’’).84
The views of commenters on the
approach to an enhanced standard of
conduct for broker-dealers varied
widely. A number of commenters
81 See

Proposing Release at 21585 et seq.
Paragraph (a)(1) of Regulation Best Interest.
83 See IAC 2018 Recommendation; Letter from
Rob Foregger, Co-Founder, NextCapital (Aug. 7,
2018) (‘‘NextCapital Letter’’) (recommending that
the Commission adopt a uniform fiduciary standard
of conduct applicable to both broker-dealers and
investment advisers); Letter from Sharon Cheever,
Senior Vice President and General Counsel, Pacific
Life Insurance Company (May 28, 2019) (‘‘Pacific
Life May 2019 Letter’’) (recommending that the
Commission adopt a single ‘best interest’ standard
of care for all financial professionals).
See also Letter from R. Scott Henderson, Bank of
America (Aug. 7, 2018) (‘‘Bank of America Letter’’);
Letter from Christopher Jones, Chief Investment
Officer, Financial Engines (Aug. 6, 2018)
(‘‘Financial Engines Letter’’); State Attorneys
General Letter; Letter from Jill I. Gross, Associate
Dean, Academic Affairs, Elisabeth Haub School of
Law, Pace University (Mar. 11, 2019) (‘‘Gross
Letter’’). Relatedly, one commenter expressed
concern that a court or arbitration panel would
determine that Regulation Best Interest would
control, rather than existing case law, which would
apply a fiduciary duty in certain circumstances. See
Gross Letter. See also AFL–CIO April 2019 Letter.
84 See, e.g., Ameriprise Letter; Cambridge Letter;
CCMC Letters; Edward Jones Letter; NAIFA Letter;
Morningstar Letter; NY Life Letter; Letter from
Kevin T. Reynolds, Senior Vice President, Penn
Mutual Life Insurance Company (Aug. 1, 2018)
(‘‘Penn Mutual Letter’’); SIFMA August 2018 Letter;
Vanguard Letter; Letter from Kent. A Mason, Davis
& Harman LLP (Jul. 20, 2018) (‘‘Davis Harman
Letter’’).

supported a broker-dealer specific
standard of conduct.85 Several of these
commenters supported the
Commission’s approach as proposed,
with certain modifications to the
specific component obligations
discussed below.86 Some commenters
urged the Commission to change the
standard from what the commenters
called ‘‘suitability-plus’’ to what the
commenters called a ‘‘true best interest
standard,’’ including the avoidance of
certain conflicts,87 and urged the
Commission to change the name of
Regulation Best Interest unless it
required firms to always be responsible
for acting in the retail customer’s best
interest (as opposed to at the time of the
recommendation).88 Other commenters
advocated for the adoption of a brokerdealer standard modeled after FINRA
suitability rules,89 and some suggested
that the Commission create a safe harbor
from liability for compliance with
Regulation Best Interest.90
By contrast, other commenters
recommended that the Commission
adopt a uniform standard of conduct for
investment advisers and broker-dealers,
in varying forms.91 Commenters
expressed differing views on the form of
such a uniform standard of conduct,
including that the Commission should
adopt: a fiduciary standard for brokerdealers similar to, or no less stringent
than, the fiduciary duty under the
Advisers Act; 92 a uniform fiduciary
standard as articulated in Section 913(g)
of the Dodd-Frank Act 93 and/or
consistent with the recommendations of

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85 See, e.g., SIFMA August 2018 Letter; Cetera
August 2018 Letter; Vanguard Letter; Edward Jones
Letter; Ameriprise Letter; NY Life Letter; NAIFA
Letter; CCMC Letters; Penn Mutual Letter;
Cambridge Letter; PIABA Letter; Letter from Ronald
J. Kruszewski, Chairman and Chief Executive
Officer, Stifel Financial (Aug. 7, 2018) (‘‘Stifel
Letter’’); Financial Engines Letter.
86 See, e.g., SIFMA August 2018 Letter; Vanguard
Letter; Edward Jones Letter; Ameriprise Letter; NY
Life Letter; NAIFA Letter; CCMC Letters; Penn
Mutual Letter; Cambridge Letter; PIABA Letter.
87 See, e.g., CFA Institute Letter.
88 See, e.g., Letter from Jean-Luc Bourdon, CPA/
PFS, Chair, Personal Financial Planning Legislative
and Regulatory Task Force, and Charles R. Kowal,
Chair, Personal Financial Planning Executive
Committee, AICPA (Aug. 7, 2018) (‘‘AICPA Letter’’);
Betterment August 2018 Letter; NASAA August
2018 Letter.
89 See, e.g., National Society of Compliance
Professionals Letter; Cetera August 2018 Letter.
90 See Cambridge Letter; BISA Letter; IPA Letter.
91 See, e.g., Betterment Letter; AARP August 2018
Letter; AFR Letter; Galvin Letter; State Attorneys
General Letter.
92 See, e.g., Betterment Letter; Warren Letter; Fein
Letter; Letter from Joseph M. Torsella, Pennsylvania
State Treasurer, et al. (Aug. 7, 2018) (‘‘State
Treasurers Letter’’); AARP August 2018 Letter.
93 See, e.g., FPC Letter; Letter from Maxine
Waters, Ranking Member, Committee on Financial
Services, U.S. House of Representatives, et al. (Sep.
12, 2018) (‘‘Waters Letter’’); Fein Letter.

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the staff’s Section 913 Study; 94 or a
uniform standard similar to the DOL
standard as reflected in the BIC
Exemption; 95 harmonized requirements
and guidance for broker-dealers and
investment advisers offering services to
retail customers; 96 or a new uniform
best interest standard, with common
core elements.97
In this vein, a number of commenters
suggested specific revisions to the text
of the General Obligation to clarify what
the standard requires with respect to
broker-dealer conflicts of interest,
including that the Commission change
the proposed ‘‘without placing the
financial or other interest [of the brokerdealer] ahead’’ language to a standard
that requires a recommendation be
made ‘‘without regard to’’ a brokerdealer’s interest 98 and/or requires the
broker-dealer to ‘‘place the customer’s
interest first’’ or ahead of its own.99
These commenters stated that changing
the proposed language to a ‘‘without
regard to’’ and/or ‘‘place the customer’s
interest first’’ phrasing would result in
a stronger standard, whereas the
proposed phrasing would allow a
broker-dealer to act in its own interests
as long as the broker-dealer does not put
its interests ahead of its customers’
interest.100 These commenters stated
that broker-dealers must put aside their
own interest when determining what is
best for the retail customer, that brokerdealers must ensure that conflicts do not
taint recommendations.101
Some commenters challenged the
Commission’s concern that the ‘‘without
regard to’’ language ‘‘could be
inappropriately construed to require a
broker-dealer to eliminate all of its
conflicts,’’ arguing that their position is
supported by the plain meaning of the
language and the context of 913(g)
(which explicitly recognizes conflicts in
certain areas), and the interpretations by
others (such as the DOL) who have used
it.102 Highlighting what commenters
viewed as inconsistencies in the
Proposing Release’s interpretation of the
proposed ‘‘without placing . . . ahead’’
phrasing, such as statements that the
obligation would require broker-dealers
to ‘‘put aside their interests’’ when
94 See,

e.g., ACLI Letter; Schwab Letter.
e.g., Galvin Letter. See supra footnote 32.
96 See, e.g., AARP August 2018 Letter.
97 See, e.g., Pacific Life August 2018 Letter.
98 See, e.g., CFA August 2018 Letter; FPC Letter;
PACE Letter; Better Markets August 2018 Letter.
99 See, e.g., Invesco Letter; Schwab Letter; Better
Markets August 2018 Letter; CFA Institute Letter.
100 See, e.g., CFA August 2018 Letter; FPC Letter;
Pace Letter.
101 See, e.g., CFA August 2018 Letter.
102 See, e.g., CFA August 2018 Letter; Waters
Letter.
95 See,

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making a recommendation versus others
suggesting that a broker-dealer’s
interests cannot ‘‘predominantly
motivate’’ or be the ‘‘sole basis’’ for the
recommendation, some commenters
suggested we either adopt the ‘‘without
regard to’’ phrasing or state that the
proposed phrasing requires a brokerdealer to put aside its interests.103 Some
commenters further stated that the
‘‘without regard to’’ phrasing, which is
used in Section 913(g) of the DoddFrank Act, is the stronger standard of
conduct that Congress intended, and
challenged the Commission’s reliance
on the authority provided in Section
913(f).104 In this vein, some commenters
suggested that the Commission should
adopt a uniform standard of conduct for
broker-dealers and investment advisers
that was authorized under Section
913(g), and recommended by the staff in
the Section 913 Study.105
Other commenters, however,
supported the proposal’s ‘‘without
placing . . . ahead’’ formulation.106
These commenters expressed concern
that a ‘‘without regard to’’ standard
would require ‘‘conflict free’’
recommendations, which would limit
compensation structures and the
offering of certain products.107 Instead,
commenters stated that the appropriate
role of a best interest standard is to
require disclosure and management of
conflicts of interest.108 Others generally
supported, or did not object to, the
Commission’s decision not to proceed
under its 913(g) authority in its current
proposal.109
103 See, e.g., CFA August 2018 Letter. See also
Waters Letter (stating that the proposal fails to
adequately explain just what it would require of
brokers that is different from the status quo, that the
standard should clearly differ from the current
‘‘suitability’’ standard, and that any final rule must
clearly explain the standard, what it requires and
prohibits, and how it differs from the status quo).
104 See, e.g., CFA August 2018 Letter; State
Attorneys General Letter; Waters Letter; FPC Letter;
Better Markets August 2018 Letter.
105 See, e.g., Waters Letter; FPC Letter.
106 See, e.g., AALU Letter; Cetera August 2018
Letter; NAIFA Letter; Pickard Letter.
107 See, e.g., AALU Letter; Cetera August 2018
Letter; NAIFA Letter; Pickard Letter.
108 See, e.g., AALU Letter; Cetera August 2018
Letter.
109 See, e.g., Invesco Letter; IAC 2018
Recommendation (stating ‘‘we recognize that the
Commission has chosen not to proceed under its
913(g) authority in its current proposal, and it is not
our intent to derail that proposal by advocating that
the Commission change the legal basis for its
rulemaking. Moreover, we believe the clarifications
we have outlined above to the meaning of best
interest, if implemented, have the potential to
deliver immediate benefits to customers of brokerdealers and investment advisers alike. Should the
Commission determine, however, that it cannot
enforce the clarified best interest standard under
the Advisers Act, a majority of the Committee
believes the Commission should reconsider
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A common theme across many
comments was the need for additional
guidance on what ‘‘best interest’’ means,
with some commenters recommending
that the Commission codify its
interpretation of ‘‘best interest’’ or
provide a more specific definition of
what it means to act in the ‘‘best
interest.’’ 110 Several commenters
suggested that the ‘‘best interest’’
standard should require the ‘‘best’’ or
most beneficial product available,111
while others (including a majority of the
IAC) requested that the Commission
clarify that there is no single ‘‘best’’
recommendation and that the obligation
is to adhere to a professional standard
of conduct when making a
recommendation.112 Some commenters
suggested defining ‘‘best interest’’ as
including a duty of loyalty and care.113
Several also suggested that the
Commission incorporate best execution
and fair pricing and compensation as
factors for determining compliance with
the standard.114
Several commenters recommended
that the Commission adopt a definition
of best interest that is consistent with
the best interest obligation described by
the DOL in the BIC Exemption’s
Impartial Conduct Standards,115 and
supported a standard which would
require a broker-dealer to act ‘‘solely’’ in
the interest of the retail customer when
making a recommendation.116
Conversely, other commenters
recommended that the ‘‘best interest’’
standard could be satisfied even if the
recommendations are in part influenced
by ‘‘self-promotion.’’ 117
Finally, in lieu of a prescribed
definition of ‘‘best interest,’’ a number
of commenters advocated for a factsregulatory gap.’’). As noted above, Regulation Best
Interest draws from key principles underlying
fiduciary obligations, including those that apply to
investment advisers under Advisers Act.
Accordingly, as discussed below, the Commission
has chosen to enhance existing obligations for
broker-dealers when they make recommendations
to a retail customer, while, in a separate
interpretation, reaffirming and in some cases
clarifying an investment adviser’s fiduciary duty.
See Fiduciary Interpretation.
110 See, e.g., NASAA August 2018 Letter.
111 See, e.g., Financial Engines Letter; CFA
August 2018 Letter.
112 See, e.g., Wells Fargo Letter; see also IAC 2018
Recommendation (‘‘[T]he Commission should
recognize there will often not be a single best option
and that more than one of the available options may
satisfy this standard.’’).
113 See, e.g., TIAA Letter; Morningstar Letter.
114 See, e.g., CFA Institute Letter; Letter from
Mark Heckert, Vice President, Pricing and
Analytics, ICE Data Services, (Aug. 7, 2018) (‘‘ICE
Letter’’); FPC Letter.
115 See, e.g., AARP August 2018 Letter; Wells
Fargo Letter; Schwab Letter; NASAA August 2018
Letter.
116 See, e.g., Galvin Letter.
117 See, e.g., LPL August 2018 Letter.

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33329

and-circumstances or ‘‘totality of the
circumstances approach’’ for
determining compliance with the ‘‘best
interest’’ standard.118 A majority of the
IAC recommended that the meaning of
the best interest obligation should be
clarified to require ‘‘broker-dealers,
investment advisers, and their
associated persons to recommend the
investments, investment strategies,
accounts or services, from among those
they have reasonably available to
recommend, that they reasonably
believe represent the best available
options for the investor.’’ 119
After careful consideration of these
comments, we continue to believe that
our proposed approach for enhancing
the standards of conduct that apply to
broker-dealers’ recommendations to
retail customers is the appropriate
approach, and therefore we are adopting
as proposed the structure and scope of
Regulation Best Interest, including the
phrasing of the General Obligation, and
are not expressly defining ‘‘best
interest’’ in the rule text.120 However, in
consideration of these comments, we are
providing our views on what the
standard generally requires, what it is
intended to achieve, and its alignment
in many respects with fiduciary
principles.
1. Commission’s Approach
After extensive consideration, and for
the reasons discussed in the Proposing
Release and further below, we are
adopting a rule to enhance the existing
broker-dealer conduct obligations when
they make recommendations to a retail
customer.121 At the same time, we seek
to preserve retail investor access (in
terms of choice and cost) to differing
types of investment services and
products.
The Commission is adopting
Regulation Best Interest pursuant to the
118 See,

e.g., AAJ Letter; CFA August 2018 Letter.
2018 Recommendation.
120 Another commenter stated that any
modification to the proposed rules and guidance
that would make them ‘‘more restrictive’’ should be
reproposed for additional public comment. See
ACLI Letter. Because we have provided notice and
the changes we are making are based on comments
we received, reproposal is not necessary.
121 See Proposing Release at 21575. In particular,
we considered the recommendations made by our
staff in 2011 and the recommendations of the IAC.
See Staff of the U.S. Securities and Exchange
Commission, Study on Investment Advisers and
Broker-Dealers As Required by Section 913 of the
Dodd-Frank Wall Street Reform and Consumer
Protection Act (Jan. 2011) (‘‘913 Study’’), at 9–10,
available at www.sec.gov/news/studies/2011/
913studyfinal.pdf; Recommendation of the Investor
Advisory Committee: Broker-Dealer Fiduciary Duty
(Nov. 2013) (‘‘IAC 2013 Recommendation’’),
available at https://www.sec.gov/spotlight/investoradvisory-committee-2012/fiduciary-dutyrecommendation-2013.pdf; IAC 2018
Recommendation.
119 IAC

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express and broad grant of rulemaking
authority in Section 913(f) of the DoddFrank Act.122 As some commenters
noted, Section 913(g) expressly
authorizes the Commission to adopt
rules that would hold broker-dealers to
the same standard of conduct as
investment advisers. However, the
availability of overlapping, yet distinct,
rulemaking power under Section 913(g)
does not negate the grant of authority
under Section 913(f). The plain text of
Section 913(f) authorizes the
Commission to promulgate this rule
addressing the legal and regulatory
standards of care for broker-dealers, and
their associated persons.
The Commission is utilizing its
authority under 913(f) in order to adopt
an enhanced investor-protection
standard for broker-dealers that
maintains the availability of both the
broker-dealer model and the investment
adviser model. The Commission has
chosen not to apply the existing
fiduciary standard under the Advisers
Act to broker-dealers in part because of
concerns that such a shift would result
in fewer broker-dealers offering
transaction-based services to retail
customers, which would in turn reduce
choice and may raise costs for certain
retail customers.
Moreover, the Commission has
chosen not to create a new uniform
standard applicable to both brokerdealers and investment advisers which,
among other things, would discard
decades of regulatory and judicial
precedent and experience with the
fiduciary duty for investment advisers
that has generally worked well for retail
clients and our markets. We believe that
adopting a ‘‘one size fits all’’ approach
would not appropriately reflect the fact
that broker-dealers and investment
advisers play distinct roles in providing
recommendations or advice and services
to investors, and may ultimately harm
retail investors. Instead, the
Commission has chosen to enhance
existing obligations for broker-dealers
when they make recommendations to a
retail customer, while, in a separate
interpretation, reaffirming and in some
122 Section 913(f) of the Dodd-Frank Act provides
the Commission discretionary authority to
‘‘commence a rulemaking, as necessary or
appropriate to the public interest and for the
protection of retail customers (and such other
customers as the Commission may by rule provide),
to address the legal or regulatory standards of care
for brokers, dealers . . . [and] persons associated
with brokers or dealers . . . for providing
personalized investment advice about securities to
such retail customers.’’ In addition to Section
913(f), the Commission is promulgating Regulation
Best Interest pursuant to other provisions of the
Exchange Act, including Section 15(c)(6) and
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cases clarifying an investment adviser’s
fiduciary duty.123
Regulation Best Interest considers and
incorporates (to the extent appropriate)
obligations that apply to investment
advice in other contexts, with the goal
of fostering greater consistency and
clarity in the level of protection
provided to retail customers at the time
that a recommendation is made. We are
tailoring these principles to the
structure and characteristics of the
broker-dealer relationship with retail
customers and building upon existing
123 Although we are not adopting a uniform
fiduciary standard of conduct, we note that our
rules are designed to achieve many of the key goals
advocated for by supporters of a uniform standard
of conduct. For example, in advocating for a
uniform standard of conduct former Commission
Chair Elisse B. Walter (then a Commissioner) stated
that (1) ‘‘[t]o appreciate fully what a fiduciary
standard means, and what it really means to act in
the best interest of an investor, it is absolutely
necessary to drill down and determine what duties
and obligations flow from a fiduciary standard,’’ (2)
‘‘a fiduciary standard is not a substitute for business
practice rules . . . [r]ather, the two are
complementary . . . and can be used by the
Commission] to prohibit certain conflicted behavior
or to require mitigation or management of the
conflict,’’ (3) ‘‘what a fiduciary duty requires
depends on the scope of the engagement,’’ and (4)
‘‘[m]ost important, whatever gloss and guidance the
Commission provides, it should not deviate from
the basic principle that financial professionals
should always act in the best interests of investors,
both large and small.’’ Commissioner Elisse B.
Walter, Regulating Broker-Dealers and Investment
Advisers: Demarcation or Harmonization? (May 5,
2009), available at https://www.sec.gov/news/
speech/2009/spch050509ebw.htm.
In our Fiduciary Interpretation and in this
release, we are providing our views on the duties
and obligations that flow from the fiduciary duty
and Regulation Best Interest. In this release, we
discuss the specific obligations of broker-dealers
under the Disclosure, Care and Conflicts of Interest
Obligations, which include requirements to
establish policies and procedures that comply with
the Conflict of Interest Obligation, specifically to
disclose and mitigate (i.e., reasonably reduce), or
eliminate, certain conflicts. As discussed below,
these specific obligations are tailored to address
particular concerns that arise as a result of the
broker-dealer model. For that reason, as well as the
other reasons set forth above, the Commission does
not believe that it is necessary to adopt a uniform
standard in order to ensure that these specific
obligations also apply to investment advisers, as the
IAC suggests. See IAC 2018 Recommendation. In
our Fiduciary Interpretation, we state that ‘‘the
application of the investment adviser’s fiduciary
duty will vary with the scope of the relationship,’’
and here we have noted that we are not expressly
defining in the rule text the term ‘‘best interest,’’
and instead are providing in the rule and through
interpretations what ‘‘best interest’’ means.
Compliance with each of the specific component
obligations will turn on an objective assessment of
the facts and circumstances of how the specific
components of Regulation Best Interest are satisfied
at the time that the recommendation is made.
Finally, regardless of whether a retail investor
chooses a broker-dealer or an investment adviser (or
both), the retail investor will be entitled to a
recommendation (from a broker-dealer) or advice
(from an investment adviser) that is in the best
interest of the retail investor and that does not place
the interests of the firm or the financial professional
ahead of the interests of the retail investor.

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regulatory obligations. As a result,
Regulation Best Interest protects
investors who seek access to the
services, products, and payment options
offered by broker-dealers.
Although we are not applying the
existing fiduciary standard under the
Advisers Act to broker-dealers, key
elements of the standard of conduct that
applies to broker-dealers under
Regulation Best Interest will be
substantially similar to key elements of
the standard of conduct that applies to
investment advisers pursuant to their
fiduciary duty under the Advisers
Act 124 at the time that a
recommendation is made. Regulation
Best Interest’s regulatory structure is
unique to broker-dealers—and is
tailored to the broker-dealer business
model—but regardless of whether a
retail investor chooses a broker-dealer or
an investment adviser (or both), the
retail investor will be entitled to a
recommendation (from a broker-dealer)
or advice (from an investment adviser)
that is in the best interest of the retail
investor and that does not place the
interests of the firm or the financial
professional ahead of the interests of the
retail investor.
As discussed in the proposal, and in
the discussion below, Regulation Best
Interest, as adopted, incorporates Care
and Conflict of Interest Obligations
substantially similar to the fiduciary
duties of care and loyalty under Section
206(1) and (2) of the Advisers Act, even
if not in the same manner as the 913
Study recommendations or identical to
the duties under the Advisers Act.125
We extensively considered the 913
Study as part of developing Regulation
Best Interest, as discussed in the
Proposing Release, and believe that the
enhancements to the broker-dealer
standard of conduct incorporate, and in
many aspects (such as the concept of
mitigation, and the detailed Care
Obligation), build upon and go beyond
the recommendations in the 913 Study.
Although key elements are
substantially similar, the Commission
notes that the obligations of a brokerdealer under Regulation Best Interest
and the obligations of an investment
adviser pursuant to its fiduciary duty
under the Advisers Act differ in certain
respects, taking into account the scope
of the services and relationships
typically offered by broker-dealers and
124 Specifically, an investment adviser’s fiduciary
duty under the Advisers Act comprises a duty of
care and a duty of loyalty. This combination of care
and loyalty obligations has been characterized as
requiring the investment adviser to act in the ‘‘best
interest’’ of its client at all times. See Fiduciary
Interpretation.
125 See Proposing Release at 21590.

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Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations
investment advisers. For example, an
investment adviser’s duty of care
encompasses the duty to provide advice
and monitoring at a frequency that is in
the best interest of the client, taking into
account the scope of the agreed
relationship. This difference reflects the
generally ongoing nature of the advisory
relationship, and the Commission’s
view that, within the scope of the agreed
adviser-client relationship, investment
advisers’ fiduciary duty generally
applies to the entire relationship. In
contrast, the provision of
recommendations in a broker-dealer
relationship is generally transactional
and episodic, and therefore the final
rule requires that broker-dealers act in
the best interest of their retail customers
at the time a recommendation is made
and imposes no duty to monitor a
customer’s account following a
recommendation.
As noted above, Regulation Best
Interest also generally imposes more
specific obligations on broker-dealers
under the Disclosure, Care and Conflict
of Interest Obligations (each of which is
discussed in detail below) than the
principles-based requirements of
investment advisers’ fiduciary duty
under the Advisers Act. This approach
is intended to tailor the application of
principles that have developed in the
context of a different business model
over the course of almost 80 years.
Moreover, this more specific and
tailored approach drawing on key
fiduciary principles (1) is consistent
with the generally rules-based
regulatory regime that applies to brokerdealers, (2) acknowledges that certain
relevant obligations may already be
addressed by existing broker-dealer
requirements (e.g., broker-dealers are
already subject to a duty of best
execution), (3) allows us to impose
requirements that we are believe are
more appropriately tailored to address
the specific conflicts raised by the
transaction-based nature of the brokerdealer model, and (4) recognizes that it
would be inappropriate to apply to
certain generally applicable obligations
of investment advisers (e.g., duty to
monitor) in the context of a transactionbased relationship.
These specific obligations include
express requirements relating to the
Care Obligation, requiring that a brokerdealer exercise reasonable diligence,
care, and skill to: (1) Understand the
risks, rewards and costs of a
recommendation; (2) have a reasonable
basis to believe that the
recommendation is in the best interest
of a particular retail customer, based on
the retail customer’s investment profile,
and that the recommendation does not

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place the broker-dealer’s interest ahead
of the retail customer’s interest; and (3)
have a reasonable basis to believe that
a series of transactions is in the best
interest of the retail customer and does
not place the interest of the brokerdealer ahead of the retail customer’s
interests. Regulation Best Interest
imposes a duty of care that enhances
existing suitability obligations (as
discussed further below). It also
includes a requirement under the Care
Obligation to specifically address the
risk that a broker-dealer’s transactionbased recommendations and
compensation could result in a series of
recommendations that are not in the
best interest or a retail customer—a
‘‘churning’’ risk unique to the brokerdealer model of providing
recommendations and resulting
transaction-based compensation.
Regulation Best Interest also includes
a requirement under the Conflict of
Interest Obligation for broker-dealers to
establish, maintain, and enforce written
policies and procedures reasonably
designed to (1) mitigate conflicts of
interest at the associated person level,
(2) specifically address the conflicts of
interest presented when broker-dealers
place material limitations on the
securities or products that may be
recommended (i.e., only make
recommendations of proprietary or
other limited range of products), and (3)
eliminate sales contests, bonuses, and
non-cash compensation that are based
on the sales of specific securities or
specific types of securities within a
limited period of time. The conflicts of
interest associated with incentives at the
associated person level and limitations
on the securities or products that may
be recommended to retail customers
have raised particular concerns in the
context of the broker-dealer, transactionbased relationship. Accordingly, the
Commission believes specific disclosure
and additional mitigation requirements
are appropriate to address those
conflicts. Sales contests, sales quotas,
bonuses and non-cash compensation
that are based on the sales of specific
securities within a limited period of
time create high-pressure situations for
associated persons to increase the sales
of specific securities or specific types of
securities within a limited period of
time and thus compromise the best
interests of their retail customers. The
Commission does not believe such
conflicts of interest can be reasonably
mitigated and, accordingly, they must
be eliminated.
Phrasing of Standard
We are adopting the phrasing ‘‘act in
the best interest of the retail customer at

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the time the recommendation is made,
without placing the financial or other
interest of the [broker-dealer] ahead of
the interest of the retail customer’’ as it
was proposed.126 In response to
comments, we are clarifying our views
on what this standard entails and how
it compares to the ‘‘without regard to’’
language of Section 913.
By replacing the ‘‘without regard to’’
language of Section 913(g) and the 913
Study with the ‘‘without placing the
financial or other interest of the [brokerdealer] . . . ahead of the interest of the
retail customer’’ phrasing, we did not
intend to create a ‘‘lower’’ or ‘‘weaker’’
standard compared to the language of
Section 913(g) and the 913 Study.
Rather, we are adopting a standard that
reflects that a broker-dealer should not
put its interests ahead of the retail
customer’s interest, and thereby aligns
with (and in certain areas imposes more
specific obligations than) the investment
adviser fiduciary duty, at the time a
broker-dealer makes a recommendation
to a retail customer.
As discussed in the Proposing
Release, we do not intend for our
standard to require a broker-dealer to
provide conflict-free recommendations.
For example, under Regulation Best
Interest, a broker-dealer could
recommend a more expensive or more
remunerative security or investment
strategy if the broker-dealer has a
reasonable basis to believe there are
other factors about the security or
investment strategy that make it in the
best interest of the retail customer,
based on that retail customer’s
investment profile.127
We also agree with commenters that
we do not believe that is the intent
behind the ‘‘without regard to’’ phrase,
as included in Section 913 of the DoddFrank Act or recommended in the 913
Study, as is evident both from other
provisions of Section 913 that
acknowledge and permit the existence
of financial interests under that
standard, and how our staff articulated
the recommended uniform fiduciary
standard in the 913 Study.128
126 See paragraph (a)(1) of Regulation Best
Interest. As discussed in Section II.C.2, we are also
adding the phrasing ‘‘does not place the financial
or other interest of the broker, dealer, or such
natural person . . . ahead of the retail customer’’
to certain provisions of the Care Obligation.
127 See Section II.C.2, Care Obligation.
128 See Proposing Release at 21590. As noted in
the proposal, among other things, Dodd-Frank Act
Section 913(g) expressly provides that the receipt of
commission-based compensation, or other standard
compensation, for the sale of securities shall not, in
and of itself, violate any uniform fiduciary standard
promulgated under that subsection’s authority as
applied to a broker-dealer. Moreover, Section 913(g)
does not itself require the imposition of the

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Nevertheless, we are concerned that
there is a risk that the ‘‘without regard
to’’ language would be inappropriately
construed to require a broker-dealer to
eliminate all of its conflicts when
making a recommendation (i.e., require
recommendations that are conflict free),
which we believe could ultimately harm
retail investors by reducing their access
to differing types of investment services
and products and by increasing their
costs.
The potential for a range of different
meanings to be given to the phrase
‘‘without regard to’’ was heightened by
the DOL’s use of this same language for
purposes of the Impartial Conduct
Standards set forth in the BIC
Exemption. We recognize, as noted by
some commenters, that the DOL
interpretation of this phrase does not
require ‘‘conflict-free’’
recommendations. Nevertheless,
because of the differences in the
approach to the treatment of conflicts
under ERISA and under the federal
securities laws—ERISA starts by
prohibiting conflicts and then through
exemptions permits certain conflicts,
whereas the federal securities laws
generally start with disclosure and
become more restrictive—we share
commenters’ concerns that DOL’s use of
the ‘‘without regard to’’ language could
alter the way in which conflicts are
viewed and cause a substantial portion
of conduct that is currently permitted,
and reasonably accepted and desired by
retail customers, to be limited or
eliminated. Based on market participant
experience with the implementation
of—and reaction to the subsequent
overturning of—the DOL Fiduciary
Rule, in particular the BIC
Exemption,129 we continue to believe
that it is better to use language that
provides similar investor protections,
but does not raise these legal
ambiguities.
The ‘‘without placing the financial or
other interest . . . ahead of the interest
of the retail customer’’ phrasing
recognizes that while a broker-dealer
will inevitably have some financial
interest in a recommendation—the
nature and magnitude of which will
vary—the broker-dealer’s interests
cannot be placed ahead of the retail
principal trade provisions of Advisers Act Section
206(3) on broker-dealers. In addition, Dodd-Frank
Act Section 913 provides that offering only
proprietary products by a broker-dealer shall not, in
and of itself, violate such a uniform fiduciary
standard, but may be subject to disclosure and
consent requirements. See Exchange Act Section
15(k)(1) and Advisers Act Section 211(g)(1). See
also 913 Study at 113; Proposing Release at 21590.
129 See supra footnotes 33 and 34 (citing
reduction in services and increase in costs
following DOL).

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customer’s interest.130 Accordingly, we
believe this phrasing establishes a
standard that enhances investor
protection by prohibiting a brokerdealer from placing its interests ahead of
the retail customer’s interests, and
preserves investor access (in terms of
both choice and cost) to differing types
of investment services and products.
The phrasing also aligns with an
investment adviser’s fiduciary
obligation. As discussed in the
Fiduciary Interpretation, an investment
adviser’s fiduciary duty under the
Advisers Act comprises a duty of care
and a duty of loyalty.131 The fiduciary
duty requires that an adviser ‘‘adopt the
principal’s goals, objectives, or
ends.’’ 132 This means the adviser must,
at all times, serve the best interest of its
clients and not subordinate its client’s
interest to its own. In other words, the
investment adviser cannot place its own
interests ahead of the interests of its
client.133 This combination of care and
loyalty obligations has been
characterized as requiring the
investment adviser to act in the ‘‘best
interest’’ of its client at all times.134
Language that would require a brokerdealer to put the retail customer’s
interest ‘‘first’’ arguably raises many of
the same concerns as the ‘‘without
regard to’’ language. Accordingly, we
are adopting a formulation in Regulation
Best Interest that is consistent with how
we describe the duty of loyalty for
investment advisers in the Fiduciary
Interpretation—that is, a requirement
130 In this vein, we believe that a broker-dealer’s
‘‘financial interest’’ is broad, and that a brokerdealer is unlikely to have an ‘‘other interest’’ that
is not a ‘‘financial interest.’’ See, e.g., Proposing
Release at 21618 (noting ‘‘. . . our interpretation of
the types of material conflicts of interest arising
from financial incentives is broad. . .’’).
131 See, e.g., Proxy Voting by Investment
Advisers, Advisers Act Release No. 2106 (Jan. 31,
2003) (‘‘Investment Advisers Release No. 2106’’).
See also Fiduciary Interpretation.
132 Arthur B. Laby, The Fiduciary Obligations as
the Adoption of Ends, 56 Buffalo Law Review 99
(2008); see also Restatement (Third) of Agency,
§ 2.02 Scope of Actual Authority (2006) (describing
a fiduciary’s authority in terms of the fiduciary’s
reasonable understanding of the principal’s
manifestations and objectives). See Fiduciary
Interpretation.
133 See Fiduciary Interpretation.
134 Id. See also Amendments to Form ADV,
Advisers Act Release No. 3060 (Jul. 28, 2010)
(adopting amendments to Form ADV and stating
that ‘‘under the Advisers Act, an adviser is a
fiduciary whose duty is to serve the best interests
of its clients, which includes an obligation not to
subrogate clients’ interests to its own,’’ citing
Investment Advisers Act Release 2106). See SEC v.
Tambone, 550 F.3d 106, 146 (1st Cir. 2008)
(‘‘Section 206 imposes a fiduciary duty on
investment advisers to act at all times in the best
interest of the fund. . .’’); SEC v. Moran, 944 F.
Supp. 286, 297 (S.D.N.Y 1996) (‘‘Investment
advisers are entrusted with the responsibility and
duty to act in the best interest of their clients.’’).

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not to place the adviser’s interests ahead
of the interests of its client.135
While we are not revising this
phrasing of the standard, we appreciate
concerns raised by commenters about
clarifying whether this standard permits
broker-dealers to allow their conflicts to
taint their recommendations or to allow
broker-dealers to make
recommendations that are motivated by
their own interests or to put their
interests first. We discuss below what it
means to ‘‘act in the best interests,’’
particularly in the context of satisfying
the Care and Conflict of Interest
Obligations. Specifically, we clarify that
the obligations set forth in Regulation
Best Interest are intended to require
broker-dealers to take steps to reduce
the effect of (and in some cases
eliminate) conflicts that create an
incentive to place a broker-dealer’s or an
associated person’s interest ahead of the
retail customer’s interest when making
a recommendation, and to make
recommendations in the best interest of
the retail customer even where conflicts
continue to exist. We believe that this
approach will result in a standard of
conduct that is consistent with what a
reasonable retail customer would
expect.136
135 See Fiduciary Interpretation at footnote 54
(stating that, in practice, referring to putting a
client’s interest first is a plain English formulation
commonly used by investment advisers to explain
their duty of loyalty in a way that may be more
understandable to retail clients).
136 See, e.g., Brian Scholl, et al., SEC Office of the
Investor Advocate and RAND Corporation, The
Retail Market for Investment Advice (2018),
available at https://www.sec.gov/comments/s7-0718/s70718-4513005-176009.pdf (‘‘OIAD/RAND’’).
OIAD/RAND summarized the results of focus
groups, indicating that in the context of discussing
expectations for standards of conduct, ‘‘the groups
typically expected that a financial professional who
is acting in a client’s best interest’’ to, among other
things, ‘‘disclose payments they receive that might
influence their advice [and] avoid taking higher
compensation for selling one product over a similar
but less costly product.’’ Further, OIAD/RAND
summarized focus group comments on
professionals’ form of compensation, noting that
‘‘although many participants prefer that a
professional be compensated by the client alone,
some might not rule out using a professional who
is receiving other compensation, for example if the
compensation is openly disclosed and they are
comfortable with the professional.’’ The SEC’s
Office of Investor Advocate and the RAND
Corporation prepared this research report regarding
the retail market of investment advice prior to, and
separate from, our rulemaking proposals. This
report was included in the comment file at https://
www.sec.gov/comments/s7-07-18/s70718-4513005176009.pdf. See also, e.g., Washington, DC
Roundtable at 49 (‘‘So it seems to me that there is
a tight connection between the obligation that you
have, and our obligations down below here to the
conflicts of interest, that it’s really important that
advisers or brokers spell out what conflicts of
interest they have, and what that means in real
terms to the person before they make a choice, for
example’’).

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Finally, although our standard draws
from key fiduciary principles, for
various reasons, including to emphasize
that Regulation Best Interest is tailored
to the broker-dealer relationship and
distinct from the investment adviser
fiduciary duty, we are not referring to
Regulation Best Interest as a ‘‘fiduciary’’
standard, and we emphasize that
Regulation Best Interest is separate from
any common law analysis of whether a
broker-dealer has fiduciary duties.137 As
noted in the proposal, fiduciary
standards vary, for example, for
investment advisers, banks acting as
trustees or fiduciaries, and fiduciaries to
ERISA plans. As we have learned
through our consideration of the
Relationship Summary Proposal, and
from various investor studies, using the
term ‘‘fiduciary’’ to describe the
standard may not sufficiently convey
meaning regarding the specific
substance of the standard.138 In
addition, we appreciate commenters’
concerns that using the term in the
context of a different relationship may
introduce further legal or compliance
ambiguity.139
As articulated in the Proposing
Release, we appreciate the desire for
clarity about the requirements imposed
by Regulation Best Interest, and we have
sought to provide such clarity by
specifying by rule the specific
components with which a broker-dealer
is required to comply to satisfy its best
interest obligation. The changes we are
137 In addition to the antifraud provisions of the
federal securities laws, courts interpreting state
common law have imposed fiduciary obligations on
broker-dealers in certain circumstances. See
Proposing Release at 21584. Generally, courts have
found that broker-dealers that exercise discretion or
control over customer assets, or have a relationship
of trust and confidence with their customers, owe
customers a fiduciary duty. Id. In developing
proposed Regulation Best Interest, the Commission
has drawn from principles that apply to investment
advice under other regulatory regimes, including
state common law fiduciary principles, among
others. By doing so, we hope to establish greater
consistency in the level of retail customer
protections and to make it easier to comply with
Regulation Best Interest where other legal regimes,
such as state common law drawing upon
comparable fiduciary principles, might also apply.
138 See, e.g., RAND 2018 (‘‘Some participants had
never heard of the word, whereas others had heard
it but did not know what it meant in this context.
Others thought the word ‘‘fiduciary implies acting
in best interest . . .’’). We have modified the
standard of conduct disclosure required by Form
CRS to eliminate technical words, such as
‘‘fiduciary,’’ and describe the standards of conduct
of broker-dealers, investment advisers, or dualregistrants using similar terminology in a plainEnglish manner. In particular, Form CRS uses the
term ‘‘best interest’’ to describe how broker-dealers,
investment advisers, and dual-registrants must act
regarding their retail customers or clients when
providing recommendations as a broker-dealer or
acting as an investment adviser. See Relationship
Summary Adopting Release.
139 See, e.g., Stifel Letter.

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making from the Proposing Release to
this final Regulation Best Interest and
the additional interpretations and
guidance we are providing are intended
to further clarify how a broker-dealer
could comply with these requirements.
As noted above and discussed in the
Fiduciary Interpretation, an investment
adviser’s fiduciary duty under the
Advisers Act requires the adviser to act
in the best interests of its clients. We
have chosen to describe the standard by
referring directly to what the standard
requires at the time a recommendation
is made.140 Furthermore, while key
elements of the standard of conduct that
applies to broker-dealers under
Regulation Best Interest will be
substantially similar to key elements of
the standard of conduct that applies to
investment advisers pursuant to their
fiduciary duty under the Advisers Act at
the time that a recommendation is
made, we are concerned that using the
term ‘‘fiduciary’’ to describe a brokerdealer’s obligations under Regulation
Best Interest may create confusion by
suggesting that the standards of conduct
are identical in all respects, when there
are key differences as noted above,
including the scope of the of the duty
(e.g., the application of the adviser’s
fiduciary duty to the entire relationship
versus Regulation Best Interest’s
recommendation-specific application,
and the application of an adviser’s
fiduciary duty to all clients as opposed
to Regulation Best Interest’s application
to retail customers).141
Similarly, while we are not
harmonizing the phrasing of the best
interest standard with the DOL’s
definition of ‘‘best interest’’ as reflected
in the BIC Exemption’s Impartial
Conduct Standards, as suggested by
some commenters,142 or otherwise
adopting some or all conditions of the
BIC Exemption, we gave careful
consideration to the DOL Fiduciary Rule
in developing Regulation Best
Interest.143 Regulation Best Interest
takes into account both market
participant experience with the
implementation of—and reaction to the
subsequent overturning of the DOL
Fiduciary Rule, in particular the BIC
Exemption. As discussed in the
Proposing Release, we believe
140 As discussed in the Relationship Summary
Adopting Release, we are adopting a requirement in
Form CRS for a description of a firm’s applicable
standard of conduct using prescribed wording.
141 See Fiduciary Interpretation.
142 See AARP August 2018 Letter; Wells Fargo
Letter; Schwab Letter; NASAA August 2018 Letter.
143 On March 15, 2018, the DOL Fiduciary Rule
was vacated by the United States Court of Appeals
for the Fifth Circuit. Chamber of Commerce v. U.S.
Dep’t of Labor, 885 F.3d 360 (5th Cir. 2018).

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Regulation Best Interest is consistent
with many of the key components of the
DOL’s Impartial Conduct Standards.
Regulation Best Interest incorporates
principles underlying the DOL
Fiduciary Rule—such as the concept of
conflict mitigation—that, based on our
expertise in regulating the broker-dealer
industry, we believe would further our
goal of reducing the effect of conflicts
on recommendations and would
promote recommendations in the best
interest of the retail customer even
where conflicts continue to exist.
2. General Obligation To ‘‘Act in Best
Interest’’
We agree with commenters that
further clarity should be provided on
what it means to ‘‘act in the best
interest’’ of a retail customer and
particularly what it means to make a
recommendation in a retail customer’s
‘‘best interest’’ under the Care
Obligation. In the guidance that follows
and in the detailed discussion of each
of the Disclosure, Care, Conflict of
Interest, and Compliance Obligations in
Section II.C below, we provide further
clarity on how a broker-dealer acts in a
retail customer’s best interest when
making a recommendation.
First, in response to comments, we are
clarifying the relationship between the
General Obligation and the specific
component obligations described in
Section II.C. These specific component
obligations expressly set forth what it
means to ‘‘act in the best interest’’ of the
retail customer in accordance with the
General Obligation. As articulated in the
proposal, and discussed in more detail
in the relevant sections specifically
addressing these obligations, these
specific component obligations draw on
principles underlying the fiduciary
duties of care and loyalty interpreted
under the Advisers Act and as
recommended in the 913 Study.
However, we believe that adopting
specific regulatory obligations for
broker-dealers appropriately reflects the
structure and characteristics of brokerdealer relationships with retail
customers and the extensive existing
regulatory regime applicable to brokerdealers. Regulation Best Interest does
not establish a ‘‘safe harbor.’’ The
specific component obligations of
Regulation Best Interest are mandatory,
and failure to comply with any of the
components would violate the General
Obligation. By contrast, compliance
with a safe harbor is optional, and
failure to comply with the terms of the
safe harbor does not necessarily violate
the relevant legal requirement.
Second, while we are declining to
expressly define ‘‘best interest’’ in the

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rule text as suggested by some
commenters, we are providing
interpretations and guidance regarding
the application of the specific
component obligations and in particular
what it means to make a
recommendation in the retail customer’s
‘‘best interest.’’ Consistent with the
proposal, compliance with each of the
specific component obligations of
Regulation Best Interest, including the
‘‘best interest’’ requirement in the Care
Obligation, will be applied in a
principles-based manner. This
principles-based approach to
determining what is in the ‘‘best
interest’’ is similar to an investment
adviser’s fiduciary duty, which has
worked well for advisers’ retail clients
and our markets. As proposed, whether
a broker-dealer has acted in the retail
customer’s best interest will turn on an
objective assessment of the facts and
circumstances of how the specific
components of Regulation Best Interest
are satisfied at the time that the
recommendation is made (and not in
hindsight). In particular, whether a
broker-dealer’s recommendation
satisfies the requirements of the Care
Obligation is an objective evaluation
that is not susceptible to a bright line
test; rather it turns on the facts and
circumstances of the particular
recommendation and the particular
retail customer, at the time the
recommendation is made. This factsand-circumstances approach recognizes
that one size does not fit all, and what
is in the best interest of one retail
customer may not be in the best interest
of another.
We understand that markets evolve
and we encourage broker-dealers to
have an open dialogue with the
Commission and Commission’s staff as
questions arise.
As a general matter, however, in
response to comments, we are changing
guidance in the Proposing Release
stating that under Regulation Best
Interest, a broker-dealer’s financial
interests cannot be the ‘‘predominant
motivating factor behind’’ a
recommendation, and that a ‘‘brokerdealer would violate proposed
Regulation Best Interest’s Care
Obligation and Conflict of Interest
Obligations, if any recommendation was
predominantly motivated by the brokerdealer’s self-interest.’’ 144 Many
commenters expressed concerns
regarding and requested removal of the
‘‘predominantly motivated’’ language,
stating that it contradicted statements
that there was no scienter requirement
under Regulation Best Interest by
144 See

Proposing Release at 21588.

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requiring a consideration of intent,
creating ambiguity as to what extent a
broker-dealer’s interests could influence
its recommendations or requiring a
weighing of the broker-dealer’s interests
against the retail customer’s interests.145
Some commenters, however, indicated
support for the ‘‘predominantly
motivated language’’ in the context of
agreeing with the Commission’s
proposed ‘‘without placing the financial
or other interest . . . ahead’’ phrasing of
the best interest standard.146
In consideration of these comments,
we are modifying these statements to
remove this language and to clarify our
intent. Specifically, Regulation Best
Interest recognizes that while a brokerdealer will inevitably have some
financial interest in a
recommendation—the nature and
magnitude of which will vary—the
broker-dealer’s interests cannot be
placed ahead of the retail customer’s
interest.147 Accordingly, Regulation Best
Interest will not per se prohibit a brokerdealer from making recommendations
where conflicts of interest are
present.148 Instead, Regulation Best
Interest includes specific requirements
for broker-dealers to address their
conflicts of interest.149 These specific
requirements are designed to promote
recommendations that are in the best
interest of the retail customer despite
the existence of these conflicts of
interest. In other words,
recommendations involving conflicts of
interest between the broker-dealer and
the retail customer will be permissible
under Regulation Best Interest only to
the extent that the broker-dealer satisfies
145 See CFA August 2018 Letter; Better Markets
August 2018 Letter; Wells Fargo Letter.
146 See AXA Letter; FSI August 2018 Letter.
147 See id. See infra Section II.C.2.
148 Such conflicts of interest may include:
Charging commissions or other transaction-based
fees; receiving or providing differential
compensation based on the product sold; receiving
third-party compensation; recommending
proprietary products, products of affiliates or a
limited range of products; recommending a security
underwritten by the broker-dealer or a broker-dealer
affiliate, including initial public offerings (‘‘IPOs’’);
recommending a transaction to be executed in a
principal capacity; allocating trades and research,
including allocating investment opportunities (e.g.,
IPO allocations or proprietary research or advice)
among different types of customers and between
retail customers and the broker-dealer’s own
account; considering cost to the broker-dealer of
effecting the transaction or strategy on behalf of the
customer (for example, the effort or cost of buying
or selling a complex or an illiquid security); or
accepting a retail customer’s order that is contrary
to the broker-dealer’s recommendations. While
these practices will not be per se prohibited by
Regulation Best Interest, we are also not saying that
these practices are per se consistent with Regulation
Best Interest or other obligations under the federal
securities laws. See also Proposing Release at
21587.
149 Id at 21588.

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the specific requirements of Regulation
Best Interest.
Further, for the reasons discussed in
the proposal, we confirm that
Regulation Best Interest is not intended
to limit or eliminate recommendations
that encourage diversity in a retail
customer’s portfolio through investment
in a wide range of products, including,
when appropriate, products that may
involve higher risks or cost to the retail
customer, as these products may be in
the best interest of certain retail
customers at certain times or in certain
circumstances.150 Regulation Best
Interest will not necessarily obligate a
broker-dealer to recommend the ‘‘least
expensive’’ or the ‘‘least remunerative’’
security or investment strategy,
provided the broker-dealer complies
with the specific component
obligations.151 In other words,
Regulation Best Interest will allow a
broker-dealer to recommend products
that entail higher costs or risks for the
retail customer, or that result in greater
compensation to the broker-dealer, or
that are more expensive, than other
products, provided that the brokerdealer complies with the specific
component obligations detailed
below,152 including the requirement to
make these recommendations exercising
reasonable diligence, care, and skill to
have a reasonable basis to believe that
the recommendation is in the retail
customer’s best interest and does not
place the broker-dealer’s interest ahead
of the retail customer’s interest.
Finally, some commenters sought
additional clarity whether Regulation
Best Interest would extend beyond a
particular recommendation, impose a
duty to monitor the retail customer’s
account, or apply to unsolicited
orders.153 We confirm that, consistent
with the Proposing Release and as
discussed further below, Regulation
Best Interest would not: (1) Extend
beyond a particular recommendation 154
or generally require a broker-dealer to
have a continuous duty to a retail
customer or impose a duty to
monitor; 155 (2) require the broker-dealer
150 Id.
151 See

id.
id.
153 See, e.g., SIFMA August 2018 Letter;
Transamerica August 2018 Letter; see also generally
CFA August 2018 Letter; Better Markets August
2018 Letter.
154 However, paragraph (a)(2)(iii)(C) of Regulation
Best Interest addresses a series of recommended
transactions. See Section II.C.2.d.
155 However, as discussed below, it is our
position that when a broker-dealer agrees with a
retail customer to provide account monitoring
services: (1) The broker-dealer would be required to
disclose the material facts (including scope and
frequency) of those services pursuant to the
152 See

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to refuse to accept a customer’s order
that is contrary to the broker-dealer’s
recommendation; or (3) apply to selfdirected or otherwise unsolicited
transactions by a retail customer,
whether or not she also receives
separate recommendations from the
broker-dealer.
B. Key Terms and Scope of Best Interest
Obligation
1. Natural Person Who Is an Associated
Person
In the Proposing Release, we stated
that a ‘‘natural person who is an
associated person’’ is a natural person
who is an associated person as defined
in Section 3(a)(18) of the Exchange Act:
‘‘any partner, officer, or director or
branch manager of such broker or dealer
(or any person occupying a similar
status or performing similar functions);
any person directly or indirectly
controlling, controlled by, or under
common control with such broker or
dealer; or any employee of such broker
or dealer, except that any person
associated with a broker or dealer whose
functions are solely clerical or
ministerial shall not be included in the
meaning of such term for purposes of
Section 15(b) of this title (other than
paragraph 6 thereof).’’ 156 In limiting the
term to only a ‘‘natural person who is
an associated person,’’ we sought to
exclude affiliated entities of the brokerdealer that are not themselves brokerdealers, as they are not the intended
focus of Regulation Best Interest.157
We solicited comment on whether the
application of the definition was
appropriate, alternative definitions
should be considered, or the scope
should be broadened or narrowed. We
received no comments and, for the
reasons discussed in the Proposing
Release, are using the term ‘‘natural
person who is an associated person,’’
consistent with the definition in Section
3(a)(18) of the Exchange Act.158

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2. Recommendation of Any Securities
Transaction or Investment Strategy
Involving Securities
We proposed to apply Regulation Best
Interest to broker-dealer
recommendations of any securities
Disclosure Obligation, and (2) such agreed-upon
account monitoring services involve an implicit
recommendation to hold (i.e., an implicit
recommendation not to buy, sell, or exchange assets
pursuant to that securities account review) at the
time agreed-upon monitoring occurs, which is a
recommendation ‘‘of any securities transaction or
investment strategy involving securities’’ covered
by Regulation Best Interest.
156 Proposing Release at 21592–21593.
157 Id.
158 Id.

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transaction or investment strategy
involving securities to a retail customer.
We believed that by applying Regulation
Best Interest to a ‘‘recommendation,’’ as
that term is currently interpreted under
broker-dealer regulation, we would
make clear when the obligation applied
and would maintain efficiencies for
broker-dealers that have already
established infrastructures to comply
with suitability obligations, which are
recommendation-based.159 Moreover,
we believed that focusing on each
recommendation would appropriately
capture and reflect the various types of
recommendations that broker-dealers
make to retail customers, whether on an
episodic, periodic, or more frequent
basis and would help ensure that retail
customers receive the protections that
Regulation Best Interest is intended to
provide. We received numerous
comments supporting our general
proposed approach to what is a
‘‘recommendation,’’ while several
commenters suggested modifications
regarding the scope of a
recommendation or sought additional
clarity regarding particular scenarios.160
As we indicated in the Proposing
Release, in our view, the determination
of whether a broker-dealer has made a
recommendation that triggers
application of Regulation Best Interest
should turn on the facts and
circumstances of the particular situation
and therefore, whether a
recommendation has taken place is not
susceptible to a bright line definition.
Factors considered in determining
whether a recommendation has taken
place include whether the
communication ‘‘reasonably could be
viewed as a ‘call to action’’’ and
‘‘reasonably would influence an
investor to trade a particular security or
group of securities.’’ 161 The more
individually tailored the
communication to a specific customer
or a targeted group of customers about
a security or group of securities, the
159 Id.
160 See generally SIFMA August 2018 Letter;
Financial Engines Letter; IPA Letter; Putnam Letter;
Cambridge Letter (recommending the Commission
adopt FINRA’s approach to determining whether a
communication is a ‘‘recommendation’’). But see
NASAA August 2018 Letter; BlackRock Letter; FSI
August 2018 Letter (recommending modifications
or clarifications to ‘‘recommendation’’).
161 See Proposing Release at 21592–21593; see
also NASD Notice to Members 01–23, Online
Suitability—Suitability Rules and Online
Communications (Apr. 2001); Notice of Filing
Proposed Rule Change to Adopt FINRA Rule 2090
(Know Your Customer) and FINRA Rule 2111
(Suitability) in the Consolidated FINRA Rulebook,
Exchange Act Release No. 62718 (Aug. 13, 2010),
75 FR 51310 (Aug. 19, 2010), as amended, Exchange
Act Release No. 67218A (Aug. 20, 2010), 75 FR
52562 (Aug. 26, 2010) (discussing what it means to
make a ‘‘recommendation’’).

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33335

greater the likelihood that the
communication may be viewed as a
‘‘recommendation.’’ We continue to
believe this general framework
regarding what is a recommendation is
appropriate, and for the reasons
discussed in the Proposing Release, are
taking this approach.162
While certain commenters
recommended formally defining the
term ‘‘recommendation,’’ including
what does not come within that term,163
other commenters maintained there is
no need to define ‘‘recommendation’’
and expressed support for harmonizing
the term in accordance with existing
broker-dealer guidance and case law.164
We agree with commenters that clarity
is important, and we continue to believe
that the current principles-based
approach underlying existing
Commission precedent and guidance
will provide effective clarity. Being
more prescriptive could result in a
definition that is over inclusive, under
inclusive, or both.165 We believe that
what constitutes a recommendation is
highly fact-specific and not conducive
to an express definition in the rule text.
Furthermore, we believe that the
existing framework has worked well,
that broker-dealers generally are familiar
with the existing framework, and
therefore, that this approach should
continue. Accordingly, we are taking the
approach as set forth in the Proposing
Release, which we believe provides a
workable framework and clarity for
broker-dealers regarding the contours of
a recommendation. To provide further
clarity, in response to comments, we
describe below the types of
communications that we generally view
162 See

Proposing Release at 21592–21593.
e.g., Prudential Letter (recommending an
express definition of ‘‘recommendation’’ that would
codify guidance).
164 See, e.g., SIFMA August 2018 Letter
(‘‘Similarly, the SEC refers to the FINRA concept of
‘recommendation’ rather than prescribing a specific
definition. We believe this is appropriate, and we
believe that a carve-out for educational materials
would be consistent with that approach.’’); Edward
Jones Letter (‘‘We do not believe it is necessary for
the SEC to define the phrase ‘at the time the
recommendation is made,’ because its meaning is
plain.’’); Cambridge Letter (‘‘FINRA Rule 2111 sets
forth an explicit standard for what constitutes a
recommendation and recognizes ‘call to action’ as
the hallmark. Cambridge believes this definition is
fully understood and in use by the industry.’’
Cambridge also states that harmonizing the final
rule with existing FINRA rules and guidance will
provide clarity to firms, financial professionals, and
investors).
165 See id.; Proposing Release at 21592–21593.
Similarly, FINRA has stated that ‘‘defining the term
‘recommendation’ is unnecessary and would raise
many complex issues in the absence of specific
facts of a particular case.’’ Exchange Act Release
No. 37588, 1996 SEC LEXIS 2285, at *29 (Aug. 20,
1996), 61 FR 44100, 44107 (Aug. 27, 1996).
163 See,

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as falling outside of the scope of a
recommendation.
We are also generally confirming our
interpretation in the Proposing Release
of the phrase ‘‘any securities transaction
or investment strategy involving
securities.’’ However, in response to
comments regarding the coverage of
certain securities or investment
strategies, we are providing further
clarity regarding our interpretation of
this phrase, and in certain instances,
refining our interpretation. For example,
as discussed more fully below, we are
confirming our interpretation that
recommendations of ‘‘any securities
transaction’’ (purchase, sale, or
exchange) and any ‘‘investment
strategy’’ involving securities (including
an explicit hold recommendation) are
recommendations ‘‘of any securities
transaction or investment strategy
involving securities.’’
In addition, we are generally
confirming our interpretation that a
broker-dealer may agree with a retail
customer to take on additional
obligations beyond those imposed by
Regulation Best Interest, for example, by
agreeing with a retail customer to
provide monitoring of the retail
customer’s investments on a periodic
basis for purposes of recommending
changes in investments.166 In response
to comments, it is our position that
when a broker-dealer agrees 167 with a
166 Proposing Release at 21594–21595. The
Proposing Release referred to ‘‘ongoing’’ monitoring
of the retail customer’s investments for purposes of
recommending changes in investments. Id. In the
discussion that follows and the Solely Incidental
Interpretation, we are clarifying our views regarding
broker-dealer account monitoring services, and the
application of Regulation Best Interest to such
services. As discussed in the Solely Incidental
Interpretation, a broker-dealer that agrees to
monitor a retail customer’s account on a periodic
basis for purposes of providing buy, sell, or hold
recommendations may still be considered to
provide advice in connection with and reasonably
related to effecting securities transactions. Brokerdealers may choose to adopt policies and
procedures that, if followed, would help
demonstrate that any agreed-upon monitoring is in
connection with and reasonably related to the
broker-dealer’s primary business of effecting
securities transactions. See Solely Incidental
Interpretation.
167 An agreement to provide account monitoring
services to a retail customer is not required to be
in writing (although whether or not the brokerdealer is providing account monitoring services,
and, if so, the scope and frequency of such
monitoring services, must be disclosed in writing
pursuant to the Disclosure Obligation). For
example, a broker-dealer’s oral undertaking that the
broker-dealer will monitor the retail customer’s
account on a periodic basis would create an
agreement to monitor the account on the terms
specified orally. Whether an agreement with the
retail customer has been established in the absence
of a written agreement or express oral undertaking
will depend on an objective inquiry of the
particular facts and circumstances, including
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retail customer to monitor that
customer’s account: (1) The brokerdealer is required to disclose the terms
of such account monitoring services
(including the scope and frequency of
those services) pursuant to the
Disclosure Obligation 168 and (2) such
agreed-upon monitoring involves an
implicit recommendation to hold (i.e.,
recommendation not to buy, sell, or
exchange assets pursuant to that
securities account review) at the time
the agreed-upon monitoring occurs,
which is a recommendation ‘‘of any
securities transaction or investment
strategy involving securities’’ covered
by Regulation Best Interest.169 As
discussed further below, in our view, a
recommendation of ‘‘an investment
strategy’’ includes implicit hold
recommendations in this context, where
the broker-dealer has agreed to monitor
a retail customer’s account.170 We are
interpreting the phrase ‘‘any security
transaction or investment strategy’’ to
include instances where there is an
agreement to monitor because in this
context there is an implicit
recommendation to hold at the time the
agreed-upon monitoring occurs when
the broker-dealer’s course of conduct. In cases
where a broker-dealer does not intend to create an
implied agreement to monitor the retail customer’s
account through course of conduct or otherwise,
and to avoid ambiguity over whether an implied
agreement has been formed, broker-dealers should
take steps to ensure that all communications with
the retail customer are consistent with its
disclosures required under the Disclosure
Obligation, which in this case would require the
broker-dealer to clearly disclose that the brokerdealer does not monitor the retail customer’s
account.
168 To avoid ambiguity over whether or when an
implicit hold recommendation has been made, this
disclosure should identify with specificity when
the agreed upon monitoring will occur. See also
FINRA Regulatory Notice 12–25 at Q14.
169 See IAC 2018 Recommendation; NAIFA Letter;
AFL–CIO April 2019 Letter; see also FINRA
Regulatory Notice 12–25, Suitability—Additional
Guidance on FINRA’s New Suitability Rule (May
2012) at Q3 and accompanying footnotes.
170 See FINRA Rule 2111.03; FINRA Regulatory
Notice 12–25. The Commission recognizes that its
position with respect to Regulation Best Interest
differs from that provided in FINRA guidance
regarding whether implicit hold recommendations
are subject to the suitability rule. This
interpretation applies in the context of the
protections of Regulation Best Interest, and does not
change the scope of the application of the FINRA
suitability rule. Further, while for purposes of
Regulation Best Interest implicit hold
recommendations are generally recommendations
of ‘‘any securities transaction or investment strategy
regarding securities’’ where a broker-dealer agrees
to provide account monitoring services, we are not
otherwise addressing the treatment of implicit hold
recommendations in other contexts. In other words,
except where a broker-dealer agrees to provide
account monitoring services as described,
consistent with existing FINRA guidance,
Regulation Best Interest will only apply to explicit
hold recommendations. See FINRA Regulatory
Notice 12–25 at Q3 and accompanying footnotes.

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the broker-dealer does not provide an
express recommendation to buy, sell, or
hold.171
We recognize that a broker-dealer may
voluntarily, and without any agreement
with the customer, review the holdings
in a retail customer’s account for the
purposes of determining whether to
provide a recommendation to the
customer. We do not consider this
voluntary review to be ‘‘account
monitoring,’’ nor would it in itself
create an implied agreement with the
retail customer to monitor the
customer’s account. Any explicit
recommendation made to the retail
customer as a result of any such
voluntary review would be subject to
Regulation Best Interest.
Finally, in response to comments
received, we have modified the rule text
to provide that an ‘‘investment strategy
involving securities’’ includes ‘‘account
recommendations.’’ We interpret
‘‘account recommendations’’ to include
recommendations of securities account
types generally, as well as
recommendations to roll over or transfer
assets from one type of account to
another (e.g., workplace retirement plan
to an IRA). As discussed in more detail
below, we believe that
recommendations of securities account
types are consistent with the types of
recommendations that have been treated
as investment strategies,172 because the
171 Our interpretation is generally consistent with
commenters’ views regarding the application of
Regulation Best Interest to implicit hold
recommendations in the context of agreed-upon
account monitoring services. See IAC 2018
Recommendation (‘‘we believe the best interest
standard should be applied to the broker-dealer’s
monitoring of the customer account, where brokers
provide ongoing services to the account. In essence,
this would apply the best interest standard to the
implicit ‘‘no recommendation’’ recommendation
that a broker makes when reviewing the account
and recommending no change.’’); NAIFA Letter
(asserting broker-dealers should be free to agree to,
and define the nature of, any ongoing relationship
via contract, such as including monitoring services).
See also AFL–CIO April 2019 Letter (‘‘adopt a
principles-based obligation to monitor the account,
where the nature and extent of the monitoring
follows the contours of the relationship’’). See also
supra footnote 166 (encouraging broker-dealers to
adopt policies and procedures that, if followed,
would help demonstrate that any agreed-upon
monitoring is in connection with and reasonably
related to the broker-dealer’s primary business of
effecting securities transactions in accordance with
the Solely Incidental Interpretation).
172 Although FINRA has stated that a
recommendation concerning the type of workplace
retirement plan account in which a customer
should hold his retirement investments typically
involves a recommended securities transaction, and
thus is subject to suitability requirements, FINRA
did not address whether such a recommendation
would be an investment strategy in the absence of
such a recommended securities transaction. FINRA
Regulatory Notice 13–45, Rollovers to Individual
Retirement Accounts—FINRA Reminds Firms of
Their Responsibilities Concerning IRA Rollovers

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type of securities account recommended
is an investment strategy that has the
potential to greatly affect retail
customers’ costs and investment
returns.173 For example, different types
of securities accounts can offer different
features, products, or services, some of
which may—or may not—be in the best
interest of certain retail customers.174
Our interpretation is consistent with a
majority of the IAC and other
commenters that stated that such
important recommendations relating to
securities are ‘‘investment strategies
involving securities’’ and thus within
the scope of Regulation Best Interest.175
We note that, although we are
specifically identifying ‘‘account
recommendations’’ as an investment
strategy involving securities in the rule
text, an account recommendation is just
one example of an investment strategy.

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a. Recommendation
We interpret whether a
‘‘recommendation’’ has been made to a
retail customer that triggers the best
(Dec. 2013). Taking this approach is consistent with
Commission precedent finding a recommendation
of a margin strategy to be unsuitable under the
NASD suitability rule, in light of the associated
transactions costs and the impact the strategy could
have on customer returns. See F.J. Kaufman & Co.,
50 SEC. 164 (1989) (Commission Opinion) (stating
that a broker-dealer recommending the purchase of
securities using a margin strategy ‘‘at a minimum
. . . had an obligation to understand that, in light
of the applicable transaction costs, the two
components of his recommended strategy, when
combined, always would have produced returns
inferior to those that could have been obtained from
one of those components alone.’’).
173 See SEC Office of Investor Education and
Advocacy, Updated Investor Bulletin: How Fees
and Expenses Affect Your Investment Portfolio
(Sep. 2016).
174 In addition to brokerage versus investment
advisory accounts, there are also many options or
account types within brokerage accounts. For
example, brokerage accounts can include:
Education accounts (e.g., 529 Plans and tax-free
Coverdell accounts); retirement accounts (e.g., IRA,
Roth IRA, or SEP–IRA accounts); and specialty
accounts (e.g., cash or margin accounts, and
accounts with access to Forex or options trading).
Different brokerage accounts can also offer different
levels of services, such as access to online trading,
or can offer different products, for example, in
higher dollar amount accounts (e.g., access to
products with break-points).
175 See, e.g., IAC 2018 Recommendation
(‘‘Decisions about which type of account to open
have the potential to greatly affect their costs.
Moreover, both rollover and account type
recommendations are recommendations of an
‘investment strategy involving securities’ that can
have substantial potential long-term impacts on
investors. Both types of recommendations
inherently involve potential conflicts of interest,
making it critical that advisers and brokers put their
clients’ interests ahead of their own in making such
recommendations.’’); Capital Group Letter
(‘‘Choosing between a brokerage and an advisory
account is an incredibly impactful decision for
investors. It is very important that these
recommendations be made in the best interest of the
retail [customer].’’).

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interest obligation consistent with
precedent under the anti-fraud
provisions of the federal securities laws
as applied to broker-dealers, and with
how the term has been applied under
the rules of self-regulatory organizations
(‘‘SROs’’).176 Several commenters
supported this approach, and
specifically agreed with following the
existing facts and circumstances
approach as understood under federal
securities laws and SRO rules.177
Commenters sought additional clarity
regarding the scope of a
recommendation and in particular
whether certain activities or
communications would constitute
recommendations, and requested that
the Commission incorporate or
specifically identify exceptions or
exclusions such as the exceptions
recognized in FINRA Rule 2111.03
(Suitability) or acknowledged by the
DOL.178 Some commenters also sought
176 See Proposing Release at 21592–21595. In this
regard, Regulation Best Interest does not extend
beyond a particular recommendation, for example,
by imposing a general broker-dealer duty to monitor
a customer’s account or by applying the duty to
unsolicited orders.
177 See, e.g., AXA Letter; SIFMA August 2018
Letter; IPA Letter; Putnam Letter; FSI August 2018
Letter; Cetera August 2018 Letter.
178 See, e.g., Prudential Letter; Transamerica
August 2018 Letter; SPARK Letter; see also FINRA
Rule 2111.03 (excluding the following
communications from the coverage of Rule 2111 as
long as they do not include (standing alone or in
combination with other communications) a
recommendation of a particular security or
securities: (a) General financial and investment
information, including: (i) Basic investment
concepts, such as risk and return, diversification,
dollar cost averaging, compounded return, and tax
deferred investment, (ii) historic differences in the
return of asset classes (e.g., equities, bonds, or cash)
based on standard market indices, (iii) effects of
inflation, (iv) estimates of future retirement income
needs, and (v) assessment of a customer’s
investment profile; (b) Descriptive information
about an employer-sponsored retirement or benefit
plan, participation in the plan, the benefits of plan
participation, and the investment options available
under the plan; (c) Asset allocation models that are:
(i) Based on generally accepted investment theory,
(ii) accompanied by disclosures of all material facts
and assumptions that may affect a reasonable
investor’s assessment of the asset allocation model
or any report generated by such model, and (iii) in
compliance with Rule 2214 (Requirements for the
Use of Investment Analysis Tools) if the asset
allocation model is an ‘‘investment analysis tool’’
covered by Rule 2214; and (d) Interactive
investment materials that incorporate the above).
The DOL took a similar approach, excluding from
the term ‘‘recommendation,’’ among other things,
general communications and investment education
(including plan information, general financial,
investment and retirement information, asset
allocation models and interactive investment
materials). See DOL Interpretative Bulletin 96–1;
Participant Investment Education, 29 CFR 2509.96–
1, 61 FR 29588 (Jun. 11, 1996) (IB 96–1). See also
DOL, Definition of the Term ‘‘Fiduciary’’; Conflict
of Interest Rule—Retirement Investment Advice, 81
FR 20945, 20975 (Apr. 8, 2016) (noting that the now
vacated DOL Fiduciary Rule would have carved out
investment education from the definition of
investment advice, incorporating much of IB 96–1).

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an explicit carve out or confirmation
that certain communications, such as
general education materials, general
retirement planning materials, or
general retirement communications,
including ‘‘pure distribution
recommendations,’’ are not
‘‘recommendations’’ subject to
Regulation Best Interest.179
The treatment of certain
communications as ‘‘education’’ rather
than ‘‘recommendations’’ is well
understood by broker-dealers. We
generally view the following types of
communications as not being
recommendations of any securities
transaction or investment strategy
involving securities as long as they do
not include, standing alone or in
combination with other
communications, a recommendation of
a particular security or securities or
particular investment strategy involving
securities: 180
• General financial and investment
information, including:
Æ Basic investment concepts, such as
risk and return, diversification, dollar
cost averaging, compounded return, and
tax deferred investment,
Æ historic differences in the return of
asset classes (e.g., equities, bonds, or
cash) based on standard market indices,
Æ effects of inflation,
Æ estimates of future retirement
income needs, and
Æ assessment of a customer’s
investment profile;
• Descriptive information about an
employer-sponsored retirement or
benefit plan, participation in the plan,
the benefits of plan participation, and
the investment options available under
the plan; 181
179 See SPARK Letter; NAGDCA Letter. Similarly,
communications regarding participation in a plan
and communications to make or increase plan
contributions, without more, would generally not
come within ‘‘recommendation.’’
180 This concept also applies to investment
strategies. See FINRA Regulatory Notice 11–25,
Know Your Customer and Suitability—New
Implementation Date for and Additional Guidance
on the Consolidated FINRA Rules Governing KnowYour-Customer and Suitability Obligations (May
2011) at FAQ 9 (‘‘It is important to note, however,
that the suitability rule would not apply to a firm’s
explanation of a strategy falling outside the safeharbor provision if a reasonable person would not
view the communication as a recommendation.
Accordingly, the suitability rule would cover a
firm’s recommendation that a customer purchase
securities using margin, whereas the rule generally
would not cover a firm’s brochure that simply
explains the risks and benefits of margin without
suggesting that the customer take action.’’).
181 While this descriptive information would be
treated as ‘‘education’’ rather than a
‘‘recommendation,’’ we caution broker-dealers to
ensure that communications by their associated
persons intended as ‘‘education’’ do not cross the
line into ‘‘recommendations.’’ See FINRA
Regulatory Notice 13–45.

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• Asset allocation models that are:
Æ Based on generally accepted
investment theory,
Æ accompanied by disclosures of all
material facts and assumptions that may
affect a reasonable investor’s assessment
of the asset allocation model or any
report generated by such model, and
Æ in compliance with FINRA Rule
2214 (Requirements for the Use of
Investment Analysis Tools) if the asset
allocation model is an ‘‘investment
analysis tool’’ covered by FINRA Rule
2214; 182 and
• Interactive investment materials
that incorporate the above.
Thus, for example, a general
conversation about retirement planning,
such as providing a company’s
retirement plan options to a retail
customer, would not, by itself, rise to
the level of a recommendation.
Similarly, where a broker-dealer informs
a retail customer that he or she needs to
take a required minimum distribution
under the Internal Revenue Code, we
would not interpret such
communication, by itself, to rise to the
level of a recommendation. Such a
communication would be considered
investment education or descriptive
information, provided it does not
involve, for example, a recommendation
regarding specific securities to be sold
or a recommendation regarding specific
securities to be purchased with the
proceeds of any sale.183 We agree with
commenters that Regulation Best
Interest should not stifle investment
education as a means to encourage
financial wellness, or otherwise restrict
broker-dealers from disseminating
information about, for example,
retirement plans, and the approach we
are taking to what is or is not considered
a ‘‘recommendation’’ achieves this
goal.184
182 In this regard, as an allocation
recommendation becomes narrower or more
specific, the recommendation gets closer to
becoming a recommendation of particular securities
and, thus, subject to the suitability rule. See FINRA
Regulatory Notice 12–25 at FAQ 8.
183 See, e.g., SPARK Letter (asking for
confirmation that ‘‘pure ‘distribution
recommendations’ involving retirement accounts,
such as those required under Internal Revenue Code
section 401(a)(9), are not a ‘recommendation of any
securities transaction or investment strategy
involving securities.’ ’’). However, informing a retail
customer about a required minimum distribution
may become a recommendation where a brokerdealer includes (standing alone or in combination
with other communications) a recommendation of,
or regarding, a particular security or securities or an
investment strategy involving securities. See FINRA
Rule 2111 (Suitability) FAQ.
184 See SPARK Letter (suggesting expressly
excluding beneficial conversations about retirement
savings and ‘‘ensuring that Regulation Best Interest
does not discourage broker-dealers in any way from
having these important conversations with

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b. Interpretation of Any Securities
Transaction or Investment Strategy
Involving Securities
As proposed, Regulation Best Interest
would apply to recommendations of
‘‘any securities transaction’’ (purchase,
sale, and exchange) and any
‘‘investment strategy’’ involving
securities (including explicit
recommendations to hold a security or
regarding the manner in which it is to
be purchased or sold). In addition, the
Proposing Release stated that securities
transactions or investment strategies
involving securities might also include
recommendations to roll over or transfer
assets from one type of account to
another, such as recommendations to
roll over or transfer assets from a
retirement plan.185 Finally, although we
did not propose to cover account type
recommendations generally, we noted
that evaluating the appropriateness of
the type of account is an issue that
relates to both broker-dealers and
investment advisers, and requested
comment on whether and how we
should address this type of
recommendation.
In response to the Proposing Release,
several commenters supported the
Commission’s approach; however,
several commenters also requested
modifications or clarifications regarding
products or strategies covered under
Regulation Best Interest. For example, a
majority of the IAC and numerous
commenters highlighted the conflicts of
interest associated with account type
recommendations, and urged the
Commission to apply Regulation Best
Interest to account type
recommendations generally, and to IRA
rollovers.186 Relatedly, several
commenters sought clarity regarding
whether and when a rollover or account
type recommendation would be a
‘‘recommendation’’ under Regulation
Best Interest.187
After careful consideration of
comments and feedback, the
Commission has modified the rule text
retirement investors’’); see also Transamerica
August 2018 Letter (suggesting the exclusion of
various conversations designed to facilitate
retirement savings).
185 See Proposing Release at 21595.
186 See, e.g., IAC 2018 Recommendation
(supporting the ‘‘expan[sion] of the best interest
obligation to cover rollover recommendations and
recommendations by dual registrant firms regarding
account types’’); see also NASAA August 2018
Letter; SPARK Letter; Financial Engines Letter;
Cetera August 2018 Letter; AFL–CIO April 2019
Letter. But see SIFMA August 2018 Letter (viewing
recommendations of an account type as not
involving a recommendation of a securities
transaction or investment strategy involving
securities).
187 See, e.g., NAGDCA Letter; FPC Letter.

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to state that an ‘‘investment strategy
involving securities’’ includes ‘‘account
recommendations.’’ We interpret
‘‘account recommendations’’ to include
recommendations by broker-dealers of
securities account types generally,188 as
well as recommendations to roll over or
transfer assets from one type of account
to another (e.g., workplace retirement
plan account to an IRA).189 In addition,
the Commission is stating its view that
‘‘any securities transaction or
investment strategy involving
securities’’ not only includes explicit
hold recommendations, but also
includes implicit hold
recommendations that are the result of
agreed-upon account monitoring
between the broker-dealer and retail
customer.190
Account Recommendations
The Proposing Release indicated that
securities transactions or investment
strategies involving securities could
include recommendations to roll over or
transfer assets from one type of account
to another, such as recommendations to
roll over or transfer assets in a
workplace retirement plan account to an
IRA, and requested comment on
whether and how to address account
type recommendations.
Several commenters suggested
expanding Regulation Best Interest to
explicitly cover rollover
recommendations and
recommendations by firms regarding
account types. For example, a majority
of the IAC explained that rollover
recommendations ‘‘are frequently
provided at a critical juncture in an
investor’s life—retirement—and are
often irrevocable decisions,’’ and further
noted that ‘‘[d]ecisions about which
type of account to open have the
188 In the discussion of the Care Obligation in
Section II.C.2, we are also setting forth additional
positions regarding the application of the Care
Obligation to account type recommendations, as
well as recommendations to roll over or transfer
assets from one account to another. See also
Fiduciary Interpretation (explaining that ‘‘[a]dvice
about account type includes advice about whether
to open or invest through a certain type of account
(e.g., a commission-based brokerage account or a
fee-based advisory account) and advice about
whether to roll over assets from one account (e.g.,
a retirement account) into a new or existing account
that the adviser or an affiliate of the adviser
manages’’).
189 A majority of the IAC and numerous
commenters expressed the importance of account
rollovers and the need for rollovers to be covered
under Regulation Best Interest. See, e.g., IAC 2018
Recommendation; Financial Engines Letter.
190 Several commenters stated that broker-dealers
should be able to contract with retail customers to
provide additional services, such as account
monitoring, and that such agreed upon services
should be subject to Regulation Best Interest. See,
e.g., NAIFA Letter; IAA August 2018 Letter; AFL–
CIO April 2019 Letter.

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potential to greatly affect [retail
customers’] costs’’ and that both
rollovers and account type
recommendations can ‘‘have substantial
potential long-term impacts on
investors.’’ 191 Another commenter
noted that ‘‘[r]etirees have no practical
ability to recoup lost spending power by
returning to work and setting aside
additional retirement savings, so they
are particularly vulnerable to the
adverse consequences of poor advice
and high expenses.’’ 192 Finally, a
majority of the IAC and several
commenters noted that broker-dealers
and investment advisers alike have a
strong economic incentive to
recommend investors roll over plan
assets into an IRA or otherwise transfer
assets to open an account with the
broker-dealer or investment adviser.193
After consideration of comments
received, including concerns expressed
about the conflicts associated with
recommendations of account types, IRA
rollovers and retirement advice more
broadly, it is our view that Regulation
Best Interest should apply broadly to
recommendations of securities
transactions and investment strategies
involving securities. Accordingly, the
Commission is including in the rule text
account recommendations as
recommendations that will be covered
by Regulation Best. ‘‘Account
recommendations’’ include
recommendations of securities account
types generally (e.g., to open an IRA or
other brokerage account), as well as
recommendations to roll over or transfer
assets from one type of account to
another (e.g., a workplace retirement
plan account to an IRA).
Although account recommendations,
including recommendations of a
securities account type generally, as
well as recommendations to roll over
assets from a workplace retirement plan
account to an IRA or to open an IRA
held at the broker-dealer, will almost
always involve a ‘‘securities
transaction’’ (such as a securities
purchase, sale, or exchange), and thus
would generally be subject to Regulation
Best Interest, we are modifying the rule
text to provide that such
recommendations are ‘‘investment
strategies involving securities’’ for
purposes of Regulation Best Interest,
191 IAC 2018 Recommendation. See also Letter
from Brian H. Graff, Executive Director and CEO,
Craig P. Hoffman, General Counsel, Doug Fisher,
Director of Retirement Policy, American Retirement
Association (‘‘ARA’’) (Dec. 13, 2018) (‘‘ARA
December 2018 Letter’’); Transamerica August 2018
Letter.
192 Fiduciary Benchmarks Letter.
193 See, e.g., IAC 2018 Recommendation; NASAA
August 2018 Letter; Fiduciary Benchmarks Letter.

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regardless of whether they are tied to a
specific securities transaction.194
Existing broker-dealer regulation and
guidance stresses that the term
‘‘investment strategy’’ is to be
interpreted broadly, and would include,
among others, recommendations
generally to use a bond ladder, day
trading, ‘‘liquefied home equity,’’ or
margin strategy involving securities,
irrespective of whether the
recommendations mention particular
securities.195 This approach
appropriately recognizes that customers
may rely on firms’ and associated
persons’ investment expertise and
knowledge, and therefore the brokerdealer should be responsible for such
recommendations, regardless of whether
those recommendations result in
transactions or generate transactionbased compensation.196
Account recommendations, including
recommendations of securities account
types generally (e.g., to open an IRA or
other brokerage account), and
recommendations to roll over or transfer
assets into an IRA or another securities
account, are consistent with the types of
recommendations that have been treated
as investment strategies under existing
suitability rules.197 Specifically, like
other investment strategies, account
recommendations are recommendations
of an approach or method (i.e., a
‘‘strategy’’) for how a retail customer
should engage in transactions in
securities, involve conflicts of interest,
and can have long-term effects on
investors’ costs and returns from their
investments.198 In addition, we believe
retail customers rely on broker-dealers’
and associated persons’ investment
expertise and knowledge with respect to
such recommendations. As a result,
such recommendations must be made
consistent with the retail customer’s
objectives and needs (i.e., investment
profile), irrespective of whether those
recommendations are tied to a specific
securities transaction. Consistent with a
majority of the IAC’s and other
commenters’ suggestions, we are
modifying the rule text to state that the
194 A recommendation that a retail customer roll
over or transfer assets to an IRA held at the brokerdealer, or open an IRA or another securities account
with a broker-dealer, presumes that the
recommendation would involve transactions in
securities, even if the rollover or account
recommendation does not result in transactions or
transaction-based compensation.
195 See FINRA Rule 2111.03; FINRA Regulatory
Notice 12–25 at Q7.
196 See FINRA Regulatory Notice 11–02, Know
Your Customer and Suitability—SEC Approves
Consolidated FINRA Rules Governing Know-YourCustomer and Suitability Obligations (Jan. 2011).
197 See supra footnotes 172 and 173.
198 See Capital Group Letter; see also IAC 2018
Recommendation; NASAA August 2018 Letter.

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term ‘‘investment strategy involving
securities’’ includes ‘‘account
recommendations,’’ which we interpret
to include recommendations of
securities account types generally, as
well as recommendations to roll over or
transfer assets.199
Thus, such account recommendations
will be subject to Regulation Best
Interest even if there is not a
recommendation of a securities
transaction. Although we proposed only
covering account type recommendations
that are tied to securities transactions,
and not account type recommendations
generally, we agree with commenters
and a majority of the IAC that consistent
with other investment strategies
involving securities, securities account
type recommendations should be
covered under Regulation Best Interest
regardless of whether those
recommendations result in transactions
or generate transaction-based
compensation.200 In addition, as
discussed in the Fiduciary
Interpretation, investment advisers’
fiduciary duty applies to advice to
clients about account types, which
satisfies the concerns about parity set
forth in the Proposing Release and
protects retail customers of brokerdealers and retail clients of investment
advisers alike.201
Where a financial professional who is
dually registered (i.e., an associated
person of a broker-dealer and a
supervised person of an investment
adviser (regardless of whether the
professional works for a dual-registrant,
affiliated firm, or unaffiliated firm)) is
making an account recommendation to
a retail customer,202 whether Regulation
Best Interest or the Advisers Act will
apply will depend on the capacity in
which the financial professional making
199 See, e.g., IAC 2018 Recommendation; Capital
Group Letter (‘‘Choosing between a brokerage and
an advisory account is an incredibly impactful
decision for investors. It is very important that these
recommendations be made in the best interest of the
retail [customer].’’).
200 See, e.g., IAC 2018 Recommendation; NASAA
August 2018 Letter.
201 See Fiduciary Interpretation.
202 As discussed in more detail below in Section
II.B.3.b, Regulation Best Interest applies to a retail
customer who receives a recommendation and uses
the recommendation. Among other things, we
interpret a retail customer to use a recommendation
when: (1) The retail customer opens a brokerage
account with the broker-dealer, regardless of
whether the broker-dealer receives compensation;
(2) the retail customer has an existing account with
the broker-dealer and receives a recommendation
from the broker-dealer, regardless of whether the
broker-dealer receives or will receive compensation,
directly or indirectly, as a result of that
recommendation; or (3) the broker-dealer receives
or will receive compensation, directly or indirectly
as a result of that recommendation, even if that
retail customer does not have an account at the
firm.

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the recommendation is acting.203 As
discussed further in the Care Obligation,
if the individual is acting as a brokerdealer or associated person thereof, he
or she must comply with Regulation
Best Interest and will need to take into
consideration all types of accounts
offered by the financial professional
(i.e., both brokerage and advisory
accounts) when making the
recommendation of an account that is in
the retail customer’s best interest.
In the case of an account
recommendation by a financial
professional who is only registered as an
associated person of broker-dealer
(regardless of whether that broker-dealer
entity is a dual-registrant or affiliated
with an investment adviser), Regulation
Best Interest will apply to the
recommendation. Further, the
associated person can only recommend
a brokerage account that the brokerdealer offers when the associated person
has a reasonable basis to believe that the
recommended brokerage account is in
the best interest of the retail customer
and the broker-dealer otherwise
complies with Regulation Best Interest.
Regulation Best Interest would apply
to account recommendations by the
dual-registrant firm, and consistent with
the Conflict of Interest Obligation, the
firm would need to, among other things,
establish, maintain and enforce policies
and procedures to identify, disclose,
and mitigate, any incentives for an
associated person of the broker-dealer to
place the interest of the firm or the
associated person ahead of the interests
of the retail customer.
In the discussion of the Care
Obligation below, we discuss how a
broker-dealer and associated persons of
a broker-dealer can make
recommendations of securities account
types, including recommendations to
open an IRA or to roll over assets into
an IRA, in the best interest of the retail
customer.
Hold Recommendations

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The Proposing Release stated that
Regulation Best Interest would apply to
any securities transaction or investment
strategy involving securities, including
203 See Section II.B.3.d, below for discussion of
factors the Commission will consider in
determining capacity. See also Fiduciary
Interpretation at footnotes 42–44 and accompanying
text. As discussed in the Fiduciary Interpretation,
while advice to prospective clients about these
matters is subject to the antifraud provisions under
section 206 of the Advisers Act, the adviser must
also satisfy its fiduciary duty with respect to any
such advice (e.g., regarding account type) once a
prospective client becomes a client. Thus, at the
point in time at which the prospective client
becomes a client of the investment adviser (e.g., at
account opening), the fiduciary duty applies. Id.

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explicit recommendations to hold a
security or regarding the manner in
which it is to be purchased or sold to
retail customers.204 The Proposing
Release also recognized that brokerdealers may agree with a retail customer
by contract to take on additional
obligations beyond those imposed by
Regulation Best Interest, for example, by
agreeing with a retail customer to
provide periodic or ongoing services,
such as ongoing monitoring of the retail
customer’s investments for purposes of
recommending changes in
investments.205 To the extent that a
broker-dealer takes on such additional
obligations, the Proposing Release
indicated that Regulation Best Interest
would apply to any recommendations
about securities or investment strategies
involving securities made to retail
customers resulting from such services.
Several commenters agreed that
broker-dealers should be able to contract
with retail customers for additional
services and be able to expand the
relationship on their own terms, while
other commenters recommended that a
duty to monitor apply to broker-dealers
depending on the facts and
circumstances.206 Other commenters
suggested that the Commission not
impose a duty to monitor brokerage
accounts.207
We are confirming that, consistent
with existing broker-dealer regulation,
Regulation Best Interest will apply to
explicit recommendations to hold a
security or securities.208 We are also
confirming that Regulation Best Interest
does not impose a duty to monitor a
retail customer’s account. We agree,
however, with commenters that

Regulation Best Interest should apply to
any recommendations that result from
the account monitoring services that a
broker-dealer agrees to provide.209 We
believe that any monitoring service
agreed to by the broker-dealer, the scope
and frequency of which would be
required to be disclosed pursuant to the
Disclosure Obligation, would be covered
by Regulation Best Interest, as these
activities will result in a
recommendation to purchase, sell, or
hold a security, or the manner in which
to purchase, sell, or hold a security, at
each time the agreed-upon monitoring
occurs.210 Thus, by agreeing to perform
account monitoring services, the brokerdealer is taking on an obligation to
review and make recommendations
with respect to that account (e.g., to buy,
sell or hold) on that specified, periodic
basis.211 For example, if a broker-dealer
agrees to monitor the retail customer’s
account on a quarterly basis, the
quarterly review and each resulting
recommendation to purchase, sell, or
hold, will be a recommendation subject
to Regulation Best Interest. This is the
case even in instances where the brokerdealer does not communicate any
recommendation to the retail customer.
We believe that such an ‘‘implicit’’
recommendation to hold in this context
should be covered under Regulation
Best Interest in addition to ‘‘explicit’’
recommendations to hold.212
This position differs from FINRA
guidance, which generally states that
the FINRA suitability rule does not
cover an implicit recommendation to
hold.213 We believe that ‘‘implicit’’ hold
209 See

NAIFA Letter; IAA August 2018 Letter.
agreeing to provide any account monitoring
services, broker-dealers need to consider whether
the monitoring services fit within the broker-dealer
exclusion from the Advisers Act. See Solely
Incidental Interpretation.
211 The broker-dealer would also be required to
disclose the existence, scope, and frequency of such
account monitoring services pursuant to the
Disclosure Obligation. To avoid ambiguity over
whether or when an implicit hold recommendation
has been made, this disclosure should identify with
specificity when the agreed upon monitoring will
occur.
212 See FINRA Rule 2111.03 (noting ‘‘[t]he phrase
‘investment strategy involving a security or
securities’ used in this Rule is to be interpreted
broadly and would include, among other things, an
explicit recommendation to hold a security or
securities.’’); see also NASAA August 2018 Letter.
213 FINRA Regulatory Notice 11–25 at Q7 (‘‘The
rule, for instance, would not apply where an
associated person remains silent regarding, or
refrains from recommending the sale of, securities
held in an account. That is true regardless of
whether the associated person previously
recommended the purchase of the securities, the
customer purchased them without a
recommendation, or the customer transferred them
into the account from another firm where the same
or a different associated person had handled the
account.’’). See also id. at footnote 21 (‘‘To the
extent that a customer account at a broker-dealer
210 In

Release at 21593–21595.
We also asked whether broker-dealers who
provide ongoing monitoring should be considered
investment advisers. Id. at 21592.
206 See, e.g., NAIFA Letter (‘‘Additionally, while
the best interest standard applies to each
recommendation and may not be waived or
modified by contract as it applies to those
recommendations, it should not be interpreted to
create obligations with respect to other, expanded
services (e.g., ongoing research and monitoring
services, regular in-person meetings, etc.). Again,
however, advisors and consumers may agree to
expand the relationship in these ways on their own
terms.’’); see also CFA August 2018 Letter; Better
Markets August 2018 Letter (recommending the
Commission establish a duty to monitor depending
on the facts and circumstances); AFL–CIO April
2019 Letter.
We note that additional commenters maintained
that if broker-dealers agree with retail customers to
provide ongoing monitoring for purposes of
recommending changes in investments, they should
be considered investment advisers. See NASAA
August 2018 Letter; FPC Letter. We have addressed
these comments in the context of the Solely
Incidental Interpretation. See Solely Incidental
Interpretation.
207 See IAA August 2018 Letter.
208 See FINRA Regulatory Notice 12–25.

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205 Id.

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recommendations in this context, where
the broker-dealer agrees to provide
specified account monitoring services,
are similar to explicit hold
recommendations that are considered
‘‘investment strategies’’ because they
would constitute the type of
recommendations that retail customers
would be expected to rely upon and
would be a ‘‘call to action’’ in the sense
of a recommendation that the customer
stay the course.214 We believe that, in
this context, silence is tantamount to an
explicit recommendation to hold, and
should be viewed as a recommendation
to hold the securities for purposes of
Regulation Best Interest.215 Our
interpretation that the term ‘‘investment
strategy involving securities’’ includes
implicit recommendations to hold that
result from an agreement to monitor, at
the time the agreed-upon monitoring
occurs, is generally consistent with the
treatment of similar broker-dealer
communications as ‘‘investment
strategies,’’ and applies the Regulation
Best Interest protections to retail
customers relying on a broker-dealer’s
agreement to monitor the customer’s
account.216
can be discretionary under applicable federal
securities laws, the suitability rule generally would
not apply where a firm refrains from selling a
security. The rule states that it applies to explicit
recommendations to hold. Unless the facts indicate
that an associated person’s failure to sell securities
in a discretionary account was intended as or
tantamount to an explicit recommendation to hold,
FINRA would not view the associated person’s
inaction or silence in such circumstances as a
recommendation to hold the securities for purposes
of the suitability rule.’’).
214 See FINRA Regulatory Notice 11–25 at Q7
(‘‘The rule would apply, for example, when an
associated person meets with a customer during a
quarterly or annual investment review and
explicitly advises the customer not to sell any
securities in or make any changes to the account or
portfolio.’’). While the FINRA guidance goes on to
state that the rule generally would not cover an
implicit recommendation to hold, it does not
address the particular scenario in which a brokerdealer agrees to monitor an account (such as a
quarterly review) and discloses the terms of that
monitoring, and then during that review is silent on
whether the customer should make any changes.
Id.; see also FINRA Regulatory Notice 12–25 at Q3
and accompanying footnotes.
215 See FINRA Regulatory Notice 11–25 at
footnote 21.
216 Our interpretation is generally consistent with
a majority of the IAC’s and other commenters’
views regarding application of Regulation Best
Interest to implicit hold recommendations in the
context of agreed-upon account monitoring
services. See IAC 2018 Recommendation (‘‘We
believe the best interest standard should be applied
to the broker-dealer’s monitoring of the customer
account, where brokers provide ongoing services to
the account. In essence, this would apply the best
interest standard to the implicit ‘‘no
recommendation’’ recommendation that a broker
makes when reviewing the account and
recommends no change.’’); NAIFA Letter (asserting
broker-dealers should be free to agree to, and define
the nature of, any ongoing relationship via contract,

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Although for purposes of Regulation
Best Interest, implicit hold
recommendations will be considered a
recommendation of ‘‘any securities
transaction or investment strategy
regarding securities’’ where a brokerdealer has agreed to provide account
monitoring services, we are not
otherwise changing the treatment of
implicit hold recommendations in other
contexts. In other words, unless the
broker-dealer has agreed to provide
account monitoring services as
described, Regulation Best Interest
would only apply to explicit—and not
to implicit—hold recommendations
regarding security positions in an
account.217 This is consistent with the
fact that Regulation Best Interest would
not impose a duty to monitor customer
accounts.218
Finally, although certain commenters
stated that account monitoring services
should only be performed by investment
advisers,219 we reiterate that Regulation
Best Interest does not change the scope
of account monitoring that brokerdealers may agree to provide, nor does
it change the scope of activities that
would come within the ‘‘solely
incidental’’ prong of the broker-dealer
exclusion to the definition of
‘‘investment adviser’’ in the Advisers
Act. We recognize that a broker-dealer
may voluntarily, and without any
agreement with the customer, review
the holdings in a retail customer’s
account for the purpose of determining
whether to provide a recommendation
to the customer. We view this voluntary
review—and any subsequent
recommendation to the customer—as in
connection with and reasonably related
to the broker-dealer’s primary business
of effecting securities transactions.220
Recommendations Involving Retirement
Accounts
Furthermore, based on comments, our
position is that recommendations to
retail customers regarding retirement
accounts would also be subject to
such as including monitoring services); AFL–CIO
April 2019 Letter.
217 FINRA Notice to Members 11–25 at Q7.
218 Our approach does not require broker-dealers
to undertake account monitoring, unless they
choose to do so. See Solely Incidental
Interpretation.
219 See, e.g., NASAA August 2018 Letter; FPC
Letter.
220 See Solely Incidental Interpretation. Absent an
agreement with the customer (which would be
required to be disclosed pursuant to the Disclosure
Obligation), we do not consider this voluntary
review to be ‘‘account monitoring’’ nor would it in
itself create an obligation under Regulation Best
Interest, provided of course that any
recommendation made to the customer as a result
of any such voluntary review would be subject to
Regulation Best Interest.

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Regulation Best Interest where they
involve securities transactions or
investment strategies involving
securities. We agree with commenters
that recommendations to retail
customers to take distributions from
proceeds of specific securities or to take
in-service loans from an employersponsored plan are recommendations of
a securities transaction, as they would
involve a recommendation to sell a
security.221 However, while such
recommendations to take plan
distributions are ‘‘recommendations’’
and thereby subject to Regulation Best
Interest, we reiterate that general
communications by broker-dealers
relating to distributions in the context of
a required minimum distribution or
education regarding a plan’s options
would not, by themselves, constitute
recommendations that would be subject
to Regulation Best Interest.222
3. Retail Customer
We proposed to define retail customer
as: ‘‘a person, or the legal representative
of such person, who: (1) Receives a
recommendation of any securities
transaction or investment strategy
involving securities from a broker,
dealer, or a natural person who is an
associated person of a broker or dealer,
and (2) uses the recommendation
primarily for personal, family or
household purposes.’’ 223 The definition
was generally intended to track the
definition of ‘‘retail customer’’ under
Section 913(a) of the Dodd-Frank Act
with some differences, as described in
the Proposing Release.224
In proposing the definition, we
intended to exclude recommendations
221 See supra footnotes 185–189 and
accompanying text. See, e.g., NASAA August 2018
Letter; Fiduciary Benchmarks Letter; IAC 2018
Recommendation.
222 For example, where a broker-dealer informs a
retail customer that based on age and other relevant
factors, he or she needs to take a required minimum
distribution, but does not otherwise recommend
specifics, such as what securities to sell, or where
to place the proceeds, the communication would
generally not be a ‘‘recommendation’’ subject to
Regulation Best Interest. As with other
communications subject to broker-dealer regulation,
an inquiry of whether a ‘‘recommendation’’ was
made would depend on the facts and circumstances
relating to the communication, as discussed more
fully above. See supra Section II.B.2.a.
223 As we stated in the Proposing Release, we
believe that broker-dealers would generally be
required to obtain sufficient facts about a customer
to determine an account’s primary purpose for
purposes of Regulation Best Interest. See Proposing
Release at 21595.
224 See Proposing Release at Section II.C.4.
Section 913(a) defines ‘‘retail customer’’ as a natural
person, or the legal representative of such natural
person who: (1) Receives personalized investment
advice about securities from a broker or dealer or
investment adviser; and (2) uses such advice
primarily for personal, family, or household
purposes.

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related to commercial or business
purposes but for the definition to
remain sufficiently broad to capture
recommendations related to the various
reasons retail customers may invest,
such as saving for retirement, education
expenses and other savings purposes.
As such, the proposed definition
applied to any persons who receive a
recommendation from a broker or dealer
or a natural person who is an associated
person of a broker or dealer, provided
that the recommendation is primarily
for personal, family or household
purposes. In the case of dual-registrants,
the proposed definition was intended to
apply only to recommendations made
by broker-dealers in their brokerage
capacity, based on a facts and
circumstances analysis and consistent
with existing guidance.225 The proposed
definition differed from the definition of
‘‘retail investor’’ in the Relationship
Summary Proposal as the Relationship
Summary was intended for a broader
range of investors.226
The Commission requested comment
on the scope and definition of retail
customer and received a range of
comments requesting: modification of
the definition to focus on natural
persons; clarification of the ‘‘personal,
family or household purposes’’
qualification; harmonization with the
definition in Form CRS; and further
guidance surrounding the treatment of
dual-registrants. In consideration of the
comments received, the Commission is
modifying the definition of ‘‘retail
customer’’ to mean a natural person, or
the legal representative of such natural
person, who: (A) Receives a
recommendation of any securities
transaction or investment strategy
involving securities from a broker,
dealer, or a natural person who is an
associated person of a broker or dealer;
and (B) uses the recommendation
primarily for personal, family, or
household purposes.
The revised definition shifts the focus
to natural persons, as opposed to any
persons, but otherwise it is adopted
largely as proposed. However, as
discussed below, the Commission is
providing additional interpretations,
guidance and clarification regarding:
The interpretation of the ‘‘personal,
family, or household purposes’’
qualifier; the interaction of this
definition with the definition of ‘‘retail
investor’’ in Form CRS; what it means
for a retail customer to ‘‘use’’ the
recommendation; and the status of dualregistrants. Furthermore, we are
providing guidance on who would be
225 Id.
226 Id.

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considered to be the legal representative
of a natural person for purposes of this
definition.
a. Focus on Natural Persons and Legal
Representatives of Natural Persons
The Commission proposed to extend
the definition of ‘‘retail customer’’ in
Regulation Best Interest beyond natural
persons to any persons to cover nonnatural persons (e.g., trusts that
represent the assets of a natural person),
which the Commission stated it
believed would benefit from the
protections of Regulation Best Interest.
Commenters generally suggested that
the definition of retail customer be
modified to focus on natural persons.227
To that end, a number of commenters
suggested eliminating the ‘‘personal,
family or household purposes’’ qualifier
from the definition under Dodd-Frank
Section 913.228 Many commenters
suggested excluding institutional
investors and professional advisers or
fiduciaries, including retirement plan
representatives 229 and family offices,230
while a few stated that non-professional
plan fiduciaries should have the same
protections as retail customers.231 Many
commenters suggested harmonizing the
definition with FINRA’s definition,232
in particular, by excluding: (1)
Institutional accounts that would be
exempted from certain suitability
protections under FINRA Rule 2111
(Suitability) 233 or (2) institutional
investors as defined in Rule 2210
(Communications with the Public),234
227 See, e.g., Cetera August 2018 Letter; Invesco
Letter.
228 See FPC Letter; SIFMA August 2018 Letter;
BlackRock Letter. Contra ACLI Letter (supporting
the provision in Section 913 and positing that
Regulation Best Interest appropriately implements
this foundational threshold).
229 See, e.g., SIFMA August 2018 Letter; Vanguard
Letter; Prudential Letter; ICI Letter; Fidelity Letter.
230 See, e.g., TIAA Letter; SIFMA August 2018
Letter; Letter from Stuart J. Kaswell, Executive Vice
President and Managing Director, Managed Funds
Association, and Jiri Krol, Deputy CEO, Global
Head of Government Affairs, Alternative Investment
Management Association (Aug. 7, 2018) (‘‘Managed
Funds Association Letter’’).
231 ARA August 2018 Letter; CFA August 2018
Letter.
232 See, e.g., UBS Letter; Bank of America Letter;
Raymond James Letter; TIAA Letter; Letter from
Joseph Giovanniello, Ladenburg Thalmann
Financial Services Inc. (Jul. 30, 2018) (‘‘Ladenburg
Letter’’).
233 FINRA Rule 2111(b). Institutional accounts
include banks, savings and loan associations,
insurance companies, registered investment
companies, state and Federal Registered investment
advisers, and other persons with total assets of at
least $50 million.
234 FINRA Rule 2210(a)(4). Institutional investors
include, in addition to persons with institutional
accounts, government entities and their
subdivisions, employee benefit plans, qualified
plans as defined in Exchange Act Section
3(a)(12)(C), broker-dealers and registered

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which is broader 235 and would include,
among others, certain workplace
retirement plans. Conversely, a few
commenters believed that Regulation
Best Interest should apply to both retail
and institutional customers.236
In response to comments, we are
modifying the definition to focus on
natural persons and their legal
representatives, and are clarifying that
we interpret ‘‘legal representatives’’ to
mean non-professional legal
representatives of a natural person, as
we discuss below. We believe this
change and clarification provides more
certainty that institutions and certain
professional fiduciaries are not covered
for purposes of Regulation Best Interest.
It would also retain, however, coverage
of certain legal entities (i.e., trusts that
represent the assets of a natural person)
specifically identified in the Proposing
Release as ‘‘retail customers’’ within the
scope of Regulation Best Interest, but
would not exclude certain high-networth natural persons, as was suggested
by some commenters 237 to match the
current FINRA exclusion of such natural
persons from customer-specific
suitability requirements.238
While the Commission recognizes
commenters’ concerns regarding
compliance costs and burdens if the
definition of retail customer does not
align with FINRA’s exclusion of certain
institutional accounts and institutional
investors, we have decided not to align
our definition with FINRA’s exclusion
because we believe conflicted
recommendations can also result in
harm to high net-worth individuals.239
representatives, and persons acting solely on behalf
of such institutional investors.
235 See, e.g., SIFMA August 2018 Letter; TIAA
Letter; IPA Letter.
236 NASAA August 2018 Letter, Better Markets
August 2018 Letter; FPC Letter. But see Managed
Funds Association Letter (suggesting that
sophisticated investors should not be treated as
retail customers).
237 See, e.g., Morgan Stanley Letter; FSI August
2018 Letter.
238 See FINRA Rule 4512(c), which includes
within the definition of ‘‘institutional account’’ any
person (whether a natural person, corporation,
partnership, trust or otherwise) with total assets of
at least $50 million. Currently, under FINRA rules,
broker-dealers are exempt from the customerspecific suitability obligations with respect to these
‘‘institutional accounts’’ if certain conditions are
met. FINRA Rule 2111(b).
239 The Commission has brought numerous
enforcement actions against financial professionals
engaged in schemes to defraud certain high networth individuals, in particular, professional
athletes. See, e.g. SEC v. Charles A. Banks, IV, Civil
Action No. 16–CV–3399–TWT (N.D. Ga. Nov. 2,
2018) (former investment adviser who fraudulently
induced a former professional athlete to invest $7.5
million in a sports team and apparel merchandise
company based on a series of misrepresentations);
SEC v. Ash Narayan, The Ticket Reserve Inc. a/k/
a Forward Market Media, Inc., Richard M. Harmon,

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We believe the benefits of Regulation
Best Interest justify compliance costs as
these individuals could benefit from the
protections included in Regulation Best
Interest regardless of their net worth,
which may not necessarily correlate to
a particular level of financial
sophistication.240
In addition, we view a ‘‘legal
representative’’ of a natural person to
only cover non-professional legal
representatives (e.g., a non-professional
trustee that represents the assets of a
natural person and similar
representatives such as executors,
conservators, and persons holding a
power of attorney for a natural
person),241 thereby excluding certain
institutions from Regulation Best
Interest’s coverage. In capturing nonprofessional legal representatives within
the definition of retail customer, we are
providing the protections of Regulation
Best Interest to non-professional persons
who are acting on behalf of natural
persons but who are not regulated
financial services industry professionals
retained by natural persons to exercise
independent professional judgment,
such as registered investment advisers
and broker-dealers, corporate fiduciaries
(e.g., banks, trust companies and similar
financial institutions) and insurance
companies, and the employees or other
regulated representatives of such
advisers, broker-dealers, corporate
fiduciaries and insurance companies.242
Our definition is intended to capture
natural persons and their legal
representatives who rely directly on the
broker-dealer for the recommendation.
Accordingly, such non-professional
legal representatives would not include
regulated financial industry
professionals. We believe this responds
to commenters who stated that it should
and John A. Kaptrosky, Civil Action No. 16–CV–
1417–M (N.D. Tex. May 24, 2016) (investment
adviser who misappropriated millions of dollars
from accounts he managed for professional athletes
and invested them in online sports and
entertainment ticket business on whose board he
served).
In addition, reports indicate deficiencies in
financial literary among the general population of
retail investors. See Federal Research Division,
Library of Congress, Financial Literacy Among
Retail Investors in the United States (Dec. 30, 2011)
at 25, available at https://www.sec.gov/news/
studies/2012/917-financial-literacy-study-part2.pdf
(‘‘Library of Congress Report’’).
240 See Primerica Letter (noting challenges in
using wealth and education as proxies for
investment sophistication).
In addition, the definition of ‘‘retail customer’’
under Section 913(a) of the Dodd-Frank Act did not
make a distinction based on net worth.
241 A non-professional legal representative is
covered pursuant to this rule even if another person
is a trustee or managing agent of the trust.
242 See also Relationship Summary Adopting
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not be necessary to provide the
protections of Regulation Best Interest to
regulated professionals.243 Importantly,
however, this will not relieve firms or
financial professionals retained to
represent the assets of natural persons
from their own obligations to retail
customers.244
We retained the ‘‘personal, family, or
household purposes’’ qualifier,245 but
are providing additional guidance and
clarification on our interpretation of this
phrase to address comments received. In
particular, we interpret ‘‘personal,
family or household purposes’’ to mean
that any recommendation to a natural
person for his or her account would be
subject to Regulation Best Interest, other
than recommendations to natural
persons seeking these services for
commercial or business purposes.
Accordingly, under this interpretation,
‘‘personal, family or household
purposes’’ would not include, for
example, an employee seeking services
for an employer or an individual who is
seeking services for a small business or
on behalf of another non-natural person
entity such as a charitable trust.246 As
discussed above 247 and pursuant to the
Care Obligation,248 we believe brokerdealers are able to obtain sufficient facts
to determine the purpose for which a
recommendation will be used.
We also confirm that ‘‘personal,
family or household purposes’’ would
cover retirement accounts, as retirement
savings is a personal, household or
family purpose. Accordingly, the
definition of retail customer will
include a natural person receiving
243 See, e.g., Bank of America Letter; Invesco
Letter; Letter from Bob Grohowski, Senior Legal
Counsel, and Jon Siegel, Senior Legal Counsel, T.
Rowe Price (Aug. 10, 2018) (‘‘T. Rowe Letter’’);
Oppenheimer Letter; ICI Letter.
244 See also Relationship Summary Adopting
Release.
245 Regulation Best Interest relies in part on the
statutory authority provided in Section 913 of the
Dodd-Frank Act which includes the statutory
definition of ‘‘retail customer.’’ See Section 913(a)
of the Dodd-Frank Act.
246 As discussed below, to the extent a plan
representative who decides service arrangements
for a workplace retirement plan is a sole proprietor
or other self-employed individual who will
participate in the plan, the plan representative will
be a retail customer to the extent that the sole
proprietor or self-employed individual receives
recommendations directly from a broker-dealer
primarily for personal, family or household
purposes.
247 See supra footnote 223 and accompanying
text.
248 Pursuant to the Care Obligation, a brokerdealer is required to ascertain the customer’s
investment profile which considers, among other
things, financial situation and needs and
investment objectives, in evaluating a
recommendation and whether it is in a retail
customer’s best interest.

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recommendations 249 for his or her own
retirement account, including but not
limited to IRAs and individual accounts
in workplace retirement plans, such as
401(k) plans and other tax-favored
retirement plans.250 For example, plan
participants receiving recommendations
about whether to take a distribution
from a 401(k) plan or other workplace
retirement plan and how to invest that
distribution would be covered as retail
customers. Similarly, a plan participant
receiving recommendations for the
participant’s individual account held in
a 401(k) plan or other workplace
retirement plan would be a retail
customer for purposes of Regulation
Best Interest.251
The Commission acknowledges
concerns from some commenters that
workplace retirement plans and their
representatives (e.g., plan sponsors,
trustees, other fiduciaries) and service
providers should be included in the
definition of retail customer.252
However, we understand that plan
representatives of workplace retirement
plans typically are not receiving
recommendations for their own account
for personal, family or household
purposes when they engage a brokerdealer to provide services to a
retirement plan established, maintained,
249 See Section II.C.2 (describing what constitutes
a ‘‘recommendation’’ for purposes of Regulation
Best Interest).
250 Such IRAs include, for example, individual
retirement accounts and individual retirement
annuities described by Internal Revenue Code
section 408(a) and (b), ‘‘simplified employee
pensions’’ (SEPs) described by Code section 408(k),
and simple retirement accounts described by Code
section 408(p) (SIMPLE IRAs). In response to
commenters, we also clarify that workplace
retirement plans include any arrangement available
at a workplace that provides retirement benefits or
allows saving for retirement, including, for
example, any 401(k) plans or other plan that meet
requirements for qualification under Code section
401(a), deferred compensation plans of state and
local governments and tax-exempt organizations
described by Code section 457, and annuity
contracts and custodial accounts described by Code
section 403(b). Likewise, the definition of retail
investor includes natural persons seeking brokerage
or advisory services for other tax-favored savings
arrangements such as an Archer Medical Savings
Account described by Code section 220(d), a Health
Savings Accounts described by Code section 223(d)
and any similar tax-favored health plan saving
arrangement, a Coverdell education savings account
described by Code section 530 and a qualified
tuition program or ‘‘529 plan’’ established pursuant
to Code section 529.
251 For example, we understand that, although not
common, some 401(k) plans and other individual
account plans provide participants total discretion
to choose a broker-dealer to provide services for
their individual plan account. See, e.g., 29 CFR
2550. 404c–1(f), Example 9.
252 See, e.g., ARA December 2018 Letter; FPC
Letter. But see Empower Letter (‘‘It would be
helpful if the SEC could confirm that the definition
of ‘retail customer’ under RBI does not include
advice to managers of retirement plans or to their
fiduciaries or representatives.’’).

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and operated by an employer to provide
pension or retirement savings benefits to
employees; and further, as a legal
representative of a plan participant,
must comply with DOL rules.253 As
such, the Commission does not believe
that workplace retirement plans or their
representatives and service providers
generally fall within the definition of
retail customer for purposes of
Regulation Best Interest because the
workplace retirement plan is not a
natural person, and therefore the
workplace retirement plan
representatives are not a nonprofessional representative of a natural
person that is receiving a
recommendation directly from a broker253 It is our understanding that the investment
responsibilities of plan representatives typically
include, among other things, selecting and
monitoring a menu of plan investment options and
designating and monitoring ‘‘default’’ investments
for investing account balances of participants who
do not make their own investment elections, and
that plan representatives typically make these
investment selections for a workforce with diverse
investment profiles. See ARA December 2018 Letter
(describing obligations of plan fiduciaries selecting
an investment menu and qualified default
investment alternatives); Empower Letter
(describing plan fiduciary obligations to select
investment menus). We also understand that plan
representatives may receive brokerage and advice
services for plans together with or complimentary
with, other services supporting the plan’s
establishment, maintenance and operation, such as
plan design, recordkeeping and other
administrative services. See, e.g., Groom Letter
(describing business models of firms offering
brokerage and advice services together with other
services); SPARK Letter (same). In this context, a
plan representative would not be receiving
recommendations from a broker-dealer for his or
her own account and considerations material to the
plan representative’s investment decisions differ
from a situation in which a retail customer receives
a recommendation from a broker-dealer for his or
her own account.
Further, we note that DOL has rules currently in
place (not affected by the Fifth Circuit’s decision
vacating the DOL Fiduciary Rule) that address how
plan representatives operate participant-directed
plans and select investment menus for such plans,
see 29 CFR 2550.404c–1, what actions, including
disclosures, plan representatives must take to be
able to raise a defense or claim for investment
losses by a participant or beneficiaries, see 29 CFR
2550.404c–5, and also generally require brokerdealers making investment alternatives available for
a participant-directed plan to disclose in writing
(among other things) all direct and indirect
compensation received in connection with
providing plan services. See 29 CFR 2550.408b–
2(c). See also Form 5500, Schedule C, requiring
after-the-fact reporting by certain plans of
information regarding direct and indirect
compensation received by, among others, brokerdealers and investment advisers, in connection with
services rendered or their position with the plan.
Accordingly, we agree with those commenters
who recommended that plan representatives should
not be included in the definition of retail customer.
See Empower Letter; Groom Letter; Letter from Nora
M. Everett, President, Retirement and Income
Solutions, Principal Financial Group (Aug. 7, 2018)
(‘‘Principal Letter’’); SPARK Letter; T. Rowe Price
Letter; Transamerica August 2018 Letter.

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dealer for ‘‘personal, family, or
household purposes.’’ 254
We note, however, that some plan
representatives may participate under
their employer’s workplace plan, for
example, in the case of a workplace IRA
or other workplace retirement plan that
is established and maintained by a sole
proprietor or other self-employed
individual that includes one or more
employees in addition to the plan
representative. To the extent that a plan
representative who decides service
arrangements for a workplace retirement
plan is a sole proprietor or other selfemployed individual who will
participate in the plan, the plan
representative would be a retail
customer for purposes of Regulation
Best Interest to the extent the sole
proprietor or self-employed individual
receives recommendations directly from
a broker-dealer primarily for personal,
family or household purposes.
b. Retail Customer Use of the
Recommendation
In the Proposing Release, the
Commission did not specifically address
whether recommendations subject to
Regulation Best Interest needed to be for
compensation, but did state that the
proposed definition of retail customer
would only apply to a person who
‘‘received a recommendation . . . from
a broker or dealer or a natural person
who is an associated person of a broker
or dealer, and used the recommendation
primarily for personal, family, or
household purposes.’’ We stated that
this approach was appropriate because
it builds upon the guidance provided for
FINRA’s suitability rule.255 In response,
a few commenters recommended that
the Commission limit the application of
Regulation Best Interest to
recommendations made to retail
customers for compensation.256
Regulation Best Interest applies to a
retail customer that both receives a
recommendation of any securities
transaction or investment strategy
involving securities by a broker-dealer
and that uses that recommendation
primarily for personal, family, or
254 Although workplace retirement plans are not
generally covered by the definition of retail
customer in by Regulation Best Interest, based on
preliminary discussions with DOL staff, we
understand that the DOL is considering regulatory
options in light of the Fifth Circuit’s decision
vacating the DOL Fiduciary Rule, including the
types of protections available to such workplace
retirement plans and their representatives.
Department of Labor Regulatory Agenda, Fiduciary
Rule and Prohibited Transaction Exemptions, Fall
2018, available at https://www.reginfo.gov/public/
do/eAgendaViewRule?pubId=201810&RIN=1210AB82.
255 See Proposing Release at 21596, footnote 160.
256 See Morgan Stanley Letter; CCMC Letters.

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household purposes, and not simply
those recommendations for which a
broker-dealer receives compensation.257
In response to commenters, we interpret
that a retail customer ‘‘uses’’ a
recommendation of a securities
transaction or investment strategy
involving securities when, as a result of
the recommendation: (1) The retail
customer opens a brokerage account
with the broker-dealer, regardless of
whether the broker-dealer receives
compensation,258 (2) the retail customer
has an existing account with the brokerdealer and receives a recommendation
from the broker-dealer, regardless of
whether the broker-dealer receives or
will receive compensation, directly or
indirectly, as a result of that
recommendation, or (3) the brokerdealer receives or will receive
compensation, directly or indirectly as a
result of that recommendation, even if
that retail customer does not have an
account at the firm.259
When a retail customer opens or has
an existing account with a broker-dealer
the retail customer has a relationship
with the broker-dealer and is therefore
in a position to ‘‘use’’ (i.e., accept or
reject) the broker-dealer’s
recommendation. In this context, tying
‘‘use’’ solely to a broker-dealer’s receipt
of compensation would inappropriately
result in Regulation Best Interest not
applying to the broker-dealer’s
recommendations to hold securities
positions or to maintain an investment
strategy (such as account type),
recommendations to open an account,
or recommendations that may
257 See paragraph (b)(1) of Regulation Best
Interest.
258 As discussed in Section II.B.2.b below,
account recommendations, including
recommendations of a securities account type
generally, and recommendations to open an IRA or
to roll over or transfer assets into an IRA, are
covered by Regulation Best Interest regardless of
whether those recommendations result in
transactions or generate transaction-based
compensation.
259 See Proposing Release at 21596, footnote 160
and accompanying text. See also FINRA Regulatory
Notice 12–55, Suitability—Guidance on FINRA’s
Suitability Rule (Dec. 2012) at Q6(b) (‘‘The
suitability rule would apply when a broker-dealer
or registered representative makes a
recommendation to a potential investor who then
becomes a customer. Where, for example, a
registered representative makes a recommendation
to purchase a security to a potential investor, the
suitability rule would apply to the recommendation
if that individual executes the transaction through
the broker-dealer with which the registered
representative is associated or the broker-dealer
receives or will receive, directly or indirectly,
compensation as a result of the recommended
transaction.’’); NASD Notice to Members 04–72,
Transfers of Mutual Funds and Variable
Annuities—Impermissible Use of Negative
Response Letters for the Transfer of Mutual Funds
and Variable Annuities (Changes in Broker-Dealer
of Record) (Oct. 2004).

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ultimately be rejected by the retail
customer.
Whether the recommendation
complies with Regulation Best Interest
will be evaluated based on the
circumstances that existed at the time
the recommendation was made to the
retail customer. Accordingly, brokerdealers should carefully consider the
extent to which associated persons can
make recommendations to prospective
retail customers (i.e., that have received,
but not yet ‘‘used’’ the recommendation
as noted above) in compliance with
Regulation Best Interest, including
having gathered sufficient information
that would enable them to comply with
Regulation Best Interest at the time the
recommendation is made, should the
prospective retail customer use the
recommendation.260
c. Conformity With Form CRS
The proposed definition of ‘‘retail
customer’’ differed from the definition
of ‘‘retail investor’’ proposed in the
Relationship Summary Proposal, which
was a prospective or existing client or
customer who is a natural person (an
individual), regardless of the
individual’s net worth, including a trust
or other similar entity that represents
natural persons.261 The proposed
definition was different from the
definition of ‘‘retail investor’’ because
the Relationship Summary was
intended for an earlier state of the
relationship between an investor and a
financial professional, was intended to
be required regardless of whether the
investor would receive investment
advice primarily for personal, family, or
household purposes, and was designed
to be delivered by investment advisers
as well as broker-dealers.262 Many
commenters recommended that we use
the same definition to facilitate
compliance for firms and avoid investor
confusion.263
The Commission agrees with
commenters that using a similar
definition would provide consistency in
the protections, and ease the
compliance burden, of the package of
rulemakings. Therefore, the definitions
in Form CRS and Regulation Best
Interest have been revised to generally
conform to each other, consistent with
our respective goals in each of these
FINRA Regulatory Notice 12–55 at Q6(b).
Relationship Summary Proposal.
262 See Relationship Summary Proposal, Section
II, footnote 29.
263 See, e.g., Invesco Letter; BlackRock Letter; ICI
Letter; Committee of Annuity Insurers Letter; Bank
of America Letter; CFA August 2018 Letter; Cetera
August 2018 Letter; Fidelity Letter; Morgan Stanley
Letter; Oppenheimer Letter; Raymond James Letter;
SIFMA August 2018 Letter; TIAA Letter;
Transamerica August 2018 Letter.

rulemakings.264 As discussed above, the
definition of ‘‘retail customer’’ for
purposes of Regulation Best Interest has
been revised to apply only to natural
persons, not all persons, in line with the
definition of ‘‘retail investor’’ for
purposes of Form CRS. In addition, the
definition in Form CRS as adopted now
includes the ‘‘personal, family or
household purposes’’ qualifier.
While the definitions have generally
been harmonized across the package of
rulemakings,265 they differ to reflect
differences between the Relationship
Summary delivery requirement and the
obligations of broker-dealers under
Regulation Best Interest, including that
the Relationship Summary is required
whether or not there is a
recommendation and covers any
prospective and existing clients and
customers (i.e., a person who ‘‘seeks to
receive or receives services’’) of
investment advisers as well as brokerdealers.266 For the reasons discussed in
the Proposing Release and in response
to commenters who requested
clarification on whether Regulation Best
Interest applies to prospective
customers,267 we would like to clarify
that the definition of ‘‘retail customer’’
does not apply to prospective customers
who do not receive and use
recommendations from a brokerdealer,268 as discussed above. This
distinction reflects differences between
the point in time the Relationship
Summary is delivered to an investor and
when the obligations of broker-dealers
pursuant to Regulation Best Interest
attach.
d. Treatment of Dual-Registrants
In the Proposing Release, the
Commission stated that Regulation Best
Interest applies only in the context of a
brokerage relationship with a brokerage
customer, and specifically, when a
broker-dealer is making a
recommendation in the capacity of a
broker-dealer. In particular, for dualregistrants (for purposes of this section,
a broker-dealer that is dually registered
as an investment adviser with the
Commission), the obligations associated
with Regulation Best Interest were
intended to apply only when they are
acting in the capacity as a brokerdealer.269 The Commission recognized

260 See

264 See

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261 See

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Relationship Summary Adopting Release.

265 Id.
266 Id.
267 See, e.g., SIFMA August 2018 Letter;
Prudential Letter; Money Management Institute
Letter.
268 See Section II.B.3.b.
269 Although this discussion focuses on the
treatment of broker-dealers that are dually
registered with the Commission as investment

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the issues surrounding the
determination of whether a dualregistrant is acting in the capacity of a
broker-dealer or an investment adviser,
and asserted that such a determination
requires a facts and circumstances
analysis, with no one factor being
determinative.270
Many commenters requested that the
Commission clarify the treatment of
dual-registrants and what is expected
when offering products in both types of
accounts.271 Some commenters asserted
that dually registered financial
professionals should be held to a
fiduciary standard.272 A few
commenters requested clarification on
how Regulation Best Interest applies to
particular scenarios, some of which
involved dual-registrants.273
In response, the Commission is
reaffirming the guidance provided in the
proposal and providing further
clarification on when and how
Regulation Best Interest would apply to
dual-registrants. As stated in the
proposal, Regulation Best Interest would
not apply to investment advice provided
to a retail customer by a dual-registrant
when acting in the capacity of an
investment adviser, even if the retail
customer has a brokerage relationship
with the dual-registrant or the dualregistrant executes the transaction in its
brokerage capacity.274 Similarly, as
proposed, we are confirming that a dualregistrant is an investment adviser
solely with respect to those accounts for
which a dual-registrant provides
investment advice or receives
compensation that subjects it to the
Advisers Act.275
While we acknowledge that some
commenters believe all dual-registrants
advisers, a broker-dealer should perform the same
analysis when it is engaged in other financial
services (such as, as a bank, a commodity trading
advisor or a future commission merchant).
270 Proposing Release at 21596.
271 See, e.g., SIFMA August 2018 Letter; CCMC
Letters; NASAA August 2018 Letter.
272 See PIABA Letter; AICPA Letter.
273 See SIFMA August 2018 Letter; Letter from
Michael Pieciak, NASAA President, Commissioner
Vermont Department of Financial Regulation,
NASAA (Feb. 19, 2019) (‘‘NASAA February 2019
Letter’’).
274 This analysis would apply even if the dualregistrant receives transaction-based compensation
for executing the transaction because the dualregistrant did not provide a recommendation in its
capacity as a broker-dealer. While Regulation Best
Interest would not apply in this situation, other
provisions of the federal securities laws and SRO
rules would apply to the actions taken or services
provided by the broker-dealer.
275 See Proposing Release at 21596; see also
Certain Broker-Dealers Deemed Not To Be
Investment Advisers, Exchange Act Release No.
51523 (Apr. 12, 2005) at 8 (‘‘Release 51523’’);
Interpretive Rule Under the Advisers Act Affecting
Broker-Dealers, Advisers Act Release No. 2652 (Sep.
24, 2007). See also Fiduciary Interpretation.

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should be held to a fiduciary standard,
for the reasons discussed in Section
II.A, the Commission believes that
Regulation Best Interest enhances the
obligations that apply when a brokerdealer makes a recommendation to a
retail customer by drawing from key
principles underlying the fiduciary
obligation that applies to investment
advisers under the Advisers Act, while
being tailored to the broker-dealer
model.276
As stated in the proposal, determining
the capacity in which a dual-registrant
is making a recommendation is a facts
and circumstances test, with no one
factor being determinative, but the
Commission considers, among other
factors, the type of account, how the
account is described, the type of
compensation and the extent to which
the dual-registrant made clear to the
customer or client the capacity in which
it was acting.277
In addition and in response to a
commenter’s presentation 278 of
particular scenarios in its comment
letter,279 we would like to confirm or
correct the commenter’s understanding
of Regulation Best Interest in practice to
provide further guidance to firms as it
relates to their examples of dualregistrants.280 For example, in the
commenter’s explanation of a scenario
related to a recommendation to open a
fee-based account, we agree that
Regulation Best Interest would not
apply when a dually registered financial
professional of a dually registered
broker-dealer and investment adviser,
who is acting in the capacity of an
investment adviser, recommends a feebased account. We note, however, that
the dually registered financial
professional would need to comply with
the Advisers Act as well as the
requirements with respect to Form CRS
for the firm.281 In response to another
scenario in which a financial
professional who is dually registered
provides a holistic review of the overall
performance of a family’s accounts,
276 See

Section I.
Release at 21596.
278 See SIFMA August 2018 Letter. For purposes
of the presented scenarios, SIFMA has assumed that
the customer is a ‘‘retail customer.’’
279 Id.
280 For purposes of this section, we have only
addressed the scenarios applicable to dualregistrants and have not confirmed or rejected the
commenter’s analysis of the other scenarios.
281 See Fiduciary Interpretation at Section II.B.1.
In providing advice about account type, the adviser
should consider both types of accounts (i.e.,
brokerage and advisory accounts) when
determining whether the advice is in the client’s
best interest. See also NASAA February 2019 Letter
(stating that Regulation Best Interest would not
apply but instead that the fiduciary duty under the
Advisers Act would apply).

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277 Proposing

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which are both brokerage and advisory,
whether Regulation Best Interest applies
depends on a facts and circumstances
analysis. Regulation Best Interest would
apply if the financial professional in her
brokerage capacity (disclosed pursuant
to the Disclosure Obligation), provides a
recommendation of a securities
transaction or investment strategy
involving securities to the family in the
course of the holistic review.282
C. Component Obligations
As proposed Regulation Best Interest’s
obligation to ‘‘act in the best interest of
the retail customer . . . without placing
the financial or other interest of the
[broker-dealer] ahead of the retail
customer’’ would have been satisfied by
complying with four specified
obligations: A Disclosure Obligation, a
Care Obligation, and two Conflict of
Interest Obligations.283 Failure to
comply with any of these proposed
requirements would have violated
Regulation Best Interest.284
As discussed above, we have
determined to retain the overall
structure and scope of the proposed
rule, but are modifying and clarifying
the component obligations that a brokerdealer must satisfy in order to meet the
General Obligation. As adopted, the
General Obligation is satisfied only if
the broker-dealer complies with four
specified component obligations: (1)
The Disclosure Obligation; (2) the Care
Obligation; (3) the Conflict of Interest
Obligation; and (4) the Compliance
Obligation. Each of these component
obligations is discussed below. Whether
a broker-dealer has acted in the retail
customer’s best interest under the
General Obligation will turn on an
objective assessment of the facts and
circumstances of how these specific
components of Regulation Best Interest
are satisfied at the time that the
recommendation is made (and not in
hindsight). The specific component
obligations of Regulation Best Interest
are mandatory, and failure to comply
with any of the components would
violate Regulation Best Interest.
1. Disclosure Obligation
We proposed a Disclosure Obligation
that would require a broker-dealer ‘‘to,
prior to or at the time of [a]
recommendation, reasonably disclose to
the retail customer, in writing, the
material facts relating to the scope and
282 But see NASAA February 2019 Letter (stating
that ‘‘a full fiduciary duty’’ should be imposed on
the financial adviser as to all accounts in this case
as the family has probably entrusted their entire
financial well-being to one financial professional).
283 Proposing Release at 21598.
284 Id.

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terms of the relationship with the retail
customer and all material conflicts of
interest associated with the
recommendation.’’ The Proposing
Release states that, for purposes of the
Disclosure Obligation, we would
consider the following to be examples of
material facts relating to the scope and
terms of the relationship with the retail
customer: (1) That the broker-dealer was
acting in a broker-dealer capacity with
respect to the recommendation; (2) fees
and charges that would apply to the
retail customer’s transactions, holdings,
and accounts; and (3) type and scope of
services provided by the broker-dealer,
including, for example, monitoring the
performance of the retail customer’s
account.
As stated in the Proposing Release, we
understand that broker-dealers typically
provide information about their services
and accounts, which may include
disclosures concerning the brokerdealer’s capacity, fees, services, and
conflicts, on their firm websites and in
their account opening agreements.285
Furthermore, while broker-dealers are
subject to a number of specific
disclosure obligations when they effect
certain customer transactions, and are
subject to the antifraud provisions of the
federal securities laws, broker-dealers
are not currently subject to an explicit
and broad disclosure requirement under
the Exchange Act regarding the scope
and terms of the broker-dealer
relationship.286 To promote brokerdealer recommendations that are in the
best interest of retail customers, we
determined it was necessary to impose
a more explicit and broader disclosure
obligation on broker-dealers than that
which currently exists under the federal
securities laws and SRO rules.287
We solicited comment on the
Disclosure Obligation and commenters
addressed several aspects of this
proposed obligation, including the
interpretation of each required element,
as discussed in the relevant sections
below.288 In consideration of these
comments, we are revising the
Disclosure Obligation to require a
broker-dealer, prior to or at the time of
the recommendation, to provide to the
retail customer, in writing, full and fair
disclosure 289 of all material facts related
to the scope and terms of the
285 Proposing

Release at 21599.
Release at 21599–21600.
287 Proposing Release at 21600.
288 See, e.g., Better Markets August 2018 Letter;
CCMC Letters; LPL August 2018 Letter; Schwab
Letter; Morgan Stanley Letter; CFA August 2018
Letter; IPA Letter; NASAA Letter; SIFMA August
2018 Letter.
289 See Section II.C.1.c, Disclosure Obligation,
Full and Fair Disclosure.
286 Proposing

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relationship with the retail customer
and all material facts relating to
conflicts of interest that are associated
with the recommendation.290 We are
explicitly requiring in the rule text the
disclosure of examples in the Proposing
Release of the ‘‘material facts relating to
the scope and terms of the relationship
with the retail customer:’’ (1) That the
broker, dealer or such natural person is
acting as a broker, dealer or an
associated person of a broker-dealer
with respect to the recommendation; (2)
the material fees and costs that apply to
the retail customer’s transactions,
holdings, and accounts; and (3) the type
and scope of services provided to the
retail customer, including: any material
limitations on the securities or
investment strategies involving
securities that may be recommended to
the retail customer.
The Disclosure Obligation requires
the disclosure of all material facts
related to the scope and terms of the
relationship with the retail customer.
The material facts identified in
Regulation Best Interest are the
minimum of what must be disclosed.
Similar to what was proposed, brokerdealers will need to disclose in writing
prior to or at the time of a
recommendation any material facts that
relate to the ‘‘scope and terms of the
relationship.’’ As to what constitutes a
‘‘material’’ fact related to the ‘‘scope and
terms of the relationship,’’ the standard
for materiality for purposes of the
Disclosure Obligation is consistent with
the one the Supreme Court articulated
in Basic v. Levinson.291 Specifically, a
fact is material if there is ‘‘a substantial
likelihood that a reasonable shareholder
would consider it important.’’ In the
context of Regulation Best Interest, the
standard is the retail customer, as
defined in the rule.
In response to comments, we are also
refining and clarifying the treatment of
conflicts of interest under Regulation
Best Interest by: (1) Generally consistent
with the fiduciary duty under the
Advisers Act, adopting for purposes of
Regulation Best Interest, the definition
of ‘‘conflict of interest’’ associated with
a recommendation as ‘‘an interest that
might incline a broker, dealer, or a
natural person who is an associated
person of a broker or dealer—
consciously or unconsciously—to make
a recommendation that is not
disinterested’’; 292 and (2) revising the
290 As discussed in more detail below, aspects of
the Disclosure Obligation may be satisfied by other
regulatory requirements.
291 Basic, Inc. v. Levinson, 485 U.S. 224 (1988).
292 This is the same as the definition of ‘‘material
conflict of interest’’ discussed in the Proposing
Release but eliminates ‘‘material’’ and ‘‘a reasonable

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Disclosure Obligation to require
disclosure of ‘‘material facts’’ relating to
such conflicts of interest that are
associated with the recommendation.
Under this approach, all conflicts of
interest as so defined will be covered by
Regulation Best Interest (and thus, will
be subject to the Conflict of Interest
Obligation described below). However,
only ‘‘material facts’’ regarding these
conflicts of interest are required to be
disclosed under the Disclosure
Obligation.293
As discussed above, we are adopting
a new set of disclosure requirements
designed to reduce retail investor
confusion in the marketplace for
brokerage and advisory services and to
assist retail investors with the process of
deciding whether to engage a particular
firm or financial professional and
whether to establish an investment
advisory or brokerage relationship.294
Specifically, we are requiring brokerdealers and investment advisers to
deliver to retail investors a Relationship
Summary.295 The Relationship
Summary will provide succinct
information about the relationships and
services the firm offers to retail
investors, fees and costs that retail
investors will pay, specified conflicts of
interest and standards of conduct, and
disciplinary history, among other
things.296 The Relationship Summary
has a distinct purpose: It is intended to
summarize information about a
particular broker-dealer or investment
adviser in a format that allows for
comparability among the enumerated
items, encourages investors to ask
questions, and highlights additional
sources of information.
As a general matter, the Relationship
Summary reflects an initial layer of
disclosure, with the Disclosure
Obligation reflecting more specific and
additional, detailed layers of
disclosure.297 We believe the
Relationship Summary and the
person would expect’’ for the reasons discussed
below.
293 The Conflict of Interest Obligation requires,
among other things, that a broker-dealer establish
written policies and procedures reasonably
designed to identify and disclose all conflicts of
interest associated with a recommendation. Such
disclosure is required to be provided in accordance
with the Disclosure Obligation. See Section II.C.3.d.
294 See Relationship Summary Adopting Release.
295 See Relationship Summary Adopting Release.
296 See Relationship Summary Adopting Release
at Section I. For purposes of Form CRS, ‘‘retail
investor’’ is defined as ‘‘a natural person, or the
legal representative of such natural person, who
seeks to receive or receives services primarily for
personal, family, or household purposes.’’
297 Nevertheless, as discussed below where
relevant, in some instances disclosures made
pursuant to Form CRS may be sufficient to satisfy
some aspects of the Disclosure Obligation.

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Disclosure Obligation, while separate
obligations with significant individual
value, will complement each other and,
consistent with our layered approach to
disclosure, are designed to build upon
each other to provide different levels of
key information and may be required to
be delivered at different times. In
addition, we believe the Relationship
Summary and Disclosure Obligation
will improve the quality and
consistency of disclosures and thus: (1)
Reduce the information asymmetry that
may exist between a retail customer and
their broker-dealer, and (2) facilitate
customer comparisons of different
broker-dealers which we expect will, in
turn, increase competition among
broker-dealers, including with respect to
fees and costs.298
As discussed below, we have
identified those items of information
that we consider to be ‘‘material facts’’
under the Disclosure Obligation.
Though there are disclosures in the
Relationship Summary that could
satisfy the Disclosure Obligation, in
most instances the Relationship
Summary will not be sufficient.299
Moreover, as discussed below, we
believe the Disclosure Obligation can be
satisfied to varying degrees with
existing documents provided to retail
customers, such as account opening
documents, with a standalone
document, or by some combination.
However, we encourage broker-dealers,
in deciding whether to rely on such an
existing disclosure document or
whether to include or repeat
information from existing disclosures, to
consider the usefulness and ease of
understanding for retail customers of
any existing disclosure document.
Oral Disclosure or Disclosure After a
Recommendation
As discussed in more detail below, a
number of commenters highlighted
practical difficulties associated with
delivering disclosure either in writing,
or prior to or at the time of a
recommendation in some instances.
Although Regulation Best Interest
requires that the Disclosure Obligation
be made ‘‘in writing,’’ we recognize the
challenges associated with providing
written disclosure in each instance that
disclosure may be required. For
example, a broker-dealer may need to
supplement, clarify or update written
disclosure it has previously made before
298 See

infra footnote 1192 and accompanying

text.
299 For example, as noted below, a standalone
broker-dealer will be able to satisfy the Disclosure
Obligation’s requirement to disclose the brokerdealer’s capacity by delivering the Relationship
Summary to the retail customer.

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or at the time it provides a customer
with a recommendation. As we stated in
the Proposing Release, we recognized
that broker-dealers may provide
recommendations by telephone and may
need to offer clarifying disclosure orally
in some instances subject to certain
conditions, such as a dual-registrant
informing a retail customer of the
capacity in which the dual-registrant is
acting in conjunction with a
recommendation. We stated that a
broker-dealer could orally clarify the
capacity in which it is acting at the time
of the recommendation if it had
previously provided written disclosure
to the retail customer beforehand
disclosing its capacity as well as the
method it planned to use to clarify its
capacity at the time of the
recommendation.
Similarly, although Regulation Best
Interest requires a broker-dealer to
disclose, prior to or at the time of a
recommendation, all material facts
relating to the scope and terms of the
relationship with the retail customer
and relating to conflicts of interest that
are associated with the
recommendation, we recognize that in
some instances a broker-dealer may not
have all the material facts at the time of
the recommendation, or that such
disclosure is provided to the retail
customer pursuant to an existing
regulatory obligation, such as the
delivery of a product prospectus or a
trade confirmation, after the execution
of the trade.300 In the Proposing Release
we stated that in circumstances where a
broker-dealer determines to provide an
initial, more general disclosure (such as
a relationship guide) followed by
specific information in a subsequent
disclosure that is provided after the
recommendation (e.g., a trade
confirmation) the initial disclosure
should address when and how a brokerdealer would provide more specific
information regarding the material fact
or conflict in a subsequent disclosure
(e.g., after the trade in the trade
confirmation). We noted also that
whether there is sufficient disclosure in
both the initial disclosure and any
subsequent disclosure would depend on
the facts and circumstances.
We continue to believe that some
flexibility with respect to the provision
by broker-dealers of written and oral
disclosure, as well as with respect to the
timing that disclosure is made, is
appropriate in certain circumstances,
such as when a broker-dealer updates its
written disclosures orally in order to
reflect facts not reasonably known at the
time the written disclosure is provided.
300 See

infra footnote 525.

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In such circumstances, a broker-dealer
may satisfy its Disclosure Obligation by
making supplemental oral disclosure
not later than the time of the
recommendation, provided that the
broker-dealer maintains a record of the
fact that oral disclosure was provided to
the retail customer.301 In addition, in
the limited instances where existing
regulations permit disclosure after the
recommendation is made (e.g., trade
confirmation, prospectus delivery), a
broker dealer may satisfy its Disclosure
Obligation regarding the information
contained in the applicable disclosure
document by providing such document
to the retail customer after the
recommendation is made. Before
supplementing, clarifying or updating
written disclosures in the limited
circumstances described above, brokerdealers must provide an initial
disclosure in writing that identifies the
material fact and describes the process
through which such fact may be
supplemented, clarified or updated.
For example, with regard to productlevel fees, a broker-dealer could provide
an initial standardized disclosure of
product-level fees generally (e.g.,
reasonable dollar or percentage ranges),
noting that further specifics for
particular products appear in the
product prospectus, which will be
delivered after a transaction in
accordance with the delivery method
the retail customer has selected, such as
by mail or electronically.302 Similarly,
with regard to the disclosure of a brokerdealer’s capacity, a dual-registrant could
disclose that recommendations will be
made in a broker-dealer capacity unless
otherwise expressly stated at the time of
the recommendation, and that any such
statement will be made orally. Or, a
broker-dealer could disclose that its
associated persons may have conflicts of
interest beyond than those disclosed by
the broker-dealer, and that associated
persons will disclose, where
appropriate, any additional material
conflicts of interest not later than the
time of a recommendation, and that any
such disclosure will be made orally.
301 See Section II.D, Record-Making and
Recordkeeping.
302 While using a percentage or dollar range to
describe a fee can be appropriate, that range should
be designed to reasonably reflect the actual fees to
be charged. For example, if the firm offers in almost
all instances funds with up-front sales charges of
between 5% and 5.5%, but the disclosure states that
mutual fund up-front sales charges may ‘‘range from
0.0% to 5.5%,’’ then the broker-dealer would need
to evaluate whether the disclosure should be
revised to more accurately describe the sales charge.
See discussion in Section II.C.1.a, Disclosure
Obligation, Material Facts Regarding Scope and
Terms of the Relationship, Fees and Costs,
Particularly of Fees and Costs Disclosed.

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We believe it is in the public interest
and consistent with the protection of
investors to permit such flexibility in
the delivery of information pursuant to
the Disclosure Obligation. Providing
retail customers written summary
information about material facts relating
to a recommendation and indicating
that additional information will be
forthcoming, the point at which the
additional information will be
delivered, and the method by which it
will be conveyed, highlights for retail
customers a useful summary of
information while allowing for the
practical realities of the process by
which securities recommendations are
made and transactions are executed and
leaving longstanding existing disclosure
regimes, particularly those relating to
product issuer disclosure, undisturbed.
Other Liabilities Under the Federal
Securities Laws
Further, the requirements under
Regulation Best Interest that particular
information be disclosed is not
determinative of a broker-dealer or
associated person’s other potential
liabilities under the general antifraud
provisions of the federal securities laws
for failure to disclose material
information to a customer at the time of
a recommendation.303 In addition, we
303 Broker-dealers are liable under the antifraud
provisions for failure to disclose material
information to their customers when they have a
duty to make such disclosure. See Basic v.
Levinson, 485 U.S. 224, 239 footnote 17 (1988)
(‘‘Silence, absent a duty to disclose, is not
misleading under Rule 10b–5.’’); Chiarella v. U.S.,
445 U.S. 222, 228 (1980) (explaining that a failure
to disclose material information is only fraudulent
if there is a duty to make such disclosure arising
out of ‘‘a fiduciary or other similar relation of trust
and confidence’’); SEC v. Monarch Funding Corp.,
192 F.3d 295, 308 (2d Cir. 1999) (explaining that
defendant is liable under Section 10(b) and Rule
10b-5 for material omissions ‘‘as to which he had
a duty to speak’’). Generally, under the antifraud
provisions, a broker-dealer’s duty to disclose
material information to its customer is based upon
the scope of the relationship with the customer,
which is fact intensive. See, e.g., Conway v. Icahn
& Co., Inc., 16 F.3d 504, 510 (2d Cir. 1994) (‘‘A
broker, as agent, has a duty to use reasonable efforts
to give its principal information relevant to the
affairs that have been entrusted to it.’’). For
example, where a broker-dealer processes its
customers’ orders, but does not recommend
securities or solicit customers, then the material
information that the broker-dealer is required to
disclose is generally narrow, encompassing only the
information related to the consummation of the
transaction. See, e.g., Press v. Chemical Inv. Servs.
Corp., 166 F.3d 529, 536 (2d Cir. 1999). However,
courts have found that a broker-dealer’s duty to
disclose material information under the antifraud
provisions is broader when the broker-dealer is
making a recommendation to its customer. See, e.g.,
Hanly, 415 F.2d 589, 597 (2d Cir. 1969). When
recommending a security, broker-dealers generally
are liable under the antifraud provisions if they do
not give ‘‘honest and complete information’’ or
disclose any material adverse facts or material
conflicts of interest, including any economic self-

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remind broker-dealers that even full and
fair disclosure of the information
required by the Disclosure Obligation is
not sufficient, standing alone, to satisfy
the Care Obligation, and that even
sufficient disclosure cannot cure a
violation of the Care Obligation.
Disclosures by Natural Persons
Associated With a Broker-Dealer

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The Disclosure Obligation applies to a
broker, dealer, or natural person who is
an associated person of a broker or
dealer.304 As stated in the Proposing
Release, we are requiring not only the
broker-dealer entity, but also
individuals who are associated persons
of a broker-dealer (e.g., registered
representatives) to comply with
specified components of Regulation Best
Interest when making recommendations
to retail customers.305 One commenter
requested guidance on how an
associated person should comply with
the Disclosure Obligation.306 In
response, we believe that a natural
person who is an associated person of
a broker-dealer may in many instances
rely on the disclosures provided by the
broker-dealer with which he or she is
associated to satisfy the Disclosure
Obligation. However, when an
associated person knows or should have
known that the broker-dealer’s
disclosure is insufficient to describe ‘‘all
material facts,’’ the associated person
must supplement that disclosure. For
example, if an associated person of a
broker-dealer that offers a full range of
securities products is licensed solely as
a Series 6 Registered Representative,307
and can sell only mutual funds, variable
annuities and other enumerated
products, that limitation on the scope of
services provided by the particular
associated person must be sufficiently
clear in the broker-dealer’s disclosures;
otherwise additional clarifying
interest. See, e.g., De Kwiatkowski v. Bear, Stearns
& Co., 306 F.3d 1293, 130 (2d Cir. 2002); Chasins
v. Smith, Barney & Co., 438 F.2d 1167, 1172 (2d Cir.
1970). See Proposing Release at 21599 footnote 176.
304 Rule 15l–1(a)(2)(i).
305 Proposing Release at 21592.
306 See NASAA August 2018 Letter
(recommending that the Commission provide
specific instructions on how associated persons
should disclose capacity in which they are acting).
307 A candidate who passes the Series 6 exam is
qualified for the solicitation, purchase and/or sale
of the following securities products: Mutual funds
(closed-end funds on the initial offering only),
Variable annuities, Variable life insurance, Unit
investment trusts (UITs), Municipal fund securities
(e.g., 529 savings plans, local government
investment pools (LGIPs)). FINRA, Series 6—
Investment Company and Variable Contracts
Products Representative Exam, Permitted Activities,
available at: http://www.finra.org/industry/series6
#permitted-activities.

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disclosure by the associated person
would be necessary.

securities offered 312 and account
monitoring services.313
As discussed below, in response to
a. Material Facts Regarding Scope and
comments, we have revised the
Terms of the Relationship
Disclosure Obligation to require
disclosure of ‘‘all material facts relating
As discussed above, the proposed
to the scope and terms of the
Disclosure Obligation would require a
relationship with the retail customer,
broker-dealer to, among other things,
including: (i) That the broker, dealer or
‘‘prior to or at the time of such
such natural person is acting as a
recommendation, reasonably disclose to broker, dealer or an associated person of
the retail customer, in writing, the
a broker-dealer with respect to the
material facts relating to the scope and
recommendation; (ii) the material fees
terms of the relationship with the retail
and costs that apply to the retail
customer.’’ We proposed to consider the customer’s transactions, holdings, and
following to be examples of material
accounts; and (iii) the type and scope of
facts relating to the scope and terms of
services provided to the retail customer,
the relationship with the retail
including any material limitations on
customer: (i) That the broker-dealer was the securities or investment strategies
acting in a broker-dealer capacity with
involving securities that may be
recommended to the retail
respect to the recommendation; (ii) fees
customer.’’ 314 In addition, we are
and charges that would apply to the
retail customer’s transactions, holdings, clarifying the scope of the obligation.
As we did in the Proposing Release,
and accounts; and (iii) the type and
we
emphasize that although we have
scope of services provided by the
explicitly identified the capacity in
broker-dealer, including, for example,
monitoring the performance of the retail which the broker-dealer is acting,
material fees and costs, and the type and
customer’s account.
scope of services, as what would at a
Commenters requested that we clarify minimum be required to be disclosed as
which facts a broker-dealer would be
‘‘material facts relating to the scope and
required to disclose about the scope and terms of the relationship with the retail
terms of the relationship it has with a
customer,’’ the Disclosure Obligation
customer under Regulation Best
requires broker-dealers and associated
Interest.308 In particular, several
persons to disclose ‘‘all material facts
commenters recommended that the
relating to the scope of the terms of the
Commission clarify how a dualrelationship,’’ (emphasis added) and
broker-dealers and such associated
registrant should disclose its capacity
regarding its recommendations.309 Other persons thus will need to consider,
based on the facts and circumstances,
commenters recommended that the
whether there are other material facts
Commission define the scope of fees a
relating to the scope and terms of the
broker-dealer must disclose 310 and the
relationship with the retail customer
form that disclosure should take.311 In
that need to be disclosed. This analysis
addition, some commenters requested
generally should include consideration
clarity on the types of services that a
of whether information in the
broker-dealer would be required to
Relationship Summary constitutes a
disclose, including limitations on
‘‘material fact’’ that could appropriately
be expanded upon in satisfying the
Disclosure Obligation. It would be
possible, but would be unlikely for most

308 See, e.g., SIFMA August 2018 Letter; Edward
Jones Letter; NASAA August 2018 Letter; AARP
August 2018 Letter; PIABA Letter; Prudential Letter.
309 See, e.g., SIFMA August 2018 Letter; Edward
Jones Letter.
310 See, e.g., Bank of America Letter
(recommending that the Commission apply a
‘‘materiality’’ threshold to determine which fees
should be disclosed).
311 See, e.g., SIFMA August 2018 Letter (stating
that a broker-dealer’s disclosure of a range of
customer costs per product should be sufficient);
CFA August 2018 Letter (stating a broker-dealer’s
disclosure of percentages or ranges of cost
information would do little to enlighten investors
about the true costs of brokers’ advice services).

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312 See, e.g., NY Life Letter (stating that an insurer
may appropriately focus its career agents on the
distribution of variable insurance products that the
insurer manufactures, so long as limitations on the
universe of available products are disclosed to
consumers and supervisory procedures are in place
to ensure that a variable insurance product is in the
client’s best interest); CFA Institute Letter (stating
that the Disclosure Obligation should complement
the information presented in Form CRS and provide
greater specificity about, among other things, the
type and scope of services offered by the brokerdealer).
313 See, e.g., IAA August 2018 Letter
(recommending that the Commission clarify that
Regulation Best Interest would apply to all advisory
activities that broker-dealers agree to provide (e.g.,
ongoing monitoring for purposes of recommending
changes in investments)).
314 Rule 15l–1(a)(2)(i)(A).

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broker-dealers, for the abbreviated
format of the Relationship Summary to
sufficiently disclose ‘‘all material facts’’
regarding the scope and terms of the
relationship such that no further
information would be required to satisfy
the Disclosure Obligation.
Capacity In Which the Broker-Dealer Is
Acting
In the Proposing Release, the
Commission identified that the capacity
in which a broker-dealer is acting is a
material fact relating to the scope and
terms of a customer relationship subject
to the Disclosure Obligation.315 In so
identifying this critical element of
information, we hoped to promote
greater awareness among retail
customers of the capacity in which their
financial professional or firm acts with
respect to recommendations.
Several commenters requested
additional guidance on how dualregistrants and their associated persons
could comply with the proposed
Disclosure Obligation in this respect.316
Some commenters stated that repeated
disclosures of capacity would distract
customers from more important
disclosures related to a recommendation
and could lead to confusion.317 While
we received comments expressing
concerns that our proposed approach
might lead to investor confusion,318
many of these commenters were seeking
clarity regarding this requirement and
not its elimination.319
315 Proposing

Release at 21601.
e.g., NASAA August 2018 Letter
(requesting that the Commission provide guidance
to associated persons of dual-registrants explaining
how they should disclose the capacity in which
they are acting and whether they are providing a
recommendation or advice); Better Markets August
2018 Letter; CFA August 2018 Letter; Fidelity
Letter; IPA Letter; SIFMA August 2018 Letter;
Edward Jones Letter; CCMC Letters.
317 See, e.g., Edward Jones Letter (recommending
that the Commission not require repeated capacity
disclosures to customers because it would be
redundant and potentially confuse customers);
SIFMA August 2018 Letter (stating that disclosure
of capacity should not be required at the time of the
recommendation as it would cause unnecessary
delay and distract customers from more important
disclosures regarding account features and
recommendations); Better Markets August 2018
Letter (stating that one-time written disclosure
about a dual-registrant’s advisory capacity, followed
by future oral disclosures when they change roles
when making recommendations would be
confusing).
318 See, e.g., Better Markets August 2018 Letter;
CFA August 2018 Letter (stating that flexibility in
disclosure will result in disclosures that do not
effectively convey key information especially for
dual-registrants as customers will not understand
the capacity the dual-registrant is acting in at the
particular time or its significance).
319 See, e.g., SIFMA August 2018 Letter
(requesting that the Commission clarify the
application of the Disclosure Obligation to dually
registered firms and personnel, including what, and

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316 See,

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In response to commenters, we are
revising Regulation Best Interest to
explicitly require disclosure of capacity,
which the Proposing Release addressed
in guidance. Therefore, Rule 15l–
1(a)(2)(i)(A) requires that the broker,
dealer, or natural person who is an
associated person of a broker or dealer,
prior to or at the time of the
recommendation, provide the retail
customer, in writing, full and fair
disclosure of all material facts relating
to the scope and terms of the
relationship with the retail customer,
including that the broker-dealer or such
natural person is acting as a brokerdealer or an associated person of a
broker-dealer with respect to the
recommendation.
This disclosure is designed to
improve awareness among retail
customers of the capacity in which their
financial professional or broker-dealer
acts when it makes recommendations so
that the retail customer can more easily
identify and understand their
relationship, a goal shared with the
Relationship Summary.320 Form CRS
requires a firm to state the name of the
broker-dealer or investment adviser and
whether the firm is registered with the
Commission as a broker-dealer,
investment adviser, or both.321 A
standalone broker-dealer (i.e., a brokerdealer not also registered as an
investment adviser) will generally be
able to satisfy the Disclosure
Obligation’s requirement to disclose the
broker-dealer’s capacity by delivering
the Relationship Summary to the retail
customer.
For broker-dealers who are dually
registered, and for associated persons
who are either dually registered or, who
are not dually registered but only offer
broker-dealer services through a firm
that is dually registered, the information
contained in the Relationship Summary
will not be sufficient to disclose their
capacity in making a recommendation.
Although some commenters expressed
concerns about potential investor
confusion caused by ‘‘additional’’
disclosure regarding a dual-registrant’s
capacity, we believe that the Disclosure
Obligation will not duplicate or confuse,
but instead will provide clarifying detail
on capacity to supplement the
information contained in the
Relationship Summary. Accordingly, we
are clarifying that dually registered
associated persons and associated
persons who are not dually registered
how frequently, disclosure is required to put
customer on notice of their capacity); Edward Jones
Letter; IPA Letter; CCMC Letters.
320 See Relationship Summary Proposal at 21420.
321 See Relationship Summary Adopting Release
at Section II.C.

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but only offer broker-dealer services
through a firm that is dually registered
as an investment adviser with the
Commission or with a state, must
disclose whether they are acting (or, in
the case of the latter, that they are only
acting) as an associated person of a
broker-dealer to satisfy the Disclosure
Obligation.322 An associated person of a
dual-registrant who does not offer
investment advisory services must
disclose that fact as a material limitation
in order to satisfy the Disclosure
Obligation.
Furthermore, as discussed in greater
detail below, we would presume the use
of the terms ‘‘adviser’’ and ‘‘advisor’’ by
(1) a broker-dealer that is not also
registered as an investment adviser or
(2) a financial professional that is not
also a supervised person of an
investment adviser to be a violation of
the Disclosure Obligation under
Regulation Best Interest. Disclosure of
capacity may, in part, be made orally
under the circumstances outlined in
Section II.C.1, Oral Disclosure or
Disclosure After a Recommendation.
For example, a broker-dealer may
disclose that: ‘‘All recommendations
will be made in a broker-dealer capacity
unless otherwise expressly stated at the
time of the recommendation; any such
statement will be made orally.’’ In this
case, no further oral or written
disclosure would be required until a
recommendation is made in a capacity
other than as a broker-dealer. Similarly,
a broker-dealer may disclose that: ‘‘All
recommendations regarding your
brokerage account will be made in a
broker-dealer capacity, and all
recommendations regarding your
advisory account will be in an advisory
capacity. When we make a
recommendation to you, we will
expressly tell you orally which account
we are discussing’’). In this instance, no
further disclosure of capacity is
necessary.
Capacity in the Context of Names,
Titles, and Marketing Practices
The Relationship Summary Proposal
included a proposed rule that would
have restricted broker-dealers and their
associated persons (unless they were
registered as, or supervised persons of,
an investment adviser), when
communicating with a retail investor,
322 Financial professionals with registrations to
offer services as a representative of a broker-dealer
and investment adviser may offer services through
a dual-registrant, affiliated firms, or unaffiliated
firms, or only offer one type of service
notwithstanding their dual licensing. Financial
professionals who are not dually registered may
offer one type of service through a firm that is
dually registered. See Relationship Summary
Adopting Release at Section II.B.4.

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from using the term ‘‘adviser’’ or
‘‘advisor’’ as part of a name or title
(‘‘Titling Restrictions’’).323 After further
consideration of our policy goals and
the comments we received, and in light
of the disclosure requirements under
Regulation Best Interest, we do not
believe that adopting a separate rule
restricting these terms is necessary,
because we presume that the use of the
term ‘‘adviser’’ and ‘‘advisor’’ in a name
or title by (1) a broker-dealer that is not
also registered as an investment adviser
or (2) an associated person that is not
also a supervised person of an
investment adviser, to be a violation of
the capacity disclosure requirement
under the Disclosure Obligation as
discussed further below.324
We received several comments on the
proposed Titling Restrictions, which we
have also considered when determining
to presume use of such names and titles
to be a violation of the capacity
disclosure.325 Some commenters
supported a restriction on the terms
‘‘adviser’’ and ‘‘advisor,’’ noting, for
323 See Relationship Summary Proposal, supra
footnote 12, at 21461–63. We also requested
comment on whether we should explicitly restrict
other terms, including ‘‘wealth manager’’ and
‘‘financial consultant.’’ Additionally, we requested
comment on whether we should restrict terms that
are synonymous with ‘‘adviser’’ or ‘‘advisor.’’
324 We recognize that, in adopting the fee-based
brokerage rule in 2005, we declined to place any
limitations on how a broker-dealer may hold itself
out or the titles it may employ. Certain BrokerDealers Deemed Not to Be Investment Advisers,
Advisers Act Release No. 2376 (Apr. 12, 2005).
However, as we noted in the Relationship Summary
Proposal, comments we received in response to
Chairman Clayton’s request for comment and our
experience prompted us to revisit our approach
from 2005. In addition, given that the new
disclosure requirements under Regulation Best
Interest and Form CRS will and should necessitate
a reassessment of a broker-dealer’s names, titles,
and communications with its customers, we believe
it is necessary to re-evaluate the appropriateness of
these practices in light of these new obligations. See
also generally Relationship Summary Proposal,
supra footnote 12, at 21459–61 (citing commenters
and studies by the Siegel and Gale Consulting
Group and the RAND Corporation that document
investor confusion in the marketplace, all of which
were conducted subsequent to the 2005 fee-based
brokerage rule); Public Comments from Retail
Investors and Other Interested Parties on Standards
of Conduct for Investment Advisers and BrokerDealers, Chairman Jay Clayton (Jun. 1, 2017),
available at https://www.sec.gov/news/publicstatement/statement-chairman-clayton-2017-05-31.
We also proposed rules (the ‘‘Affirmative
Disclosures’’) that would have required a brokerdealer and an investment adviser to prominently
disclose that it is registered as a broker-dealer or
investment adviser, as applicable, with the
Commission in print or electronic retail investor
communications. As we discuss in a concurrent
rulemaking, we are not adopting the Affirmative
Disclosures. See Relationship Summary Adopting
Release, supra footnote 12, at Section III.
325 See, e.g., CFA August 2018 Letter; IAA August
2018 Letter; LPL August 2018 Letter; Letter from
Dennis M. Kelleher, President and CEO, et al.,
Better Markets (Aug. 7, 2018) (‘‘Better Markets CRS
Letter’’).

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example, that these particular terms are
often associated with the statutory term
‘‘investment adviser,’’ 326 or that
investors ‘‘typically associate’’ these
terms with registered investment
advisers.327 A few commenters
generally noted that the title ‘‘financial
advisor’’ prevents investors from
understanding whether they are
engaging a financial professional who
provides advisory services or who sells
brokerage services.328 Moreover, other
commenters generally stated that names
and titles containing ‘‘adviser’’ or
‘‘advisor’’ create investor confusion
and/or could mislead investors about
the differences between broker-dealers
and investment advisers including the
applicable standard of care 329 and the
services to be provided.330
Other commenters did not support the
proposed Titling Restrictions, believing
that the terms ‘‘adviser’’ and ‘‘advisor’’
are more generically used and
understood, and refer to financial
professionals who provide advice and
financial services more generally.331
Several of these commenters stated that
the restriction adds little additional
investor protection when taken together
with Regulation Best Interest and Form
CRS (i.e., it is duplicative).332
326 See Letter from Lexie Pankratz, Owner,
Trailhead Consulting, LLC (Aug. 7, 2018)
(‘‘Trailhead Letter’’).
327 See, e.g., Letter from Kurt N. Schacht,
Managing Director, et al., CFA Institute (Aug. 7,
2018) (‘‘CFA Institute CRS Letter’’); Pickard Letter.
328 See, e.g., Letter from Gerald Lopatin (Jul. 30,
2018) (‘‘Lopatin Letter’’); Letter from Paula Hogan
(Aug. 6, 2018) (‘‘Hogan Letter’’); Letter from Arlene
Moss (Jul. 31, 2018) (‘‘Moss Letter’’); Letter from
Daniel Wrenne (Jul. 31, 2018) (‘‘Wrenne Letter’’).
329 See, e.g., FSI August 2018 Letter; Schwab
Letter; CFA Institute CRS Letter; Betterment Letter.
330 See, e.g., NASAA August 2018 Letter (stating
that ‘‘[t]his rule change will help forestall retail
investors’ confusion about the different roles and
duties owed by broker-dealers/agents and
investment advisers/investment adviser
Representatives’’); CFA Institute CRS Letter (stating
that ‘‘[i]nvestor confusion about the roles and duties
of different financial services providers who use
‘‘adviser/advisor’’ in their titles has become
problematic from both an investor protection and
trust standpoint. Use of the proposed CRS, alone,
will not allay the substantial investor confusion in
the marketplace about the differences between
broker-dealers and investment advisers.’’)
331 See LPL August 2018 Letter (stating that
‘‘restricting use of ‘advisor’ and ‘adviser’ is contrary
to the plain English meaning the average investor
associates with those terms . . . regardless of the
legal contours of the service relationship.’’); NAIFA
Letter (stating that ‘‘[m]any financial professionals
are recognized as and/or refer to themselves as
‘advisors/advisers’ or ‘financial advisors/advisers.’
These words are (aptly) used by professionals who
offer advice on any number of financial topics.’’);
Letter from Investments & Wealth Institute (‘‘IWI’’)
(Aug. 6, 2018) (‘‘IWI August 2018 Letter’’) (stating
that an outright ban on the use of the terms
‘‘adviser’’ and ‘‘advisor’’ by broker-dealers would
raise First Amendment concerns).
332 See, e.g., Letter from Robert D. Oros, Chief
Executive Officer, HD Vest Financial Services (Aug.

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Additionally, some commenters stated
that Form CRS alone provides similar
investor protections that alleviate the
need for the restriction.333 Along similar
lines, one commenter stated that certain
fraud-based securities laws and FINRA
rules provide the same protections that
the proposed restriction seeks to add,
making it unnecessary.334
We also received several comments
on the following alternative approaches
to the Titling Restrictions on which we
sought comment: (i) A broker-dealer that
used the terms ‘‘adviser’’ or ‘‘advisor’’ as
part of a name or title would not be
considered to provide investment
advice solely incidental to the conduct
of its business as a broker-dealer, and
(ii) a broker-dealer would not be
providing investment advice solely
incidental to its brokerage business if it
‘‘held itself out’’ as an investment
adviser to retail investors.335 This
second alternative approach would have
resulted in a restriction generally
broader in scope than the Titling
Restrictions, as it would also have
encompassed communications and sales
practices in addition to the use of names
and titles.
In response to these alternatives,
several commenters stated that the
Titling Restrictions were too narrow in
meeting the Commission’s intended
objective of mitigating the risk that
investors could be misled by the use of
certain names and titles because the
Titling Restrictions did not address
other confusing names or titles,336 and,
7, 2018) (‘‘HD Vest Letter’’); LPL August 2018
Letter; SIFMA August 2018 Letter. But see Pickard
Letter (supporting the restriction and our proposed
alternative holding out approach by noting that
‘‘[w]e do not think that Reg BI or Form CRS as
currently proposed is sufficient.’’)
333 See, e.g., LPL August 2018 Letter; Morgan
Stanley Letter; Raymond James Letter.
334 See Cambridge Letter.
335 See Relationship Summary Proposal, supra
footnote 12, at 21463–64. We are not adopting the
proposed alternative approach that would have
restricted a broker-dealer from availing itself of the
solely incidental exclusion if it ‘‘held itself out’’ as
an investment adviser. Use of the terms ‘‘adviser’’
or ‘‘advisor,’’ however, could support a conclusion
depending on other facts and circumstances, that
the primary business of the firm is advisory in
nature, in which case the advice provided by the
broker-dealer would not be solely incidental to the
conduct of its brokerage business. See Solely
Incidental Interpretation, supra footnote 12, at
Section II.B (providing the Commission’s
interpretation of the solely incidental prong of the
broker-dealer exclusion from the Advisers Act).
336 See e.g., Letter from Barbara Roper, Director of
Investor Protection, and Micah Hauptman,
Financial Services Counsel, (Dec. 7, 2018) (‘‘CFA
December 2018 Letter’’); State Treasurers Letter;
Waters Letter (noting that the Titling Restrictions
are too narrow of a fix for investor confusion
because they fail ‘‘to address the numerous other
titles professionals use. . . . As a result, most retail
investors cannot easily distinguish between

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more specifically, because the Titling
Restrictions did not address the brokerdealers who ‘‘hold themselves out’’ as
investment advisers.337 Several of these
commenters instead advocated for
precluding reliance on the solely
incidental prong by any broker-dealer
that holds itself out as an investment
adviser.338 Some commenters stated that
certain marketing practices indicate that
advice is the main function of the
broker-dealer’s service.339 Additionally,
one commenter stated that ‘‘the
potential for investor confusion is at its
greatest when dealing with brokerdealers and dual-registrants that
routinely market their services as
advisory in nature. . . .’’ 340

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Use of Terms ‘‘Adviser’’ or ‘‘Advisor’’
Financial firms and their
professionals, including broker-dealers
and investment advisers, seek to acquire
new customers and to retain existing
customers by marketing their services,
financial advisers who are mere salespeople and
those that are investment advisers that must
provide advice that is in the best interests of the
investor.’’). See also NAIFA Letter (noting that
restricting these terms for broker-dealers and their
financial professionals only ‘‘and not for numerous
other professionals using those words and
delivering advice on a wide variety of financial
topics creates more consumer confusion and does
not enhance consumers’ understanding of the
specific obligations and standards that apply to
their advisor(s).’’)
Additionally, several of the commenters who
supported the restriction recommended
modifications such as broadening the restriction to
include other terms, including ‘‘wealth manager’’
and ‘‘financial consultant.’’ See, e.g., Financial
Engines Letter; Comment Letter of Altruist
Financial Advisors LLC (Aug. 7, 2018) (‘‘Altruist
Letter’’); Letter from David John Marotta (April 22,
2018) (‘‘Marotta Letter’’); Galvin Letter; Letter from
Pamela Banks, Senior Policy Counsel, Consumers
Union (Oct. 19, 2018) (‘‘Consumers Union Letter’’).
337 See, e.g., CFA August 2018 Letter; FPC Letter;
IAA August 2018 Letter; Letter from Michael Kitces
(Aug. 2, 2018) (‘‘Kitces Letter’’); LPL August 2018
Letter; MarketCounsel Letter; Waters Letter.
338 See, e.g., IAA August 2018 Letter (noting that
‘‘[w]hile names or titles are contributing factors to
investor confusion and the potential for investors to
be misled, we believe that other factors should be
considered as well. In particular, previous studies
noted the confusion arising from ‘we do it all’
advertisements and ‘marketing efforts which
depicted an ongoing relationship between the
broker-dealer and the investor.’ ’’); Betterment
Letter; CFA August 2018 Letter; LPL August 2018
Letter.
339 See CFA August 2018 Letter (citing to Micah
Hauptman and Barbara Roper, Financial Advisor or
Investment Salesperson? Brokers and Insurers Want
to Have it Both Ways, January 18, 2017). See also
Better Markets CRS Letter (stating that titles present
a professional as not ‘‘only an expert in financial
matters but also someone who will offer advice and
recommendations’’); Letter from Michael Palumbo
(Aug. 7, 2018) (‘‘Palumbo Letter’’); Kitces Letter.
340 See CFA August 2018 Letter. See also CFA
Institute CRS Letter (stating that the proposal
should address ‘‘those who may not expressly refer
to themselves as ‘adviser/[advis]or’ but through
their actions convey that meaning to
investors. . . .’’).

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including through the use of particular
terms in names and titles. Firms often
spend time and money to market, brand,
and create intellectual property by using
these terms in an effort to shape investor
expectations.341 A name or title is
generally used, and is designed to have
significance, on its own without any
additional context as to what it means.
Given that the titles ‘‘adviser’’ and
‘‘advisor’’ are closely related to the
statutory term ‘‘investment adviser,’’
their use by broker-dealers can have the
effect of erroneously conveying to
investors that they are regulated as
investment advisers, and have the
business model, including the services
and fee structures, of an investment
adviser.342 Such potential effect
undermines the objective of the capacity
disclosure requirement under
Regulation Best Interest to enable a
retail customer to more easily identify
and understand their relationship.
As discussed above, the Disclosure
Obligation requires broker-dealers to
make full and fair disclosure of all
material facts relating to the scope and
terms of the relationship with a retail
customer, including the capacity in
which they are acting with respect to a
recommendation. The capacity
disclosure requirement is designed to
improve awareness among retail
customers of the capacity in which their
firm and/or financial professional acts
when it makes recommendations so that
a retail customer can more easily
identify and understand their
relationship.343 We believe that in most
cases broker-dealers and their financial
professionals cannot comply with the
capacity disclosure requirement by
disclosing that they are a broker-dealer
while calling themselves an ‘‘adviser’’
or ‘‘advisor.’’ Under the Disclosure
341 See, e.g., Letter from Barbara Roper, Director
of Investor Protection, and Micah Hauptman,
Financial Services Counsel, CFA (Sep. 14, 2017)
(‘‘CFA September 2017 Letter’’) (‘‘[O]ur study
documents how everything from the titles brokers
use to the way they describe their services is
designed to send the message that they are in the
business of ‘providing expert investment advice,
comprehensive financial planning, and retirement
planning that is based on their clients’ needs and
goals and that is designed to serve their best
interests.’ ’’)
342 See Relationship Summary Proposal, supra
footnote 12, at 21461.
343 Similarly, Form CRS is designed to reduce
retail investor confusion in the marketplace for
brokerage and investment advisory services and to
assist retail investors with the process of deciding
whether to engage, or to continue to engage, a
particular firm or financial professional and
whether to establish, or to continue to maintain, an
investment advisory or brokerage relationship. A
broker-dealer firm or financial professional’s use of
‘‘adviser’’ or ‘‘advisor’’ in its name or title would
inhibit a customer’s full understanding of the
contours of his or her relationship with the firm and
financial professional, undermining Form CRS.

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Obligation, a broker-dealer, or an
associated person, must, prior to or at
the time of the recommendation,
disclose that the broker-dealer or that
associated person is acting as a broker
or dealer with respect to the
recommendation.344 When a brokerdealer or an associated person uses the
name or title ‘‘adviser’’ or ‘‘advisor’’
there are few circumstances 345 in which
that broker-dealer or associated person
would not violate the capacity
disclosure requirement because the
name or title directly conflicts with the
information that the firm or professional
would be acting in a broker-dealer
capacity.346 Therefore, use of the titles
‘‘adviser’’ and ‘‘advisor’’ by brokerdealers and their financial professionals
would undermine the objectives of the
capacity disclosure requirement by
potentially confusing a retail customer
as to type of firm and/or professional
they are engaging, particularly since
‘‘investment adviser’’ is defined by
statute separately from ‘‘broker’’ or
‘‘dealer.’’
As a result,347 we presume that the
use of the terms ‘‘adviser’’ and
‘‘advisor’’ in a name or title by (i) a
broker-dealer that is not also registered
as an investment adviser or (ii) an
associated person that is not also a
supervised person of an investment
adviser to be a violation of the capacity
disclosure requirement under
Regulation Best Interest.348
344 See

Rule 15l–1(a)(2)(i)(A)(i).
infra footnotes 349–351 and
accompanying text.
346 In the Relationship Summary Proposal, we
stated that our proposed restriction on the terms
‘‘adviser’’ and ‘‘advisor’’ would not have applied to
broker-dealers when communicating with
institutions. See Relationship Summary Proposal,
supra footnote 12, at 21462. Given that Regulation
Best Interest and the Relationship Summary apply
only to retail customers and retail investors,
respectively, our presumption would only apply to
the use of ‘‘adviser’’ and ‘‘advisor’’ in such contexts.
Therefore, we do not believe that further
clarification of communications by non-retail
focused broker-dealers is necessary.
347 Specifically, in the Proposing Release we
stated that a standalone broker-dealer would satisfy
the capacity disclosure by complying with the
proposed Relationship Summary and Affirmative
Disclosure requirements. We provided this
proposed guidance in the context of concurrently
proposing the Titling Restrictions. For the reasons
discussed herein, we believe a presumption against
the use of these titles by standalone broker-dealers
is more appropriate than a restriction.
348 If a financial professional is a registered
representative of a broker-dealer that is a dualregistrant but the professional is not also a
supervised person of an investment adviser, this
professional would similarly be presumptively in
violation of the capacity disclosure requirement if
the financial professional uses the title ‘‘adviser’’ or
‘‘advisor.’’ However, this financial professional may
continue to use either the dual-registrant’s materials
or may use the firm’s name in the financial
professional’s communications even if the firm’s
name includes the title ‘‘adviser’’ or ‘‘advisor’’
345 See

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Although using these names or titles
creates a presumption of a violation of
the Disclosure Obligation in Regulation
Best Interest, we are not expressly
prohibiting the use of these names and
titles by broker-dealers because we
recognize that some broker-dealers use
them to reflect a business of providing
advice other than investment advice to
retail clients. A clear example is a
broker-dealer (or associated person) that
acts on behalf of a municipal advisor 349
or commodity trading adviser,350 or as
an advisor to a special entity,351 as these
are distinct advisory roles specifically
defined by federal statute that do not
entail providing investment advisory
services. We also recognize that a
broker-dealer may provide advice in
other capacities outside the context of
investment advice to a retail customer
that would present a similarly
compelling claim to the use of these
terms. In these circumstances, firms and
their financial professionals may in
their discretion use the terms ‘‘adviser’’
or ‘‘advisor.’’ 352 In most instances,
however, when a broker-dealer uses
these terms in its name or title in the
context of providing investment advice
to a retail customer, they will generally
violate the capacity disclosure
requirement under Regulation Best
Interest.
because such firm is dually registered as an
investment adviser and broker-dealer and is not
presumptively violating the capacity disclosure
requirement under Regulation Best Interest.
Moreover, we believe it would be consistent for
dual-registrants and dually registered financial
professionals to use these terms as they would be
accurately describing their registration status as an
investment adviser.
349 15 U.S.C. 78o–4(e)(4).
350 15 U.S.C. 80b–2(a)(29).
351 15 U.S.C. 78o–8(h)(2)(A).
352 Some commenters raised concerns that the
proposed restriction would not permit financial
professionals to indicate that they maintain
particular certifications that include in the name or
title ‘‘adviser’’ or ‘‘advisor.’’ See, e.g., IWI August
2018 Letter; Letter from IWI (Oct. 9, 2018) (‘‘IWI
October 2018 Letter’’). Cf. Letter from John
Robinson (Aug. 6, 2018) (‘‘Robinson Letter’’)
(suggesting that the Commission limit the use of the
term ‘‘financial planner’’ to investment adviser
representatives); FPC Letter (suggesting that the
Commission clarify which certifications or
professional designations may be used for financial
planners). We recognize that these designations are
intended to convey adherence to particular
standards that financial professionals have met.
However, these designations are not rooted in any
statutory construct (as are the titles ‘‘commodity
trading advisor’’ and ‘‘municipal advisor’’) and
given that the terms ‘‘adviser’’ and ‘‘advisor’’ are
still associated with the statutory term ‘‘investment
adviser,’’ even if used in a designation, a brokerdealer or associated person that uses these
designations would similarly be in presumptive
violation of the capacity disclosure requirement in
Regulation Best Interest.

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Marketing Communications
As discussed above, several
commenters on the Titling Restrictions
raised concerns that restricting the use
of names and titles would be
insufficient to address what they viewed
as the larger issue of broker-dealer
marketing communications where a
broker-dealer and/or its financial
professional appears to be holding itself
out as an investment adviser. Marketing
communications provide additional
context to investors and are designed to
persuade potential customers to obtain
and pay for the firm’s services and
products.353 They communicate to
customers what services firms
understand themselves to be
providing—including, for brokerdealers, recommendations in connection
with and reasonably related to effecting
securities transactions.
The way in which a broker-dealer
markets itself may have regulatory
consequences. As noted above, Form
CRS requires, among other items,
broker-dealers (and investment advisers)
to state clearly key facts about their
relationship, including their registration
status and the services they provide.354
Broker-dealers (and investment
advisers) will also be required through
Form CRS to provide information to
assist retail investors in deciding
whether to engage in an investment
advisory or brokerage relationship.355
Additionally and as discussed above,
we are adopting the capacity disclosure
requirement under Regulation Best
Interest, which requires broker-dealers
and their financial professionals to
affirmatively disclose the capacity (e.g.,
brokerage) in which they are acting with
respect to their recommendations.356
These obligations are designed to
353 Affiliated firms may market advisory and
brokerage services in a single set of
communications. A dually registered firm also may
seek to market the primary services provided by its
advisory and brokerage business lines in a single set
of communications. We believe this combined
approach to providing customers with information
about investment services enhances customer
choice, and we understand that many such firms
market in this way in an effort to provide a
comprehensive picture of the firm’s services.
See also Instructions to Form CRS, General
Instruction 5. (Encouraging dual-registrants to
prepare one relationship summary discussing both
its brokerage and investment advisory services, but
stating that they may prepare two separate
relationship summaries for brokerage services and
investment advisory services. Whether the firm
prepares one relationship summary or two, the firm
must present the brokerage and investment advisory
information with equal prominence and in a
manner that clearly distinguishes and facilitates
comparison of the two types of services.).
354 See Relationship Summary Adopting Release,
supra footnote 12.
355 Id.
356 See Rule 15l–1(a)(2)(i)(A)(i).

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33353

improve awareness among retail
customers of the capacity in which their
firm or financial professional acts when
it makes recommendations so that the
retail customer can more easily identify
and understand their relationship.
As noted above, we are not adopting
the Commission’s proposed alternative
holding out approach that would have
addressed broker-dealer marketing
communications through the lens of the
solely incidental exclusion.357 However,
under our interpretation of the solely
incidental prong of the broker-dealer
exclusion from the definition of
investment adviser, a broker-dealer’s
investment advisory services do not fall
within that prong if the broker-dealer’s
primary business is giving investment
advice or if its investment advisory
services are not offered in connection
with and are not reasonably related to
the broker-dealer’s business of effecting
securities transactions.358 By more
clearly delineating when a brokerdealer’s performance of advisory
activities renders it an investment
adviser, this interpretation provides
guidance that may be informative to
broker-dealers when designing
marketing communications that
accurately reflect their activities.
Broker-dealers, dual-registrants, and
affiliated broker-dealers of investment
advisers that market their services
together should consider whether
modifications are needed in their
marketing communications in light of
these new obligations. As we noted in
the Relationship Summary Proposal,
broker-dealers can, and do, provide
investment advice so long as such
advice comports with the broker-dealer
exclusion under Advisers Act section
202(a)(11)(C). While broker-dealers and
their financial professionals may state
that they provide ‘‘advice’’ in their
marketing communications, those and
other statements should not be made in
a manner that contradicts the
disclosures made pursuant to
Regulation Best Interest and Form CRS,
and should be reviewed in light of the
Solely Incidental Interpretation.359 We
believe that the combination of new
disclosure obligations and requirements
and firms’ implementation of these new
obligations will appropriately address
commenters’ concerns regarding brokerdealers that hold themselves out as
357 See

supra footnote 335 and accompanying

text.
358 See Solely Incidental Interpretation, supra
footnote 12, Section II.B (providing the
Commission’s interpretation of the solely incidental
prong of the broker-dealer exclusion from the
Advisers Act.)
359 See Relationship Summary Proposal, supra
footnote 12, at 21461.

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investment advisers, particularly those
who can change capacities when serving
retail investors in a dual capacity.360
In addition to these new obligations,
FINRA Rule 2210 (regarding its
members’ communications with the
public) is designed to ensure that
broker-dealer communications with the
public are fair, balanced, and not
misleading.361 This rule includes
general standards, such as a requirement
to not make any false or misleading
statements, and specific content
standards, such as requirements on how
to disclose the broker-dealer’s name in
marketing communications.362
Accordingly, we anticipate that FINRA
will be reviewing the application of
these rules in light of these new
disclosure obligations. The Commission
staff also will evaluate broker-dealer
marketing communications to consider
whether additional measures may be
necessary.

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Fees and Costs
In the Proposing Release, we stated
that fees and charges applicable to the
retail customer’s transactions, holdings,
and accounts would also be examples of
‘‘material facts relating to the terms and
scope of the relationship’’ 363 As such,
these fees and charges would generally
have needed to be disclosed in writing
prior to, or at the time of, the
recommendation. While we did not
propose to mandate the form, specific
content, or method for delivering fee
disclosure, we stated that we would
generally expect that, to meet the
Disclosure Obligation, broker-dealers
would build upon the proposed
Relationship Summary by disclosing,
among other things, additional detail
regarding the types of fees and charges
described in the proposed Relationship
Summary.364
We received a number of comments
on the proposed Disclosure Obligation
relating to fees and charges. As
discussed in more detail in the relevant
sections below, these comments
generally sought clarity on the scope of
fees and charges to be disclosed,
including the particularity of the fees
and charges to be disclosed (i.e.,
whether standardized or individualized
disclosure would be required). In
360 See, e.g., IAA August 2018 Letter; FPC Letter;
Better Markets CRS Letter.
361 See FINRA Rule 2210.
Additionally, broker-dealers and their financial
professionals should keep in mind the applicability
of the antifraud provisions of the federal securities
laws, including section 17(a) of the Securities Act,
and Exchange Act Section 10(b) and Rule 10b–5
thereunder, to their marketing practices.
362 See, e.g., FINRA Rule 2210(d)(1) and (d)(3).
363 See Proposing Release at 21601.
364 See Proposing Release at 21600.

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consideration of the comments received,
and in light of the obligations being
imposed by the Relationship Summary,
we are revising Regulation Best Interest
to explicitly require the disclosure of
fees and costs, and are providing
additional clarifying guidance. In
addition, we are revising the Regulation
Best Interest rule text to refer to ‘‘fees
and costs’’ instead of ‘‘fees and
charges,’’ consistent with the approach
taken in the Relationship Summary.
Specifically, we are revising the
Disclosure Obligation to require
disclosure of ‘‘all material facts relating
to the scope and terms of the
relationship with the retail customer,
including [. . .] the material fees and
costs that apply to the retail customer’s
transactions, holdings and
accounts.’’ 365
We are also providing additional
guidance addressing the scope of fees
and costs to be disclosed. Namely, the
Disclosure Obligation requires
disclosure of material fees and costs
relating to the retail customer’s
transactions, holdings and accounts.
This obligation would not require
individualized disclosure for each retail
customer. Rather, the use of
standardized numerical and other nonindividualized disclosure (e.g.,
reasonable dollar or percentages ranges)
is permissible, as discussed below.366
Scope of Fees and Costs To Be Disclosed
Several commenters asked for
clarification about whether all fees and
charges must be disclosed, or only those
that are ‘‘material.’’ 367 In response, we
are revising Regulation Best Interest to
make explicit that a material fact
regarding the scope and terms of the
relationship includes material fees and
costs that apply to the retail customer’s
transactions, holdings and accounts. As
noted above, the standard for materiality
for purposes of the Disclosure
Obligation is consistent with the one the
Supreme Court articulated in Basic v.
Levinson; fees and costs are material
and must be disclosed, if there is ‘‘a
substantial likelihood that a reasonable
shareholder would consider it
important.’’ 368 As noted above, in the
context of this Regulation Best Interest,
the standard of materiality is based on
15l–1(a)(2)(i)(A)(ii).
Section II.C.1.a, Disclosure Obligation,
Fees and Costs, Particularity of Fees and Costs
Disclosed; Individualized Disclosure.
367 See, e.g., Bank of America Letter
(recommending that the Commission: (i) Provide
greater specificity regarding the fees to be disclosed
under Regulation Best Interest, and (ii) apply a
‘‘materiality’’ threshold to those fees).
368 Basic, Inc. v. Levinson, 485 U.S. 224, 224
(1988).

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365 Rule
366 See

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the retail customer, as defined in the
rule.
We would generally expect that, to
satisfy the Disclosure Obligation,
broker-dealers would build upon the
material fees and costs identified in the
Relationship Summary, providing
additional detail as appropriate. These
descriptions could include, for example,
an explanation of how and when the
fees are deducted from the customer’s
account (e.g., such as on a pertransaction basis or quarterly). Although
the fees and costs identified in the
Relationship Summary may provide a
useful starting point for the
identification of the material fees and
costs that may be disclosed pursuant to
the Disclosure Obligation, there may be
other categories of fees and costs that
are material under the facts and
circumstances of a broker-dealer’s
business model that must be disclosed
pursuant to the Disclosure Obligation.
Particularity of Fees and Costs
Disclosed; Individualized Disclosure
Several commenters recommended
that the Commission not require that
broker-dealers provide individualized
fee disclosures to retail customers.
Specifically, they recommended that the
Commission clarify that broker-dealers
could meet the Disclosure Obligation if
they provide a range of fees and costs
or use standardized and hypothetical
amounts rather than requiring
disclosure of actual dollar amounts
based on proposed amounts to be
invested (i.e., individualized fees).369
These commenters cited concerns about
cost and practicality associated with
generating individualized
disclosures.370 With regard to productlevel fees in particular, several
commenters expressed concern that
369 See, e.g., Vanguard Letter (recommending that
the Disclosure Obligation could be satisfied by
relaying the types and ranges of costs associated
with a recommendation, or by using standardized
and hypothetical investments, rather than requiring
computation of actual dollar amounts based on
proposed amounts to be invested); Capital Group
Letter (stating that customized mutual fund fee and
expense disclosures for investors at the time of the
recommendation would be impractical); SIFMA
August 2018 (recommending the Commission
permit disclosure of a range of customer costs per
product); NASAA August 2018 Letter (suggesting
that the Commission mandate its Model Fee Table
along with disclosure of other fees paid for services
and any other third party remuneration).
370 See, e.g., TIAA Letter (stating that brokerdealers would need to expend significant resources
to build new systems and new compliance
programs in order to provide individualized fee
disclosure); ICI Letter (recommending that the
Commission confirm that the Disclosure Obligation
would not require a broker-dealer to separately
calculate fund fees and expenses); Capital Group
Letter (stating that individualized disclosures raise
significant operational burdens and compliance
issues in exchange for, at best, inconsistent utility).

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broker-dealers could not easily calculate
individualized fees and charges
associated with the securities about
which they provide recommendations
and that doing so might lead to
inadvertently providing inconsistent or
inaccurate fee estimates to their retail
customers.371 In this vein, several
commenters recommended that brokerdealers should be able to satisfy the
Disclosure Obligation regarding
product-level fees by providing retail
customers with or referring them to an
issuer’s offering materials, such as a
prospectus.372 Other commenters, on
the other hand, stated that the
Commission should not allow the use of
percentages or ranges because such a
presentation does not adequately inform
investors of the fees and charges they
will incur.373
As adopted, the Disclosure Obligation
does not mandate individualized fee
disclosure particular to each retail
customer. Instead, broker-dealers may
disclose ‘‘material facts’’ about material
fees and costs in terms of more
standardized numerical and narrative
disclosures, such as standardized or
hypothetical amounts, dollar or
percentage ranges, and explanatory text
where appropriate. The disclosure
should accurately convey why a fee is
being imposed and when the fee is to be
charged. Further, as discussed below,374
a broker-dealer will need to supplement
this standardized disclosure with more
particularized information if the brokerdealer concludes that such information
is necessary to fully and fairly disclose
the material facts associated with the fee
or charge. For example, a broker-dealer
might initially disclose a range of
371 See, e.g., TIAA Letter (stating that calculating
individualized fee information for any retail
customer would be difficult and might lead to
inadvertently providing inconsistent or inaccurate
fee estimate); Capital Group Letter.
372 See TIAA Letter (stating that broker-dealers
should not be obligated to provide fund-level fee
disclosure outside of a fund prospectus or to
provide individualized fee disclosure to retail
customers); ICI Letter (stating that when making a
recommendation of a fund, a broker-dealer should
be permitted to direct customers to the fund’s
prospectus as the source of information about fund
fees and expenses); Oppenheimer Letter (stating
that the fund, not the broker-dealer, is in a better
position to provide these disclosures, in a manner
that is accurate, consistent and complete).
373 See, e.g., CFA August 2018 Letter (stating that
the Commission should not allow for percentages
or ranges because it would do little to inform
investors); PIABA Letter (stating that broker-dealers
should disclose the specific charges that their
customers will incur as a result of the particular
recommendation); UMiami Letter (stating that
customers should be provided with clear and
concise information that fully and fairly discloses
the specific charges the customer will incur as a
result of a particular recommendation).
374 See Section II.C.1.c, Disclosure Obligation,
Full and Fair Disclosure, Layered Disclosure.

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product fees, and later supplement that
information with more particularized
information by delivering the product
prospectus.375
Consistent with this approach, and
also in response to comments, we are
further clarifying that a broker-dealer
recommending a securities transaction
or an investment strategy involving
securities can meet the Disclosure
Obligation regarding fees and costs
assessed at the product level by
describing those fees and costs in initial,
standardized terms and providing
subsequent particularized disclosure as
necessary. To the extent that such
subsequent information regarding
product-level fees and costs appears in
a currently mandated disclosure
document, such as a trade confirmation
or a prospectus, delivery of that
information in accordance with existing
regulatory obligations will be deemed to
satisfy the Disclosure Obligation, even if
delivery occurs after the
recommendation is made, under the
circumstances outlined in Section II.C.1.
Although it is not required by
Regulation Best Interest, broker-dealers
may refer the customer to any issuer
disclosure of the security being
recommended, such as a prospectus,
private placement memorandum, or
offering circular, where more particular
information may be found.
We acknowledge that the desire for
greater fee transparency was a
consistent theme of our investor
engagement and we believe that the
Disclosure Obligation, in conjunction
with the Relationship Summary,
significantly advances that goal.
Individualized fee disclosure may be
helpful to some retail customers, but it
can also be costly, prone to errors, and
cause delays in trade execution. In
addition, in some cases the precise
amount of the fee may be based on the
dollar value of the transaction, and
would not be known prior to or at the
time of the recommendation, meaning
that it could only be expressed in more
general terms, such as a percentage
value or range, as an initial matter. We
believe that adopting the Disclosure
Obligation that allows for the use of
standardized disclosure furthers our
goal of informing investors about fees
and costs by the time of a
recommendation in a workable manner.
Nothing in Regulation Best Interest
prevents a broker-dealer from providing
such individualized disclosure to its
customers should it wish to do so, and
we encourage firms to assist retail
customers in understanding the specific
fees and costs that apply, and to provide

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supra footnote 302.

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33355

more individualized disclosure where
appropriate, or in response to a retail
customer’s request. As a best practice,
firms may also consider reviewing with
their retail customers the effect of fees
and costs on the retail customer’s
account(s) on a periodic basis.376 The
costs, errors, delays, and other practical
obstacles to individualized fee
disclosure are likely to fall over time.
We will continue to consider whether to
require more personalized fee
disclosure, particularly as technology
evolves to address operational and
technological costs.
With regard to the disclosure of
product-level fees in particular, while
we support the goal of bringing greater
transparency to all fees incurred, we are
seeking to supplement, not supplant,
the existing regulatory regime currently
applicable to product-level fees with the
adoption of Regulation Best Interest. We
acknowledge that if a broker-dealer
highlights such fees with particularity,
it may raise a customer’s awareness of
them, and we encourage as a best
practice that broker-dealers do so.377 We
acknowledge also that the nature and
extent of product-level disclosures may
vary. However, we do not believe that
requiring broker-dealers to deliver
product disclosures earlier than is
currently required, to generate fee
disclosure not currently required of
issuers, or to recalculate or highlight
specific product-level fees already
disclosed in an issuer’s offering
materials will meaningfully improve fee
disclosure and it may, in fact, be unduly
burdensome and raise the possibility of
errors if broker-dealers were to be
obligated to project or calculate product
fees based on product issuer
information. Accordingly, we believe
that allowing broker-dealers to meet the
Disclosure Obligation with regard to
product-level fees by describing those
fees in standardized terms with further
detailed, particularized information
related to the recommendation provided
either prior to or at the time of the
recommendation or afterwards under
the circumstances outlined in Section
II.C.1, Oral Disclosure or Disclosure
After a Recommendation, strikes an
376 Although we encourage firms to have this
conversation with their retail customers, we are not
suggesting that engaging in such a best practice
would, by itself, create any implied or explicit
obligation to monitor such fees and costs.
377 With regard to product-level fees, in
particular, broker-dealers may wish to highlight
certain categories of fees such as distribution fees,
platform fees, shareholder servicing fees and subtransfer agency fees, in order to enhance retail
customers’ understanding of these fees to the extent
applicable to the customer’s transactions, holdings,
and accounts.

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appropriate balance between costs to
firms and benefits to retail customers.378
We believe this approach is bolstered
by the existence of complementary
obligations protective of retail
customers that are imposed by
Regulation Best Interest. For example, to
the extent fees and costs incurred
related to these products create conflicts
of interest associated with a
recommendation, we believe they are
appropriately highlighted and addressed
in the context of the conflicts and
incentives they create to make a
recommendation, and must be
addressed as part of the obligation to
disclose material facts about conflicts of
interest associated with a
recommendation, as discussed below.379
Moreover, under the Care Obligation,
a broker-dealer recommending a
securities transaction or investment
strategy involving securities to a retail
customer must consider costs associated
with that recommendation when
determining whether it is in the best
interest of that retail customer. As a
result, disclosure of product-level fees
and costs to satisfy the Disclosure
Obligation will be supplemented by
other aspects of Regulation Best Interest.
While the Disclosure Obligation
provides broker-dealers with flexibility
in describing the material fees and costs
that apply, the disclosure should
accurately convey why the fee or charge
is being imposed and when the fee or
charge is to be assessed. For example,
describing a commission or markup as
a fee for ‘‘handling services’’ could
inappropriately disguise the fee’s true
nature. Furthermore, while using a
percentage or dollar range to describe a
fee can be appropriate, that range
should be designed to reasonably reflect
the actual fee to be charged. For
example, a statement that a charge may
be ‘‘between 5 and 100 basis points’’
would not be accurate if the fee is in
almost all instances between 85 and 100
basis points. However, in this case, a
broker-dealer could accurately describe
the fee, for example, as ‘‘generally being
between 85 and 100 basis points,
sometimes lower, but never above.’’ In
some cases, actual dollar values based
on a hypothetical transaction may
facilitate customer understanding.
A material fact about fees and costs
could also include informing a retail
customer of a fee’s triggering event, such
as a fee imposed because an account
minimum falls below a threshold and
whether fees are negotiable or waivable.
378 See Section II.C.1, Disclosure Obligation, Oral
Disclosure or Disclosure After a Recommendation.
379 See Section II.C.1.b, Disclosure Obligation,
Material Facts Regarding Conflicts of Interest.

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Type and Scope of Services Provided
In the Proposing Release, we provided
guidance that the type and scope of
services a broker-dealer provides its
retail customers would also be an
example of what typically would be
‘‘material facts relating to the terms and
scope of the relationship,’’ that would
require disclosure pursuant to the
Disclosure Obligation.380 Specifically,
we stated that broker-dealers should
build upon their disclosure in the
Relationship Summary, and provide
additional information regarding the
types of services that will be provided
as part of the relationship with the retail
customer and the scope of those
services.381
In particular, we noted that under
proposed Form CRS broker-dealers
would provide high-level disclosures
concerning services offered to retail
investors, including, for example,
recommendations of securities,
assistance with developing or executing
an investment strategy, monitoring the
performance of the retail investor’s
account, regular communications, and
limitations on selections of products.382
We recognized that a broker-dealer that
offers different account types, or offers
varying additional services to the retail
customer may not be able, within the
content and space constraints of the
Relationship Summary, to provide ‘‘all
material facts relating to the scope and
terms of the relationship’’ with the retail
customer.383 Thus, we stated that
pursuant to the proposed Disclosure
Obligation, we would have generally
expected broker-dealers to disclose
these types of material facts concerning
the actual services offered as part of the
relationship with the retail customer
separately from the Relationship
Summary.
Commenters generally agreed that it
was important for broker-dealers to
disclose to their customers material
facts about the type and scope of
services they provide to their
customers.384 However, commenters
sought clarity regarding the application
of this proposed guidance, and raised
questions about whether firms would be
specifically required to disclose certain
services (e.g., monitoring account
performance and providing financial
education) pursuant to Regulation Best
380 See

Proposing Release at 21602.

381 Id.
382 See Relationship Summary Proposing Release
at 31426.
383 See Section II.C.1.a, Disclosure Obligation,
Standard of Conduct.
384 See, e.g., Pacific Life August 2018 Letter;
Cetera August 2018 Letter.

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Interest,385 as discussed below, and the
level of disclosure required under
Regulation Best Interest.386
Consistent with our approach in the
Proposing Release, we continue to
believe that the type and scope of
services a broker-dealer provides to its
retail customers are ‘‘material facts
relating to the scope and terms of the
relationship.’’ Accordingly, we are
revising the rule text to explicitly
require the disclosure of the ‘‘type and
scope of services provided to the retail
customer, including any material
limitations on the securities or
investment strategies involving
securities that may be recommended to
the retail customer,’’ as part of the
‘‘material facts relating to the scope and
terms of the relationship’’ that must be
disclosed pursuant to the Disclosure
Obligation.387
We are interpreting the Disclosure
Obligation to only require disclosure of
material facts relating to the type of
services provided (e.g., the fact that the
broker-dealer monitors securities
transactions and investment strategies)
and the scope of services (e.g.,
information about the frequency and
duration of the services). In response to
comments, we are also specifically
addressing the disclosure of information
regarding whether or not the brokerdealer provides account monitoring
services and whether the broker-dealer
has account minimums or similar
requirements.
In addition, in response to comments,
we are clarifying that pursuant to the
Disclosure Obligation, broker-dealers
need to disclose only material
information relating to the ‘‘type and
scope of services provided.’’ As
discussed in the context of the
disclosure of fees and costs above, the
standard for materiality of the type and
scope of services to be disclosed is
consistent with the standard articulated
in Basic v. Levinson: Information related
to the type and scope of services
provided is material, and must be
disclosed, if there is ‘‘a substantial
likelihood that a reasonable shareholder
385 See, e.g., Betterment Letter (recommending
that the Commission ensure that dual-registrants
communicate which of their services are advisory
in nature); Northwestern Mutual Letter.
386 See, e.g., Cetera August 2018 Letter (stating
that a best interest standard should include a
requirement to deliver a summary description of the
relationship between the firm and customer,
including the scope of services); Committee of
Annuity Insurers Letter (recommending the
Commission clarify that a broker-dealer could
satisfy the Disclosure Obligation by disclosing the
products and services available to its retail
customers and does not need to disclose
information particularized to a recommendation).
387 Rule 15l–1(a)(2)(i)(A)(iii).

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would consider it important.’’ 388 As
noted above, in the context of
Regulation Best Interest, this standard
would apply in the context of retail
customers, as defined.
We believe the information included
in the Relationship Summary may
provide a useful starting point for the
identification of the type and scope of
services that must be disclosed pursuant
to the Disclosure Obligation. For
example, in the Relationship Summary
a broker-dealer must describe its
principal brokerage services offered,
including buying and selling securities,
and whether or not it offers
recommendations to retail investors.389
Additionally, in the Relationship
Summary, if applicable, the brokerdealer must address whether or not the
firm offers monitoring of investments.
We believe that broker-dealers will
generally need to build upon the
disclosures made in the Relationship
Summary as appropriate, and to provide
additional information regarding the
types of services that will be provided
as part of the relationship with the retail
customer and the scope of those services
(e.g., the frequency and duration of the
services), as necessary, in order to meet
the Disclosure Obligation’s requirement
to disclose ‘‘all material facts’’ regarding
the type and scope of services provided.
Broker-dealers may be able to satisfy
this aspect of the Disclosure Obligation
by relying on their existing disclosures
about the type and scope of their
services, typically reflected in their
account opening agreement or other
account opening related documentation,
so long as the disclosure as a whole
addresses the material facts relating to
the type and scope of services offered to
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Disclosure of Material Limitations on
Securities and Investment Strategies
In the Proposing Release, we included
any limitations on the products and
services offered as an example of a
material fact relating to the terms and
scope of the relationship that would
need to be disclosed pursuant to the
Disclosure Obligation. We agree with
commenters who advocated for helping
investors to understand whether a
broker-dealer limits its product
offerings, and to what extent, before
entering into a relationship with a
broker-dealer.390 We continue to believe
388 Basic, Inc. v. Levinson, 485 U.S. 224, 224
(1988).
389 See Form CRS, Item 2.B. (Description of
Services).
390 See CFA Institute Letter (stating that if a
broker-dealer only offers proprietary products, it
should clearly call attention to the higher product
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that broker-dealers that place material
limitations on the securities or
investment strategies involving
securities that may be recommended to
retail customers—such as
recommending only proprietary
products or a specific asset class—need
to describe the material facts relating to
those limitations.391
Therefore, in response to comments,
we are revising Regulation Best Interest
to explicitly require that, as part of the
disclosure of the type and scope of
services provided to the retail customer,
a broker-dealer must include ‘‘any
material limitations on the securities or
investment strategies involving
securities that may be recommended to
the retail customer.’’ 392 For purposes of
this requirement, a ‘‘material limitation’’
placed on the securities or investment
strategies involving securities could
include, for example, recommending
only proprietary products (e.g., any
product that is managed, issued, or
sponsored by the broker-dealer or any of
its affiliates), a specific asset class, or
products with third-party arrangements
(e.g., revenue sharing, mutual fund
service fees).393 Similarly, the fact that
the broker-dealer recommends only
products from a select group of issuers,
or makes IPOs available only to certain
clients, could also be considered a
material limitation. To cite another
example, if an associated person of a
dually registered broker-dealer only
offers brokerage services, and is not able
to offer advisory services, the fact that
the associated person’s services are
materially narrower than those offered
by the broker-dealer would constitute a
material limitation.
We recognize that, as a practical
matter, all broker-dealers limit their
offerings of securities and investment
strategies to a greater or lesser degree.
We do not believe that disclosing the
fact that a broker-dealer does not offer
a limited offering); SIFMA August 2018 Letter
(stating that a firm should be able to limit its
offerings to a particular subset of its customers to
proprietary product or revenue sharing products as
long as: (1) The broker-dealer discloses that it is
limiting its recommendation to a specific set of
securities and (2) the specific set of securities
contains appropriate securities to meet the
customer’s needs); SPARK Letter (recommending
that the Commission permit broker-dealers that
only offers proprietary products or a limited menu
of investments to satisfy the conflict mitigation
requirements by: (1) Disclosing any material
limitations on the investment products being
offered and (2) reasonably concluding that the
limitations will not violate the Care Obligation).
391 See Form CRS, Item 2.B.(iii).
392 Rule 15l–1(a)(2)(A). See also Section II.C.1 for
a discussion of the materiality standard under
Basic, Inc. v. Levinson, 485 U.S. 224 (1988).
393 This is consistent with the approach we are
taking in the Relationship Summary Adopting
Release.

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the entire possible range of securities
and investment strategies would convey
useful information to a retail customer,
and therefore we would not consider
this fact, standing alone, to constitute a
material limitation.394
In addition, we believe that there are
a number of reasonable practices by
which appropriate limitations are
determined, including processes for the
selection of a ‘‘menu’’ of products that
will be available for recommendations
to retail customers. We further recognize
that these limitations can be beneficial,
such as by helping ensure that a brokerdealer and its associated persons
understand the securities they are
recommending, as required by
paragraph (a)(2)(ii)(A) of the Care
Obligation. We have also explicitly
stated that Regulation Best Interest
would not prohibit a broker-dealer from
recommending, for example, a limited
range of products, or only proprietary
products, provided the broker-dealer
satisfies the component obligations of
Regulation Best Interest. Nonetheless,
because these firm-wide threshold
decisions have such a significant effect
on the subsequent recommendations
ultimately made to a retail customer, we
are requiring disclosure of the material
limitations on the securities or
investment strategies involving
securities that may be recommended—
by the broker-dealer and its associated
persons—as well as any associated
conflicts of interest.
Explicitly requiring disclosure of
these limitations is also consistent with
our approach in the Care and Conflict of
Interest Obligations. As discussed
below, despite the potential beneficial
aspects of some limitations, we are
concerned that such limitations and any
associated conflicts of interest can
negatively affect the securities or
investment strategies recommended to a
retail customer.395 In recognition of this
concern, we have revised the Conflict of
Interest Obligation to specifically
require the establishment of policies
and procedures to identify, disclose,
and address that risk.396 Furthermore,
we reiterate that even if a broker-dealer
discloses and addresses any material
limitations on the securities or
investment strategies involving
securities recommended to a retail
customer, and any associated conflicts
of interest, as required by the Disclosure
394 See Basic, Inc. v. Levinson, 485 U.S. 224, 224
(1988).
395 See Section II.C.3, Conflicts of Interest. See
Proposing Release at 21608 (asking commenters to
comment on whether, and, if so why, the
Commission should require specific disclosure on
product limitations).
396 See Section II.C.4.

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and Conflict of Interest Obligations, it
would nevertheless need to satisfy the
Care Obligation in recommending such
products.397
Account Monitoring Services
In the Proposing Release, we
identified as a material fact relating to
the scope and terms of the relationship
with the retail customer the type and
scope of services provided by the
broker-dealer, including, for example,
monitoring the performance of the retail
customer’s account.398 Additionally, the
Proposing Release stated that to the
extent that the broker-dealer agrees with
a retail customer by contract to provide
periodic or ongoing monitoring of the
retail customer’s investments for
purposes of recommending changes in
investments, Regulation Best Interest
would apply to, and a broker-dealer
would be liable for not complying with
the proposed rule with respect to, any
recommendations about securities or
investment strategies made to retail
customers resulting from such
services.399
Commenters suggested that brokerdealers should be required to clearly
define the nature of account monitoring
services offered, with some commenters
pointing to retail customer confusion on
this topic.400 One commenter stated that
disclosure will not help a retail
customer of a dual-registrant who has
both brokerage and advisory accounts,
who is unlikely to remember which
accounts his or her financial advisor is
responsible for monitoring, and for
which accounts the customer bears that
responsibility. Accordingly, the
commenter recommends that we require
broker-dealers to monitor all retail
customers’ accounts.401
As discussed in the Solely Incidental
Interpretation, we disagree with
commenters who suggested that any
monitoring of customer accounts would
require a broker-dealer to register as an
investment adviser and we believe that
it is important for retail customers to
understand: (1) The types of account
monitoring services (if any) a particular
broker-dealer provides, and (2) whether
or not the broker-dealer will be
397 See

Section II.C.2.
Release at 21600.
399 Id. at 21594.
400 See, e.g., NAIFA Letter (asserting brokerdealers should be free to agree to, and define the
nature of, any ongoing relationship via contract,
such as including monitoring services); see also
RAND 2018 (stating that participants demonstrated
a lack of clarity on how a financial professional
would monitor an account); OIAD/RAND (stating
that some participants perceived that continuous
monitoring of a client’s account is consistent with
acting in the client’s best interest).
401 AFL–CIO April 2019 Letter.

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398 Proposing

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providing monitoring services for the
particular retail customer’s account.
Accordingly, we believe that whether or
not the broker-dealer will monitor the
retail customer’s account and the scope
and frequency of any account
monitoring services that a broker-dealer
agrees to provide are material facts
relating to the type and scope of services
provided to the retail customer and
must be disclosed pursuant to the
Disclosure Obligation. This disclosure
could indicate, for example, that the
broker-dealer will monitor the account
or investments at a stated frequency in
light of the retail customer’s investment
objectives for the purpose of
recommending an asset reallocation
where appropriate, or that the brokerdealer will monitor the account
periodically to determine whether a
brokerage account continues to be in the
retail customer’s best interest. Or,
broker-dealers that offer no account
monitoring services could disclose that
they will not monitor the account or
consider whether any recommendations
may be appropriate unless the retail
customer specifically requests that they
do so.402
The Relationship Summary requires
broker-dealers to explain whether or not
they monitor retail investors’
investments, including the frequency
and any material limitations.403
However, as noted above, because the
Relationship Summary provides highlevel disclosure, in most cases it
generally would not be sufficiently
specific to inform investors about the
scope and frequency of any account
monitoring services applicable to the
particular retail customer’s account. The
Disclosure Obligation is designed to
provide investors with an expanded
description of the material information
relating to such services. Furthermore,
as discussed in Section 2.B.2.b.,
Regulation Best Interest applies to
recommendations resulting from agreedupon account monitoring services
(including implicit hold
recommendations). Requiring disclosure
of whether or not the broker-dealer will
monitor the retail customer’s account,
and the scope and frequency of such
402 As discussed in footnote 167, we recognize
that a broker-dealer may voluntarily, and without
any agreement with the customer, review the
holdings in a retail customer’s account for the
purposes of determining whether to provide a
recommendation to the customer. We do not
consider this voluntary review to be ‘‘account
monitoring,’’ nor would it in and of itself on its own
to create an implied agreement with the retail
customer to monitor the customer’s account. Any
explicit recommendation made to the retail
customer as a result of any such voluntary review
would be subject to Regulation Best Interest.
403 See Form CRS, Item 2.B.(i).

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monitoring, will help retail customers
understand the terms applicable to the
particular retail customer’s account.
While retail customers with multiple
accounts will have to keep track of the
accounts for which their broker-dealer
has agreed to monitor, we believe that
requiring disclosure of this service will
provide those retail customers with
sufficient clarity about the monitoring
services they may expect. Requiring all
broker-dealers to monitor all retail
customer accounts, as one commenter
suggested, would diminish the options
available to retail customers, who may
wish to have their accounts monitored
to a greater or lesser degree (including
not at all).
Account Balance Requirements
The Proposing Release did not
address whether a broker-dealer offering
brokerage accounts subject to account
balance requirements is a ‘‘material fact
relating to the scope and terms of the
relationship.’’ However, several
commenters to the Form CRS proposal
suggested that the Commission require
firms to disclose any account balance
requirements in the Relationship
Summary.404 We believe that account
balance requirements are a material fact
relating to the terms and scope of the
relationship. Consequently, we are
interpreting the Disclosure Obligation to
include disclosure of whether a brokerdealer has any requirements for retail
customers to open or maintain an
account or establish a relationship, such
as a minimum account size. We believe
that if a broker-dealer will only open a
brokerage account for a retail customer
with a specific account minimum, such
a basic operational aspect of the account
is a material fact relating to the type and
scope of services provided. If dollar
thresholds or other requirements apply
to a retail customer’s ability to maintain
an existing account, or to avoid
additional fees when the threshold is
crossed (for example, a ‘‘low account
balance’’ fee), such requirements also
would likely be of importance to a retail
customer.405 We further believe retail
customers can use facts about different
account size requirements for both
current and future planning and
decision-making purposes. Accordingly,
404 See, e.g., NASAA Letter (stating that ‘‘Form
CRS should specify minimum account size and
include information on miscellaneous fees different
categories of investors can expect to pay.’’); Cetera
August 2018 Letter (stating that Form CRS should
include ‘‘[w]hether or not the firm has established
standards for the minimum or maximum dollar
amount of various account types;’’ and submitting
mock-up form that include disclosures of account
minimums); Primerica Letter. See Relationship
Summary Adopting Release.
405 See Relationship Summary Adopting Release.

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the Commission believes this
information constitutes a ‘‘material fact’’
that must be disclosed pursuant to the
Disclosure Obligation.
Other Material Facts Related to the
Scope and Terms of the Relationship
In the Proposing Release, although we
identified the broker-dealer’s capacity,
fees and charges, and type and scope of
services provided as examples of what
would generally be considered
‘‘material facts relating to the scope and
terms of the relationship with the retail
customer,’’ we noted that the Disclosure
Obligation would also require brokerdealers and their associated persons to
determine, based on the facts and
circumstances, whether there are other
material facts relating to the scope and
terms of the relationship that would
need to be disclosed.406 We also asked
for comment on whether examples of
other information relating to scope and
terms of the relationship should be
highlighted by the Commission as likely
to be considered a material fact relating
to the scope and terms of the
relationship that would need to be
disclosed.407
A number of commenters provided
suggestions of additional examples of
such material facts that the Commission
should highlight or explicitly require to
be disclosed as a ‘‘material fact relating
to the scope and terms of the
relationship.’’ Specifically, commenters
raised whether a broker-dealer’s basis
for,408 and risks associated with,409 a
recommendation, or the standard of
conduct applicable to a broker-dealer
making a recommendation,410 should be
material facts relating to the scope and
terms of the relationship.
Basis for and Risks Associated With the
Recommendation
The Proposing Release did not
address whether a broker-dealer’s basis
for a recommendation is a ‘‘material fact
relating to the scope and terms of the
relationship.’’ However, several
commenters requested that the
Commission treat a broker-dealer’s basis
for a recommendation as a ‘‘material fact
relating to the scope and terms of the
relationship’’ that would likely need to
be disclosed prior to, or at the time of
the recommendation, pursuant to the
Disclosure Obligation.411 Similarly,

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406 See

Proposing Release at 21600–21601.
Proposing Release at 21607.
408 See infra footnote 411.
409 See infra footnote 412.
410 See infra footnote 417.
411 See, e.g., PIABA Letter (recommending that
broker-dealers be required to provide a clear and
understandable explanation as to the other lower
cost investments which are available, and why the
407 See

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several commenters suggested that the
Commission should treat risks
associated with a broker-dealer’s
recommendation as ‘‘material facts
relating to the scope and terms of the
relationship’’ that would likely need to
be disclosed prior to, or at the time of
the recommendation.412 Other
commenters opposed requiring
particularized disclosure of the basis of
individual recommendations, stating
that it is sufficient to disclose that
different products are available with
different features rather than require
firms specify why the broker-dealer
recommended one product over
another.413
Our view is that the general basis for
a broker-dealer’s or an associated
person’s recommendations (i.e., what
might commonly be described as the
firm’s or associated person’s investment
approach, philosophy, or strategy) is a
material fact relating to the scope and
terms of the relationship with the
broker-dealer that must be disclosed
pursuant to the Disclosure Obligation.
The process by which a broker-dealer
and an associated person develop their
recommendations to retail customers is
of fundamental importance to the retail
customer’s understanding of what
services are being provided, and
whether those services are appropriate
to the retail customer’s needs and goals.
We believe that such a description can
be made in standardized or summary
form; however the disclosure should
also address circumstances of when the
higher cost investment is being recommended);
Morningstar Letter (recommending that the
Commission require a firm to disclose its analysis
of the reasons it is recommending a rollover from
an ERISA-covered retirement plan to an IRA and
why it is in the participant’s best interest).
412 See, e.g., PIABA Letter (recommending that
the Commission extend the Disclosure Obligation to
include the risks, benefits, and ramifications of a
recommendation).
413 See, e.g., LPL August 2018 Letter (stating that
a broker-dealer could satisfy the Care Obligation if
it recommends a more expensive investment
product so long as it discloses that the
recommended product is not the least expensive
among the alternatives and is otherwise in the
investor’s best interest); Committee of Annuity
Insurers Letter (recommending that the Commission
clarify that a broker-dealer could satisfy the
Disclosure Obligation through the use of a
disclosure describing the products and services
available to its retail customers and related conflicts
of interest, and that a broker-dealer or associated
person need not provide a disclosure particularized
to a recommendation). See also CCMC Letters
(requesting that the SEC confirm that it is sufficient
to disclose that different products are available with
different features rather than require firms to also
document why the firm recommended one product
over another); IPA Letter (requesting additional
guidance regarding specificity of disclosure needed
to demonstrate why a broker-dealer recommended
one of multiple different products (with different
terms, cost structures and conditions) that each
meet the customer’s investment objective).

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standardized disclosure does not apply
and how the broker-dealer will notify
the customer when that is the case. For
example, if an associated person has a
distinct investment approach, as may be
the case with persons associated with an
independent contractor broker-dealer,
the broker-dealer’s standardized
disclosure should indicate how its
associated persons will notify retail
customers of their own investment
approach.
While the general basis for the
recommendation is a material fact for
purposes of the Disclosure Obligation,
we decline to require disclosure of the
basis for each recommendation, an
approach that could involve significant
costs and in many cases may simply
repeat the more standardized disclosure
that we are already requiring. With
regard to how conflicts of interest may
affect the basis for a particular
recommendation, we note that the
Disclosure Obligation requires
disclosure of the material facts relating
to the conflicts of interest associated
with the recommendation, which will
help retail customers evaluate the
incentives a broker-dealer or associated
person may have in making a
recommendation; and the Conflict of
Interest Obligation requires a brokerdealer to have policies and procedures
to mitigate, and in certain instances,
eliminate, specified conflicts of interest.
Accordingly, to the extent the basis for
any recommendation is subject to any
conflicts of interest, the Commission
believes that the Care Obligation’s
substantive requirement to have a
reasonable basis for the
recommendation, combined with the
Disclosure, Conflict of Interest and
Compliance Obligations, provides
sufficient protections to broker-dealers’
retail customers.
Similarly, we are interpreting
disclosure of the risks associated with a
broker-dealer’s or associated person’s
recommendations in standardized terms
as a material fact related to the scope
and terms of the relationship that needs
to be disclosed. For example, a brokerdealer could disclose: ‘‘While we will
take reasonable care in developing and
making recommendations to you,
securities involve risk, and you may
lose money. There is no guarantee that
you will meet your investment goals, or
that our recommended investment
strategy will perform as anticipated.
Please consult any available offering
documents for any security we
recommend for a discussion of risks
associated with the product. We can
provide those documents to you, or help
you to find them.’’ This example is
purely illustrative. Whether any

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particular disclosure by a broker-dealer
is sufficient to meet the Disclosure
Obligation will depend on the facts and
circumstances.
The risks associated with a particular
recommendation would be relevant to a
retail customer. However, we believe
that broker-dealers may rely on the
existing disclosure regime governing
securities issuers to disclose the risks
associated with any issuer, security or
offering,414 and it is not our intent to
require the broker-dealer to duplicate or
expand on those disclosures. Consistent
with our approach, discussed above, to
disclosure of product-level fees and
costs, we believe that describing
product-level risks in standardized
terms, with additional information in
any available issuer disclosure
documents delivered in accordance
with existing regulatory requirements
would satisfy the Disclosure Obligation.
As noted above, we are not seeking to
supplant the developed regulatory
regime currently applicable to offering
disclosure with the adoption of
Regulation Best Interest.
While we believe that a standardized
discussion of risks is a material fact that
must be disclosed to satisfy the
Disclosure Obligation, we decline to
impose a disclosure requirement
specific to each recommendation. As
with regard to the disclosure of the
individualized basis for each
recommendation, we believe that such
specific disclosure could involve
significant costs and in many cases
simply repeat the more standardized
disclosure that we are requiring, which
we believe will sufficiently inform retail
customers, in broad terms, of the nature
of the risks associated with a
recommendation.
In addition, under the Care
Obligation, a broker-dealer making a
recommendation of a securities
transaction or investment strategy
involving securities to a retail customer
must consider the risks when
determining whether it has a reasonable
414 See, e.g., Item 503(c) of Reg. S–K (requiring
disclosure of the ‘‘most significant’’ factors that
make an offering ‘‘speculative or risky,’’ as well as
an explanation of how each risk ‘‘affects the issuer
or the securities being offered.’’ See also Form 10–
K (requiring a description of the 503(c) risk factors
that are ‘‘applicable to the registrant’’). In some
cases, SRO Rules applicable to recommendations of
particular securities may also require disclosure of
risks. See, e.g., FINRA Rule 2330 (requiring a
FINRA member or its associated persons
recommending deferred variable annuity to have a
reasonable belief that the customer has been
informed of, among other things, market risk). See
also FINRA Rule 2210(d), requiring, among other
things, that statements in member communications
‘‘are clear and not misleading within the context in
which they are made, and that they provide
balanced treatment of risks and potential benefits.’’

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basis for believing that the
recommended transaction or investment
strategy could be in the best interest of
at least some retail customers, and is in
the best interest of a particular retail
customer. Moreover, under paragraph
(a)(2)(B) of Regulation Best Interest,
discussed below, broker-dealers need to
disclose ‘‘all material facts relating to
conflicts of interest that are associated
with the recommendation,’’ which will
require disclosure of what we believe to
be a significant risk associated with a
broker-dealer’s recommendations—the
broker-dealer’s conflicts of interest. For
these reasons, we believe that
standardized written disclosure of this
information in general terms is
sufficient.
Consistent with the Compliance
Obligation, broker-dealers should
consider developing policies and
procedures that address the
circumstances under which the basis for
a particular recommendation would be
disclosed to a retail customer. As a best
practice, firms also should encourage
their associated persons to discuss the
basis for any particular recommendation
with their retail customers, including
the associated risks, particularly where
the recommendation is significant to the
retail customer. For example, the
decision to roll over a 401(k) into an
IRA may be one of the most significant
financial decisions a retail investor
could make. Thus, a broker-dealer
should discuss the basis of such
recommendations with the retail
customer. Similarly, we encourage
broker-dealers to record the basis for
their recommendations, especially for
more complex, risky or expensive
products and significant investment
decisions, such as rollovers and choice
of accounts, as a potential way a brokerdealer could demonstrate compliance
with the Care Obligation.
Standard of Conduct 415
As stated in the Proposing Release,
the Commission intended the
Relationship Summary to touch on
issues that are also contemplated under
the Disclosure Obligation, such as
facilitating greater awareness of key
aspects of a relationship with a firm or
financial professional, such as the
applicable standard of conduct.416
Several commenters on Regulation Best
Interest also requested that the
Commission treat the standard of
conduct applicable to a broker-dealer
making the recommendation to its retail
customer as a ‘‘material fact relating to
415 See Section II.C.1.a, Disclosure Obligation,
Capacity in Which the Broker-Dealer is Acting.
416 See Proposing Release at 21600.

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the scope and terms of the relationship’’
that would likely need to be disclosed
prior to, or at the time of the
recommendation under the Disclosure
Obligation.417 Specifically, these
commenters requested that the
Commission require a firm to disclose
whether it is providing a
recommendation subject to Regulation
Best Interest or advice subject to a
fiduciary duty.418
The Commission also carefully
considered numerous comments
concerning the standard of conduct
disclosure in proposed Form CRS, along
with the results of investor testing and
the Commission’s Feedback Form.419 As
discussed more fully in the Relationship
Summary Adopting Release, we are
adopting a requirement in Form CRS for
a description of a firm’s applicable
standard of conduct using prescribed
wording.420 This ‘‘standard of conduct’’
disclosure (as modified from proposed
Form CRS) both eliminates technical
words, such as ‘‘fiduciary,’’ and
describes the legal obligations of brokerdealers, investment advisers, or dualregistrants using similar terminology in
plain English. The prescribed wording
417 See, e.g., NASAA 2018 Letter (recommending
that the Commission provide specific instructions
on how associated persons of dually registered
firms should disclose capacity in which they are
acting and whether the information they are
providing is a recommendation subject to ‘‘best
interest’’ or advice subject to a fiduciary duty). See
also Betterment Letter (recommending that the
Commission require broker-dealers to disclose that
they are ‘‘salespeople who are providing sales
recommendations and not advice’’ in lieu of the
adoption of a fiduciary duty on broker-dealers).
418 Id.
419 Most commenters did not object to the
proposal’s requirement that broker-dealers and
investment advisers provide disclosure regarding
their standards of conduct or that such disclosure
be standardized. See, e.g., CFA Institute Letter
(urging the Commission to require disclosure of the
standard of conduct under which broker-dealers
operate); IAA August 2018 Letter. In addition,
results of investor studies and surveys indicate that
retail investors view this information as helpful.
See RAND 2018 (almost one third of survey
respondents selected this section as one of the two
most useful; Letter from Mark Quinn, Director of
Regulatory Affairs, Cetera (Nov. 19, 2018) (‘‘Cetera
November 2018 Letter’’) (88% of survey
respondents somewhat or strongly agreed ‘‘the
firm’s obligations to you’’ is an important topic’’).
See also Schwab Letter I (Hotspex) (‘‘obligations the
firm and its representatives owe me’’ ranked third
where survey participants were asked to identify
four topics as most important for a firm to
communicate’’). Similarly, commenters on
Feedback Forms found this information to be
useful. See Feedback Forms Comment Summary
(38% of commenters on Feedback Forms graded the
‘‘Our Obligations to You’’ section of the
relationship summary as ‘‘very useful’’ and 46%
graded this section as ‘‘useful’’).
420 Form CRS, Item 3.B.(i).a (stating that ‘‘If you
are a broker-dealer that provides recommendations
subject to Regulation Best Interest, include: ‘When
we provide you with a recommendation, we have
to act in your best interest and not put our interest
ahead of yours’ ’’).

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also highlights when a firm must satisfy
its legal obligation—specifically, in the
case of a broker-dealer, when making a
recommendation.
We believe the standard of conduct
owed to a retail customer under
Regulation Best Interest is a material
fact relating to the scope and terms of
the relationship. However, given that
Form CRS requires firms to disclose in
prescribed language the applicable
standard of conduct and, as discussed
above, the Disclosure Obligation
requires broker-dealers to disclose the
capacity (i.e., brokerage) in which they
are acting with respect to a
recommendation, we believe this
disclosure to be sufficient and thus
requiring any additional disclosure
would be duplicative.
b. Material Facts Regarding Conflicts of
Interest
As noted above, in addition to
requiring disclosure of the ‘‘material
facts relating to the scope and terms of
the relationship,’’ the proposed
Disclosure Obligation would have
required a broker-dealer to disclose ‘‘all
material conflicts of interest associated
with the recommendation.’’ We
proposed to interpret a ‘‘material
conflict of interest’’ as a conflict of
interest that a reasonable person would
expect might incline a broker-dealer—
consciously or unconsciously—to make
a recommendation that is not
disinterested.’’ 421 We generally
modeled this proposed interpretation on
the Advisers Act approach to
identifying conflicts of interest for
which investment advisers may face
antifraud liability in the absence of full
and fair disclosure.422 We expressed our
preliminary belief that a material
conflict of interest that generally should
be disclosed would include material
conflicts associated with
recommending: Proprietary products,
products of affiliates, or a limited range
of products, or one share class versus
another share class of a mutual fund;
securities underwritten by the brokerdealer or an affiliate; the rollover or
transfer of assets from one type of
account to another (such as a
recommendation to roll over or transfer
assets in an ERISA account to an IRA);
and allocation of investment

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421 Proposing

Release at 21602.
id. (citing Capital Gains (stating that as
part of its fiduciary duty, an adviser must fully and
fairly disclose to its clients all material information
in accordance with Congress’s intent ‘‘to eliminate,
or at least expose, all conflicts of interest which
might incline an investment adviser—consciously
or unconsciously—to render advice which was not
disinterested’’)).
422 See

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opportunities among retail customers
(e.g., IPO allocation).423
While commenters supported the
disclosure of conflicts of interest, some
sought clarity on the standard for
determining which conflicts should be
disclosed,424 and others requested
clarity on whether conflicts involving
certain actions (e.g., rollovers) 425 and
products (e.g., proprietary products) 426
should be disclosed.427
Several commenters urged the
Commission to define ‘‘conflicts of
interest’’ without a reference to the
terms ‘‘consciously or
unconsciously.’’ 428 These commenters
claim that discerning a broker’s
conscious or unconscious state of mind
is ‘‘confusing and inherently
unknowable.’’ 429 Similarly, one
commenter stated that a broker-dealer
would be unable to draft adequate
policies and procedures that address an
individual’s mindset, noting that it
would be impossible for a broker-dealer
to anticipate an individual’s
unconscious conflicts.430 Instead, these
commenters suggested revised language
that eliminates the notion of conscious
or unconscious inclination.431
Proposing Release at 21603.
e.g., SIFMA August 2018 Letter, Edward
Jones Letter (requesting clarity on the definition of
materiality with regards to conflicts); Ameriprise
Letter (stating that the definition of ‘‘material
conflicts of interest’’ should follow well known and
understood principles); Fidelity Letter (stating that
the Commission should not distinguish between
conflicts of interest based on financial incentives
and all other conflicts of interest); Morgan Stanley
Letter; CCMC Letters; TIAA Letter; Mass Mutual
Letter; Empower Letter. See also IRI Letter (stating
that requiring a registered representative to predict
what a hypothetical reasonable person might think
is confusing); ICI Letter (stating that rather than
focusing on what a ‘‘reasonable person would
expect . . .’’ the standard should focus on that
nature of the incentive and its effect on a brokerdealer’s conduct).
425 See, e.g., CFA Institute Letter.
426 See, e.g., SIFMA August 2018 Letter; State
Attorneys General Letter; CFA Institute Letter.
427 See, e.g., Ameriprise Letter; State Attorneys
General Letter; CFA August 2018 Letter.
428 See, e.g., Edward Jones Letter (urging the
Commission to articulate a definition of materiality
that does not refer to a person’s unconscious
activity); Empower Letter; Ameriprise Letter.
429 Id.
430 See Great-West Letter.
431 See, e.g., Edward Jones Letter (suggesting that
the Commission define ‘‘material conflict’’ as an
activity that: (i) Affects financial compensation of
a person making a recommendation; and (ii) a
reasonable investor would likely view as important
to the total mix of information available when
considering that recommendation); Ameriprise
Letter (suggesting that the Commission define
‘‘material conflict of interest’’ as a conflict of
interest that a reasonable person might conclude
has the potential to influence the recommendation);
Pacific Life August 2018 Letter (suggesting the
Commission define ‘‘material conflict of interest’’ as
a financial interest of the financial professional
making a recommendation that a reasonable person
would expect to affect the impartiality of such
recommendation).

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424 See,

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Similarly, several commenters opposed
the Commission’s use of the term ‘‘not
disinterested.’’ 432 These commenters
believe that the term is not clear and
could, among other things, suggest the
elimination of all conflicts.433 One of
these commenters recommended that
the Commission eliminate the term ‘‘not
disinterested’’ 434 while another
suggested that the Commission clarify
whether ‘‘material’’ and ‘‘not
disinterested’’ are intended to be
identical or different standards for
brokers and advisers.435 Other
commenters opposed the proposed
standard, arguing that it was not as
broad as the disclosure obligation
applicable to investment advisers. In
particular, some commenters urged the
Commission to apply the standard for
disclosure applicable to investment
advisers as articulated by the Supreme
Court in SEC. v. Capital Gains Research
Bureau.436 Specifically, commenters
requested that the Commission require
disclosure of not only material conflicts
but also the material facts related to a
recommendation.437
We are adopting the obligation to
disclose conflicts of interest, with
several modifications and clarifications
to the Proposing Release. Specifically,
Paragraph (a)(2)(i)(B) of Regulation Best
Interest requires that broker-dealers
disclose ‘‘material facts relating to
conflicts of interest that are associated
with the recommendation.’’ 438
432 See, e.g., IPA Letter (stating that the use of the
term ‘‘not disinterested’’ may require unnecessary
legal interpretation); Empower Letter.
433 See, e.g., Empower Letter.
434 See id.
435 See IPA Letter.
436 375 U.S. 180 (1963). See, e.g., CFA August
2018 Letter; Schnase Letter.
437 See, e.g., CFA August 2018 Letter.
438 This supplements the disclosure required in
the Relationship Summary regarding ways in which
the broker-dealer and its affiliates make money from
brokerage or investment advisory services they
provide to retail investors, and about the related
material conflicts of interest. The Relationship
Summary requires firms to disclose, if applicable,
conflicts related to compensation it could receive
from proprietary products, third-party payments,
revenue sharing, or principal trading. If firms do not
have any of these conflicts, the firm must disclose
at least one other material conflict of interest that
affects retail investors. As described in the
Relationship Summary Adopting Release, we
declined to make a change pursuant to comments
that suggested that Regulation Best Interest’s and
Form CRS’s conflicts disclosures be coordinated,
and that any conflict disclosure obligations under
Regulation Best Interest should be satisfied upon
delivery of the Relationship Summary. We
recognize that broker-dealers may need to disclose
additional conflicts at a point in time other than at
the beginning of the relationship with a retail
investor. Broker-dealers also may need to include
additional information about conflicts of interest
summarized in the Relationship Summary. The
Relationship Summary will provide a high-level

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However, as discussed in more detail
below, in response to comments and in
the light of the Relationship Summary,
we are: (1) Adopting for purposes of
Regulation Best Interest a definition of
‘‘conflict of interest’’ associated with a
recommendation ‘‘as an interest that
might incline a broker, dealer, or a
natural person who is an associated
person of a broker or dealer—
consciously or unconsciously—to make
a recommendation that is not
disinterested;’’ and (2) revising the
Disclosure Obligation to require
disclosure of ‘‘material facts’’ regarding
such conflicts of interest. Under this
approach, all conflicts of interest as
interpreted under the Proposing Release
will be covered by Regulation Best
Interest.
We believe distinguishing between
‘‘conflicts of interest’’ and ‘‘material
facts’’ regarding such conflicts that
would be disclosed would make the
Disclosure Obligation more consistent
with the proposal’s intent. In the
Proposing Release, the Commission
discussed limiting the disclosure of
conflicts under the Disclosure
Obligation ‘‘consistent with case law
under the antifraud provisions, which
limit disclosure obligations to ‘‘material
facts.’’
After considering the comments, we
have determined to retain the proposed
approach to conflicts of interest as
described in Capital Gains. In
particular, we acknowledge commenter
concerns about discerning a broker’s
conscious or unconscious state of mind.
However, the description of conflicts of
interest in Capital Gains is well
established, familiar to many in the
industry, particularly dual-registrants,
and guidance already exists regarding
what constitutes a conflict of interest
under this standard. To provide clarity
that this interpretation is limited to
Regulation Best Interest, however, we
are revising Regulation Best Interest to
explicitly provide that a ‘‘conflict of
interest’’ ‘‘means an interest that might
incline a, broker, dealer, or natural
person who is an associated person of
a broker-dealer—consciously or
unconsciously—to make a
recommendation that is not
disinterested,’’ 439 consistent with the
scope of the meaning of ‘‘conflict of
summary for retail investors so that they can engage
in a conversation with their financial professional
about investment advisory or brokerage services,
and so that the retail investors can choose the type
of service that best meets their needs, but will not
necessarily include all material facts related to a
particular conflict of interest. We believe many
firms may not be able to capture all of the necessary
disclosures about their conflicts in this short
standardized disclosure.
439 Rule 15l–1(b)(3).

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interest’’ for investment advisers under
Capital Gains.440
Several commenters also made
suggestions regarding the Commission’s
interpretation of the term ‘‘material’’ as
used in the proposed Disclosure
Obligation (i.e., the proposed
requirement to disclose ‘‘all material
conflicts of interest that are associated
with the recommendation’’).441 Many
commenters agreed with the
Commission’s decision to use a
‘‘materiality’’ standard to determine
those facts about conflicts of interest
that must be disclosed.442 However,
several other commenters asked the
Commission to clarify the meaning of
‘‘material.’’ 443 These latter commenters
stated, among other things, that the term
‘‘material’’ in proposed Regulation Best
Interest was not clearly defined and
would be subjectively interpreted.444
Accordingly, many of these commenters
recommended that the Commission
adopt a materiality standard based on
the standard articulated in Basic v.
Levinson.445
The Supreme Court in Basic
articulated a standard for materiality,
stating that information is material if
there is ‘‘a substantial likelihood that a
reasonable shareholder would consider
it important.’’ 446 This definition of
‘‘material’’ is well established and thus
limiting disclosure to material facts in
the Disclosure Obligation will eliminate
confusion and reduce the compliance
burden on broker-dealers in fulfilling
the Disclosure Obligation. It will also
help focus the information made
available to retail customers.447
Accordingly, we interpret ‘‘material
facts’’ consistent with the Basic
standard. Moreover, while the

Regulation Best Interest definition of
‘‘conflict of interest’’ is modeled on the
regulatory regime applicable to
investment advisers, and is not by its
terms explicitly limited to ‘‘material’’
conflicts of interest, it would be difficult
to envision a ‘‘material fact’’ that must
be disclosed pursuant to the Disclosure
Obligation that is not related to a
conflict of interest that is also material
under the Basic standard.448
Interpretation of Disclosure of Material
Facts Relating to Conflicts of Interest
In response to comments, we are
providing our view regarding what we
would consider ‘‘material facts relating
to conflicts of interest that are
associated with a recommendation’’ that
would need to be disclosed under the
Disclosure Obligation. We believe the
conflicts of interest identified in the
Relationship Summary may provide a
useful starting point for the
identification of material facts that need
to be disclosed pursuant to the
Disclosure Obligation.449 In addition,
we also view how a broker-dealer’s
investment professionals are
compensated, and the conflicts
associated with those arrangements, as
material facts relating to conflicts of
interest that are associated with a
recommendation.450 While these
conflicts of interest must be summarized
in the Relationship Summary to the
extent they are applicable, we believe
that additional details regarding many
of these conflicts need to be disclosed
under the Disclosure Obligation as
‘‘material facts’’ relating to conflicts of
interest associated with a
recommendation.
Disclosure of Compensation

the same reasons, we have eliminated the
phrase ‘‘a reasonable person would expect’’ that
was included in the definition of ‘‘material conflict
of interest’’ discussed in the Proposing Release at
21602.
441 See, e.g., Transamerica August 2018 Letter;
Fidelity Letter; SIFMA August 2018 Letter; Morgan
Stanley Letter; IPA Letter; Great-West Letter.
442 See, e.g., Morgan Stanley Letter; Great-West
Letter.
443 See, e.g., FSI August 2018 Letter
(recommending the Commission publish examples
of when a conflict is material); Wells Fargo Letter;
Cetera August 2018 Letter; IPA Letter.
444 See, e.g., Great-West Letter (stating that the
Commission appears to have created a very
subjective standard to determine materiality).
445 See, e.g., Mass Mutual Letter; SIFMA August
2018 Letter; Bank of America Letter; CCMC Letters;
TIAA Letter; Cetera August 2018 Letter; Fidelity
Letter.
446 Basic v. Levinson.
447 As stated in the Proposing Release, we are
sensitive to the potential that broker-dealers could
adopt an approach that results in lengthy
disclosures that undermine the Commission’s goal
of facilitating meaningful disclosure to assist retail
customers in making informed investment
decisions. Proposing Release at 21604.

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Broker-dealers receive compensation
that typically varies depending on what
securities transaction or investment
strategy involving securities is being
recommended. The source of the
compensation may also vary, for
example being paid directly by the
investor, or by a product sponsor, or a
combination of both. A broker-dealer
may also pay its associated persons
different rates of compensation
depending on the type of security they
sell.451 Similarly, broker-dealers can
receive different payments from
448 See

Fiduciary Interpretation.
e.g., Form CRS, Item 3 (Fees, Costs,
Conflicts, and Standard of Conduct).
450 See Form CRS, Item 3.C.(i) (‘‘Description of
How Financial Professionals Make Money:
Summarize how your financial professionals are
compensated, including cash and non-cash
compensation, and the conflicts of interest those
payments create.’’).
451 See NASD NTM 03–54.
449 See,

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Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations
different product providers (e.g., mutual
funds) for a variety of reasons, such as
payments for inclusion on a brokerdealer’s menu of products offered
(sometimes referred to as shelf space).
These compensation arrangements
create a variety of conflicts of interest
that must be addressed under both Form
CRS and the Disclosure Obligation.
We believe that compensation
associated with recommendations to
retail customers and related conflicts of
interest—whether at the broker-dealer or
the associated person level—is a conflict
of interest about which material facts
must be disclosed as part of the
Disclosure Obligation. This disclosure
should summarize how the brokerdealer and its financial professionals are
compensated for their recommendations
and, as importantly, the conflicts of
interest that such compensation creates.
This summary should include the
sources and types of compensation
received, and may include the fact that
fees and costs disclosed pursuant to
Paragraph (a)(2)(i)(A) of Regulation Best
Interest that a retail customer may pay
directly or indirectly are a source of
compensation, if that is the case. For
example, if a broker-dealer receives
compensation derived from the sale of
securities or other investment products
held by retail customers of the firm,
including asset-based sales charges or
service fees on mutual funds, that fact
and the conflicts associated with the
receipt of such compensation should be
fully and fairly described.
Broker-dealers could meet the
Disclosure Obligation by making certain
required disclosures of information
regarding conflicts of interest to their
customers at the beginning of a
relationship, and this form of disclosure
may be standardized. However, if
standardized disclosure, provided at
such time, does not sufficiently identify
the material facts relating to conflicts of
interest associated with any particular
recommendation, the disclosure would
need to be supplemented so that such
disclosure is tailored to the particular
recommendation. For example, with
regard to mutual fund transactions and
holdings, a broker-dealer might disclose
broadly that it is compensated by funds
out of product fees or by the funds’
sponsors, and that such compensation
gives it an incentive to recommend
certain products over other products for
which the broker-dealer receives less
compensation; later, when a brokerdealer recommends a particular fund, it
could provide more specific detail about
compensation arrangements, for
example revenue sharing associated
with the fund family. In the alternative,
so long as the ‘‘material facts’’ regarding

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the conflicts associated with a
recommendation of a mutual fund were
disclosed at the outset of the
relationship, no further disclosure need
be made at the time of recommendation;
we are not requiring that information
regarding conflicts be disclosed on a
recommendation-by-recommendation
basis.
The Disclosure Obligation also does
not require specific written disclosure of
the amounts of compensation received
by the broker-dealer or the financial
representative. For example, we are not
requiring broker-dealers to disclose the
amount, if any, they compensate their
financial professionals per transaction,
or for year-end bonuses. We believe that
disclosure of the material facts regarding
conflicts of interest associated with a
recommendation need not entail such
individualized numerical disclosure,
and that in any event such a level of
detail may be difficult and costly to
calculate with accuracy, and also
confusing to investors in many
instances. Instead, disclosure regarding
conflicts must reasonably inform
investors so that the investor may use
the information to evaluate the
recommendation, and that can be done
without specific disclosure of the
amount of the compensation. Although
disclosure of specific compensation
amounts is not required, depending on
facts and circumstances, full and fair
disclosure may require disclosure of the
general magnitude of the
compensation.452
We are also clarifying that while
product fees and costs can be a
significant source of compensation
received by broker-dealers and
associated persons, no disclosure
regarding the particular amounts of
these fees and costs is required under
Regulation Best Interest with regard to
conflicts of interest. Instead, what must
452 See, e.g., Advantage Investment Management,
Advisers Act Release No. 4455 (Jul. 18, 2016)
(settled order) (the Commission brought an
enforcement action against an adviser for failing to
disclose the existence, nature and magnitude of a
forgivable loan from a broker-dealer that the adviser
had engaged to provide services to the adviser’s
clients); Taberna Capital Management LLC,
Advisers Act Release No. 4186 (Sep. 2, 2015)
(settled order) (the Commission brought an
enforcement action against an adviser for failing to
disclose the existence, nature, and extent of a
conflict of interest raised by the adviser’s receipt of
certain fees from issuers); BISYS Fund Services,
Inc., Advisers Act Release No. 2554 (Sep. 26, 2006)
(settled order) (the Commission brought an
enforcement action against a mutual fund
administrator for failure to disclose information
concerning the existence or magnitude of the
conflicts of interest created by a marketing
arrangement that called for BISYS to rebate a
portion of its administrative fees to 27 mutual fund
advisers so that the fund advisers would continue
to recommend BISYS as an administrator).

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be disclosed under Paragraph (a)(2)(i)(B)
of Regulation Best Interest are the
‘‘material facts relating to conflicts of
interest’’ created by compensation
sourced from product fees and costs,
rather than the fees and costs
themselves.
Differences in Compensation and
Proprietary Products
Several commenters recommended
that required conflict disclosure address
recommendations where a less
expensive alternative is available, or
condition the ability to recommend a
more expensive product on the
adequacy of a broker-dealer’s conflict
disclosures.453 Similarly, several
commenters expressed differing views
on how payment of varying
compensation should be handled under
the ‘‘best interest’’ standard of
Regulation Best Interest and how related
conflicts should be disclosed.454 For
example, one commenter identified
compensation differences within
product lines as an example of a conflict
that should be disclosed.455 Several
commenters also recommended that the
Commission require disclosure of
conflicts of interest related to use of
proprietary products, and whether the
broker-dealer offers alternatives to
proprietary products.456 Similarly,
several commenters requested that the
Commission clarify that broker-dealers
can limit their offerings to proprietary
products or products that make revenue
sharing payments if, among other
453 See PIABA Letter (stating that where less
expensive alternatives are available, disclosure
should include an explanation of why the
recommendation is nevertheless in the best interest
given other factors associated with the
recommendation); LPL August 2018 Letter
(recommending that the Commission clarify that a
broker-dealer can recommend a product involving
costs and charges that are within a range of
reasonableness that has been disclosed to the
investor in advance provided the recommendation
is otherwise in the investor’s best interest); UMiami
Letter; SIFMA August 2018 Letter.
454 See, e.g., CFA August 2018 Letter
(recommending that the Commission include
compensation differences within product lines as
an example of a conflict that should be disclosed);
Ameriprise (stating that differential compensation
for diverse products aligns with Regulation Best
Interest provided the firm mitigates the potential
related conflicts); Pacific Life August 2018 Letter
(stating that the definition of ‘‘material conflicts of
interest’’ must encompass, among other things, the
types of compensation received by the person
making the recommendation).
455 See CFA August 2018 Letter.
456 See, e.g., Money Management Institute Letter
(recommending the SEC allow firms to meet the
Conflict of Interest Obligation with respect to their
preference for proprietary products through
disclosure); CFA Institute Letter; IRI Letter; SIFMA
August 2018 Letter.

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things, appropriate disclosure is
made.457
As discussed above, we agree with
commenters who stated that it may be
compatible with the Care Obligation to
recommend a more expensive product
that is otherwise in a retail customer’s
best interest when there are less
expensive alternatives available, to
receive compensation that varies among
products, and to recommend proprietary
products.458 However, we also believe
that the conflicts of interest associated
with such practices constitute ‘‘material
facts’’ relating to conflicts of interest
that must be disclosed under the
Disclosure Obligation.
The receipt of higher compensation
for recommending some products rather
than others, whether received by the
broker-dealer, the associated person, or
both, is a fundamental and powerful
incentive to favor one product over
another.459 While we are requiring firms
to establish policies and procedures
reasonably designed to mitigate the
conflicts of interest that create an
incentive for financial professionals to
place the interest of the professional or
broker-dealer ahead of the interest of the
retail customer, we believe also that full
and fair disclosure of the material facts
concerning conflicts raised by variable
compensation schemes is of particularly
critical importance for an investor
seeking to evaluate a recommendation
under such circumstances, a concern
further underscored by our approach
under the Conflict of Interest Obligation
of requiring policies and procedures to
mitigate or eliminate certain
conflicts.460
The benefits that accrue to a brokerdealer and its financial professionals
from recommending proprietary
products also raise conflicts of interest
that must be disclosed. Material facts
relating to the conflicts of interest
457 See, e.g., SIFMA August 2018 Letter (stating
that a firm should be allowed to limit its offerings
to proprietary products or revenue sharing
products, as long as: (a) The broker-dealer discloses
to its customer that it is limiting the
recommendation to a specific set of securities, and
(b) the specific set of securities contains appropriate
securities to meet the customer’s needs); CFA
Institute Letter (stating that when a firm only offers
proprietary products it should disclose not only the
higher product cost, but the potential cost to the
investor of such a limited offering).
458 See generally Section II.A.1, Commission’s
Approach.
459 See Proposing Release at 21578 (referencing
the Commission’s long-held concerns about the
incentives that commission-based compensation
provides to churn accounts, recommend unsuitable
securities, and engage in aggressive marketing of
brokerage services); FINRA Report on Conflicts of
Interest (Oct. 2013), available at https://
www.finra.org/sites/default/files/Industry/
p359971.pdf (‘‘FINRA Conflicts Report’’) at p. 4.
460 See generally Section II.C.3.

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associated with recommending
proprietary products could include, as
relevant, that the broker-dealer owns the
product, and that in addition to any
commission associated with purchasing
the product, the broker-dealer or an
affiliate may receive additional fees and
compensation 461 related to that
product.462
c. Full and Fair Disclosure
As proposed, the Disclosure
Obligation would have required brokerdealers to ‘‘reasonably disclose’’
material facts relating to the scope and
terms of the relationship with the retail
customer, including all material
conflicts of interest associated with the
recommendation. The Commission used
this formulation in order to give
flexibility to broker-dealers in
determining the most appropriate way
to meet the proposed Disclosure
Obligation depending on their
individual business practices. The
Commission also provided preliminary
guidance on what it believed would be
to ‘‘reasonably disclose’’ in accordance
with the Disclosure Obligation by
setting forth the aspects of effective
disclosure, including the form and
manner of disclosure and the timing and
frequency of disclosure.
In this regard, the Commission
requested comment on whether brokerdealers should be required to
‘‘reasonably disclose’’ and whether
additional guidance as to how brokerdealers could meet this standard should
be provided. The Commission also
requested comment on whether
disclosure should explicitly be required
to be ‘‘full and fair.’’ In response, some
commenters raised questions about
using the term ‘‘reasonably disclose’’ 463
and whether broker-dealers should be
subject to less rigorous disclosure
obligations for recommendations made
to retail customers than investment
advisers.464 These commenters
461 For example, a broker-dealer’s sale of
proprietary products potentially generates a
compensation stream for the broker-dealer, in
addition to commissions, which may need to be
disclosed under paragraph (a)(2)(i)(A).
462 As discussed further in Section II.C.3, in
addition to disclosure of such conflicts, brokerdealers are also required under the Conflict of
Interest Obligation to establish, maintain, and
enforce written policies and procedures reasonably
designed to mitigate or address the conflicts
presented.
463 See, e.g., CFA August 2018 Letter (stating that
a ‘‘reasonable’’ disclosure standard gives firms too
much discretion to determine how the disclosures
will be presented); Galvin (arguing that the
proposed standard would give broker-dealers more
opportunities to argue that they acted ‘‘reasonably’’
under the rules).
464 See, e.g., CFA August 2018 Letter (stating that
‘‘[t]he Commission offers no explanation for why

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recommended that the Commission
explicitly require broker-dealers to
provide full and fair disclosure of
material facts.465 One commenter
reasoned that the Commission should
not make Regulation Best Interest any
more stringent than in the Proposing
Release, stating that ‘‘full and fair’’ is
both inapplicable and unnecessary
given the proposed standard under the
Disclosure Obligation.466
After careful consideration of the
comments received, the Commission is
adopting the Disclosure Obligation with
revisions to require ‘‘full and fair
disclosure’’ of all material facts relating
to the scope and terms of the
relationship with the retail customer
and all material facts relating to
conflicts of interest associated with the
recommendation for the reasons
described below.
While we do not believe that adopting
a ‘‘full and fair disclosure’’ standard is
significantly different from the proposed
requirement to ‘‘reasonably disclose,’’
we believe that the Regulation Best
Interest serves the Commission’s goal of
facilitating disclosure to assist retail
customers in making informed
investment decisions.467 In addition,
broker-dealers should be subject to less rigorous
disclosure obligations than investment advisers’’).
465 See, e.g., Pace Investor Rights Clinic August
2018 Letter (urging the Commission to require
broker-dealers to provide full and fair disclosure of
any conflicts that are not eliminated or mitigated);
Better Markets August 2018 Letter (urging the
Commission to further enhance the Disclosure
Obligations by requiring broker-dealers to make full
and fair disclosure of all information required to be
disclosed); State Attorneys General Letter; NASAA
August 2018 Letter.
466 See SIFMA August 2018 Letter.
467 This approach is consistent with the rationale
articulated in the Fiduciary Interpretation. See
Fiduciary Interpretation at Section II.C (stating, ‘‘In
order for disclosure to be full and fair, it should be
sufficiently specific so that a client is able to
understand the material fact or conflict of interest
and make an informed decision whether to provide
consent. For example, it would be inadequate to
disclose that the adviser has ‘other clients’ without
describing how the adviser will manage conflicts
between clients if and when they arise, or to
disclose that the adviser has ‘conflicts’ without
further description. Similarly, disclosure that an
adviser ‘may’ have a particular conflict, without
more, is not adequate when the conflict actually
exists.’’ [However,] ‘‘[t]he word ‘may’ could be
appropriately used to disclose to a client a potential
conflict that does not currently exist but might
reasonably present itself in the future.’’). See also
In the Matter of The Robare Group, Ltd., et al.,
Advisers Act Release No. 4566 (Nov. 7, 2016)
(Commission Opinion) (finding, among other
things, that adviser’s disclosure that it may receive
a certain type of compensation was inadequate
because it did not reveal that the adviser actually
had an arrangement pursuant to which it received
fees that presented a potential conflict of interest);
aff’d in part and rev’d in part on other grounds
Robare Group, Ltd., et al. v. SEC, 922 F.3d 468 (D.C.
Cir. 2019); SEC v. Blavin, 760 F.2d 706, 711 (6th
Cir. 1985) (disclosure that investment adviser
‘‘may’’ trade in recommended securities for its own

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Regulation Best Interest will more
closely align the Disclosure Obligation
with existing requirements for
investment advisers 468 and is consistent
with disclosure standards in other
contexts under the federal securities
laws.469
The full and fair disclosure standard
that the Commission is adopting for
broker-dealers under the Disclosure
Obligation is generally similar to the
disclosure standard applicable to
investment advisers under the Advisers
Act.470 Similar to the Proposing
Release’s interpretation of the phrase
‘‘reasonably disclose,’’ broker-dealers’
obligation to provide full and fair
disclosure should give sufficient
information to enable a retail investor to
make an informed decision with regard
to the recommendation.471
We disagree with commenters who
believe the ‘‘full and fair’’ standard is
too stringent. While the general
standard for broker-dealers under the
Disclosure Obligation will be generally
similar to the disclosure requirements
applicable to investment advisers, the
scope of the required disclosure is not
as broad. For example, the Disclosure
Obligation only requires disclosure of
material facts relating to the scope and
terms of the relationship with the
broker-dealer, and material facts relating
account was false and misleading where the adviser
actually invested in 10%–25% of the publicly
available stock of the companies it recommended);
ICI Letter (commenting on the Fiduciary
Interpretation proposing release).
468 See Fiduciary Interpretation at Section II.A
(stating that ‘‘[t]he [investment adviser’s] fiduciary
duty follows the contours of the relationship
between the adviser and its client, and the adviser
and its client may shape that relationship by
agreement provided that there is full and fair
disclosure and informed consent’’ (emphasis
added)).
469 For instance, the Municipal Securities
Rulemaking Board requires that municipal advisors
provide full and fair disclosure of material conflicts
of interest and material legal or disciplinary events.
See MSRB Rule G–42. In addition, the registration
and disclosure requirements of the Securities Act of
1933 (‘‘Securities Act’’) are based on the concept
that investors in a public offering should be
provided with full and fair disclosure of material
information needed for an informed investment
decision. See Securities Act Concepts and Their
Effects on Capital Formation, Securities Act Release
No. 7314 (Jul. 25, 1996); 61 FR 40044 (Jul. 31, 1996)
at text accompanying footnote 13; see also SEC v.
Ralston Purina Co., 346 U.S. 119, 124 (1953).
Finally, Regulation FD under the Securities Act was
‘‘designed [in part] to promote the full and fair
disclosure of information by issuers.’’ See Selective
Disclosure and Insider Trading, Securities Act
Release No. 7881 (Aug. 15, 2000), 65 FR 51715
(Aug. 24, 2000).
470 See supra footnote 468. See also Fiduciary
Interpretation, stating that the disclosure ‘‘should
be sufficiently specific so that a client is able to
understand the material fact or conflict of interest
and make an informed decision whether to provide
consent.’’
471 See Proposing Release at 21604, footnote 208.

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to conflicts of interest associated with a
broker-dealer’s recommendations, and
not of all material facts relating to the
relationship. In addition, the Disclosure
Obligation only applies to retail
customers. In contrast, the disclosure
requirements imposed by the fiduciary
duty under the Advisers Act generally
and Form ADV in particular are broader
(e.g., Form ADV requires disclosure of
the adviser’s principal owner(s) and
certain financial industry activities and
affiliations, which are not explicitly
required under the Disclosure
Obligation; Form ADV and the fiduciary
duty also go to disclosure of the entire
relationship while the Disclosure
Obligation is tailored to the
recommendation and also given at
relevant points in time). We designed
our approach to avoid having retail
customers receive overwhelming
amounts of information.472
Some commenters suggested that
disclosure and informed consent should
be required in order to comply with the
obligations under Regulation Best
Interest, similar to the approach taken
under the fiduciary duty under the
Advisers Act.473 We have carefully
considered these comments. As noted
above, under the Disclosure Obligation,
broker-dealers are required to provide
full and fair disclosure such that a retail
customer can make an informed
decision with regard to the
recommendation (i.e., whether to accept
(or reject) that recommendation). In
making such an informed decision after
being provided with full and fair
disclosure, we believe that the retail
customer has provided ‘‘informed
consent’’ in a manner that is analogous
to the informed consent required to be
provided by a client in the context of an
investment adviser-client
relationship.474 An investment advisory
472 Commenters pointed out that requiring too
much information regarding conflicts of interest
would go beyond the standard of materiality set
forth under Basic. See, e.g., SIFMA August 2018
Letter; Cetera August 2018 Letter (citing Basic at
231, noting that ‘‘an avalanche of trivial
information’’ would not be ‘‘conducive to informed
decision making.’’). See also Letter from David
Schwartz, President and CEA, Florida International
Bankers Association (‘‘FIBA’’) (Feb. 8, 2019) FIBA
(‘‘February 2019 Letter’’) (stating that ‘‘the amount
of required disclosure may overwhelm rather than
educate’’).
473 See, e.g., ASA Letter (stating that the
Commission should reaffirm that broker-dealers can
address conflicts of interest by disclosing them and
obtaining informed consent); Primerica Letter
(suggesting that the Commission clarify that brokerdealers can effectively address all material conflicts
by providing full and fair disclosure and obtaining
customer consent); Morgan Stanley Letter.
474 As discussed in the Fiduciary Interpretation,
a client’s informed consent can be either explicit or,
depending on the facts and circumstances, implicit.
See Fiduciary Interpretation at Section II.C. Under

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33365

client must provide informed consent to
the adviser’s conflicts of interest in the
context of the entire relationship, which
can be broader than the informed
consent provided by a retail customer
when making an informed decision to
accept or reject a particular
recommendation by a broker-dealer. We
believe this is appropriate because the
investment-adviser client relationship is
generally broader and can include, for
example, unlimited investment
discretion by the investment adviser to
conduct securities transactions on
behalf of the client. The broker-dealer
customer relationship on the other hand
is generally transaction-based and the
retail customer must accept (or reject)
each recommendation by a brokerdealer after the broker-dealer has
provided full and fair disclosure as
required under the Disclosure
Obligation. Thus, in this regard,
Regulation Best Interest will more
closely align the Disclosure Obligation
with the existing requirements for
investment advisers, as noted above, but
is tailored to the broker-dealer
relationship.475 The Commission
believes that the final Disclosure
Obligation along with the protections
provided by the requirements of
Regulation Best Interest, including the
Care Obligation and Conflict of Interest
Obligation, will further serve to enhance
the protections available to retail
customers.
One commenter recommended that
the Commission clarify what a brokerdealer is required to deliver to a retail
customer in order to permit the retail
customer to make an ‘‘informed
decision,’’ and asked the Commission to
confirm that it does not require a caseby-case analysis of what is reasonable to
permit the retail customer to make an
informed decision.476 In addition, other
commenters underscored the
importance of providing retail
customers with sufficient time to review
and comprehend the disclosed
information prior to making an
informed decision about a
recommendation.477 Other commenters
Regulation Best Interest, however, assuming the
retail customer has been provided with full and fair
disclosure, the retail customer will be considered to
have provided informed consent by affirmatively
accepting a recommendation.
475 See Fiduciary Interpretation (describing an
investment adviser’s obligation to provide
disclosure designed to put a reasonable client in a
position to be able to understand and provide
informed consent).
476 See, e.g., CCMC Letters.
477 See, e.g., Financial Planning Coalition Letter
(stating that disclosures should be made prior to the
recommendation so a retail customer has sufficient
time to review and understand them, as well as to

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questioned whether providing
‘‘sufficient information’’ to enable a
retail customer to make an informed
decision broadens the Disclosure
Obligation beyond ‘‘material facts’’ and
‘‘material conflicts.’’ 478
We have considered the issues raised
by the commenters and in the sections
that follow are providing guidance on
what we believe constitutes ‘‘full and
fair disclosure’’ for purposes of the
Disclosure Obligation, including the
form and manner, and the timing and
frequency, of the disclosure. Similar to
the proposal, in lieu of setting explicit
requirements by rule for what
constitutes full and fair disclosure of all
material facts, we are providing brokerdealers flexibility in determining the
most appropriate way to meet the
Disclosure Obligation depending on
each broker-dealer’s specific business
practices.
As we noted in the Proposing Release,
while we are providing flexibility to
broker-dealers to meet the Disclosure
Obligation, we continue to be sensitive
to the potential that broker-dealers
could opt to disclose all facts, including
those that do not meet the materiality
threshold.479 We are cognizant of the
likelihood that some broker-dealers
could provide lengthy disclosures that
do not meaningfully convey the material
facts regarding the scope and terms of
the relationship and material facts
regarding conflicts of interest, an
outcome that could undermine the
Commission’s goal of facilitating
disclosure to assist retail customers in
making an informed investment
decision. To this end, broker-dealers
will only be required to disclose
material facts about the scope and terms
of the relationship or conflicts of
interest.
Although we are adopting the
requirement with revisions to require
full and fair disclosure of all material
facts, we still believe it is important to
clarify that broker-dealers’ compliance
with the Disclosure Obligation will be
measured against a negligence standard,
not against a standard of strict liability,
consistent with the Proposing Release.
The Commission has taken this position
in other contexts where full and fair
disclosure is required, including under
ask questions); CFA August 2018 Letter (stating that
if the Commission wants to give investors time to
consider the information and make an informed
choice disclosure should be provided as soon as
reasonably feasible and, when possible, no later
than the point of recommendation).
478 See, e.g., IPA Letter (requesting clarification
on whether providing sufficient information to
enable a retail investor to make an informed
decision broadens the disclosure obligation beyond
material facts); CCMC Letters.
479 Id.

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the fiduciary duty under the Advisers
Act.480
Form and Manner
In the Proposing Release, the
Commission noted that it was not
proposing to specify by rule the form
(e.g., narrative v. graphical/tabular) or
manner (e.g., relationship guide or other
written communications) of disclosure
required under the Disclosure
Obligation. The Commission stated that
disclosure should be concise, clear and
understandable to promote effective
communication between a broker-dealer
and a retail customer.481 We also stated
that broker-dealers would be able to
deliver disclosure required pursuant to
Regulation Best Interest consistent with
the Commission’s guidance regarding
electronic delivery of documents.482
Although we preliminarily believed that
broker-dealers should have the
flexibility to make disclosures by any
means, as opposed to requiring a
standard written document at the outset
of the relationship, we stated our belief
that any such disclosure should be
provided in writing.483
Commenters sought further guidance
in a number of areas relating to
disclosure, including the extent to
which the Relationship Summary or
other disclosures may satisfy the
Disclosure Obligation,484 the
circumstances under which
standardized disclosure could be
sufficient, as well as how, and the
extent to which, disclosures made
pursuant to the Disclosure Obligation
480 While establishing scienter is a requirement to
establish violations of Section 206(1) of the
Advisers Act, it is not required to establish a
violation of Section 206(2); a showing of negligence
is adequate. See SEC v. Capital Gains Research
Bureau, Inc., 375 U.S. 180, 195 (1963); see also SEC
v. Steadman, 967 F.2d at 643 and footnote 5;
Steadman v. SEC, 603 F.2d 1126, 1132–34 (5th Cir.
1979), aff’d on other grounds, 450 U.S. 91 (1981).
See also Prohibition of Fraud by Advisers to Certain
Pooled Investment Vehicles, Advisers Act Release
No. 2628 (Aug. 3, 2007). In its adoption of Rule
206(4)–8 under the Advisers Act, the Commission
stated that it would not need to demonstrate that
an adviser violating the rule acted with scienter.
481 See Proposing Release at 21604, footnote 211.
482 Id. at 21604 and footnote 214.
483 Id. at 21604 and footnote 213.
484 See, e.g., Cambridge Letter (arguing that the
Relationship Summary and Disclosure Obligation
are duplicative requirements); CUNA Mutual Letter
(seeking greater clarification regarding the extent to
which information provided in other documents
could satisfy the Disclosure Obligation); Financial
Services Institute August 2018 Letter (arguing that
providing the Relationship Summary should be
deemed to satisfy the requirements of the brokerdealer’s Disclosure Obligation); Morningstar Letter
(arguing that due to the brevity of the Relationship
Summary, additional broker-dealer disclosures
would be necessary); Wells Fargo Letter
(recommending that the requirements of the
Disclosure Obligation be incorporated into Form
CRS).

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should be made in writing.485 In
response to comments we are providing
additional guidance. We are also
reaffirming guidance that we provided
in the Proposing Release.
Prescribed Form of Disclosure
As noted in the Proposing Release, we
believe it is important to provide brokerdealers with flexibility in determining
the most appropriate and effective way
to meet the Disclosure Obligation to
reflect the structure and characteristics
of their relationships with retail
customers.486 Many commenters agreed
with this reasoning, arguing that there
was a need to preserve flexibility for
broker-dealers to comply with the
Disclosure Obligation as proposed.487
Other commenters believed, however,
that the proposed Disclosure Obligation
gave broker-dealers too much
discretion.488
After careful consideration of these
comments, the Commission has decided
not to require any standard written
disclosures (other than the Relationship
Summary) at this time. Although we
recognize the potential value to retail
customers of standardizing the
disclosures required pursuant to the
Disclosure Obligation, we believe that
retail customers can derive value from
disclosures that accommodate the
structure and characteristics of the
particular broker-dealer. On balance, we
recognize the wide variety of business
models and practices and we continue
to believe it is important to provide
broker-dealers with flexibility to enable
them to better tailor disclosure and
information that their retail customers
can understand and may be more likely
to read at relevant points in time, rather
485 See, e.g., Schwab Letter (arguing that because
most recommendations occur over the phone and
through various digital means, the Commission
should remove the ‘‘in writing’’ requirement and
allow firms to determine the best method for
disclosure depending on the situation); SIFMA
August 2018 Letter (seeking clarification that oral
disclosure at the time of the recommendation may
be sufficient to satisfy the Disclosure Obligation in
certain circumstances). But see AARP August 2018
Letter (stating that oral disclosures should never be
permitted).
486 See Proposing Release at 21604.
487 See, e.g., Prudential Letter; SIFMA August
2018 Letter; TIAA Letter; UBS Letter.
488 See, e.g., Better Markets August 2018 Letter
(arguing that proving broker-dealer discretion in
this area will virtually assure a failure to
communicate helpfully with investors); CFA
August 2018 Letter (arguing that the flexibility the
Commission provides will result in disclosure that
does not effectively convey key information). See
also Morningstar Letter (supporting the expansion
of disclosures, but arguing that ‘‘publicly available
disclosures with a standard taxonomy work best
because they empower third parties such as
‘‘fintech’’ and ‘‘reg-tech’’ firms to analyze and
contextualize critical information and amplify a call
to action for ordinary investors’’).

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Relying on Other Disclosures and
Standardized Documents
In the Proposing Release, we
described how the Disclosure Obligation
builds upon the requirements of Form
CRS and the disclosures in the
Relationship Summary.490 We also
stated that we anticipated that brokerdealers may elect to use other
documents to satisfy elements of the
Disclosure Obligation, such as an
account agreement, a relationship guide,
or a fee schedule.491
Several commenters requested
guidance on their ability to use other
documents to meet the requirements of
the Disclosure Obligation. For example,
some commenters recommended that
the Commission harmonize the
Disclosure Obligation with the broad,

firm-level disclosure obligations of
Form CRS so that firms can use the
Relationship Summary to help satisfy
the Disclosure Obligation.492
Commenters also recommended that
broker-dealers should be permitted to
satisfy the Disclosure Obligation by
using standardized language generally
to describe the broker-dealer’s products
and services available to their retail
customers and related conflicts of
interest, including the ranges of
remuneration payable to a broker-dealer
in connection with its recommendation
of different products.493 Several
commenters also suggested that the
Commission should clarify that the
Disclosure Obligation should not apply
where an existing disclosure regime
already exists.494 Similarly, other
commenters recommended that the
Commission clarify whether brokerdealers could meet the Disclosure
Obligation by referencing information
required to be disclosed pursuant to
other regulatory requirements such as
FINRA disclosure rules.495
After careful consideration of the
comments, the Commission is providing
guidance to permit a broker-dealer to
utilize existing disclosures and
standardized documents, such as a
product prospectus, relationship guide,
account agreement, or fee schedule to
help satisfy the Disclosure Obligation.
The Commission recognizes that brokerdealers are subject to disclosure
requirements other than the Disclosure
Obligation and Form CRS, and believes
utilizing such existing disclosures

489 With respect to the length of disclosure
documents, investor testing of proposed Form CRS
examined retail investors’ likelihood of reading
only longer documents (such as Form ADV Part II
or an account opening agreement), only a short
document (Form CRS), both, or neither when
choosing a financial professional, account type or
firm. Although the context was specific to Form
CRS and the retail investor’s initial determination
regarding a financial professional, account type or
firm, the survey suggests that retail investors may
be more likely to read either both longer and shorter
disclosures or just shorter disclosures. See RAND
2018 (‘‘Whereas Figure 2.20 shows that half of all
investors reported having reviewed neither a Form
ADV nor an account opening agreement in the past
and another 20 percent reported not knowing
whether they had ever done so, Figure 2.21 shows
that about 70 percent of all respondents and of all
investors reported that they would be likely to read
either both types of documents or only the
Relationship Summary when choosing a financial
professional in the future. Just 2 percent of
investors and 1 percent of noninvestors reported
being likely to read only the longer documents,
whereas 29 percent of investors and 13 percent of
noninvestors were likely to read only the
Relationship Summary.’’ More specifically, Figure
2.21 shows that over 40% of all respondents
indicated they would read both and under 30%
indicated that they would read only the
Relationship Summary.)
490 See Proposing Release at 21600.
491 See id. at 21605.

492 See, e.g., Cambridge Letter (recommending
that providing the Form CRS should fulfill the
broker-dealer’s Disclosure Obligation under
Regulation Best Interest); ACLI Letter (noting that
a single disclosure fulfilling Regulation Best Interest
and Form CRS would reduce the disclosure burdens
and increase the likelihood consumers will read the
required information); FSI August 2018 Letter;
Mutual of America Letter; Northwestern Mutual
Letter; IPA Letter; Transamerica August 2018 Letter;
NAIFA Letter.
493 See, e.g., LPL August 2018 Letter
(recommending that all investors be provided with
general disclosures setting forth the ranges of
remuneration payable to broker-dealers in
connection with its recommendations of different
products); Committee of Annuity Insurers (urging
the Commission to clarify that a broker-dealer can
satisfy the Disclosure Obligation through disclosure
describing products and services available to its
retail customers and need not provide a disclosure
particularized to a recommendation).
494 See, e.g., SIFMA August 2018 Letter (asking
the Commission to clarify that the Disclosure
Obligation does not apply in contexts where there
is an existing regime, such as for equity and debt
research); Transamerica August 2018 Letter
(recommending that the Commission recognize that
existing disclosure regimes suffice to meet certain
disclosure requirements).
495 See, e.g., Transamerica August 2018 Letter
(stating that the disclosure obligation should
expressly take into consideration existing
disclosures).

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than, for example, mandating a
standardized all-inclusive (and likely
lengthy) disclosure.489
We disagree that flexibility will
prevent investors from obtaining
information necessary to make an
informed investment decision and do
not believe that requiring a standard
written disclosure beyond the
Relationship Summary is necessary at
this time. We emphasize, however, that
the adequacy of the disclosure will
depend on the facts and circumstances.
We intend to evaluate broker-dealer
disclosure practices in response to
Regulation Best Interest over time to
determine whether additional
disclosure initiatives may be
appropriate.

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33367

where appropriate is a reasonable and
cost-effective way to satisfy the
requirements of the Disclosure
Obligation, and can also help avoid
duplicative or voluminous disclosure by
not requiring the creation of new
disclosure documents.496 We recognize
also that in many instances, information
necessary to satisfy the Disclosure
Obligation may be broadly applicable to
a broker-dealer’s retail customers, and
therefore the use of standardized
disclosure may be appropriate.
However, while broker-dealers may
choose to standardize certain forms of
their disclosure, whether such materials
would be sufficient to satisfy the
Disclosure Obligation will depend on
the facts and circumstances.497 For
example, disclosures may need to be
tailored to a particular recommendation
if the standardized disclosure does not
sufficiently identify the material facts
about a conflict of interest presented by
a particular recommendation.
Accordingly, a broker-dealer remains
responsible for disclosing all material
facts relating to the scope and terms of
the relationship with the retail customer
(as discussed above), as well as all
material facts relating to conflicts of
interest that are associated with a
recommendation whether or not the
firm relies on other materials to fulfill
that obligation.
With regard to commenters’ request
that the Relationship Summary be
considered sufficient to satisfy the
Disclosure Obligation, we note that the
Relationship Summary will provide
succinct information and is designed to
assist retail investors with the process of
deciding whether to engage, or to
continue to engage, a particular firm or
financial professional, deciding whether
to establish or continue to maintain a
brokerage or investment advisory
relationship, and asking questions and
easily finding additional information.
496 See Proposing Release at 21599, footnotes 175
and 176. For example, broker-dealers must disclose
information about a transaction on trade
confirmations pursuant to Exchange Act Rule 10b–
10. 17 CFR 240.10b–10. See also Morgan Stanley
Letter (noting that the securities laws and FINRA
rules already require firms to provide significant
disclosures to clients at natural touchpoints in the
client relationship).
497 Similarly, we also note that a number of
broker-dealers are modeling their disclosure of fees
other than transaction-based fees on the NASAA
Schedule of Miscellaneous Account and Service
Fees. See NASAA August 2018 Letter. A brokerdealer may use this schedule to comply in part with
its obligation to disclose fees and costs pursuant to
the Disclosure Obligation. We note, however, that
the NASAA Schedule may recommend the
disclosure of certain fees that may not be required
under the Disclosure Obligation depending on the
facts and circumstances, for example those that are
not ‘‘material facts’’ for purposes of Regulation Best
Interest.

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We recognize that additional details
regarding many of the topics (e.g.,
services, fees and conflicts of interest)
would in many cases be necessary to
satisfy the Disclosure Obligation. Thus,
although a broker-dealer could use a
Relationship Summary and other
standardized disclosures about its
products and services to help satisfy the
Disclosure Obligation, these disclosures
may not be sufficient to satisfy the
Disclosure Obligation. Whether the
Relationship Summary standing alone,
or any additional or existing
disclosures, satisfy any of these required
disclosures in full would depend on the
facts and circumstances. In most
instances, broker-dealers will need to
provide additional information beyond
that contained in the Relationship
Summary in order to satisfy the
Disclosure Obligation.
In Writing
We proposed requiring that
disclosures be provided in writing.498
We also stated that requiring written
disclosures would help facilitate
investor review of the disclosure,
promote compliance by firms, facilitate
effective supervision, and facilitate
more effective regulatory oversight to
help ensure and evaluate whether the
disclosure complies with the
requirements of Regulation Best
Interest.499 We also stated that the ‘‘in
writing’’ requirement could be satisfied
either through paper or electronic
means consistent with existing
Commission guidance on electronic
delivery of documents. We also
provided guidance on how brokerdealers could comply with the ‘‘in
writing’’ requirement when
recommendations are given over the
telephone.500
A number of commenters supported
the ‘‘in writing’’ requirement.501 Other
commenters, however, recommend that
the Commission also permit the use of
oral disclosure.502 For example, several
commenters recommend that the
Commission permit broker-dealers to
orally disclose information to their
customers provided they later follow-up
498 See

Proposing Release at 21604.

499 Id.

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500 Id.
501 See, e.g., Vanguard Letter (recommending that
the Commission require a consolidated written
disclosure of all material conflicts); CFA August
2018 Letter.
502 See Schwab Letter (recommending that the
Commission eliminate the ‘‘in writing’’ requirement
and allow firms to design and document the best
method depending on the situation); SIFMA August
2018 Letter; TIAA Letter. But see AARP August
2018 Letter (stating that oral disclosures should
never be permitted).

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in writing.503 Other commenters
highlighted concerns associated with
such oral disclosure.504
After carefully considering the
comments, we are adopting the ‘‘in
writing’’ requirement as proposed,
subject to discussion in Section II.C.1,
Oral Disclosure or Disclosure After a
Recommendation. As stated above, we
believe that retail customers would
benefit from receiving a written
disclosure to assist their investment
decisions and form the basis of an
informed investment decision.505
However, we also believe that brokerdealers require flexibility to make
proper written disclosures to their
customers. Accordingly, the
Commission is not requiring a specific
form or method of written disclosure.
Although we are requiring that
disclosure be made ‘‘in writing,’’ we
recognize that a broker-dealer may need
to supplement, clarify or update written
disclosure it has previously made before
it provides a retail customer with a
recommendation. For instance, as we
stated in the Proposing Release, we
recognized that broker-dealers may
provide recommendations by telephone
and offer clarifying disclosure orally in
some instances subject to certain
conditions,506 such as a dual-registrant
503 See PIABA Letter (recommending that the
Commission allow broker-dealers to discharge their
disclosure obligations by: (i) Orally explaining the
relationship, any conflicts, how the broker-dealer is
paid, and the features, benefits and risks of the
recommendation; and (ii) confirming the discussion
by letter or email, which is signed or confirmed as
being accurate by the customer, and retained in
customer’s file); SIFMA August 2018 Letter
(recommending that the Commission clarify that
oral disclosure at the time of the recommendation
may satisfy the Disclosure Obligation if: (1) The
associated person documents that the oral
disclosure was made, or (2) the firm provides
written disclosure after the trade); USAA Letter
(suggesting that the Commission could allow oral
product-level disclosures, while providing the
client the choice to request confirming disclosure
in writing at her option).
504 See Edward Jones Letter (expressing concern
that the Commission is implying that a dualregistrant would need to provide an oral point of
sale disclosure regarding the capacity in which it
is acting when it makes a recommendation, and that
such oral disclosure would be difficult to supervise
and of little value); CCMC Letters (stating that a
dual-registrant should not have to make an oral
disclosure of the capacity for each and every
conversation it has with retail customers).
505 One commenter stated that certain foreign
laws do not permit firms to provide their customers
with written materials prior to entering into a
contractual relationship. See FIBA February 2019
Letter. In response, we note that the Disclosure
Obligation requires disclosure to be provided prior
to or at the time of the recommendation and is not
tied to a contractual relationship. In addition, the
staff will continue to evaluate the application of the
Disclosure Obligation in circumstances such as the
one raised by this commenter. Interested parties are
invited to provide further feedback on issues
involving non-U.S.- resident retail customers.
506 See Proposing Release at 21604, footnote 213.

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informing a retail customer of the
capacity in which the dual-registrant is
acting in conjunction with a
recommendation.507 In such instances,
we believe that it may be necessary as
a practical matter to provide oral
disclosure of a material fact to
supplement, clarify, or update written
disclosure made previously.508
Therefore, firms may make oral
disclosures under the circumstances
outlined in Section II.C.1, Oral
Disclosure or Disclosure After a
Recommendation.509
When making such an oral disclosure,
firms must maintain a record of the fact
that oral disclosure was provided to the
retail customer.510 We are not explicitly
requiring broker-dealers to create a
record documenting the substance of
the oral disclosure itself, but rather a
record of the fact that such oral
disclosure was made.511 This record
should include documentation
sufficient to demonstrate that disclosure
was made to the retail customer, which
could include, for example, recordings
of telephone conversations or
contemporaneous written notations.
Nonetheless, although it is not required
by Regulation Best Interest, as a best
practice we encourage broker-dealers
that make oral disclosures to
subsequently provide to their retail
customers in a timely manner written
disclosure summarizing the information
conveyed orally.
Plain English
In the Proposing Release, we stated
that broker-dealers should apply plain
English principles to written disclosures
including, among other things, the use
of short sentences and active voice, and
avoidance of legal jargon, highly
technical business terms, or multiple
negatives.512 Similarly, several
commenters recommended that
whatever format broker-dealers use for
their disclosure, they should be written
in plain English and easy to
understand.513 Accordingly, although it
507 See id. at 21605, footnote 216. We stated that
a broker-dealer could orally clarify the capacity in
which it is acting at the time of the
recommendation if it had previously provided
written disclosure to the retail customer beforehand
disclosing its capacity as well as the method it
planned to use to clarify its capacity at the time of
the recommendation.
508 For more discussion on guidance relating to
updating disclosures, see Section II.C.1.d,
Disclosure Obligation, Updating Disclosure.
509 See Section II.C.1, Disclosure Obligation, Oral
Disclosure or Disclosure After a Recommendation.
510 See Section II.D.
511 See Section II.C.1, Disclosure Obligation, Oral
Disclosure or Disclosure After a Recommendation.
512 Proposing Release at 21604, footnote 213.
513 See State Attorneys General Letter (stating that
all disclosures must be in plain language and easily

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Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations
is not required, the Commission
encourages broker-dealers to use plain
English in preparing any disclosures
they make in satisfaction of the
Disclosure Obligation.

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disclosure and recommended various
methods (e.g., hyperlinks to web-based
documents) but recommended paper
delivery as the default option.518 Other
commenters recommended permitting
electronic delivery for required
Electronic Delivery
disclosures.519 While investor testing on
In the Proposing Release, we took the
the proposed Relationship Summary
position that broker-dealers could
indicated that some retail investors
deliver written disclosures required by
generally support some form of
Regulation Best Interest in accordance
electronic copies, most participants in
with the Commission’s existing
the study ‘‘generally liked having a
guidance regarding electronic delivery
paper version of the Relationship
of documents.514 This framework
Summary.’’ 520 Similarly, as stated in
consists of the following elements: (1)
the Form CRS adopting release, the IAC
Notice to the investor that information
has cited one study indicating that
is available electronically; (2) access to
nearly half of investors (49%) still prefer
information comparable to that which
to receive paper disclosures through the
would have been provided in paper
mail, compared with only 33% who
form and that is not so burdensome that prefer to receive disclosures
the intended recipients cannot
electronically, either through email
effectively access it; and (3) evidence to (27%) or accessing them online (6%).521
show delivery (i.e., reason to believe
After considering investor testing
that electronically delivered information results and commenters’ concerns and
will result in the satisfaction of the
recommendations, the Commission
delivery requirements under the federal reaffirms the application of existing
securities laws).515 We have furthermore Commission guidance relating to paper
clarified that one method to satisfy the
and electronic delivery of disclosure
evidence of delivery element is to obtain documents to broker-dealers in meeting
informed consent from investors.516
the Disclosure Obligation. Specifically,
Several commenters agreed with this
we believe that broker-dealers should be
approach.517 These commenters
able to satisfy the Disclosure Obligation
typically supported the use of electronic by using electronic delivery.522
understood by investors); CFA Institute
(recommending that the Commission require a clear
English listing of all conflicts of interest in which
a broker-dealer engages). One commenter requested
that the Commission consider clarifying that the
Plain English standard in the Disclosure Obligation
is not an English-only requirement to address the
needs of certain non-U.S. customers. See FIBA
February 2019 Letter. In response, we note that any
disclosure should be made consistent with Plain
English principles.
514 See Proposing Release at 21604. We cited to
a number of prior Commission releases on
electronic delivery in the Proposing Release,
including Use of Electronic Media by BrokerDealers, Transfer Agents, and Investment Advisers
for Delivery of Information, Exchange Act Release
No. 37182 (May 9, 1996), 61 FR 24644 (May 15,
1996) (‘‘1996 Release’’) (providing Commission
views on electronic delivery of required
information by broker-dealers, transfer agents and
investment advisers) and Use of Electronic Media,
Exchange Act Release No. 42728 (Apr. 28, 2000), 65
FR 25843 (May 4, 2000) (‘‘2000 Release’’) (providing
updated interpretive guidance on the use of
electronic media to deliver documents on matters
such as telephonic and global consent; issuer
liability for website content; and legal principles
that should be considered in conducting online
offerings).
515 See 1996 Release at 24646–47; see also
Relationship Summary Proposing Release at 21454.
516 See 2000 Release at 25845–46 (clarifying how
market intermediaries and other market participants
can obtain consent for electronic delivery).
517 See, e.g., CFA August 2018 Letter (stating that
giving firms discretion to choose the delivery
mechanism would all but ensure that many
investors would never see the disclosures); AARP
August 2018 Letter (recommending that the
Commission prohibit firms from solely providing
electronic access to disclosures and require delivery
of paper copies).

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518 Id. See also LPL August 2018 Letter (noting
that modern communication practices underscore
the need for the Commission to provide more
flexibility to broker-dealers to satisfy their
document delivery obligations; and requesting that
the Commission confirm that broker-dealers can
deliver disclosures in compliance with existing
guidance regarding electronic delivery of
documents (which requires paper delivery as a
default)).
519 See, e.g., IPA Letter (urging the Commission to
confirm that all required disclosures may be
delivered electronically); see also AXA Letter
(urging the Commission to encourage the use of
appropriate electronic disclosures, which can make
information available to consumers more quickly
and in a more digestible format); Prudential Letter
(recommending that electronic delivery be deemed
to comply with the Disclosure Obligation).
520 See RAND 2018.
521 Relationship Summary Adopting Release at
Section II.D.3.a (citing Investor Advisory
Committee, Recommendation of the Investor as
Purchaser Subcommittee: Promotion of Electronic
Delivery and Development of a Summary Disclosure
Document for Delivery of Investment Company
Shareholder Reports (Dec. 7, 2017), available at
https://www.sec.gov/spotlight/investor-advisorycommittee-2012/recommendation-promotion-ofelectronic-delivery-and-development.pdf (citing
FINRA Investor Education Foundation, ‘‘Investors
in the United States 2016,’’ December 2016,
available at http://bit.ly/2hMrppX).
522 See 1996 Release (stating that ‘‘the
Commission believes that broker-dealers . . .
similarly should have reason to believe that
electronically delivered information will result in
the satisfaction of the delivery requirements under
the federal securities laws. Thus, whether using
paper or electronic media, broker-dealers . . .
should consider the need to establish procedures to
ensure that applicable delivery obligations are
met’’); see also 2000 Release.

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33369

However, if a broker-dealer is providing
its customers with electronic delivery
(upon their consent) it cannot solely
offer electronic delivery and must make
paper delivery available, upon request.
Both Regulation Best Interest and Form
CRS require firms to provide electronic
delivery of documents within the
framework of the Commission’s existing
guidance regarding electronic
delivery.523
d. Timing and Frequency
We proposed requiring broker-dealers
to provide the disclosures required by
the Disclosure Obligation ‘‘prior to or at
the time of’’ the recommendation. We
noted the importance of determining the
appropriate timing and frequency of
disclosure that may be effectively
provided ‘‘prior to or at the time of’’ the
recommendation.524 In cases where a
broker-dealer determines that disclosure
may be more effectively be provided in
an initial, more general disclosure (such
as a relationship guide) followed by
specific information in a subsequent
disclosure that is provided at a later
time, the initial disclosure would
address when and how a broker-dealer
would provide more specific
information regarding the material fact
or conflict in a subsequent disclosure.
We stated also that in circumstances
where a broker-dealer determines to
provide an initial, more general
disclosure (such as a relationship guide)
followed by specific information in a
subsequent disclosure that is provided
after the recommendation (such as a
trade confirmation), the initial
disclosure must address when and how
a broker-dealer would provide more
specific information regarding the
material fact or conflict in a subsequent
disclosure (e.g., after the trade in the
trade confirmation).525 We also stated
523 See Relationship Summary Adopting Release,
Section II.C.3.
524 See Proposing Release at 21605.
525 The Commission has granted exemptions to
certain dual-registrants, subject to a number of
conditions, from the written disclosure and consent
requirements of Advisers Act Section 206(3) (which
makes it unlawful for an adviser to engage in a
principal trade with an advisory client, unless it
discloses to the client in writing before completion
of the transaction the capacity in which the adviser
is acting and obtains the consent of the client to the
transaction). The exemptions are subject to several
conditions, including conditions to provide
disclosures at multiple points in the relationship,
including disclosure that the entity may be acting
in a principal capacity in a written confirmation at
or before completion of a transaction. See, e.g., In
the matter of Merrill Lynch Pierce Fenner & Smith,
Incorporated, Investment Advisers Act Release No.
4595; (Dec. 28, 2016); In the matter of Robert W.
Baird & Co., Incorporated, Advisers Act Release No.
4596 (Dec. 28, 2016); In the matter of UBS Financial
Services, Inc., Advisers Act Release No. 4597 (Dec.

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that disclosure after the
recommendation, such as in a trade
confirmation for a particular
recommended transaction would not, by
itself, satisfy the Disclosure Obligation,
because the disclosure would not be
‘‘prior to, or at the time of the
recommendation.’’ We noted also that
whether there is sufficient disclosure in
both the initial disclosure and any
subsequent disclosure would depend on
the facts and circumstances.526
Several commenters supported the
Commission’s proposal to require
broker-dealers to make disclosure prior
to or at the time of the recommendation,
but disagreed about the precise timing
with which disclosure should be
provided.527 For example, some
commenters recommended that the
Commission require or allow brokerdealers to meet the Disclosure
Obligation prior to or at account
opening.528 Similarly, several
commenters recommended that the
Commission require broker-dealers to
provide disclosure prior to a
recommendation or investment
decision.529 Specifically, commenters
recommended that the Commission
require disclosures to be made with
enough time prior to a recommendation
that a retail customer has sufficient time
to review and understand them, as well
as ask questions.530
28, 2016); In the matter of Wells Fargo Advisors,
LLC, Wells Fargo Advisors Financial Network, LLC,
Advisers Act Release No. 4598 (Dec. 28, 2016).
526 See Proposing Release at 21605.
527 See, e.g., CFA August 2018 Letter (stating that
any information that can be provided before the
transaction is entered into should be provided to
give investor time to consider it); AARP August
2018 Letter (stating that all key disclosures should
be made significantly in advance of an investment
decision; disclosure made at the time of or
immediately prior to investing is not adequate);
Bank of America Letter (stating that disclosure of
material conflicts of interest can be satisfied in
advance of a particular recommendation on a onetime basis); Pacific Life August 2018 Letter (stating
that disclosure of material conflicts of interest must
be disclosed at or prior to the point of sale or at
the time the recommendation is made); FPC Letter.
528 See, e.g., TIAA Letter (recommending that the
Commission require firms to meet their Regulation
Best Interest and CRS disclosure obligations at or
before the point the investor: (i) Opens a brokerage
account; or (ii) engages the broker-dealer to provide
advice services (including for recommendations
provided by phone)).
529 See, e.g., Better Markets August 2018 Letter
(stating that disclosure should be provided in a
timely fashion so investors have a meaningful
opportunity to read, digest, understand, and discuss
them); FPC Letter; AARP August 2018 Letter.
530 See, e.g., NAIFA Letter (recommending that
disclosure be provided at or before the time of a
recommendation because it helps consumers better
understand and evaluate the recommendations they
receive and preserves flexibility for professionals
who may be interacting with clients of various
levels of financial sophistication, duration of
relationship, and investment history); CFA August
2018 Letter (recommending that transaction-specific

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Several other commenters, however,
recommended that the Commission
clarify whether broker-dealers could
meet the Disclosure Obligation at the
point of sale 531 or after a
recommendation is made.532
Conversely, several commenters
recommended that the Commission
clarify that it will not require point of
sale or point of recommendation
disclosure obligations.533
After carefully considering the
comments received, we are providing
our view on what it means for brokerdealers to provide the required
disclosures in writing ‘‘prior to or at the
time of’’ the recommendation. As with
the ‘‘form and manner’’ of making
disclosures, the Commission continues
to believe that broker-dealers should
have flexibility with respect to the
‘‘timing and frequency’’ of providing
disclosure to determine the most
information should be provided, whenever
possible, at the point of recommendation rather
than at the point of sale); Groom Letter
(recommending that the Commission require
disclosure of material conflicts of interest related to
investing plan distribution proceeds at the
inception of any discussions of the matter); PIABA
Letter (recommending that the Commission require
firms to provide specific charges prior to or at the
time the recommendation is made); FPC Letter
(stating that disclosures should be made prior to the
recommendation so the retail customer has
sufficient time to review and understand them, as
well as to ask questions); Better Markets August
2018 Letter; AARP August 2018 Letter; Bank of
America Letter.
531 See Pacific Life August 2018 Letter (stating
that material conflicts of interest must be disclosed
at or prior to the point-of-sale or at the time the
recommendation is made).
532 See, e.g., LPL August 2018 Letter (suggesting
that the Commission permit a broker-dealer to
satisfy the Disclosure Obligation by directing an
investor in writing to review the recommended
product’s offering documents, along with
hyperlinks to those documents, prior to the
recommendation or shortly thereafter via a trade
confirmation); SIFMA August 2018 Letter
(recommending that the Commission confirm that
firms would be permitted to provide disclosures on
a website or on a post-trade basis, provided
customers have been informed in advance of the
timing of those disclosures).
533 See, e.g., SIFMA August 2018 Letter
(requesting the Commission clarify that there is no
requirement for a point of sale or point of
recommendation disclosure, as such a requirement
would be unworkable for the industry); Morgan
Stanley Letter (noting that point-of-sale disclosures
pose operational issues and may not afford clients
sufficient time to adequately consider and
understand them); HD Vest Letter (recommending
that the Commission not mandate written point of
recommendation or point of sale disclosure);
Prudential Letter (requesting that the Commission
clarify that it is not mandating a point of sale or
point of recommendation disclosure obligation).
But see NASAA August 2018 Letter (stating that
only a transaction-by-transaction disclosure
obligation will ensure that broker-dealers are
meeting their ‘‘best interest’’ duties and provide
investors the level of protection they deserve);
AARP August 2018 Letter (recommending that the
Commission require firms to disclose their fees any
time a recommendation is made).

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appropriate and effective way to meet
the Disclosure Obligation. Accordingly,
the Commission has decided not to
provide any prescriptive requirements
for the timing and frequency of written
disclosures, other than requiring
disclosure prior to or at the time of the
recommendation.
In order to make an informed decision
about a securities recommendation,
retail customers must have appropriate
information at the time or before a
recommendation is made. Being in
possession of relevant information gives
investors the tools with which to judge
the merits of acting on a particular
recommendation. As stated in the
Proposing Release, the Commission
believes that broker-dealers should
provide retail customers information
early enough in the process to give them
adequate time to consider the
information and promote the investor’s
understanding in order to make
informed investment decisions.534
Similarly, the Commission believes that
broker-dealers should not provide
information so early that the disclosure
fails to provide meaningful information
(e.g., does not sufficiently identify
material conflicts presented by a
particular recommendation, or
overwhelms the retail customer with
disclosures related to a number of
potential options that the retail
customer may not be qualified to
pursue).535 Nevertheless, in order to
provide broker-dealers the flexibility to
determine how and when to make
relevant disclosures pursuant to the
Disclosure Obligation, we are not
mandating a requirement that
disclosures be made within a certain
timeframe preceding a recommendation.
However, we continue to encourage
broker-dealers to consider whether it
would be helpful to repeat or highlight
disclosures already made pursuant to
the Disclosure Obligation at the time of
the recommendation.
We are also clarifying the ability of a
broker-dealer to supplement, clarify, or
update information after making a
recommendation.536 In particular, if a
broker-dealer determines to disclose
information, in part, after the
recommendation, such as in a
prospectus or trade confirmation, that
disclosure may be used to supplement,
clarify, or update the initial, general
disclosure. For example, any necessary
534 Proposing

Release at 21605.

535 Id.
536 See id. In the proposal, we noted that there
may be material information that the broker-dealer
may not be in a position to disclose at or prior to
the recommendation that may be revealed following
the transaction, such as the final transaction
information contained in a trade confirmation.

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information in a product offering
document, such as information about
product risks or fees, may be provided
in accordance with existing disclosure
mechanisms that occur after a
transaction, such as the delivery of a
trade confirmation or a prospectus,
private placement memorandum, or
offering circular.537 However, the
broker-dealer must comply with the
circumstances outlined in Section II.C.1,
Oral Disclosure or Disclosure After a
Recommendation, in order to make any
such disclosure after the
recommendation.

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Layered Disclosure
We proposed to require broker-dealers
to provide disclosure prior to or at the
time of the recommendation but gave
guidance on a number of approaches
they could take to achieve this
requirement, including providing
layered disclosure, in which more
general information is supplemented by
more detailed information provided
either at the same time or
subsequently.538 We received a number
of comments supporting our proposed
guidance concerning a layered approach
to the Disclosure Obligation.539 In
addition, investor testing illustrates that
many retail investors support a layered
approach as well.540
537 In instances where a recommended
transaction is not acted upon by the retail customer,
and therefore there is no subsequent delivery of
disclosure otherwise required by the transaction,
the fact that such information is not provided
would not be a violation of the Disclosure
Obligation.
538 See Proposing Release at 21605 (suggesting the
Disclosure Obligation could be satisfied, for
example, at multiple points in the relationship or
through a layered approach to disclosure, such as
an initial disclosure conveying more general
information regarding the material fact or conflict
followed by more specific information in a
subsequent disclosure).
539 See, e.g., Commonwealth Letter (supporting a
layered disclosure approach that includes (i) the
Relationship Summary at the inception of the
relationship; (ii) the traditional disclosures
included in account-opening agreements; (iii)
product-specific point-of-sale disclosures (e.g.,
prospectuses and alternative investment offering
documents); and (iv) more detailed disclosures on
the firm’s website); IRI Letter (supporting a
principles-based disclosure regime, which leverages
the benefits of layered disclosure to combat
information overload); Morgan Stanley Letter
(concurring with the Commission’s proposed
layered approach to disclosure of material facts
regarding the scope of the relationship with the
client and fees, as well as material conflicts of
interest associated with the recommendation); Stifel
Letter; Mass Mutual Letter; Triad Advisors Letter;
Investacorp Letter; Ladenburg Letter.
540 See, e.g., Study Regarding Financial Literacy
Among Investors As Required by Section 917 of the
Dodd-Frank Wall Street Reform and Consumer
Protection Act, August 2012 at iv. A key finding of
the SEC staff’s 917 study was that Investors favor
‘‘layered’’ disclosure and, wherever possible, the
use of a summary document containing key
information about an investment product or service.

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We have considered these comments
and results of investor testing and will
continue to permit broker-dealers to use
a layered approach to disclosure. We
acknowledge that different investors
have different preferences for the type
and length of disclosures they receive,
and that some investors may not read
additional information provided in any
particularized disclosure that
supplements initial, standardized
disclosure. Nonetheless, we believe that
permitting broker-dealers to provide
their retail customers with a
standardized summary of information
supplemented by more particularized
information will help avoid the
likelihood that retail customers receive
a single, potentially voluminous
disclosure document, and enable the
many investors who prefer a shorter,
summary document to have it available
to them, with additional information
available should they wish to have it.
This approach to layering information is
also consistent with our concurrent
effort in Form CRS to provide retail
investors with high level information
and context concerning key material
facts, supplemented by additional layers
of information regarding their
relationship.
We also continue to believe that
broker-dealers should have flexibility in
determining when to make disclosures
and whether, in light of their retail
customer base, certain material facts
That study described layered disclosure as an
‘‘approach to disclosure in which key information
is sent or given to the investor and more detailed
information is provided online and, upon request,
is sent in paper or by email.’’ See Enhanced
Disclosure and New Prospectus Delivery Option for
Registered Open-End Management Investment
Companies, Securities Act Release No. 8998 (Jan.
13, 2009). This layered approach is ‘‘intended to
provide investors with better ability to choose the
amount and type of information to review, as well
as the format in which to review it (online or
paper).’’ Id. Other studies that considered the use
of hyperlinks for layered disclosure in proposed
Form CRS suggested that retail investors are
generally interested in receiving additional
information, but recognized the possibility that
retail investors may not click on a hyperlink. See,
e.g., RAND 2018 (finding 58% of participants
selecting ‘‘very likely’’ and another 32% selecting
‘‘somewhat likely’’ to click on a hyperlink relating
to fees; although no other potential hyperlink
generated a majority with ‘‘very likely’’ usage, other
potential hyperlinks concerning services, conflicts
and investor education generated a majority when
combining responses of ‘‘very likely’’ and
‘‘somewhat likely’’ to click on the hyperlink). See
also Kleimann Communication Group, Inc., Report
on Development and Testing of Model Client
Relationship Summary, Presented to AARP and
Certified Financial Planner Board of Standards, Inc.
(Dec. 5, 2018), available at https://www.sec.gov/
comments/s7-07-18/s70718-4729850-176771.pdf
(indicating that while some participants were
interested in additional information, others
admitted they would not follow the links because
it was extra effort, they were uninterested, or the
link did not itself suggest what would be there).

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would be more effectively conveyed in
a more general manner in an initial
written disclosure accompanied or
followed by more specific information
in a separate disclosure. Similarly, we
believe that providing broker-dealers
with flexibility to best target their
disclosures to their particular retail
customer base will increase the
likelihood that investors will view
them.
The Commission is not prescribing
specific procedures obligating brokerdealers to fulfill the Disclosure
Obligation in a particular way. Rather,
Regulation Best Interest as adopted
provides broker-dealers with flexibility
to provide disclosures that are
consistent with the various ways in
which broker-dealers may already
provide disclosure to their customers.541
This could include, for example,
providing multiple or ‘‘layered’’
disclosures either initially or over time,
but that in total constitute full and fair
disclosure of the information required
by the Disclosure Obligation. While we
are not setting forth a prescriptive
approach regarding exactly when
disclosures should be made as suggested
by some commenters, we believe that a
broker-dealer may determine that
certain disclosures are most effective if
they are made at multiple points of the
relationship, or alternatively, certain
material facts may be conveyed in a
more general manner in an initial
written disclosure accompanied or
followed by more specific
information.542
Updating Disclosures
Several commenters recommend that
the Commission clarify under what
circumstances a broker-dealer would be
required to update prior disclosures
made pursuant to the Disclosure
Obligation.543 Among the suggestions
are to only require broker-dealers to
update their disclosures when there are
material changes to the disclosed
541 See

Proposing Release at 21605.
id.
543 See, e.g., LPL August 2018 Letter
(recommending that the Commission provide
additional guidance with respect to the updating
and amendment requirements that apply to the
Disclosure Obligation); CFA Institute Letter
(recommending that the Commission require
broker-dealers to provide updated disclosures at
least 30 days before raising or imposing new fees);
Bank of America Letter (recommending that the
Commission require firms to update existing
disclosures when there are changes to material
conflicts of interest, as well as annually); NAIFA
Letter (recommending that the Commission not
require regular disclosure (e.g., quarterly, annual,
etc.) of any new information items, unless the
information has materially changed).
542 See

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information; 544 require broker-dealers
to update their disclosures at least 30
days before raising or imposing new
fees; 545 and require broker-dealers to
update their disclosures when changes
are made, as well as annually.546
The Commission has carefully
considered the commenters’ suggestions
and is providing guidance on a brokerdealer’s duty to update disclosures
made to customers under Regulation
Best Interest. The Disclosure Obligation
requires broker-dealers to provide their
retail customers with full and fair
disclosure of material facts related to
several aspects of their relationship with
their customers. Therefore, a brokerdealer cannot provide customers with
full and fair disclosure if the disclosures
contain materially outdated,
incomplete, or inaccurate information.
Additional disclosure will be necessary
when any previously provided
information becomes materially
inaccurate, or when there is new
relevant material information (e.g., a
new material conflict of interest has
arisen that is not addressed by the
standardized disclosure).547 Therefore, a
broker-dealer’s duty to update
disclosures made to its customers under
Regulation Best Interest is based on the
facts and circumstances.
While we are not prescribing an
explicit timeframe in which required
updates must be made, generally the
Commission encourages broker-dealers
to update their disclosures to reflect
material changes or inaccuracies as soon
as practicable, and thus generally
should be no later than 30 days after the
material change; in the meantime,
broker-dealers are encouraged to
provide, supplement, or correct any
written disclosure with oral disclosure
as necessary prior to or at the time of the
recommendation.548 However, if
updated information is to be provided
either orally, or after a recommendation,
such disclosure must be made under the
circumstances outlined in Section II.C.1,
Oral Disclosure or Disclosure After a
Recommendation.
544 See

NAIFA Letter.
CFA Institute Letter.
546 See Bank of America Letter.
547 See Proposing Release at 21605.
548 The 30-day period aligns with other
requirements to update disclosures in similar
contexts. For instance, NASD Notice to Members
92–11, Fees and Charges for Services (Feb. 1992)
states that its member firms need to provide written
notification to customers of all service charges
when accounts are opened, and . . . written
notification at least 30 days prior to the
implementation or change of any service charge.
Failure to do so could be construed as conduct
inconsistent with just and equitable principles of
trade under FINRA Rule 2010 (Standards of
Commercial Honor and Principles of Trade).

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2. Care Obligation
We proposed the Care Obligation to
require a broker-dealer, when making a
recommendation of any securities
transaction or investment strategy
involving securities to a retail customer,
to exercise reasonable diligence, care,
skill, and prudence to: (1) Understand
the potential risks and rewards
associated with the recommendation,
and have a reasonable basis to believe
that the recommendation could be in
the best interest of at least some retail
customers; (2) have a reasonable basis to
believe that the recommendation is in
the best interest of a particular retail
customer based on that retail customer’s
investment profile and the potential
risks and rewards associated with the
recommendation; and (3) have a
reasonable basis to believe that a series
of recommended transactions, even if in
the retail customer’s best interest when
viewed in isolation, is not excessive and
is in the retail customer’s best interest
when taken together in light of the retail
customer’s investment profile. As we
indicated in the Proposing Release, the
Care Obligation was intended to
incorporate and enhance existing
suitability requirements applicable to
broker-dealers under the federal
securities laws by, among other things,
imposing a ‘‘best interest’’ requirement
that will require a broker-dealer to not
place its own interest ahead of the retail
customer’s interest, when making
recommendations.549
Commenters generally supported the
proposed Care Obligation, including its
principles-based approach, but many
commenters requested additional
guidance or clarification on how a
broker-dealer could satisfy the Care
Obligation under different
circumstances and regarding specific
products.550 Relatedly, several
commenters requested further guidance
regarding the role of costs and other
relevant factors when making a best
interest determination,551 while other
commenters expressed concern over the
usage of the term ‘‘prudence’’ 552 or
expressed concern that Regulation Best
Interest is not a major change from
FINRA’s suitability rule.553 Numerous
549 As discussed in the Fiduciary Interpretation,
the duty of care of the investment adviser’s
fiduciary duty includes a duty to provide
investment advisory services that are in the best
interest of the client. See Fiduciary Interpretation
at footnote 34.
550 See, e.g., NASAA August 2018 Letter;
Cambridge Letter; BlackRock Letter.
551 See, e.g., Wells Fargo Letter; Primerica Letter;
CFA Institute Letter.
552 See, e.g., BISA Letter; Raymond James Letter;
Transamerica August 2018 Letter.
553 See, e.g., CFA August 2018 Letter (stating
‘‘[n]owhere does the Commission explain how the

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commenters also requested clarification
on the meaning and scope of
‘‘reasonably available alternatives’’ and
‘‘otherwise identical securities,’’
including how the phrase ‘‘reasonably
available alternatives’’ would apply in
situations where a broker-dealer
operated in an open architecture
environment,554 or maintained a limited
product menu such as where brokerdealers limited available offerings to
proprietary products.555 Finally, several
commenters recommended the
Commission include other factors in
building a retail customer’s investment
profile, such as longevity risk,556 market
risk,557 or income profile.558
We are adopting the Care Obligation
substantially as proposed, but with
certain modifications and additional
guidance to address comments. As
discussed in more detail below, in
response to comments, we are revising
the Care Obligation to remove the term
‘‘prudence,’’ as we have concluded that
its inclusion creates legal uncertainty
and confusion, and it is redundant of
what we intended in requiring a brokerdealer to exercise ‘‘diligence, care, and
skill,’’ and its removal does not change
the requirements under the Care
Obligation. Accordingly, the Care
Obligation will require broker-dealers to
‘‘exercise reasonable diligence, care, and
skill’’ to meet the three components of
the Care Obligation.
In addition, after careful
consideration of the comments received,
we are expressly adding cost to the rule
text as a factor that a broker-dealer must
consider in fulfilling the Care
Obligation. While certain commenters
expressed concerns about the
prominence of cost and how cost would
be balanced against other factors under
the Care Obligation,559 other
standard differs from, or even whether it improves
upon, the existing suitability standard under FINRA
rules’’); AFL–CIO April 2019 Letter (stating ‘‘that
the intent of [proposed Regulation Best Interest] is
to codify, rather than enhance, protections investors
currently receive under FINRA’s suitability
standard’’).
554 For purposes of this requirement, we use the
term ‘‘open architecture’’ to mean a firm’s product
menu that includes both third-party and proprietary
products, or as a concept wherein a firm offers a
large range of products to their retail customers that
are not limited, for example, to a small list of
approved managers or funds (i.e., a product menu
that is not limited to proprietary products or
otherwise constrained to certain retail customers or
registered representatives). See generally FINRA
2013 Conflicts Report; Morgan Stanley Letter.
555 See, e.g., Fidelity Letter; ICI Letter; LPL
August 2018 Letter; SIFMA August 2018 Letter;
Prudential Letter; Morningstar Letter.
556 See, e.g., CCMC Letters; Lincoln Financial
Letter; Pacific Life August 2018 Letter.
557 See, e.g., Jackson National Letter.
558 See, e.g., Lincoln Financial Letter.
559 See, e.g., ICI Letter; Putnam Letter; Morgan
Stanley Letter; Letter from Eric R. Dinallo,

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commenters supported incorporating
cost into the rule text.560 As noted in the
Relationship Summary Adopting
Release, participants in investor testing
and roundtables also overwhelmingly
supported including fees in the
Relationship Summary, and believed
that the ‘‘fees and costs’’ section was the
most important for determining which
type of investment accounts and
services are right for that person.561 We
believe that while the factors that a
broker-dealer should understand and
consider when making a
recommendation may vary depending
upon the particular product or strategy
recommended, cost—along with
potential risks and rewards—will
always be a relevant factor that will bear
on the return of the security or
investment strategy involving
securities.562 This would include, for
example, both costs associated with the
purchase of the security, as well as any
costs that may apply to the future sale
or exchange of the security, such as
deferred sales charges or liquidation
costs. Elevating cost to the rule text
clarifies that this factor must always be
considered when making a
recommendation. Thus, a broker-dealer,
in fulfilling its obligation to make a
recommendation in the best interest of
its retail customer, must exercise
reasonable diligence, care, and skill to
understand the ‘‘potential risks,
rewards, and costs’’ associated with the
recommendation and have a reasonable
basis to believe that the
recommendation is in the best interest
of the retail customer based on these
factors.
Importantly, however, while cost, like
potential risks and rewards, is always a
Executive Vice President, General Counsel,
Guardian Life (Aug. 7, 2018) (‘‘Guardian August
2018 Letter’’) (cautioning against inclusion of
‘‘costs’’ into rule text or overemphasizing its
importance).
560 See, e.g., AFL–CIO April 2019 Letter (stating
‘‘If, as has been suggested, one goal is to ensure that
brokers give greater consideration to costs in
determining what investments to recommend,
[Regulation Best Interest] should incorporate an
explicit requirement to consider costs in the rule
text.’’); NASAA August 2018 Letter; U. of Miami
Letter (supporting addition of ‘‘costs’’ into rule
text). See also CFA August 2018 Letter (supporting
the Commission’s emphasis of cost and associated
financial incentives as more important factors, and
stating ‘‘[t]his requirement would be clearer,
however, if it were incorporated into the rule text,
which requires the broker to consider the ‘potential
risks and rewards associated with the
recommendation,’ rather than the material
characteristics, including costs, of the
recommended investment or investment strategy.’’).
561 See Relationship Summary Adopting Release.
562 See Vanguard Letter (‘‘We agree that costs and
remuneration should play a central role in meeting
the revise best interest standards. Cost is a critical
factor because of its compounding effect upon
performance.’’).

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factor that a broker-dealer must consider
in making a recommendation, it is not
a dispositive factor and its inclusion in
the rule text is not meant to limit or
foreclose the recommendation of a more
costly or complex product that a brokerdealer has a reasonable basis to believe
is in the best interest of a particular
retail customer.563 Moreover, we are
reiterating that the standard does not
necessarily require the lowest cost
option, and that while cost is an
important factor that always needs to be
taken into consideration in making a
recommendation, it is not the only
one.564 Rather, as explained more fully
below, the evaluation of cost would be
more analogous to a broker-dealer’s best
execution analysis, which does not
require the lowest possible cost, but
rather looks at whether the transaction
represents the best qualitative execution
for the customer using cost as one
factor.565
Several commenters expressed
concern over the emphasis of ‘‘cost’’ and
suggested that, for example, more
emphasis be placed on additional or
subjective factors beyond specific
product attributes.566 Those
commenters stated that the emphasis on
cost may discourage certain products or
investment strategies. Our intent is not
to discourage or otherwise limit the
recommendation of products or
investment strategies where a brokerdealer concludes that the
recommendation is in the best interest
of the retail customer. Instead, we
believe that cost will always be relevant
to a recommendation and accordingly
should be a required consideration as
563 See Proposing Release at 21587–21589;
21610–21612.
564 See Proposing Release at 21610.
565 Under the antifraud provisions of the federal
securities laws and SRO rules, broker-dealers have
a legal duty to seek to obtain best execution of
customer orders. See Regulation NMS, Exchange
Act Release No. 51808 (Jun. 9, 2005) (‘‘Regulation
NMS Release’’); FINRA Rule 5310 (Best Execution
and Interpositioning). A broker-dealer’s duty of best
execution requires a broker-dealer to seek to
execute customers’ trades at the most favorable
terms reasonably available under the circumstances.
See Regulation NMS Release at 160; see also
Proposing Release at 21615. Certain commenters
pointed to best execution analysis as an example of
a rule or guidance that is facts-and-circumstancesbased. See, e.g., CFA August 2018 Letter (‘‘Just as
compliance with the best execution standard will
not always be met by sending trades to the
exchange where the lowest cost is displayed,
compliance with a best interest standard will not
always be satisfied by recommending the lowest
cost option.’’).
566 See, e.g., ICI Letter; BlackRock Letter; Putnam
Letter; Transamerica August 2018 Letter;
Northwestern Mutual Letter; see also Vanguard
Letter (recognizing the importance of cost, but
urging the Commission to maintain a principlesbased approach recognizing the importance of
‘‘holistic advice that necessarily contemplates
factors beyond cost.’’).

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set forth in the rule text. It should never
be the only consideration. Additional
factors such as those cited by
commenters also should be taken into
consideration as the broker-dealer
formulates a recommendation consistent
with the best-interest standard.567
Though we are declining to expressly
define ‘‘best interest’’ in the rule text, as
discussed above,568 we are providing
guidance regarding the application of
the Care Obligation and in particular
what it means to make a
recommendation in the retail customer’s
‘‘best interest.’’ In addition, to
emphasize the importance of
determining that each recommendation
is in the best interest of the retail
customer and that it does not place the
broker-dealer’s interests ahead of the
retail customer’s interests, we are
expressly incorporating into the rule
text of Paragraph (a)(2)(ii)(B) and
Paragraph (a)(2)(ii)(C) of Regulation Best
Interest that a broker-dealer must have
a reasonable basis to believe that the
recommendation ‘‘does not place the
financial or other interest of the [brokerdealer] . . . ahead of the interest of the
retail customer.’’ While we acknowledge
that a broker-dealer and an associated
person can and will have some financial
interest in a recommendation, as noted
above, this addition to the Care
Obligation makes clear these interests
cannot be placed ahead of the retail
customer’s interests when making a
recommendation.569
Finally, we believe that by explicitly
requiring in the rule text that the brokerdealer have a reasonable basis to believe
that a recommendation is both in the
retail customer’s ‘‘best interest’’ and
567 See, e.g., BlackRock Letter (citing
consideration of investors’ needs and desired
outcomes relative to service offerings of several
different managers); Vanguard Letter
(‘‘considerations include important factors such as
product structure, investment features, liquidity,
volatility, issuer reputation, brand and business
practices (securities lending activities, portfolio
tracking error, or usage of derivatives in a
portfolio)’’); ICI Letter (citing several subjective
factors, such as the ‘‘nature and quality of a
provider’s services (including advantages to the
investor of consolidating investments as a single
firm, such as higher levels of service that may be
offered), minimum initial investments, and firm
reputation’’); FIBA February 2019 Letter (citing
‘‘highly personalized non-economic reasons
underlying cross-border investment’’).
568 See Section II.A.2.
569 See id. See also AFL–CIO April 2019 Letter
(noting ‘‘Adopting a standard that explicitly states
that brokers are prohibited form placing their own
interests ahead of the retail customer’s interests
reinforces [investors’ reasonable expectations that
the financial professionals they rely on for
investment advice will put their interests first]’’ and
asserting that ‘‘a requirement to place the
customer’s interests ahead of the brokers’ interests
must be included in the operational provisions of
Reg BI. . . .’’).

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does ‘‘not place the financial or other
interest’’ of the broker-dealer ahead of
the retail customer’s interests, we are
enhancing the Care Obligation by
imposing obligations beyond existing
suitability obligations. Under existing
suitability requirements, a broker-dealer
is required to make recommendations
that are ‘‘suitable’’ for the customer.
While certain cases and guidance have
interpreted FINRA’s suitability rule to
require that ‘‘a broker’s
recommendations must be consistent
with his customers’ best interests,’’ and
FINRA has further interpreted the
requirement to be ‘‘consistent with the
customer’s best interest’’ to prohibit a
broker-dealer from placing his or her
interests ahead of the customer’s
interests, this obligation is not explicitly
required by FINRA’s rule (or its
supplementary material), nor does the
interpretation require recommendations
to be in the best interest (as opposed to
‘‘consistent with the best interest’’) of a
retail customer.570 We believe that
requiring recommendations to be in the
best interest is declarative of what must
be done, and therefore stronger than,
requiring recommendations to be
‘‘consistent with’’ the best interest of the
retail customer, which we believe at a
minimum creates ambiguity as to
whether the recommendation must be in
the retail customer’s best interest or
something less.571
The Care Obligation significantly
enhances the investor protection
provided as compared to current
suitability obligations by: (1) Explicitly
requiring in Regulation Best Interest that
recommendations be in the best interest
of the retail customer and do not place
the broker-dealer’s interests ahead of the
retail customer’s interests; (2) explicitly
requiring by rule the consideration of
costs when making a recommendation;
570 See FINRA Regulatory Notice 12–25 at Q1. See
also FINRA Letter to Senators Warren, Brown, and
Booker (Aug. 3, 2018) (‘‘FINRA 2018 Letter’’)
(stating that ‘‘[w]hile FINRA’s suitability rule
implicitly requires a broker-dealer’s
recommendations to be consistent with customer’s
best interests, the SEC’s proposed best interest
standard explicitly establishes the customer’s best
interest as an overarching standard of care for
broker-dealers.’’ (internal citations omitted)). Some
commenters have also made this point. See, e.g.,
CFA August 2018 Letter (‘‘In enforcing that
standard, however, FINRA has only rarely and very
narrowly enforced the obligation to do what is best
for the customer—typically in cases that involve
recommending the most appropriate share class of
a particular mutual fund. . . . Indeed, as we
detailed in our July 2015 comment letter to the
Department of Labor, most of the cases in which
FINRA and the Commission have asserted an
obligation for brokers to act in customers’ best
interest have involved egregious frauds rather than
questions of whether customers’ best interests were
being served.’’).
571 See, e.g., CFA August 2018 Letter.

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and (3) applying the obligations relating
to a series of recommended transactions
(currently referred to as ‘‘quantitative
suitability’’) irrespective of whether a
broker-dealer exercises actual or de
facto control over a customer’s
account.572 In addition, it is our view
that a broker-dealer should consider
‘‘reasonably available alternatives’’ as
part of having a ‘‘reasonable basis to
believe’’ that the recommendation is in
the best interest of the retail customer,
which we also believe is an
enhancement beyond existing suitability
expectations.573
a. Exercise Reasonable Diligence, Care,
and Skill
A broker-dealer is required to
‘‘exercise reasonable diligence, care, and
skill’’ to satisfy the three components of
the Care Obligation set forth in
Regulation Best Interest. In the
Proposing Release, we included
‘‘prudence,’’ and explained that
‘‘prudence’’ ‘‘conveys the fundamental
importance of conducting a proper
evaluation of any securities or
investment strategy recommendation in
accordance with an objective standard
of care.’’ 574 Further, we solicited
comment on all aspects of the Care
Obligation, and also asked specifically
whether there was adequate clarity and
understanding regarding the term
‘‘prudence,’’ or whether other terms
were more appropriate in the context of
broker-dealer regulation.
Several commenters supported
adopting a principles-based obligation,
thus requiring the broker-dealer to
assess the adequacy of a
recommendation based on the facts and
circumstances of each
572 See FINRA 2018 Letter (noting that proposed
Regulation Best Interest augments and enhances
current requirements by, among other things:
‘‘explicitly impos[ing] a ‘best interest’ standard,
making clear that a broker-dealer cannot put its
interests ahead of the interests of its customers.
While FINRA’s suitability rule implicitly requires a
broker-dealer’s recommendations to be consistent
with customers’ best interests, the SEC’s proposed
best interest standard explicitly establishes the
customer’s best interest as an overarching standard
of care for broker-dealers;’’ ‘‘explicitly requir[ing]
broker-dealers to consider ‘reasonably available
alternatives’ to a recommended security and justify
any choice of a more costly product. . . . Although
case law and FINRA guidance establish cost and
available alternatives as factors to consider as part
of a FINRA suitability assessment, particularly
regarding mutual fund share classes, proposed Reg
Bl expressly establishes the significance of these
factors’’; and ‘‘remov[ing] the ‘control’ element for
purposes of quantitative suitability, which would
make this obligation more enforceable.’’) (internal
citations omitted).
573 See infra Section II.C.2.c, Application of the
Care Obligation—Reasonably Available Alternatives
and Otherwise Identical Securities.
574 Proposing Release at 21609.

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recommendation.575 We also received
numerous comments asking for further
guidance relating to recommendations
of specific securities or asking how the
Care Obligation applies to certain
factual scenarios.576 With respect to the
term ‘‘prudence,’’ a number of
comments requested removal of the
term, stating that such language is
unnecessary given the other
requirements to satisfy the Care
Obligation, as well as the fact that the
term introduces legal confusion and
uncertainty.577 Other commenters
supported the use of the term
‘‘prudence’’ because they believed that
Regulation Best Interest’s component
obligations generally rested on a
‘‘prudence’’ standard or maintained that
the Care Obligation ‘‘echoes elements
found in the common law ‘prudent
person rule,’ ’’ and thus thought its
addition was appropriate to capture, or
describe, these obligations.578
After careful consideration of
comments, we are revising the Care
Obligation to remove the term
575 See, e.g., SIFMA August 2018 Letter; Vanguard
Letter; Morningstar Letter; Edward Jones Letter.
576 See, e.g., SIFMA August 2018 Letter; Direxion
Letter; Chapman Letter.
577 See, e.g., Primerica Letter (stating ‘‘. . . . the
term [prudence] raises numerous interpretative
issues and compliance risks. Regulatory and
judicial interpretations of ERISA ‘prudence’ and its
requirements abound, but these are exclusive to
employee benefit plan duties and do not address
duties with respect to retail accounts for individual
customers.’’); Transamerica August 2018 Letter
(‘‘The term ‘prudence’ is one used primarily in the
ERISA context and is not generally used in the
federal securities laws. We believe inclusion of the
term ‘prudence’ in describing the care obligation is
unnecessary and could lead to confusion in
interpretation of the care obligation set forth in the
Proposal’’); IPA Letter (‘‘ ‘Prudence’ is an ERISA
term based on trust law that is not generally used
under the federal securities laws’’). See also Fein
Letter (discussing that the ‘‘duties of loyalty and
care are the core fiduciary standards that apply
across all fiduciary fields, including trust law,
agency law, and employee benefits law;’’ that
‘‘[b]oth of these duties are reflected in the existing
regulation of broker-dealers and investment
advisers when they give investment advice to retail
customers;’’ and that the ‘‘duty of care—also called
‘prudence’—requires a fiduciary to act with care,
skill and diligence in fulfilling his designated
functions.’’) (internal citations omitted).
578 See LPL August 2018 Letter (‘‘We believe that
each of the four component obligations identified
in Regulation BI generally rests on a ‘prudence’
standard that is the foundation of the common law
principles and the Federal law that have governed
the activities of financial services providers for
decades. The obligation to provide prudent
recommendations that are appropriate for an
investor’s circumstances is a principal component
of the suitability obligations that apply to
investment advisers under the [Advisers Act]’’
(internal citations omitted); FPC Letter (stating that
‘‘the duty of care, as described by both Reg BI and
CFP Board Standards, echoes elements found in the
common law ‘prudent person rule’ which can serve
to measure the reasonableness of a prudent
professional’s actions. . . .’’); see also CFA August
2018 Letter; NAIFA Letter.

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‘‘prudence.’’ Accordingly, the Care
Obligation will require broker-dealers to
‘‘exercise reasonable diligence, care, and
skill’’ to meet the three components of
the Care Obligation. We are persuaded
by commenters that its inclusion in the
proposed rule text to satisfy the
components of the Care Obligation is
superfluous and unnecessarily presents
the possibility for confusion and legal
uncertainty.579 We believe requiring
broker-dealers ‘‘to exercise reasonable
diligence, care, and skill’’ conveys ‘‘the
fundamental importance of conducting
a proper evaluation of any securities
recommendation in accordance with an
objective standard of care’’ 580 that was
intended by the inclusion of
‘‘prudence.’’ Removing ‘‘prudence’’
does not lessen nor otherwise change
the requirements or our expectations
under the Care Obligation, or Regulation
Best Interest more broadly as it was
duplicative of the phrase ‘‘diligence,
care, and skill.’’ 581 The revised
obligation, in requiring the brokerdealer to ‘‘exercise[ ] reasonable
diligence, care and skill’’ and to have a
‘‘reasonable basis to believe that the
recommendation is in the best interest
. . . and does not place’’ the interest of
the broker-dealer ahead of the interest of
the retail customer, will continue to
require an analysis that is comparable to
the notion of ‘‘prudence’’ as described
in other regulatory frameworks,582 but
does so using the terms ‘‘diligence, skill,
and care’’—terminology with which
broker-dealers are familiar and that is
well understood under the federal
securities laws.583 As such, we believe
that the revised language will minimize
the potential confusion and legal
uncertainty created by using a term that
is predominantly interpreted in other
579 See

supra footnote 577.
Release at 21609.
581 See, e.g., LPL August 2018 Letter (noting that
the component obligations of Regulation Best
Interest generally rest on ‘‘prudence’’ concepts);
Fein Letter.
582 See Fein Letter (stating that the ‘‘duty of
care—also called ‘prudence’—requires a fiduciary
to act with care, skill and diligence in fulfilling his
designated functions’’) (citing Restatement 3d of
Agency, § 8.08 Duties of Care, Competence, and
Diligence (‘‘[s]ubject to any agreement with the
principal, an agent has a duty to the principal to
act with care, competence, and diligence normally
exercised by agents in similar
circumstances. . . .’’)). The DOL interpreted
‘‘prudence’’ to represent ‘‘an objective standard of
care that requires investment advice fiduciaries to
investigate and evaluate investments, make
recommendations, and exercise sound judgment in
the same way that knowledgeable and impartial
professionals would.’’ BIC Exemption Release, 81
FR 21208 at 21028–21029.
583 See, e.g., Proposing Release at 21595, 21609–
21613. The discussion that follows addresses what
it means to ‘‘exercise reasonable diligence, care, and
skill’’ in the context of each aspect of the Care
Obligation.

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580 Proposing

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legal regimes,584 and will aid brokerdealers in achieving compliance with
Regulation Best Interest as well as
permit broker-dealers to utilize existing
compliance and supervisory systems
that already rely on this language.
Moreover, we note that certain
commenters’ support for the term
‘‘prudence’’ was based on our
interpretation of the Care Obligation in
the Proposing Release.585 As noted
above, the removal of the term
‘‘prudence’’ does not change the
obligations or our interpretation of the
Care Obligation, which we believe are
addressed by the ‘‘diligence, care, and
skill’’ language and through Regulation
Best Interest more broadly. In light of
concerns regarding legal uncertainty
associated with the term ‘‘prudence,’’
and our view that its inclusion or
removal would not change the
requirements or expectations of
Regulation Best Interest, we have
determined to remove it from the rule
text.
Finally, in response to comments, we
are retaining the facts-andcircumstances determination for the
reasons set forth in the Proposing
Release,586 and providing additional
guidance on the application of the
components of the Care Obligation with
respect to certain securities and under
certain scenarios. As we noted in the
Proposing Release, such an approach is
consistent with how broker-dealers are
currently regulated with respect to the
suitability of their recommendations
and would allow broker-dealers to
utilize and incorporate pre-existing
compliance systems. In addition, this
approach is generally consistent with
the principles-based approach
applicable to the duty of care of
investment advisers.587
b. Understand Potential Risks, Rewards,
and Costs Associated With
Recommendation, and Have a
Reasonable Basis To Believe That the
Recommendation Could Be in the Best
Interest of at Least Some Retail
Customers
Under the proposed ‘‘reasonable
basis’’ component of the Care
Obligation, broker-dealers would be
required to understand the potential
supra footnote 577.
e.g., NAIFA Letter.
586 Proposing Release at 21587 (‘‘[W]e
preliminarily believe that whether a broker-dealer
acted in the best interest of the retail customer
when making a recommendation will turn on the
facts and circumstances of the particular
recommendation and the particular retail customer,
along with the facts and circumstances of how the
four specific components of Regulation Best Interest
are satisfied.’’).
587 See Fiduciary Interpretation.

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585 See,

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33375

risks and rewards of the
recommendation and have a reasonable
basis to believe that the
recommendation could be in the best
interest of at least some retail customers.
Although potential costs were not
specifically included in the proposed
rule text as a factor to be considered as
part of a recommendation, the
Proposing Release identified potential
costs associated with a recommendation
as an important factor to understand
and consider as part of making a
recommendation, and likewise as a key
factor to consider when evaluating
whether or not a broker-dealer had a
reasonable basis to believe it was acting
in the best interest of the retail customer
when making the recommendation.588
After careful consideration of
comments, the Commission is adopting,
for the reasons set forth in the Proposing
Release, Paragraph (a)(2)(ii)(A) of the
Care Obligation substantially as
proposed. However, as discussed above,
in addition to requiring broker-dealers
to understand the potential risks and
rewards associated with the
recommendation, we are also expressly
requiring them to understand and
consider the potential costs associated
with a recommendation. Elevating costs
to the rule text is consistent with a
number of commenters’
recommendations and, importantly,
stresses that cost will always be a salient
factor to be considered when making a
recommendation.589 Additionally, this
requirement that the broker-dealer
understands and considers costs is a
distinct enhancement over existing
reasonable basis suitability obligations,
which do not expressly require this
consideration.590 Nevertheless, we
recognize—and emphasize—that cost is
one important factor among many
factors, and thus provide additional
guidance below regarding the
importance of weighing and considering
costs in light of other relevant factors
and the retail customer’s investment
profile.
Paragraph (a)(2)(ii)(A) of Regulation
Best Interest is intended to incorporate
and build upon broker-dealer’s existing
‘‘reasonable-basis suitability’’
obligations and would relate to the
broker-dealer’s understanding of the
particular security or investment
strategy recommended, rather than to
any particular retail customer. Without
establishing such a threshold
understanding of its particular
588 See Proposing Release at 21609–21612. See
also supra footnote 572.
589 See, e.g., AFL–CIO April 2019 Letter; NASAA
August 2018 Letter; U. of Miami Letter.
590 See supra footnote 572.

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recommended security or investment
strategy involving securities, we do not
believe that a broker-dealer could, as
required by Regulation Best Interest,
have a reasonable basis to believe that
it is acting in the best interest of a retail
customer when making a
recommendation.591
In order to meet the requirement
under Paragraph (a)(2)(ii)(A), a brokerdealer would need to undertake
reasonable diligence, care, and skill to
understand the nature of the
recommended security or investment
strategy involving a security or
securities, as well as the potential risks,
rewards—and now costs—of the
recommended security or investment
strategy, and have a reasonable basis to
believe that the recommendation could
be in the best interest of at least some
retail customers based on that
understanding. A broker-dealer must
adhere to both components of Paragraph
(a)(2)(ii)(A). For example, a brokerdealer could violate the obligation by
not understanding the potential risks,
rewards, or costs of the recommended
security or investment strategy, even if
the security or investment strategy
could have been in the best interest of
at least some retail customers.
Conversely, even if a broker-dealer
understands the recommended security
or investment strategy, the broker-dealer
must still have a reasonable basis to
believe that the security or investment
strategy could be in the best interest of
at least some retail customers.
What would constitute reasonable
diligence, care, and skill under
Paragraph (a)(2)(ii)(A) will vary
depending on, among other things, the
complexity of and risks associated with
the recommended security or
investment strategy and the brokerdealer’s familiarity with the
recommended security or investment
strategy.592 While every inquiry will be
specific to the particular broker-dealer
and the recommended security or
investment strategy, broker-dealers
generally should consider important
factors such as the security’s or
investment strategy’s investment
objectives, characteristics (including
any special or unusual features),
liquidity, volatility, and likely
performance in a variety of market and
economic conditions; the expected
return of the security or investment
strategy; as well as any financial
incentives to recommend the security or
investment strategy. Together, this
inquiry should allow the broker-dealer
591 See Proposing Release at 21609–21610 (for
further discussion regarding this requirement).
592 See FINRA Rule 2111.05(a).

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to develop a sufficient understanding of
the security or investment strategy and
to be able to reasonably believe that it
could be in the best interest of at least
some retail customers.
This ‘‘reasonable-basis’’ component of
the Care Obligation is especially
important when broker-dealers
recommend securities and investment
strategies that are complex or risky.593
For example, in recent years, the
Commission staff and FINRA have
addressed broker-dealer sales practice
obligations under existing law relating
to complex products, such as inverse or
leveraged exchange-traded products.594
These products, which may be useful
for some sophisticated trading
strategies, are highly complex financial
instruments and are typically designed
to achieve their stated objectives on a
daily basis.595 However, because of the
effects of compounding, the
performance of these products over
longer periods of time can differ
significantly from their stated daily
objectives. Thus, broker-dealers
recommending such products should
understand that inverse and leveraged
exchange-traded products that are reset
daily may not be suitable for, and as a
consequence also not in the best interest
of, retail customers who plan to hold
them for longer than one trading
session, particularly in volatile
markets.596 Without understanding the
terms, features, and risks of inverse and
leveraged exchange-traded products—as
with the potential risks, rewards, and
593 See FINRA Rule 2111 (Suitability) FAQ at
Q5.1 (‘‘The reasonable-basis obligation is critically
important because, in recent years, securities and
investment strategies that brokers recommend to
customers, including retail investors, have become
increasingly complex and, in some cases, risky.).
See also SEC v. Hallas, No. 17–cv–02999 (S.D.N.Y.
filed Apr. 25, 2017).
594 See FINRA Regulatory Notice 09–31, NonTraditional ETFs—FINRA Reminds Firms of Sales
Practice Obligations Relating to Leveraged and
Inverse Exchange-Traded Funds (June 2009); SEC
staff and FINRA, Investor Alert, Leveraged and
Inverse ETFs: Specialized Products with Extra Risks
for Buy-and-Hold Investors (Aug. 1, 2009); SEC
Office of Investor Education and Advocacy, Investor
Bulletin: Exchange-Traded Funds (ETFs) (Aug.
2012).
595 See id. See also Exchange-Traded Funds,
Securities Act Release No. 10515 (Jun. 28, 2018);
Use of Derivatives by Registered Investment
Companies and Business Development Companies,
Investment Company Act Release No. 31933 (Dec.
11, 2015) [80 FR 80883 (Dec. 28, 2015)]
(‘‘Derivatives Proposing Release’’); Direxion Letter
(recognizing that leveraged ETFs are not
appropriate for all customers, and thus the
importance for broker-dealers to perform sufficient
diligence to adequately ‘‘understand the terms and
features of such funds, including how they are
designed to perform, how they achieve that
objective, and the impact that market volatility, the
ETF’s use of leverage, and the customer’s intended
holding period will have on their performance’’).
596 See supra footnotes 593–595.

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costs of any security or investment
strategy—a broker-dealer could not
establish a reasonable basis to
recommend these products to retail
customers.597 Further, these products
may not be in the best interest of a retail
customer absent an identified, shortterm, customer-specific trading
objective. Similarly, when a brokerdealer recommends a potentially high
risk product to a retail customer—such
as penny stocks or other thinly-traded
securities—the broker-dealer should
generally apply heightened scrutiny to
whether such investments are in a retail
customer’s best interest.598
Finally, several commenters
expressed concern about the
applicability of Regulation Best Interest
to variable annuities and variable life
insurance products.599 Variable
annuities and variable life insurance
products have generated special
attention from regulators and their staff,
such as statements regarding sales
practice obligations and specific FINRA
rules relating to the recommendation of
variable annuities.600 These variable
insurance products are often unique and
have different features depending on the
company providing the product, as well
as depending on the chosen investment
options, benefits, fees and expenses,
liquidity restrictions, and other
considerations.601 Consistent with
597 See

id.
e.g., FINRA Regulatory Notice 17–32,
Volatility-Linked Exchange Traded Products—
FINRA Reminds Firms of Sales Practice Obligations
for Volatility-Linked Exchange-Traded Products
(Oct. 2017) (explaining that ‘‘The level of
reasonable diligence that is required will rise with
the complexity and risks associated with the
security or strategy. With regard to a complex
product such as a volatility-linked ETP, an
associated person should be capable of explaining,
at a minimum, the product’s main features and
associated risks.’’); FINRA Regulatory Notice 12–03,
Complex Products—Heightened Supervision of
Complex Products (Jan. 2012) (stating that
‘‘Reasonable diligence must provide the firm or
registered representative ‘with an understanding of
the potential risks and rewards associated with the
recommended security or strategy.’ This
understanding should be informed by an analysis
of likely product performance in a wide range of
normal and extreme market actions. The lack of
such an understanding when making the
recommendation could violate the suitability rule.’’)
(internal citations omitted).
599 See related discussion in Section II.C.2.c,
Retail Customer Investment Profile.
600 See, e.g., FINRA Rule 2330, Members
Responsibilities Regarding Deferred Variable
Annuities; FINRA Rule 2320, Variable Contracts of
Insurance Companies; FINRA Regulatory Notice
10–05, Deferred Variable Annuities—FINRA
Reminds Firms of Their Responsibilities Under
FINRA Rule 2330 for Recommended Purchases or
Exchange of Deferred Variable Annuities (Jan.
2010); SEC Updated Investor Bulletin: Variable
Annuities (Oct. 30, 2018); SEC Investor Bulletin:
Variable Life Insurance (Oct. 30, 2018).
601 See id. See also Updated Disclosure
Requirements and Summary Prospectus for Variable
598 See,

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existing FINRA rules and existing
suitability obligations under the federal
securities laws and SRO rules,
regulators and their staffs have stated
that recommendations of these products
would require careful attention and a
specific understanding of certain
factors, such as whether the product
provides tax-deferred growth, or a death
or living benefit, before a broker-dealer
could establish an understanding of the
product, and apply that understanding
to a retail customer’s investment profile
in making a recommendation.
While we stress the importance of
understanding the potential risks,
rewards, and costs associated with a
recommended security or investment
strategy, as well as other factors
depending on the facts and
circumstances of each recommendation,
we do not intend to limit or foreclose
broker-dealers from recommending
complex or more costly products or
investment strategies where the brokerdealer has a reasonable basis to believe
that a recommendation could be in the
best interest of at least some retail
customers and the broker-dealer has
developed a proper understanding of
the recommended product or
investment strategy. As discussed
below, once a broker-dealer develops an
appropriate understanding of a
securities product or investment
strategy, including its potential costs,
and believes it could be in the best
interest of at least some retail customers,
the broker-dealer will then need to
apply that understanding to reasonably
determine that the recommended
product or investment strategy is in the
particular retail customer’s best interest
at the time of the recommendation.

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c. Have a Reasonable Basis To Believe
the Recommendation Is in the Best
Interest of a Particular Retail Customer
Based on That Retail Customer’s
Investment Profile and the Potential
Risks, Rewards, and Costs Associated
With the Recommendation and Does
Not Place the Interest of the BrokerDealer Ahead of the Interest of the Retail
Customer
In the Proposing Release, we stated
that beyond establishing an
understanding of the recommended
securities transaction or investment
strategy, in order to act in the best
interest of the retail customer, a brokerdealer would be required to have a
reasonable basis to believe that a
specific recommendation is in the best
Annuity and Variable Life Insurance Contracts,
Investment Advisers Act Release No. 10569 (Oct.
30, 2018) [83 FR 61730 (Nov. 30, 2018)] (‘‘VA
Summary Prospectus Proposal’’).

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interest of the particular retail customer
based on its understanding of the
investment or investment strategy under
Paragraph (a)(2)(ii)(A), and in light of
the retail customer’s investment
objectives, financial situation, and
needs. Accordingly, under proposed
paragraph (a)(2)(ii)(A), the second subcomponent of the Care Obligation
would require a broker-dealer to
‘‘exercise reasonable diligence, care,
skill, and prudence to . . . have a
reasonable basis to believe that the
recommendation is in the best interest
of a particular retail customer based on
that retail customer’s investment profile
and the potential risks and rewards
associated with the recommendation.’’
In the Proposing Release, the
Commission further articulated that
under this standard, a broker-dealer
could not have a reasonable basis to
believe that the recommendation is in
the ‘‘best interest’’ of the retail
customer, if the broker-dealer put its
interest ahead of the retail customer’s
interest. This was intended to
incorporate a broker-dealer’s existing
well-established obligations under
‘‘customer-specific suitability,’’ but also
to enhance these obligations by
requiring that the broker-dealer have a
reasonable basis to believe that the
recommendation is in the ‘‘best
interest’’ of (rather than ‘‘suitable for’’)
the retail customer.
Commenters largely supported the
Commission’s proposed approach, but
several commenters requested clarifying
guidance regarding the importance of
costs and other specific factors in a
‘‘best interest’’ evaluation, as well as
more broadly how ‘‘best interest’’ was to
be determined.602 For example, several
commenters requested additional
guidance on the role of costs and other
‘‘relevant factors,’’ including subjective
and qualitative factors such as
shareholder support services,
redemption procedures, or
qualifications of the investment
adviser.603 Similarly, several
commenters asked for clarification that
‘‘best interest’’ does not necessarily
mean the lowest cost option or require
the broker-dealer to look at every single
possible security.604 Commenters also
requested further direction regarding
guidance in the Proposing Release
related to the consideration of
‘‘reasonably available alternatives’’ and
‘‘otherwise identical securities,’’ and
602 See, e.g., Wells Fargo Letter; Primerica Letter;
Great-West Letter; NASAA August 2018 Letter;
Cambridge Letter; BlackRock Letter.
603 See Chapman Letter; BlackRock Letter;
Vanguard Letter; ICI Letter; Morgan Stanley Letter.
604 See Great-West Letter; SIFMA August 2018
Letter.

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requested certain modifications to the
definition of ‘‘Retail Customer
Investment Profile.’’ 605
After careful consideration of these
comments, for the reasons set forth in
the Proposing Release, the Commission
is adopting the ‘‘customer specific’’
component of the Care Obligation
substantially as set forth in the
Proposing Release. However, as
included under the reasonable basis
component of the Care Obligation and
for the reasons discussed above, the
Commission is expressly incorporating
‘‘costs’’ into the rule text to emphasize
that broker-dealers must consider the
potential costs associated with a
recommendation to a particular retail
customer.
As noted above, the Commission is
also incorporating into the rule text that
broker-dealers must have a reasonable
basis to believe that the
recommendation ‘‘does not place the
financial or other interest of the brokerdealer ahead of the interest of the retail
customer.’’ 606 This addition is intended
to make clear that while a broker-dealer
typically will have some interest in a
recommendation, the broker-dealer
cannot put that interest ahead of the
retail customer’s interest when making
the recommendation.
To address feedback from
commenters, the Commission is also
providing further interpretations and
guidance regarding the application of
the Care Obligation, and in particular,
what it means to make a
recommendation in a retail customer’s
best interest and not place the brokerdealer’s interest ahead of the retail
customer’s interest. Specifically,
recognizing that a facts and
circumstances evaluation of a
recommendation makes it difficult to
draw bright lines around whether a
particular recommendation would meet
the Care Obligation, the Commission is
providing further interpretations and
guidance on how a broker-dealer could
have a ‘‘reasonable basis to believe’’ that
a recommendation is in the best interest
of its retail customer and does not place
the broker-dealer’s interest ahead of the
retail customer’s interest, as well as
circumstances when we believe that a
broker-dealer could not have such a
reasonable belief.
605 See, e.g., Committee of Annuity Insurers
Letter; Guardian August 2018 Letter; IPA Letter;
Morgan Stanley Letter; Invesco Letter; CFA August
2018 Letter.
606 See related discussion in Section II.A.2; see
also Fiduciary Interpretation.

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Factors To Consider Regarding a
Recommendation to a Particular Retail
Customer and Relevance of Cost
Consistent with paragraph (a)(2)(ii)(A)
of the Care Obligation, we are
incorporating ‘‘costs’’ in the rule text of
paragraph (a)(2)(ii)(B) of Regulation Best
Interest as a relevant factor that, in
addition to risks and rewards, must
always be understood and considered
by the broker-dealer prior to
recommending a particular securities
transaction or investment strategy
involving securities to a particular retail
customer. As discussed above, under
paragraph (a)(2)(ii)(A) of the Care
Obligation, a broker-dealer will be
required to exercise reasonable
diligence, care, and skill to understand
the potential risks, rewards, and costs of
a recommended security or investment
strategy and have a reasonable basis to
believe that it could be in the best
interest of at least some retail
customers.607 Paragraph (a)(2)(ii)(B) of
the Care Obligation builds on this
obligation and will require a brokerdealer to have a reasonable basis to
believe, based on its understanding of
the potential risks, rewards, and costs of
the recommendation, and in light of the
retail customer’s investment profile, that
the recommendation is in the best
interest of a particular retail customer
and does not place the broker-dealer’s
interest ahead of the retail customer’s
interest. Accordingly, when making a
recommendation to a particular retail
customer, broker-dealers must weigh the
potential risks, rewards, and costs of a
particular security or investment
strategy, in light of the particular retail
customer’s investment profile. As
discussed above,608 a broker-dealer’s
diligence, care, and skill to understand
the potential risks, rewards, and costs of
a security or investment strategy should
generally involve a consideration of
factors, depending on the facts and
circumstances of the particular
recommendation and the particular
retail customer’s investment profile, as
discussed below.
While the factors noted above are
examples of important factors to
consider based on the particular
security or investment strategy, this list
is not exhaustive and additional factors,
including those raised by commenters,
could be relevant depending on the
particular security or investment
strategy being recommended and
depending on the particular retail
customer’s investment profile. For
example, prior to recommending a
607 See

Proposing Release at 21610–21611.
related discussion in Section II.C.2.a and
Section II.C.2.b.
608 See

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variable annuity to a particular retail
customer, broker-dealers should
generally develop a reasonable basis to
believe that the retail customer will
benefit from certain features of deferred
variable annuities, such as tax-deferred
growth, annuitization, or a death or
living benefit.609
As stated in the Proposing Release,
the importance of each factor in
determining the customer-specific
component of the Care Obligation will
depend on the facts and circumstances
of each recommendation. Thus, one or
more factors may have more or less
relevance—or may not be obtained or
analyzed at all—if the broker-dealer has
a reasonable basis for determining that
the factors are not relevant. Regardless
of which factors are evaluated—and
equally important, which factors are not
evaluated—a broker-dealer must have a
reasonable basis to believe that the
particular recommendation is in the best
interest of the particular retail customer
and does not place the broker-dealer’s
interest ahead of the retail customer’s
interest, consistent with the
interpretations and guidance provided.
For example, recommendations of the
‘‘lowest cost’’ security or investment
strategy, without consideration of other
factors, could violate Regulation Best
Interest. In the same vein, it is important
to consider that a recommendation may
be considered to be in a retail
customer’s best interest when viewed in
the context of the retail customer’s
portfolio even if seemingly not in a
retail customer’s best interest when
viewed in isolation (e.g., inclusion of
what otherwise might be seen as a risky
investment in the portfolio of a riskadverse customer, such as including
hedging instruments in a conservative
portfolio).
The customer-specific component of
the Care Obligation will rest on whether
a broker-dealer had a reasonable basis to
believe that the recommendation was in
the best interest of the particular retail
customer at the time of the
recommendation, based on that retail
customer’s investment profile and the
potential risks, rewards, and costs
associated with the recommendation,
and did not place the financial or other
interest of the broker, dealer, or such
natural person ahead of the interest of
the retail customer. Thus, as discussed
further below, the importance of each
factor, and which factors to consider,
will depend on the facts and
circumstances of each recommendation,
609 Cf. also FINRA Rule 2330, Members’
Responsibilities Regarding Deferred Variable
Annuities. See Transamerica November 2018 Letter.

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as well as the specific security or
investment strategy.
While the Care Obligation does not
require broker-dealers to document the
basis for a recommendation, brokerdealers may choose to take a risk based
approach when deciding whether or not
to document certain recommendations.
For example, broker-dealers may wish
to document an evaluation of a
recommendation and the basis for the
particular recommendation in certain
contexts, such as the recommendation
of a complex product, or where a
recommendation may seem inconsistent
with a retail customer’s investment
objectives on its face.610 Similarly,
broker-dealers may consider using
existing compliance measures, such as
generating and reviewing exception
reports that identify transactions that
fall outside of firm-specified parameters
to help evaluate and review for
compliance with the Care Obligation.
These measures are not meant to be
exhaustive, but rather are examples of
the sorts of compliance tools and
methods broker-dealers should
generally consider using in evaluating
whether recommendations are
consistent with a retail customer’s best
interests.
Retail Customer Investment Profile
The Proposing Release would have
required a ‘‘Retail Customer Investment
Profile’’ to include, but not be limited
to, ‘‘the retail customer’s age, other
investments, financial situation and
needs, tax status, investment objectives,
investment experience, investment time
horizon, liquidity needs, risk tolerance,
and any other information the retail
customer may disclose to the broker,
dealer, or a natural person who is an
associated person of a broker or dealer
in connection with a
recommendation.’’ 611 The Proposing
Release also explained that brokerdealers would be required to exercise
‘‘reasonable diligence’’ to ascertain the
610 See FINRA Regulatory Notice 11–25 at FAQ 2
(explaining that FINRA Rule 2111 (Suitability)
permits firms to take a risk-based approach with
respect to documenting suitability determinations).
Regulation Best Interest similarly does not require
documentation; however, as noted above, we
encourage broker-dealers to take a risk-based
approach when deciding whether or not to
document certain recommendations.
611 Proposing Release at 21611 (noting the
proposed definition of Retail Customer Investment
Profile was consistent with FINRA Rule 2111(a)
(Suitability), which provides that ‘‘A customer’s
investment profile includes, but is not limited to,
the customer’s age, other investments, financial
situation and needs, tax status, investment
objectives, investment experience, investment time
horizon, liquidity needs, risk tolerance, and any
other information the customer may disclose to the
member or associated person in connection with
such recommendation’’).

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retail customer’s investment profile as
part of satisfying proposed paragraph
(a)(2)(i)(B), and that when retail
customer information is unavailable
despite a broker-dealer’s reasonable
diligence to obtain such information, a
broker-dealer should consider whether
it has sufficient understanding of the
retail customer to properly evaluate
whether the recommendation is in the
retail customer’s best interest.612
Furthermore, under the proposed rule, a
broker-dealer would not meet its Care
Obligation if it made a recommendation
to a retail customer for whom it lacks
sufficient information to have a
reasonable basis to believe that the
recommendation is in the best interest
of that retail customer based on such
customer’s investment profile.
In response to this definition and the
related discussion, commenters
identified several additional factors that
they believed should be included or
discussed as part of a retail customer’s
investment profile. For example, several
commenters suggested adding
‘‘longevity risk,’’ ‘‘retirement income
needs,’’ or ‘‘lifetime income needs’’ as
factors that should be included as part
of an investor’s investment profile.613
Other commenters suggested additional
factors, such as, for trust accounts,
considering the profile of trust
beneficiaries and not the trustee, or
adding a retail customer’s ‘‘income
profile.’’ 614
While we agree that many of these
factors will likely be relevant to a
broker-dealer’s recommendation of
various securities or investment
strategies involving securities, we are
adopting the definition of ‘‘retail
customer investment profile’’ as
proposed. We believe that the list of
factors under ‘‘retail customer
investment profile’’ is widely
understood and importantly, offers
612 Id. This is similar to the approach articulated
below, as well as in FINRA Regulatory Notice 12–
25, which outlines what constitutes ‘‘reasonable
diligence’’ under FINRA’s suitability rule in
attempting to obtain customer-specific information
and that the reasonableness of the effort also will
depend on the facts and circumstances. See FINRA
Regulatory Notice 12–25 at Q16. Moreover, under
Regulation Best Interest, as with the approach
under FINRA’s suitability rule, broker-dealers may
generally rely on a retail customer’s responses
absent ‘‘red flags’’ indicating that the information is
inaccurate. Id.
613 See, e.g., IRI Letter, The Committee of Annuity
Insurers Letter, CCMC Letters, Jackson National
Letter, Pacific Life August 2018 Letter, Lincoln
Financial Letter, AXA Letter, Principal Letter;
Transamerica November 2018 Letter; Letter from
Mark F. Halloran, VP Managing Director, Business
Development, Transamerica (Dec. 14, 2018)
(‘‘Transamerica December 2018 Letter’’).
614 See, e.g., Jackson National Letter, Lincoln
Financial Letter; Transamerica December 2018
Letter.

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broker-dealers the flexibility to consider
additional factors as deemed
necessary.615 Although many of the
additional factors cited by commenters
may be relevant to securities or
investment strategy recommendations
under certain facts and circumstances,
we are not persuaded that we should
add any specific factor or factors to the
existing list of profile factors,
particularly given that the list of factors
is non-exhaustive and broker-dealers
can consider additional factors as
appropriate under the unique facts and
circumstances of each recommendation.
Thus, for example, where a brokerdealer making a variable annuity
recommendation believes that longevity
risk is an important factor for a
particular retail customer and that such
factor is necessary to develop a
reasonable basis to believe that the
product is in the best interest of that
retail customer, that broker-dealer
should consider and utilize that
factor.616 We believe that this approach
appropriately provides broker-dealers
with a well-understood starting
framework, but also gives broker-dealers
the ability to consider additional factors
based on the unique nature of its
particular securities products,
investment strategies, and retail
customers.
Broker-dealers must obtain and
analyze enough customer information to
have a reasonable basis to believe that
the recommendation is in the best
interest of the particular retail customer.
The significance of specific types of
customer information generally will
depend on the facts and circumstances
of the particular case, including the
nature and characteristics of the product
or strategy at issue. Where retail
customer information is unavailable
despite a broker-dealer’s reasonable
diligence, the broker-dealer should
carefully consider whether it has a
sufficient understanding of the retail
customer to properly evaluate whether
the recommendation is in the best
interest of that retail customer.617 In
addition, a broker-dealer generally
should make a reasonable effort to
ascertain information regarding an
existing customer’s investment profile
prior to the making of a
recommendation on an ‘‘as needed’’
basis—that is, where a broker-dealer
knows or has reason to believe that the
customer’s investment profile has
615 See, e.g., CCMC Letters; Jackson National
Letter; Pacific Life August 2018 Letter; Committee
of Annuity Insurers Letter; AXA Letter.
616 See, e.g., AXA Letter; Committee of Annuity
Insurers Letter; Pacific Life August 2018 Letter.
617 See supra footnotes 611–612 and
accompanying text.

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changed.618 The reasonableness of a
broker-dealer’s efforts to collect
information regarding a customer’s
investment profile information depends
on the facts and circumstances of a
given situation, and the importance of
each factor may vary depending on the
facts and circumstances of the particular
case.619 Under Regulation Best Interest,
as with the approach under FINRA’s
suitability rule, broker-dealers may
generally rely on a retail customer’s
responses absent ‘‘red flags’’ indicating
that the information is inaccurate.620
Moreover, as noted in the Proposing
Release, one or more factors may have
more or less relevance, or may not be
obtained or analyzed at all if the brokerdealer has a reasonable basis for
determining that the factor is irrelevant
to that particular best interest
determination. However, consistent
with existing obligations, where a
broker-dealer determines not to obtain
or analyze one or more of the factors
specifically identified in the definition
of ‘‘Retail Customer Investment Profile,’’
the broker-dealer should document its
determination that the factor(s) are not
relevant components of a retail
customer’s investment profile in light of
the facts and circumstances of the
particular recommendation.621
Regulation Best Interest, as noted
above, does not require documentation
of the basis for believing a particular
recommendation was in a particular
retail customer’s best interest.622
Nevertheless, broker-dealers may wish
to consider documenting the basis for
determining that the recommendation is
in the best interest of the retail customer
when it is not evident from the
recommendation itself.623
Documentation by itself will not cure a
recommendation in circumstances in
which a broker-dealer could not have
reasonably believed the
recommendation was in the best interest
of the retail customer at the time the
recommendation was made.624
618 See id.; see also Proposing Release at 21611–
21612.
619 See id.; see also FINRA Regulatory Notice 12–
25 at Q16.
620 See supra footnote 612.
621 FINRA Rule 2111.04.
622 As discussed in Section II.C.1, we believe that
the basis for and risks associated with a brokerdealer’s recommendations in standardized terms (as
opposed to individualized disclosure of the basis
for each recommendation made) is a material fact
relating to the scope and terms of the relationship
that is required to be disclosed under the Disclosure
Obligation.
623 See supra footnote 610 and accompanying
text.
624 See FINRA Rule 2111 (Suitability) FAQ.

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Application of the Care Obligation—
Reasonably Available Alternatives and
Otherwise Identical Securities
In the Proposing Release, we provided
guidance on what types of
recommendations would or would not
be in the best interest of a particular
retail customer. In particular, the
Proposing Release stated that where a
broker-dealer is choosing among
identical securities available to the
broker-dealer, it would be inconsistent
with the Care Obligation to recommend
the more expensive alternative for the
customer.625 Similarly, in the Proposing
Release, we noted our belief that it
would be inconsistent with the Care
Obligation if the broker-dealer made a
recommendation to a retail customer in
order to: Maximize the broker-dealer’s
compensation, further the brokerdealer’s business relationships, satisfy
firm sales quotas or other targets, or win
a firm-sponsored sales contest.626
We also stated that under the Care
Obligation a broker-dealer generally
should consider reasonable alternatives,
if any, offered by the broker-dealer in
determining whether it has a reasonable
basis for making the
recommendation.627 The Proposing
Release explained that this approach
would not require a broker-dealer to
analyze all possible securities, all other
products, or all investment strategies to
recommend the single ‘‘best’’ security or
investment strategy for the retail
customer, nor necessarily require a
broker-dealer to recommend the least
expensive or least remunerative security
or investment strategy. Further, the
Proposing Release indicated that under
the Care Obligation, when a brokerdealer recommends a more expensive
security or investment strategy over
another reasonably available alternative
offered by the broker-dealer, the broker
dealer would need to have a reasonable
basis to believe that the higher cost is
justified (and thus nevertheless is in the
retail customer’s best interest) based on
other factors (e.g., the product’s or
strategy’s investment objectives,
characteristics (including any special or
unusual features), liquidity, risks and
potential benefits, volatility and likely
performance in a variety of market and
economic conditions), in light of the
retail customer’s investment profile.628
625 Proposing

Release at 21612.

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626 Id.
627 Proposing

Release at 21608–21610.
Release at 21612 (emphasis in
original). We similarly noted that ‘‘when a brokerdealer recommends a more remunerative security or
investment strategy over another reasonably
available alternative offered by the broker-dealer,
the broker-dealer would need to have a reasonable
basis to believe that—putting aside the broker628 Proposing

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Relatedly, we stated that a broker-dealer
could not meet the Care Obligation
through disclosure alone.629
The Commission received numerous
comments relating to the Proposing
Release’s discussion of ‘‘reasonably
available alternatives’’ and regarding
recommendations of ‘‘otherwise
identical securities.’’ 630 For example,
commenters sought clarification
regarding what factors need to be
considered in the evaluation, and also
how the evaluation could be performed
in certain contexts, such as where a
broker-dealer operates with an open
architecture framework, recommends
only a limited menu of products, or
recommends only proprietary
products.631 A majority of the IAC
recommended that Regulation Best
Interest should be clarified to require
recommendations of ‘‘the investments,
investment strategies, accounts, or
services, from among those that [the
broker-dealers, investment advisers, and
their associated persons] have
reasonably available to recommend, that
they reasonably believe represent the
best available options for the investor’’
and that a ‘‘determination regarding the
best reasonably available options should
be based on a careful review of the
investor’s needs and goals, as well as
the full range of the reasonably available
products’, strategies’, accounts’, or
services’ features, including, but by no
dealer’s financial incentives—the recommendation
was in the best interest of the retail customer based
on the factors noted [therein], in light of the retail
customer’s investment profile. Nevertheless, this
does not mean that a broker-dealer could not
recommend the more remunerative of two
reasonably available alternatives, if the brokerdealer determines the products are otherwise both
in the best interest of—and there is no material
difference between them from the perspective of—
the retail customer, in light of the retail customer’s
investment profile.’’ Id. (emphasis in original).
629 Id. at 21612–21613 (further explaining that
‘‘where a broker-dealer is choosing among identical
securities with different cost structures, we believe
it would be inconsistent with the best interest
obligation for the broker-dealer to recommend the
more expensive alternative for the customer, even
if the broker-dealer had disclosed that the product
was higher cost and had policies and procedures
reasonably designed to mitigate the conflict under
the Conflict of Interest Obligation, as the brokerdealer would not have complied with the Care
Obligation. Such a recommendation, disclosure
aside, would still need to be in the best interest of
a retail customer, and we do not believe it would
be in the best interest of a retail customer to
recommend a higher-cost product if all other factors
are equal.’’) (internal citations omitted).
630 See, e.g., Fidelity Letter; Vanguard Letter; MMI
Letter; BlackRock Letter.
631 See, e.g., CFA August 2018 Letter; Wells Fargo
Letter; Fidelity Letter; Morgan Stanley Letter. See
also LPL August 2018 Letter (suggesting that its
representatives could not conduct a meaningful
comparison across ‘‘all similar available securities’’
and that, such recommendations would be subject
to legal challenges in hindsight).

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means limited to cost.’’ 632 Several other
commenters recommended that the
Commission confirm that Regulation
Best Interest will not require brokerdealers to offer an unlimited number of
securities or investment strategies.633
Commenters also expressed concern
over whether the consideration of
‘‘reasonably available alternatives’’
would effectively require a brokerdealer to document the basis of any
recommendation, as well as concerns
about disclosure’s role in satisfying the
Care Obligation.634 Finally, a majority of
the IAC and other commenters sought
clarification on whether broker-dealers
were required to recommend only the
single ‘‘best’’ product.635
The Care Obligation will require a
broker-dealer to have a reasonable basis
to believe, based on its understanding of
the potential risks, rewards, and costs of
the recommended security or
investment strategy involving securities,
and in light of the retail customer’s
investment profile, that the
recommendation is in the best interest
of a particular retail customer and does
not place the broker-dealer’s interest
ahead of the retail customer’s interest.
As noted above, determining what is in
a retail customer’s best interest is an
objective evaluation turning on the facts
and circumstances of the particular
recommendation and the particular
retail customer at the time the
recommendation is made.636
Accordingly, as noted above, a brokerdealer would not satisfy the Care
Obligation by simply recommending the
least expensive or least remunerative
632 IAC 2018 Recommendation (emphasis in
original).
633 See LPL August 2018 Letter (recommending
that the Commission clarify that a financial
professional can satisfy his or her obligations under
Regulation Best Interest, even if he or she limits
recommendations to a smaller number of product
sponsors because financial professionals
participating on large platforms may, in practice, be
discouraged from conducting focused analysis of
product offerings, instead opting for a more cursory
review of a few high-level cost, risk, and
performance metrics across all available products).
See also Fidelity Letter; Cetera August 2018 Letter;
SIFMA August 2018 Letter; Guardian August 2018
Letter; Prudential Letter.
634 See, e.g., Fidelity Letter; Wells Fargo Letter.
635 See 2018 IAC Recommendation (‘‘The
Commission should recognize that there will often
not be a single best option and that more than one
of the available options may satisfy this standard,’’
and that ‘‘compliance should be measured based on
whether the broker or adviser had a reasonable
basis for the recommendation at the time it was
made, and not on how the recommendation
ultimately performed for the investor. . . .’’); see
also SIFMA August 2018 Letter.
636 As noted and further reiterated below, a
broker-dealer will not be required to recommend
the single ‘‘best’’ of all possible alternatives that
might exist, in part because many different options
may in fact be in the retail customer’s best interest.
See infra footnote 640 and accompanying text.

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Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations
security without any further analysis of
these other factors and the retail
customer’s investment profile. A brokerdealer could recommend a more
expensive security or investment
strategy if there are other factors about
the product that reasonably allow the
broker-dealer to believe it is in the best
interest of the retail customer, based on
that retail customer’s investment profile.
Similarly, a broker-dealer could
recommend a more remunerative
security or investment strategy if the
broker-dealer has a reasonable basis to
believe that there are other factors about
the security or investment strategy that
make it in the best interest of the retail
customer, in light of the retail
customer’s investment profile.
We also continue to have the view
that, as part of determining whether a
broker-dealer has a reasonable basis to
believe that a recommendation is in the
best interest of the retail customer, a
broker-dealer generally should consider
reasonably available alternatives offered
by the broker-dealer. It is our view that
such a consideration is an inherent
aspect of making a ‘‘best interest’’
recommendation, and is a key
enhancement over existing brokerdealer suitability obligations, which do
not necessarily require a comparative
assessment among such alternatives.637
Similarly, this concept has been applied
in the context of guidance regarding
suitability and heightened supervision
of complex products, stating that when
broker-dealers are recommending
complex or costly products, they should
first consider whether less complex or
costly products could achieve the same
objectives for their retail customers.638

In terms of conducting such an
evaluation, a broker-dealer does not
have to conduct an evaluation of every
possible alternative, either offered
outside of the firm (such as where the
firm offers only proprietary or other
limited range of products) or available
on the firm’s platform. We appreciate
commenter concerns about the
impracticality and potential
impossibility of such a comparative
evaluation, particularly where the firm
offers numerous different products,
many of which may have similar
strategies but with other varying
characteristics, including cost
structures, that may apply differently
based on the particular retail
customer.639 We also recognize that
different products are rarely perfectly
equal, and that differences will be both
quantitative and qualitative in nature. A
broker-dealer will not be required to
recommend the single ‘‘best’’ of all
possible alternatives that might exist, in
part because many different options
may in fact be in the retail customer’s
best interest.640 We are sensitive to
commenters’ concern that this
determination, to the extent it can be
made at all, may be judged in hindsight
even though Regulation Best Interest
applies at the time of the
recommendation.641
In particular, we are not requiring a
natural person who is an associated
person of the broker-dealer to be
familiar with every product on a brokerdealer’s platform, particularly where a
broker-dealer operates in an open
architecture framework or otherwise
operates a platform with a large number
of products or options.642 Such a

637 While enforcement actions and related
guidance may be construed as interpreting the
suitability obligation to include a consideration of
available alternatives, it is generally limited to
certain circumstances, such as recommendations of
mutual funds with different share classes or
recommendations of complex or costly products.
See In re Application of Raghavan Sathianathan,
Exchange Act Release No. 54722 at 21 (Nov. 8,
2006); In the Matter of Wendell D. Belden, 56 S.E.C.
496 (2003); FINRA Regulatory Notice 12–03. See
also FINRA 2018 Letter; MSRB Rule G–42
(requiring a municipal advisor to inform its
municipal entity or obligated person client whether
it has investigated or considered other reasonably
feasible alternatives to the recommended municipal
securities transaction).
Thus, although certain enforcement actions and
guidance contemplate a consideration of available
alternatives under certain situations, it is not a
general expectation. Nevertheless, such statements
serve as an example and evidence that the concept
is not unfamiliar to broker-dealers.
638 See FINRA Regulatory Notice 12–03 (‘‘For
example, registered representatives should compare
a structured product with embedded options to the
same strategy through multiple financial
instruments on the open market, even with any
possible advantages of purchasing a single
product.’’). See also supra footnote 635.

639 See, e.g., Morgan Stanley Letter (‘‘Large firms
with an open architecture like Morgan Stanley offer
an enormous range of products to their clients. To
take but one example, Morgan Stanley offers
approximately 300 large capitalization equity
mutual funds to its retail customers.’’); see also
Morningstar Letter; Primerica Letter; ICI Letter;
Chapman Letter (stating that ‘‘identical’’ is too
stringent because they believe all securities have
distinctions).
640 Commenters suggesting different approaches
acknowledged this concern. See, e.g., IAC 2018
Recommendation (‘‘[T]he Commission should
recognize there will often not be a single best option
and that more than one of the available options may
satisfy this standard.’’).
641 See LPL August 2018 Letter.
642 Conversely, where a broker-dealer only has a
few products, an associated person of the brokerdealer may be expected to understand and consider
all of these options when recommending a security
or investment strategy. We recognize that this factsand-circumstances approach does not provide a
clear bright-line rule; however, we are providing
further guidance below on a broker-dealer’s process
for evaluating reasonably available alternatives and
the scope herein. Furthermore, nothing in this
discussion excuses a broker-dealer from satisfying
the Care Obligation. An associated person of the
broker-dealer cannot use a large platform as an

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requirement might not allow an
associated person of a broker-dealer to
develop a proper understanding of every
security or investment strategy’s
potential risks, rewards, or costs, and
thus it might not be possible to fulfill
the obligation set forth in paragraph
(a)(2)(ii)(A). Furthermore, such a
requirement could encourage brokerdealers to limit their product menus or
otherwise restrict access to products and
services currently available to retail
customers, which is contrary to the
purpose and goals of Regulation Best
Interest.643
As discussed above, the
determination of whether a
recommendation is in the ‘‘best
interest’’ of the retail customer and does
not place the interests of the brokerdealer ahead of the retail customer’s
interest must be based on information
reasonably known to the associated
person (based on her reasonable
diligence, care, and skill) at the time the
recommendation is made. Accordingly,
in fulfilling the Care Obligation, the
associated person should exercise
reasonable diligence, care, and skill to
consider reasonably available
alternatives offered by the broker-dealer.
This exercise would require the
associated person to conduct a review of
such reasonably available alternatives
that is reasonable under the
circumstances. Consistent with the
Compliance Obligation discussed
below, a broker-dealer should have a
reasonable process for establishing and
understanding the scope of such
‘‘reasonably available alternatives’’ that
would be considered by particular
associated persons or groups of
associated persons (e.g., groups that
specialize in particular product lines) in
fulfilling the reasonable diligence, care,
and skill requirements under the Care
Obligation.
What will be a reasonable
determination of the scope of
alternatives considered will depend on
the facts and circumstances, at the time
of the recommendation, including both
the nature of the retail customer and the
retail customer’s investment profile, and
the particular associated persons or
groups of associated persons that are
providing the recommendations. With
respect to broker-dealers that materially
limit the range of products or services
that they recommend to retail customers
(e.g., limits its product offerings to only
proprietary or other limited menus of
products), the Conflict of Interest
excuse for not developing a proper understanding
of a recommended security or investment strategy’s
potential risks, rewards, or costs.
643 See LPL August 2018 Letter.

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Obligation provision requires brokerdealers to have reasonably designed
policies and procedures to identify and
disclose the material limitations and
any conflicts of interest associated with
such limitations, and to prevent such
limitations and associated conflicts of
interest from causing the broker-dealer
or associated person to make
recommendations that place the interest
of the broker-dealer or associated person
ahead of the interest of the retail
customer.644 Similarly, where a brokerdealer offers numerous products on its
platform, a broker-dealer or an
associated person could reasonably
limit the universe of ‘‘reasonably
available alternatives’’ if there is a
reasonable process or methodology for
limiting the scope of alternatives or the
universe considered for a particular
retail customer, particular category of
retail customers, or the retail customer
base more generally.645
In addition to the particular retail
customer’s investment profile, we
believe the scope of reasonably available
alternatives considered could depend
upon a variety of factors, including but
not limited to, the associated person’s
customer base (including the general
investment objectives and needs of the
customer base), the investments and
services available to the associated
person to recommend (including
limitations due to licensing of the
associated person), and other factors
such as specific limitations on the
available investments and services with
respect to certain retail customers (e.g.,
product or service income thresholds;
product geographic limitations; or
product limitations based on account
type, such as those only eligible for IRA
accounts). A reasonable process would
not need to consider every alternative
that may exist (either outside the brokerdealer or on the broker-dealer’s
platform) or to consider a greater
number of alternatives than is necessary
in order for the associated person to
exercise reasonable diligence, care, and
skill in providing a recommendation
that complies with the Care Obligation.
644 See Section II.C.3. Broker-dealers would be
required to disclose the conflict of interest, as well
as the material facts associated with such a conflict
pursuant to the Disclosure Obligation provision as
described in Section II.C.1.
645 We note that where a broker-dealer (or an
associated person) limits the securities or
investment strategies that are considered as
‘‘reasonably available alternatives’’ from the
universe of securities or investment strategies
involving securities offered by the broker-dealer,
this limitation may constitute a material limitation
placed on the securities or investment strategies
involving securities that may be recommended,
which the broker-dealer (or an associated person)
would need to disclose and address as provided in
the Disclosure and Conflict of Interest Obligations.

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Importantly, where all reasonably
available alternatives considered would
be inconsistent with a retail customer’s
investment profile, a broker-dealer
would not be able to form a reasonable
belief that the best of these options is in
the best interest of that retail customer.
All recommendations to retail
customers of securities or investment
strategies are required to satisfy the Care
Obligation, and broker-dealers cannot
use a limited product menu or a process
to determine the scope of reasonably
available alternatives considered to
justify a recommendation that is not in
the best interest of the retail customer.
We recognize that the process by
which a broker-dealer and its associated
persons develop and make
recommendations to retail customers,
including the scope of reasonably
available alternatives considered, will
depend upon a variety factors, including
the nature of the broker-dealer’s
business.646 The disclosure of this
process pursuant to the Disclosure
Obligation will provide critical
information to retail customers and
underscores our acknowledgment that
we do not expect every broker-dealer or
associated person to follow the same
process. Instead, consistent with the
Compliance Obligation, broker-dealers
and their associated persons must have
a reasonable process for developing and
making recommendations to retail
customers in compliance with the Care
Obligation, including the consideration
of reasonably available alternatives,
which will depend on the facts and
circumstances.
We emphasize that what is in the
‘‘best interest’’ of a retail customer
depends on the facts and circumstances
of a recommendation at the time it is
made, including matching the
recommended security or investment
strategy to the retail customer’s
investment profile at the time of the
recommendation, and the process for
coming to that conclusion. Whether a
broker-dealer has complied with the
Care Obligation will be evaluated based
on the facts and circumstances at the
time of the recommendation (and not in
hindsight) and will focus on whether
646 Accordingly, we believe that disclosure of this
process is of fundamental importance to a retail
customer’s understanding of what services are being
provided, and in deciding whether those services
are appropriate to the retail customer’s needs and
goals, and have thus clarified that the basis for a
broker-dealer’s or an associated person’s
recommendations as a general matter (i.e., what
might commonly be described as the firm’s or
associated person’s investment approach,
philosophy or strategy) is a material fact relating to
the scope and terms of the relationship that must
be disclosed pursuant to the Disclosure Obligation.
See Section II.C.1.

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the broker-dealer had a reasonable basis
to believe that the recommendation is in
best interest of the retail customer.
Finally, broker-dealers or their
associated persons are not required to
prepare and maintain documentation
regarding the basis for each specific
recommendation, including an
evaluation of a recommended securities
transaction or investment strategy
against similar available alternatives. In
circumstances where the ‘‘match’’
between the retail customer profile and
the recommendation appears less
reasonable on its face (for example,
where a retail customer’s account
objective is preservation of income and
the recommendation involves higher
risk, or where there are more significant
conflicts of interest present), the more
important the process will likely be for
a broker-dealer to establish that it had
a reasonable belief that the
recommendation was in the best interest
of the retail customer and did not place
the broker-dealer’s interest ahead of the
retail customer. This could include
reasonably designed policies and
procedures to establish compliance with
the Care Obligation, as required by the
new Compliance Obligation, and could
include maintaining supporting
documentation for certain
recommendations.647
Application of Care Obligation to
Account Type Recommendations
As discussed above, Regulation Best
Interest will apply to recommendations
by a broker-dealer of a securities
account type. Thus, the Care Obligation
will require a broker-dealer to have a
reasonable basis to believe that a
recommendation of a securities account
type (e.g., brokerage or advisory, or
among the types of accounts offered by
the firm) is in the retail customer’s best
interest at the time of the
recommendation and does not place the
financial or other interest of the brokerdealer ahead of the interest of the retail
customer.648
We believe broker-dealers would need
to consider various factors in
determining whether a particular
account is in a particular retail
customer’s best interest. For example,
broker-dealers generally should
consider: (1) The services and products
provided in the account (ancillary
647 See

supra footnote 610 and accompanying

text.
648 As discussed in Section II.B.2, whether and
how Regulation Best Interest applies will depend
on whether the financial professional making the
recommendation is dually registered.
In the section that follows we discuss how the
Care Obligation will apply to recommendations to
open an IRA or to roll over assets into an IRA.

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services provided in conjunction with
an account type, account monitoring
services, etc.); (2) the projected cost to
the retail customer of the account; (3)
alternative account types available; (4)
the services requested by the retail
customer; and (5) the retail customer’s
investment profile. Moreover, retail
customer-specific factors, such as those
identified in the definition of ‘‘Retail
Customer Investment Profile,’’ may not
be applicable or available in every
context, and would depend on the facts
and circumstances at the time of
account type recommendation. For
example, one or more factors may have
more or less relevance, or information
about those factors may not be obtained
or analyzed at all where the brokerdealer has a reasonable basis for
believing that a particular factor is or is
not relevant.649 In addition, as
discussed above, we recognize that
factors other than cost may properly be
considered when determining whether
an account is in a retail customer’s best
interest.650
Where the financial professional
making the recommendation is dually
registered (i.e., an associated person of
a broker-dealer and a supervised person
of an investment adviser (regardless of
whether the professional works for a
dual-registrant, affiliated firms, or
unaffiliated firms)) the financial
professional would need to make this
evaluation taking into consideration the
spectrum of accounts offered by the
financial professional (i.e., both
brokerage and advisory taking into
account any eligibility requirements
such as account minimums), and not
just brokerage accounts. For example,
all other things being equal, it may be
in the retail customer’s best interest to
recommend a brokerage account to the
retail customer who intends to buy and
hold a long-term investment (e.g.,
maintain an account primarily
composed of bonds or mutual funds and
has a stated buy-and-hold strategy), as
opposed to an advisory account (i.e., it
may not be in the retail customer’s best
interest in this context to pay an
ongoing fee for a security that he or she
plans to hold to maturity).651 On the
other hand, it may not be in the retail
customer’s best interest to recommend a
brokerage account where the retail
649 As discussed above, where a broker-dealer
determines not to obtain or analyze one or more of
the factors specifically identified in the definition
of ‘‘Retail Customer Investment Profile,’’ the brokerdealer generally should document its determination
that the factor(s) are not relevant components of a
retail customer’s investment profile in light of the
facts and circumstances of the particular
recommendation.
650 See id.
651 See id.

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customer plans to engage in at least a
moderate level of trading and prefers to
pay for advice in connection with such
trading on the basis of a consistent
recurring monthly or annual charge.652
Furthermore, where a retail customer
holds a variety of investments, or
prefers differing levels of services (e.g.,
both episodic recommendations from a
broker-dealer and continuous advisory
services including discretionary asset
management from an investment
adviser), it may be in the retail
customer’s best interest to recommend
both a brokerage and an advisory
account.
Similarly, where the financial
professional is only registered as an
associated person of a broker-dealer
(regardless of whether that broker-dealer
entity is a dual-registrant or affiliated
with an investment adviser), he or she
would need to take into consideration
only the brokerage accounts
available.653 However, even if a brokerdealer only offered brokerage accounts,
the associated person would
nevertheless need to have a reasonable
basis to believe that the recommended
account was in the best interest of the
retail customer. For example, if the
retail customer were seeking a
relationship where the financial
professional would have unlimited
investment discretion (i.e., having
responsibility for a customer’s trading
decisions),654 the associated person
would not have a reasonable basis to
believe that a brokerage account was in
the best interest of the retail customer.
Thus, as with limited product menus, a
limited selection of account types
would not excuse a broker-dealer from
making a recommendation not in the
best interest of the retail customer.
Application of Care Obligation to IRA
Rollovers and Related
Recommendations
Regulation Best Interest also applies
to recommendations to open an IRA or
to roll over assets into an IRA. Thus, the
Care Obligation will require a brokerdealer to have a reasonable basis to
believe that the IRA or IRA rollover is
652 See id. We reiterate that this is a facts and
circumstances determination, and that these
examples are not meant to provide a bright line
rule, but rather to illustrate certain considerations
that a broker-dealer could consider when
determining whether a recommended account type
is in the best interest of the retail customer.
653 For example, if the natural person that is an
associated person of the broker-dealer is not
registered as an investment adviser representative,
but is associated with a broker-dealer that is a dualregistrant, that associated person would only need
to consider the brokerage accounts offered by the
firm, and not the firm’s advisory accounts in
making the recommendation.
654 See Solely Incidental Interpretation.

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33383

in the best interest of the retail customer
at the time of the recommendation and
does not place the financial or other
interest of the broker-dealer ahead of the
interest of the retail customer, taking
into consideration the retail customer’s
investment profile and other relevant
factors, as well as the potential risks,
rewards, and costs of the IRA or IRA
rollover compared to the investor’s
existing 401(k) account or other
circumstances.655
When making a recommendation to
open an IRA, or to roll over workplace
retirement plan assets into an IRA rather
than keeping assets in a previous
employer’s workplace retirement plan
(or rolling over assets to a new
employer’s workplace retirement plan),
broker-dealers should consider a variety
of factors, the importance of which will
depend on the particular retail
customer’s needs and circumstances. In
addition to the Factors to Consider
Regarding a Recommendation to a
Particular Retail Customer discussed
above, as well as the Retail Customer’s
Investment Profile, broker-dealers
should consider a variety of additional
factors specifically salient to IRAs and
workplace retirement plans, in order to
compare the retail customer’s existing
account to the IRA offered by the
broker-dealer. These factors should
generally include, among other relevant
factors: Fees and expenses; level of
service available; available investment
options; ability to take penalty-free
withdrawals; application of required
minimum distributions; protection from
creditors and legal judgments; holdings
of employer stock; and any special
features of the existing account.656 With
respect to available investment options,
we caution broker-dealers not to rely on,
for example, an IRA having ‘‘more
investment options’’ as the basis for
recommending a rollover. Rather, as
with other factors, broker-dealers should
consider available investment options in
an IRA, among other relevant factors, in
light of the retail customer’s current
situation and needs in order to develop
a reasonable basis to believe that the
rollover is in the retail customer’s best
interest.
While these examples may be relevant
to an analysis of available options, this
list is not meant to be exhaustive.
Furthermore, each factor generally
should be analyzed with respect to a
particular retail customer in order for a
broker-dealer to form a reasonable belief
that the recommendation is in the best
655 See infra Section II.C.2; see also FINRA
Regulatory Notice 13–45 (outlining several
considerations regarding IRA rollovers).
656 See id.

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interest of that retail customer and does
not place the financial or other interest
of the broker-dealer ahead of the interest
of the retail customer. Finally, as
described above, certain factors may
have more or less relevance, or not be
relevant at all, depending on the
particular facts and circumstances of
each recommendation.
d. Have a Reasonable Basis To Believe
That a Series of Recommended
Transactions, Even if in the Retail
Customer’s Best Interest When Viewed
in Isolation, Is Not Excessive and Is the
Retail Customer’s Best Interest When
Taken Together in Light of the Retail
Customer’s Investment Profile and Does
Not Place the Interest of the BrokerDealer Ahead of the Interest of the Retail
Customer
As proposed, the third component of
the Care Obligation would require a
broker-dealer to exercise reasonable
diligence, care, skill, and prudence to
have a reasonable basis to believe that
a series of recommended transactions,
even if in the retail customer’s best
interest when viewed in isolation, is not
excessive and is in the retail customer’s
best interest when taken together in
light of the retail customer’s investment
profile.657 The Proposing Release noted
that this requirement is intended to
incorporate and enhance a brokerdealer’s existing ‘‘quantitative
suitability’’ obligation by applying the
requirement irrespective of whether a
broker-dealer exercises actual or de
facto control over a customer’s account,
thereby making the obligation consistent
with the current requirements for
‘‘reasonable basis suitability’’ and
‘‘customer specific suitability.’’ 658
We received a few comments
suggesting modifications to this
component of the obligation. For
example, one commenter recommended
the Commission clarify the meaning of
‘‘series of transactions,’’ while a second
commenter requested a carve-out for
‘‘active traders’’ who are ‘‘interested in
trading individual stocks . . . with a
great degree of regularity.’’ 659 Another
commenter maintained that the
quantitative suitability obligations
should only apply to those accounts
657 Proposing

Release at 21613.
Release at 21613–21614.
659 See Letter from Keith Lampi, President,
Alternative and Direct Investment Securities
Association (‘‘ADISA’’) (Aug. 7, 2018) (‘‘ADISA
Letter’’) (recommending the Commission clarify the
meaning of ‘‘series of transactions’’); Letter from
Joseph C. Cascarelli, Corporate Counsel, Network 1
Financial Securities (Aug. 7, 2018) (‘‘Network 1
Letter’’) (suggesting a ‘‘carve-out exemption
formula’’ from Regulation Best Interest to
accommodate investors and their stockbrokers who
specialize in ‘‘active trading’’).

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658 Proposing

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over which the member firm has
‘‘control,’’ and that if the Commission
does not include the control element of
FINRA Rule 2111 as part of the Care
Obligation, that the Commission
‘‘should at a minimum confirm that this
requirement applies only to
recommendations by a single associated
person, not across multiple associated
persons at the firm who act
independently.’’ 660
After considering these comments, the
Commission is adopting the proposed
‘‘quantitative care’’ component of the
Care Obligation as proposed. As noted
in the Proposing Release, we believe
that imposing the quantitative care
obligation without a ‘‘control’’ element
would provide consistency in the
investor protections provided to retail
customers by requiring a broker-dealer
to always form a reasonable basis as to
the recommended frequency of trading
in a retail customer’s account—
irrespective of whether the brokerdealer ‘‘controls’’ or exercises ‘‘de facto
control’’ over the retail customer’s
account.661 This would also be
consistent with the other components of
the Care Obligation, which apply
regardless of whether a broker-dealer
‘‘controls’’ or exercises ‘‘de facto
control’’ over the retail customers’
account.
While the Commission appreciates
the concern raised about ‘‘active
traders’’ and the concern relating to a
retail customer that could maintain
several accounts at the same firm, we
nevertheless believe that retail
customers could, and should, benefit
from the protections of this requirement,
namely the protection from a brokerdealer recommending a level of trading
that is so excessive that the resulting
cost-to-equity ratio or turnover rate
makes a positive return virtually
impossible.662 As we indicated in the
Proposing Release, the fact that a
customer may have some knowledge of
financial markets or some ‘‘control’’
should not absolve the broker-dealer of
the ultimate responsibility to have a
reasonable basis to believe that any
recommendations it makes are in the
best interest of the retail customer.663
Where a retail customer expresses a
desire for ‘‘active trading,’’ 664 a brokerdealer may take this factor into
consideration when evaluating a
recommendation; however, the brokerdealer will nevertheless need to
reasonably believe that a series of

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660 SIFMA

August 2018 Letter.
Proposing Release at 21613–21614.
662 See id.
663 See id.
664 See Network 1 Letter.

recommended transactions is in the best
interest of the retail customer. We
further note that Regulation Best Interest
does not require a broker-dealer to
refuse to accept a customer’s order that
is contrary to the broker-dealer’s
recommendation. Nor does Regulation
Best Interest apply to self-directed or
otherwise unsolicited transactions by a
retail customer, whether or not he or she
also receives separate recommendations
from the broker-dealer.
With respect to the concern about
applying the requirement ‘‘only to
recommendations by a single associated
person, not across multiple associated
persons at the firm who act
independently,’’ 665 we note that both
the firm and their associated persons
have to comply with the Care
Obligation. If we took this commenter’s
suggestion, we are concerned we would
potentially create a loophole and a
perverse outcome that would allow for
avoidance of the Care Obligation, and
permit potentially excessive trading, by
encouraging recommendations across a
number of associated persons. We
reiterate our position that, consistent
with the other components of the Care
Obligation under the Care Obligation,
when a series of transactions is
recommended to a retail customer, a
broker-dealer must evaluate whether the
series of recommended transactions
places the broker-dealer’s interest ahead
of the retail customer’s—this is true for
both the associated person making the
recommendation, as well as for the
firm.666 This will necessarily depend on
the facts and circumstances of each
particular recommendation, and of each
particular series of transactions;
however, we note that, as part of
developing a retail customer’s
investment profile, a broker-dealer is
required to exercise reasonable
diligence to ascertain the retail
customer’s investment profile, which
would include seeking to obtain and
analyze a retail customer’s other
investments.667
Finally, with respect to the meaning
of series of recommended transactions,
what would constitute a ‘‘series’’ of
recommended transactions would
depend on the facts and circumstances,
and would need to be evaluated with
respect to a particular retail customer. In
other words, a broker-dealer would need
to reasonably believe that the level of
trading (series of recommended
transactions) is appropriate for a
particular retail customer, and thus a
bright line definition across all retail

661 See

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665 See

SIFMA 2018 Letter.
Proposing Release at 21613–21614.
667 See supra Section II.C.2.c.
666 See

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customers would be unworkable.
Moreover, providing a bright line
definition could encourage firms to
focus on a particular number of
transactions rather than focusing on
ensuring that a series of
recommendations, taken together, are in
the best interest of the retail customer.
Finally, a ‘‘series’’ of recommended
transactions is an established term
under the federal securities laws and
SRO rules that is evaluated in concert
with existing guideposts, such as
turnover rate,668 cost-to-equity ratio,669
and use of in-and-out trading,670 which
have been developed over time and
which serve as indicators of excessive
trading.

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3. Conflict of Interest Obligation
We proposed the Conflict of Interest
Obligation to require a broker-dealer
entity 671 to: (1) Establish, maintain, and
enforce written policies and procedures
reasonably designed to identify, and
disclose, or eliminate all material
conflicts of interest associated with
recommendations covered by
Regulation Best Interest; and (2)
establish, maintain and enforce written
policies and procedures reasonably
designed to identify and disclose and
mitigate, or eliminate, material conflicts
of interest arising from financial
incentives associated with such
recommendations. This proposed
668 See, e.g., Carras v. Burns, 516 F.2d 251, 258
(4th Cir. 1975); Shearson Lehman Hutton Inc., 49
S.E.C. 1119, 1122 at footnote 10 (1989); Laurie Jones
Canady, 54 S.E.C. 65, 74 (1999), Exchange Act
Release No. 41250 (Apr. 5, 1999) (using the
turnover rate for relevant period), petition denied,
230 F.3d 362 (D.C. Cir. 2000).
669 See, e.g., Shearson Lehman, 49 S.E.C. at 1121
(stating that ‘‘[o]ne test for excessive trading is the
relationship between the account opening balance
and the amounts of markups, commissions, and
margin charges’’); Michael E. Tennenbaum, 47
S.E.C. 703 (Jan.19, 1982).
670 See, e.g., Hecht v. Harris, Upham & Co., 283
F. Supp. 417, 435–36 (N.D. Cal. 1968), modified in
part and aff’d, 430 F.2d 1202 (9th Cir. 1970); R.H.
Johnson & Co., 36 S.E.C. 467 (1955); Behel, Johnson
& Co., 26 S.E.C. 163 (1947). Cody v. S.E.C., 693 F.3d
251, 260 (1st Cir. 2012).
671 Unlike the Disclosure and Care Obligations,
which apply to a broker or dealer and to natural
persons who are associated persons of a broker or
dealer, the Conflict of Interest Obligation (and the
Compliance Obligation discussed in Section II.C.4
below) applies solely to the broker or dealer entity,
and not to the natural persons who are associated
persons of a broker or dealer. For purposes of
discussing the Conflict of Interest Obligation and
the Compliance Obligation, the term ‘‘brokerdealer’’ refers only to the broker-dealer entity, and
not to such individuals. While the Conflict of
Interest Obligation applies only to the broker-dealer
entity, the conflicts of interest that the broker-dealer
entity must analyze are conflicts (as defined in
paragraph (c)(3) of the rule) between: (i) The brokerdealer entity and the retail customer, (ii) the natural
persons who are associated persons and the retail
customer, and (iii) the broker-dealer entity and the
natural persons who are associated persons.

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approach reflected our view that
establishing reasonably designed
policies and procedures is critical to
identifying and addressing conflicts of
interest. In addition, the proposed
approach would serve the Commission’s
goal of addressing conflicts of interest
that may harm investors while
providing flexibility to establish systems
tailored to broker-dealers’ business
models.
The Commission solicited comment
on the Conflict of Interest Obligation,
including the specific requirements to
create policies and procedures with
respect to disclosure, mitigation, and
elimination of conflicts of interest.
Commenters requested changes to
several aspects of the Conflict of Interest
Obligation, including providing more
clarity and guidance surrounding when
specific conflicts need to be disclosed,
mitigated or eliminated.672
In consideration of these comments,
we are adopting the Conflict of Interest
Obligation with revisions to: (1) Create
an overarching obligation to establish
written policies and procedures to
identify and at a minimum disclose,
pursuant to the Disclosure Obligation,
or eliminate all conflicts of interest
associated with the recommendation;
and (2) require broker-dealers to
establish policies and procedures to be
reasonably designed to mitigate or
eliminate certain identified conflicts of
interest.
In addition to the overarching
obligation, we specifically require
broker-dealers to establish, maintain,
and enforce written policies and
procedures reasonably designed to: (i)
Identify and mitigate any conflicts of
interest associated with
recommendations that create an
incentive for a natural person who is an
associated person of a broker or dealer
to place the interest of the broker or
dealer, or such natural person making
the recommendation, ahead of the
interest of the retail customer; (ii)(A)
identify and disclose any material
limitations placed on the securities or
investment strategies involving
securities that may be recommended
(i.e., only make recommendations of
proprietary or other limited range of
products) to a retail customer and any
conflicts of interest associated with such
limitations, in accordance with the
Disclosure Obligation, and (B) prevent
such limitations and associated conflicts
of interest from causing the broker,
dealer, or a natural person who is an
associated person of the broker or dealer
672 See, e.g., SIFMA August 2018 Letter; Primerica
Letter; BISA Letter; CCMC Letters; Wells Fargo
Letter.

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33385

to make recommendations that place the
interest of the broker, dealer, or such
natural person ahead of the interest of
the retail customer; and (iii) identify
and eliminate any conflicts of interest
associated with sales contests, bonuses,
and non-cash compensation that are
based on the sales of specific securities
or specific types of securities within a
limited period of time.673
Each of these changes and the
requirements pursuant to the Conflict of
Interest Obligation is discussed in more
detail below.
a. Reasonably Designed Policies and
Procedures
We proposed to require broker-dealers
to establish reasonably designed
policies and procedures as we believe
they are critical to identifying and
addressing conflicts of interest 674 and
helping ensure compliance with the
requirements to disclose conflicts of
interest pursuant to the Disclosure
Obligation.675 In addition, policies and
procedures may minimize compliance
costs that may be passed on to retail
customers.676 As discussed in the
Proposing Release, it would be
reasonable for broker-dealers to use a
risk-based compliance and supervisory
system rather than requiring a detailed
review of each recommendation and to
have flexibility to tailor policies and
procedures to their specific business
models. The Commission also provided
guidance on components a broker-dealer
should consider including in its
program with regard to the Conflict of
Interest Obligation.677
In response to the proposed policies
and procedures requirement, some
673 Rule

15l–1 under the Exchange Act.
FSI August 2018 Letter (‘‘Experience
shows that investors already ignore much of the
enormous volume of regulatory disclosures they are
being provided. Instead, a more realistic approach
is to require broker-dealers to adopt written
supervisory procedures to detect and manage
conflicts of interest, to avoid those they can and
take steps to mitigate the impact of those conflicts
that can’t be avoided.’’).
675 See Proposing Release at Section II.D.3.b. See
also CCMC Letters (policies and procedures
requirement should assist broker-dealers in
managing the potential impact of conflicts of
interest); FPC Letter (acknowledging the importance
of firms’ policies and procedures when providing
financial planning to act in the client’s best
interest).
676 See Proposing Release at Section II.D.3.b. See
also Cambridge Letter (‘‘Cambridge believes the
SEC’s goals of facilitating disclosure and mitigating
material conflicts of interest, while minimizing
additional compliance costs that may be passed on
to the retail customers can best be accomplished by
requiring broker-dealers to adopt written
supervisory procedures to detect and manage
conflicts of interest, to avoid those they can and
take steps to mitigate the impact of those conflicts
that can’t be avoided.’’).
677 Proposing Release at Section II.D.3.b.
674 See

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commenters asserted that it was an
effective means of addressing
conflicts 678 while others were
concerned that the Commission was
providing too much flexibility in
addressing conflicts of interest.679 A few
commenters expressed agreement with
allowing a flexible risk-based approach
tailored to a broker-dealer’s business
model as opposed to a detailed review
of each recommendation.680 A few
commenters expressed concern with the
Commission’s assertion that policies
and procedures may minimize
compliance costs that may be passed on
to retail customers, noting the
uncertainty surrounding how conflicts
of interest should be addressed by
policies and procedures.681 One
commenter suggested that the
Commission should adopt a safe harbor
for the Conflicts of Interest Obligation
by demonstrating compliance with
certain existing FINRA rules.682 As
discussed below under the new
Compliance Obligation, some
commenters suggested that the policies
and procedures requirement should
apply to aspects of the entire rule.683
In consideration of the comments
received, we are adopting the approach
with respect to reasonably designed
policies and procedures to identify and
address conflicts of interest set forth in
the proposal substantially as proposed.
As stated in the Proposing Release, we
believe that broker-dealers should have
flexibility to tailor their policies and
procedures to their particular business
model, focusing on specific areas of
their business that pose the greatest risk
of noncompliance and greatest risk of
potential harm to retail customers as
opposed to a detailed review of each
recommendation.684
While we recognize a commenter’s
statement 685 that policies and
678 See Fidelity Letter; SIFMA August 2018 Letter;
Morgan Stanley Letter.
679 See, e.g., NASAA August 2018 Letter; CFA
Institute Letter; Galvin Letter; Better Markets
August 2018 Letter (policies and procedures should
be ‘‘actually designed’’ to achieve those ends, not
just ‘‘reasonably designed’’ to do so). But see IRI
Letter (‘‘The Conflict of Interest Obligation should
be simplified and streamlined to give BDs the
flexibility to determine appropriate steps to manage
material conflicts.’’).
680 See Cambridge Letter; CCMC Letters. But see
NASAA August 2018 Letter (suggesting the
Commission reconsider the risk-based approach to
comply with its duties).
681 See, e.g., Better Markets August 2018 Letter;
CFA Institute Letter.
682 See AXA Letter.
683 See, e.g., NASAA August 2018 Letter
(suggesting that, at a minimum, a firm’s policies
and procedures should require an analysis of the
costs and risks of a product as well as the client’s
financial goals).
684 See Proposing Release at II.D.3.b.
685 See Better Markets August 2018 Letter.

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procedures should be ‘‘actually
designed’’ to address conflicts of
interest, we do not believe that the
design of policies and procedures
should be measured against a standard
of strict liability, but should instead be
measured against a standard of
reasonableness. In addition, we believe
that policies and procedures are an
effective tool to identify and address
conflicts of interest, and would allow
the Commission to identify and address
potential compliance deficiencies or
failures (such as inadequate or
inaccurate policies and procedures, or
failure to follow the policies and
procedures) early on, reducing the
chance of retail customer harm.686 We
also believe that there is no one-size-fits
all framework, and, as such, brokerdealers should have flexibility to
reasonably design their policies and
procedures to tailor them to account for
their business model, given the
structure and characteristics of their
relationships with retail customers,
including the varying levels and
frequency of recommendations provided
and the types of conflicts that may be
presented. This requirement of
‘‘reasonably designed’’ policies and
procedures is also consistent with
Commission rules and regulations in
other contexts, including under the
Advisers Act.687 Further, the
Commission continues to believe that
while not required components, as an
effective practice, broker-dealers should
consider including in their supervisory
and compliance programs the
components listed in the Proposing
Release, which may be relevant in
considering whether policies and
procedures are reasonably designed.688
The Commission is not providing a
safe harbor to Regulation Best Interest
for broker-dealers who demonstrate
compliance with FINRA rules 689
because, while FINRA rules may
address specific conflicts of interest,
Regulation Best Interest establishes a
infra footnote 809.
Rule 206(4)–7 under the Advisers Act. See
also Section 15(g) of the Exchange Act; 15E(g) of the
Exchange Act.
688 These components could include, among other
things: policies and procedures outlining how the
firm identifies conflicts, identifying such conflicts
and specifying how the broker-dealer intends to
address each conflict; robust compliance and
monitoring systems; processes to escalate identified
instances of noncompliance for remediation;
procedures that designate responsibility to business
line personnel for supervision of functions and
persons, including determination of compensation;
processes for escalating conflicts of interest;
processes for periodic review and testing of the
adequacy and effectiveness of policies and
procedures; and training on policies and
procedures. Proposing Release at Section II.D.3.b.
689 See supra footnote 682.

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686 See
687 See

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broader obligation to address conflicts
both at the firm level and at the
associated person level.690 As to
commenters’ concerns that the policies
and procedures requirement provides
too much flexibility and as discussed in
more detail below, the Commission has
changed the specific requirements to be
addressed by the policies and
procedures pursuant to the Conflict of
Interest Obligation to provide more
certainty to firms on which conflicts of
interest should be addressed through
disclosure, mitigation or elimination.
While the Commission also understands
concerns related to compliance costs,
we believe that the revisions to the
Conflict of Interest Obligation, including
the greater specificity in the rule text, as
well as the guidance provided below,
will ease the adjustment of brokerdealers’ existing supervisory and
compliance systems and streamline
compliance with Regulation Best
Interest.
b. Conflicts of Interest
The Proposing Release distinguished
between material conflicts of interest in
general and material conflicts of interest
arising from financial incentives. Under
the Proposing Release, broker-dealers
would be required to establish,
maintain, and enforce policies and
procedures to identify and, in the case
of material conflicts of interest, disclose
or eliminate, and in the case of financial
incentives, disclose and mitigate, or
eliminate material conflicts of interest
arising from financial incentives.691
The Commission proposed to
interpret a material conflict of interest
as a conflict of interest that a reasonable
person would expect might incline a
broker—consciously or unconsciously—
to make a recommendation that is not
disinterested.692 For material conflicts
of interest arising from financial
incentives associated with a
recommendation, the Proposing Release
discussed compensation practices
established by the broker-dealer,
including fees and other charges for the
services provided and products sold;
employee compensation or employment
incentives (e.g., quotas, bonuses, sales
contests, special awards, differential or
variable compensation, incentives tied
to appraisals or performance reviews);
compensation practices involving thirdparties, including both sales
690 ‘‘While FINRA has repeatedly emphasized the
importance of identifying and managing conflicts
and has a number of rules that address discrete
conflicts of interest, there is currently no similarly
broad conflicts provision in FINRA rules, including
the suitability rule.’’ See FINRA 2018 Letter.
691 See Proposing Release at Section II.D.3.
692 Proposing Release at 21602.

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compensation and compensation that
does not result from sales activity, such
as compensation for services provided
to third-parties (e.g., sub-accounting or
administrative services provided to a
mutual fund); receipt of commissions or
sales charges, or other fees or financial
incentives, or differential or variable
compensation, whether paid by the
retail customer or a third-party; sales of
proprietary products or services, or
products of affiliates; and transactions
that would be effected by the brokerdealer (or an affiliate thereof) in a
principal capacity.693
In addition, the Commission proposed
to limit conflicts of interest to those
associated with recommendations as
broker-dealers may provide a range of
services not involving a
recommendation, and such services are
subject to general antifraud liability and
specific requirements to address
associated conflicts of interest.694
Recognizing the phrase ‘‘financial
incentives’’ could be interpreted
broadly, the Commission solicited
comment on the proposed requirement
and the distinction between the
different requirements under the
Conflict of Interest Obligation. In
response, many commenters suggested
that the scope of the description of
financial incentives be narrowed as it
was too broad and requested guidance
or examples of material conflicts of
interest that would not fall within the
description of financial incentives.695
Specifically, a number of commenters
suggested that the mitigation obligation
should focus on financial incentives at
the registered representative level as
opposed to the firm level.696 A number
of commenters suggested that the
distinction between material conflicts
and financial incentives should be
removed altogether.697 Commenters also
stated that the mitigation requirement is
a higher standard of conduct than the
investment adviser fiduciary duty
which allows for conflicts to be
addressed through disclosure sufficient
for informed consent.698
693 Id.

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694 See

Proposing Release at 21617. In including
this limitation, the Commission explained that it
was not intending to change the disclosure
obligations associated with these services under the
general antifraud provisions of the federal securities
laws.
695 See, e.g., SIFMA August 2018 Letter; Primerica
Letter; BISA Letter; Committee of Annuity Insurers
Letter; IPA Letter; CFA Institute Letter.
696 See, e.g., Primerica Letter; TIAA Letter; ICI
Letter; Invesco Letter; Money Management Institute
Letter; Committee of Annuity Insurers Letter.
697 See, e.g., CFA August 2018 Letter; CFA
Institute Letter; Morgan Stanley Letter; SIFMA
August 2018 Letter; CCMC Letters.
698 See Franklin Templeton Letter (stating that by
including this heightened requirement for financial

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In consideration of comments and as
discussed in more detail below, the
Commission has restructured the
Conflict of Interest Obligation to: (1)
Create an overarching obligation to
establish, maintain and enforce written
policies and procedures that are
reasonably designed to identify and at a
minimum disclose (pursuant to the
Disclosure Obligation), or eliminate, all
conflicts of interest associated with the
recommendation; and (2) adopt specific
requirements with respect to such
policies and procedures for the
mitigation and elimination of identified
conflicts of interest.
In particular, we have revised the
proposed policies and procedures
requirement for mitigation to focus on
conflicts of interest that create an
incentive for an associated person to
place his or her interests ahead of the
interest of the retail customer as
described below, by eliminating the
distinction between material conflicts of
interest and material conflicts of interest
arising from financial incentives, and
removing the affirmative mitigation
requirement at the firm level. However,
in light of this change, we are adding a
new provision requiring broker-dealers
to establish, maintain, and enforce
written policies and procedures to
specifically require broker-dealers to
identify and disclose material
limitations, and any associated conflicts
of interest a broker-dealer places on the
securities or investment strategies
involving securities that may be
recommended to the retail customer,
such as recommendations being based
on limited product menus (i.e., only
make recommendations of proprietary
or other limited range of products) and
prevent such limitations and associated
conflicts of interest from causing the
broker-dealer to make recommendations
that place its interest ahead of the retail
customer. We believe the policies and
procedures need to address those
certain conflicts of interest inherent in
the broker-dealer business model by
heightened measures in order to prevent
conflicts of interest, Regulation Best Interest would
impose a higher standard on broker-dealers than is
required of investment advisers with respect to
such conflicts); Primerica Letter (stating that by
requiring broker-dealers to disclose and mitigate or
eliminate conflicts resulting from financial
incentives, the standard is actually higher than the
standard that applies under the Advisers Act);
CCMC Letters (stating that the requirement to
mitigate or eliminate material conflicts of interest
arising from financial incentives effectively subjects
broker-dealers to a higher standard than investment
advisers, who are generally able to disclose
conflicts of interest). See also UBS Letter; ASA
Letter. Some commenters also suggested that the
obligation to address conflicts of interest should be
harmonized between broker-dealers and investment
advisers. See, e.g., Schwab Letter.

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33387

recommendations that are not in the
best interest of the retail customer.
Therefore, we are adding a provision
requiring broker-dealers to establish,
maintain, and enforce written policies
and procedures reasonably designed to
identify and to eliminate any conflicts
of interest associated with sales
contests, sales quotas, bonuses, and
non-cash compensation that are based
on the sale of specific securities or
specific types of securities within a
limited period of time.
For purposes of Regulation Best
Interest, and for the reasons described in
more detail in the context of the
Disclosure Obligation, we have also
amended the rule text by eliminating
‘‘material’’ from ‘‘conflict of interest’’
and codified the definition of a conflict
of interest 699 to mean an interest that
might incline a broker-dealer—
consciously or unconsciously—to make
a recommendation that is not
disinterested.700 While ‘‘material’’ has
been eliminated, pursuant to the
Disclosure Obligation, broker-dealers
are required to disclose all material facts
relating to conflicts of interest
associated with recommendations,
consistent with the Proposing Release’s
intent of facilitating disclosure to assist
retail customers in making informed
investment decisions.701
Regarding the application of the
Conflict of Interest Obligation only to
those conflicts of interest associated
with recommendations, one commenter
stated that given the lack of detail in the
Proposing Release, broker-dealers may
have difficulty determining whether
material conflicts are associated with a
recommendation and how to adequately
address such conflicts, which could
create inconsistent application of
Regulation Best Interest.702 We continue
to believe this approach is appropriate,
for the reasons discussed in the
Proposing Release 703 and also believe
699 See Section II.D.1. To provide clarity that the
interpretation of ‘‘conflict of interest’’ is limited to
Regulation Best Interest, the Commission has
revised the rule text to include a definition of the
term.
700 See id.
701 Id.
702 See State Attorneys General Letter. (‘‘Given
the lack of detail in the Proposed Rule, brokerdealers may have difficulty determining whether
material conflicts are (1) ‘‘associated with
recommendations’’ and therefore subject to
disclosure or elimination; or (2) ‘‘arising from
financial incentives associated with such
recommendations’’ and therefore subject to
disclosure and mitigation, or elimination. This
ambiguity, while designed to give maximum
flexibility to broker-dealers, may in fact result in
inconsistent application of the Proposed Rule
nationwide and further add to the existing
confusion.’’)
703 See Proposing Release at 21618.

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that our revised Conflict of Interest
Obligation provides more specificity
about how to address specific conflicts
of interest, in conjunction with our
Disclosure Obligation, which should
address commenters’ concerns.

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c. Identifying Conflicts of Interest
In the Proposing Release, the
Commission stated that having a process
to identify and appropriately categorize
conflicts of interest is a critical first step
to ensure that broker-dealers have
reasonably designed policies and
procedures to address conflicts of
interest in order to comply with the
Conflict of Interest Obligation. As stated
in the Proposing Release, reasonably
designed policies and procedures to
identify conflicts of interest generally
should do the following: (i) Define such
conflicts in a manner that is relevant to
a broker-dealer’s business (i.e., conflicts
of both the broker-dealer entity and the
associated persons of the broker-dealer),
and in a way that enables employees to
understand and identify conflicts of
interest; (ii) establish a structure for
identifying the types of conflicts that the
broker-dealer (and associated persons of
the broker-dealer) may face; (iii)
establish a structure to identify conflicts
in the broker-dealer’s business as it
evolves; (iv) provide for an ongoing
(e.g., based on changes in the brokerdealer’s business or organizational
structure, changes in compensation
incentive structures, and introduction of
new products or services) and regular,
periodic (e.g., annual) review for the
identification of conflicts associated
with the broker-dealer’s business; and
(v) establish training procedures
regarding the broker-dealer’s conflicts of
interest, including conflicts of natural
persons who are associated persons of
the broker-dealer, how to identify such
conflicts of interest, as well as defining
employees’ roles and responsibilities
with respect to identifying such
conflicts of interest.704 Most
commenters did not express a view on
such guidance relating to the process of
identifying conflicts of interest.
Therefore, for the reasons discussed in
the Proposing Release, we are reiterating
this guidance here.
d. Overarching Obligation Related to
Conflicts of Interest
As proposed, the first component of
the Conflict of Interest Obligation would
have required a broker-dealer to
establish, maintain, and enforce written
policies and procedures reasonably
designed to identify, and disclose, or
eliminate, all material conflicts of
704 Id.

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interest that are associated with
recommendations covered by
Regulation Best Interest. In guidance,
the Commission stated that reasonably
designed policies and procedures
should establish a clearly defined and
articulated structure for: determining
how to effectively address material
conflicts of interest identified (i.e.,
whether to eliminate or disclose (and
mitigate, as required) the material
conflict); and setting forth a process to
help ensure that material conflicts are
effectively addressed as required by the
policies and procedures.
As such, the requirement was
intended to provide flexibility to brokerdealers regarding how to address
conflicts of interest, whether through
disclosure pursuant to the Disclosure
Obligation, or elimination. The
Commission also indicated that there
may be situations in which disclosure
alone is not sufficient, and brokerdealers may need to establish policies
and procedures designed to eliminate
the conflict or both disclose and
mitigate it.705 The Commission also
provided examples of how a brokerdealer could eliminate a conflict.706
As discussed above, we received
many comments generally on the
Conflict of Interest Obligation,
requesting clarification on which
conflicts needed to be disclosed, versus
those that should be mitigated or
eliminated.707 Some commenters
suggested that disclosure and informed
consent should be considered to
effectively address conflicts, similar to
the approach taken under the Advisers
Act.708 Some commenters suggested that
disclosure alone was sufficient to
address conflicts arising from financial
incentives.709 For example, a few
commenters identified specific types of
conflicts they believed could be
addressed by appropriate disclosure,
such as third-party payments.710 A few
commenters requested that the
examples of how to eliminate conflicts
of interest in the Proposing Release be
removed.711
705 See

Proposing Release at 21619–21620.

706 Id.

supra footnote 672.
708 See IPA Letter; Morgan Stanley Letter; ASA
Letter.
709 See, e.g., Committee of Annuity Insurers
Letter; Stifel Letter; Mass Mutual Letter; SIFMA
August 2018 Letter; HD Vest Letter; Primerica
Letter.
710 See, e.g., Invesco Letter; Transamerica August
2018 Letter; Primerica Letter.
711 See, e.g., ICI Letter (‘‘This example suggests a
firm that offers proprietary funds should consider
relinquishing the advisory fees the firm or its
affiliate receives for managing those funds as a
means to address conflicts that selling such funds
creates. This example is inconsistent with the SEC’s

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707 See

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After carefully considering comments,
we are adopting, similar to the
Proposing Release, an overarching
requirement to establish, maintain, and
enforce reasonably designed policies
and procedures to identify and, at a
minimum, disclose, in accordance with
the Disclosure Obligation, or eliminate
all conflicts of interest associated with
the recommendation. However, as
discussed in the following sections, we
are otherwise revising the Conflict of
Interest Obligation in response to these
comments. Subparagraphs (a)(2)(iii)(B)–
(D) of the rule text will now require
policies and procedures that are
reasonably designed to address specific
conflicts of interest in areas that we
believe create greater incentives for, and
increased risk that, the broker-dealer or
associated person may place its or his or
her own interest ahead of the retail
customer’s interest, specifically
conflicts of interest that: (1) Create
certain incentives to associated persons;
(2) conflicts of interest associated with
material limitations on the securities or
investment strategies involving
securities, such as, limited product
menus; and (3) sales contests, sales
quotas, bonuses, and non-cash
compensation based on the sales of
specific securities or type of security
within a limited period of time.
In adopting this overarching
requirement, we are reaffirming
guidance in the Proposing Release on
establishing a process to identify and
determine how to address a conflict, as
discussed above.712 Further, similar to
the Proposing Release, while we are not
requiring broker-dealers to develop
policies and procedures to disclose and
mitigate all conflicts of interest, we are
requiring that broker-dealers develop
policies and procedures reasonably
designed to ‘‘at a minimum disclose, or
eliminate’’ all conflicts.713 We continue
to believe that where a broker-dealer
cannot fully and fairly disclose a
conflict of interest in accordance with
the Disclosure Obligation, the brokerdealer should eliminate the conflict or
adequately mitigate (i.e., reduce) the
explicit statements elsewhere in the Best Interest
Proposal that Regulation Best Interest would not
preclude a firm from offering proprietary
products. . . .The SEC should clarify in any
adopting release that firms selling proprietary funds
are not obligated to credit fund advisory fees against
other broker-dealer charges. The ability to charge
fees to manage proprietary funds is critical to
preserve the ability of firms to offer both proprietary
and third-party funds.’’); Committee of Annuity
Insurers Letter (‘‘This suggested method for
elimination of material conflicts of interest relating
to affiliated mutual funds presents a number of
problematic issues. . . .This example is
exacerbated in the context of variable annuities.’’).
712 See Section II.C.3.c.
713 Proposing Release at 21620.

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conflict such that full and fair
disclosure in accordance with the
Disclosure Obligation is possible. In
some cases, conflicts of interest may be
of a nature and extent that it would be
difficult to provide disclosure that
adequately conveys to a retail customer
the material facts or the nature,
magnitude and potential effect of the
conflict for informed decision-making or
where disclosure may not be sufficiently
specific or comprehensible for the retail
customer to understand whether and
how the conflict will affect the
recommendations he or she receives.714
Also, in certain situations, a brokerdealer, even if not required, may
determine that in addition to addressing
a conflict through disclosure, to take
additional steps beyond disclosure to
also mitigate the conflict of interest.
The Commission acknowledges
commenters’ concerns regarding the
examples of how to eliminate conflicts
of interest that were provided in the
Proposing Release. The Commission’s
intent was not to prevent firms from
offering certain products to the extent
that they are in a retail customer’s best
interest. In order to avoid confusion and
to respond to commenters, we are not
including these examples as final
guidance here as we have instead
decided to focus the rule text on specific
conflicts of interest associated with
certain sales practices based on the sale
of specific securities that we require to
be eliminated and thus such examples
are not necessary. In discussing the
separate mitigation and elimination
requirements below, we provide
guidance on the specific conflicts for
which we are requiring these
heightened measures beyond disclosure.
However, while we have removed the
examples of potential conflicts of
interest that may be more appropriately
avoided, we emphasize that pursuant to
the overarching obligation, elimination
of conflicts of interest is one method of
addressing the conflict, in lieu of
disclosure, which broker-dealers may
find appropriate in certain
circumstances even when not required
by Regulation Best Interest.

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e. Mitigation of Certain Incentives to
Associated Persons
We proposed to require firms to
establish, maintain, and enforce written
policies and procedures reasonably
714 See id.; see also Fiduciary Interpretation
(stating that where an investment adviser cannot
fully and fairly disclose a conflict such that the
client can provide informed consent, the adviser
should eliminate the conflict or adequately mitigate
(i.e., modify practices to reduce) the conflict such
that full and fair disclosure and informed consent
are possible).

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designed to identify and disclose and
mitigate, or eliminate, material conflicts
of interest arising from financial
incentives with such recommendations.
In proposing this requirement, we
recognized the importance of the
brokerage model as a potentially costeffective option for investors,
acknowledging that the compensation
structures and arrangements within the
business model create inherent
conflicts 715 but that such compensation
may be appropriate in light of the time
and experience necessary to understand
investments. As such, we aimed to
promote investor choice and access to
products and instead of requiring
broker-dealers to establish policies and
procedures to eliminate compensation
structures and arrangements,716
required policies and procedures to
mitigate those conflicts of interest.
We proposed a principles-based
approach to provide flexibility to firms
to develop and tailor policies and
procedures that included conflict
mitigation measures based on each
firm’s circumstances, for example, the
size, retail customer base, nature and
significance of the conflict, and
complexity of the product.717 We stated
that, depending on the conflict and the
firm’s assessment, more or less
demanding measures may be
appropriate.718 We provided examples
of situations in which heightened
mitigation measures may be appropriate
and also suggested that broker-dealers
assess their policies and procedures as
they may be reasonably designed at the
outset but may later cease to be
reasonably designed based on
subsequent events or information.719
Finally, we provided a non-exhaustive
list of potential practices that we believe
broker-dealers should consider
including in their policies and
procedures, and as discussed above,
suggested that some practices may be
more appropriately avoided as they may
be difficult to mitigate.720
As discussed above, many
commenters expressed concern with the
715 See Proposing Release at II.D.3.e. See also
Tully Report.
716 While the Commission’s goal is to promote
access and choice to investors, as discussed in more
detail in Section II.C.3.g, Elimination of Certain
Conflicts of Interest, the Commission believes it is
in the public interest and will enhance investor
protection to require broker-dealers to reasonably
design policies and procedures to eliminate certain
conflicts of interest as we believe such conflicts
create too strong of an incentive for a broker-dealer
to make a recommendation that places the brokerdealer’s interest ahead of the retail customer’s
interest.
717 Proposing Release at II.D.3.e.
718 Id.
719 Id.
720 Id.

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33389

breadth of the mitigation requirement
and requested that mitigation be limited
to certain types of compensation 721 or
solely to financial incentives to the
individual registered representative.722
Many commenters were also concerned
about what they described as
ambiguities in the Proposing Release,
including the lack of a definition of the
term ‘‘mitigate’’ 723 and requested
further guidance surrounding conflicts
that needed to be mitigated versus those
that can be disclosed.724 Some
commenters suggested that supervision
should be adequate mitigation and
requested clarification on whether their
existing supervisory practices, if
compliant, were sufficient.725 As
discussed above under Section II.C.3.b,
a number of commenters expressed
concern that the mitigation requirement
is a higher standard of conduct than the
investment adviser fiduciary duty and
requested that it be aligned with the
fiduciary duty.726
Many commenters expressed concern
over some of the examples, and in
particular neutral compensation factors,
described as a potential mitigation
measure.727 Similarly, some
721 See, e.g., Cetera August 2018 Letter; SIFMA
August 2018 Letter. But see CFA August 2018 Letter
(stating that the Commission has proposed an
appropriately broad definition of material conflicts
that arise out of financial incentives and that it
should not be narrowed but a cleaner approach
would be to eliminate the artificial distinction
between those material conflicts of interest that
arise from financial incentives and those that do
not, and to apply the same obligation to disclose
and mitigate all material conflicts, whatever the
source).
722 See, e.g., Primerica Letter; Committee of
Annuity Insurers Letter; Cetera August 2018 Letter.
See also Wells Fargo Letter (stating that receipt of
fees and other revenue that does not otherwise
result in a direct financial incentive at the
registered representative level should be disclosed);
ICI Letter (recommending revisions to the proposed
conflict of interest obligation to focus the mitigation
obligation on the fees, revenue, or other financial
incentives that may influence the recommendation
of a broker-dealer representative—the individual
making the recommendation); Invesco Letter.
723 See, e.g., UVA Letter.
724 See, e.g., CFA August 2018 Letter; Wells Fargo
Letter; Committee of Annuity Insurers Letter;
NASAA August 2018 Letter; Cetera August 2018
Letter; Morningstar Letter.
725 See, e.g., BISA Letter; AALU Letter; Primerica
Letter; Committee of Annuity Insurers Letter.
726 Supra footnote 698.
727 See, e.g., SIFMA August 2018 Letter; ICI
Letter; Edward Jones Letter; Morgan Stanley Letter;
Transamerica August 2018 Letter; Ameriprise
Letter; Capital Group Letter; Cetera August 2018
Letter; CCMC Letters; Letter from Michelle Bryan
Oroschakoff, Chief Legal Officer, LPL Financial
(Dec. 18, 2018) (‘‘LPL December 2018 Letter’’)
(requesting confirmation that the non-exhaustive
list of potential practices was intended merely as
a list of examples and are not required mitigation
practices); Mass Mutual February 2019 Letter. But
see NASAA August 2018 Letter (stating that neutral
compensation across products could constitute

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commenters suggested that the
Commission should take more of a
principles-based approach as they
viewed the Proposing Release as too
prescriptive because it incorporated
examples from the DOL Fiduciary
Rule.728 One commenter expressed
concern over the suggestion that
heightened mitigation may be
appropriate if a retail customer has a
less sophisticated understanding, stating
that it is unclear how mitigation would
be measured and could create
heightened costs and risks for firms.729
Finally, some commenters requested
confirmation that certain practices are
permissible such as use of
compensation grids,730 receipt of
revenue sharing,731 differential
compensation,732 recommendations
based on a limited range of products
and proprietary products,733 and use of
employment benefits.734
In response to commenters, we have
revised the Proposing Release’s
requirement with respect to mitigation
to require broker-dealers to establish
policies and procedures reasonably
designed to identify and mitigate any
conflicts of interest associated with such
recommendations that create an
incentive for a natural person who is an
associated person of a broker- dealer to
place the interest of the broker-dealer, or
such natural person ahead of the
interest of the retail customer.
We agree with commenters that it is
appropriate to focus on the incentives
that directly affect the associated person
making a recommendation, because we
believe those conflicts are most likely to
undermine the associated person’s
ability to make a recommendation that
is in the best interest of the retail
customer, and thus present heightened
risk of recommendations that are not in
a retail customer’s best interest and that
place the associated person’s or firm’s
interests ahead of the retail customer’s
interest.
appropriate mitigation), State Attorneys General
Letter (suggesting differential compensation be
permitted based solely on neutral factors).
728 See, e.g., LPL August 2018 Letter; Cetera
August 2018 Letter; Davis Harman Letter.
729 See Primerica Letter.
730 See, e.g., SIFMA August 2018 Letter;
Committee of Annuity Insurers Letter; Primerica
Letter.
731 See, e.g., SIFMA August 2018 Letter; Cetera
August 2018 Letter.
732 See, e.g., Cetera August 2018 Letter;
Transamerica August 2018 Letter; Ameriprise
Letter.
733 See, e.g., NY Life Letter; Fidelity Letter; ICI
Letter; T.Rowe Letter. These commenters suggested
that disclosure would be an appropriate way to
address conflicts of interest associated with limited
product menus and proprietary products.
734 See, e.g., AALU Letter.

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While disclosure can be an effective
tool for retail customers to increase
awareness of a conflict of interest,735 in
certain cases, we do not believe that
disclosure alone sufficiently reduces the
potential effect that these conflicts of
interest may have on recommendations
made to retail customers.736 Instead, we
believe that broker-dealers are most
capable of identifying and addressing
the conflicts that may affect the
obligations of their associated persons
with respect to the recommendations
they make, and therefore are in the best
position, to affirmatively reduce the
potential effect of these conflicts of
interest such that they do not taint the
recommendation.
We are persuaded by commenters 737
that expressed concern that requiring
broker-dealers to establish policies and
procedures reasonably designed to
mitigate all financial incentives,
including any compensation, may result
in broker-dealers narrowing their
product shelf and compensation
practices which would be inconsistent
with the Commission’s stated goal.738
As stated in the Proposing Release,
while the Commission’s goal in
adopting Regulation Best Interest is to
enhance investor protection by reducing
the potential harm to retail customers
from conflicts of interest that may affect
broker-dealer recommendations, we
want to do so while preserving, to the
extent possible, access and choice for
investors who prefer to pay for
investment recommendations on a
transaction-by-transaction basis, which
is the ‘‘pay as you go’’ model that
broker-dealers generally provide, as well
as preserving retail customer choice of
the level and types of advice provided
and the products available.739 As such,
735 See Section II.C.1, Disclosure Obligation;
Relationship Summary Adopting Release.
736 See, e.g., Tully Report; CFA August 2018
Letter; AARP August 2018 Letter; Warren Letter
(‘‘the [Commission] should not rely on disclosure
alone to protect consumers.’’). See also DOL
Fiduciary Rule Release at 20950. ‘‘Disclosure alone
has proven ineffective to mitigate conflicts in
advice.’’
737 See, e.g., Primerica Letter (‘‘The SEC’s current
formulation of the conflicts obligation thus
inappropriately, and we believe unintentionally,
preferences advisory models over brokerage
models.’’); Transamerica August 2018 Letter
(expressing concern that the proposed
interpretation of financial incentives is overbroad
and may result in broker-dealers narrowing their
product shelf, which seems inconsistent with the
SEC’s stated goal of preserving the broker-dealer
model to protect an investor’s right to choose
between brokerage and advisory accounts).
738 The Commission recognizes that a brokerdealer’s financial or other interest can and will
inevitably exist.
739 We are persuaded by commenters regarding
the competitive issues for broker-dealers that could
arise if we require mitigation of firm-level financial
incentives, which is not required by an investment

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transaction based-compensation need
not be eliminated pursuant to
Regulation Best Interest.
Accordingly, rather than requiring
mitigation of all firm-level financial
incentives, we have determined to
refine our approach by generally
allowing firm-level conflicts to be
generally addressed through
disclosure.740 At the same time, we are
persuaded by commenters 741 that there
are some conflicts that should be
addressed through mitigation at the firm
level due to the potential impact that we
believe certain conflicts of interest
(either at the associated person or firm
level) may have on recommendations to
retail customers; therefore we are
requiring policies and procedures for
mitigation or elimination of those
conflicts (as identified in the rule text)
and are not leaving it to the brokerdealer to determine whether disclosure
alone is sufficient.742 We believe that
this approach appropriately balances
our goal of reducing the potential harm
conflicts of interest may have on brokerdealers’ recommendations to retail
customers and preserving retail access
(in terms of choice and cost) to
brokerage products and services.
i. Guidance on Covered Incentives
The Commission interprets this
requirement to establish, maintain, and
enforce reasonably designed policies
and procedures to identify and mitigate
adviser’s fiduciary duty, and could further
encourage migration from the broker-dealer to
investment adviser model and result in a loss of
choice for retail customers. See Section I; CCMC
Letters (‘‘Imposing a standard on broker-dealers
with respect to managing conflicts of interest that
is greater than that imposed on investment advisers,
on top of the additional regulatory obligations to
which broker-dealers are subject that are not
imposed on investment advisers, threatens to
undermine the SEC’s objective of preserving retail
customer choice and access to the brokerage advice
model and may introduce a new source of
confusion when it comes to investors’
understanding of the duties they are owed.’’);
AALU Letter (‘‘Overly-rigid mitigation requirements
could limit consumer choice of products and access
to professional financial advice’’). See also 913
Study; Proposing Release at 21575.
740 As discussed above in the section about the
Disclosure Obligation, the Commission believes that
compliance with the Disclosure Obligation,
including disclosure of the material facts relating to
the scope and terms of the relationship with the
retail customer and all conflicts of interest, should
give sufficient information to enable a retail
customer to make an informed decision with regard
to the recommendation. See II.D.1.
Nevertheless, as noted, there may be situations in
which disclosure alone may not be sufficient to
provide ‘‘full and fair’’ disclosure in accordance
with the Disclosure Obligation discussed above,
and the broker-dealer may need to take additional
steps to mitigate or eliminate the conflict,
consistent with an investment adviser’s fiduciary
duty. See Section II.C.3.d.
741 See, e.g., CFA August 2018 Letter.
742 See Section II.C.3.f and g.

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any conflicts of interest that create an
incentive for the associated person to
place the interest of the broker-dealer or
such associated person ahead of the
interest of the retail customer, to only
apply to incentives provided to the
associated person, whether by the firm
or third-parties that are within the
control of or associated with the brokerdealer’s business.743 It would not cover
external interests of the associated
person not within the control of or
associated with the broker-dealer’s
business.744 In the case of a dually
registered individual, this requirement
would generally only apply to
incentives provided to the associated
person when making a recommendation
in a brokerage capacity and not when
making a recommendation in an
investment advisory capacity as the
investment adviser fiduciary duty
would apply to the advice given in that
instance.745
The Commission generally considers
the following as examples of incentives
to an associated person that would need
to be addressed under this revised
provision: (i) Compensation from the
broker-dealer or from third-parties,
including fees and other charges for the
services provided and products sold; (ii)
employee compensation or employment
incentives (e.g., incentives tied to asset
accumulation and not prohibited under
(a)(2)(iii)(D), as discussed below, special
awards, differential or variable
compensation, incentives tied to
appraisals or performance reviews); and
(iii) commissions or sales charges, or
other fees or financial incentives, or
differential or variable compensation,
whether paid by the retail customer, the
broker-dealer or a third-party. These
743 The ability to control the compensation of
associated person, including incentives, is an
important mechanism by which broker-dealers
exercise supervisory control over sales practices.
744 For example, if an associated person of a
broker-dealer participates in a securities transaction
outside of the broker-dealer and receives
compensation, although the broker-dealer would
need to approve the transactions and record it in
its books and records under FINRA Rule 3280
(Private Securities Transaction of an Associated
Person), as described in more detail above, this
requirement to mitigate certain incentives to an
associated person would not apply to compensation
that is not an incentive provided by or in the
control of the broker-dealer.
Nevertheless, additional registration, disclosure
or other obligations, and antifraud liabilities may
apply to any other firm through which an
associated person may have such external interests
under federal or state law (for example, as a stateregistered adviser). We also note that an associated
person of a broker-dealer who receives transactionbased compensation and participates in a private
securities transactions that is not in accordance
with FINRA Rule 3280 should be mindful of the
broker-dealer registration requirements under
Section 15 of the Exchange Act.
745 See Fiduciary Interpretation; Section II.B.3.

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examples focus on compensation that
varies based on the advice given, such
as commissions, markups/markdowns,
loads, revenue sharing, and Rule 12b–1
fees.
ii. Guidance on Mitigation Methods
By requiring that a broker-dealer
establish policies and procedures
reasonably designed to ‘‘mitigate’’ these
conflicts of interest, we mean the
policies and procedures must be
reasonably designed to reduce the
potential effect such conflicts may have
on a recommendation given to a retail
customer. Thus, whether or not a
broker-dealer’s policies and procedures
are reasonably designed to mitigate such
conflicts will be based on whether they
are reasonably designed to reduce the
incentive for the associated person to
make a recommendation that places the
associated person’s or firm’s interests
ahead of the retail customer’s interest.
As noted in the Proposing Release, in
lieu of mandating specific mitigation
measures or a ‘‘one-size fits all’’
approach, we are providing brokerdealers with flexibility to develop and
tailor reasonably designed policies and
procedures that include conflict
mitigation measures, based on each
firm’s circumstances.746 Reasonably
designed policies and procedures
should include mitigation measures that
depend on the nature and significance
of the incentives provided to the
associated person and a variety of
factors related to a broker-dealer’s
business model (such as the size of the
broker-dealer, retail customer base (e.g.,
diversity of investment experience and
financial needs), and the complexity of
the security or investment strategy
involving securities that is being
recommended), some of which may be
weighed more heavily than others. For
example, more stringent mitigation
measures may be appropriate in
situations where the characteristics of
the retail customer base in general
displays less understanding of the
incentives associated with particular
securities or investment strategies; 747
746 See Proposing Release at 21618. See also
Letter from Steven W. Stone, Morgan, Lewis &
Bockius LLP (May 3, 2019) (‘‘Morgan Lewis Letter’’)
(‘‘The Commission should recognize that firms may
appropriately employ only some—or various
combinations—of these approaches depending on
their businesses and business models,
compensation structures, and related conflicts of
interest, and should not prescribe a one-size-fits-all
approach to mitigating compensation-related
conflicts.’’).
747 FINRA’s heightened suitability requirements
for options trading accounts require that a
registered representative have ‘‘a reasonable basis
for believing, at the time of making the
recommendation, that the customer has such
knowledge and experience in financial matters that

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33391

where the compensation is less
transparent (for example, an incentive
from a third-party or charge built into
the price of the product or a transaction
versus a straight commission); or in a
situation involving a complex security
or investment strategy.748 A brokerdealer could reasonably determine
through its policies and procedures that
the same mitigation measures could
apply to a particular type of retail
customer, type of security or investment
strategy, or type of incentive across the
board; or in some instances a brokerdealer may reasonably determine that
some conflicts create incentives that
may be more difficult to mitigate, and
are more appropriately avoided in their
entirety or for certain categories of retail
customers.749
As noted in the Proposing Release,
policies and procedures may be
reasonably designed at the outset, but
may later cease to be reasonably
designed based on subsequent events or
information obtained (for example, such
as through supervision (e.g., exception
testing) of associated person
recommendations), and the actual
experience of a broker-dealer should be
used to revise the broker-dealer’s
measures as appropriate.750 Further,
what are considered reasonable
mitigation measures may vary based on
the size of the firm.751 While many
broker-dealers have programs currently
in place to manage conflicts of interest,
each broker-dealer will need to carefully
consider whether its existing framework
complies with this provision.752
In response to commenters’ concerns
regarding the potential mitigation
he may reasonably be expected to be capable of
evaluating the risks of the recommended
transaction, and is financially able to bear the risks
of the recommended position in the complex
product.’’ FINRA Rule 2360(b)(19).
748 See Proposing Release at 21620–21621.
749 Id.
750 Id.
751 In the FINRA Conflicts Report, FINRA
identified certain mitigation measures firms
implemented that we believe highlight differences
in conflict management frameworks, based on the
size of the firm. For example, large firms may
address conflicts of interest through enterprise
management or operational risk frameworks, and
components of such programs, for example, risk
and control self-assessments, may provide an
opportunity to identify and evaluate possible
impacts. By contrast, small firms selling basic
products may have a conflicts management
framework that relies largely on the tone set by the
firm owner coupled with required supervisory
controls, particularly related to suitability, and the
firm’s compensation structure. See FINRA Conflicts
Report. An effective practice FINRA observed at a
number of firms is implementation of a
comprehensive framework to identify and manage
conflicts of interest across and within firms’
business lines that is scaled to the size and
complexity of their business. See FINRA Conflicts
Report at 5.
752 See Proposing Release at 21621.

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methods described in the Proposing
Release, and, in particular, the
references to neutral factors,753 we
would like to emphasize that this nonexhaustive list of factors is purely
illustrative and the factors are not
required elements.754 In providing these
examples, we did not intend to take a
prescriptive approach, as suggested by
some commenters, but a principlesbased approach designed to provide
flexibility to broker-dealers, depending
on their business model, level of
conflicts, and the retail customers they
serve.755
Among other things, firms may adopt
a range of reasonable alternatives to
meet the mitigation requirement of the
Conflict of Interest Obligation. As noted
above, we recognize that there are a
number of different kinds of incentives
and that, depending on the specific
characteristics of an incentive, different
levels and types of mitigation measures
may be necessary. For example,
incentives tied to asset accumulation
generally would present a different risk
and require a different level or kind of
mitigation, than variable compensation
for similar securities, which in turn may
present a different level or kind of risk
and may require different mitigation
methods than differential or variable
compensation or financial incentives
tied to firm revenues. In certain
instances, we believe that compliance
with existing supervisory requirements
and disclosure may be sufficient, for
example, where a firm may develop a
surveillance program to monitor sales
activity near compensation
thresholds.756
As discussed above, while not
required elements, the Commission
believes the following non-exhaustive
list of practices could be used as
potential mitigation methods for firms
to comply with (a)(2)(iii)(B) of
Regulation Best Interest:
• Avoiding compensation thresholds
that disproportionately increase
compensation through incremental
increases in sales;
• minimizing compensation
incentives for employees to favor one
type of account over another; or to favor
one type of product over another,
proprietary or preferred provider
products, or comparable products sold
on a principal basis, for example, by
753 See, e.g., Mass Mutual February 2019 Letter;
Edward Jones Letter; IRI Letter; Capital Group
Letter; SIFMA August 2018 Letter; Committee of
Annuity Insurers Letter.
754 See Proposing Release at 21621.
755 See Proposing Release at 21622.
756 FINRA Conflicts Report at 30–31.

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establishing differential compensation
based on neutral factors; 757
• eliminating compensation
incentives within comparable product
lines by, for example, capping the credit
that an associated person may receive
across mutual funds or other
comparable products across providers;
• implementing supervisory
procedures to monitor
recommendations that are: Near
compensation thresholds; near
thresholds for firm recognition; involve
higher compensating products,758
proprietary products or transactions in a
principal capacity; or, involve the roll
over or transfer of assets from one type
of account to another (such as
recommendations to roll over or transfer
assets in an ERISA account to an IRA)
or from one product class to another; 759
• adjusting compensation for
associated persons who fail to
adequately manage conflicts of interest;
and
• limiting the types of retail customer
to whom a product, transaction or
strategy may be recommended.760
While the Commission is providing
flexibility so that broker-dealers can
determine the nature and extent of
mitigation, whether a broker-dealer has
developed policies and procedures
reasonably designed to mitigate a
conflict is not measured against
industry practice (although such
practice could be a useful point of
reference). Each firm must look at the
facts and circumstances surrounding the
mitigation methods, the particular
broker-dealer’s business model, and
whether or not the policies and
procedures were reasonably designed
for the particular firm to reduce the
impact of the incentive in a manner to
prevent the incentive from causing the
associated person to place the broker757 As noted above, we are not requiring firms to
establish differential compensation based on
neutral factors but do believe firms could choose to
do so as potential practice to promote compliance
with the requirement to establish, maintain, and
enforce written policies and procedures reasonably
designed to identify and mitigate any conflicts of
interest that create an incentive for an associated
person to place its interest ahead of the interest of
the retail customer.
758 See Morgan Lewis Letter (suggesting, among
other things, that firms can conduct surveillance
(whether transactions, periodic, or forensic) to
identify activity that appears to be driven by
compensation considerations—whether at the
representative, team, or business level—rather than
a customer’s interest).
759 See FINRA Exam Report 2017. FINRA
observed a variety of effective practices in
recommending the purchase and sale of UITs,
including tailoring supervisory systems to products’
features and sources of risk to customers.
760 See, e.g., supra footnote 747; FINRA
Regulatory Notice 12–03, Heightened Supervision
of Complex Products (Jan. 2012).

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dealer’s or the associated person’s
interest ahead of the retail customer’s
interest.
In response to a commenter’s concern
that we suggested in the Proposing
Release that some compensation
conflicts may be more appropriately
avoided for certain categories of retail
customers,761 we would like to clarify
that such a suggestion is an example
and not a requirement. Nevertheless, we
are adopting a requirement to establish,
maintain, and enforce written policies
and procedures reasonably designed to
eliminate the incentives that we believe
create the most problematic conflicts,
namely incentives to associated persons
that are tied to recommendations of
specific securities or specific types of
securities within a limited period of
time as we believe these incentives
cannot be adequately mitigated, and are
likely to result in recommendations that
place the interest of the broker-dealer or
associated person ahead of the interests
of the retail customer. Furthermore, in
accordance with the Care Obligation, a
broker-dealer, when making a
recommendation, is required to, among
other things, have a reasonable basis to
believe that the recommendation is in
the best interest of the particular retail
customer.762 In particular, and
consistent with existing suitability
obligations, a broker-dealer is required
to exercise ‘‘reasonable diligence’’ to
ascertain (and consider) the retail
customer’s investment profile which,
among other things, includes the retail
customer’s investment experience and
risk tolerance.763 A broker-dealer that
has established reasonably designed
policies and procedures to mitigate the
conflicts associated with the incentives
provided to the associated person would
nevertheless violate Regulation Best
Interest if the recommendation does not
comply with the Care Obligation.
Finally, in response to commenters’
questions regarding the permissibility of
specific practices, the Commission
believes the revised, explicit
requirements related to: Mitigation of
incentives to associated persons as
discussed herein; mitigation of any
material limitations placed on the
securities or investment strategies that
may be recommended to retail
customers; and elimination of certain
761 See Primerica Letter (‘‘The SEC’s statements in
the Proposals regarding the additional protections
broker-dealers should afford ‘less sophisticated’
retail customers could create a sub-class of retail
customers that broker-dealers would have to
identify based on subjective and poorly defined
criteria, and potentially further restrict access to
help with saving and investing for customers who
need it most.’’).
762 See Section II.C.2.
763 Id.

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practices, as discussed below,
sufficiently address these comments. To
the extent the Commission has not
identified a practice that needs to be
eliminated, it would be permitted,
subject to compliance with the
requirements of Regulation Best Interest.

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f. Mitigation of Material Limitations on
Recommendations to Retail Customers
As part of the proposed requirement
to manage conflicts of interest arising
from financial incentives through
mitigation, firms would have been
required to establish policies and
procedures reasonably designed to
mitigate the conflicts of interest
associated with offering a limited range
of products and proprietary products.
We also solicited comment on
information related to the magnitude of
conflicts of interest when broker-dealers
recommend, among other things,
proprietary products and a limited range
of products. In response, several
commenters requested that the
Commission confirm that a product
menu limited to appropriate alternative
investments offered by the broker-dealer
would not violate Regulation Best
Interest.764 Some commenters requested
we clarify that, for certain customers, a
firm can limit its offerings to proprietary
products or products for which the firm
receives revenue sharing payments if
the limitation is properly disclosed and
appropriate to meet the retail customer’s
needs.765
764 See, e.g., SIFMA August 2018 Letter
(requesting clarification on how a broker-dealer
could satisfy the Conflict of Interest Obligation if
the platform is limited to certain bond offerings);
Fidelity Letter (stating that given the vast array of
readily available investment options and the
breadth of securities typically available to
customers through broker-dealers, some limitation
of the universe of investment options must be
undertaken in order for a broker-dealer to
adequately understand, compare and formulate a
recommendation); Prudential Letter (‘‘It is unclear
what ‘significantly limits’ means for firms that offer
predominantly, but not exclusively, proprietary
products. It is also unclear what constitutes a ‘small
choice of investments.’ Additional examples or
more prescriptive instructions regarding when firms
must disclose such limitations would be helpful.’’).
See also Guardian August 2018 Letter; LPL August
2018 Letter; LPL December 2018 Letter.
765 See, e.g., SIFMA August 2018 letter; CFA
Institute Letter; Letter from Emanuel Alves, Senior
Vice President and General Counsel, John Hancock
Life Insurance Company (Aug. 3, 2018) (‘‘John
Hancock Letter’’); Ameriprise Letter. See also NY
Life Letter (recommending the Commission require
disclosure of the limits on the universe of available
products, while allowing further context so that
firms describe the full scope and impact of those
limits); SPARK Letter (recognizing that the SEC did
not want to mandate specific mitigation procedures
or a ‘‘one-size-fits’’ all’’ approach but requesting
further guidance in the case of, among other things,
broker-dealers who only offer proprietary products
or only offer limited investment menus). But see
CFA August 2018 Letter (suggesting that simply
stating that a firm offers a limited selection of

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In consideration of these comments,
and our revisions to remove firm-level
conflicts from the proposed mitigation
provision discussed above, we are
adopting a new requirement to
specifically address the conflicts of
interest presented when broker-dealers
place any material limitations on the
securities or investment strategies that
may be recommended to a retail
customer (i.e., only make
recommendations of proprietary or
other limited ranges of products). While
we generally believe that most firmlevel conflicts of interest can be
addressed through appropriate
disclosure, this new provision focuses
on the specific firm-level conflicts—
namely, the conflicts associated with
the establishment of a product menu—
which we believe are most likely to
affect recommendations made to retail
customers and have the greatest
potential to result in recommendations
that place the interest of the brokerdealer or associated person ahead of the
interest of the retail customer.766 Given
the potential impact on
recommendations to retail customer, we
believe these conflicts should not be left
to the broker-dealer to determine
whether disclosure alone is sufficient,
and are requiring broker-dealers to
establish, maintain, and enforce written
policies and procedures reasonably
designed to (1) identify and disclose any
material limitations broker-dealers place
on their securities offerings or
investment strategies involving
securities and any associated conflicts
of interest and (2) prevent such
limitations and associated conflicts of
interest from causing the broker-dealer
to make recommendations that place the
broker-dealer’s interest ahead of the
interest of the retail customer.
While we believe broker-dealers
should be permitted to limit their
product offerings from which they make
recommendations to retail customers,
provided that they comply with
Regulation Best Interest,767 we are also
investments may not be enough for an investor to
understand the limitations).
766 See CFA August 2018 Letter (‘‘[M]any brokerdealers currently restrict choice by only
recommending from a limited menu of proprietary
funds or by only recommending products from
companies that make revenue sharing payments. If
limits on investor choice are of concern to the
Commission, surely such limits deserve equal
scrutiny. After all, evidence suggests that the
limited menus offered by some firms consist
entirely of low quality products that impose
excessive costs, deliver inferior returns, and expose
investors to excessive risk.’’)
767 See Section II.C.2 for a related discussion of
the application of the Care Obligation to such
limitations. See also AFL-CIO April 2019 Letter
(recommending that the Commission make clear
that it will hold firms accountable for developing

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33393

concerned that without requiring a
broker-dealer to have a process in place
to disclose and address negative effects
of such limitations, retail customers
may be unaware that a broker-dealer
offers only a limited set of products and
therefore would be unable to make an
informed investment decision.768 We
are also concerned that retail customers
may be harmed by such limitations if
they are more likely to result in
recommendations that are not in the
best interest of the retail customer.769
Broker-dealers will be required to
establish, maintain and enforce written
policies and procedures reasonably
designed to: (i) Identify and disclose any
material limitations placed on the
securities or investment strategies
involving securities that may be
recommended to a retail customer and
any conflicts of interest associated with
such limitations, in accordance with the
Disclosure Obligation, and (ii) prevent
such limitations and associated conflicts
of interest from causing the broker,
dealer, or a natural person who is an
associated person of the broker or dealer
to make recommendations that place the
interest of the broker, dealer, or such
natural person ahead of the interest of
the retail customer.
As discussed in the context of the
Disclosure Obligation and the
Relationship Summary, for purposes of
this requirement, a ‘‘material
limitation’’ 770 placed on the securities
or investment strategies involving
securities would include, for example,
recommending only proprietary
products (i.e., any product that is
managed, issued, or sponsored by the
financial institution or any of its
affiliates), a specific asset class, or
products with third-party arrangements
(i.e., revenue sharing).771 In addition,
the fact that the broker-dealer
recommends only products from a select
a product menu that complies with the first prong
of the proposed best interest standard and that
under such approach, firms would periodically
assess their product offerings against other products
available in the marketplace in order to ensure that
their offerings are competitive).
768 See Disclosure Obligation at Section II.C.1.
769 We believe that by including this requirement
to address material limitations to product menus,
which does not rely on disclosure alone, coupled
with the requirements under the Care Obligation,
we are addressing a commenter’s concern that
product limitations can limit investor choice which
in turn harms investors. See CFA August 2018
Letter.
770 As discussed in Section II.C.1, Disclosure
Obligation, a limitation is ‘‘material’’ if there is ‘‘a
substantial likelihood that a reasonable shareholder
would consider it important.’’ Basic, Inc. v.
Levinson, 485 U.S. 224, 224 (1988). In the context
of this Regulation Best Interest, this standard would
apply in the context of retail customers, as defined.
771 See II.C.1.; Relationship Summary Adopting
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group of issuers could also be a material
limitation.
We recognize, however, that, as a
practical matter, almost all brokerdealers limit their offerings of securities
and investment strategies to some
degree. We do not believe that
disclosing the fact that a broker-dealer
does not offer the entire possible range
of securities and investment strategies
would convey useful information to a
retail customer, and therefore we would
not consider this fact, standing alone, to
constitute a material limitation.772
Rather, consistent with the examples of
a ‘‘material limitation’’ provided above,
whether the limitation is material will
depend on the facts and circumstances
of the extent of the limitation.
Adopting this revised requirement is
critical to ensuring that retail customers
are aware of any material limitations
associated with a broker-dealer’s
recommendation and associated
conflicts of interest and that brokerdealers, through their policies and
procedures, establish processes to
evaluate whether or not such a limited
range of products is consistent with
making recommendations that are in the
retail customer’s best interest and that
do not place the interests of the brokerdealer or associated person ahead of the
retail customer’s interest, consistent
with Care Obligation.773 Broker-dealers
would be able to satisfy paragraph
(a)(2)(iii)(C)(1) by identifying any
material limitations and complying with
the Disclosure Obligation which, as
discussed above, requires disclosure of
‘‘the type and scope of services
provided to the retail customer,
including any material limitations on
the securities or investment strategies
involving securities that may be
recommended to the retail
customer.’’ 774
Similar to the requirement to
establish, maintain, and enforce written
policies and procedures reasonably
designed to mitigate certain incentives
to associated persons, firms will have
flexibility to develop and tailor
reasonably designed policies and
procedures to prevent such limitations
and the associated conflicts from
causing the broker-dealer or associated
person from placing their interest ahead
of the retail customer’s interest. In
developing such policies and
procedures, the Commission believes
that firms should, for example, consider
establishing product review processes
for products that may be recommended,
772 See Basic, Inc. v. Levinson, 485 U.S. 224, 224
(1988).
773 See Section II.C.2 and infra footnote 779.
774 Section II.C.1.

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including establishing procedures for
identifying and mitigating the conflicts
of interests associated with the product,
or declining to recommend a product
where the firm cannot effectively
mitigate the conflict, and identifying
which retail customers would qualify
for recommendations from this product
menu.775 As part of this process, firms
may consider evaluating the use of
‘‘preferred lists,’’ 776 restricting the retail
customers to whom a product may be
sold, prescribing minimum knowledge
requirements for associated persons
who may recommend certain
products,777 and conducting periodic
product reviews to identify potential
conflicts of interest, whether the
measures addressing conflicts are
working as intended, and to modify the
mitigation measures or product
selection accordingly.778 The
Commission’s intent is not to prevent
firms from offering proprietary products
or other limited range of products so
long as firms comply with the
Disclosure, Care,779 and Conflict of
775 For example, in its Conflicts Report, FINRA
identified the following as effective practices to
identify and manage conflicts of interest for new
products: (i) A product review process to identify
and mitigate conflicts of interest that may be
associated with a product; (ii) evaluation of whether
to decline to offer products to customers when the
conflicts associated are too significant to be
mitigated effectively; (iii) differentiation of product
eligibility between institutional and retail clients;
(iv) post-launch reviews of products to identify
potential problems; (v) evaluation of registered
representatives’ ability to understand a product,
provide training where necessary, and limit access
to products for which they cannot demonstrate
sufficient understanding to perform a suitability
analysis and effectively explain a product and its
risks to customers; and (vi) disclosure of product
conflicts and risks. See FINRA Conflicts Report at
3, 18–25.
776 See FINRA Conflicts Report at 24.
777 Cf. FINRA Conflicts Report at 19 (stating that
as an effective practice in evaluating new products,
a product review committee may engage in these
activities to address conflicts of interest).
778 Cf., e.g., NASD Notice to Members 03–71,
Non-Conventional Investments—NASD Reminds
Members of Obligations When Selling NonConventional Investments (Nov. 2003). Similarly,
under the Compliance Obligation, we suggest that
compliance policies and procedures’ adequacy and
effectiveness should be reviewed as frequently as
necessary in connection with changes in business
activities, affiliations, or regulatory and legislative
developments. See Section II.D.4, Compliance
Obligation.
779 In particular, consistent with the Care
Obligation and as discussed further in Section
II.C.2, Care Obligation, as part of determining
whether a broker-dealer has a reasonable basis to
believe that a recommendation is in the best interest
of the retail customer, broker-dealers generally need
to evaluate reasonably available alternatives offered
by the broker-dealer. When a broker-dealer
materially limits is product offerings or offers only
a limited menu of products, it must still comply
with the Care Obligation, and could not use its
limited menu to justify recommending a product
that does not satisfy this obligation. See Section
II.C.2.

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Interest Obligations. In fact, we believe
that these limitations can be beneficial,
such as by helping ensure that a brokerdealer and its associated persons
understand the securities they are
recommending, as required by the Care
Obligation.780 This requirement is
designed to allow firms to determine
whether and how to restrict their menu
of investment options based, among
other things, on their retail customer
base and area of expertise, while
protecting the interests of retail
customers when recommendations are
made from such limited menus by
requiring firms have a reasonably
designed process to identify, disclose,
and prevent the conflicts of interest
associated with such limitations from
resulting in recommendations that place
the broker-dealer’s interests ahead of the
retail customer’s interest.
We also note that the risk that limited
product menus result in
recommendations that are not in the
retail customer’s best interest is also
addressed through the Care
Obligation 781 and required disclosure
pursuant to the Disclosure
Obligation.782
g. Elimination of Certain Conflicts of
Interest
Under Section 15(l)(2) of the
Exchange Act, the Commission may
examine and, where appropriate,
promulgate rules prohibiting or
restricting certain sales practices,
conflicts of interest, and compensation
schemes for brokers, dealers, and
investment advisers that the
Commission deems contrary to the
public interest and protection of
investors. As discussed below, the
Commission finds that it is in the public
interest and consistent with the
protection of investors to require that
broker-dealers establish, maintain, and
enforce written policies and procedures
reasonably designed to identify and
eliminate any sales contests, sales
quotas, bonuses, and non-cash
compensation that are based on the
sales of specific securities or specific
types of securities within a limited
period of time.
780 See

also supra footnote 775.
id.
782 Material limitations are material facts that
need to be disclosed pursuant to the Disclosure
Obligation. The Commission is concerned about the
potential effect that such limitations have on the
securities or investment strategies involving
securities recommended to a retail customer, and
any associated conflicts of interest, could have on
the ability of a broker-dealer to make a
recommendation in the best interest of the retail
customer. See Disclosure Obligation at Section
II.C.1.
781 See

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In the Proposing Release, the Conflict
of Interest Obligation would have
required the establishment of policies
and procedures reasonably designed to
at a minimum disclose or eliminate all
material conflicts of interest related to
the recommendation (or to disclose and
mitigate or eliminate those material
conflicts of interest arising from
financial incentives). We did not
mandate the absolute elimination of, or
policies and procedures reasonably
designed to eliminate any particular
conflicts.783 We were concerned that the
absolute elimination of specified
particular conflicts could mean a
broker-dealer may not receive
compensation for its services.784 Our
intent, rather, was to identify certain
practices that may be more
appropriately avoided for certain
categories of retail customers, including,
for example, sales contests, trips, prizes,
and other similar bonuses based on
sales of certain securities or
accumulation of AUM.785
We also provided examples of how a
broker-dealer could eliminate conflicts
of interest.786 We requested comment on
elimination, including suggestions of
whether certain conflicts should be
required to be eliminated and how
broker-dealers could eliminate conflicts
of interest. Specifically, we requested
comment on whether the Commission
should explicitly prohibit receipt of
certain non-cash compensation (e.g.,
sales contests, trips, prizes, and other
bonuses based on sales of certain
securities, accumulation of AUM or any
other factor).787
In response, several commenters
requested greater certainty as to whether
certain conflicts of interest should be
eliminated and if so, which ones.788
783 See

Proposing Release at 21619.

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784 Id.
785 See id. FINRA rules also establish restrictions
on the use of non-cash compensation in connection
with the sale and distribution of certain types of
products. See FINRA Rules 2310, 2320, 3221, and
5110.
786 Proposing Release at 21621–21622.
787 Id.
788 See TIAA Letter (‘‘If the SEC were to provide
more specific direction as to which conflicts are
significant enough to warrant complete elimination,
broker-dealers would be better able to effectively
address material conflicts of interest in a manner
consistent with the SEC’s goals and preferred
approach.’’); Wells Fargo Letter (‘‘Rather than
leaving broker-dealers vulnerable to secondguessing, the SEC should either provide more
guidance on how such conflicts may be mitigated
or simply identify a set of financial incentives that
are prohibited.’’); AXA Letter (‘‘In the absence of
clear guidance from the Commission as to which
financial incentives must be eliminated, and not
just mitigated and disclosed, broker-dealers may be
forced to curtail otherwise legitimate practices and
the sale of certain products and services out of an
abundance of caution—thereby depriving investors

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Some commenters generally requested
that certain sales contests and financial
incentives be prohibited.789 Of these
commenters, many expressed concern
that product-based incentives could
lead to recommendations that are not in
a customer’s best interest, with some
commenters stating that firms could
find ways to mitigate these conflicts 790
and others advocating that they should
be prohibited in their entirety.791 Other
of choice of offerings for which they might
otherwise be suited. . . It would also be helpful if
the Commission could provide additional examples
of the types of conflicts (besides ‘‘sales contests,
trips, prizes . . . based on sales of certain
securities’’) that likely require elimination.’’); see
also Money Management Institute Letter;
Northwestern Mutual Letter; AALU Letter.
789 See, e.g., PIABA Letter (favoring a prohibition
on compensation structures that would incentivize
a broker to: Recommend a proprietary product or
recommend one type of product line over another;
and/or which would reward the sale of certain
products within a product line’’), Americans for
Financial Reform (recommending prohibiting
brokers from adopting practices, such as sales
quotas and contests, that clearly incentivize their
representatives to base their recommendations on
their own financial interests rather than the
customer’s best interests); NASAA August 2018
Letter (‘‘[W]e encourage the Commission to proceed
further by declaring these two practices—sales
contests and preferential treatment of allocations—
per se impermissible under Regulation Best
Interest.’’); Galvin Letter (identifying the following
practices as per se violations of the standard as they
are contrary to the requirement to provide advice
that is in the true best interest of customers: Sales
contests; sales quotas (especially for in-house
products); and incentives to sell high-cost and highrisk products); See also Warren Letter; Better
Markets August 2018 Letter; CFA August 2018
Letter. But see Primerica Letter (‘‘The SEC should
recognize that sales contests, trips, prizes, awards,
and similar bonuses can be used to incentivize
positive behavior and clarify there is no per se
requirement to eliminate such incentives.’’).
790 See, e.g., SIFMA August 2018 Letter (‘‘With
respect to product-based sales contests, we agree
that instances where a firm cannot adequately
mitigate incentives that are misaligned with the
customer’s best interest, the firm should eliminate
such sales contests. A firm, however, may be able
to mitigate such conflicts through several
methods. . .under a principles-based regime, we
ask that the SEC allow firms to decide whether to
mitigate or eliminate such conflicts.’’); Cetera
August 2018 Letter (‘‘A commonly-cited example is
sales contests or incentives that are focused on sales
of a single product. While we agree that such
arrangements may be per se inappropriate and
Cetera does not permit them, this judgment is
largely subjective. We suggest that reaching
consensus on what other practices fall into this
category would be well-nigh impossible. So long as
a broker-dealer can demonstrate that it has made a
good faith determination regarding identification
and management of conflicts, it should not be
subject to either regulatory action or private
litigation based on those determinations.’’); CFA
Institute Letter (‘‘Our view is that recommendations
aimed at winning sales contests and meeting
internal quotas are irreconcilable with the concept
of a best interest standard and should not be
allowed.’’).
791 See, e.g., PIABA Letter; CFA August 2018
Letter. See also Fidelity Letter (‘‘The SEC has
properly pointed out that certain conflicts of
interest can be so problematic that it simply may
not be possible to mitigate them effectively. For

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commenters requested clarification that
incentives not tied to a particular
investment product would be permitted
and would not need to be eliminated.792
A number of commenters requested
clarification that incentives based on
asset growth would be permitted as they
do not raise the same types of conflicts
present with product-based sales.793 A
number of commenters expressed
concern that provisions requiring
elimination of certain conflicts could be
in conflict with current treatment under
the Internal Revenue Code governing
certain employee benefits.794
After considering comments, we are
modifying the rule text of the Conflict
of Interest Obligation to include new
paragraph (a)(2)(iii)(D), which requires
the broker or dealer to establish,
maintain, and enforce written policies
and procedures reasonably designed to
identify and eliminate any sales
contests, sales quotas, bonuses, and
non-cash compensation that are based
on the sales of specific securities or
specific types of securities within a
limited period of time. In adopting this
new requirement, the Commission
believes it will provide certainty to
broker-dealers regarding the types of
practices where conflicts of interest are
so pervasive such that they cannot be
reasonably mitigated and must be
example, we agree that sales contests improperly
favoring certain investment products over others
involve uniquely troubling conflicts and should
generally be impermissible.’’); NY Life Letter (In
this context, the proposal notes that single product
sales contests create conflicts that may best be
eliminated. We agree that it is inappropriate to use
a contest or other non-cash compensation to
incentivize the sale of a specific investment or
variable insurance product over other available
alternatives, irrespective of a consumer’s situation
and needs.’’) But see AALU Letter (finding that the
Commission should not prohibit currentlycompliant compensation arrangements and
business models, including non-cash
compensation).
792 See, e.g., SIFMA August 2018 Letter; Edward
Jones Letter; NY Life Letter; Prudential Letter; LPL
August 2018 Letter; Transamerica August 2018
Letter; Northwestern Mutual Letter; Letter from Eric
R. Dinallo, Executive Vice President, General
Counsel, Guardian Life (Feb. 6, 2019) (‘‘Guardian
February 2019 Letter’’); Primerica Letter; Cambridge
Letter. Some of these commenters stated that
FINRA’s rules and supervisory practices
appropriately cover these incentives. See
Transamerica August 2018 Letter; NY Life Letter;
Northwestern Mutual Letter; Guardian August 2018
Letter; Primerica Letter.
793 Generally these commenters believed that
programs tied to assets under management, total
production or revenue growth do not give
associated persons an incentive to recommend
specific securities that may be inconsistent with a
customer’s best interest. See, e.g., SIFMA August
2018 Letter; Bank of America Letter; Edward Jones
Letter; Transamerica August 2018 Letter; ASA
Letter; UBS Letter; Fidelity Letter; NY Life Letter;
Money Management Institute Letter; IPA Letter.
794 See AALU Letter; NY Life Letter; Guardian
February 2019 Letter; Northwestern Mutual Letter.

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eliminated in their entirety, as we
believe they create too strong of an
incentive for the associated persons to
make a recommendation that places
their financial or other interest ahead of
the interest of retail customers’ interests
and therefore would be inconsistent
with Regulation Best Interest.795
The requirement is designed to
eliminate sales contests, sales quotas,
bonuses and non-cash compensation
that are based on the sales of specific
securities and specific types of
securities within a limited period of
time. We believe that these practices,
particularly when coupled with a time
limitation, create high-pressure
situations for associated persons to
engage in sales conduct contrary to the
best interest of retail customers. For
purposes of this requirement, we
interpret non-cash compensation to
mean any form of compensation
received in connection with the sale and
distribution of specific securities or
specific types of securities that is not
cash compensation, including but not
limited to merchandise, gifts and prizes,
travel expenses, meals and lodging
except we do not intend it to cover
certain employee benefits, including
healthcare and retirement benefits.796
We recognize that some associated
persons may focus their business on
certain general categories of securities
(e.g., mutual funds, variable annuities,
bonds, or equities) and that brokerdealers may provide compensation or
other incentives related to such sales.
As discussed further herein, this
requirement is not designed to prohibit
broker-dealers from providing such
incentives, provided that they do not
create high-pressure situations to sell a
specifically identified type of security
(e.g., stocks of a particular sector or
bonds with a specific credit rating)
within a limited period of time, such
that the associated person cannot make
a recommendation in the retail
customer’s best interest.
We believe the conflicts created by
these practices are in direct opposition
to our goal of reducing the effect of
conflicts of interest on broker-dealer
recommendations to retail customers.797
We agree with many commenters that
broker-dealers cannot reasonably be
795 See Section I. See also AFL–CIO April 2019
Letter (‘‘The Commission must provide greater
clarity regarding how the obligation to eliminate or
mitigate conflicts would apply to different types of
conflicts. In particular, it must make clear that
conflicts cannot be addressed through disclosure
alone and that firms would be prohibited from
artificially creating harmful incentives that
undermine compliance with the best interest
standard.’’).
796 Infra footnote 803 and accompanying text.
797 See Section I.

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expected to make recommendations in a
particular retail customer’s best interest
consistent with the requirements of the
Care Obligation, if they are motivated to
‘‘push’’ certain securities or types of
securities in order to win a contest or
reach a target in order to receive a bonus
or other non-cash compensation. We are
also persuaded that it would be
difficult, if not impossible, for a firm to
establish reasonably designed policies
and procedures to sufficiently mitigate
the incentive created to put the brokerdealer’s interest ahead of the retail
customer’s interest, as discussed above,
as the point of these practices is simply
to increase the sale a particular security
or type of security, for example, in the
context where a broker-dealer is
attempting to reduce its inventory of or
exposure to that security. Accordingly,
we believe that these practices should
be eliminated in order to enhance
investor protection 798 and achieve the
goals of Regulation Best Interest.
By explicitly requiring broker-dealers
to establish, maintain, and enforce
written policies and procedures
reasonably designed to eliminate certain
practices, we believe we are responding
to commenters who requested certainty
as to which specific incentives are
prohibited.799 Also in response to
commenters requesting clarification as
to what practices would be permitted,
the requirement to have reasonably
designed written policies and
procedures to eliminate sales contests,
sales quotas, bonuses, and non-cash
compensation applies only to those that
are based on the sales of specific
securities or types of securities, and
does not apply to compensation
practices based on, for example, total
products sold, or asset growth or
accumulation,800 and customer
satisfaction. In addition, this
elimination requirement would not
prevent firms from offering only
proprietary products, placing material
limitations on the menu of products, or
incentivizing the sale of such products
through its compensation practices, so
798 See Chairman Jay Clayton, Statement on
Investor Roundtables Regarding Standards of
Conduct for Investment Professionals Rulemaking
(Aug. 22, 2018), available at https://www.sec.gov/
news/public-statement/statement-clayton-082218.
See also CFA Institute; CFA.
799 See supra footnote 788 and accompanying
text.
800 See CCMC Letters (asserting that increasing
assets under management is a natural outgrowth of
serving clients well and is fundamentally different
from sales contests based on a particular product);
UBS Letter (stating that compensation and other
rewards based on the growth of overall revenues or
assets under management should continue to be
permitted as they do not incent sales of one product
over another but instead simply reward overall
business growth).

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long as the incentive is not based on the
sale of specific securities or types of
securities within a limited period of
time.801 While conflicts of interest are
also associated with sales contests, sales
quotas, bonuses and non-cash
compensation that apply to, among
other things, total products sold, or asset
accumulation and growth, we agree
with commenters 802 these conflicts
present less risk that the incentive
would compromise compliance with the
Care Obligation and Conflict of Interest
Obligation such that a recommendation
could be made that is in a retail
customer’s best interest and that does
not place the place the interest of the
broker-dealer or associated person
ahead of the interest of the retail
customer.
We also recognize that certain
production requirements may exist for
other reasons, specifically to maintain a
contract of employment.803 As
discussed above, we do not intend to
prohibit the receipt of certain employee
benefits by statutory employees, and do
not believe this provision would apply,
as we do not consider these benefits to
be non-cash compensation for purposes
of Regulation Best Interest. In addition,
we do not intend to prohibit training or
education meetings, including
attendance at company-sponsored
meetings such as annual conferences,804
provided that these meetings are not
based on the sale of specific securities
801 Although we are not defining what would
constitute a ‘‘limited period of time,’’ as noted
above, we are concerned about time limitations that
create high-pressure situations for associated
persons to increase the sales of specific securities
or specific types of securities which compromise
the best interests of their customers.
802 See, e.g., Ameriprise Letter (‘‘We believe such
concerns around incentives do not exist with
respect to programs that reward asset growth or
asset flows, or recruitment bonuses tied to assets
under management or revenue growth because
these programs do not give associated persons an
incentive to recommend specific securities that may
not be consistent with a customer’s best interest.’’);
Empower Letter (‘‘We also believe asset-gathering or
account-retention incentives should not be subject
to the same level of scrutiny as incentives aimed at
increasing sales of particular securities. The
potential for a conflict of interest to result in a bad
outcome for a retail investor is much higher when
a recommendation is related to individual securities
rather than the type of account in which such
securities should be held.’’)
803 See Prudential Letter; NY Life Letter; Guardian
February 2019 Letter; AALU Letter. Under the
Internal Revenue Code, statutory employees are
eligible for certain employee benefits such as 401(k)
and health insurance. In order to qualify under this
definition, full time life insurance sales agents must
devote their principal business to the solicitation of
life insurance or annuities primarily for one
company. See Department of Treasury, Internal
Revenue Service, Employer’s Supplemental Tax
Guide, Publication 15–A (2018), available at
https://www.irs.gov/pub/irs-pdf/p15a.pdf.
804 See Guardian August 2018 Letter; NY Life
Letter.

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or type of securities within a limited
time period.
We emphasize that prohibiting certain
incentives does not mean that all other
incentives are presumptively compliant
with Regulation Best Interest. As
discussed above, such other incentives
and practices that are not explicitly
prohibited are permitted provided that
the broker-dealer establishes reasonably
designed policies and procedures to
disclose and mitigate the incentive
created, and the broker-dealer and its
associated persons comply with the
Care Obligation. Nevertheless, if the
firm determines that the conflicts
associated with these practice are too
difficult to disclose and mitigate, the
firm should consider carefully assessing
whether it is able to satisfy its best
interest obligation in light of the
identified conflict and in certain
circumstances, may wish to avoid such
practice entirely.

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4. Compliance Obligation
As proposed, under the Conflict of
Interest Obligation, a broker-dealer
entity 805 would be required to: (1)
Establish, maintain, and enforce written
policies and procedures reasonably
designed to identify, and disclose, or
eliminate all material conflicts of
interest associated with
recommendations covered by
Regulation Best Interest; and (2)
establish, maintain and enforce written
policies and procedures reasonably
designed to identify and disclose and
mitigate, or eliminate, material conflicts
of interest arising from financial
incentives associated with such
recommendations. As discussed above,
in response to commenters, we have
made modifications to the Conflict of
Interest Obligation to more
appropriately focus on the conflicts of
interest that create an incentive for
broker-dealers and their associated
persons to place the interest of the
broker-dealer or the associated person
ahead of the interest of the retail
customer.
We solicited comment on the
proposed requirement to establish,
maintain, and enforce certain policies
and procedures as part of the Conflict of
Interest Obligation, including whether
we should require policies and
procedures specifically to assist
compliance with Regulation Best
Interest. While commenters generally
viewed the requirement to adopt
policies and procedures as an effective
means of addressing conflicts of
805 See

supra footnote 671.

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interest,806 some commenters suggested
broadening this requirement to a general
policies and procedures obligation that
would be reasonably designed to ensure
that recommendations are made in the
customer’s best interest or reasonably
designed to ensure compliance with
Regulation Best Interest as a whole.807
After considering the comments
received, we are adopting the
Compliance Obligation, which requires,
in addition to the policies and
procedures required by the Conflict of
Interest Obligation, that broker-dealer
entities 808 establish, maintain and
enforce written policies procedures
reasonably designed to achieve
compliance with Regulation Best
Interest. The Compliance Obligation
creates an affirmative obligation under
the Exchange Act with respect to the
rule as a whole,809 while providing
sufficient flexibility to allow brokerdealers to establish compliance policies
and procedures that accommodate a
broad range of business models.810 The
806 See CFA August 2018 Letter; Fidelity Letter;
Vanguard Letter; FPC Letter.
807 See CFA August 2018 Letter; UBS Letter.
808 Similar to the Conflict of Interest Obligation,
the Compliance Obligation applies solely to the
broker or dealer entity, and not to the natural
persons who are associated persons of a broker or
dealer. For purposes of discussing the Compliance
Obligation, the term ‘‘broker-dealer’’ refers only to
the broker-dealer entity, and not to such
individuals. See footnote 671 and accompanying
text.
809 As noted in the Proposing Release, brokerdealers are currently subject to supervisory
obligations under Section 15(b)(4)(E) of the
Exchange Act and SRO rules, including the
establishment of policies and procedures
reasonably designed to prevent and detect
violations of, and to achieve compliance with, the
federal securities laws and regulations, as well as
applicable SRO rules. See Proposing Release at
21622. Specifically, the Exchange Act authorizes
the Commission to sanction a broker-dealer or any
associated person that fails to reasonably supervise
another person subject to the firm’s or the person’s
supervision that commits a violation of the federal
securities laws. Exchange Act Sections 15(b)(4)(E)
and (b)(6)(A). The Exchange Act provides an
affirmative defense against a charge of failure to
supervise where reasonable procedures and systems
for applying the procedures have been established
and effectively implemented without reason to
believe those procedures and systems are not being
complied with. Id. While the Compliance
Obligation creates an explicit requirement, we
believe that broker-dealers would likely establish
policies and procedures to comply with Regulation
Best Interest pursuant to Section 15(b)(4)(E). In
order to comply, broker-dealers could adjust their
current systems of supervision and compliance, as
opposed to creating new systems.
810 This approach is similar to the one taken
under rule 206(4)–7 under the Advisers Act which
requires policies and procedures reasonably
designed to prevent violations of the Advisers Act,
which should be tailored to address compliance
considerations relevant to the operations of each
adviser. See Compliance Programs of Investment
Companies and Investment Advisers, Advisers Act
Release No. 2204 (Dec. 17, 2003) (‘‘Advisers Act
Release 2204’’). See also Questions Advisers Should

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33397

Commission believes that the
Compliance Obligation is important to
help ensure that broker-dealers have
strong systems of controls in place to
prevent violations of Regulation Best
Interest, including the component
Disclosure and Care Obligations, in
addition to the policies and procedures
required pursuant to the Conflict of
Interest Obligation, and to protect the
interests of retail customers.811
As with the policies and procedures
requirement included in the Conflict of
Interest Obligation, whether policies
and procedures are reasonably designed
to comply with Regulation Best Interest
will depend on the facts and
circumstances of a given situation.812 As
such, the Compliance Obligation does
not enumerate specific requirements
that broker-dealers must include in their
policies and procedures as brokerdealers are too varied in their operations
for rules to impose a single set of
universally applicable specific required
elements. Each broker-dealer when
adopting policies and procedures
should consider the nature of that firm’s
operations and how to design such
policies and procedures to prevent
violations from occurring, detect
violations that have occurred, and to
correct promptly any violations that
have occurred.813
A firm’s compliance policies and
procedures should be reasonably
designed to address and be
proportionate to the scope, size, and
risks associated with the operations of
the firm and the types of business in
which the firm engages.814 As such, the
Commission is not mandating specific
requirements pursuant to the
Compliance Obligation. In addition to
the required policies and procedures,
depending on the size and complexity
of the firm, we believe a reasonably
designed compliance program generally
Ask While Establishing or Reviewing Their
Compliance Programs (May 2006), available at
https://www.sec.gov/info/cco/adviser_compliance_
questions.htm (‘‘No one standard set of policies and
procedures will address the requirements
established by the Compliance Rule for all advisers
because each adviser is different, has different
business relationships and affiliations, and
therefore, has different conflicts of interest.’’).
811 Similar to the discussion included under
Section II.C.3.a, we believe that policies and
procedures to comply with Regulation Best Interest
would allow the Commission to identify and
address potential compliance deficiencies or
failures (such as inadequate or inaccurate policies
and procedures, or failure to follow the policies and
procedures) early on, reducing the chance of retail
customer harm.
812 See Section II.C.3.
813 See Advisers Act Release 2204.
814 See Section II.C.3.a.

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would also include: 815 Controls;
remediation of non-compliance; 816
training; 817 and periodic review and
testing.818

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D. Record-Making and Recordkeeping
In connection with proposed
Regulation Best Interest, we proposed
new record-making and recordkeeping
requirements for broker-dealers with
respect to certain information collected
from or provided to retail customers.
Specifically, we proposed amendments
to Exchange Act Rules 17a–3 and 17a–
4, which specify minimum
requirements with respect to the records
that broker-dealers must make, and how
long those records and other documents
must be kept, respectively. We received
several comments on the proposed new
requirements and are adopting them
substantially as proposed with
additional clarifications and guidance to
address commenters’ concerns.
We proposed amending Rule 17a–
3 819 to add a new paragraph (a)(25),
which would require, for each retail
customer to whom a recommendation of
any securities transaction or investment
strategy involving securities is or will be
provided, a record of all information
collected from and provided to the retail
customer pursuant to Regulation Best
Interest, as well as the identity of each
natural person who is an associated
person of a broker or dealer, if any,
responsible for the account. The new
paragraph would specify that the
neglect, refusal, or inability of a retail
customer to provide or update any such
information would excuse the brokerdealer from obtaining that information.
We are adopting the provision
substantially as proposed but
redesignating it as new paragraph (a)(35)
of Rule 17a–3.820 We are also amending
the text of paragraph (ii) of the
amendment as adopted to refer to ‘‘any
information described in paragraph
(a)(35)(i) of this section’’ rather than the
815 Cf. FINRA Conflicts Report at 6 (identifying
supporting structures, policies, processes, controls
and training as critical to protect customers and the
firm).
816 Id. at 10 (‘‘Most firms’ policies describe an
escalation process for handling those conflicts of
interest that cannot be handled through other firm
policies. . . .’’).
817 ‘‘For firms, training is an important vehicle to
communicate firm culture, specific requirements of
a firm’s code of conduct and its conflicts
management framework.’’ Id. at 15.
818 Cf. Questions Advisers Should Ask While
Establishing or Reviewing Their Compliance
Programs (May 2006), available at https://
www.sec.gov/info/cco/adviser_compliance_
questions.htm; FINRA Conflicts Report.
819 See Exchange Act Rule 17a–3.
820 The Commission is also reserving paragraphs
(a)(24) through (a)(34) of Rule 17a–3 for use in
connection with future rulemakings.

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proposed ‘‘any information required
under paragraph (a)(25)(i) of this
section.’’ This is a non-substantive
change reflecting the fact that paragraph
(i) of the new provision requires a
record of the information collected from
a retail customer by the broker-dealer
pursuant to Regulation Best Interest; it
does not require the information itself
directly as implied by the original
wording of paragraph (i) of the proposed
amendment. It is therefore more
accurate to refer in paragraph (ii) to the
information ‘‘described in,’’ rather than
‘‘required under,’’ paragraph (i), as well
as to update the reference in paragraph
(ii) to ‘‘paragraph (a)(35)(i) of this
section.’’
Several commenters expressed
concern that the proposed rule
amendment would significantly expand
recordkeeping requirements.821 One
commenter expressed concern that the
record retention requirements of the
proposed new paragraph to Rule 17a–3
would apply to each recommendation
made by the broker-dealer rather than to
each account (as required by existing
paragraph (a)(17) of Rule 17a–3, which
operates on a per-account basis).
Another commenter requested
clarification that ‘‘the current books and
records requirement is sufficient to meet
record-keeping requirements to satisfy
Reg BI,’’ adding that the Commission
should ‘‘affirm that Reg BI does not
create new record-keeping requirements
to prove that an advisor acted in a
client’s best interest.’’ 822
The Commission notes that the
proposed new requirements of Rule
17a–3 are not designed to create
additional, standalone burdens for
broker-dealers but instead to provide a
means by which they can demonstrate,
and Commission examiners can
confirm, their compliance with the new
substantive requirements of Regulation
Best Interest. In response to commenter
concerns that the proposed
requirements would significantly
expand their recordkeeping obligations,
we reiterate that, as stated in the
Proposing Release, broker-dealers
should already be attempting to collect
much of the information that would be
required under Regulation Best Interest
pursuant to the FINRA suitability rule
and existing Exchange Act books and
records rules. For example, we note that
under existing Rule 17a–3(a)(17),
broker-dealers that make
recommendations for accounts with a
natural person as customer or owner are
already required to create and
821 See SIFMA August 2018 Letter; Edward Jones
Letter; Primerica Letter.
822 See Raymond James Letter.

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periodically update customer account
information, although as part of
developing a ‘‘retail customer’s
investment profile,’’ Regulation Best
Interest may require broker-dealers to
seek to obtain certain retail customer
information that is currently not
required by Rule 17a–3(a)(17).823 In
addition, Regulation Best Interest would
require broker-dealers to disclose in
writing the material facts relating to the
scope and terms of their relationship
with the retail customer and the
material facts relating to conflicts of
interest that are associated with the
investment recommendations provided
to the retail customer. As such, it would
not be accurate to state, as suggested by
the commenter, that the Commission’s
current books and records requirements
for broker-dealers are sufficient to meet
recordkeeping requirements to satisfy
Regulation Best Interest. The additional
books and records requirements the
Commission is adopting today are
designed to allow firms to demonstrate
compliance with the substantive
requirements of Regulation Best Interest.
We further note that the new recordmaking requirements would not require
the duplication of existing records.
Rather, if a broker-dealer relied upon
previously existing records to
demonstrate its compliance with
Regulation Best Interest for a given
recommendation, it would not be
required to create and preserve
duplicate copies but instead could
create a new record noting which preexisting documents were provided to
the customer, or what customer
information already being preserved by
the broker-dealer was relied upon, to
meet the obligations of Regulation Best
Interest. However, reliance upon
previously existing records would only
be permissible so long as such records
are preserved—a record noting that a
document was relied upon would no
longer meet the recordkeeping
obligations of Regulation Best Interest if
such document was no longer preserved
by the broker-dealer.
Commenters also requested that the
Commission limit new recordkeeping
requirements to customer profile
information itself, not the ‘‘related and
823 See Exchange Act Rule 17a–3(a)(17). As
explained in the Proposing Release, Rule 17a–
3(a)(17) applies to each account with a natural
person as a customer or owner, while proposed
Regulation Best Interest would apply to each
recommendation of any securities transaction or
investment strategy involving securities to a retail
customer. Because of this difference, the
Commission believes it would be appropriate to
locate the record-making requirements related to
Regulation Best Interest in a new paragraph of Rule
17a-3 rather than in an amendment to paragraph
(a)(17).

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underlying communications.’’ 824 In
response to these concerns, the
Commission clarifies that new
paragraph (a)(35) of Rule 17a–3 as
adopted requires a record of all
information collected from and
provided to the retail customer pursuant
to Regulation Best Interest. Regulation
Best Interest does not reference, and the
Commission does not intend that it
require, ‘‘related and underlying
communications’’—rather, it applies
only to the information that is actually
provided to or obtained from the
customer pursuant to Regulation Best
Interest. Once again, the purpose of the
new record-making provision is to allow
broker-dealers to demonstrate their
compliance with the substantive
requirements of Regulation Best Interest.
Complying with those substantive
requirements will require broker-dealers
to obtain from and provide to customers
certain information, and new paragraph
(a)(35) of Rule 17a–3 requires a record
of such information. In response to
comments received requesting
clarification as to whether information
provided to or obtained from a customer
orally would be covered by the new
record-making requirements,825 the
Commission clarifies that the
requirements of new paragraph (a)(35)
of Rule 17a–3 apply to all information
collected from or provided to a retail
customer pursuant to Regulation Best
Interest, whether provided orally or in
writing (electronically or otherwise).826
Several commenters requested
clarification that, except with respect to
the specific recordkeeping requirements
in the rule text, Regulation Best Interest
does not require additional records (e.g.,
records to evidence best interest
determinations on a recommendationby-recommendation basis).827 One
commenter also stated that, as drafted,
there are significant obstacles and costs,
including increased privacy and
cybersecurity risks, that would result
from implementing the proposed new
rule, in particular with respect to the
‘‘all information collected from . . . .
the retail customer’’ requirement.828
In response, the Commission clarifies
that while the substantive requirements
of Regulation Best Interest apply on a
824 See SIFMA August 2018 Letter; Morgan
Stanley Letter.
825 See SIFMA August 2018 Letter; Primerica
Letter.
826 In the case of information provided orally
under the circumstances outlined in Section II.C.1,
Disclosure Obligation, Oral Disclosure or Disclosure
After a Recommendation, the broker-dealer must
maintain a record of the fact that oral disclosure
was provided to the retail customer.
827 See SIFMA August 2018 Letter; Edward Jones
Letter; Morgan Stanley Letter; CCMC Letters.
828 See Primerica Letter.

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recommendation-by-recommendation
basis, consistent with our approach
elsewhere, we are not requiring that
broker-dealers create and maintain
records to evidence best interest
determinations on a recommendationby-recommendation basis. Nor have we
determined to require broker-dealers to
provide information to retail customers
relating to the basis for each particular
recommendation (i.e., disclose such
information), and thus did not envision
this information to come within the
scope of Rule 17(a)(35).
Rather, in order to demonstrate
compliance with Regulation Best
Interest, a broker-dealer must be able to
demonstrate that it had a reasonable
basis to believe that each particular
recommendation made to a retail
customer was in the best interest of the
customer at the time of the
recommendation based on the
customer’s investment profile and the
potential risks, rewards, and costs
associated with the recommendation. As
noted above, the Commission does not
intend this to require, in practice, the
creation of extensive new and
potentially duplicative records for each
and every recommendation to a retail
customer. Instead, broker-dealers should
be able to explain in broad terms the
process by which the firm determines
what recommendations are in its
customers’ best interests, and similarly
to explain how that process was applied
to any particular recommendation to a
retail customer. However, we are not
mandating that broker-dealers create
and maintain a record of each such
determination. Nonetheless, as noted
above we are providing guidance
suggesting that firms may wish to
adequately document an evaluation of a
recommendation and the basis for that
recommendation in particular contexts,
such as the recommendation of a
complex product, or where a
recommendation may seem inconsistent
with a retail customer’s investment
objectives on its face.829
In addition, in response to requests
from commenters for confirmation that
the proposed record-making
requirements do not contemplate
broker-dealers needing to create and
maintain records of why certain
products were recommended over
others on a recommendation-byrecommendation basis,830 we confirm
that broker-dealers are not expected to
maintain records comparing potential
investments to one another so long as
they are able to demonstrate that each
829 See

supra footnote 610 and accompanying

text.

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830 See

SIFMA August 2018 Letter; CCMC Letters.

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33399

individual recommendation actually
made to a customer meets the
requirements of Regulation Best Interest
on its own. Regulation Best Interest
applies to recommendations made to a
retail customer, rather than to potential
recommendations considered by the
broker-dealer but not actually made to
the customer.
In response to the commenter’s
privacy and cybersecurity concerns with
respect to the proposed requirement to
make a record of all information
collected from the customer pursuant to
Regulation Best Interest, as noted in the
Proposing Release 831 and Section II.C
above, although a broker-dealer’s
customer obligations under Regulation
Best Interest (e.g., the Care Obligation)
go beyond those set forth in the FINRA’s
suitability rule, the concept of the
‘‘customer’s investment profile’’ that a
broker-dealer would be required to
compile—that is, the customer
information it would be required to
obtain—pursuant to Regulation Best
Interest is consistent with that under
FINRA’s suitability rule. As such, we
believe that since broker-dealers are
already required to seek to obtain
identical types of retail customer
information pursuant to the FINRA
suitability rule, broker-dealers should
already have in place policies and
procedures, including training
programs, to address such privacy and
cybersecurity concerns.
We also proposed an amendment to
paragraph (e)(5) of Rule 17a–4, which
currently requires broker-dealers to
maintain and preserve in an easily
accessible place all account information
required by paragraph (a)(17) of Rule
17a–3 for at least six years after the
earlier of the date the account was
closed or the date on which the
information was replaced or updated.832
The proposed amendment would
require broker-dealers to retain any
information that the retail customer
provides to the broker-dealer or the
broker-dealer provides to the retail
customer pursuant to the proposed
amendment to Rule 17a–3 being
adopted today as Rule 17a–3(a)(35), in
addition to the existing requirement to
retain information obtained pursuant to
Rule 17a–3(a)(17). As a result, brokerdealers would be required to retain all
records of the information collected
from or provided to each retail customer
pursuant to Regulation Best Interest for
at least six years after the earlier of the
date the account was closed or the date
831 Proposing Release at 21611 (noting that Retail
Customer Investment Profile is consistent with
FINRA Rule 2111(a) (Suitability)).
832 See Exchange Act Rule 17a–4(e)(5).

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on which the information was replaced
or updated. The Commission is
adopting this amendment to Rule 17a–
4(e)(5) substantially as proposed, with
the proposed reference to paragraph
(a)(25) of Rule 17a–3 replaced with a
reference to paragraph (a)(35) to reflect
the redesignation of the latter new rule
provision as discussed above.
The Commission received several
comments regarding the proposed
amendment to Rule 17a–4 requesting
clarification as to what communications
would be required to be retained
pursuant to the proposed rule
amendment beyond those already
required to be retained by existing
paragraph (b)(4) of Rule 17a–4.833 Rule
17a–4(b)(4) requires broker-dealers to
retain originals of all communications
received and copies of all
communications sent by the brokerdealer relating to its business as such for
a period of not less than three years, the
first two in an easily accessible place.
In response, the Commission notes
that while the records that a brokerdealer would be required to make in
connection with Regulation Best Interest
under new paragraph (a)(35) of Rule
17a–3 may be ‘‘business as such’’
records, the Commission believes it is
important, including for examination
purposes, that broker-dealers separately
retain records that specifically
demonstrate compliance with
Regulation Best Interest and new
paragraph (a)(35) of Rule 17a–3 rather
than simply including them in the much
broader ‘‘business as such’’ category
required to be retained under Rule 17a–
4(b)(4). Rule 17a–3(e)(5) currently serves
the purpose of allowing broker-dealers
to demonstrate compliance with the
customer information records required
to be made pursuant to Rule 17a–
3(a)(17), and the amendment to Rule
17a–3(e)(5) being adopted today will
serve the same purpose with respect to
records required to be retained by
broker-dealers to demonstrate
compliance with Regulation Best
Interest and new paragraph (a)(35) of
Rule 17a–3.
Finally, as noted in the Proposing
Release, the written policies and
procedures that broker-dealers will be
required to create pursuant to
Regulation Best Interest are already
currently required to be retained
pursuant to Exchange Act Rule 17a–
4(e)(7),834 which requires broker-dealers
to retain compliance, supervisory, and
procedures manuals (and any updates,
833 See Exchange Act Rule 17a–4(b)(4); SIFMA
August 2018 Letter; Edward Jones Letter; Prudential
Letter.
834 See Exchange Act Rule 17a–4(e)(7).

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modifications, and revisions thereto)
describing the policies and practices of
the broker-dealer with respect to
compliance with applicable laws and
rules, and supervision of the activities
of each natural person associated with
the broker-dealer, for a specified period
of time. As such, we did not propose,
and are not adopting, any additional
recordkeeping requirements with
respect to the written policies and
procedures that broker-dealers will be
required to create pursuant to
Regulation Best Interest.
E. Compliance Date
We are providing a compliance date
of June 30, 2020, consistent with the
transition provisions described in the
Relationship Summary Adopting
Release.835 In light of the importance of
the protections provided by Regulation
Best Interest, we believe that this
compliance date will provide adequate
notice and opportunity for brokerdealers to comply with Regulation Best
Interest, including by creating or
updating the necessary disclosures and
to developing, updating or establishing
their policies and procedures and
systems, as appropriate, to achieve
compliance with Regulation Best
Interest. On and after the Compliance
Date, broker-dealers that provide
recommendations of securities
transactions or investment strategies
that register with the Commission
would be required to comply with
Regulation Best Interest as of the date of
registration.
While most commenters requested an
implementation period of 18–24
months,836 one commenter requested an
implementation period of 12–18
months.837 We believe the operational
capability needed to develop processes
to comply with Regulation Best Interest
is sufficiently established by firms of all
sizes and resources. While we
understand commenters’ requests for
periods longer than 12 months after
effectiveness, the Commission has
determined, in light of the importance
of the protections afforded by
Regulation Best Interest to retail
Relationship Summary Adopting Release.
Cetera August 2018 Letter; SIFMA August
2018 Letter; HD Vest Letter (recommending that the
Commission adopt a 24-month implementation
period); Northwestern Mutual Letter; IRI Letter
(recommending that the Commission adopt an 18to-24-month implementation period); CCMC
Letters; AXA Letter (recommending that the
Commission adopt at least an 18-month
implementation period); ACLI Letter; TIAA Letter
(recommending that the Commission adopt an 18month implementation period).
837 See Raymond James Letter (recommending
that the Commission adopt a 12–18-month
implementation period).

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835 See
836 See

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customers, that a Compliance Date of
one year after effectiveness is an
appropriate timeframe for firms to
conduct the requisite operational
changes to their systems to establish
internal processes to comply with
Regulation Best Interest.838
The Commission also believes that it
is important to coordinate the transition
dates of the Relationship Summary
requirements with those of Regulation
Best Interest to ensure that all retail
investors receive the full suite of
protections and benefits afforded by the
amended and new rules. Finally, the
Commission staff intends to offer firms
significant assistance and support
during the transition period and
thereafter with the aim of helping to
ensure that the investor protections and
other benefits of the final rule are
implemented in an efficient and
effective manner.
III. Economic Analysis
A. Introduction and Primary Goals of
the Regulation, Comments on Market
Failure and Quantification, and Broad
Economic Considerations
1. Introduction and Primary Goals of the
Regulation
Regulation Best Interest enhances the
broker-dealer standard of conduct
beyond existing suitability obligations
and aligns the standard of conduct with
retail customers’ reasonable
expectations.
Under Regulation Best Interest,
broker-dealers and their associated
persons will be required to act in the
best interest of the retail customer at the
time the recommendation is made,
without placing the financial or other
interest of the broker-dealer or an
associated person making the
recommendation ahead of the interests
of the retail customer. They also will be
required to address conflicts of interest
by establishing, maintaining, and
enforcing policies and procedures
reasonably designed to identify and
fully and fairly disclose material facts
about conflicts of interest, and in
instances where the Commission has
determined that disclosure is
insufficient to reasonably address the
conflict, to mitigate or, in certain
instances, eliminate the conflict. As a
result, Regulation Best Interest should
enhance the efficiency 839 of
recommendations that broker-dealers
provide to retail customers, allow retail
customers to better evaluate the
recommendations received, improve
retail customer protection when
838 See
839 See

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Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations
receiving recommendations from
broker-dealers, and, ultimately, reduce
agency costs 840 and other costs.
Importantly, Regulation Best Interest is
designed to preserve, to the extent
possible, (1) access and choice for
investors who may prefer the
transaction-based model that brokerdealers generally provide, or the feebased model that investment advisers
generally provide, or a combination of
both types of arrangements, and (2)
retail customer choice of the level and
types of services provided and the
securities available. For example, retail
customers who intend to buy and hold
a long-term investment on a nondiscretionary basis may find that paying
a one-time commission to a brokerdealer who recommends such an
investment is more cost effective than
paying an ongoing advisory fee to an
investment adviser merely to hold the
same investment.841 Retail customers
who would prefer advisory accounts but
have not yet accumulated sufficient
assets to qualify for investment advisory
accounts, which may require customers
to have a minimum amount of assets,
may similarly benefit from
recommendations from broker-dealers.
Other retail customers who hold a
variety of investments, or prefer
different levels of services from
financial professionals, may benefit
from having access to both brokerage
and advisory accounts.
The Commission is mindful of the
costs imposed by, and the benefits
obtained from our rules. Whenever the
Commission engages in rulemaking
under the Exchange Act and is required
to consider or determine whether an
action is necessary or appropriate in the
public interest. Section 3(f) of the
Exchange Act also requires the
Commission to consider, in addition to
the protection of investors, whether the
action would promote efficiency,
competition, and capital formation.842
Also, when making rules pursuant to
the Exchange Act, S the Commission is
required under Section 23(a)(2) to
consider, among other matters, the
impact any rule would have on
competition and is prohibited from
adopting any rule that would impose a
burden on competition not necessary or
appropriate in furtherance of the
purposes of the Exchange Act.843 The
following analysis considers, in detail,
the economic effects that the
Commission believes are likely to or
840 See
841 See

infra footnote 855 and accompanying text.
infra footnote 1353 and accompanying

text.
842 See
843 See

may result from Regulation Best
Interest. The analysis includes
consideration of the benefits and costs
to retail investors and broker-dealers,
and also takes into account the broader
implications of Regulation Best Interest
for efficiency, competition, and capital
formation.
Where possible, the Commission has
sought to quantify the likely economic
effects of Regulation Best Interest. The
Commission is providing both a
qualitative assessment and quantified
estimates of the potential effects of
Regulation Best Interest, where feasible.
The Commission has incorporated data
and other information provided by
commenters to assist it in the analysis
of the economic effects of Regulation
Best Interest.844 However, as explained
below in more detail, because the
Commission does not have, has not
received, and, in certain cases, does not
believe it can reasonably obtain data
that may inform on certain economic
effects, the Commission is unable to
quantify certain economic effects. The
Commission further notes that even in
cases where it has some data or it has
received some data regarding certain
economic effects, the quantification of
these effects is particularly challenging
due to the number of assumptions that
it would need to make to forecast how
broker-dealers will respond to
Regulation Best Interest, and how those
responses will, in turn, affect the
broader market for investment advice
and the retail customers’ participation
in financial markets.
2. Broad Economic Considerations
Investors generally derive utility from
consuming goods and services over their
lifetime and from bequeathing wealth to
others.845 The amount of goods and
services that an investor can consume or
the amount of wealth the investor can
bequeath is limited by the value of the
resources available to the investor over
his or her lifetime. These resources
generally vary across market and
economic conditions and over time. An
investor generally seeks to allocate his
or her resources across market and
economic conditions and over time to
achieve the highest expected utility
possible over his or her lifetime. For
example, an investor may decide to
save, and therefore allocate, a
proportion of his or her wages to
maximize his or her expected utility
844 See

infra Section III.A.3.
e.g., Irving Fisher, Theory of Interest, as
Determined by Impatience to Spend Income and
Opportunity to Invest it (1930).
845 See,

15 U.S.C. 77b(b) and 15 U.S.C. 78c(f).
15 U.S.C. 78w(a)(2).

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from bequeathing wealth toward his or
her children’s future education.
Capital markets facilitate this
allocation and reallocation of resources.
An investor can allocate available
resources across financial assets
available to them in the capital markets,
such that these resources become
available to the investor at the times,
and in the market and economic
conditions, when he or she needs them.
There may be many combinations of
financial assets or investment strategies
that achieve an investor’s allocation
goals, but each of these strategies may
not necessarily provide the investor
with the same benefits or cause the
investor to bear the same costs. The
expected benefit of allocating resources
to an investment strategy depends on
the expected utility to the investor from
the expected payoff of the strategy and
from whether this strategy pays off in
the market and economic conditions
and at the times that the investor cares
about. Importantly, the various costs of
allocating resources to any strategy
reduce the resources available for
consumption and saving.
A rational investor seeks out
investment strategies that are efficient in
the sense that they provide the investor
with the highest possible expected net
benefit, in light of the investor’s
investment objective that maximizes
expected utility.846 From the discussion
above, an efficient investment strategy
may depend on the investor’s utility
from consumption, including: (1) His or
her risk tolerance; (2) time available for
the funds to be invested, and not
consumed; (3) the resources that the
investor has currently available (e.g.,
current wealth) or anticipates to become
available at some point in the future
(e.g., future income); and (4) the cost to
the investor of implementing the
strategy. An investor’s efficient
investment strategy may change over
time because the investor’s preferences,
as well as market conditions and
investment performance, may change
over time.
In general, a typical investor may not
have the knowledge or the time to
identify efficient strategies on his or her
own. In addition, investors may be
limited in their access to information
and their human computational
capacity when evaluating choices.847 As
846 See, e.g., Andreu Mas-Colell, Michael D.
Whinston, & Jerry R. Green, Microeconomic Theory
(1995), specifically Chapter 10: Competitive
Markets for a discussion of efficient allocations of
resources.
847 See, e.g., Herbert A. Simon, A Behavioral
Model of Rational Choice, 69 Q. J. Econ. 99 (1955)
for one of the first works on bounded rationality.

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an alternative to attempting to identify
efficient strategies on his or her own, an
investor may solicit advice from
financial professionals.
While there are many types of
financial professionals 848 that can
provide advice related to a retail
customer’s finances, we focus here (and
in Regulation Best Interest) on a type of
professional that retail customers
commonly access, namely brokerdealers and their associated persons.
A broker is any person engaged in the
business of effecting transactions in
securities for the account of others.849 A
dealer is any person engaged in the
business of buying and selling securities
for its own account, through a broker or
otherwise.850 Within the scope of these
definitions, a ‘‘broker-dealer’’ (or, a firm
that fits both definitions) may offer a
wide variety of services to retail
customers. These services include
buying and selling securities for the
retail customer as well as providing
limited personalized investment advice
in the form of recommendations of
whether or not to engage in securities
transactions or investment strategies
involving securities.851
Federal securities laws and SRO rules
govern broker-dealers’ conduct of
business. Among other things, they
require that a broker-dealer or
associated person ‘‘have a reasonable
basis to believe that a recommended
transaction or investment strategy
involving a security or securities is
suitable for the customer, based on the
information obtained through the
reasonable diligence of the [firm] or
associated person to ascertain the
customer’s investment profile.’’ 852
While a suitable recommendation must
take into account the elements of a retail
customer’s investment profile that make
securities transactions or an investment
strategy efficient for that particular retail
customer, this requirement for
See also Richard H. Thaler, Behavioral Economics:
Past, Present, and Future, 106 Am. Econ. Rev. 1577
(2016) for a discussion of the evolution of bounded
rationality in economics.
848 The list of financial professionals that can
provide advice related to a retail customer’s
finances includes broker-dealers and their
associated persons, investment advisers, banks, and
insurance agents.
849 See Section 3(a)(4)(A) of the Securities
Exchange Act.
850 See Section 3(a)(5)(A) of the Securities
Exchange Act.
851 We focus our discussion on recommendations
that are the focus of Regulation Best Interest but
note that broker-dealers and their representatives
provide a wide variety of ‘‘agency services’’ as
described in footnote 1 of the Proposing Release.
See, e.g., 913 Study. See also infra Section III.B.1.a.
852 See FINRA Rule 2111 (Suitability); see also
infra Section III.B.2.b.

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suitability may not lead to an efficient
result for the retail customer.
The efficiency of a recommendation
to a retail customer may depend on: (1)
The menu of securities transactions and
investment strategies the broker-dealer
or its associated persons considers and
makes available to the retail customer;
(2) the return distribution and the costs
of these securities transactions and
strategies; (3) the associated person’s
understanding of these investment
options and the retail customer’s
objectives, such as the retail customer’s
risk tolerance and time preference; and
(4) the retail customer’s resource
constraints.
A recommendation provided by an
associated person of the broker-dealer
may be influenced by the conflicts of
interest that the associated person may
have or the conflicts of interest that the
broker-dealer may have at the time of
the recommendation. These conflicts
can arise as a result of how brokerdealers generate revenue from various
securities or investment strategies that
they make available to retail customers
and how broker-dealers compensate
their associated persons for providing
recommendations to retail customers. In
the United States, broker-dealers may
earn transaction-based compensation
that is commonly paid either directly by
the retail customer (e.g., commissions
and markups or markdowns) or
indirectly through the investment
sponsor (e.g., 12b–1 fees or revenue
sharing). Broker-dealers may
compensate their associated persons
that provide recommendations to retail
customers with a portion of the
commissions and markups or
markdowns these persons generate
through their recommendations. Such
financial incentives can vary depending
on the investment product line, account
type, or other factors (e.g., amount of
customer assets brought into the brokerdealer or revenue generated from
customer accounts).
A retail customer generally chooses to
accept or reject a recommendation
supplied by the associated person of the
broker-dealer.853 Some retail customers
may base their decisions on an
assessment of whether the
recommendations they receive would
result in securities transactions or
investment strategies that are efficient
for them. These customers’ assessment
853 Note, however, that a retail customer may
receive automated advice without involvement of
an associated person of the broker-dealer. For
example, a broker-dealer may generate
recommendations through an asset allocation
model. FINRA Regulatory Notice 12–25; See also
FINRA Report on Digital Investment Advice (Mar.
2016).

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may depend on factors such as their
perception of the associated person’s
ability to properly understand and
account for the customer’s objectives,
any information they have about the
associated person’s or firm’s conflicts of
interest with respect to that
recommendation, and the extent to
which these conflicts are expected to
result in less than efficient
recommendations for the retail
customer. However, other retail
customers may rely in full or in part on
factors less directly related to the
recommendation at hand. Instead, they
might rely on factors such as their level
of trust with the associated person or
firm, and in certain circumstances might
be inclined to simply accept all of the
associated person’s recommendations
without evaluating for themselves
whether the recommendations are
efficient.854
As noted above, broker-dealers or
their associated persons may have
conflicts of interest that could influence
their recommendations to retail
customers at the time when they are
provided.
A retail customer’s choice to accept a
particular recommendation often
directly affects the compensation that an
associated person or broker-dealer itself
receives. For example, an associated
person may receive greater
compensation from selling certain
securities or strategies relative to other
securities or strategies. Differences in
compensation across the securities or
strategies offered by a broker-dealer may
add complexity to an associated
person’s incentives and may create
conflict between the interests of the
associated person, who desires to
maximize his or her compensation, and
the interests of the retail customer, who
expects the recommended transaction to
be efficient for him or her.
In general, this conflict of interest
may result in a broker-dealer
recommending securities or investment
strategies that are less efficient for the
retail customer. For instance, the
recommended securities or strategies
may be enhancing the associated
person’s compensation at the expense of
the retail customer. Put another way,
because of the financial incentives,
broker-dealers and their associated
854 See, e.g., the discussion on investor trust in
the markets for financial advice in Section III.B.4.a,
infra. See also Gross Letter. See also Roman Inderst
& Marco Ottaviani, How (not) to pay for advice: A
framework for consumer financial protection, 105
the J. Fin. Econ 393 (2012) for a discussion of the
economic surplus extracted by broker-dealers that
provide recommendations to retail customers, and
how this surplus relates to the factors that
determine a retail customer’s decision to accept or
reject a recommendation.

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persons may be motivated to
recommend certain types or quantities
of securities or strategies, and those
recommendations may place the
interests of the broker-dealer or its
associated persons ahead of the interests
of the retail customer, which may not
result in the retail customer maximizing
his or her expected net benefit. An
inefficient recommendation may lead to
various results for the retail customer,
including inferior investment outcomes,
such as risk-adjusted expected returns
that are lower relative to other similar
investments or investment strategies.
A retail customer may accept a
recommendation that is less efficient if
he or she is unable to assess correctly
the efficiency of the recommendation.
The difference between the net benefit
to the retail customer from accepting a
less than efficient recommendation
about a securities transaction or
investment strategy, where the
associated person or broker-dealer puts
its interests ahead of the interests of the
retail customer, and the net benefit the
retail customer might expect from a
similar securities transaction or
investment strategy that is efficient for
him or her, as defined above, is an
agency cost.855 As discussed in the
Proposing Release and above, this
agency cost arises because of the
conflicts of interest of the broker-dealer
and its associated persons, and the
differences between the information sets
available to the broker-dealer and the
retail customer at the time of the
recommendation.
In certain principal-agent
relationships, the principal may be able
to reduce the agency costs that he or she
is facing in various ways, including by
structuring the agent’s compensation in
a way that better aligns the interest of
the agent with that of the principal.856
A feature of the agency relationship
between a retail customer (the principal)
and a broker-dealer (the agent) that is
common in many principal-agent
relationships (including the investment
adviser-client relationship) is that the
retail customer generally does not have
full transparency about the agent’s
compensation for providing advice and
the sources of the agent’s compensation.
Thus, the retail customer, through the
decision to accept or reject a
recommendation received, has generally
limited understanding of and control
855 See,

e.g., Michael C. Jensen, and William. H.
Meckling, Theory of the Firm: Managerial Behavior,
Agency Costs and Ownership Structure, 3 J. Fin.
Econ. 305 (1976) for a more general discussion of
agency costs.
856 See, e.g., Stephen A. Ross, The Economic
Theory of Agency: The Principal’s Problem, 63 Am.
Econ. Rev. ( Papers & Proc.) 134 (1973).

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over the compensation that the brokerdealer and its associated person obtains
from providing the recommendation.
These limitations restrict the retail
customer’s ability to reduce the agency
costs that he or she is facing.
We also recognize that even if the
retail customer were to have full
transparency about the broker-dealer’s
and its associated person’s
compensation from providing advice,
the retail customer’s ability to reduce
the agency costs may be constrained in
other ways. For example, if the menu of
securities from which the associated
person of the broker-dealer offers
recommendations is limited, the retail
customer’s and the associated person’s
ability to identify and select a more
efficient investment may be constrained.
Different retail customers may face
different agency costs depending on
whether they base their decision to act
on a recommendation on an assessment
of the efficiency of the recommendation.
Specifically, as noted above, a retail
customer that evaluates and uses a
recommendation received based on an
assessment about the efficiency of that
recommendation may be more
successful in identifying and
controlling, albeit in a limited fashion,
the compensation that the broker-dealer
and its associated person receive from
the recommendation—such as by being
more likely to reject a less than efficient
recommendation—compared to a retail
customer that makes this decision
without forming an assessment of the
efficiency of the recommendation. Thus,
the agency costs may be higher for those
retail customers that make their
decision of whether to act on a
recommendation received without an
assessment of the efficiency of the
recommendation.
While the discussion above focuses
on the actions that the principal (i.e., the
retail customer) can take to reduce the
agency costs that he or she is facing, the
agent can also take actions to reduce the
agency costs to the principal. For
example, in the agency paradigm, when
the principal may forgo sharing a
potentially large surplus with the agent
because of the high agency costs, the
agent may have an incentive to structure
the terms of the relationship in a way
that reduces the agency costs to the
principal.857 In the agency relationship
857 See, e.g., Sanford J. Grossman & Oliver D. Hart,
The Costs and Benefits of Ownership: A Theory of
Vertical and Lateral Integration, 94 J. Pol. Econ. 691
(1986) for a discussion of the actions that agents can
take to reduce the agency costs to the principal in
the context of the relationship between an owner
(the principal) and a manager (the agent) when the
agent that has a valuable investment opportunity
that can only be financed by the principal.

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between a retail customer and a brokerdealer, given the features of the
compensation that the broker-dealer and
its associated persons receive for
providing recommendations (e.g., this
compensation does not depend on the
value of the assets in a principal’s
account), the broker-dealer and its
associated persons may not have
sufficient incentive to take actions
voluntarily that would reduce agency
costs to the retail customer, such as
voluntarily increasing transparency
with respect to compensation.858
Although the dynamics of the agency
relationship between a retail customer
and a broker-dealer may not cause the
broker-dealer to take steps to increase
transparency, competitive factors in the
broker-dealer industry such as steps
toward transparency taken by other
broker-dealers may cause increased
transparency in that relationship.
Competitive dynamics are more
effective in areas where comparisons
can be more easily made. For example,
in the market for mutual funds
—particularly index funds—
comparability and competition, among
other factors, have driven down fees
significantly.859
858 Limited transparency with respect to how
broker-dealers and their associated persons are
compensated from recommending a security and
what constrains their menus of securities may make
it difficult for retail customers to grasp the size of
the agency costs that they are facing at the time
when they receive the recommendation. As a result,
this limited transparency may allow broker-dealers
and their associated persons to extract
informational rents (i.e., in the context of a
transaction, compensation in excess of what is
competitively feasible that stems solely from the
informational advantage of one party over another)
from the retail customers when providing
recommendations. The adviser business model also
has its own set of conflicted incentives to gather
assets (based on AUM fees) or maximize the time
that it takes to complete a job (if paid an hourly fee).
Dual-registrants also have an incentive to
recommend the type of account that is most
profitable to the firm. See AFL–CIO April 2019
Letter. See also Morgan Lewis Letter (describing
investment adviser compensation and conflicts
disclosure in Form ADV); Bruce Ian Carlin &
Gustavo Manso, Obfuscation, Learning, and the
Evolution of Investor Sophistication, 24 Rev. Fin.
Stud. 754 (2011) for a discussion about the
relationship between informational rents and the
opacity of recommended investments (e.g.,
securities with complex payoff structures).
859 Comparability among index funds that follow
the same market index is facilitated in part by their
passive style of investing. Actively managed funds
that follow the same investment strategy can show
different performance due to, among other things,
the ‘‘skill’’ of the manager of outperforming the
market (or any other benchmark). This skill is
unobservable and generally hard to measure, which
makes comparisons across actively managed funds
difficult. In contrast, comparisons across index
funds that follow the same market index and that
have passive investment styles are based more on
observable variables, such as fees, rather than
unobservable variables, such as managerial skill. In

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While we do not have evidence to
establish the degree to which brokerdealers can extract large informational
rents from retail customers under the
current legal and regulatory regime that
governs the broker-dealers’ standard of
conduct, the existing agency costs of the
relationship between the retail customer
and the broker-dealer would likely be
larger, absent the current legal and
regulatory regime.860 In general,
standards and regulation are effective
means of reducing agency costs when
principals (e.g., retail customers) and
agents (e.g., broker-dealers) cannot
reduce the agency costs on their own by
negotiating to address the market
frictions in their relationship through
mechanisms available to them, such as
bilateral contracting 861 or ‘‘side
payments.’’ 862
Regulation Best Interest enhances the
current standard of conduct for brokerdealers and codifies it in an Exchange
Act rule. Regulation Best Interest is
designed to: (1) Enhance the current
standard of conduct applicable to
broker-dealers and associated persons
when they make a recommendation to a
retail customer of any securities
transaction or investment strategy
involving securities; (2) reduce conflicts
of interest that currently exist between
retail customers and broker-dealers and
their associated persons; and (3) reduce
this context, disclosure that is more salient with
respect to these observable variables may facilitate
comparisons across index funds.
860 See, e.g., Matthew L. Kozora, Security
Recommendations and the Liabilities of BrokerDealers (U.S. Sec. & Exch. Comm’n, Working Paper,
May 1, 2016), available at https://www.sec.gov/
files/Kozora_BD-Liability_05-2016.pdf, which
provides evidence from investor awards in FINRA
arbitrations that the author interprets as indicative
of informational rents being nonzero. See also our
more comprehensive discussion in Section III.B.3.c,
infra, about potential investor harm associated with
investment advice, including from potential
informational rents.
861 See Proposing Release at 21643.
862 Another way principals and agents negotiate
around market frictions is through ‘‘side
payments.’’ In a transaction between two parties, a
side payment is a monetary exchange from one
party to another that is not part of the transaction.
This mechanism is discussed in the literature on
bilateral externalities, which focuses on how the
actions of one party can affect the well-being of the
other party. This mechanism also applies to the
relationship between a broker-dealer and a retail
customer because the action taken by a brokerdealer, namely providing a recommendation, may
affect the well-being of the retail customer receiving
that recommendation. In the literature on bilateral
externalities, if the party taking these externality
actions is unconstrained, the allocation of resources
across the two parties may be inefficient. However,
in certain circumstances, the parties can avoid this
inefficient outcome through side payments that
neutralize the effect of the externality on the
allocations. See, e.g., Mas-Colell et al. (1995), supra
footnote 846, specifically Part 3: Market
Equilibrium and Market Failure for a discussion of
bilateral externalities.

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information asymmetries that currently
limit the ability of retail customers to
evaluate the efficiency of
recommendations they receive from
broker-dealers and their associated
persons. In each of these three ways,
Regulation Best Interest is designed to
reduce the agency costs in the
relationship between broker-dealers and
their retail customers, including in
situations where the existing legal and
regulatory regime that governs brokerdealers’ standard of conduct has had
limited effectiveness.
3. Comments on Market Failure of the
Principal-Agent Relationship and
Quantification; Comments That the
Broker-Dealer, Commission-Based
Model Should Be Severely Restricted or
Eliminated
The economic analysis in the
Proposing Release characterized the
relationship between a retail customer
and a broker-dealer as one between a
principal (the retail customer) and an
agent (the broker-dealer).863 The
analysis noted that the potential conflict
between interests and the differences
between the information sets available
to the agent and the principal may result
in agency costs. It further noted that the
inability of the broker-dealers and retail
customers to overcome the market
frictions underlying these agency costs
may result in inefficient allocations of
resources. An inability of the principal
and the agent to efficiently negotiate
around the frictions that produce agency
costs and take actions that would
increase the efficiency of their
allocations is what economists refer to
as a ‘‘market failure’’ of the principalagent relationship,864 generally, and of
the agency relationship between the
retail customer and the broker-dealer,
specifically.865
The analysis in the Proposing Release
recognized that while the Commission
cannot provide a quantified estimate of
the magnitude of this agency cost, the
existence of these costs and their
persistence justifies regulatory
intervention.866
A number of commenters questioned
this approach. Certain of these
commenters stated that the Commission
needs to more fully identify the market
failure that needs to be addressed, and
certain commenters stated that the
Commission did not provide a
Proposing Release at 21629–21631.
e.g., Mas-Colell et al. (1995), supra
footnote 846.
865 In general, because frictions such as
asymmetric information are ever present, all
markets and agency relationships have some degree
of market failure.
866 See Proposing Release at 21631.

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863 See

864 See,

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Fmt 4701

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quantitative assessment of the severity
of the market failure that would prompt
the need for regulatory intervention.867
We address these concerns below.
With respect to the issue of
appropriately identifying the market
failure, one commenter questioned
whether the relationship between the
retail customer and the broker-dealer is
a principal-agent relationship.868 This
commenter stated that in many
instances, a broker-dealer’s provision of
recommendations to a retail customer
resembles an arm’s length transaction
(e.g., purchasing a car) that benefits the
more informed broker-dealer at the
expense of the less informed retail
customer. This commenter disagreed
with the Commission’s broader view
that the market failure stems from the
agency costs of the relationship between
867 See, e.g., CFA August 2018 Letter at 105,
noting that ‘‘[c]orrectly diagnosing the problem
requires identifying and analyzing the market
failure that has occurred in investment advice
securities markets, as well as assessing the
significance of that problem’’; See also, e.g., Letter
from Charles Cox, Former SEC Chief Economist, et
al. (Feb. 6, 2019) (‘‘Former SEC Senior Economists
Letter’’) at 2, noting that ‘‘the Commission confronts
important questions about advisers balancing their
own compensation against the effect of that
compensation on the customer’s expected returns.
We wonder if the extreme asymmetry of
information and financial sophistication between
advisers and many of their clients constitutes a
market failure that the April proposals are intended
to ameliorate.’’ In addition, the Former SEC Senior
Economists Letter raised three main concerns with
the economic analysis in the Proposing Release: (1)
The discussion of the potential problems in the
customer-adviser relationship was incomplete and
identified other features of the market for ongoing
retail investment advice that might be problematic;
(2) there was inadequate discussion and analysis of
the existing economic literature on financial advice;
and (3) there were questions of whether the
disclosure requirements in the Proposing Release
would provide meaningful information for
customers. The economic analysis addresses these
concerns. For instance, with respect to (1), Section
III.A.2 provides a more in depth discussion of the
potential problems that may arise when a brokerdealer provides recommendations to a retail
customer. With respect to (2), Section III.B.3
engages more fully with the economic literature on
financial advice. Finally, with respect to (3),
Sections III.B.4, III.C.2, and III.C.4 provide
discussions on the effectiveness of the disclosure
requirements of Regulation Best Interest.
868 See CFA August 2018 Letter at 107, noting that
‘‘[t]he Commission’s economic analysis gets off to
a faulty start by mischaracterizing, or at least oversimplifying, the broker-customer ‘advice’
relationship, as a principal-agent relationship.
While there are certainly instances where a broker
and its customer can exhibit features of a bona fide
principal-agent relationship—for example when
executing a customer’s order—it’s not clear that, in
the context of receiving investment
recommendations, those same characteristics are
present. Certainly, the brokerage industry expressly
refutes this characterization, having argued
successfully in the Fifth Circuit that brokers engage
in nothing more than an arm’s length commercial
sales transaction, no different from a car dealer
soliciting interest in inventory.’’

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a broker-dealer and a retail customer,869
and instead stated that the market
failure is due to conflicts of interest
caused by the way broker-dealers and
their associated persons are generally
compensated for providing
recommendations to retail customers.870
Similarly, another commenter stated
that the Commission failed to discuss
how the current compensation practices
associated with providing
recommendations to retail customers
creates incentives for the broker-dealer
and its associated persons to favor one
securities transaction or investment
strategy over another when making
recommendations to retail customers.871
This commenter further questioned
whether the information asymmetry and
the discrepancy in the level of financial
sophistication between broker-dealers
and their retail customers constitute a
market failure.872 One commenter noted
that the poor performance of actively
managed funds that are being
recommended by broker-dealers to
small retail customers reflects a
principal-agent problem that causes an
‘‘enormous’’ wealth transfer from retail
customers to the financial industry,
including broker-dealers.873 This
commenter stated that this problem
arises because of the broker-dealer’s
commission-based compensation for
providing recommendations and
because of the information asymmetries
between the broker-dealer and the retail
customer at the time of the
recommendation.874 This commenter
869 See CFA August 2018 Letter at 108, noting that
‘‘[t]ypically, principal-agent relationships don’t
involve third party payments to the agent, which
can adversely affect the level of loyalty the agent
provides to the principal.’’
870 See CFA August 2018 Letter at 107, noting that
the Commission ‘‘fails to acknowledge that conflicts
of interest are a real problem that result in real harm
to investors [. . .]’’ and ‘‘[. . .] the Release fails to
make clear whether the Commission is truly seeking
to address the underlying problem of conflicts’
harmful impact on investors.’’
871 See Former SEC Senior Economists Letter at
3, noting that ‘‘[n]owhere does the EA emphasize
that an adviser’s compensation provides numerous
opportunities for her to favor one investment over
another on the basis of the compensation it pays to
her or to her firm.’’
872 See Former SEC Senior Economists Letter at
2. See also supra footnote 867 that describes in
more detail the concerns raised by this commenter.
873 See Letter from Monique Morrissey,
Economist and Heidi Shierholz, Senior Economist
and Director of Policy, EPI (Aug. 7, 2018) (‘‘EPI
Letter’’) at 6, noting that ‘‘[i]n an equilibrium with
knowledgeable investors, we would expect returns
from active and passive strategies to be equal. The
fact that actively-managed funds marketed to small
investors tend to perform poorly reflects a market
distortion—naivete´—or a ‘principal-agent problem’
in economics parlance, which results in enormous
transfers from investors to the financial industry.’’
874 See EPI Letter at 2, noting that ‘‘[c]onflicts of
interest between buyers and sellers are
commonplace. Many salesmen, including brokers

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also stated that recommendations
subject to conflicts of interest may have
no value for retail customers.875
As an initial matter, in response to
comments regarding the need to discuss
fully the existing market failure, it is
important to recognize that the
Commission has been studying and
carefully considering the issues related
to the broker-dealer-client relationship
and the related standard of conduct for
broker-dealers for many years, which
led to the development of the Proposing
Release and the economic analysis
therein.876 In light of the comments on
the Proposing Release, the extensive
outreach by the Commission and staff,
as well as investor testing, the
Commission has more specifically and
fully described the relationship between
the broker-dealer and the client, the
related market failure, and the resulting
potential economic effects of Regulation
Best Interest in addressing the market
failure.877
The Commission continues to believe
that agency costs are at the root of
existing allocative inefficiencies in the
market for broker-dealer advice.
Moreover, this economic analysis
recognizes that a proper understanding
of the economic fundamentals of an
investor’s decision to allocate resources
across market and economic conditions
and over time is central to identifying
the frictions that cause inefficiencies in
the agency relationship between a
broker-dealer and a retail customer.
In response to the commenter that
stated that in a principal-agent
relationship agents do not receive
compensation from third parties (e.g.,
investment sponsors), the Commission
notes that the compensation that the
investment sponsor provides to the
agent is ultimately funded by the
principal (i.e., the retail customer).878 In
addition, in response to the
commenter’s concern that a brokerdealer’s provision of recommendations
and car dealers, are paid on commission. However,
it has long been recognized that markets for
professional advice are different from markets for
automobiles because information asymmetries are
inherent in these transactions.’’
875 See EPI Letter at 8, noting that ‘‘the SEC never
considers that ‘advice’ offered may not just be of
lower quality than expected, but worse than no
advice at all’’ and that ‘‘much of the ‘advice’
provided by broker-dealers not only lacks value, but
is actually harmful, steering savers to higher-cost
products and costly services that will reduce their
future standard of living compared to how they
would fare in the absence of this ‘advice.’ This may
be true whether or not, in the absence of conflicted
‘advice,’ investors would have availed themselves
of more paid or free advice from more impartial
sources.’’
876 See Proposing Release at 21579–21583.
877 See supra Section III.A.2.
878 See supra footnote 869.

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33405

to retail customers resembles an arm’s
length transaction that is ‘‘no different
from a car dealer soliciting interest in
inventory,’’ 879 the Commission notes
that under the current regulatory regime
broker-dealers and their associated
persons are subject to a suitability
standard of conduct that has been
interpreted to ‘‘be consistent with [the]
customer’s best interests.’’ 880 In
contrast, in an arm’s length transaction,
the parties involved are generally not
subject to a standard of conduct that
would constrain the more informed
party from acting solely in its own
interest.881 Finally, in response to the
commenter’s concern with respect to the
identification of the market failure,882
the Commission notes that while
conflicts of interest arise in many types
of transactions, in certain instances the
parties involved can negotiate an
arrangement between themselves that
would reduce the effect of conflicts of
interest on the allocation of resources
across the parties and improve the
efficiency of this allocation. The
Commission further notes that agency
costs may deter the parties from
engaging in privately negotiated
arrangements that would improve the
efficiency of the allocation of resources
between the parties. From this
perspective, the Commission believes
that it is the agency costs rather than the
conflicts of interest themselves that
should be viewed as the source of the
market failure.
In response to the commenter that
noted that the Commission did not
discuss how the compensation received
by the broker-dealer and its associated
persons creates incentives to favor one
security or investment strategy over
another when making recommendations
to retail customers,883 the Commission
has incorporated into this economic
analysis a detailed discussion of the
incentives created by the current
compensation practices associated with
providing recommendations to retail
customers.884 In addition, in response to
the commenter’s concerns about
whether the information asymmetry and
the discrepancy in the level of financial
sophistication between retail customers
and a broker-dealer and its associated
persons are the source of market failure,
the Commission notes that this
economic analysis establishes a more
879 See

supra footnote 868.
infra footnote 979 and accompanying text.
881 However, in certain markets, there may be
market mechanisms in place that would prevent the
more informed party to a transaction from acting
solely in its own interest.
882 See supra footnote 870.
883 See supra footnote 871.
884 See infra Section III.C.4.
880 See

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clear link between bounded rationality,
including access to information and
financial literacy of retail customers,
and agency costs, and reflects our
conclusion that the agency costs are at
the root of the market failure.
The Commission further notes that
the so-called ‘‘informational rent’’ that a
broker-dealer may be incentivized to
extract from a retail customer to take
advantage of the information asymmetry
or the discrepancy in the level of
financial sophistication is one
component of the agency costs
associated with the relationship
between a retail customer and a brokerdealer. In addition, the Commission
notes that the evidence on the size of
the agency costs associated with such
informational rents is limited.885 This
evidence is not generally supportive of
a commenter’s assessment that the
wealth transfer from retail customers to
broker-dealers is ‘‘enormous.’’ 886 The
Commission agrees with this
commenter, who stated that the way
broker-dealers are compensated for
providing recommendations and the
information asymmetry between retail
customers and broker-dealers are
important determinants of the agency
costs. However, based on the evidence
discussed below, the Commission
disagrees with this commenter’s
assessment that the advice provided by
the associated persons of the brokerdealer has no value.887
With respect to the issue of measuring
the severity of the market failure, some
commenters stated that the Commission
failed to take into account existing
academic literature that provides
evidence of investor harm caused by
accepting advice from the associated
persons of the broker-dealer. A subset of
these commenters believed that the
evidence provided in some of these
academic studies is compelling and that
the Commission should use it to
quantify the severity of the market
failure.888 One commenter also urged
the Commission to supplement the
academic evidence on investor harm
with evidence from data available to the
Commission from regulatory
oversight.889
885 See supra Section III.A.2 and infra Section
III.B.3.
886 See supra footnote 873.
887 See infra Section III.B.3.b.
888 See, e.g., CFA August 2018 Letter; EPI Letter;
AARP August 2018 Letter; Better Markets August
2018 Letter; Former SEC Senior Economists Letter.
889 See CFA August 2018 Letter at 112. This
commenter suggested that we present additional
information about the existence and frequency of
the potential harm to investors ‘‘that results from
conflicted brokerage ‘advice’,’’ which may
collectively be seen as misconduct by financial
professionals.

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In response to these comments, the
Commission maintains that the
existence of misconduct that
commenters requested the Commission
to document does not render the
approach taken in Regulation Best
Interest irrational, inappropriate, or
unreasonable, nor does it suggest that an
alternative approach would be more
effective in fulfilling the Commission’s
mission. The Commission is aware and
understands the concerns raised by the
commenters with regards to the
evidence on investor harm and the
extent to which such evidence can
inform on our understanding of the
severity of the market failure in the
market for broker-dealer advice. As
discussed in the Proposing Release and
reiterated in this economic analysis, the
Commission believes that retail
investors can be harmed when they
accept recommendations from a brokerdealer that places the financial or other
interest of the broker-dealer or its
associated persons ahead of the interests
of the retail customers. In addition, this
economic analysis engages more fully
with the economic literature on
financial advice and considers these
studies in analyzing the costs and
benefits associated with Regulation Best
Interest.890
B. Economic Baseline
This section discusses, as it relates to
this rulemaking, the current state of the
broker-dealer and investment adviser
markets; the current regulatory
environment and market practices
surrounding the provision of
recommendations by broker-dealers;
evidence on the potential value and
harm of investment advice; and how
issues related to trust, financial literacy,
and disclosure effectiveness affect
conflicts between investors and
financial professionals. The economic
baseline has been revised and expanded
relative to the Proposing Release to
address comments, discussed more fully
below.
1. Providers of Financial Services 891
a. Broker-Dealers
Regulation Best Interest will affect the
market for broker-dealer services,
infra Section III.B.3.c.
addition to broker-dealers and Commissionregistered investment advisers discussed below in
the baseline, there are a number of other entities,
such as state-registered investment advisers,
commercial banks and bank holding companies,
and insurance companies, which also provide
financial advice services to retail customers;
however, because of unavailability of data, the
Commission is unable to estimate the number of
some of those other entities that are likely to
provide financial advice to retail customers as well
as their size and the scope of services they provide.

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891 In

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Fmt 4701

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including firms that are dually
registered as broker-dealers and
investment advisers 892 and brokerdealers affiliated with an investment
adviser.893 The market for broker-dealer
services encompasses a small set of
large and medium sized broker-dealers
and thousands of smaller broker-dealers
competing for niche or regional
segments of the market.894 The market
for broker-dealer services includes many
different markets for a variety of
services, including (1) managing orders
for customers and routing them to
various trading venues; (2) providing
advice to customers that is in
connection with and reasonably related
to their primary business of effecting
securities transactions; 895 (3) holding
retail customers’ funds and securities;
(4) handling clearance and settlement of
trades; (5) intermediating between retail
customers and carrying/clearing
brokers; (6) dealing in corporate debt
and equities, government bonds, and
municipal bonds, among other
securities; (7) privately placing
securities; and (8) effecting transactions
in mutual funds that involve
transferring funds directly to the issuer.
Some broker-dealers may specialize in
just one narrowly defined service, while
A number of broker-dealers (see infra footnote 899)
have non-securities businesses, such as insurance
or tax services. As of December 2018, there were
approximately 17,300 state-registered investment
advisers. The Department of Labor in its Regulatory
Impact Analysis identifies approximately 398 life
insurance companies that could provide advice to
retirement investors. See infra footnote 1002.
892 Not all firms that are dually registered as an
investment adviser and a broker-dealer offer both
brokerage and advisory accounts to retail investors.
For example, some dually registered firms offer
advisory accounts to retail investors but offer only
brokerage services, such as underwriting services,
to institutional clients. For purposes of the
discussion of the baseline in this economic
analysis, a dually registered firm is any firm that is
dually registered with the Commission as an
investment adviser and a broker-dealer.
893 Some broker-dealers may be affiliated with
investment advisers and not dually registered. From
Question 10 on Form BD, 2,098 (55.7%) brokerdealers report that, directly or indirectly, they
control, are controlled by, or are under common
control with an entity that is engaged in the
securities or investment advisory business.
Comparatively, 2,421 (18.2%) SEC-registered
investment advisers report an affiliate that is a
broker-dealer in Section 7A of Schedule D of Form
ADV, including 1,878 SEC-registered investment
advisers that report an affiliate that is a registered
broker-dealer. Approximately 77% of total
regulatory AUM are managed by the 2,421 SECregistered investment advisers.
894 See Risk Management Controls for Brokers or
Dealers with Market Access, Securities Exchange
Act Release No. 63241 (Nov. 3, 2010) [75 FR 69791,
69822 (Nov. 15, 2010)]. For simplification, we
present our analysis as if the market for brokerdealer services encompasses one broad market with
multiple segments, even though, in terms of
competition, it could also be discussed in terms of
numerous interrelated markets.
895 See Solely Incidental Interpretation.

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Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations
others may provide a wide variety of
services.
As of December 2018, there were
approximately 3,764 registered brokerdealers with over 140 million customer
accounts. In total, these broker-dealers
have over $4.3 trillion in total assets,
which are total broker-dealer assets as
reported on Form X–17a–5.896 More
than two-thirds of all brokerage assets
and close to one-third of all customer
accounts are held by the 17 largest
broker-dealers, as shown in Table 1,
Panel A.897 Of the broker-dealers
registered with the Commission as of
December 2018, 563 broker-dealers were
dually registered as investment
advisers.898 These firms hold over 90
million (63%) customer accounts.
Approximately 539 broker-dealers

(14%) report at least one type of nonsecurities business, including insurance,
retirement planning, mergers and
acquisitions, and real estate, among
others.899 Approximately 73.5% of
registered broker-dealers report retail
customer activity.900
Panel B of Table 1 is limited to the
broker-dealers that report some retail
investor activity. As of December 2018,
there were approximately 2,766 brokerdealers that served retail investors, with
over $3.8 trillion in total assets (89% of
total broker-dealer assets) and almost
139 million (97%) customer
accounts.901 Of those broker-dealers
serving retail investors, 452 were dually
registered as investment advisers.902
The number of broker-dealers that serve
retail customers (i.e., 2,766) likely

33407

overstates the number of broker-dealers
that will be subject to Regulation Best
Interest, because not all broker-dealers
that serve retail investors provide
recommendations to retail investors. We
do not have reliable data to determine
the precise number of broker-dealers
that provide recommendations (and the
extent to which broker-dealers that
provide recommendations do so, as
opposed to executing unsolicited
trades), and as a result, we have
assumed, for purposes of this Section III
and Sections IV (Paperwork Reduction
Act Analysis) and V (Final Regulatory
Flexibility Act Analysis) that 2,766
broker-dealers will be subject to
Regulation Best Interest.

TABLE 1—PANEL A: REGISTERED BROKER-DEALERS AS OF DECEMBER 2018 903
[Cumulative broker-dealer total assets and customer accounts] 904

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Size of broker-dealer
(total assets)

Total number
of BDs

Number of
dually
registered
BDs

Cumulative
total assets
(billion)

Cumulative
number of
customer
accounts 905

>$50 billion ...............................................................................................
$1 billion to $50 billion .............................................................................
$500 million to $1 billion ..........................................................................
$100 million to $500 million .....................................................................
$10 million to $100 million .......................................................................
$1 million to $10 million ...........................................................................
<$1 million ................................................................................................

17
114
35
105
490
1,021
1,982

10
23
7
20
115
182
206

$2,879
1,363
23
23
17
3.6
0.5

40,550,200
96,037,591
397,814
1,603,818
4,277,432
460,748
5,675

Total ..................................................................................................

3,764

563

4,309

143,333,278

896 Assets are estimated by Total Assets
(allowable and non-allowable) from Part II of the
FOCUS filings (Form X–17A–5 Part II, available at
https://www.sec.gov/files/formx-17a-5_2.pdf) and
correspond to balance sheet total assets for the
broker-dealer. The Commission does not have an
estimate of the total amount of customer assets for
broker-dealers. We estimate broker-dealer size from
the total balance sheet assets as described above.
897 Approximately $4.24 trillion of total assets of
broker-dealers (98%) are at broker-dealers with total
assets in excess of $1 billion. Of the 33 dualregistrants in the group of broker-dealers with total
assets in excess of $1 billion, total assets for these
dual-registrants are $2.32 trillion (54%) of aggregate
broker-dealer assets. Of the remaining 99 brokerdealers with total assets in excess of $1 billion that
are not dual-registrants, 91 have affiliated
investment advisers.
898 This number includes the number of brokerdealers who are also registered as state investment
advisers. For purposes of the discussion of the
baseline in this economic analysis, a dual-registrant
is any firm that is dually registered with either the
Commission or a state as an investment adviser and
a broker-dealer. Excluding state registered advisers,
there are 359 entities that are dually registered with
the Commission as an investment adviser and a
broker-dealer.
899 We examined Form BD filings to identify
broker-dealers reporting non-securities business.
For the 393 broker-dealers reporting such business,
staff analyzed the narrative descriptions of these
businesses on Form BD, and identified the most
common types of businesses: Insurance (202),

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management/financial/other consulting (99),
advisory/retirement planning (71), mergers and
acquisitions (70), foreign exchange/swaps/other
derivatives (28), real estate/property management
(30), tax services (15), and other (146). Note that a
broker-dealer may have more than one line of nonsecurities business.
900 The value of customer accounts is not
available from FOCUS data for broker-dealers.
Therefore, to obtain estimates of firm size for
broker-dealers, we rely on the value of brokerdealers’ total assets as obtained from FOCUS
reports. Retail sales activity is identified from Form
BR, which categorizes retail activity broadly (by
marking the ‘‘sales’’ box) or narrowly (by marking
the ‘‘retail’’ or ‘‘institutional’’ boxes as types of sales
activity). We use the broad definition of sales as we
preliminarily believe that many firms will just mark
‘‘sales’’ if they have both retail and institutional
activity. However, we note that this may capture
some broker-dealers that do not have retail activity,
although we are unable to estimate that frequency.
901 Total assets and customer accounts for brokerdealers that serve retail customers also include
institutional accounts. Data available from Form BD
and FOCUS data is not sufficiently granular to
identify the percentage of retail and institutional
accounts at firms.
902 Excluding state registered advisers, there are
359 entities that are dually registered with the
Commission as an investment adviser and a brokerdealer. Of the 31 dual-registrants in the group of
retail broker-dealers with total assets in excess of
$500 million, total assets for these dual-registrants
are nearly $2.01 trillion (53%) of aggregate retail

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Fmt 4701

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broker-dealer assets (Table 1, Panel B). Of the
remaining 81 retail broker-dealers with total assets
in excess of $500 million that are not dualregistrants, 76 have affiliated investment advisers.
903 The data is obtained from FOCUS filings as of
December 2018. Note that there may be a doublecounting of customer accounts among, in particular,
the larger broker-dealers as they may report
introducing broker-dealer accounts as well in their
role as clearing broker-dealers.
904 In addition to the approximately 143 million
individual accounts at broker-dealers, there are
approximately 302,000 omnibus accounts (0.2% of
total accounts at broker-dealers), with total assets of
$32.1 billion, across all 3,764 broker-dealers, of
which approximately 99% are held at brokerdealers with greater than $1 billion in total assets.
See also supra footnote 897. Omnibus accounts
reported in FOCUS data are the accounts of noncarrying broker-dealers with carrying brokerdealers. These accounts may have securities of
multiple customers (of the non-carrying firm), or
securities that are proprietary assets of the noncarrying broker-dealer. We are unable to determine
from the data available how many customer
accounts non-carrying broker-dealers may have.
The data does not allow the Commission to parse
the total assets in those accounts to determine to
whom such assets belong. Therefore, our estimate
may be under inclusive of all customer accounts
held at broker-dealers.
905 Customer Accounts includes both brokerdealer and investment adviser accounts for dualregistrants.

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TABLE 1—PANEL B: REGISTERED RETAIL BROKER-DEALERS AS OF DECEMBER 2018
[Cumulative broker-dealer total assets and customer accounts]
Size of broker-dealer
(total assets)

Total number
of BDs

Number of
dually
registered
BDs

Cumulative
total assets
(billion)

Cumulative
number of
customer
accounts

>$50 billion ...............................................................................................
$1 billion to $50 billion .............................................................................
$500 million to $1 billion ..........................................................................
$100 million to $500 million .....................................................................
$10 million to $100 million .......................................................................
$1 million to $10 million ...........................................................................
<$1 million ................................................................................................

16
75
21
84
378
783
1,409

8
18
5
17
96
153
155

$2,806
990
13
18
14
2.8
0.4

40,545,792
91,991,118
365,632
1,603,818
3,762,620
450,132
5,672

Total BDs 906 .....................................................................................

2,766

452

3,844

138,724,784

Table 2 reports information on
brokerage commissions,907 fees, and
selling concessions from the fourth
quarter of 2018 for all broker-dealers,
including dual-registrants.908 We
observe significant variation in the
sources of revenues for broker-dealers,
with large broker-dealers, on average,
generating substantially higher levels of
aggregate commission and fee revenues
(on a nominal basis) than smaller
broker-dealers. On average, brokerdealers, including those that are dually
registered as investment advisers, earn
about $5.1 million per quarter in
revenue from commissions and nearly
four times that amount in fees,909
although the Commission notes that fees
encompass various types of fees, not just
fees for advisory services.910 The level
of revenues earned by broker-dealers
(including dually registered firms) for
commissions and fees increases with
broker-dealer size, but also tends to be
more heavily weighted toward
commissions for broker-dealers with

less than $10 million in assets and is
weighted more heavily toward fees for
broker-dealers with assets in excess of
$10 million. For example, for the 114
broker-dealers with assets between $1
billion and $50 billion, average
revenues from commissions are
approximately $45 million, while
average revenues from fees are
approximately $225 million.911
In addition to revenue generated from
commissions and fees, broker-dealers
may also receive revenues from other
sources, including margin interest,
underwriting, research services, and
third-party selling concessions, such as
from sales of investment company
(‘‘IC’’) shares. As shown in Table 2,
Panel A, these selling concessions are
generally a smaller fraction of brokerdealer revenues than either
commissions or fees, except for brokerdealers with total assets between $10
million and $100 million. For these
broker-dealers, revenue from third-party
selling concessions is the largest

category of revenues and constitutes
approximately 42% of total revenues
earned by these firms.
Table 2, Panel B below provides
aggregate revenues by revenue type
(commissions, fees, or selling
concessions from sales of IC shares) for
broker-dealers delineated by whether
the broker-dealer is also a dualregistrant. Broker-dealers dually
registered as investment advisers have a
significantly larger fraction of their
revenues from fees compared to
commissions or selling concessions,
whereas broker-dealers that are not
dually registered generate
approximately 42% of their advicerelated revenues as commissions and
only 33% of their advice-related
revenues from fees, although we lack
granularity to determine whether
advisory services, in addition to
supervision and administrative services,
contribute to fees at standalone brokerdealers.

TABLE 2—PANEL A: AVERAGE BROKER-DEALER REVENUES FROM REVENUE GENERATING ACTIVITIES 912
Size of broker-dealer in total assets

N

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>$50 billion ...............................................................................................
$1 billion–$50 billion ................................................................................
500 million–1 billion .................................................................................
100 million–500 million ............................................................................
10 million–100 million ..............................................................................
906 Total BDs includes all retail-facing brokerdealers, including those dual-registrants that have
retail-facing broker-dealers.
907 Mark-ups or mark-downs are not included as
part of the brokerage commission revenue in
FOCUS data; instead, they are included in Net
Gains or Losses on Principal Trades, but are not
uniquely identified as a separate revenue category.
908 Source: FOCUS data.
909 Fees, as detailed in the FOCUS data, include
fees for account supervision, investment advisory
services, and administrative services. Beyond the
broad classifications of fee types included in fee
revenue, we are unable to determine whether fees
such as Rule 12b–1 fees, sub-accounting, or other
such service fees (e.g., payments by an investment
company for personal service and/or maintenance

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Commissions
17
114
35
105
490

$170,336,258
45,203,225
8,768,547
12,801,889
3,428,843

of shareholder accounts) are included. The data
covers both broker-dealers and dually registered
firms. FINRA’s Supplemental Statement of Income,
Line 13975 (Account Supervision and Investment
Advisory Services) denotes that fees earned for
account supervision are those fees charged by the
firm for providing investment advisory services
where there is no fee charged for trade execution.
Investment Advisory Services generally encompass
investment advisory work and execution of client
transactions, such as wrap arrangements. These fees
also include fees charged by broker-dealers that are
also registered with the Commodity Futures
Trading Commission (‘‘CFTC’’), but do not include
fees earned from affiliated entities (Item A of
question 9 under Revenue in the Supplemental
Statement of Income).

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Fmt 4701

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Fees 913
$414,300,268
225,063,257
30,141,270
33,726,336
8,950,892

Sales of IC
shares
$23,386,192
53,671,602
5,481,248
16,610,013
9,092,971

910 With respect to the FOCUS data, additional
granularity of what services comprise ‘‘advisory
services’’ is not available. See also Solely Incidental
Interpretation.
911 An estimate of total fees in this size category
would be 114 broker-dealers with assets between $1
billion and $50 billion multiplied by the average fee
revenue of $225 million, or $25.65 billion in total
fees.
912 The data is obtained from December 2018
FOCUS reports and averaged across size groups.
913 Fees, as detailed in the FOCUS data, include
fees for account supervision, investment advisory
services, and administrative services. The data
covers both broker-dealers and dually registered
firms.

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33409

TABLE 2—PANEL A: AVERAGE BROKER-DEALER REVENUES FROM REVENUE GENERATING ACTIVITIES 912—Continued
Size of broker-dealer in total assets

N

Commissions

Sales of IC
shares

Fees 913

1 million–10 million ..................................................................................
<1 million ..................................................................................................

1,021
1,982

996,130
197,907

1,037,825
269,459

652,905
85,219

Average of All Broker-Dealers ..........................................................

3,764

5,092,808

21,948,551

4,368,823

TABLE 2—PANEL B: AGGREGATE TOTAL REVENUES FROM REVENUE GENERATING ACTIVITIES FOR BROKER-DEALERS
BASED ON DUAL-REGISTRANT STATUS
Broker-dealer type

Commissions
(billion)

N

Sales of
IC shares
(billion)

Fees 914
(billion)

Dually Registered as IAs .........................................................................
Standalone Registered BDs ....................................................................

563
3,201

$4.62
4.07

$17.56
3.22

$2.65
2.55

All ......................................................................................................

3,764

8.69

20.78

5.20

As shown in Table 3, based on
responses to Form BD, broker-dealers’
most commonly provided business lines
include private placements of securities
(62.7% of broker-dealers); retail sales of
mutual funds (55.4%); acting as a broker
or dealer retailing corporate equity

securities over the counter (52.0%);
acting as a broker or dealer retailing
corporate debt securities (47.2%); acting
as a broker or dealer selling variable
contracts, such as life insurance or
annuities (41.0%); acting as a broker of
municipal debt/bonds or U.S.

government securities (39.8% and
37.4%, respectively); acting as an
underwriter or selling group participant
of corporate securities (31.2%); and
investment advisory services (26.4%),
among others.915

TABLE 3—LINES OF BUSINESS AT RETAIL BROKER-DEALERS AS OF DECEMBER 2018
Total

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Line of business

Number of
broker-dealers

Private Placements of Securities .........................................................................................................................
Mutual Fund Retailer ...........................................................................................................................................
Broker or Dealer Retailing:
Corporate Equity Securities OTC .................................................................................................................
Corporate Debt Securities ............................................................................................................................
Variable Contracts ........................................................................................................................................
Municipal Debt/Bonds Broker ..............................................................................................................................
U.S. Government Securities Broker ....................................................................................................................
Put and Call Broker or Dealer or Options Writer ................................................................................................
Underwriter or Selling Group Participant—Corporate Securities ........................................................................
Non-Exchange Member Arranging For Transactions in Listed Securities by Exchange Member .....................
Investment Advisory Services .............................................................................................................................
Broker or Dealer Selling Tax Shelters or Limited Partnerships—Primary Market ..............................................
Trading Securities for Own Account ....................................................................................................................
Municipal Debt/Bonds Dealer ..............................................................................................................................
U.S. Government Securities Dealer ....................................................................................................................
Solicitor of Time Deposits in a Financial Institution ............................................................................................
Underwriter—Mutual Funds .................................................................................................................................
Broker or Dealer Selling Interests in Mortgages or Other Receivables ..............................................................
Broker or Dealer Selling Oil and Gas Interests ...................................................................................................
Broker or Dealer Making Inter-Dealer Markets in Corporate Securities OTC ....................................................
Broker or Dealer Involved in Networking, Kiosk, or Similar Arrangements (Banks, Savings Banks, Credit
Unions) .............................................................................................................................................................
Internet and Online Trading Accounts .................................................................................................................
Exchange Member Engaged in Exchange Commission Business Other than Floor Activities ..........................
Broker or Dealer Selling Tax Shelters or Limited Partnerships—Secondary Market .........................................
Commodities ........................................................................................................................................................
Executing Broker .................................................................................................................................................
Day Trading Accounts .........................................................................................................................................
Broker or Dealer Involved in Networking, Kiosk, or Similar Arrangements (Insurance Company or Agency) ..
Real Estate Syndicator ........................................................................................................................................
Broker or Dealer Selling Securities of Non-Profit Organizations ........................................................................
914 See

id.
BD requires applicants to identify the
types of business engaged in (or to be engaged in)
915 Form

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that accounts for 1% or more of the applicant’s
annual revenue from the securities or investment
advisory business. Table 3 provides an overview of

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Percent of
broker-dealers

1,735
1,533

62.70
55.40

1,438
1,306
1,132
1,101
1,035
993
862
785
730
619
614
475
339
308
237
216
207
207

51.97
47.20
40.91
39.79
37.41
35.89
31.15
28.37
26.38
22.37
22.19
17.17
12.25
11.13
8.57
7.81
7.48
7.48

197
192
171
164
162
107
89
88
94
71

7.12
6.94
6.18
5.93
5.85
3.87
3.22
3.18
3.40
2.57

the types of businesses listed on Form BD, as well
as the frequency of participation in those businesses
by registered broker-dealers as of December 2018.

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33410

Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations
TABLE 3—LINES OF BUSINESS AT RETAIL BROKER-DEALERS AS OF DECEMBER 2018—Continued
Total
Line of business

Number of
broker-dealers

Exchange Member Engaged in Floor Activities ..................................................................................................
Broker or Dealer Selling Securities of Only One Issuer or Associate Issuers ...................................................
Prime Broker ........................................................................................................................................................
Crowdfunding FINRA Rule 4518(a) .....................................................................................................................
Clearing Broker in a Prime Broker ......................................................................................................................
Funding Portal .....................................................................................................................................................
Crowdfunding FINRA Rule 4518(b) .....................................................................................................................
Number of Retail-Facing Broker-Dealers ............................................................................................................

b. Investment Advisers
Other parties that could be affected by
Regulation Best Interest are SEC- or
state-registered investment advisers,
because Regulation Best Interest could
affect the competitive landscape in the
market for the provision of financial
advice.916 This section first discusses
SEC-registered investment advisers,
followed by a discussion of stateregistered investment advisers.
As of December 2018, there were
approximately 13,300 investment
advisers registered with the
Commission. The majority of SECregistered investment advisers report
that they provide portfolio management
services for individuals and small
businesses.917

Of all SEC-registered investment
advisers, 359 identify themselves as
dually registered broker-dealers.918
Further, 2,421 investment advisers
(18%) report an affiliate that is a brokerdealer, including 1,878 investment
advisers (14%) that report an SECregistered broker-dealer affiliate.919 As
shown in Panel A of Table 4 below, in
aggregate, investment advisers have over
$84 trillion in AUM. A substantial
percentage of AUM at investment
advisers is held by institutional clients,
such as investment companies, pooled
investment vehicles, and pension or
profit sharing plans; therefore, the total
number of accounts for investment
advisers is only 29% of the number of
customer accounts for broker-dealers.

61
43
21
21
14
8
5
2,766

Percent of
broker-dealers
2.20
1.55
0.76
0.76
0.51
0.29
0.18
..........................

Based on staff analysis of Form ADV
data, approximately 62% of registered
investment advisers (8,235) have some
portion of their business dedicated to
retail investors, including both high net
worth and non-high net worth
individual clients,920 as shown in Panel
B of Table 4.921 In total, these firms have
approximately $41.4 trillion of AUM.922
Approximately 8,200 registered
investment advisers (61%) serve almost
32 million non-high net worth
individual clients and have
approximately $4.8 trillion in AUM,
while approximately 8,000 registered
investment advisers (60%) serve
approximately 4.8 million high net
worth individual clients with $6.15
trillion in AUM.923

TABLE 4—PANEL A: REGISTERED INVESTMENT ADVISERS (RIAS) AS OF DECEMBER 2018
[Cumulative RIA AUM and accounts]

Number of
RIAs

jbell on DSK3GLQ082PROD with RULES2

Size of investment adviser
(AUM)

Number of
dually
registered
RIAs

Cumulative
AUM
(billion)

Cumulative
number of
accounts

>$50 billion ...............................................................................................
$1 billion to $50 billion .............................................................................
$500 million to $1 billion ..........................................................................
$100 million to $500 million .....................................................................
$10 million to $100 million .......................................................................
$1 million to $10 million ...........................................................................
<$1 million ................................................................................................

270
3,453
1,635
5,927
1,070
162
782

15
121
47
119
24
3
30

$59,264
22,749
1,151
1,397
59
0.8
0.02

20,655,756
13,304,154
1,413,099
5,135,070
310,031
69,664
13,976

Total ..................................................................................................

13,299

359

84,621

41,081,750

916 In addition to SEC-registered investment
advisers, which are the focus of this section,
Regulation Best Interest could also affect banks,
trust companies, insurance companies, and other
providers of financial advice.
917 Of the approximately 13,300 SEC-registered
investment advisers, 8,410 (63.24%) report in Item
5.G.(2) of Form ADV that they provide portfolio
management services for individuals and/or small
businesses. In addition, there are approximately
17,300 state-registered investment advisers, of
which 125 are also registered with the Commission.
Approximately 13,900 state-registered investment

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advisers are retail facing (see Item 5.D of Form
ADV).
918 See supra footnote 892.
919 Item 7.A.1 of Form ADV.
920 We note that the data on individual clients
obtained from Form ADV may not be exactly the
same as who would be a ‘‘retail customer’’ as
defined in Regulation Best Interest because the data
obtained from Form ADV regarding clients who are
individuals does not involve any test of use for
personal, family, or household purposes.
921 We use the responses to Items 5.D.(a)(1),
5.D.(a)(3), 5.D.(b)(1), and 5.D.(b)(3) of Part 1A of
Form ADV. If at least one of these responses was

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filled out as greater than 0, the firm is considered
as providing business to retail investors. Part 1A of
Form ADV.
922 The aggregate AUM reported for these
investment advisers that have retail investors
includes both retail AUM as well as any
institutional AUM also held at these advisers.
923 Estimates are based on IARD system data as
of December 31, 2018. The AUM reported here is
specifically that of those non-high net worth clients.
Of the 8,235 investment advisers serving retail
investors, 318 are also dually registered as brokerdealers.

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33411

TABLE 4—PANEL B: RETAIL REGISTERED INVESTMENT ADVISERS (RIAS) AS OF DECEMBER 2018
[Cumulative RIA AUM and accounts]

jbell on DSK3GLQ082PROD with RULES2

Size of investment adviser
(AUM)

Number
of RIAs

Number of
dually
registered
RIAs

Cumulative
AUM
(billion)

Cumulative
number of
accounts

>$50 billion ...............................................................................................
$1 billion to $50 billion .............................................................................
$500 million to $1 billion ..........................................................................
$100 million to $500 million .....................................................................
$10 million to $100 million .......................................................................
$1 million to $10 million ...........................................................................
<$1 million ................................................................................................

119
1,614
1,007
4,548
706
102
169

14
111
44
113
23
3
10

$30,291
9,570
700
1,026
40
0.5
0.02

20,592,326
13,224,188
1,392,842
5,287,584
308,285
69,534
13,946

Total IAs 924 ......................................................................................

8,235

318

41,434

40,887,325

In addition to SEC-registered
investment advisers, other investment
advisers are registered with state
regulators.925 As of December 2018,
there are 17,268 state-registered
investment advisers,926 of which 125 are
also registered with the Commission. Of
the state-registered investment advisers,
204 are dually registered as brokerdealers, while approximately 4.6% (786)
report a broker-dealer affiliate. In
aggregate, state-registered investment
advisers have approximately $334
billion in AUM. Eighty-two percent of
state-registered investment advisers
report that they provide portfolio
management services for individuals
and small businesses, compared to 63%
for Commission-registered investment
advisers.

Approximately 81% of stateregistered investment advisers (13,927)
have some portion of their business
dedicated to retail investors,927 and in
aggregate, these firms have
approximately $324 billion in AUM.928
Approximately 13,910 (81%) stateregistered advisers serve 14 million nonhigh net worth retail clients and have
approximately $137 billion in AUM,
while over 11,497 (67%) state-registered
advisers serve approximately 170,000
high net worth retail clients with $169
billion in AUM.929

924 Total IAs includes all retail-facing investment
advisers, including those dual-registrants that have
retail-facing SEC-registered broker-dealers and SECregistered investment advisers.
925 Item 2.A. of Part 1A of Form ADV and
Advisers Act rules 203A–1 and 203A–2 require an
investment adviser to register with the SEC if it (1)
is a large adviser that has $100 million or more of
regulatory AUM (or $90 million or more if an
adviser is filing its most recent annual updating
amendment and is already registered with the SEC);
(2) is a mid-sized adviser that does not meet the
criteria for state registration or is not subject to
examination; (3) meets the requirements for one or
more of the revised exemptive rules under section
203A; (4) is an adviser (or subadviser) to a
registered investment company; (5) is an adviser to

a business development company and has at least
$25 million of regulatory AUM; or (6) receives an
order permitting the adviser to register with the
Commission. Although the statutory threshold is
$100 million, the SEC raised the threshold to $110
million to provide a buffer for mid-sized advisers
with AUM close to $100 million to determine
whether and when to switch between state and
Commission registration. Advisers Act rule 203A–
1(a).
926 There are 70 investment advisers with latest
reported regulatory AUM in excess of $110 million
but that are not listed as registered with the SEC.
None of these 70 investment advisers has exempted
status with the Commission. For the purposes of
this rulemaking, these are considered potentially
erroneous submissions.

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c. Trends in the Relative Numbers of
Providers of Financial Services
Over time, the relative number of
broker-dealers and investment advisers
has changed. Figure 1 presented below

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Sfmt 4700

shows the time series trend of growth in
broker-dealers and SEC-registered
investment advisers between 2005 and
2018. Over the last 14 years, the number
of broker-dealers has declined from over
6,000 in 2005 to less than 4,000 in 2018,
while the number of investment
advisers has increased from
approximately 9,000 in 2005 to over
13,000 in 2018. This change in the
relative numbers of broker-dealers and
investment advisers over time likely is
a reflection of the market for investment
advice, and potentially of the choices
available to retail investors regarding
how to receive or pay for such advice,
the nature of the advice, and the
attendant conflicts of interest.

927 We use the responses to Items 5.D.(a)(1),
5.D.(a)(3), 5.D.(b)(1), and 5.D.(b)(3) of Part 1A. If at
least one of these responses was filled out as greater
than 0, the firm is considered as providing business
to retail investors. Form ADV Part 1A.
928 The aggregate AUM reported for these
investment advisers that have retail investors
includes both retail AUM as well as any
institutional AUM also held at these advisers.
929 Estimates are based on IARD system data as
of February 10, 2018. The AUM reported here is
specifically that of those non-high net worth
investors. Of the 13,927 state-registered investment
advisers serving retail investors, 134 may also be
dually registered as broker-dealers.

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jbell on DSK3GLQ082PROD with RULES2

Increases in the number of investment
advisers and decreases in the number of
broker-dealers could have occurred for a
number of reasons, including changes in
regulation and the enforcement of
regulation, anticipation of possible
regulatory changes, technological
innovation (e.g., the increase in
automated advisers, which are often
colloquially referred to as ‘‘roboadvisors’’ and online trading platforms),
product proliferation (e.g., index mutual
funds and exchange-traded products),
and industry consolidation driven by
economic and market conditions,
particularly among broker-dealers.930
Commission staff has observed the
transition by broker-dealers from
traditional brokerage services to also
providing investment advisory services
(often under an investment adviser
930 See Hester Peirce, Dwindling Numbers in the
Financial Industry, Brookings Center on Markets
and Regulation Report (May 15, 2017), available at
https://www.brookings.edu/research/dwindlingnumbers-in-the-financial-industry/ (‘‘Brookings
Report’’), which notes that ‘‘SEC restrictions have
increased by almost thirty percent [since 2000],’’
and that regulations post-2010 were driven in large
part by the Dodd-Frank Act. Further, the Brookings
Report observation of increased regulatory
restrictions on broker-dealers only reflects CFTC or
SEC regulatory actions, but does not include
regulation by FINRA, other SROs, National Futures
Association (‘‘NFA’’), or the Municipal Securities
Rulemaking Board (‘‘MSRB’’).

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registration, whether federal or state),
and many firms have been more focused
on offering fee-based accounts because
they provide a more steady source of
revenue than accounts that charge
commissions and are dependent on
transactions.931 Broker-dealers have
indicated that the following factors have
contributed to this migration: Provision
of revenue stability or increase in
931 Beyond Commission observations, the
Brookings Report, supra footnote 930, also
discusses the shift from broker-dealer to investment
advisory business models for retail investors, in
part due to the DOL Fiduciary Rule. Declining
transaction-based revenue due to declining
commission rates and competition from discount
brokerage firms has made fee-based securities and
services more attractive to providers of such
securities and services. Although discount
brokerage firms generally provide execution-only
services and do not compete directly in the advice
market with full service broker-dealers and
investment advisers, entry by discount brokers has
contributed to lower commission rates throughout
the broker-dealer industry. Further, fee-based
activity generates a steady stream of revenue
regardless of the customer trading activity, unlike
commission-based accounts. See also Angela A.
Hung, et al., Investor and Industry Perspectives on
Investment Advisers and Broker-Dealers, RAND
Institute for Civil Justice Technical Report (2008),
available at https://www.rand.org/content/dam/
rand/pubs/technical_reports/2008/RAND_
TR556.pdf (‘‘2008 RAND Study’’), which discusses
a shift from transaction-based to fee-based
brokerage accounts prior to recent regulatory
changes.

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profitability,932 perceived lower
regulatory burden, and provisions of
more services to retail customers.933
Some firms have reported record profits
as a result of moving clients into feebased accounts, and cite that it provides
‘‘stability and high returns.’’ 934
932 Commission staff examined a sample of recent
Form 10–K or Form 10–Q filings of large brokerdealers, many of which are dually registered as
investment advisers, that have a large fraction of
retail customer accounts to identify relevant brokerdealers. See, e.g., Edward Jones 3/14/2019 Form 10–
K available at https://www.sec.gov/Archives/edgar/
data/815917/000156459019007788/ck000081591710k_20181231.htm; Raymond James 11/21/2018
Form 10–K available at https://www.sec.gov/
Archives/edgar/data/720005/000072000518000083/
rjf-20180930x10k.htm; Stifel 2/20/2019 Form 10–K
available at https://www.sec.gov/Archives/edgar/
data/720672/000156459019003474/sf-10k_
20181231.htm; Wells Fargo 2/27/2019 10–K
available at https://www.sec.gov/Archives/edgar/
data/72971/000007297119000227/wfc12312018x10k.htm; and Ameriprise 2/23/2018
Form 10–K available at https://www.sec.gov/
Archives/edgar/data/820027/000082002718000008/
amp12312017.htm. We note that discussions in
Form 10–K and 10–Q filings of this sample of
broker-dealers here may not be representative of
other large broker-dealers or of small to mid-size
broker-dealers.
933 See infra Section III.B.2.e.ii, which discusses
industry trends, particularly in response to the DOL
Fiduciary Rule.
934 See Hugh Son, Morgan Stanley WealthManagement Fees Climb to All-Time High,
Bloomberg, Jan. 18, 2018, https://
www.bloomberg.com/news/articles/2018-01-18/
morgan-stanley-wealth-management-fees-hit-

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Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations
Further, there has been a substantial
increase in the number of retail clients
at investment advisers, both high net
worth clients and non-high net worth
clients as shown in Figure 2. Although
the number of non-high net worth retail
customers of investment advisers
dipped between 2010 and 2012, it

increased by more than 12 million new
non-high net worth retail clients
between 2012 and 2017, and has
declined since 2017. With respect to
AUM, we observe a similar, albeit more
pronounced pattern for non-high net
worth retail clients as shown in Figure
3. For high net worth retail clients, there

33413

has been a pronounced increase in AUM
since 2012, although AUM has leveled
off since 2015 and there also has been
leveling and subsequent reduction in
AUM for non-high net worth retail
clients over a similar time period.

Figure 2: Time Series of the Number of Retail Clients of
Investment Advisers (2010- 2018)

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-:&.stimatecl Noa-HNW ctitllls

record-on-stock-rally. Morgan Stanley increased the
percentage of client assets in fee-based accounts
from 37% in 2013 to 44% in 2017, while decreasing
the dependence on transaction-based revenues from
30% to 19% over the same time period. See Morgan

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2014~9 lOIS~ 1016~ 1017~9 1018~

-

- EstimateclHNW CHeats

Stanley Strategic Update (Jan. 18, 2018), available
at https://www.morganstanley.com/about-us-ir/
shareholder/4q2017-strategic-update.pdf. See also
Lisa Beilfuss & Brian Hershberg, WSJ Wealth
Adviser Briefing: The Reinvention of Morgan and

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Merrill, Adviser Profile, Wall St. J., Jan. 25, 2018,
https://blogs.wsj.com/moneybeat/2018/01/25/wsjwealth-adviser-briefing-the-reinvention-of-morganand-merrill-adviser-profile/.

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Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations

We estimate the number of associated
natural persons of broker-dealers
through data obtained from Form U4,
which generally is filed for individuals
who are engaged in the securities or
investment banking business of a
broker-dealer that is a member of an
SRO (‘‘registered representatives’’).935
Similarly, we approximate the number
of supervised persons of registered
investment advisers through the number
of registered investment adviser
representatives (or ‘‘registered IARs’’),
who are supervised persons of
investment advisers who meet the

definition of investment adviser
representatives in Advisers Act rule
203A–3 and are registered with one or
more state securities authorities to
solicit or communicate with clients.936
We estimate the number of registered
representatives and registered IARs,
including dually-registered
representatives, (together ‘‘registered
financial professionals’’) at brokerdealers, investment advisers, and dualregistrants by considering only the
employees of those firms that have
Series 6 or Series 7 licenses or are
registered with a state as a registered
representative or investment adviser
representative.937 We only consider
employees at firms who have retailfacing business, as defined

previously.938 We observe in Table 5
that approximately 60% of registered
financial professionals are employed by
dually registered entities. The
percentage varies by the size of the firm.
For example, for firms with total assets
between $1 billion and $50 billion, 67%
of all registered financial professionals
in that size category are employed by
dually registered firms. Focusing on
dually registered firms only,
approximately 60.5% of total registered
financial professionals at these firms are
dually registered representatives;
approximately 39.1% are only registered
representatives; and less than one
percent are only registered investment
adviser representatives.

935 The number of associated natural persons of
broker-dealers may be different from the number of
registered representatives of broker-dealers because
clerical/ministerial employees of broker-dealers are
associated persons but are not required to register
with FINRA. Therefore, the registered
representative number does not include such
persons. However, we do not have data on the
number of associated natural persons and therefore
are not able to provide an estimate of the number
of associated natural persons. We believe that the
number of registered representatives is an
appropriate approximation because they are the
individuals at broker-dealers that provide advice
and services to customers.
936 See Advisers Act, [17 CFR 275.203A–3
(2019)]. However, we note that the data on numbers

of registered IARs may undercount the number of
supervised persons of investment advisers who
provide investment advice to retail investors
because not all supervised persons who provide
investment advice to retail investors are required to
register as IARs. For example, Commission rules
exempt from IAR registration supervised persons
who provide advice only to non-individual clients
or to individuals that meet the definition of
‘‘qualified client.’’ In addition, state securities
authorities may impose different criteria for
requiring registration as an investment adviser
representative.
937 We calculate these numbers based on Form U4
filings. Representatives of broker-dealers,
investment advisers, and issuers of securities must
file this form when applying to become registered

in appropriate jurisdictions and with SROs. Firms
and representatives have an obligation to amend
and update information as changes occur. Using the
examination information contained in the form, we
consider an employee a registered financial
professional if he or she has an approved, pending,
or temporary registration status for either Series 6
or 7 (registered representative) or is registered as an
investment adviser representative in any state or
U.S. territory (IAR). We limit the firms to only those
that do business with retail investors, and only to
licenses specifically required as a registered
representative or IAR.
938 See supra footnotes 900 and 927.

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d. Registered Representatives of BrokerDealers, Investment Advisers, and
Dually Registered Firms

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Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations

TABLE 5—TOTAL REGISTERED REPRESENTATIVES AT BROKER-DEALERS, INVESTMENT ADVISERS, AND DUALLY
REGISTERED FIRMS WITH RETAIL INVESTORS 939
Size of firm
(total assets for standalone BDs and dually registered firms; AUM for standalone
IAs)

Total
number of
reps.

% of reps. in
dually
registered
firms

% of reps. in
standalone
BD w/an IA
affiliate

% of reps. in
standalone
BD w/o an IA
affiliate

% of reps. in
standalone
IA w/a BD
affiliate

% reps. in
standalone
IA w/o a BD
affiliate

>$50 billion ...............................................
$1 billion to $50 billion .............................
$500 million to $1 billion ..........................
$100 million to $500 million .....................
$10 million to $100 million .......................
$1 million to $10 million ...........................
<$1 million ................................................

84,461
170,256
29,874
66,924
106,178
33,790
12,522

73
67
71
51
55
35
8

7
11
5
27
42
54
52

0
0
1
0
2
11
36

19
15
7
4
1
0
3

1
7
16
18
1
0
1

Total Licensed Representatives .......

504,005

60

23

2

9

6

In Table 6 below, we estimate the
number of employees who are registered
representatives, registered investment
adviser representatives, or dually
registered representatives.940 Similar to
Table 5, we calculate these numbers
using Form U4 filings. Here, we also
limit the sample to employees at firms

that have retail-facing businesses as
discussed previously.941
In Table 6, approximately 25% of
registered employees at registered
broker-dealers or investment advisers
are dually registered representatives.
However, this proportion varies
significantly across size categories. For

example, for firms with total assets
between $1 billion and $50 billion,942
approximately 35% of all registered
employees are dually registered
representatives. In contrast, for firms
with total assets below $1 million, 13%
of all employees are dually registered
representatives.

TABLE 6—NUMBER OF EMPLOYEES AT RETAIL-FACING FIRMS WHO ARE REGISTERED REPRESENTATIVES, INVESTMENT
ADVISER REPRESENTATIVES, OR BOTH 943

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Size of firm
(total assets for standalone BDs and dually registered firms;
AUM for standalone IAs)

Total number
of employees

Percentage of
dually
registered
representatives

Percentage of
registered
representatives
only

Percentages
of IARs only

>$50 billion ...............................................................................................
$1 billion to $50 billion .............................................................................
$500 million to $1 billion ..........................................................................
$100 million to $500 million .....................................................................
$10 million to $100 million .......................................................................
$1 million to $10 million ...........................................................................
<$1 million ................................................................................................

218,539
328,842
43,211
119,214
176,559
56,230
18,334

19
35
18
23
20
17
13

16
12
40
24
39
39
46

1
4
10
9
1
1
3

Total Employees at Retail-Facing Firms ..........................................

960,929

25

23

4

Approximately 87% of investment
adviser representatives are dually
registered representatives. This
percentage is relatively unchanged from
2010. According to information
provided in a FINRA comment letter in
connection with the 913 Study, 87.6%
of registered investment adviser

representatives were dually registered as
registered representatives as of midOctober 2010.944 In contrast,
approximately 52% of registered
representatives were dually registered as
investment adviser representatives at
the end of 2018.945

e. Investor Account Statistics

939 The classification of firms as dually registered,
standalone broker-dealers, and standalone
investment advisers comes from Forms BD, FOCUS,
and ADV as described earlier. The number of
representatives at each firm is obtained from Form
U4 filings. Note that all percentages in the table
have been rounded to the nearest whole percentage
point.
940 We calculate these numbers based on Form U4
filings.
941 See supra footnotes 900 and 927.
942 Firm size is defined as total assets from the
balance sheet for broker-dealers and dual-registrants
(source: FOCUS reports) and as AUM for
investment advisers (source: Form ADV). We are
unable to obtain customer assets for broker-dealers,
and for investment advisers, we can only obtain
information from Form ADV as to whether the firm

assets exceed $1 billion. We recognize that our
approach of using firm assets for broker-dealers and
customer assets for investment advisers does not
allow for direct comparison; however, our objective
is to provide measures of firm size and not to make
comparisons between broker-dealers and
investment advisers based on firm size. Across both
broker-dealers and investment advisers, larger
firms, regardless of whether we stratify on firm total
assets or AUM, have more customer accounts, are
more likely to be dually registered, and have more
representatives or employees per firm than smaller
broker-dealers or investment advisers.
943 See supra footnotes 899, 920, 940, and 942.
Note that all percentages in the table have been
rounded to the nearest whole percentage point.
944 See Letter from Angela C. Goelzer, FINRA, to
Jennifer B. McHugh, Senior Advisor to the

Chairman, U.S. Securities and Exchange
Commission, re: File Number 4–606; Obligations of
Brokers, Dealers and Investment Advisers (Nov. 3,
2010), at 1, available at https://www.sec.gov/
comments/4-606/4606-2836.pdf.
945 In order to obtain the percentage of IARs that
are dually registered as registered representatives of
broker-dealers, we sum the representatives at dually
registered entities and those at investment advisers
across size categories to obtain the aggregate
number of representatives in each of the two
categories. We then divide the aggregate dually
registered representatives by the sum of the dually
registered representatives and the IARs at
investment adviser-only firms. We perform a
similar calculation to obtain the percentage of
registered representatives of broker-dealers that are
dually registered as IARs.

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Investors seek financial advice and
services to achieve a number of different
goals, such as saving for retirement or
children’s college education.
Approximately 73% of adults live in a

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Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations

household that invests.946 The OIAD/
RAND survey indicates that noninvestors are more likely to be female,
to have lower family income and
educational attainment, and to be
younger than investors.947
Approximately 35% of households that
do invest do so through accounts such
as broker-dealer or advisory accounts.948
As shown above in Figures 2 and 3,
the number of retail investors and their
AUM associated with investment
advisers has increased significantly,
particularly since 2012. As of December
2016, nearly $24.2 trillion is invested in
retirement accounts, of which $7.5
trillion is in IRAs.949 A total of 43.3
million U.S. households have either an
IRA or a brokerage account; an
estimated 20.2 million U.S. households
have a brokerage account, and 37.7
million households have an IRA
(including 72% of households that also
hold a brokerage account).950 With
respect to IRA accounts, one commenter
documents that 43 million U.S.
households own either traditional or
Roth IRAs and that approximately 70%
are held with financial professionals,
with the remainder being direct
market.951 Further, this commenter

finds that approximately 64% of
households have aggregate IRA
(traditional and Roth) balances of less
than $100,000, and approximately 36%
of investors have balances below
$25,000. As noted in one study, the
growth of assets in traditional IRAs
comes from rollovers from workplace
retirement plans; for example, 58% of
traditional IRAs consist of rollover
assets, and contributions due to
rollovers exceeded $460 billion in 2015
(the most recently available data).952
While the number of retail investors
obtaining services from investment
advisers and the aggregate value of
associated AUM has increased, the
OIAD/RAND study also suggests that
the general willingness of investors to
use planning or to take financial advice
regarding strategies, securities, or
accounts is relatively fixed over time.953
With respect to the account assets
associated with retail investors, the
OIAD/RAND survey also estimates that
approximately 10% of investors who
have brokerage or advisory accounts
hold more than $500,000 in assets,
while approximately 47% hold $50,000
in assets or less. Altogether, investors
who have brokerage or advisory

accounts typically trade infrequently,
with approximately 31% reporting no
annual transactions and an additional
approximately 30% reporting three or
fewer transactions per year.954
With respect to particular securities,
commenters have provided us with
additional information about ownership
of mutual funds and IRA account
statistics. For example, one commenter
stated that 56 million U.S. households
and nearly 100 million individual
investors own mutual funds, of which
80% are held through 401(k) and other
work-based retirement plans, while 63%
of investors hold mutual funds outside
of those plans.955 Of those investors
who own mutual funds outside of
workplace retirement plans,
approximately 50% use financial
professionals, while nearly one-third
purchase direct-sold funds either
directly from the fund company or
through a discount broker.956
Table 7 below provides an overview
of account ownership segmented by
account type (e.g., IRA, brokerage, or
both) and investor income category
based on the SCF Survey.957

TABLE 7—OWNERSHIP BY ACCOUNT TYPE IN THE U.S. BY INCOME GROUP
[As reported by the 2016 SCF Survey]
% Brokerage
only

Income category

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Bottom 25% .................................................................................................................................
25%–50% .....................................................................................................................................
50%–75% .....................................................................................................................................
75%–90% .....................................................................................................................................
Top 10% ......................................................................................................................................
Average ........................................................................................................................................

1.2
3.2
4.1
7.5
12.0
4.4

% IRA
only
7.6
14.5
21.4
33.4
24.7
18.3

% Both
brokerage
and IRA
2.4
5.4
11.4
16.5
43.9
11.6

With respect to the nature of the
accounts held by investors and whether
they are managed by financial

professionals, the OIAD/RAND survey
finds that 36% of its sample of
participants report that they currently

use a financial professional and
approximately 33% receive some kind
of recommendation service.958 Of the

946 See OIAD/RAND, defining ‘‘investors’’ as
persons ‘‘owning at least one type of investment
account, (e.g., an employer-sponsored retirement
account, a non-employer sponsored retirement
account such as an IRA, a college savings
investment account, or some other type of
investment account such as a brokerage or advisory
account), or owning at least one type of investment
asset (e.g., mutual funds, exchange-traded funds or
other funds; individual stocks; individual bonds;
derivatives; and annuities).’’
947 Id. at 36.
948 Id. at 39.
949 See Sarah Holden & Daniel Schrass, The Role
of IRAs in U.S. Households’ Saving for Retirement,
2016, ICI Res. Persp., Jan. 2017, available at https://
www.ici.org/pdf/per17-08.pdf. See also ICI Letter.
950 The data is obtained from the Federal Reserve
System’s 2016 Survey of Consumer Finances (‘‘SCF
Survey’’), a triennial survey of approximately 6,200
U.S. households, and imputes weights to
extrapolate the results to the entire U.S. population.

As noted, some survey respondent households have
both a brokerage and an IRA. See Board of
Governors of the Federal Reserve System, Survey of
Consumer Finances (2016), available at https://
www.federalreserve.gov/econres/scfindex.htm. The
SCF Survey data does not directly examine the
incidence of households that could use advisory
accounts instead of brokerage accounts; however,
some fraction of IRA accounts reported in the
survey could be those held at investment advisers.
951 See Sarah Holden & Daniel Schrass, The Role
of IRAs in US Households’ Saving for Retirement,
2018, ICI Res. Persp., Dec. 2018, available at https://
www.ici.org/pdf/per24-10.pdf. See also ICI Letter.
952 See Holden & Schrass (2018), supra footnote
951.
953 See OIAD/RAND at 50 (noting that this
conclusion was limited by the methodology of
comparing participants in a 2007 survey with those
surveyed in 2018).
954 See OIAD/RAND.

955 See ICI Letter; see also Sarah Holden, Daniel
Schrass, & Michael Bogdan, Ownership of Mutual
Funds, Shareholder Sentiment, and Use of the
internet, 2018, ICI Res. Persp., Nov. 2018, available
at https://www.ici.org/pdf/per22-06.pdf.
956 See Holden et al. (2018), supra footnote 955.
See also ICI Letter.
957 See SCF Survey, supra footnote 950. To the
extent that investors have IRA accounts at banks
that are not also registered as broker-dealers, our
data may overestimate the numbers of IRA accounts
held by retail investors that could be subject to
Regulation Best Interest.
958 See OIAD/RAND at 48. In a focus group
preceding the survey, focus group participants
provided a number of reasons for not using a
financial professional in making investments,
including being unable or unwilling to pay the fees,
doing their own financial research, being unsure of
how to work with a professional, and being
concerned about professionals selling securities
without attending to investors’ plans and goals.

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Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations
subset of those investors who report
holding a brokerage, advisory, or similar
account, approximately 33% self-direct
their own account, 25% have their
account managed by a financial
professional, and 10% have their
account advised by a financial
professional.959 For those investors who
take financial advice, the OIAD/RAND
study suggests that they may differ in
characteristics from other investors. The
survey further finds that investors who
take financial advice are generally older,
retired, and have a higher income than
other investors, but also may have lower
educational attainment (e.g., high school
or less) than other investors.960
Similarly, one question in the SCF
Survey asks what sources of information

households’ financial decision-makers
use when making decisions about
savings and investments. Respondents
can list up to fifteen possible sources
from a preset list that includes ‘‘Broker’’
or ‘‘Financial Planner’’ as well as
‘‘Banker,’’ ‘‘Lawyer,’’ ‘‘Accountant,’’ and
a list of non-professional sources.961
Panel A of Table 8 below presents the
breakdown of where households who
have brokerage accounts seek advice
about savings and investments. The
table shows that of those respondents
with brokerage accounts, 23% (4.7
million households) use advice services
of broker-dealers for savings and
investment decisions, while 49% (7.8
million households) take advice from a
‘‘financial planner.’’ Approximately

33417

36% (7.2 million households) seek
advice from other sources such as
bankers, accountants, and lawyers.
Almost 25% (5.0 million households)
do not use advice from the above
sources.
Panel B of Table 8 below presents the
breakdown of advice received by
households who have an IRA.
Approximately 15% (5.7 million
households) rely on advice services of
their broker-dealers and 48% (18.3
million households) obtain advice from
financial planners. Approximately 41%
(15.5 million households) seek advice
from bankers, accountants, or lawyers,
while the 25% (9.5 million households)
use no advice or seek advice from other
sources.

TABLE 8—PANEL A: SOURCES OF ADVICE FOR HOUSEHOLDS WHO HAVE A BROKERAGE ACCOUNT IN THE U.S. BY
INCOME GROUP 962
% Taking
advice from
brokers

Income category

Bottom 25% .............................................................................................
25%–50% .................................................................................................
50%–75% .................................................................................................
75%–90% .................................................................................................
Top 10% ..................................................................................................
Average ....................................................................................................

% Taking
advice from
financial
planners

20.55
22.98
20.75
22.56
25.29
23.02

53.89
38.03
52.00
48.94
50.53
49.02

% Taking
advice from
lawyers,
bankers, or
accountants
35.64
43.92
31.42
32.25
38.47
35.99

% Taking no
advice or from
other sources
24.30
32.36
23.61
28.10
21.06
24.94

TABLE 8—PANEL B: SOURCES OF ADVICE FOR HOUSEHOLDS WHO HAVE AN IRA IN THE U.S. BY INCOME GROUP 963
% Taking
advice from
brokers

Income category

Bottom 25% .............................................................................................
25%–50% .................................................................................................
50%–75% .................................................................................................
75%–90% .................................................................................................
Top 10% ..................................................................................................
Average ....................................................................................................

The OIAD/RAND survey notes that for
survey participants who reported
working with a specific individual for
investment advice, 70% work with a
dual-registrant, 5.4% with a brokerdealer, and 5.1% with an investment
adviser.964
959 See

OIAD/RAND at 46.
OIAD/RAND at 48.
961 See SCF Survey, supra footnote 950, which
specifically asks participants ‘‘Do you get advice
from a friend, relative, lawyer, accountant, banker,
broker, or financial planner? Or do you do
something else?’’ See Federal Reserve Codebook for
2016 Survey of Consumer Finances (2016),
available at https://www.federalreserve.gov/
econres/files/codebk2016.txt. Other response
choices presented by the survey include ‘‘Calling
Around,’’ ‘‘Magazines,’’ ‘‘Self,’’ ‘‘Past Experience,’’
‘‘Telemarketer,’’ and ‘‘Insurance Agent,’’ as well as

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960 See

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% Taking
advice from
financial
planners

12.14
9.79
14.93
14.68
21.40
15.25

f. Financial Incentives of Firms and
Financial Professionals
Commission experience indicates that
there is a broad range of financial
incentives provided by standalone
broker-dealers and dually registered
other choices. Respondents could also choose ‘‘Do
Not Save/Invest.’’ The SCF Survey allows for
multiple responses, so these categories are not
mutually exclusive. However, we would note that
the list of terms in the question does not
specifically include ‘‘investment adviser.’’
962 See SCFR Survey, supra footnote 950.
963 Id.
964 See OIAD/RAND at 53. As documented by
OIAD/RAND, retail investors surveyed had
difficulty in accurately identifying the type of
relationship that they have with their financial
professional.

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38.30
43.82
45.20
52.14
55.40
48.45

% Taking
advice from
lawyers,
bankers, or
accountants
43.69
40.67
41.23
41.65
40.03
41.17

% Taking no
advice or from
other sources
31.85
32.74
25.23
24.26
18.56
25.28

firms to their financial professionals.965
While some firms provide base pay for
their financial professionals ranging
from approximately $45,000 to $85,000
per year, many firms provide
compensation only through a percentage
of commissions, plus performance965 Information on compensation and financial
incentives generally relates to 2016 compensation
arrangements for a sample of approximately 20
firms, comprising both standalone broker-dealers
and dually registered firms. We acknowledge that
the information provided in this baseline may not
be representative of the compensation structures
more generally because of the diversity and
complexity of services and securities offered by
standalone broker-dealers and dually registered
firms.

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based awards, such as individual or
team bonuses based on production.966
Commission-based compensation to
financial professionals range from 30%
to 95% of total commissions paid to the
firm on a particular transaction,
although this compensation is generally
reduced by various costs and expenses
attributable to the financial professional
(e.g., clearing costs associated with
some securities, charges related to an
SRO or the Securities Investor
Protection Corporation (‘‘SIPC’’), and
insurance, among others).
Several firms have varying
commission-based compensation rates
depending on the investment type being
sold. For example, compensation ranges
from 76.5% for stocks, bonds, options,
and commodities to 90% for openended mutual funds, private
placements, and unit investment trusts.
Several firms charge varying
commissions on securities depending
on the amount of security sold (e.g.,
rates on certain proprietary mutual
funds range from 0.75% to 5.75%
depending on the share class), but do
not provide those rates to financial
professionals based on investment type.
Some firms also provide incentives for
their financial professionals to
recommend proprietary securities and
services over third-party or nonproprietary securities. Commission rates
for some firms, however, decline as the
dollar amount sold increases, and such
rates vary across asset classes as well
(e.g., within a given share class, rates
range from 1.50% to 5.75% depending
on the dollar amount of the fund sold).
With respect to compensation to
individual financial professionals, if
compensation rates for mutual funds are
approximately 90% (as discussed above,
for example), financial professionals can
earn between 0.68% and 5.18%,
depending on the type and amount of
security sold.
For financial professionals who do
not earn commission-based
compensation, some firms charge retail
customers flat fees ranging from $500 to
$2,500, depending on the level of
service required, such as financial
planning, while others charge hourly
rates ranging from $150 to $350 per
hour. For dually registered firms that
charge clients based on a percentage of
AUM, the average percentage charge
varies based on the size of the account:
The larger the AUM, the lower the
percentage fee charged. Percentagebased fees for the sample firms range
966 Commission experience indicates that some
firms award production bonuses based on
commissions generated, while other firms provide
awards based on AUM.

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from approximately 1.5% for accounts
below $250,000 to 0.5% for accounts in
excess of $1 million.967 If compensation
rates range between 30% and 95%, a
firm charging a customer $500 can
provide compensation to the financial
professional between $150 and $475 for
each financial plan provided. For feebased accounts, assuming that a retail
customer has an account worth
$250,000, the firm will charge accountlevel fees of $3,750 ($250,000 × 1.5%),
and the financial professional can earn
between $1,170 and $3,560 annually for
each account. However, accounts may
also be subject to additional fees beyond
those described here and the financial
professionals also may receive
additional compensation.
In addition to ‘‘base’’ compensation,
most firms also provide bonuses (based
on either individual or team
performance) or variable compensation,
ranging from approximately 10% to
83% of base compensation. These
bonuses could be awarded based on
either commissions generated or AUM.
While the majority of firms base at least
some portion of their bonuses on
production, usually in the form of total
gross revenue, other forms of bonus
compensation are derived from
customer retention, customer
experience, and manager assessment of
performance. Moreover, some firms use
a tiered system within their
compensation grids depending on firm
experience and production levels.
Financial professionals’ variable
compensation can also increase when
they enroll retail customers in advisory
accounts versus other types of accounts,
such as brokerage accounts. Some firms
also provide transition bonuses for
financial professionals with prior work
experience based on historical trailing
production levels and AUM. Although
many firms do not have any incentivebased contests or programs, some firms
967 We note that some firms could have higher or
lower commission-based compensation rates or
asset-based fee percentages than those provided
here. For example, based on a review of Form ADV
Part 2A (the brochure) of several large dualregistrants (not included in the sample above),
asset-based fees for low AUM accounts could range
as high as 2.0% to 3.0%, with the average fee for
high AUM accounts ranging between 0.5% to 1.5%.
See also AdvisoryHQ, Average Financial Advisor
Fees in 2018–2019: Fees Charged by Advisory &
Wealth Management Firms, http://
www.advisoryhq.com/articles/financial-advisorfees-wealth-managers-planners-and-fee-onlyadvisors/. The AdvisoryHQ report shows that
average asset-based fees range from 1.18% for
accounts less than $50,000 to less than 0.60% for
accounts in excess of $30 million, while fixed-fees
range from $7,500 for accounts less than $500,000
to $55,000 for accounts in excess of $7.5 million.
Again, we note that these are charges to clients and
are not indicative of the total compensation earned
by the financial professional per account.

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award non-cash incentives for meeting
certain performance, best practices, or
customer service goals, including
trophies, dinners with senior officers,
and travel to annual meetings with other
award winners.968
2. Regulatory Baseline and Current
Market Practices
Broker-dealers’ current standards of
conduct are governed by federal and
state law and regulation as well as the
rules and guidance of SROs,969
particularly, for the purposes of this
rulemaking, those related to the
suitability of recommendations and
disclosure of conflicts of interest. In
response to comment letters that stated
the Proposing Release did not fully
consider the current market practices,
we have provided an overview of these
practices reported by commenters and
from industry studies.970 Together,
these laws and regulations comprise the
regulatory baseline.
a. Federal and State Securities Laws
Under the antifraud provisions of the
federal securities laws and SRO rules,
broker-dealers are required to deal fairly
with their customers.971 In addition,
broker-dealers must comply with a wide
968 See FINRA Regulatory Notice 16–29, Gifts,
Gratuities and Non-Cash Compensation Rules—
FINRA Requests Comment on Proposed
Amendments to Its Gifts, Gratuities and Non-Cash
Compensation Rules (Aug. 2016). At the time this
notice was published, FINRA’s impression was that
investment-specific internal sales contests for noncash compensation were not widely used.
969 Generally, all registered broker-dealers that
deal with the public must become members of
FINRA, a registered national securities association,
and may choose to become exchange members. See
Exchange Act section 15(b)(8) and Exchange Act
rule 15b9–1. FINRA is the sole national securities
association registered with the SEC under section
15A of the Exchange Act. Accordingly, for purposes
of discussing a broker-dealer’s regulatory
requirements when providing advice, we focus on
FINRA’s regulation, examination, and enforcement
with respect to member broker-dealers.
970 See, e.g., AALU Letter; Letter from John L.
Thornton, Co-Chair, Committee in Capital Markets
Regulation (Jul. 18, 2018) (‘‘CCMR Letter’’); CFA
August 2018 Letter; Davis & Harman Letter; EPI
Letter; Lincoln Financial Letter; NASAA August
2018 Letter; UVA Letter (which stated that the
Proposing Release did not adequately address
current market practices and/or provide industry
studies and surveys of those practices).
971 See, e.g., FINRA Rule 2010 (Standards of
Commercial Honor and Principles of Trade); NASD
Interpretive Material 2310–2, Fair Dealing with
Customers (‘‘Implicit in all member and registered
representative relationships with customers and
others is the fundamental responsibility for fair
dealing. Sales efforts must therefore be undertaken
only on a basis that can be judged as being within
the ethical standards of [FINRA’s] Rules, with
particular emphasis on the requirement to deal
fairly with the public.’’); Charles Hughes & Co. v.
SEC, 139 F.2d 434 (2d Cir. 1943), cert. denied, 321
U.S. 786 (1944); Hanly v. SEC, 415 F.2d 589, 596
(2d Cir. 1969); see also e.g., 913 Study at 51 and
footnote 221.

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range of specific obligations specified in
the Exchange Act and the rules
thereunder. Moreover, there is a body of
case law holding that broker-dealers that
exercise discretion or control over
customer assets, or have a relationship
of trust and confidence with their
customers, may owe customers a
fiduciary duty, depending on the
circumstances.972 Additionally, some
states provide through statute or
regulation, among other requirements
such as minimum requirements for sales
practices, that broker-dealers have some
form of state-specific fiduciary duty to
their customers in at least some
circumstances. Substantial variation
exists among states’ fiduciary standards,
ranging from states with express
fiduciary standards that apply to brokerdealers to those with limited or no such
standards.973

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b. FINRA Rule 2111: Suitability
FINRA Rule 2111 (the ‘‘Suitability
Rule’’) requires that a broker-dealer or
associated person have a reasonable
972 See, e.g., U.S. v. Skelly, 442 F.3d 94, 98 (2d
Cir. 2006) (fiduciary duty found ‘‘most commonly’’
where ‘‘a broker has discretionary authority over
the customer’s account’’); United States v. Szur, 289
F.3d 200, 211 (2d Cir. 2002) (‘‘Although it is true
that there ‘is no general fiduciary duty inherent in
an ordinary broker/customer relationship,’ a
relationship of trust and confidence does exist
between a broker and a customer with respect to
those matters that have been entrusted to the
broker.’’) (citations omitted); Leib v. Merrill Lynch,
Pierce, Fenner & Smith, Inc., 461 F. Supp. 951, 953–
954 (E.D. Mich. 1978), aff’d, 647 F.2d 165 (6th Cir.
1981) (recognizing that a broker who has de facto
control over non-discretionary account generally
owes customer duties of a fiduciary nature; looking
to customer’s sophistication, and the degree of trust
and confidence in the relationship, among other
things, to determine duties owed); Arleen W.
Hughes, Exchange Act Release No. 4048 (Feb. 18,
1948) (Commission Opinion), aff’d sub nom.
Hughes v. SEC, 174 F.2d 969 (D.C. Cir. 1949)
(‘‘Release 4048’’) (noting that fiduciary
requirements generally are not imposed upon
broker-dealers who render investment advice as an
incident to their brokerage unless they have placed
themselves in a position of trust and confidence,
and finding that Hughes was in a relationship of
trust and confidence with her clients). See also
Gross Letter (which discussed the obligations of
broker-dealers with discretionary or de facto control
over customer accounts); Solely Incidental
Interpretation.
973 See AARP August 2018 Letter; PIABA Letter;
U. of Miami Letter. See also Michael S. Finke &
Thomas Patrick Langdon, The Impact of the BrokerDealer Fiduciary Standard on Financial Advice
(Working Paper, Mar. 9, 2012) for a discussion of
state fiduciary standards. One comment letter also
provided an extensive overview of the fiduciary
obligations of state-registered investment advisers,
‘‘typified by an expectation of undivided loyalty
where the adviser acts primarily for the benefit of
its clients.’’ See NASAA February 2019 Letter at 22
and footnote 40. This comment letter also stated
that ‘‘[s]ome states also extend these fiduciary
obligations beyond investment advisers to brokers,
especially in dual-hatted scenarios,’’ and that these
fiduciary obligations were extended even when
broker-dealers handled non-discretionary accounts.
Id. at 23–24 and footnote 41.

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basis to believe that a recommended
securities transaction or investment
strategy involving securities is suitable
for the retail customer.974 A brokerdealer cannot disclaim away its
suitability obligation under the
Suitability Rule.975 We reviewed the
Suitability Rule and drew upon it and
enhanced the suitability requirement in
developing Regulation Best Interest.976
FINRA also requires additional specific
suitability obligations with respect to
certain types of securities or
transactions, such as variable insurance
products and derivatives securities,
including options and securities-based
futures.977
As discussed by several
commenters,978 the regulatory baseline
also includes FINRA guidance on best
practices, such as guidance regarding
suitability, which provides guidance on
how broker-dealers and associated
persons should comply with suitability
obligations when making
recommendations to customers. FINRA
guidance regarding suitability includes
Regulatory Notice 12–25, which states
that under the Suitability Rule, ‘‘a
broker’s recommendations must be
consistent with his customers’ best
interests,’’ 979 as well as other regulatory
notices that provide guidance on the
suitability of specific securities or
investment strategies involving
securities, including, but not limited to,
mutual funds, variable contracts
including annuities, structured and
complex securities, leveraged and
974 See FINRA Rule 2111, supra footnote 161. As
a ‘‘General Principle,’’ the rule states that associated
persons have a ‘‘fundamental responsibility for fair
dealing’’ and that the rule is intended to promote
ethical sales practices and high standards of
commercial conduct. See FINRA Rule 2111.01. See
also, In re Application of Raghavan Sathianathan,
Exchange Act Release No. 54722 at 10 (Nov. 8,
2006) (‘‘Sathianathan’s recommendations . . . were
unsuitable because they were designed to maximize
his own commissions rather than to establish a
suitable portfolio.’’). See also 913 Study at 59 and
footnote 187.
975 FINRA Rule 2111.02 (Disclaimers).
976 See supra footnote 161. The primary
requirements for the Suitability Rule are described
in the Proposing Release at Section IV.B.2.a.
977 See, e.g., FINRA Rule 2330 (Members’
Responsibilities Regarding Deferred Variable
Annuities); FINRA Rule 2360 (Options); FINRA
Rule 2370 (Securities Futures); FINRA Rule 2821
(Sales Practices for Deferred Variable Annuities
including a Suitability Obligation). See also 913
Study at 65–66.
978 See CFA August 2018 Letter; Bank of America
Letter; Transamerica August 2018 Letter.
979 See FINRA Regulatory Notice 12–25; see also
FINRA Regulatory Notice 13–31, Suitability—
FINRA Highlights Examination Approaches,
Common Findings and Effective Practices for
Complying With its Suitability Rules (Sep. 2013)
(which provides ‘‘. . . effective practices . . . to
help firms enhance compliance and supervision
under the suitability rule’’).

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33419

inverse exchange-traded products, and
IRA rollovers.980
c. FINRA Report on Conflicts of Interest
In 2013, FINRA published as
guidance a Report on Conflicts of
Interest (‘‘FINRA Conflicts Report’’) to
provide an overview of effective
practices that broker-dealers could
employ to manage and mitigate conflicts
of interest.981 In the report, FINRA
provides suggestions for broker-dealers
for addressing conflicts of interest
related to three broad areas: A firm-level
approach to identify and manage
conflicts of interest; the production and
distribution of new securities; and
compensation and other financial
incentives of associated persons.982
With respect to new securities, the
FINRA Conflicts Report recommends,
among other things, new security review
committees and disclosure of conflicts
related to recommendations of new
securities to customers.983 The FINRA
Conflicts Report also provides guidance
to broker-dealers on managing conflicts
of interest that arise from compensation
and financial incentives of brokerdealers. For example, the FINRA
Conflicts Report recommends increased
surveillance of recommendations near
compensation thresholds and capping
compensation credits across similar
980 See, e.g., NASD Notice to Members 94–16,
NASD Reminds Members Of Mutual Fund Sales
Practice Obligations (Mar. 1994) and NASD Notice
to Members 95–80, NASD Further Explains
Members Obligations and Responsibilities
Regarding Mutual Funds Sales Practices (Sep. 1995)
(mutual fund suitability and sales practices); NASD
Notice to Members 96–86, NASD Regulation
Reminds Members and Associated Persons that
Sales of Variable Contracts are Subject to NASD
Suitability Requirements (Dec. 1996) and NASD 99–
35, NASD Reminds Members of Their
Responsibilities Regarding Sales of Variable
Annuities (May 1999) (suitability and sales
practices of variable contracts and variable
annuities); NASD Notice to Members 05–59, NASD
Provides Guidance Concerning the Sale of Structure
Products; and FINRA Regulatory Notice 12–03,
Complex Products—Heightened Supervision of
Complex Products (Jan. 2012); (suitability and sales
practices of structured and complex products);
FINRA Regulatory Notice 09–31, FINRA Reminds
Firms of Sales Practice Obligations Relating to
Leveraged and Inverse Exchange-Traded Funds
(June 2009) (sales practices of leveraged and inverse
ETFs); and FINRA Regulatory Notice 13–45,
Rollovers to Individual Retirement Accounts—
FINRA Reminds Firms of Their Responsibilities
Concerning IRA Rollovers (Dec. 2013) (obligations
when recommending a rollover or transfer of assets
from a sponsored retirement plan to an IRA).
981 See FINRA Conflicts Report, supra footnote
459. See also IRI Letter, which notes that the FINRA
Conflicts Report ‘‘. . . provides valuable guidance
as to the elements of an effective practice
framework for managing BDs’ conflicts of
interest. . .’’ See also SIFMA August 2018 Letter;
CFA August 2018 Letter; Raymond James Letter;
Ameriprise Letter; ACLI Letter; Fein Letter.
982 See FINRA Conflicts Report, supra footnote
459.
983 Id.

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as applicable SRO rules.989 Specifically,
the Exchange Act authorizes the
Commission to sanction a broker-dealer
or any associated person that fails to
reasonably supervise another person
d. Other Broker-Dealer Obligations:
subject to the firm’s or the person’s
Disclosure, Supervision, and
supervision that commits a violation of
Compensation
the federal securities laws.990 The
Broker-dealers are subject to other
Exchange Act provides an affirmative
disclosure obligations under the federal defense against a charge of failure to
securities laws and SRO rules. For
supervise where reasonable procedures
instance, under existing antifraud
and systems for applying the procedures
provisions of the Exchange Act, a
have been established and effectively
broker-dealer has a duty to disclose
implemented without reason to believe
material adverse information to its
those procedures and systems are not
985
Broker-dealers found to be being complied with. Further, under the
customers.
acting as fiduciaries also have a duty to
federal securities laws and FINRA rules,
disclose material conflicts of interest.986 prices for securities and broker-dealer
Broker-dealers are also prohibited from
compensation are required to be fair and
making misleading statements.987
reasonable, taking into consideration all
Courts have found that broker-dealers,
relevant circumstances.991
in making recommendations, should
Broker-dealers also register with and
have disclosed that they were: Acting as report information, including about
a market maker for the recommended
their business and affiliates, to the
security; trading as a principal with
Commission, the SROs, and other
respect to the recommended security;
jurisdictions through Form BD.992 Form
engaging in revenue sharing with a
BD requires information about the
recommended mutual fund; or
background of the applicant, its
‘‘scalping’’ a recommended security.988
principals, controlling persons, and
Broker-dealers are also currently
employees, as well as information about
subject to supervisory obligations under the type of business in which the
Section 15(b)(4)(E) of the Exchange Act
broker-dealer proposes to engage and all
and SRO rules, including the
control affiliates engaged in the
establishment of policies and
securities or investment advisory
procedures reasonably designed to
business.993 Once a broker-dealer is
prevent and detect violations of, and to
registered, it must keep its Form BD
achieve compliance with, the federal
current by amending it promptly when
securities laws and regulations, as well
the information is or becomes
inaccurate for any reason.994 In
984 Id.
addition,
firms report similar
985 A broker-dealer may be liable if it does not
information and additional
disclose ‘‘material adverse facts of which it is
aware.’’ See, e.g., Chasins v. Smith, Barney & Co.,
information—such as written customer
438 F.2d 1167, 1172 (2nd Cir. 1970); SEC v. Hasho,
complaints and other disciplinary
784 F. Supp. 1059, 1110 (S.D.N.Y. 1992); In the
matters— to FINRA pursuant to FINRA
Matter of RichMark Capital Corp., Exchange Act
Rule 4530 (Reporting Requirements).
Release No. 48758 (Nov. 7, 2003) (Commission

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investment types to prevent
representatives from preferentially
recommending securities that yield the
largest compensation.984

Opinion) (‘‘When a securities dealer recommends
stock to a customer, it is not only obligated to avoid
affirmative misstatements, but also must disclose
material adverse facts of which it is aware. That
includes disclosure of ‘adverse interests’ such as
‘economic self-interest’ that could have influenced
its recommendation.’’) (citations omitted). See also
Relationship Summary Proposal.
986 See, e.g., United States v. Szur, 289 F.3d 200,
212 (2d Cir. 2002) (broker’s fiduciary relationship
with customer gave rise to a duty to disclose
commissions to customer, which would have been
relevant to customer’s decision to purchase stock);
Arleen W. Hughes, Exchange Act Release No. 4048
(Feb. 18, 1948) (Commission Opinion), aff’d sub
nom. Hughes v. SEC, 174 F.2d 969, 976 (D.C. Cir.
1949) (broker-dealer acted in the capacity of a
fiduciary and, as such, broker-dealer was under a
duty to make full disclosure of the nature and
extent of her adverse interest when engaging in
principal transactions, ‘‘including her cost of the
securities and the best price at which the security
might be purchased in the open market’’).
987 See Proposing Release at footnotes 175–177
and 205, and accompanying text. See Exchange Act
Sections 10(b) and 15(c).
988 See 913 Study at footnotes 251–54. See also
id. at footnotes 225–232 (which discuss existing
SRO rules on disclosures).

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e. DOL Fiduciary Rule as It Relates to
Current Market Practice
This section discusses the recently
vacated DOL Fiduciary Rule,995 the
989 See supra footnote 809. See also Proposing
Release at 21622.
990 Exchange Act Sections 15(b)(4)(E) and
(b)(6)(A).
991 See, e.g., Exchange Act Sections 10(b) and
15(c); FINRA Rules 2121 (Fair Prices and
Commissions), 2122 (Charges for Services
Performed), and 2341 (Investment Company
Securities). See also FINRA Rule 3221 (Non-Cash
Compensation). Several commenters stated that, as
part of their overall business practices, they use
non-cash compensation (e.g., firm-sponsored
business conferences), which they believe is in
compliance with existing FINRA Rule 3221 on noncash compensation practices. See Guardian August
2018 Letter; NY Life Letter.
992 See Relationship Summary Proposal at 21472;
see also generally Form BD.
993 See generally Form BD.
994 See Exchange Act rule 15b3–1(a).
995 See supra footnote 32.

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implications for broker-dealers, and the
industry response to the DOL Fiduciary
Rule. Although the DOL Fiduciary Rule
was vacated by the Fifth Circuit Court
of Appeals in June, we discuss the DOL
Fiduciary Rule as part of the baseline
because certain broker-dealers and other
industry participants may have adjusted
their practices in order to plan for the
implementation of the requirements of
this rule. It is possible that some of
these broker-dealers may continue to
operate their business using these
adjusted practices, while other may
have reverted to the pre-DOL Fiduciary
Rule practices. Below, we discuss actual
and potential costs, as well as changes
in services and securities offerings, in
response to the DOL Fiduciary Rule as
reported by industry participants
through surveys. We also describe how,
following the Fifth Circuit Court of
Appeals decision vacating the DOL
Fiduciary Rule, certain of those costs
have been reduced and the trend toward
reduction in retail investor access to
services and securities offerings that
may have been caused in part by the
DOL Fiduciary Rule appears to have
ended and may be reversing.
i. Department of Labor’s Fiduciary Rule
and Temporary Enforcement Policy
As noted above, prior to the Fifth
Circuit decision, many firms took steps
to come into compliance with the DOL
Fiduciary Rule, and in particular, the
BIC Exemption and other PTEs,
including changes to business
practices.996
Following the decision by the Fifth
Circuit, the DOL acknowledged that
uncertainty about fiduciary obligations
and the scope of exemptive relief under
the prohibited transaction provisions of
ERISA and the Internal Revenue Code
following the court’s decision could
temporarily disrupt existing investment
advice arrangements during the
transition period, and also that financial
institutions had devoted significant
resources to comply with PTEs issued in
connection with the DOL Fiduciary
Rule, including the BIC Exemption.997
Based on these concerns, the DOL
issued a temporary enforcement policy
stating that it would not pursue claims
against fiduciaries working in good faith
to comply with the BIC Exemption’s
Impartial Conduct Standards for
transactions that would have been
exempted by the BIC Exemption or treat
such fiduciaries as violating applicable
996 See

supra footnotes 32–34 and accompanying

text.
997 See U.S. Department of Labor Field Assistance
Bulletin 2018–02, available at https://www.dol.gov/
agencies/ebsa/employers-and-advisers/guidance/
field-assistance-bulletins/2018-02.

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prohibited transactions rules.998 Prior to
the Fifth Circuit decision, some brokerdealers that offered services to IRAs and
other retirement accounts may have
implemented changes to services and
securities to comply with and meet the
conditions of the BIC Exemption and
other PTEs, including the Impartial
Conduct Standards.999 Although the
Commission does not currently have
data on the number of firms that may
have devoted resources to comply with
the PTEs,1000 the Commission can
broadly estimate the maximum number
of broker-dealers that could have
undertaken changes in order to comply
with requirements of the PTEs from the
number of broker-dealers that have
retail customer accounts.
Approximately 73.5% (2,766) of
registered broker-dealers report sales to
retail customers.1001 Similarly,
approximately 8,235 (62% of)
investment advisers serve high net
worth and non-high net worth
individual clients. The Commission
understands that these numbers are an
upper bound and likely overestimate the
broker-dealers and investment advisers
that provide retirement account services
and began compliance with the
requirements of the PTEs.1002

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998 Id.
999 See, e.g., Michael Wursthorn, A Complete List
of Brokers and Their Approach to ‘The Fiduciary
Rule’, Wall St. J., Feb. 6, 2017, https://
www.wsj.com/articles/a-complete-list-of-brokersand-their-approach-to-the-fiduciary-rule1486413491?mod=article_inline for a discussion of
how broker-dealers adjusted certain practices in
response to the DOL Fiduciary Rule.
1000 In order to perform this analysis, the
Commission would need to know which financial
firms offer services to IRAs and other retirement
accounts. Under the current reporting regimes for
both broker-dealers and investment advisers, they
are not required to disclose whether (or what
fraction of) their accounts are held by retail
investors in retirement accounts.
1001 As of December 2018, 3,764 broker-dealers
have filed Form BD. Retail sales by broker-dealers
were obtained from Form BR. See supra footnote
900.
1002 The Department of Labor Regulatory Impact
Analysis (‘‘DOL RIA’’) identifies approximately
4,000 broker-dealers (FINRA, 2016), of which
approximately 2,500 are estimated to have either
ERISA accounts or IRA accounts serviced by brokerdealers, similar to the estimates that we provide
above. In addition to broker-dealers, the DOL RIA
estimates that other providers of ERISA or IRA
accounts include: Approximately 10,600 federally
registered investment advisers and 17,000 stateregistered investment advisers (NASAA 2012/2013
Report), of which approximately 17,000 of federal
and state investment advisers that are not dually
registered, approximately 6,000 ERISA plan
sponsors (2013 Form 5500 Schedule C), and
approximately 400 life insurance companies (2014
SNL Financial Data). See U.S. Department of Labor,
Regulating Advice Markets: Definition of the Term
’Fiduciary’, Conflicts of Interest, Retirement
Investment Advice: Regulatory Impact Analysis for
Final Rule and Exemptions (Apr. 2016), available
at https://www.dol.gov/sites/default/files/ebsa/

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ii. Industry Response to DOL Fiduciary
Rule
Although the DOL Fiduciary Rule
became effective in June 2017, the DOL
provided transitional relief through July
2019,1003 which is now indefinitely
extended under the temporary
enforcement policy put in place in June
2018 following the Fifth Circuit
decision. As described above, a
significant subset of broker-dealers have
retail customers with retirement
accounts and would have been affected
by the DOL Fiduciary Rule, and at least
some broker-dealers began taking steps
to effectuate compliance with the DOL
Fiduciary Rule. A number of
commenters stated that we did not
sufficiently consider the existing
regulatory environment and the current
market practices of firms and financial
professionals in light of the DOL’s
Fiduciary Rule and other existing rules
and regulations.1004 Below, we discuss
the industry response to the DOL
Fiduciary Rule and the effect of the
Fifth Circuit decision on broker-dealers.
In the Proposing Release, we
predominantly based our discussion of
the industry and customer effects of the
DOL Fiduciary Rule on information
from a single industry study.1005
Commenters provided additional
citations to industry studies,1006 which
describe changes in market practices
across a broader-sample of brokerdealers in response to the DOL
Fiduciary Rule.1007 In these studies,
laws-and-regulations/rules-and-regulations/
completed-rulemaking/1210-AB32-2/ria.pdf.
1003 See supra footnote 1002.
1004 See, e.g., AALU Letter; CCMC Letters; CCMR
Letter; CFA August 2018 Letter; Davis & Harman
Letter; EPI Letter; Lincoln Financial Letter;
Morningstar Letter; NASAA August 2018 Letter;
Wells Fargo Letter.
1005 See SIFMA Study, supra footnote 33. The
SIFMA Study surveyed 21 SIFMA members and
captured 43% of U.S. ‘‘financial advisors’’ (132,000
out of 310,000), 35 million retail retirement
accounts, and 27% of qualified retirement savings
assets ($4.6 trillion out of $16.9 trillion). The types
of retirement accounts serviced by the participants
in the SIFMA Study were not defined.
1006 See, e.g., CCMC Letters; Davis & Harman
Letter; EPI Letter; Lincoln Financial Letter.
1007 See, e.g., Financial Services Roundtable &
Harper Polling, Department of Labor Fiduciary
Rule: National Survey of Financial Professionals
(July 2017), available at https://www.sec.gov/
comments/ia-bd-conduct-standards/cll4-2641320161289.pdf (see Appendix A) (‘‘FSR Study’’). The
FSR Study surveyed 600 financial advisers in July
2017, including certified financial planners,
chartered financial analysts, broker-dealers, and
dually registered representatives. See also Center
for Capital Markets Competitiveness, Fiduciary
Rule: Initial Impact Analysis, FTI Consulting Report
Presented to the U.S. Chamber of Commerce (Sept.
7, 2017), available at https://
www.centerforcapitalmarkets.com/wp-content/
uploads/2017/07/Fiduciary-Rule-Initial-ImpactAnalysis.pdf (‘‘Chamber Study’’). The Chamber
Study surveyed 14 financial advisory companies

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certain of the survey participants
reported that they responded to the DOL
Fiduciary Rule and the BIC Exemption
by reducing certain services and access
to advice to small retirement accounts.
Certain participants further reported
that they encouraged customers toward
self-directed accounts and/or advisory
accounts, including robo-advisors.
Certain other participants reported that
they reduced or eliminated certain
securities within certain types of
retirement accounts that they offered.
Finally, certain participants reported
that they increased certain fees for some
of their customers. However, as it is
generally the case with survey analysis,
the surveys in the aforementioned
studies are subject to potential selection
biases (i.e., the sample of respondents is
not necessarily random) and
methodological limitations (e.g., the
design of the questionnaire may
influence the choices made by the
respondents). Given these limitations, it
is generally not clear whether the results
of these studies capture significant or
marginal changes in broker-dealer
practices, and whether these changes
are indicative of broader trends in the
market for advice in response to the
DOL Fiduciary Rule.
Changes to Services and Securities
A number of studies indicated that, as
a result of the DOL Fiduciary Rule,
certain industry participants had
already or were planning to alter their
menu of services and securities that
they made available to retail customers.
For example, of the 21 SIFMA members
that participated in the SIFMA Study,
53% eliminated or reduced access to
certain brokerage advice services and
67% migrated away from open choice to
fee-based or limited brokerage
services.1008 Another study also
discussed a shift from commissionbased accounts to fee-based accounts
but offered no details about the sample
or the methodology employed to arrive
(insurance companies, securities manufacturers,
and broker-dealers) responsible for $10 trillion in
AUM and nearly 26 million investment accounts.
The types of accounts serviced by the participants
in the Chamber Study were not defined. See also
A.T. Kearney, The $20 Billion Impact of the New
Fiduciary Rule on the U.S. Wealth Management
Industry, Perspective for Discussion (Oct. 2016),
available at https://www.atkearney.com/
documents/10192/7041991/DOL+Perspective++August+2016.pdf/b2a2176b-c821-41d9-b12ed3d2b0807d69 (‘‘Kearney Study’’). We note that the
development of business models and practices
discussed herein reflect changes made voluntarily
by firms in response to the DOL Fiduciary Rule, but
were not necessarily required by the DOL Fiduciary
Rule.
1008 See SIFMA Study, supra footnote 33.

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at the estimates.1009 Finally, another
study documented that at least 29% of
their survey participants expected to
move clients, particularly those with
low account balances, to roboadvisors.1010 In addition, a number of
media articles describe several cases of
broker-dealers that have adjusted their
practices with respect to the range of
accounts offered as a result of the DOL
Fiduciary Rule.1011
Further, industry studies noted that
certain of their respondents changed
their securities offerings as a result of
the DOL Fiduciary Rule.1012 For
example, 95% of the SIFMA Study
participants altered their securities
offerings by reducing or eliminating
certain asset or share classes; 86% of the
respondents reduced the number or type
of mutual funds (e.g., 29% eliminated
no-load funds, while 67% reduced the
number of mutual funds), and 48%
reduced annuity securities offerings.1013
Similarly, another study found that
nearly 30% of survey participants
eliminated or reduced securities or
services available to retirement
investors in response to the DOL
1009 See Kearney Study (provided by the Davis &
Harman and Lincoln Financial Letters).
1010 See FSR Study, which states that ‘‘[a]dvisors
who say the average net worth of their clients is
under $25,000 are more likely to say they will
definitely, probably, or have already directed more
clients to robo advisor services, both online and at
call centers (43% vs. 29% overall).’’
1011 For example, in response to the DOL
Fiduciary Rule, J.P. Morgan and Merrill Lynch
phased out commission-based retirement plans and
instead charged fees based on AUM. See Crystal
Kim, BofA, JPMorgan, and the Fiduciary Rule: Will
They or Won’t They, Barron’s, Mar. 15, 2017,
https://www.barrons.com/articles/bofa-jpmorganand-the-fiduciary-rule-will-they-or-wont-they1489588442. However, upon the Fifth Circuit’s
ruling on the DOL Fiduciary Rule, J.P. Morgan and
Merrill Lynch reversed their earlier decision and
began to offer commission-based retirement plans
again. See Jed Horowitz, JPMorgan to Remove Some
Fiduciary Rule Handcuffs, Others May Follow,
AdvisorHub, May 4, 2018, https://advisorhub.com/
jpmorgan-to-remove-some-fiduciary-rule-handcuffsothers-may-follow/; Imani Moise, Merrill Lynch
Does about Face on Fiduciary-Era Policy, Reuters,
Aug. 30, 2018, https://www.reuters.com/article/usbank-of-america-fiducuary/merrill-lynch-doesabout-face-on-fiduciary-era-policyidUSKCN1LF1R9. See also Daisy Maxey, Winners
and Losers in a Post-Fiduciary World, Wall St. J.,
May 24, 2017, available at https://www.wsj.com/
articles/winners-and-losers-in-a-post-fiduciaryworld-1495638708; Nir Kaissir, Merrill Lynch Can’t
Restore the Bad Old Days of Conflicts, Bloomberg,
Sept. 4, 2018, available at https://
www.bloomberg.com/opinion/articles/2018-09-04/
merrill-lynch-can-t-restore-the-bad-old-days-ofconflicts.
1012 While the industry studies discussed in this
section examined shifts in services and securities
provided to retail investors, one limitation of these
studies is that they did not discuss whether the
quality of advice provided to retail investors also
changed as a result.
1013 See SIFMA Study, supra footnote 33.

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Fiduciary Rule,1014 while the Chamber
Study noted that 13.4 million accounts
of the companies surveyed had limited
access to certain securities, including
mutual funds, variable annuities, and
exchange-traded funds.1015 Finally, the
SIFMA Study states that although the
DOL Fiduciary Rule applied only in
connection with services for retirement
accounts, certain of the survey
participants had implemented the
changes to both retirement and nonretirement accounts.1016 These studies
do not discuss the attributes of the
securities that the participants chose to
no longer offer. In addition, as noted
above, survey analysis is subject to
certain limitations that, generally,
complicate the interpretation of their
results. For instance, it is not generally
clear whether the results of these
studies capture significant or marginal
changes in broker-dealer practices, and
whether these changes are indicative of
broader trends in the market for advice
in response to the DOL Fiduciary Rule.
Besides the studies mentioned above,
a number of media articles provide
anecdotal evidence of broker-dealers
that chose to no longer offer certain
securities.1017 Some commenters also
American Bankers Association, ABA
Survey: Department of Labor Fiduciary Rule (July
20, 2017), available at https://www.aba.com/
Advocacy/Issues/Documents/dol-fiduciary-rulesurvey-summary-report.pdf (‘‘ABA Study’’). The
ABA Study conducted a survey of 57 banks about
their understanding of the DOL Fiduciary Rule on
securities and services available to retirement
investors. See also Kearney Study, which
anticipated a shift from mutual funds to exchangetraded funds, and that ‘‘certain high-cost
investment products (such as variable annuities)
will be phased out as the business model is no
longer viable under [the DOL Fiduciary Rule].’’ See
also FSR Study, which reported that 63% of its
survey participants anticipated fewer investment
options and 56% had already reduced or
anticipated reducing the number of mutual funds
offered to retirement customers.
1015 See Chamber Study. See also Editorial Board,
Tom Perez’s Fiduciary Flop, Wall St. J., Mar. 18,
2018, https://www.wsj.com/articles/tom-perezsfiduciary-flop-1521412228, which noted that some
firms restricted sales of commission-based
securities such as load mutual funds and variable
annuities in retirement accounts.
1016 See, e.g., SIFMA Study, supra footnote 33.
1017 See Alex Steger, Exclusive: UBS to Cut over
800 Funds from Platform, City Wire, Mar. 13, 2018,
https://citywireusa.com/professional-buyer/news/
exclusive-ubs-to-cut-over-800-funds-from-platform/
a1100101; Michael Thrasher, Ameriprise Drops
Hundreds of Funds Offered to Brokerage Clients,
WealthManagement.com, June 8, 2017, https://
www.wealthmanagement.com/industry/ameriprisedrops-hundreds-funds-offered-brokerage-clients;
Hugh Son, Morgan Stanley to Reduce Wealth Fees
Even with Rule Uncertainty, Bloomberg, Jan. 26,
2017, https://www.bloomberg.com/news/articles/
2017-01-26/morgan-stanley-to-proceed-with-wealthchanges-ahead-of-new-rules; Margarida Correia, LPL
Puts Final Touches on Product Lineups in
Preparation for Fiduciary Rule, Financial Planning,
Mar. 9, 2017, https://www.financial-planning.com/
news/lpl-puts-final-touches-on-product-lineups-in-

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provided data about historical trends in
certain product markets.1018 For
example, one commenter provided data
for the market of mutual funds and
showed that between 2007 and 2018,
the percentage of assets in load mutual
funds declined from 27% to 12%, while
no-load share classes increased from
51% to 71% over the same time
period.1019 Further, this commenter
stated that this shift has occurred
because of the growth in assets in 401(k)
plans and other retirement accounts, as
well as the increase in the number of
advisory accounts, both of which tend
to invest in no-load share classes.
However, the DOL Fiduciary Rule
may have caused certain product
markets to adjust.1020 For example,
innovations, including the introduction
of T and clean share classes of mutual
funds, can be regarded as a paradigm
shift in terms of how product sponsors
compensate broker-dealers for
distribution services. One commenter
noted that these products may reduce
the expected fund underperformance
net of costs for retail investors relative
to A shares by nearly 50 basis points
annually.1021
The Effect of Costs and Fees
Some firms may have responded to
the DOL Fiduciary Rule by either
presenting customers with the option to
enter into different and potentially more
costly advice relationships compared to
a brokerage advice relationship or by
passing some of the compliance costs to
customers.1022 However, one study
observed that 63% of the responding
firms that limited or eliminated access
to advised brokerage services stated that
they had at least some customers who
chose to move to self-directed accounts
rather than fee-based accounts and cited
the reasons that customers provided as
(1) ‘‘did not want to move to a fee-based
account,’’ (2) ‘‘was not in the retirement
investor’s best interest to move to a feepreparation-for-fiduciary-rule?tag=00000154-3e16d45e-a175-7f9f48a20001; Bruce Kelly, Wells Fargo
Advisors Restricting Investments for Retirement
Accounts, Investment News, May 24, 2017, https://
www.investmentnews.com/article/20170524/FREE/
170529959/wells-fargo-advisors-restrictinginvestments-for-retirement-accounts.
1018 See, e.g., ICI Letter.
1019 See id.
1020 See, e.g., James Chen, Clean Shares,
Investopedia, available at https://
www.investopedia.com/terms/c/clean-shares.asp,
stating that ‘‘[t]he mutual fund industry introduced
clean shares, along with T shares, in response to the
Department of Labor’s fiduciary rule.’’
1021 See Letter from Aron Szapiro, Director of
Policy Research, Morningstar (Sept. 2017).
1022 See supra footnote 1011 (which describes
how certain firms responded to the DOL Fiduciary
Rule and later reversed changes in response to the
Fifth Circuit decision).

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Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations
based account,’’ (3) ‘‘did not meet the
account minimums,’’ or (4) ‘‘wished to
maintain positions in certain asset
classes which were not eligible for a feebased account.’’ 1023 Another study
further observed that nearly 40% of the
responding firms believed that the
relationship with their customers had
been altered as a result of the DOL
Fiduciary Rule and that customers with
smaller account balances were nearly
ten times more likely to have been
negatively affected by the DOL
Fiduciary Rule than customers with
larger account balances.1024 Further,
another study observed that 68% of the
responding firms were less likely to
provide services to smaller accounts,
and 46% anticipated that they may
service fewer clients overall.1025
One study observed that, generally,
based on the numbers provided by the
respondents, a fee-based account can be
more costly than a brokerage account;
however, such comparison is generally
hard to make without knowing the
securities in the two types of accounts,
and it is not clear that the survey made
this clear to respondents.1026 One
study 1027 observed that approximately
52% of its survey participants indicated
that they may pass on the costs
associated with complying with the
DOL Fiduciary Rule to clients in the
form of higher fees, while another study
stated that more than 6 million client
accounts of the survey participants may
be subject to higher costs and fees as a
result of the DOL Fiduciary Rule,
although it is not clear whether this
estimate assumes full adoption of the
DOL Fiduciary Rule.1028
Estimated Costs of Compliance and
Effects on Compensation Structures
One study observed that survey
respondents were expecting to incur
compliance costs as a result of the DOL
Fiduciary Rule that would vary by the
size of the respondent.1029 For instance,
1023 See

SIFMA Study, supra footnote 33.
ABA Study.
1025 See FSR Study. See also Chamber Study,
which found that some survey participants have
added minimum account balances and have
migrated away from commission-based models
toward fee-based models.
1026 See SIFMA Study. We note that only a subset
of the SIFMA Study participants provided
information on the costs associated with brokerage
and advisory accounts. See CFA August 2018
Letter. The SIFMA Study did not provide any
information on the set of firms comprised in this
subset that provided information on brokerage and
advisory costs. See also ICI Letter (which provided
similar estimates for fees and costs attributable to
brokerage and advisory accounts).
1027 See FSR Study.
1028 See Chamber Study.
1029 See SIFMA Study. As a general matter, we
note that the estimates reported by industry studies,

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large firms with net capital in excess of
$1 billion were expected to have startup and ongoing compliance costs of $55
million and $6 million, respectively,
while firms between $50 million and $1
billion in net capital were expected to
have start-up and ongoing compliance
costs of $16 million and $3 million,
respectively. The study further
estimated that the total start-up
compliance costs for large and mediumsize firms combined would have been
approximately $4.7 billion, while
ongoing costs would have been
approximately $700 million per year.
Another study observed that the costs
of complying with DOL Fiduciary Rule
would encompass technology, legal,
process changes, educational, and
training costs for firms.1030 This study
forecasted that the DOL Fiduciary Rule
may cause a $2 trillion redistribution in
assets from broker-dealers to investment
advisers, robo-advisors, and selfdirected accounts, and a nearly $20
billion decrease in revenues to the
entire financial services industry,
including broker-dealers.
The study further forecasted that as a
result of the DOL Fiduciary Rule
product sponsors ‘‘will be incentivized
to streamline product offerings, lower
fees, and improve performance,’’ and
investor would pay $7.5 billion less in
mutual fund and ETF expenses by the
end of 2010. However, as noted above,
this study does not provide details
about how it obtained its estimates.
Several media articles provide some
anecdotal evidence suggesting that as a
response to the DOL Fiduciary Rule
some broker-dealers began to alter the
compensation structures of their
registered representatives.1031 For
example, some broker-dealers have
indicated that they adjusted their
compensation structures by equalizing
commissions and deferred sales charges
across similar securities.1032 Other
broker-dealers banned sales quotas,
contests, special awards, and
bonuses,1033 including deferred bonuses
including this study, are based on a rulemaking
with more extensive requirements for changes to
business models than those required by Regulation
Best Interest.
1030 See Kearney Study.
1031 See Son (2017), supra footnote 1017; Tara
Siegel Bernard, Do Financial Advisers Have to Act
in Your Interest? Maybe, N.Y. Times, Mar. 22, 2018,
https://www.nytimes.com/2018/03/22/your-money/
financial-advisers-customer-interest.html.
1032 See, e.g., Andrew Welsch, Facing Higher
Costs, Raymond James Cuts Adviser Pay in Rare
Move, Financial Planning, July 11, 2017, https://
onwallstreet.financial-planning.com/news/facinghigher-costs-raymond-james-cuts-adviser-pay-inrare-move?tag=00000151-16d0-def7-a1db97f024310000.
1033 See Bernard (2018).

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33423

as part of recruitment efforts.1034
However, following the decision by the
Fifth Circuit to vacate the DOL
Fiduciary Rule, some firms reinstated
back-end recruiting bonuses.1035
iii. Additional Evidence of Current
Market Practices
In this section, we include
information on Commission
observations on the broker-dealer
industry. Commission experience
indicates that there have been a number
of changes to the broker-dealer industry
and its business practices over time.1036
Consistent with the trend baseline
provided in Section III.B.1.c and
industry studies and anecdotal evidence
described above, we have observed
firms choosing to do business with retail
investors as investment advisers, not as
broker-dealers, by either migrating
existing brokerage accounts to advisory
accounts or directing new retail
customers to advisory accounts.
Beyond broker-dealer trends in
business practices, Commission
experience also indicates that some
broker-dealers have responded to the
DOL Fiduciary Rule and the Fifth
Circuit decision vacating the DOL
Fiduciary Rule by modifying their
existing business practices. For
example, some firms, consistent with
anecdotal evidence discussed above,
eliminated brokerage IRA accounts in
response to the DOL Fiduciary Rule;
however, upon the Fifth Circuit
decision, the firms reinstituted
1034 See Mason Braswell, Morgan Stanley
Resumes Recruiting Offers—Slimmer and DOLCompliant, AdvisorHub, Nov. 3, 2016, https://
advisorhub.com/morgan-stanley-resumesrecruiting-offers-slimmer-and-dol-compliant/; Deon
Roberts, Wells Fargo Overhauling Bonuses to
Comply with New Rules on Financial Advisers,
Charlotte Observer, Dec. 14, 2016, https://
www.charlotteobserver.com/news/business/
banking/bank-watch-blog/article120961138.html.
1035 See Mason Braswell, Farewell Fiduciary
Rule? Morgan Stanley Sweetens Recruiting Bonuses,
AdvisorHub, May 1, 2018, https://advisorhub.com/
farewell-fiduciary-rule-morgan-stanley-sweetensrecruiting-bonuses/. ‘‘Back-end’’ bonuses are
expressly contingent on the achievement of sales or
asset targets. See U.S. Department of Labor, Conflict
of Interest FAQs (Part I—Exemptions) (Oct. 27,
2016), available at https://www.dol.gov/sites/
default/files/ebsa/about-ebsa/our-activities/
resource-center/faqs/coi-rules-and-exemptions-part1.pdf.
1036 Information on the broker-dealer industry
and business practices comes from a variety of
Commission resources and generally relates to
market trends and changes to business practices
that have emerged in recent years and is comprised
of both standalone broker-dealers and dually
registered firms. With respect to industry trends,
Commission resources generally verify data cited
above in Section III.B.2.e.ii. We acknowledge that
the information provided in this baseline may not
be representative of business practices more
generally because of the diversity and complexity
of services and securities offered by standalone
broker-dealers and dually registered firms.

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brokerage IRAs. Other examples of
changes following the Fifth Circuit
decision include changes to incentivebased compensation in certain types of
accounts and principal trading
restrictions.
3. Investment Advice and Evidence of
Potential Investor Harm
A number of commenters expressed
the view that the Proposing Release did
not fully document the problems
attributed to potential conflicts of
interest stemming from the brokerdealer model and the resulting harm to
retail customers.1037 In order to address
these commenters’ concerns, we analyze
academic and industry studies to
present an overview of the market for
advice for retail customers.1038 Below,
we discuss which types of investors
seek investment advice; the benefits
attained through investment advice for
retail investors; limitations to the value
of that advice that stem from agency
costs, particularly those related to
conflicts of interest arising from
financial professional compensation;
and evidence of potential investor harm.
Where appropriate, we note limitations
to the application of various academic
studies that form the basis of other
economic analyses, which investigate
potential investor harm attributed to
recommendations received from
financial professionals.

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1037 See,

e.g., AARP August 2018 Letter; Better
Markets August 2018 Letter; CFA August 2018
Letter; EPI Letter; U. of Miami Letter; Morningstar
Letter; PIABA Letter; Letter from Ron A. Rhoades,
Director, Personal Financial Planning Program and
Assistant Professor of Finance, Gordon Ford College
of Business, Western Kentucky University (Aug. 6,
2018) (‘‘Rhoades August 2018 Letter’’); Former SEC
Senior Economists Letter.
1038 Although the discussion here generally
focuses on studies provided by comment letters, at
times we have included additional references either
to more fully articulate specific arguments or to
provide counterarguments to studies provided by
comment letters in an effort to present a complete
overview of pertinent literature. Because the studies
we cite in this section generically discuss
investment advice or advice rather than
recommendations, and use a variety of terms to
describe financial professionals or firms (e.g.,
brokers, advisers, or financial advisers) and
investors (e.g., investors, customers, or clients), in
the discussion that follows, we use generic terms
of advice or investment advice, financial
professional, firm, and retail investor or investor.
Although we believe that the studies generally
discuss advice as it relates to broker-dealers or
investment advisers, because of generic terms used,
such as ‘‘financial adviser,’’ it is possible that other
types of advice providers (e.g., commercial banks,
tax consultants, etc.) could be included in some of
the studies cited below. However, because not all
authors clearly define which financial professionals
are included in a given study, we are unable to
provide an exhaustive list of all types of financial
professionals that make up the market for advice.

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a. Who Seeks Investment Advice 1039
Approximately 37% of U.S.
households currently engage with
financial professionals according to
OIAD/RAND; however, households who
hire these professionals are not
uniformly distributed among the U.S.
population.1040 In addition to OIAD/
RAND, a number of academic studies,
provided with comment letters, examine
characteristics of investors and their
propensity for seeking (and following)
investment advice. Older, wealthier,
more educated, and financially more
literate retail investors are more likely to
seek and act on advice obtained from
financial professionals, suggesting that
investors who may benefit most from
advice (younger, less educated, and less
financially sophisticated) are least likely
to obtain it.1041 Several studies examine
1039 One limitation of the majority of the studies
examined is that we are unable to distinguish
whether the retail investor is seeking and/or
receiving investment advice from a broker-dealer or
an investment adviser (or some other type of
financial professional). The studies generally do not
have sufficiently granular data to distinguish
broker-dealer customers from investment adviser
clients. Further, for studies where retail investors
can be distinguished by their investment choices
(e.g., purchasing direct-sold versus broker-sold
funds), we are unable to determine whether
differences exist between broker-sold funds sold by
broker-dealers and broker-sold funds sold by
investment advisers. As discussed below, some
commenters expressed the view that buy-and-hold
retail investors were more likely to prefer the
services of brokerage accounts over advisory
accounts. See infra footnote 1055.
1040 According to OIAD/RAND, the use of
financial professionals varies by both income and
education levels. For example, 38% of retail
investors with income greater than $100,000 engage
with financial professionals, while only 13.7% of
retail investors with incomes below $25,000 did so.
Another study, the Survey of Consumer Finance,
indicates that the use of financial professionals by
American households is closer to 60%, but also
includes financial planners, accountants, lawyers,
and bankers, in addition to broker-dealers and
investment advisers. See SCF Survey, supra
footnote 950.
1041 See, e.g., Utpal Bhattacharya et al., Is
Unbiased Financial Advice to Retail Investors
Sufficient? Answers from a Large Field Study, 25
Rev. Fin. Stud. 975 (2012); Daniel Hoechle et al.,
The Impact of Financial Advice on Trade
Performance and Behavioral Biases, 21 Rev. Fin.
871 (2017); Jeremy Burke & Angela A. Hung, Do
Financial Advisors Influence Savings Behavior?,
RAND Labor and Population Report Prepared for
the Department of Labor (2015), available at https://
www.rand.org/content/dam/rand/pubs/research_
reports/RR1200/RR1289/RAND_RR1289.pdf;
Claude Montmarquette & Nathalie Viennot-Briot,
Econometric Models on the Value of Advice of a
Financial Advisor, CIRANO Project Report No.
2012RP–17 (July 2012), available at https://
www.cirano.qc.ca/pdf/publication/2012RP-17.pdf;
Andreas Hackethal, Michael Haliassos, & Tullio
Jappelli, Financial Advisors: A Case of Babysitters?,
36 J. Banking & Fin. 509 (2012). See also AARP
August 2018 Letter; CFA August 2018 Letter; FPC
Letter; Primerica Letter; Wells Fargo Letter (which
provided several studies cited here; other studies
(e.g., Hoechle et al. (2017)) are included because
they capture characteristics of the investors most

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the choice by retail investors to select
into broker-sold or direct-sold mutual
funds. These studies find less
financially sophisticated investors are
more likely to purchase ‘‘broker-sold’’
funds and therefore more likely to
receive advice from a financial
professional.1042
As we detail below, retail investors
bear costs associated with obtaining
advice from financial professionals,
which may deter some investors,
especially those with limited wealth or
income, from seeking investment
advice. However, an investor’s lack of
sophistication may also prevent the
investor from obtaining or using
investment advice even when advice is
provided at no cost. One paper
examines the outcomes from a large
sample of active retail investors of a
large broker-dealer.1043 These retail
investors received unsolicited and
unbiased advice from the broker-dealer
at no cost. Although the advice was
designed to improve the efficiency of
the investors’ portfolios, only 5% of
investors accepted the offer to receive
the free advice. Moreover, those that did
accept the advice rarely followed the
advice. Investors who participated in
the study had only minimal
improvements to their portfolio
efficiency. The authors cite lack of
financial sophistication and lack of
familiarity or trust as reasons why the
unsolicited advice was not followed.1044
likely to seek and act on financial advice that are
not captured by the studies suggested by the
commenters). Studies also note that the
characteristics of investors most likely to seek
advice are also likely to be those most attractive to
financial professionals as they have more assets to
manage. See Michael S. Finke, Financial Advice:
Does it Make a Difference? (Working Paper, May 5,
2012) (which describes the relationship between
investors and financial professionals).
1042 See, e.g., Christopher J. Malloy & Ning Zhu,
Mutual Fund Choices and Investor Demographics
(Working Paper, Mar. 14, 2004), available at https://
pdfs.semanticscholar.org/16a1/8daed89c3c48
a765ad3a265018b4d27bd0f4.pdf; John Sabelhaus,
Daniel Schrass, & Steven Bass, Characteristics of
Mutual Fund Investors, 2008, ICI Res.
Fundamentals, Feb. 2009, available at https://
www.ici.org/pdf/fm-v18n2.pdf; John Chalmers &
Jonathan Reuter, Is Conflicted Advice Better than
No Advice? (Working Paper, Sept. 14, 2015),
available at https://www.semanticscholar.org/
paper/Is-Conflicted-Investment-Advice-Better-thanNo-Chalmers-Reuter/3337ce8c3a72bf55dac43f407
fd104b93aec863b. See also AARP August 2018
Letter; CFA August 2018 Letter; EPI Letter (which
provided the Chalmers & Reuter (2015) citation;
Malloy & Zhu (2004) and Sabelhaus et al. (2009) are
included because they capture aspects of the
mutual fund selection decision by retail investors
that are not captured by the studies suggested by
the commenters). We provide a more detailed
discussion of these studies below in Section
III.B.3.c.
1043 See Bhattacharya et al. (2012), supra footnote
1041.
1044 See id.

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b. Benefits and Limitations of
Investment Advice
A number of commenters provided
academic studies of benefits that
investors may obtain from hiring
financial professionals.1045 One benefit
of hiring a firm or financial professional
is that professional advice can help the
average retail investor overcome
common ‘‘investment mistakes’’ that he
or she may make when investing.1046
Common ‘‘investment mistakes’’ made
by retail investors include limited
allocation of assets to equities, underdiversification, excessive trading, and
home bias.1047 These studies also
attempt to identify reasons why retail
investors persistently make inefficient
investment choices.
Beyond correcting potential
‘‘investment mistakes,’’ academic
studies document a multitude of other
benefits that accrue to retail investors as
a result of seeking investment advice,
including, but not limited to: Higher
household savings rates, setting longterm goals and calculating retirement
needs, more efficient portfolio
diversification and asset allocation,
increased confidence and peace of
mind, improvement in financial
situations, and improved tax
efficiency.1048 For example, one study

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1045 See

infra footnote 1048.
1046 See Bhattacharya et al. (2012), supra footnote
1041. ‘‘Investment mistakes’’ are investors’ actions
that would go against what a rational investor
would do when undertaking efficient investment
decisions (here and below, infra footnote 1047, we
provide studies that analyze common ‘‘investment
mistakes’’ made by retail investors). For example,
evidence suggests that retail investors tend to trade
too frequently. See Brad M. Barber & Terrance
Odean, Trading is Hazardous to Your Wealth: The
Common Stock Performance of Individual
Investors, 55 J. FIN. 773 (2000).
1047 As described in Bhattacharya et al. (2012),
supra footnote 1041, possible explanations for
common ‘‘investment mistakes’’ may arise from
behavioral biases (e.g., cognitive errors), the cost of
information acquisition, or the selection of the
financial professional. See, e.g., Luigi Guiso, Paolo
Sapienza, & Luigi Zingales, People’s Opium?
Religion and Economic Attitudes, 50 J. Monetary
Econ. 225 (2003); Laurent E. Calvet, John Y.
Campbell, & Paolo Sodini, Down or Out: Assessing
the Welfare Costs of Household Investment
Mistakes, 115 J. Pol. Econ. 707 (2007); Barber &
Odean (2000), supra footnote 1046; Karen K. Lewis,
Trying to Explain Home Bias in Equities and
Consumption, 37 J. Econ. Literature 571 (1999).
1048 See, e.g., Mitchell Marsden, Catherine D.
Zick, & Robert N. Mayer, The Value of Seeking
Financial Advice, 32 J. Fam. & Econ. Issues 625
(2011); Jinhee Kim, Jasook Kwon, & Elaine A.
Anderson, Factors Related to Retirement
Confidence: Retirement Preparation and Workplace
Financial Education, 16 J. Fin. Counseling & Plan.
77 (2005); Michael S. Finke, Sandra J. Huston, &
Danielle D. Winchester, Financial Advice: Who
Pays, 22 J. Fin. Counseling & Plan. 18 (2011); Daniel
Bergstresser, John M.R. Chalmers, & Peter Tufano,
Assessing the Costs and Benefits of Brokers in the
Mutual Fund Industry, 22 Rev. Fin. Stud. 4129
(2009); Ralph Bluethgen, Steffen Meyer, & Andreas

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notes that investors who engaged
financial professionals for at least 15
years had approximately 173% more
assets on average than investors who
did not hire financial professionals,
driven by higher household savings
rates and increased asset allocation to
non-cash instruments.1049 Further,
financial professionals may be able to
help retail investors overcome
information asymmetries that exist
between firms that supply securities and
their customers that retail investors
would not be able to disentangle on
their own.1050
Commenters also provided academic
studies which discussed the limitations
of the advice received from financial
professionals, including how both direct
and indirect costs of advice can reduce
returns earned by investors.1051 How
financial professionals are compensated
can erode the value of advice in two
primary ways: (1) The direct costs
associated with purchasing advice
Hackethal, High-Quality Financial Advice Wanted!
(Working Paper, Feb. 2008), available at http://
citeseerx.ist.psu.edu/viewdoc/
summary?doi=10.1.1.596.2310; Neal M. Stoughton,
Youchang Wu, & Josef Zechner, Intermediated
Investment Management, 66 J. Fin. 947 (2011).
Marsden et al. (2011) documents benefits
attributable to hiring a financial professional, such
as better retirement account diversification and
savings goals, but does not find that hiring a
financial professional measurably increases the
amount of overall wealth accumulation for those
investors. See also, Burke & Hung (2015), supra
footnote 1041, for additional studies on the causal
relation between the use of a financial professional
and wealth accumulation. Francis M. Kinniry et al.,
Putting a Value on Your Value: Quantifying
Vanguard Advisor’s Alpha, Vanguard Research
(Sept. 2016), available at https://
www.vanguard.com/pdf/ISGQVAA.pdf, estimates
the value to investors associated with obtaining
financial advice of approximately 3% in net returns
to investors, associated with suitable asset
allocation, managing expense ratios, behavioral
coaching, alleviating home bias, among others. See
also AARP August 2018 Letter; CCMC Letters; CFA
August 2018 Letter; Edward Jones Letter; Letter
from Brian M. Nelson (Jul. 10, 2018) (‘‘Nelson
Letter’’) (which provided several of these studies;
other studies were included because they capture
aspects of the benefits of advice for retail investors
that are not captured by the studies suggested by
the commenters (e.g., Marsden et al. (2011), Finke
et al. (2011)).
1049 See Montmarquette & Vionnet-Briot (2012),
supra footnote 1041. While this study describes the
benefits of hiring financial professionals on asset
accumulation, it also notes that termination of
relationships with financial professionals resulted
in a significant loss of overall investment asset
value. See Primerica Letter; Wells Fargo Letter
(which provided references to this academic study).
1050 See Roman Inderst & Marco Ottaviani,
Financial Advice, 50 J. Econ. Literature 494 (2012).
See also AARP August 2018 Letter.
1051 See, e.g., AARP August 2018 Letter; CFA
August 2018 Letter; EPI Letter; Letter from Ron A.
Rhoades, Director, Personal Financial Planning
Program and Assistant Professor of Finance, Gordon
Ford College of Business, Western Kentucky
University (Dec. 6, 2018) (‘‘Rhoades December 2018
Letter’’).

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detract from returns over time; 1052 and
(2) the indirect costs to retail investors
that arise from conflicts of interest
between financial professionals and
investors. Financial professionals are
generally compensated directly by retail
investors in three principal ways:
Commission-based (e.g., broker-dealers),
fee-based on AUM (e.g., investment
advisers), and flat or hourly fees (e.g.,
financial planners), although some
financial professionals may receive
compensation in multiple ways for
providing advice to the same
investor.1053
One study estimates that the average
annual costs associated with
commission-based accounts are
approximately 75 bps, while the average
fee-based account costs 130 bps.1054 We
acknowledge that in addition to the fees
charged for particular types of services,
other expenses may be incurred that
reduce returns earned by investors,
some of which may be earned by the
financial professional or the firm and
paid by the firm’s product or service
providers (e.g., fund loads, 12b–1 fees,
and shareholder servicing fees).
Some commenters expressed the view
that certain investors (e.g., buy-and-hold
investors) may prefer to pay a single
commission relative to an ongoing fee1052 As noted in one study, the direct costs (fees
and expenses) may not be transparent to retail
investors. Coupled with conflicts of interest that
can bias any advice provided, information
asymmetry between financial professionals and
retail investors may be large. See Finke (2012),
supra footnote 1041.
1053 For example, investment advisers and
supervised persons may receive account-level
advisory fees, and may also receive compensation
for the sale of securities or other investment
products, including asset-based sales charges or
service fees for the sale of mutual funds to their
advisory clients. See Items 5.C, 5.E, and 14.A of
Form ADV Part 2A; Items 4.A.2, 4.B, and 5 of Form
ADV Part 2B. When we refer to advisers and
supervised persons receiving fees for the sale of
securities or other investment products, we
generally mean advisers that are also registered
broker-dealers or advisers whose affiliated brokerdealers receive these fees. Form ADV instructs
advisers that if they receive compensation in
connection with the purchase or sale of securities,
they should carefully consider the applicability of
broker-dealer registration requirements of the
Exchange Act and any applicable state securities
statutes. See Form ADV, Part 2A, Note to Item 5.E.
1054 See John H. Robinson, Who’s the Fairest of
Them All? A Comparative Analysis of Financial
Advisor Compensation Models, 20 J. Fin. Plan. 56
(2007). See also AARP August 2018 Letter. One
study, however, argues that when the direct costs
associated with commissions are combined with the
estimated agency costs, there is little difference in
the costs between commission-based and fee-based
advice. See Quinn Curtis, The Fiduciary Rule
Controversy and the Future of Investment Advice
(Univ. of Va. Sch. of Law, Law & Econ. Research
Paper Series No. 2018–04, Mar. 2018). See also
UVA Letter. We note that services provided may
also vary between brokerage and advisory accounts,
which could also affect differences in costs paid by
retail investors.

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based obligation that is tied to AUM in
their account.1055 We note that this
choice may be dependent on the
investor’s holding period and other
ongoing expenses that affect an
investor’s net return over time. For
example, a buy-and-hold investor that
chooses an account where fees are based
on AUM may pay more over time than
a similar buy-and-hold investor that
pays a single commission. Further, some
commission-based securities, such as
mutual funds, may have ongoing
expenses, including 12b–1 fees, which
could lead to an erosion of net returns
over time.1056 Such ongoing expenses,
however, may not be adequately
accounted for by investors when making
investment decisions about the type of
account to open and what type of
security to purchase.1057 Several
commenters provided analyses to show
the expected effect of one-time costs and
ongoing expenses (e.g., operating costs
or advisory fees) to investors from both
commission-based and fee-based
perspectives, conditional on the
investor’s holding period.1058
Separately, investors may face
indirect costs that are a result of agency
problems that emerge when financial
professionals seek to maximize their
own compensation and take actions that
place their own interests ahead of the
investors that they are supposed to
serve.1059 A number of commenters and
academic studies have stated that
commission-based compensation is
more likely to contribute to conflicts of
interest between financial professionals
and retail investors than fee-based
compensation.1060 Other commenters,
1055 See, e.g., Cetera August 2018 Letter; AALU
Letter; Pacific Life August 2018 Letter; NAIFA
Letter; Empower Retirement Letter; CCMR Letter;
Primerica Letter.
1056 See CFA August 2018 Letter; EPI Letter. See
also ICI Letter (which described a shift from load
to no load funds, decreasing expense ratios, and a
decline in the percentage of funds that charge
12b–1 fees).
1057 See infra footnote 1084 and corresponding
discussion.
1058 See, e.g., Cetera August 2018 Letter and
November 2018 Letter; Pacific Life August 2018
Letter.
1059 See Jeremy Burke et al., Impacts of Conflicts
of Interest in the Financial Services Industry (RAND
Labor & Population, Working Paper No. WR–1076,
Feb. 2015), available at https://www.rand.org/pubs/
working_papers/WR1076.html; Hamid Mehran &
Rene M. Stulz, The Economics of Conflicts of
Interest in Financial Institutions, 85 J. Fin. Econ.
267 (2007). See also Letter from D. Bruce Johnsen,
Professor of Law, Scalia Law School, George Mason
University (Aug. 7, 2018) (‘‘Johnsen Letter’’);
Robinson (2007), supra footnote 1054. Brokerdealers may act in a brokerage (i.e., agency) capacity
or a dealer (i.e., principal) capacity. See Proposing
Release at Section I. While the discussion is framed
in terms of agency problems, it is applicable to both
capacities.
1060 See IPA Letter; CFA August 2018 Letter.

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however, indicated that commissionbased compensation provides benefits to
investors.1061 One study finds that
conflicts of interest are likely to be
present in all forms of compensation
earned by financial professionals. For
example, fee-based compensation could
result in so-called ‘‘reverse churning’’
and a disincentive to reduce AUM, even
if that would be in the investor’s best
interest, while flat-fee models can lead
to shirking and overbilling.1062
However, due to limitations on the data
available regarding fee-based advice,
most of the academic studies to date
regarding conflicts of interest focus on
commission-based compensation
models. As such, the potential conflicts
associated with the fee-based
compensation models, including feebased compensation earned by brokerdealers, have not been subject to as
much analysis. Studies show that
commission-based compensation
potentially leads to biased advice,
including excessive trading in accounts
and recommendations to purchase highcommission securities, both of which
benefit the financial professional and
may lead to lower net returns.1063
Financial professionals also may
benefit from other forms of transactionbased payment from customers, such as
mark-ups and mark-downs; for instance,
one study documents that the size of the
mark-up or mark-down is significantly
positively related to whether the brokerdealer solicits the transaction and
whether the broker-dealer acts in a
principal capacity.1064 Because markups and mark-downs are payments from
the customer to the broker-dealer, they
give rise to conflicts of interest between
a broker-dealer and his or her customer
at the time of a recommendation,
particularly if they are opaque to the
customer, at the time of the
recommendation. Mechanisms,
including regulation,1065 disclosure, and
1061 See AALU Letter; Invesco Letter; ACLI Letter;
NAIFA Letter. See Burke et al. (2015), supra
footnote 1059 for a survey on the academic
literature on conflicts of interest.
1062 See Robinson (2007), supra footnote 1054.
1063 See, e.g., Stoughton et al. (2011), supra
footnote 1048; Roman Inderst & Marco Ottaviani,
Misselling Through Agents, 99 Am. Econ. Rev. 883
(2009); Max Beyer, David de Meza, & Diane
Reyniers, Do Financial Advisor Commissions
Distort Client Choice?, 119 Econ. Letters 117 (2013).
See also AARP August 2018 Letter. Financially
unsophisticated investors, as discussed by
Stoughton et al. (2011), are those most likely to
purchase inefficient assets.
1064 See Allen Ferrell, The Law and Finance of
Broker-Dealer Mark-Ups (Harvard John M. Olin Ctr.
for Law, Econ., and Bus., Discussion Paper, Apr. 6,
2011), available at https://www.finra.org/sites/
default/files/NoticeAttachment/p123492.pdf. See
AARP August 2018 Letter.
1065 See, e.g., antifraud provisions of the federal
securities laws, FINRA Rule 2121 (Fair Prices and

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reputation,1066 may be able to mitigate
the risk of financial professionals acting
on conflicts of interest to the detriment
of their customers.1067 In addition to
direct payments of commissions from
retail investors, financial professionals
may receive payments from third
parties, such as securities issuers, which
can increase costs to investors through
higher management fees and reduced
net returns, and provide incentives to
recommend these securities over those
that do not provide such incentives.1068
While a number of studies suggest
that conflicts of interest may lead to
investor harm, one study, which
provides a survey of the literature on
conflicts of interest, states that
‘‘although conflicts of interest are
omnipresent when contracting is costly
and parties are imperfectly informed,
there are important factors that mitigate
their impact and, strikingly, it is
possible for customers of financial
institutions to benefit from the existence
of such conflicts . . . The existence of
a conflict of interest . . . does not mean
that . . . the customers of that
Commissions); MSRB Rules G–15 and G–30,
amended pursuant to Exchange Act Release No.
79347 (Nov. 17, 2016) [81 FR 84637] (Nov. 23,
2016); and FINRA Rules 2121 and 2232, amended
pursuant to Exchange Act Release No. 79346 (Nov.
17, 2016) [81 FR 84659] (Nov. 23, 2016).
1066 See William P. Rogerson, Reputation and
Product Quality, 14 Bell J. Econ. 508 (1983);
Benjamin Klein & Keith B. Leffler, The Role of
Market Forces in Assuring Contractual
Performance, 89 J. Pol. Econ. 615 (1981); W. Bentley
MacLeod, Reputations, Relationships, and Contract
Enforcement, 45 J. Econ. Literature 595 (2007) for
theoretical models of the effect of reputation on
investment quality. See AARP August 2018 Letter.
For example, FINRA and MSRB introduced rules in
May 2018 regarding mark-up disclosure rules for
same-day trades, allowing investors to be able to see
what they have paid for riskless principal
transactions (FINRA Rule 2232 and MSRB Rule
G–15). The Commission has also brought
enforcement cases for undisclosed excessive
markups under Exchange Act Rule 10b–5.
1067 See, e.g., Inderst & Ottaviani (2012), supra
footnote 1050. See also Bolton et al. (2007), infra
footnote 1073, which posits that competition or
consolidation affect reputation costs and provide a
disciplining mechanism for providers of financial
advice. Although various mechanisms exist to
address agency problems in general, such as
monitoring, bonding, and contracting (see, e.g.,
Finke (2012), supra footnote 1041), the agency
problem between financial professionals and retail
investors is not necessarily one that can be solved
cost-effectively through these approaches. See infra
Section III.A.2 for a discussion of limitations to
these approaches. See also Curtis (2018), supra
footnote 1054. See also AARP August 2018 Letter;
CFA August 2018 Letter; UVA Letter.
1068 See Stoughton et al. (2011), supra footnote
1048. The authors also state that ‘‘[i]n addition to
the advisory fees charged to the clients, wrap
account managers may receive rebates from fund
management companies as well,’’ and that wrap
accounts have increased in popularity. See also
Mark Egan, Brokers vs. Retail Investors: Conflicting
Interests and Dominated Products, J. Fin.
(forthcoming 2019). See also AARP August 2018
Letter; CFA August 2018 Letter.

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institution will be harmed . . . [A]
variety of mechanisms help control
conflicts of interest and their impact
[e.g., a financial institution’s
reputation].’’ 1069 Another study of
commission-based compensation in the
United Kingdom indicates that
commission-based compensation leads
to significant bias in certain types of
securities (e.g., with profit bonds or
distribution bonds) and financial
professionals and when bias exists,
retail investors are harmed and the costs
associated with such harm are
significant; however, the study also
states that the advice market in the
United Kingdom is not overrun with
bias (‘‘adviser recommendations are not
dominated by self-interest’’) and the
market for advice generally works
well.1070
Although financial professionals may
aid retail investors in correcting
common investing mistakes and
overcoming informational hurdles
associated with securities transactions
or investment strategies, the average
retail investor may not be able to assess
the quality of advice received from
financial professionals.1071 The
difficulty in assessment can arise from
several sources, including a large degree
of heterogeneity in the quality of advice,
insufficient financial literacy on the part
of investors, and information asymmetry
1069 See Mehran & Stulz (2007), supra footnote
1059. See also Johnsen August 2018 Letter.
1070 See Robert Laslett, Tim Wilsdon, & Kyla
Malcolm, Polarisation: Research into the Effect of
Commission Based Remuneration on Advice,
Charles River Associates Report Submitted to the
U.K. Financial Services Authority (Jan. 2002),
available at http://www.crai.com/sites/default/files/
publications/polarisation-research-into-the-effectof-commission-based-remuneration-on-advice.pdf.
Laslett et al. (2002) estimate harm resulting from
biased advice of approximately £140 million per
year. Following the ban on commission-based
compensation in the U.K. in 2013, another study
finds that while the quality of financial advice
increases, increased costs of providing advice lead
some financial professionals to turn away small
retail investors. See Tracey McDermott & Charles
Roxbury, Financial Advice Market Review,
Financial Conduct Authority and HM Treasury
Final Report (Mar. 2016), available at https://
www.fca.org.uk/publication/corporate/famr-finalreport.pdf (which provides an overview of the
effects of the Retail Distribution Review by the
Financial Conduct Authority in the United
Kingdom). Further, McDermott & Roxbury (2016)
report that financial advice costs approximately
£150 per hour and that giving retirement advice
requires an average of nine hours on the part of the
financial professional.
1071 A number of studies consider advice to be a
credence good, which is a type of good with
qualities that cannot be observed by the consumer
after purchase, making it difficult to assess its
utility. See, e.g., Roman Inderst, Consumer
Protection and the Role of Advice in the Market for
Retail Financial Services, 167 J. Institutional &
Theoretical Econ. 4 (2011) (which provides a review
of investors’ ability to assess the quality of
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between the financial professional and
investors.1072 Information asymmetry
arises when information necessary to
assess the quality of the advice received
may not be available to the retail
investor, even when it is available to the
financial professional. For example, a
financial professional may disclose
conflicts of interest that could affect the
advice provided, but the information
may not be sufficiently precise to help
a retail investor gauge how those
conflicts affect the advice provided.
Conflicts of interest, therefore, can
erode the benefits of advice provided to
retail investors, particularly if investors
are unaware that the conflicts exist or if
they do not understand the implications
of conflicts.1073 Financial professionals
may use this information asymmetry,
particularly with unsophisticated
investors, to capture economic rents for
themselves, and this could exacerbate
biases that investors sometimes exhibit,
such as return chasing or underdiversification.1074 One experimental
study sent ‘‘mystery shoppers’’ to
broker-dealers and investment advisers
in several large cities in the United
States and found that financial
professionals provided
recommendations that benefited
themselves and exacerbated behavioral
biases on the part of investors, including
return chasing or recommendations of
high-cost actively managed funds.1075
1072 See, e.g., Bluethgen et al. (2008), supra
footnote 1048. Although this study documents
reasons why investors may be unable to assess the
quality of advice, the focus is on using adviser
characteristics as screening mechanisms to alleviate
the first complication noted, the high degree of
heterogeneity in the quality of advice. The paper
finds that good predictors of high quality advice
include the financial professional’s cognitive ability
(e.g., analytical skills, rationality, and financial
knowledge), how financial professionals are
compensated (financial professionals that have a
high fraction of commission-based revenue are less
likely to recommend high quality investments, e.g.,
index funds), and the firm’s business model. See
also Finke (2012), supra footnote 1041; AARP
August 2018 Letter. See also Relationship Summary
Adopting Release.
1073 See, e.g., Inderst & Ottaviani (2012), supra
footnote 1050; Patrick Bolton, Xavier Freixas, & Joel
Shapiro, Conflicts of Interest, Information
Provision, and Competition in the Financial
Services Industry, 85 J. Fin. Econ. 297 (2007). See
also AARP August 2018 Letter.
1074 See, e.g., Marco Ottaviani, The Economics of
Advice (Working Paper, May 2000), available at
http://faculty.london.edu/mottaviani/EOA.pdf
(included because they capture aspects of the
information asymmetries between retail investors
and financial professionals that are not captured by
the studies suggested by the commenters); Miriam
Krausz & Jacob Paroush, Financial Advising in the
Presence of Conflict of Interests, 54 J. Econ. & Bus.
55 (2002); Inderst & Ottaviani (2012), supra footnote
1050; Stoughton et al. (2011), supra footnote 1048.
See also AARP August 2018 Letter.
1075 See Sendhil Mullainathan, Markus Noeth, &
Antoinette Schoar, The Market for Financial
Advice: An Audit Study (Nat’l Bureau of Econ.

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Although financial professionals may
be hired to help overcome ‘‘investment
mistakes’’ made by investors,1076 a
number of studies show that financial
professionals themselves may be subject
to the same behavioral biases as
unadvised retail investors, such as
return chasing and overconfidence.1077
One study, using data on Canadian
investors and their financial
professionals, observes that financial
professionals appear to have the same
‘‘misguided beliefs’’ as their investors,
and therefore do not correct, and may
even exacerbate common investment
mistakes.1078 In that study, financial
professionals invested in the same
manner that they recommended to their
Research, Working Paper No. 17929, Mar. 2012),
available at https://www.nber.org/papers/
w17929.pdf. See also AARP August 2018 Letter;
CFA August 2018 Letter; EPI Letter. Although the
Mullainathan et al. (2012) study included both
broker-dealers and investment advisers, the study
notes that most professionals in their sample
focused on the lower end of the retail spectrum and
tended to be compensated through commissions
rather than fees based on AUM. See also Santosh
Anagol, Shawn Cole, & Shayak Sarkar,
Understanding the Advice of Commissions
Motivated Agents: Evidence from the Indian Life
Insurance Market (Harvard Bus. Sch., Working
Paper No. 12–055, Oct. 2015), available at https://
www.hbs.edu/faculty/Publication%20Files/12-055_
13c23c02-e57f-4aea-9630-316aa4b772ce.pdf, which
used a similar audit approach to evaluate the
quality of advice provided by life insurance agents
in India, and found that agents recommended
unsuitable products and strategies that paid high
commissions.
1076 See supra footnote 1046.
1077 See, e.g., Mullinathan et al. (2012), supra
footnote 1075; Terrance Odean, Are Investors
Reluctant to Realize Their Losses?, 53 J. Fin. 1775
(1998); Zur Shapira & Itzhak Venezia, Patterns of
Behavior of Professionally Managed and
Independent Investors, 25 J. Banking & Fin. 1573
(2001). See also AARP August 2018 Letter. See also
Anagol et al. (2015), supra footnote 1075, which
documents that life insurance agents in India
purchase the same inefficient products that they
recommend to their clients. One study of Canadian
financial professionals and their clients observed a
commonality among portfolios of a given financial
professional, and that the financial professional’s
own portfolio allocations strongly predicted the
asset allocations of his or her customers, indicating
limited customization, regardless of the customer’s
risk tolerance, age, or financial sophistication.
Although the results of this paper indicate that
conflicts of interest are unlikely to motivate advice
because financial professionals and their investors
hold similar portfolios, it does raise questions of the
high cost of financial advice when customization is
limited. See Stephen Foerster et al., Retail Financial
Advice: Does One Size Fit All?, 72 J. Fin. 1441
(2017) (included because they capture insights into
how financial professionals may be subject to
similar biases as retail investors that are not
captured by the studies suggested by the
commenters). See Robinson (2007), supra footnote
1054.
1078 See Juhani T. Linnainmaa, Brian T. Melzer,
& Alessandro Previtero, The Misguided Beliefs of
Financial Advisors (Kelley Sch. of Bus., Research
Paper No. 18–9, May 2018), available at http://
www.aleprevitero.com/wp-content/uploads/2018/
06/SSRN-id3101426.pdf. See also CFA August 2018
Letter.

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clients; they traded excessively, chased
returns, bought expensive actively
managed funds, under-diversified their
portfolios, and earned similar net
returns. Further, these financial
professionals continued to follow
similar investment strategies as those
they recommended to their clients, even
after they had left the industry,
suggesting that they believed their own
investment advice.1079

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c. Evidence of Potential Investor Harm
A number of commenters provided
citations to academic studies that
analyze the evidence of potential
investor harm driven by conflicts of
interest of financial professionals.1080 A
number of these studies, including
Bergstresser et al. (2009), Del Guercio
and Reuter (2014), and Christoffersen,
Evans, and Musto (2013), underpinned
the economic analyses of the Council of
Economic Advisors 2015 Study (‘‘CEA
Study’’) and the DOL RIA assessment of
the aggregate harm borne by retail
investors in retirement plans due to
conflicts of interest.1081 Below we
1079 Linnainmaa et al. (2018), supra footnote
1078, also suggest that conflicts of interest may not
be driven by financial professionals, but instead are
between the firm and its clients, and that firms
deliberately hire financial professionals who
believe their misguided (and ultimately expensive)
advice. In light of their findings, the authors suggest
that regulation designed to stem conflicts of interest
could be ineffective if aligning investors and
financial professionals does not alter the advice that
they provide, could raise barriers to entry that could
reduce the amount of advice available, and may
limit investor choice.
1080 See, e.g., AARP August 2018 Letter; Better
Markets August 2018 Letter; CFA August 2018
Letter; EPI Letter; State Attorneys General Letter.
1081 See Letter from Linda Agerbak (Jun. 21, 2018)
(‘‘Agerbak Letter’’); Better Markets August 2018
Letter; CFA August 2018 Letter; EPI Letter; Letter
from Public Citizen (Aug. 7, 2018) (‘‘Public Citizen
Letter’’); State Attorneys General Letter; Former SEC
Senior Economists Letter. See also Bergstresser et
al. (2009), supra footnote 1048; Diane Del Guercio
& Jonathan Reuter, Mutual Fund Performance and
the Incentive to Generate Alpha, 69 J. Fin. 1673
(2014); Susan E.K. Christoffersen, Richard Evans, &
David K. Musto, What Do Consumers’ Fund Flows
Maximize? Evidence from Their Brokers’ Incentives,
68 J. Fin. 201 (2013). See Office of the President of
the United States, Council of Economic Advisers,
The Effects of Conflicted Investment Advice on
Retirement Savings (Feb. 2015), available at https://
obamawhitehouse.archives.gov/sites/default/files/
docs/cea_coi_report_final.pdf. See also DOL RIA,
supra footnote 1002. Both the CEA Study and the
DOL RIA assumed that the DOL Fiduciary Rule
would eliminate all conflicts of interest and,
therefore, all of the harms to retirement investors
resulting from conflicts. See also Curtis (2018) and
infra footnote 1103. By contrast, Regulation Best
Interest would not require elimination or mitigation
of firm-level conflicts, and will require written
policies and procedures reasonably designed to
eliminate or mitigate of some representative-level
conflicts, which means that some conflicts and their
attendant harms may remain, especially at the firm
level. The disclosure requirements of Regulation
Best Interest, however, may empower some
customers to push back on broker-dealer conflicts

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discuss evidence of potential investor
harm attributable to recommendations
of certain investments by financial
professionals, including mutual funds,
401(k) plans, corporate bonds, and nontraded REITs. We then discuss the
aggregate measures of investor harm
estimated by the CEA Study and the
DOL RIA and the limitations of those
estimates.
Directly addressing the question of
whether and how brokerage customers
or advisory clients are affected by
conflicts of interest (e.g., through
quantification) requires measurement of
the effect of advice, subject to different
levels of conflict, received from brokerdealers or investment advisers. Most
data currently available to researchers
does not make distinctions between
types of firms or financial professionals,
and generally aggregates all firms or
financial professionals into a single
category of financial professionals (e.g.,
‘‘adviser’’ or ‘‘financial adviser’’).
Further, an investor’s propensity to
choose a particular type of relationship
may be correlated with the investor’s
skill or choice of investment and,
therefore, may introduce bias into
studies that are able to differentiate
between types of advice relationships.
Despite these limitations, by examining
the existing academic literature,
discussed below, we are able to gain
qualitative insight into, and address
commenter concerns, about conflicts of
interest in the market for financial
advice and the potential harm to
investors.
The majority of studies to date that
investigate the potential harm to
investors arising from potential conflicts
of interest have generally centered on
findings based on analysis of
investments in mutual funds. Due to the
readily available data for mutual funds,
the literature is rich with studies
exploring various aspects of those
securities, including the performance of
funds, relationships between flows and
performance or expenses, and
differences in performance of funds
depending on the distribution channel.
These studies have further been used by
commenters and other providers of
economic analyses to estimate the
magnitude of investor harm potentially
stemming from conflicts of interest as it
relates to mutual fund investments.1082
of interest and more generally may have a deterrent
effect.
1082 See CEA Study, supra footnote 1081, and
DOL RIA, supra footnote 1002. See also EPI Letter;
Better Markets August 2018 Letter; St. John’s U.
Letter; Letter from Royce A. Charney, President,
Trust Administrators (Aug. 7, 2018) (‘‘Charney
Letter’’); Agerbak Letter; CFA August 2018 Letter.

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Evidence suggests that there is a
strong relationship between past
performance and subsequent fund
flows, even when funds do not
persistently outperform, suggesting that
investors and/or their financial
professionals may engage in returnchasing behavior.1083 Several studies
also examine the effect of mutual fund
costs, and find that (1) fund flows are
negatively related to front-end loads, but
are relatively insensitive to fund-level
operating expenses (e.g., 12b–1 fees),
indicating that investors may be aware
of upfront costs when selecting funds,
but may be less attuned to the effect on
net returns of ongoing operating
expenses; 1084 and (2) unsophisticated
investors are more likely to pay higher
fees than sophisticated investors and are
less likely to expend search costs to look
for lower-fee funds.1085 Retail investors,
however, can benefit when funds
commence operation of an institutional
‘‘twin’’ fund as overall expenses
decrease and managerial effort
increases, suggesting that retail
investors may not be able to monitor
fund managers as effectively as
institutional investors.1086
Analyses in the CEA Study and the
DOL RIA focus on the
underperformance of certain broker-sold
funds, potentially driven by conflicts of
interest and a misalignment of
incentives between financial
professionals and investors.1087 A
number of studies document that
actively managed load mutual funds
purchased by investors through a
financial professional underperform
1083 See Judith Chevalier & Glenn Ellison, Risk
Taking by Mutual Funds as a Response to
Incentives, 105 J. Pol. Econ. 1167 (1997); Jonathan
B. Berk & Richard C. Green, Mutual Fund Flows and
Performance in Rational Markets, 112 J. Pol. Econ.
1269 (2004); Brad M. Barber, Terrance Odean, & Lu
Zheng, Out of Sight, Out of Mind: The Effects of
Expenses on Mutual Fund Flow, 78 J. Bus. 2095
(2005); Erik R. Sirri & Peter Tufano, Costly Search
and Mutual Fund Flows, 53 J. Fin. 1589 (1998). In
the theoretical model provided by Berk and Green
(2004), active funds do not outperform passive
funds because investors compete to invest in strong
past performers (i.e., they chase returns), driving
these funds’ returns to the competitive level. See
also AARP August 2018 Letter; CFA August 2018
Letter.
1084 See Barber et al. (2005), supra footnote 1083.
1085 See Todd Houge & Jay Wellman, The Use and
Abuse of Mutual Fund Expenses, 70 J. Bus. Ethics
23 (2007). See AARP August 2018 Letter.
1086 See Richard B. Evans & Rudiger Fahlenbrach,
Institutional Investors and Mutual Fund
Governance: Evidence from Retail-Institutional
Fund Twins, 25 Rev. Fin. Stud. 3530 (2012). See
AARP August 2018 Letter. The authors identify
funds as ‘‘twins’’ if they share the same manager,
investment objectives, fund families, and have a
gross return correlation of 0.95 or greater.
1087 See CEA Study, supra footnote 1081, and
DOL RIA, supra footnote 1002.

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other types of mutual funds.1088 For
example, several studies find that
actively managed load funds
underperform a buy-and-hold strategy
by between 1.56% and 2.28% annually,
while other studies show that actively
managed load funds underperform noload funds by between 1% and 1.5% per
year.1089 This underperformance could
be driven by poor market timing of
investors (e.g., return chasing),1090 or
because increased expenditures by the
funds on marketing and advertising
successfully attract retail flows, and
such expenses decrease net returns to
investors over time.1091 Fees and
expenses, as documented by several
studies, are two of the most reliable
predictors of future returns, and fees
should reflect performance (e.g., funds
with high fees hypothetically should
have better ex post performance in order
to justify the fees), as at least some
portion of the fees are dedicated to
portfolio management; however, these
studies consistently find a negative
relationship between fees and
performance—lower cost funds on
average are more likely to generate
higher performance net of fees than high
cost funds.1092
1088 See Bergstresser et al. (2009), supra footnote
1048; Del Guercio & Reuter (2014), supra footnote
1081.
1089 See, e.g., Mercer Bullard, Geoffrey Friesen, &
Travis Sapp, Investor Timing and Fund Distribution
Channels (Working Paper, 2008); Geoffrey C.
Friesen & Travis R.A. Sapp, Mutual Fund Flows and
Investor Returns: An Empirical Examination of
Fund Investor Timing Ability, 31 J. Banking & Fin.
2796 (2007); Matthew R. Morey, Should You Carry
the Load? A Comprehensive Analysis of Load and
No-Load Mutual Fund Out-of-Sample Performance,
27 J. Banking & Fin. 1245 (2003). See also Eugene
F. Fama & Kenneth R. French, Luck Versus Skill in
the Cross-Section of Mutual Fund Returns, 65 J. Fin.
1915 (2010), which notes that although some active
managers may outperform passive benchmarks
while others underperform, on average, the alpha
attributable to active management will net to zero;
therefore, net of fees, on average, and the alpha
earned by actively managed funds will be reduced
by the aggregate amount of fees and expenses of
active management. See also William F. Sharpe,
The Arithmetic of Active Management, 47 Fin.
Analysts J. 7 (1991). See AARP August 2018 Letter;
CFA August 2018 Letter.
1090 See, e.g., Bullard et al. (2008), supra footnote
1089; Friesen & Sapp (2007), supra footnote 1089.
1091 One study documents that heavily advertised
funds outperform their benchmarks prior to the
marketing efforts, but do not outperform their
benchmarks in the post-advertising period. These
funds, however, attract significantly more inflows,
relative to a control group. See Prem C. Jain &
Joanna Shuang Wu, Truth in Mutual Fund
Advertising: Evidence on Future Performance and
Fund Flows, 55 J. Fin. 937 (2000). See also Nikolai
Roussanov, Hongxun Ruan, & Yanhao Wei,
Marketing Mutual Funds (Nat’l Bureau of Econ.
Research, Working Paper No. 25056, Sept. 2018),
available at https://www.nber.org/papers/
w25056.pdf. See AARP August 2018 Letter; CFA
August 2018 Letter; EPI Letter.
1092 See Javier Gil-Bazo & Pablo Ruiz-Verdu, The
Relation Between Price and Performance in the

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A number of studies, also cited by the
DOL RIA and the CEA Study, explore
the distinction between broker-sold
funds and direct-sold funds, and the
effect of the distribution channel on
fund flows and performance. When
examining a sample of only broker-sold
funds, one study shows that funds that
pay higher fees to financial
professionals or charge higher excess
loads generate greater fund inflows.1093
Moreover, broker-sold funds, on
average, underperform direct-sold funds
by between 23 bps and 255 bps per
annum, with most studies observing
average underperformance of
approximately 100 bps (1%) per
year.1094
Further, conflicts of interest appear to
depend upon the choice of investment
(e.g., broker-sold versus direct-sold
funds) as well as the magnitude of the
costs (e.g., mutual fund loads). One
study suggests that the market for funds
is segmented: More financially
sophisticated investors select direct-sold
funds, which unbundle portfolio
management from advice of financial
professionals, while less financially
sophisticated investors purchase brokersold funds, which combine portfolio
management and advice.1095 Another
Mutual Fund Industry, 64 J. Fin. 2153 (2009); Russel
Kinnel, Predictive Power of Fees: Why Mutual Fund
Fees Are So Important, Morningstar Manager
Research (May 2016); William F. Sharpe, The
Arithmetic of Investment Expenses, 69 Fin.
Analysts J. 34 (2013). Gil-Bazo & Ruiz-Verdu (2009)
find that actively managed funds with the worst
performance charge, on average, the highest fees.
See AARP August 2018 Letter; CFA August 2018
Letter.
1093 See Christoffersen et al. (2013), supra
footnote 1081; Chalmers & Reuter (2015), supra
footnote 1042; Jasmin Sethi, Jake Spiegel, & Aron
Szapiro, Conflicts of Interest in Mutual Fund Sales:
What Do the Data Tell Us?, 6 J. Retirement 46
(2019). Christoffersen et al. (2013) and Sethi et al.
(2019) measure excess loads by first estimating the
baseline (average) load paid with regressions of
loads on a number of explanatory variables, then
using the residuals from these regressions (excess
loads) to explain fund flows and performance. See
also Morningstar Letter; Letter from Aron Szapiro,
Director of Policy Research, Morningstar, Inc., et al.
(Aug. 24, 2018) (‘‘Morningstar Letter Supplement’’).
Sethi et al. (2019) find, however, that the relation
between excess loads and fund flows tapered off
after the DOL Fiduciary Rule was adopted,
suggesting that the DOL Fiduciary Rule may have
discouraged financial professionals from directing
flows to funds with high excess loads.
1094 See, e.g., Bergstresser et al. (2009), supra
footnote 1048; Chalmers & Reuter (2015), supra
footnote 1042; Xuanjuan Chen, Tong Yao, & Tong
Yu, Prudent Man or Agency Problem? On the
Performance of Insurance Mutual Funds, 16 J. Fin.
Intermediation 175 (2007). See AARP August 2018
Letter.
1095 See Del Guercio & Reuter (2014), supra
footnote 1081. Moreover, this study finds that
broker-sold actively managed funds underperform
broker-sold index funds by between 1.1% and 1.3%
per year, which the authors suggest may reflect an
agency conflict. See also Diane Del Guercio,
Jonathan Reuter, & Paula A. Tkac, Broker Incentives

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study focuses exclusively on broker-sold
funds, but segments those funds into
groups that depend on the size of excess
loads and whether the funds are sold by
affiliated or unaffiliated brokers.1096
That study observes that funds with a
one-standard deviation increase in
excess loads are related to a reduction
in future performance of between 34 bps
and 49 bps in the following year. As
detailed in Bergstresser et al. (2009), the
broker-sold channel is likely to include
funds sold through both broker-dealers
and investment advisers; however, the
data provided to the authors is not
granular enough to be able to
distinguish the performance
characteristics of the two distinct
channels.1097
A number of commenters stated that
the Proposing Release did not
appropriately account for existing
economic analyses produced by the
CEA Study and the DOL RIA to measure
the potential harm to investors from
conflicts of interest.1098 The CEA Study
and the DOL RIA use the literature on
underperformance of broker-sold
mutual funds as the foundation for their
analyses on the potential harm of retail
investors, focusing on harm specifically
directed at retirement savings. Applying
an estimate of approximately 1%
underperformance to broker-sold funds,
which is consistent with estimates of
underperformance provided by several
studies,1099 the CEA Study and the DOL
and Mutual Fund Market Segmentation (Nat’l
Bureau of Econ. Research, Working Paper No.
16312, Aug. 2010), available at https://
www.nber.org/papers/w16312.pdf. See AARP
August 2018 Letter; CFA August 2018 Letter.
Although some of the growth in direct-sold funds
comes from passive investing (e.g., index funds),
greater than 75% of the number of direct-sold funds
are actively managed (as of 2012). See Jonathan
Reuter, Revisiting the Performance of Broker-Sold
Mutual Funds (Working Paper, Nov. 2, 2015),
available at https://www2.bc.edu/jonathan-reuter/
research/brokers_revisited_201511.pdf.
1096 See Christoffersen et al. (2013), supra
footnote 1081.
1097 See Bergstresser et al. (2009), supra footnote
1048. The Bergstresser et al. study also notes that
many funds in the direct-sold channel may be
recommended by fee-based advisers, whose services
‘‘are typically paid for with an advisory fee that is
outside of the fund expenses or distribution costs.
As a practical matter, the ‘direct’ channel may not
be as direct as one might imagine.’’
1098 See also ARA August 2018 Letter; EPI Letter;
Better Markets August 2018 Letter; St. John’s U.
Letter; Charney Letter; Agerbak Letter; CFA August
2018 Letter.
1099 See Bergstresser et al. (2009), supra footnote
1048; Del Guercio & Reuter (2014), supra footnote
1081; Christoffersen et al. (2013), supra footnote
1081. A number of commenters, regarding the DOL
RIA, indicated that both the CEA Study, supra
footnote 1081, and the DOL RIA, supra footnote
1002, misinterpreted estimated effects described in
the Christoffersen et al. (2013) paper, and overstated
the potential harm associated with funds with high
excess loads by more than double the actual

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RIA apply different methods and
approaches to calculate the aggregate
dollar harm for retail investors in their
retirement accounts.1100 Based on $1.7
trillion invested in potentially
conflicted funds, the CEA Study
estimates annual harm to retirement
investors of approximately $17
billion.1101 Similarly, the DOL RIA,
which estimates potential loss due to
conflicts of interest of between 50 bps
and 100 bps per year, produces ten-year
aggregate estimates of investor harm of
between $95 billion and $189 billion
stemming from the underperformance of
broker-sold mutual funds.
The level of underperformance due to
fund selection is highly sensitive to the
data sample, including the sample
period, as well as the methodology
employed to calculate performance.
Many of the studies used to support the
analyses underlying the CEA Study and
the DOL RIA rely on data obtained prior
to 2011. However, since 2011 there have
been a number of advances in the
market for mutual funds (e.g., shifts
from load to no-load funds and increase
in no-load funds without 12b–1 fees),
likely leading some of the inferences
drawn from those studies to be dated
and not reflective of the current market
environment.1102 A number of
commenters indicated potential flaws
associated with the approach and
interpretation of the analyses used by
the CEA Study and the DOL RIA.1103
One study updates the Del Guercio and
estimate had the interpretation been correct. See
Craig M. Lewis, The Flawed Cost-Benefit Analysis
Underlying the Department of Labor’s Fiduciary
Rule (White Paper, Aug. 2017), available at https://
www.sec.gov/comments/ia-bd-conduct-standards/
cll4-2268185-160965.pdf; Public Interest Comment
from Mark Warshawsky & Hester Peirce, George
Mason University Mercatus Center (Apr. 17, 2017),
available at https://www.mercatus.org/system/files/
warshawsky-dol-fiduciary-rule-pic-v1.pdf. See also
Curtis (2018), supra footnote 1054.
1100 See CEA Study, supra footnote 1081, and
DOL RIA, supra footnote 1002.
1101 See CEA Study, supra footnote 1081.
1102 See ICI Letter and Section III.B.2.e.ii, supra.
1103 See Lewis (2017), supra footnote 1099;
Warshawsky & Peirce (2017), supra footnote 1099.
See also Curtis (2018), supra footnote 1054. To date,
only one academic study of which we are aware
(Curtis (2018)) has analyzed the DOL Fiduciary
Rule and the DOL RIA, and discusses issues with
the approach taken by the DOL RIA in estimating
the benefits and costs of the DOL Fiduciary Rule,
noting that the DOL RIA likely underestimates the
potential costs of the rule. This study also indicates
that the net benefits of the DOL Fiduciary Rule are
expected to be close to zero because the DOL
Fiduciary Rule may not completely eliminate
conflicts of interest and the actual cost of
investment advice at the intermediary-level was
excluded from the DOL RIA computation of benefit.
Once the calculation accounted for costs of advice,
Curtis (2018) estimates that the total costs attributed
to conflicts of interest, including underperformance
of some securities, is only slightly higher than the
costs associated with advice that is free of conflicts.

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Reuter (2014) sample using data from
between 2003 and 2012 and tests the
robustness of the methodology by
examining the underperformance of
broker-sold funds relative to direct-sold
funds.1104 While underperformance of
broker-sold funds still existed,
depending on the methodology and
empirical approach used, the
underperformance of these funds was
reduced to between 20 bps and 70 bps,
with the majority of the estimation
approaches falling to between 20 bps
and 50 bps, indicating a reduction in the
underperformance of broker-sold funds
relative to earlier studies.1105 Another
study replicates the Christoffersen et al.
(2013) analysis of excess loads on
underperformance using data from
between 2010 and 2017, and finds that
after 2010, funds with high excess loads
did not underperform funds with low
excess loads, which the authors
interpret as evidence that financial
professionals have improved their
recommendations over time.1106 Taken
together, these recent studies on fund
selection suggest that the magnitude of
potential investor harm likely is not as
large as that estimated by the CEA Study
and the DOL RIA when more recent data
is used to compute the
underperformance of broker-sold
mutual funds.
Another recent study replicates and
extends the Friesen and Sapp (2007)
and Bullard et al. (2008) analyses of
market timing ability by investors in
mutual fund sales and purchases to
newer data (2007 through 2016).1107 The
Reuter (2015), supra footnote 1095.
(2015), supra footnote 1095, states that
‘‘[t]hese changes suggest that the average brokersold fund has become more competitive with the
average direct-sold fund’’; however additional
research would be required to determine if these
changes are driven by existing fund families, new
fund families, or some combination of factors.
When performance is value-weighted, Reuter (2015)
discusses that brokers appear to direct clients
toward funds that pay ‘‘higher-than-average
distribution costs.’’
1106 See Sethi et al. (2019), supra footnote 1093.
The authors note that the underperformance of high
excess load funds becomes statistically insignificant
in the analysis only with the inclusion of prior-year
performance of the fund (which Christoffersen et al.
(2013), supra footnote 1081, include in one of their
models). The authors suggest that the reduction in
flows to funds with excess loads could be due in
part to the DOL Fiduciary Rule; however, they also
note that their analysis does not reveal a clear
association between the DOL Fiduciary Rule and
returns. The authors further cite to Holden et al.
(2018), supra footnote 955, which discusses the
shift away from load mutual funds to no-load funds
over time. See also ICI Letter; Morningstar Letter;
Morningstar Letter Supplement.
1107 See Karthik Padmanabhan, Constantijn Panis,
& Timothy Tardiff, The Ability of Investors to Time
Purchases and Sales of Mutual Funds (Working
Paper, Nov. 1, 2017) (see also Department of Labor
April 2019 memo). See, e.g., Bullard et al. (2008),

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1105 Reuter

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study shows that the difference between
dollar returns and buy-and-hold returns
(‘‘performance gap’’) declined from
1.56% between 1991 and 2004 to 1.01%
between 2007 and 2016 for a combined
sample of load and no-load funds,
suggesting a moderation in market
timing errors in the most recent period.
However, the excess performance gap
(the difference between the performance
gap on load funds and no load funds)
has slightly increased between 2007 and
2016, from approximately 1% to 1.12%,
indicating that, to the extent that load
funds are sold by financial professionals
and that all inflows and outflows are
due solely to market timing motivations,
investors who hold load funds are more
prone to market timing errors than
investors in no-load funds, and these
errors are not being corrected by
financial professionals. The studies
discussed above acknowledge that
interpretation of the empirical result
that broker-sold funds underperform
direct-sold funds is subject to another
caveat because there is likely to be a
selection bias in the type of investor that
utilizes the direct-sold fund channel
relative to those investors who rely on
financial professionals for advice and
recommendations about which funds to
purchase. A similar selection bias is
likely to exist for investors who
purchase no-load funds versus those
that purchase load funds from financial
professionals. For example, although
numerous studies discussed above
suggest that financial advice is more
likely to be obtained by older, more
financially sophisticated, and wealthier
investors,1108 Chalmers and Reuter
(2015) observe that younger, less
financially experienced, and less
wealthy investors are more likely to buy
broker-sold funds.1109
Beyond mutual funds, a nascent
literature is emerging on other securities
that may be prone to conflicts of interest
by financial professionals.1110 Recent
supra footnote 1089; Friesen & Sapp (2007), supra
footnote 1089.
1108 See supra Section III.B.3.a.
1109 See supra footnote 1042.
1110 Some commenters (see, e.g., CFA August
2018 Letter; AARP August 2018 Letter; EPI Letter)
also provided studies about conflicts of interest in
401(k) plans which have shown that (i) plan
sponsors tilt securities toward high-cost securities
(see Ian Ayres & Quinn Curtis, Beyond
Diversification: The Pervasive Problem of Excessive
Fees and ‘‘Dominated Funds’’ in 401(k) Plans, 124
Yale L.J. 1476 (2015)); (ii) plans have inadequate or
excessive investment choices (see Edwin J. Elton,
Martin J. Gruber, & Christopher R. Blake, The
Adequacy of Investment Choices Offered by 401(K)
Plans, 90 J. Pub. Econ. 1299 (2006); Sheena SethiIyengar, Gur Huberman, & Wei Jiang, How Much
Choice is Too Much? Contributions to 401(k)
Retirement Plans, in Pension Design and Structure:
New Lessons from Behavioral Finance (Olivia S.

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Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations
studies have examined potential
conflicts of interest in markets for more
complex investments, including reverse
convertible corporate bonds and nontraded REITs. One study uses a sample
of reverse convertible corporate bonds
that differ only in the financial
incentives provided to financial
professionals and the coupon rate, and
finds that investors are more likely to
purchase—based on the advice given—
the inferior bond (lower coupon, all else
equal) with the higher ‘‘kick-back’’ to
the broker-dealer, which appears to be
driven by conflicts of interest between
the financial professional and the
investors.1111 In an examination of nontraded REITs, one study documents that
retail investors in non-traded REITs
underperformed by over $45 billion
relative to a portfolio of traded REITs,
and that nearly one-third of that
underperformance was driven by
upfront fees used to compensate brokerdealers.1112
Finally, although a significant amount
of empirical evidence suggests that there
may be investor harm due to conflicts of
interest between financial professionals
and investors, because of changes to the
mutual fund industry (e.g., shifts from
load to no-load funds and the
introduction of new share classes),1113
increased competition,1114 and the
anticipation of regulation designed to
ameliorate potential conflicts of interest,
several new studies indicate that
potential harm to investors arising from
conflicts of interest may be

declining.1115 One survey paper
concludes that although the empirical
evidence is consistent with financial
professionals having conflicts of interest
that may harm consumers, ‘‘none of the
articles concludes that clients would
have been better off by foregoing advice.
Even if people receive lower returns
. . . consulting with an advisor may
provide intangible benefits that
consumers value,’’ and ‘‘it is important
to bear in mind that these studies may
have data limitations and in general
cannot account for selection issues and
the intangible benefits that investors
receive from financial advisors.’’ 1116

Mitchell & Stephen P. Utkuss eds., 2004)); (iii)
plans may include proprietary funds even when
other funds perform better (see Veronika K. Pool,
Clemens Sialm, & Irina Stefanescu, It Pays to Set
the Menu: Mutual Fund Investment Options in
401(K) Plans, 71 J. Fin. 1779 (2016)); and (iv) funds
included in 401(k) plans underperform passive
benchmarks by approximately 31 bps annually (see
Edwin J. Elton, Martin J. Gruber, & Christopher T.
Blake, How do Employer’s 401(K) Mutual Fund
Selections Affect Performance?, Ctr. for Retirement
Research at Bos. Coll., Issue in Brief No. 13–1 (Jan.
2013), available at https://crr.bc.edu/wp-content/
uploads/2013/01/IB_13-1-508.pdf).
1111 See Egan (2019), supra footnote 1068.
1112 See Craig McCann, Fiduciary Duty and NonTraded REITs, Investments & Wealth Monitor, July/
Aug. 2015, at 39, available at https://www.slcg.com/
pdf/workingpapers/Fiduciary%20duty
%20and%20Non-traded%20REITs.pdf. See CFA
August 2018 Letter.
1113 See ICI Letter and Holden et al. (2018), supra
footnote 951. See also Capital Group Letter; Money
Management Institute Letter; FPC Letter at footnote
73. As noted above, innovations, including the
introduction of T and clean share classes of funds
may reduce the expected fund underperformance
net of costs for retail investors relative to A shares
by nearly 50 basis points annually. See supra
footnote 1021 and accompanying text. See also
supra footnote 1020 and accompanying text.
1114 See LPL December 2018 Letter; Morgan
Stanley Letter (which discuss the migration to open
architecture platforms).

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4. Trust, Financial Literacy, and the
Effectiveness of Disclosure
A number of commenters stated that
the Proposing Release did not
sufficiently address how issues related
to trust in financial professionals,
investors’ level of financial literacy or
sophistication, and limitations on the
effectiveness of disclosure likely
exacerbate the problems of information
asymmetry and potential conflicts of
interest between retail investors and
financial professionals.1117 In order to
address commenters’ concerns, we
examined and discuss below both
academic and industry research on how
trust and financial literacy could affect
the recommendations provided by
financial professionals to retail
investors, as well as the effectiveness
and limitations of disclosure in
ameliorating potential conflicts of
interest.
In seeking financial advice, a retail
investor places not only money but also
trust in a financial professional.
Commenters stated that retail investors
will follow the advice of their ‘‘trusted
advisors,’’ because they believe
‘‘financial professional[s] will place the
investor’s financial interest before his or
1115 See Reuter (2015), supra footnote 1042; Sethi
et al. (2019), supra footnote 1093. See also CFA
August 2018 Letter; EPI Letter; Morningstar Letter;
Morningstar Letter Supplement. We include recent
studies provided by commenters to present the
current baseline of empirical findings on potential
investor harm stemming from conflicts of interest.
1116 See Burke et al. (2015), supra footnote 1059.
The DOL RIA, supra footnote 1002, and some
commenters, however, have stated that no advice is
a better alternative to advice subject to conflicts of
interest. See also EPI Letter; Betterment Letter;
PIABA Letter; CFA August 2018 Letter. The DOL
RIA suggests that investors who obtain advice
subject to conflicts of interest are worse off due to
the costs associated with obtaining such advice
(e.g., underperformance) than had they not sought
or received advice at all.
1117 See AARP August 2018 Letter; CFA August
2018 Letter; FPC Letter; Rhoades December 2018
Letter; EPI Letter.

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33431

her own.’’ 1118 Moreover, one industry
study of over 800 investors notes that
‘‘96% of U.S. investors report that they
trust their financial professional and
97% believe their financial professional
has their best interest in mind.’’ 1119
Academic studies have explored the
issue of trust and how it affects financial
decisions of investors. Studies in this
strand of academic literature find that
higher levels of trust increase investors’
propensity to seek investment advice
and hire financial professionals,1120
increase levels of stock market
participation,1121 and increase
willingness to take on higher-risk
investments.1122 Regarding the
importance of trust in established
advice relationships, some studies find
that trust in financial professionals is
greater when investors have lower
financial literacy or when purchasing
complex products, such as insurance
products.1123 Further, as trust in
1118 See Letter from Christine Lazaro, President,
PIABA (Dec. 7, 2018) (‘‘PIABA December 2018
Letter’’). See also, e.g., Rhoades December 2018
Letter; Gross Letter; Letter from William W.
McGinnis, W. McGinnis Advisors (Aug. 7, 2018)
(‘‘McGinnis Letter’’); EPI Letter; Betterment Letter;
State Attorneys General Letter; Better Markets
August 2018 Letter; OIAD/RAND (providing a
survey on academic literature on trust). One survey
notes, however, that approximately 15% of survey
participants do not consult with financial
professionals because they ‘‘don’t trust them.’’ See
Cetera November 2018 Letter.
1119 See CCMC Letters. See also Center for Capital
Markets Competitiveness, Working with Financial
Professionals: Opinions of American Investors
(2018), available at https://www.centerfor
capitalmarkets.com/wp-content/uploads/2018/04/
CCMC_InvestorPolling_v5-1.pdf.
1120 See Jeremy Burke & Angela A. Hung, Trust
and Financial Advice (RAND Labor & Population,
Working Paper No. WR–1075, Jan. 2015), available
at https://www.dol.gov/sites/default/files/ebsa/
laws-and-regulations/rules-and-regulations/
proposed-regulations/1210-AB32-2/trust-andfinancial-advice.pdf. This study indicates that
increased financial trust is associated with higher
levels of both seeking and following investment
advice. See also AARP August 2018 Letter; FPC
Letter; CFA August 2018 Letter.
1121 See Luigi Guiso, Paola Sapienza, & Luigi
Zingales, Trusting in the Stock Market, 63 J. Fin.
2557 (2008). Guiso et al. (2008) find that higher
levels of trust in financial professionals by investors
is associated with a 50% increase in the probability
of buying stocks and a 3.4% increase in the
proportion of equity investments in the aggregate
portfolio. See Rhoades December 2018 Letter.
1122 See Nicola Gennaioli, Andrei Shleifer, &
Robert Vishny, Money Doctors, 70 J. Fin. 91 (2015).
This study suggests that increased trust in financial
professionals by investors alleviates anxiety in
undertaking higher-risk investments (e.g., equities)
(included because they capture aspects of the
benefits of higher levels of trust in financial
professionals by retail investors that are not
captured by the studies suggested by the
commenters).
1123 See Thomas Pauls, Oscar Stolper, & Adreas
Walter, Broad-Scope Trust and Financial Advice
(Working Paper, Nov. 17, 2016), available at https://
www.researchgate.net/publication/314235638_
Broad-scope_trust_and_financial_advice; David de

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financial professionals grows, investors
may be more likely to delegate all
investment decisions to the financial
professional, irrespective of their level
of financial education.1124
Several commenters stated that some
financial professionals respond to the
trust that retail investors place in them
by acting on their conflicts of interest,
which could benefit the financial
professional at the expense of the
investor.1125 In addition, some studies
have shown that higher levels of trust by
retail investors can provide incentives
for financial professionals to provide
conflicted investment advice or
undertake actions that benefit
themselves at the expense of their
customers. For example, one study
found that because investors trust their
financial professionals to provide higher
ex ante expected returns on their risky
investments, firms employing those
professionals increased fees above levels
that, in the author’s view, were
consistent with a competitive
equilibrium, resulting in lower ex post
net returns to investors.1126 Further, this
study documents that, although a
relationship with a trusted professional
can encourage investors to invest in
financial markets when it is efficient for
them to do so, in some cases financial
professionals may instead provide more
conflicted investment advice or
inefficient advice in order to satisfy the
desires of investors who trust them (e.g.,
undertaking lottery-like behavior by
investing in the riskiest securities).1127
Although trust in financial professionals
can help alleviate certain behavioral
biases and encourage participation in
the securities markets, one commenter
stated that ‘‘[r]etail customers who place
their trust in salespeople that market
services as acting in their best interest
can end up paying excessively high
costs for higher risk or underperforming
investments that only satisfy a
Meza, Bernd Irlenbusch, & Diane Reyniers,
Disclosure, Trust and Persuasion in Insurance
Markets (IZA Discussion Paper Series, No. 5060,
July 2010), available at http://repec.iza.org/
dp5060.pdf. See also OIAD/RAND, which shows
that investors most likely in need of investor
protection (e.g., financially unsophisticated) are
most likely to place their trust in financial
professionals. See also Letter from AFL–CIO et al.
(Dec. 7, 2018) (‘‘AFL–CIO December 2018 Letter’’).
1124 See Riccardo Calcagno, Maela Giofre, & Maria
Cesira Urzi-Brancati, To Trust is Good, but to
Control is Better: How Investors Discipline
Financial Advisors’ Activity, 140 J. Econ. Behav. &
Org. 287 (2017). See OIAD/RAND.
1125 See, e.g., Rhoades December 2018 Letter; EPI
Letter; Better Markets August 2018 Letter.
1126 See Calcagno et al. (2017), supra footnote
1124.
1127 See id.

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suitability standard, not a fiduciary
standard.’’ 1128
b. Financial Literacy and Investment
Advice
As discussed above, financial literacy
affects those who seek investment
advice from financial professionals. One
commenter noted that ‘‘[a]s consumers
move closer to retirement, they may be
more vulnerable to the negative impact
of advice that is not in their best interest
for three reasons: (1) The assets they
have to invest are larger; (2) they may
lack strong financial literacy skills; and
(3) reduced cognition may affect
financial decision making.’’ 1129 A
number of studies have shown that
financial literacy is significantly related
to retirement planning and wealth
accumulation by retail investors.1130
Generally, studies find that investors
who are more financially literate or
sophisticated are more likely to seek
investment advice and are more likely
to follow that advice than less
financially sophisticated investors.1131
Further, one study shows that investors
with lower financial literacy who do not
seek investment advice underperform
investors with higher financial literacy
who seek investment advice by more
than 50 bps on average, and these losses
are predominantly driven by underdiversification of their portfolios.1132
1128 See AARP August 2018 Letter. See also
PIABA Letter; St. John’s U. Letter. See also Joseph
C. Peiffer & Christine Lazaro, Major Investor Losses
Due to Conflicted Advice: Brokerage Industry
Advertising Creates the Illusion of a Fiduciary Duty,
PIABA Report (Mar. 25, 2015), available at https://
piaba.org/sites/default/files/newsroom/2015-03/
PIABA%20Conflicted%20Advice%20Report.pdf.
1129 See AARP August 2018 Letter.
1130 See, e.g., Jere R. Behrman et al., Financial
Literacy, Schooling, and Wealth Accumulation
(Nat’l Bureau of Econ. Research, Working Paper No.
16452, Oct. 2010), available at https://
www.nber.org/papers/w16452.pdf; Hans-Martin von
Gaudecker, How Does Household Portfolio
Diversification Vary with Financial Literacy and
Financial Advice?, 70 J. Fin. 489 (2015) (included
in response to comment letters that expressed views
about limited financial literacy by some retail
investors).
1131 See supra Section III.B.3. See also Riccardo
Calcagno & Chiara Monticone, Financial Literacy
and the Demand for Financial Advice, 50 J. Banking
& Fin. 363 (2015), who observe that investors with
lower levels of financial literacy are less likely to
consult advisers and avoid risky assets; however,
when they do seek advice, they generally delegate
investment decisions to their financial
professionals. Lusardi & Mitchell (2011) indicate
that investors who are more financially
sophisticated are more likely to plan for wealth
accumulation and be successful in their planning.
See Annamaria Lusardi & Olivia S. Mitchell,
Financial Literacy and Planning: Implications for
Retirement Wellbeing (Nat’l Bureau of Econ.
Research, Working Paper No. 17078, May 2011),
available at https://www.nber.org/papers/
w17078.pdf. See AARP August 2018 Letter.
1132 See von Gaudecker (2015), supra footnote
1130. This study finds that losses borne by

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A number of studies link retail
investor demographic characteristics to
financial literacy and document that
financial illiteracy, although
widespread, is most significant among
investors with lower levels of
educational attainment, women, and
minorities.1133 Moreover, many studies
have examined the relationship between
age, cognition, and financial literacy,
and have shown that older investors, on
average, are the least likely to be
financially literate, and that financial
literacy degrades as investors age.1134 A
number of these studies show, however,
that investors with low levels of
financial literacy are likely to be overconfident in their financial abilities. For
example, several studies that explore
the relationship between age and
financial literacy show that confidence
in financial decision making does not
decline with age, and potentially leads
to poor decisions (e.g., paying higher
mortgage rates).1135 Although overconfident investors with low levels of
financial literacy could potentially
benefit most from seeking and following
investment advice, one study shows that
over-confident investors are less likely
to seek advice and perceive it as less
valuable.1136
One potential problem, however, for
investors with lower financial literacy is
that they may not be able to distinguish
the quality of their financial
professional or the advice that they
receive.1137 One study documents that
small traders, relative to large
institutional investors, are unable to
recognize biases in recommendations
investors with lower financial literacy are
predominantly driven by under-diversification of
their portfolios.
1133 See Lusardi & Mitchell (NBER 2011), supra
footnote 1131. See also Annamaria Lusardi & Olivia
S. Mitchell, Financial Literacy and Retirement
Planning in the United States, 10 J. Pension Econ.
& Fin. 509 (2011). See AARP August 2018 Letter.
1134 See Michael S. Finke, John Howe & Sandra
J. Huston, Old Age and Decline in Financial
Literacy (Working Paper, Aug. 24, 2011), who
document that financial literacy scores decline by
approximately 1% each year over the age of 60. See
also Annamaria Lusardi, Olivia S. Mitchell, & Vilsa
Curto, Financial Literacy and Financial
Sophistication Among Older Americans (Nat’l
Bureau of Econ. Research, Working Paper No.
15469, Nov. 2009), available at https://
www.nber.org/papers/w15469.pdf; Keith Gamble et
al., Aging and Financial Decision Making, 61 Mgmt.
Sci. 2603 (2015). See AARP August 2018 Letter.
1135 See Finke et al. (2011) and Gamble et al.
(2015), supra footnote 1134.
1136 See Marc M. Kramer, Financial Literacy,
Overconfidence and Financial Advice Seeking
(Working Paper, Dec. 19, 2014), available at https://
efmaefm.org/0EFMAMEETINGS/
EFMA%20ANNUAL%20MEETINGS/2015Amsterdam/papers/EFMA2015_0067_fullpaper.pdf.
1137 See Lauren E. Willis, Against FinancialLiteracy Education, 94 Iowa L. Rev. 197 (2008). See
AARP August 2018 Letter.

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provided by securities analysts, and
therefore follow analyst
recommendations to buy and sell
securities without considering other
information produced by the
analyst.1138 Additionally, financial
literacy may influence the quality of
advice that financial professionals are
willing to provide their clients. Some
financial professionals appear to be
more likely to provide superior
information to more financially literate
investors, who may be able to discern
the quality of the advice, and more
likely to provide inferior and potentially
more conflicted information to investors
who are less financially literate.1139

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c. Evidence on the Effectiveness and
Limitations of Disclosure
Regulation Best Interest relies in part
on disclosure of certain material facts to
retail customers.1140 A number of
commenters, however, stated that we
failed to sufficiently account for
limitations of disclosure in the
Proposing Release of Regulation Best
Interest.1141 One commenter stated that
‘‘studies show that regulation by
disclosure alone can actually undermine
investor protection by emboldening
advisers to ignore the client’s best
interest once they have ‘checked the
disclosure box,’ and by rendering
investors even more vulnerable to
conflicted advice once they receive
disclosures.’’ 1142 Another commenter
asserted that the ineffectiveness of
disclosure arises because of investors’
failure to understand the disclosure,
inadequate time to read and process the
information, cognitive dissonance, and
trust in financial professionals’ oral
representations over written disclosures,
among others.1143 Below, we discuss
1138 See Ulrike Malmendier & Devin
Shanthikumar, Are Small Investors Naive About
Incentives?, 85 J. Fin. Econ. 457 (2007). See AARP
August 2018 Letter.
1139 See Willis (2008), supra footnote 1137, and
Calcagno & Monticone (2015), supra footnote 1131.
See also John A. Turner, Bruce W. Klein, & Norman
P. Stein, Financial Illiteracy Meets Conflicted
Advice: The Case of Thrift Savings Plan Rollovers
(Working Paper, Apr. 2015), available at https://
gflec.org/wp-content/uploads/2015/04/Turner0408Assessing-the-Standard-for-FinancialAdvice.pdf, which documents that financial
professionals often suggest rolling over from thrift
savings plans to more expensive plans (e.g., IRAs),
and that such behavior is pervasive among both
broker-dealers and investment advisers. See AARP
August 2018 Letter.
1140 See supra Section II.C.1.
1141 See AARP August 2018 Letter; Better Markets
August 2018 Letter; State Attorneys General Letter;
EPI Letter; Morningstar Letter; Warren Letter; UVA
Letter.
1142 See Better Markets August 2018 Letter. See
infra footnote 1148 for studies submitted by this
commenter.
1143 See State Attorneys General Letter. See also
EPI Letter.

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studies that have identified
characteristics that make disclosure
effective as well as limitations to the
effectiveness of disclosure to investors,
in particular focusing on issues related
to disclosure of conflicts of interest and
how disclosure could inflate potential
conflicts between financial
professionals and investors.
Characteristics of effective disclosures
include saliency of information, clear
and concise information delivered in a
transparent manner, and increased use
of visual and interactive design, among
others.1144 One study, examining the
effect of disclosure of fees and costs for
mutual funds, observes that disclosures
that prominently feature fees are more
effective than others, but do not appear
to reduce the importance that investors
place on other fund characteristics, such
as performance or risk.1145 Other
studies, however, have found that
disclosures may be ineffective,
particularly if the intended audience
does not read the disclosure documents
or does not understand the material
presented to them. One study, for
example, notes that as the length and
complexity of the disclosure document
increases, so does the time that it takes
for investors to read and understand the
material contained within; therefore,
investors are more likely to prefer
shorter, simpler, and more
straightforward language in
disclosures.1146
Many studies have explored the effect
of revealing conflicts of interest to
1144 See Relationship Summary Adopting Release
at Section IV, which also discusses the benefits and
limitation of disclosure. See also Margaret Hagan,
Designing 21st Century Disclosure Methods for
Financial Decision Making, Stanford Law School
Policy Lab (2016), available at https://
law.stanford.edu/publications/designing-21stcentury-disclosures-for-financial-decision-making/.
One study finds that when fund expenses are
bundled with brokerage commissions, reducing the
transparency of various fees and costs, investors
experience larger degrees of underperformance than
when the fees are more transparent. See Roger M.
Edelen, Richard B. Evans, & Gregory B. Kadlec,
Disclosure and Agency Conflict: Evidence from
Mutual Fund Commission Bundling, 103 J. Fin.
Econ. 308 (2012). See AARP August 2018 Letter.
1145 See Lucy Hayes, William Lee, & Anish
Thakrar, Now You See It: Drawing Attention to
Charges in the Asset Management Industry (Fin.
Conduct Auth., Occasional Paper No. 32, Apr.
2018), available at https://www.fca.org.uk/
publication/occasional-papers/occasional-paper32.pdf. See Morningstar Letter. See also Anagol et
al. (2015), supra footnote 1075.
1146 See Tamar Frankel, The Failure of Investor
Protection by Disclosure, 81 U. Cin. L. Rev. 421
(2013). See FPC. See also Omri Ben-Shahar & Carl
E. Schneider, The Failure of Mandated Disclosure,
159 U. Pa. L. Rev. 647 (2011), which also questions
the effectiveness of disclosures and finds mandated
disclosures ineffective substitutes for more direct
regulation. See AARP August 2018 Letter; Better
Markets August 2018 Letter; State Attorneys
General Letter.

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consumers and note that disclosure of
conflicts may produce undesirable
behavior by the disclosing party, or that
receivers of the information provided by
disclosures may fail to appropriately
account for the implications.1147 A
series of studies documents that
consumers do not account for conflicts
of interest revealed through disclosures,
and that such disclosures of conflicts
can have the perverse effect of
increasing bias and moral licensing in
the provision of advice.1148 Moral
licensing arises when the discloser of
information ‘‘take[s] an ethical action
that validates [her] self-image as a good
person’’ so she feels as though she ‘‘may
well give [herself] permission to play
fast and loose with the rules for a
while.’’ 1149 Disclosure may also lead to
a decrease in trust of biased advice
because consumers feel pressured to
satisfy the discloser’s self-interest
(‘‘panhandler effect’’); 1150 however, the
panhandler effect can be mitigated if the
disclosure is provided from an external
source, the disclosure is not common
knowledge between the discloser and
the receiver of the information, the
receiver can change his or her mind at
a later date, and the receiver can change
his or her mind in private.1151 One
1147 See also Relationship Summary Adopting
Release.
1148 See Daylian M. Cain, George Loewenstein, &
Don A. Moore, When Sunlight Fails to Disinfect:
Understanding the Perverse Effects of Disclosing
Conflicts of Interest, 37 J. Consumer Res. 836 (2011);
Daylian M. Cain, George Loewenstein, & Don A.
Moore, The Dirt on Coming Clean: Perverse Effects
of Disclosing Conflicts of Interest, 34 J. Legal Stud.
1 (2005); George Loewenstein, Daylian M. Cain &
Sunita Sah, The Limits of Transparency: Pitfalls
and Potential of Disclosing Conflicts of Interest, 101
Am. Econ. Rev. (Papers & Proc.) 423 (2011). These
studies also note that, although disclosure is
intended to help financially unsophisticated
consumers, disclosure is most likely to be beneficial
to sophisticated users of the information. One
study, however, notes that disclosure can reduce
biased advice if the disclosure acts as a deterrent
against entering into conflicts, and may improve
trust in advisers. See Sunita Sah & George
Loewenstein, Nothing to Declare: Mandatory and
Voluntary Disclosure Leads Advisors to Avoid
Conflicts of Interest, 25 PSYCH. SCI. 575 (2014). See
also Morningstar Letter; EPI Letter; Better Markets
August 2018 Letter; Warren Letter; UVA Letter;
AARP August 2018 Letter; Johnsen Letter.
1149 See Robert A. Prentice, Moral Equilibrium:
Stock Brokers and the Limits of Disclosure, 2011
Wis. L. Rev. 1059 (2011). See AARP August 2018
Letter; Better Markets August 2018 Letter; State
Attorneys General Letter.
1150 See Cain et al. (2011), supra footnote 1148;
Sunita Sah, Prashant Malaviya, & Debora
Thompson, Conflict of Interest Disclosure as an
Expertise Cue: Differential Effects of Automatic and
Deliberative Processing, 147 Organizational Behav.
& Hum. Decision Processes 127 (2018), whereby
disclosures of conflicts of interest act ‘‘as a heuristic
cue to infer greater trust in advisors’ expertise.’’
1151 See Sunita Sah, George Loewenstein, &
Daylian M. Cain, The Burden of Disclosure:
Increased Compliance With Distrusted Advice, 104

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study notes that, beyond conflicts
disclosures, disclosures of actual bias
lead to an improvement in performance
of portfolios relative to investors who
only receive conflict disclosures.1152
From the perspective of the investor,
conflicts disclosures may lead to underor over-reaction by investors. According
to one study, investors may not know
how to appropriately respond to
information about conflicts (e.g.,
estimating the effects on the quality of
advice or knowing how to search for an
unbiased second opinion) and therefore
may fail to adequately adjust their
behaviors when conflicts are
disclosed.1153 Alternatively, some
investors may overreact to disclosures of
conflicts of interest, and may instead
forgo valuable investment advice.1154
C. Benefits and Costs

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1. General
In formulating Regulation Best
Interest, the Commission has considered
the potential benefits of establishing a
best interest standard of conduct for
broker-dealers, as well as the potential
costs.
Regulation Best Interest enhances the
broker-dealer standard of conduct
beyond existing suitability obligations,
and aligns the standard of conduct with
retail customers’ reasonable
expectations. Under Regulation Best
Interest, broker-dealers and their
associated persons will be required,
among other things, to: (1) Act in the
J. Personality & Soc. Psychol. 289 (2013). See
Morningstar Letter; Better Markets August 2018
Letter; EPI Letter.
1152 See Christopher Tarver Robertson, Biased
Advice, 60 Emory L.J. 653 (2011). This study also
suggests that obtaining an opinion from an unbiased
adviser ‘‘is a much better remedy for biased advice
than disclosure.’’ See AARP August 2018 Letter.
1153 See Angela A. Hung, Min Gong, & Jeremy
Burke, Effective Disclosures in Financial
Decisionmaking, RAND Labor and Population
Report Prepared for the Department of Labor (2015),
available at https://www.rand.org/content/dam/
rand/pubs/research_reports/RR1200/RR1270/
RAND_RR1270.pdf. See also AARP August 2018
Letter; Better Markets August 2018 Letter; Warren
Letter. See also James M. Lacko & Janis K.
Pappalardo, The Effect of Mortgage Broker
Compensation Disclosures on Consumers and
Competition: A Controlled Experiment, Federal
Trade Commission, Bureau of Economics Staff
Report (Feb. 2004), available at https://www.ftc.gov/
sites/default/files/documents/reports/effectmortgage-broker-compensation-disclosuresconsumers-and-competition-controlled-experiment/
030123mortgagefullrpt.pdf, which documents that
when mortgage customers receive information
about mortgage broker compensation through
disclosures, such disclosures lead to an increase in
more expensive loans and create a bias against
broker-sold loans, even when the broker-sold loans
are the more cost effective option. See EPI Letter.
1154 See George Loewenstein, Cass R. Sunstein, &
Russell Golman, Disclosure: Psychology Changes
Everything, 6 Ann. Rev. Econ. 391 (2014). See IRI
Letter.

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best interest of the retail customer at the
time the recommendation is made,
without placing the financial or other
interest of the broker-dealer ahead of the
interests of the retail customer; and (2)
address conflicts of interest by
establishing, maintaining, and enforcing
policies and procedures reasonably
designed to identify and fully and fairly
disclose material facts about conflicts of
interest, and in instances where we have
determined that disclosure is
insufficient to reasonably address the
conflict, to mitigate or, in certain
instances, eliminate the conflict. As a
result, Regulation Best Interest should
enhance the efficiency of
recommendations that broker-dealers
provide to retail customers, help retail
customers evaluate the
recommendations received, and
improve retail customer protection
when receiving recommendations from
broker-dealers. The four component
obligations of Regulation Best Interest’s
work together to enhance the current
standard of conduct for broker-dealers
and improve disclosure of material facts
relating to the scope and terms of the
relationship and conflicts of interest.
Both on its own and together with the
other new rules and forms we are
adopting,1155 we anticipate that
Regulation Best Interest will reduce the
agency costs of the relationship between
the associated persons of the brokerdealer and their retail customers, while
preserving access to financial advice
and choice in the scope of services and
how to pay for them.
In this section, we discuss broader
themes associated with the costs and
benefits of Regulation Best Interest,
including general comments we
received on our analysis of the costs and
benefits in the Proposing Release.
Following this more general discussion,
we discuss the specific costs and
benefits associated with Regulation Best
Interest’s four component obligations.
While the Commission has considered
the potential benefits and costs of
Regulation Best Interest, the
Commission notes that generally it is
difficult to quantify such benefits and
costs with meaningful precision.1156
Where possible, the Commission has
provided an estimate of specific costs;
however, several factors make the
quantification of many of the effects of
Regulation Best Interest difficult. With
1155 See, e.g., Relationship Summary Adopting
Release.
1156 See supra Section III.B.3.c for discussion of
the wide range of estimates of the potential benefits
of Regulation Best Interest stemming from a
reduction in investor harm, and discussion
surrounding infra footnotes 1165–1182 for other
issues associated with these estimates.

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respect to costs to broker-dealers, there
is a lack of data on the extent to which
broker-dealers with different business
practices engage in disclosure and
conflict mitigation activities to comply
with existing requirements, and
therefore how costly it would be to
comply with the proposed
requirements. Also, the final rule will
provide broker-dealers flexibility in
complying with Regulation Best
Interest, and, as a result, there could be
multiple ways in which broker-dealers
will satisfy this obligation, although
broker-dealers must comply with each
of the elements of the obligation. In
addition, Regulation Best Interest may
affect broker-dealers differently
depending on their business model (e.g.,
full service broker-dealer, broker-dealer
that uses independent contractors,
insurance-affiliated broker-dealer) and
size. More generally, estimates of the
magnitude of such benefits and costs
depend on assumptions about (1) the
extent to which broker-dealers currently
engage in disclosure and conflict
mitigation activities, (2) how brokerdealers currently develop
recommendations for their customers,
(3) how broker-dealers choose to comply
with Regulation Best Interest, (4)
whether and how broker-dealers change
investments and share classes offered as
a result of Regulation Best Interest, (5)
whether and how product
manufacturers change their investment
offerings as a result of Regulation Best
Interest, (6) whether broker-dealers
restrict access to brokerage accounts by
raising minimum account sizes or
adding additional qualification
requirements, (7) whether brokerdealers try to shift customers to advisory
accounts as a result of Regulation Best
Interest, (8) how retail customers
perceive the risk and return of their
portfolios, (9) how likely retail investors
are to act on a recommendation that
complies with Regulation Best Interest,
(10) how the risk and return of retail
customer portfolios change as a result of
how they act on the recommendation,
and (11) how investment advisers,
including dually registered advisers,
react to the adoption of Regulation Best
Interest and the other regulatory
developments, including the rules we
are adopting and interpretations we are
issuing simultaneously with Regulation
Best Interest. Because many of these
factors are firm-specific and thus
inherently difficult to quantify, even if
it were possible to calculate a range of
potential quantitative estimates, that
range would be so wide as to not be
informative about the magnitude of the

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benefits or costs associated with
Regulation Best Interest.
Broader economic forces, beyond
broker-dealer and retail customer
behavioral responses to Regulation Best
Interest, also make meaningful estimates
of economic impacts difficult to
develop. The market for investment
advice and services is complex and vast,
and as history demonstrates, is dynamic
and affected by market-specific facts
(including product developments and
regulatory changes) as well as
macroeconomic factors (including
general economic conditions). For
example, the introduction of indexation
to the retail investment market and the
subsequent increase in index products
(and providers) and reduction in the
costs of indexing for retail investors
have had substantial effects on the
market for retail investment advice and
services. The more recent introduction
of ETFs has had similar unanticipated
and underestimated effects, including,
in general, reducing investor costs and
increasing tax efficiency, as well as
increasing the array of product offerings.
Developments such as the employerdriven shift from defined benefit plans
to defined contribution plans also have
had significant effects on the market for
investment advice. We expect these and
other factors, including factors not
currently identified, will continue to
affect the market and, accordingly, may
change the economic effects of the rule.
These sources of uncertainty and
complexity make meaningfully
quantifying many of the costs and
benefits of the rule difficult and,
particularly over long time periods,
inherently speculative.
a. Broad Commenter Concerns With
Respect to Costs and Benefits
We received many comments
regarding our analysis in the Proposing
Release of the benefits and costs. In this
section, we discuss comments that
address broader aspects of our analysis.
Comments that address costs and
benefits of more specific components of
Regulation Best Interest are discussed in
the corresponding sections for each rule
component that follows.
Some commenters stated that our
analysis in the Proposing Release did
not properly incorporate current market
practices into the baseline.1157 As
discussed above, we have revised the
discussion to include those practices,
which may reflect guidance by SROs
such as FINRA, requirements and
obligations under state laws, practices
implemented by broker-dealers in
1157 See, e.g., CFA August 2018 Letter; CCMC
Letters.

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response to the (now vacated) DOL
Fiduciary Rule that have not been
reversed, and any practices
implemented by broker-dealers to fulfill
their obligations under existing federal
securities laws.1158 While we
acknowledged in the Proposing Release
that variation in the extent to which
broker-dealers with different business
practices already engage in disclosure
and conflict mitigation activities makes
quantifying Regulation Best Interest’s
costs and benefits with meaningful
precision difficult, we more explicitly
emphasize how this variation in current
market practices affects the costs and
benefits of Regulation Best Interest in
the discussion that follows.1159 In
general, to the extent that broker-dealer
practices are already aligned with the
requirements of Regulation Best Interest,
the anticipated magnitude of both the
costs and the benefits associated with a
given component of Regulation Best
Interest will be correspondingly
reduced, and vice versa.
As discussed above,1160 commenters
noted the existence of fiduciary
standards in various states. One
commenter provided an overview of the
fiduciary obligations of state-registered
investment advisers, ‘‘typified by an
expectation of undivided loyalty where
the adviser acts primarily for the benefit
of its clients.’’ 1161 This commenter also
stated that ‘‘[s]ome states also extend
these fiduciary obligations beyond
investment advisers to brokers,
especially in dual-hatted scenarios,’’
and that these fiduciary obligations
were extended even when brokerdealers handled non-discretionary
accounts.1162 We recognize that there is
substantial variation in the sources,
scope, and application of state fiduciary
law. And we acknowledge that such
state-level obligations for broker-dealers
mean that they may already engage in
practices under the baseline that overlap
with certain requirements under
Regulation Best Interest. To the extent
that state-level law incorporates
fiduciary principles similar to those
reflected in Regulation Best Interest, the
magnitude of the costs and benefits
discussed below that stem from the
application of those principles to
broker-dealers will be correspondingly
reduced. However, costs and benefits
that arise from obligations under
Regulation Best Interest that differ from
obligations under state law, such as the
supra Section III.B.2.
Proposing Release at 21643.
1160 See supra Section III.B.2.
1161 See NASAA February 2019 Letter at 22 and
footnote 40.
1162 Id. at 23–24.

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1159 See

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33435

Conflict of Interest Obligation, will be
maintained.1163
Some commenters suggested that
certain types of costs should remain
outside the scope of our analysis. Some
stated that our analysis should not
consider, for example, costs to brokerdealers resulting from lost revenues on
securities they cease offering or costs
associated with any potential increase
in arbitration claims as a result of
Regulation Best Interest, except to the
extent that they are passed on to
investors in the form of higher fees.1164
These commenters suggested that
because these types of costs are a direct
result of policies that make investors
better off, they should not factor into an
assessment of Regulation Best Interest.
The Commission has an obligation to
consider the economic effect of
Regulation Best Interest on affected
parties, including broker-dealers, even
when those costs are associated with
benefits to investors. However, in the
specific discussion of each rule
component that follows, we highlight
instances where a given cost is directly
associated with a benefit to investors.
Commenters raised several issues
related to the quantification of costs and
benefits, or lack thereof, in the
Proposing Release. They asserted that
our analysis focused too much on
Regulation Best Interest’s costs and did
not quantify any of the benefits, such as
the reduction in investor harm.1165 As
discussed above, some studies present
anecdotal evidence of behavior by
certain broker-dealers, such as
recommending investments that are
inferior to available alternatives, that is
harmful to investors.1166 A potential
1163 Whether Regulation Best Interest would have
a preemptive effect on any state law would be
determined in future judicial proceedings, and
would depend on the language and operation of the
particular state law at issue. We considered whether
we could determine the economic impact of
possible, future state-law preemption on retail
customers, but concluded that we cannot analyze
the economic effects of the possible preemption of
state law at this point because the factors that will
shape those judicial determinations are too
speculative. Among the unknown factors are: (1)
The final language in any proposed state legislation
or regulation adopting a fiduciary or other standard
for broker-dealers; (2) whether that language would
constitute the type of law, rule, or regulation that
is expressly preempted by the securities law or
impliedly preempted under principles applied by
courts; and (3) whether, if there was preemption,
that preclusion of state law would have any positive
or negative effects on investors when compared
with the economic effects of Regulation Best
Interest.
1164 See AARP August 2018 Letter; EPI Letter;
Better Markets August 2018 Letter; Cetera August
2018 Letter.
1165 See AARP August 2018 Letter; Better Markets
August 2018 Letter; CFA August 2018 Letter.
1166 See supra footnotes 1068 and 1075.

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benefit of Regulation Best Interest is
therefore a reduction in that harm, as
asserted by commenters. However, the
anecdotal evidence of investor harm in
these studies does not lend itself to
aggregation.
Commenters also stated that we
should have incorporated the approach
used by the DOL RIA and the CEA to
quantify aggregate investor harm.1167
While both of these analyses surveyed a
broad literature on the relative
performance of broker-sold versus
direct-sold mutual funds, they both
relied on a particular study to estimate
aggregate investor harm, extrapolating
the effect of ‘‘excess loads’’ on the
performance of broker-sold funds to
total industry-wide AUM.1168 We
disagree with this approach because, as
noted by commenters, we believe these
analyses misapplied the particular
study’s results.1169 When the results of
the study are correctly applied, the
aggregate estimate of investor harm
obtained using this approach is
negligible.1170
Another commenter advocated a
similar approach, claiming that riskadjusted returns net of fees, which
calculate the excess return of an
investment above a benchmark that
matches the risk of the investment, are
the only appropriate measure of
whether a recommendation is in a retail
customer’s best interest.1171 While there
are studies showing that broker-sold
mutual funds underperform direct-sold
funds to varying degrees,1172 we do not
believe, for the reasons explained
below, that applying estimates of this
under-performance to industry-wide
AUM produces a meaningful estimate of
the aggregate investor harm attributable
to recommendations made by brokerdealers that is sufficiently precise to
inform our policy choices. First, as
discussed above, these studies do not
necessarily cleanly distinguish underperformance attributable to brokerdealers from under-performance
attributable to investment advisers.1173
Second, interpreting the relative
underperformance of broker-sold funds
as a measure of investor harm due to
conflicts of interest implicitly evaluates
investor harm against a benchmark that
does not include financial advice.
1167 See

Better Markets August 2018 Letter.
supra footnotes 1081 and 1099.
1169 See, e.g., Lewis (2017), supra footnote 1099.
1170 See id.
1171 See EPI Letter. See also Former SEC Senior
Economists Letter, stating that risk-adjusted returns
are an appropriate measure of investor harm.
1172 See, e.g., Bergstresser et al. (2009), supra
footnote 1048; Del Guercio & Reuter (2014), supra
footnote 1081.
1173 See supra footnote 1097.

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However, that benchmark does not
necessarily reflect the appropriate
alternative available to investors in
broker-sold funds. Extrapolating from
these studies leads to the conclusion
that investors would do better investing
on their own, yet there are other studies
showing that is not the case, at least not
for all investors.1174 We further note
that calculating the investor harm
against a benchmark that includes the
fees retail customers would pay for
equivalent advice could significantly
reduce the magnitude of these
estimates.1175
Finally, while risk-adjusted returns
may be useful in comparing the
performance of particular mutual funds,
particularly when trying to evaluate
fund manager skill, they do not
necessarily reflect the utility that
investors achieve from their
investments.1176 Heterogeneous
investors value investments and the
services provided by financial
professionals differently depending on
their investment profile and
preferences, and risk-adjusted returns
do not necessarily represent aggregate
utility across all investors in a way that
permits us to arrive at an aggregate
measure of investor harm. For example,
consumers invest in various forms of
insurance products in order to hedge
their exposure to bad outcomes (e.g.,
home insurance policies), even though
the expected returns on such
investments are generally negative. The
relative underperformance of brokersold mutual funds also may not capture
any intangible benefits investors derive
from receiving tailored financial
advice.1177 Alternatively, the relative
performance of mutual funds sold
through these two channels may reflect
other factors that are unrelated to
conflicts of interest.1178 Accordingly,
while we do not dispute the existence
of broker-dealer behavior under the
supra footnotes 1045–1048.
also supra footnote 1103.
1176 Even in the context of evaluating fund
manager skill, there is debate about whether riskadjusted returns are an appropriate measure of fund
performance. See e.g., Vincent Glode, Why Mutual
Funds ‘‘Under Perform’’, 99 J. Fin. Econ. 546 (2011);
Jonathan B. Berk & Jules H. van Binsbergen,
Measuring Skill in the Mutual Fund Industry, 118
J. Fin. Econ. 1 (2015).
1177 See, e.g., Bergstresser et al. (2009), supra
footnote 1048, who note that ‘‘[o]ne possibility is
that brokers provide other intangible benefits,
which we cannot measure’’ when interpreting the
relative performance of broker-sold versus directsold mutual funds.
1178 See, e.g., The DOL RIA, supra footnote 1002,
at footnote 473, noting that the relative performance
of broker-sold versus direct-sold funds ‘‘. . . is an
imperfect measure of the impact of conflicts of
interest; other factors, aside from conflicts of
interest, affect the relative performance of mutual
funds sold through the two distribution channels.’’

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1175 See

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baseline that is harmful to investors,
based on our analysis, including our
analysis of the comments received, we
continue to believe that quantifying that
harm, and therefore quantifying the
benefits associated with reducing it,
depends on many contingent factors
that would render any estimates
insufficiently precise to inform our
policy choices.1179
With respect to the magnitude of the
costs we assessed in the Proposing
Release, some commenters asserted that
our analysis underestimated the costs of
complying with Regulation Best
Interest, though only a few provided
estimates of these costs.1180 Where
commenters provided estimates for a
specific component of Regulation Best
Interest, particularly the Disclosure
Obligation, we discuss those estimates
when discussing that component of
Regulation Best Interest below. Based on
its experience with the DOL Rule, one
commenter provided a broad estimate of
the compliance costs associated with
the entire package of rules we proposed,
including Regulation Best Interest and
Form CRS, indicating that the rule
package would entail initial costs of $20
million and ongoing costs of $5 million
per year for their firm, but that these
costs would be manageable.1181 Another
commenter stated that for a small
broker-dealer with $500,000 in net
capital, the compliance costs estimated
in the Proposing Release could
constitute 12% of that net capital,
making compliance with Regulation
Best Interest burdensome for such
broker-dealers.1182 We acknowledge that
the costs of Regulation Best Interest
could be more burdensome for small
broker-dealers and discuss any
corresponding competitive effects in
Section III.D.1.
Although the majority of the industry
studies provided by commenters
focused on the effects of the DOL
Fiduciary Rule on broker-dealers and
their customers, one industry survey
provided information about industry
beliefs about potential effects of
proposed Regulation Best Interest.1183
1179 See Discussion following footnote 1156 for a
discussion of these factors. See also infra Section
III.C.7, where we have endeavored to estimate some
of the potential benefits of Regulation Best Interest
based on many assumptions.
1180 See Schwab Letter; ICI Letter; Letter from
James J. Angel, Associate Professor of Finance,
Georgetown University (Aug. 7, 2018) (‘‘Angel
Letter’’); LPL August 2018 Letter; NSCP Letter.
1181 See Raymond James Letter.
1182 See NSCP Letter.
1183 See Center for Capital Markets
Competitiveness, SEC Regulation Best Interest Rule
Proposals: Request for Information Analysis, FTI
Consulting Report Presented to the U.S. Chamber of
Commerce (Jul. 25, 2018), available at https://

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The survey consisted of approximately
30 individual financial professionals
across a mix of 15 companies providing
financial advisory services and
products, including broker-dealers and
dually registered firms, with $23 trillion
in AUM and administration and nearly
79 million investment accounts. All of
the participants surveyed stated that it
was unlikely that they would reconsider
their broker-dealer registration status,
while nearly 40% stated that they may
alter their investment choices and 35%
could alter the services that they offer.
With respect to the costs of Regulation
Best Interest and Form CRS,
approximately 36% of respondents
stated that the implementation costs
could be between 1% and 5% of annual
profits; however, nearly 80% of
respondents noted that costs are likely
to decline over time.1184 We note that
one of the cost estimates provided by a
commenter above is consistent with this
range.1185 One commenter suggested
that for firms that offer access to
thousands of unique securities, many of
which likely have similar strategies
(e.g., index mutual funds or ETFs),
requiring broker-dealers to ‘‘consider
reasonably available alternatives offered
by the broker-dealer as part of having a
reasonable basis for making the
recommendation’’ would make it cost
prohibitive for broker-dealers and
financial professionals to evaluate the
costs associated with ‘‘every similar
investment product available through
the broker-dealer’s platform.’’ 1186 Many
survey participants, although they
believed that the Commission
underestimated the aggregate costs of
Regulation Best Interest and Form CRS,
agreed that the benefits to investors
were likely to justify the costs.
Other commenters stated that a
number of elements of the Proposing
Release potentially could increase
litigation exposure for some brokerdealers. For example, one commenter
discussed that, because proposed
www.centerforcapitalmarkets.com/wp-content/
uploads/2018/08/Reg-BI-Rule-Proposal-Research_
8.7.18_FTI-Updated_final.pdf. See CCMC Letters.
Survey participants also addressed questions
related to beliefs regarding investor protection,
choices for retail customers, and the standard of
conduct for broker-dealers.
1184 One commenter stated that the ‘‘costly’’
recordkeeping requirements described in the
Proposing Release ‘‘are unnecessary as self-interest
will lead firms to keep proof of compliance’’ and
should be eliminated. See Angel Letter.
1185 See supra footnote 1181. Relative to this
commenter’s 2018 fiscal year profits, its initial cost
estimate of $20 million would represent
approximately 2% of annual profits for this firm.
See https://www.sec.gov/Archives/edgar/data/
720005/000072000518000083/rjf20180930x10k.htm.
1186 See LPL December 2018 Letter.

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Regulation Best Interest did not
‘‘expressly define ‘financial incentive’’’
for purposes of the proposed
requirement of policies and procedures
designed to disclose and mitigate, or
eliminate, conflicts arising from
financial incentives, broker-dealers
could face challenges to ‘‘design and
maintain effective compliance programs
that appropriately address the conflicts
inherent in their particular business
models’’ thereby potentially increasing
litigation risks.1187 Another commenter
indicated that, with respect to
proprietary products, ‘‘[s]tate courts in
enforcement actions and in review of
such actions’’ may find it difficult to
distinguish the best interest standard for
broker-dealers from a fiduciary standard
for investment advisers, and may cause
certain associated persons of brokerdealers to ‘‘shy away from the risks of
litigation in this regulatory
environment, causing a substantial
market contraction away from middle
class investors.’’ 1188
In the Proposing Release, we were
able to quantify costs for limited
portions of Regulation Best Interest,
particularly those stemming from
requirements related to document
creation for purposes of the Paperwork
Reduction Act. While we have updated
these estimates in Section IV.B, we
continue to believe that it is not possible
to meaningfully quantify the full costs
and benefits of Regulation Best Interest
because such analysis would depend on
many contingent factors that render any
estimate insufficiently precise to inform
our policy choices.1189 So while we
acknowledge, for example, that
Regulation Best Interest may impose
costs that are a significant portion of the
estimate of initial and ongoing costs of
$20 million and $5 million by the
commenter cited above, we cannot
anticipate the associated costs for all
firms because of the wide variation in
size and scope of business practices
across firms as well as the many
unknown factors associated with the
principles-based nature of Regulation
Best Interest. In discussing Regulation
Best Interest’s component obligations
below, we address any estimates
provided by commenters where we can
and otherwise explain the specific
factors that preclude quantifying the
costs of Regulation Best Interest with
Primerica Letter.
Letter from Douglas M. Ommen, Iowa
Insurance Commissioner (Aug. 6, 2018) (‘‘Iowa
Insurance Commissioner Letter’’).
1189 See Discussion following footnote 1156 for a
discussion of these factors. See also infra Section
III.C.7, where we have endeavored to estimate some
of the potential benefits of Regulation Best Interest
based on many assumptions.

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1188 See

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meaningful precision beyond our
Paperwork Reduction Act estimates.
b. Broad Investor Protection Benefits
As discussed above, in addition to
any enhancements provided above and
beyond current requirements and
market practices, each of the component
obligations of Regulation Best Interest
share features with market best practices
under the baseline, as shaped by
FINRA’s guidance on relevant rules or
as described in its Report on Conflicts
of Interest. Given this overlap, FINRA,
in response to a congressional request,
enumerated the ways it believes
Regulation Best Interest enhances
existing broker-dealer obligations under
current FINRA rules.1190
In addition to the enhancements that
each of Regulation Best Interest’s
component obligations provide above
and beyond existing broker-dealer
obligations under the baseline, which
we discuss below, Regulation Best
Interest increases retail customer
protections by establishing these
obligations under the Exchange Act so
that the Commission may enforce them
directly and examine for compliance.
Additionally, to the extent that market
best practices may reflect some FINRA
guidance that is not required by
FINRA’s rules, some broker-dealers may
not currently implement these practices.
To the extent that broker-dealers and
their associated persons do not
currently implement existing best
practices that will be codified in
Regulation Best Interest, retail
customers will benefit because it will
increase the implementation of these
best practices throughout the industry.
2. Disclosure Obligation
As adopted, the Disclosure Obligation
of Regulation Best Interest’s requires a
broker-dealer, prior to or at the time of
the recommendation, to provide to the
retail customer, in writing, full and fair
disclosure of all material facts relating
to the scope and terms of the
relationship and all material facts
relating to conflicts of interest that are
associated with the recommendation.
Regulation Best Interest explicitly
requires disclosure of ‘‘all material facts
relating to the scope and terms of the
relationship with the retail customer’’
including: (i) That the broker, dealer, or
such natural person is acting as a
broker, dealer, or an associated person
of a broker or dealer with respect to the
recommendation; (ii) the material fees
and costs that apply to the retail
customer’s transactions, holdings, and
accounts; and (iii) the type and scope of
1190 See

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services provided to the retail customer,
including any material limitations on
the securities or investment strategies
involving securities that may be
recommended to the retail customer;
and all material facts relating to
conflicts of interest that are associated
with the recommendation.
Under the baseline, some disclosure
obligations already exist, as do an array
of market practices with respect to the
disclosure of capacity, fees, services,
and conflicts of interest.1191 The
Disclosure Obligation will enhance
disclosure obligations that exist under
the baseline and bring greater alignment
to market practices by establishing an
explicit and broad disclosure
requirement under the Exchange Act
that applies to all broker-dealers when
they make a recommendation to a retail
customer. We expect this change to
improve the quality and consistency of
disclosures and thus (1) reduce the
information asymmetry that may exist
between a retail customer and her
broker-dealer, and (2) facilitate customer
comparisons of different broker-dealers
which we expect will, in turn, increase
competition among broker-dealers,
including with respect to fees and costs,
as discussed below.1192
Relative to the baseline, the
Disclosure Obligation will change how
broker-dealers disclose information to
their retail customers in several specific
ways. First, under the baseline, a brokerdealer and its associated persons are not
explicitly required to disclose that they
are acting in a broker-dealer capacity
1191 For instance, broker-dealers are subject to a
number of disclosure obligations under the
Exchange Act when they effect certain customer
transactions. These disclosure obligations include
written disclosure about capacity, compensation,
and third-party remuneration related to the
transaction, and disclosures about whether the
broker-dealer has any control, affiliation, or interest
in the security or the issuer of the security being
offered. Broker-dealers also face liability under the
antifraud provisions of the federal securities laws
for failure to provide disclosure, such as disclosure
of ‘‘honest and complete information’’ or any
material adverse facts or materials conflicts of
interest, including any economic self-interest, when
recommending a security (see supra footnote 988).
In addition, broker-dealers must comply with a
number of SRO disclosure obligations—such as
FINRA Rule 2124 (Net Transactions with
Customers), FINRA Rule 2262 (Disclosure of
Control Relationship with Issuer), and FINRA Rule
2269 (Disclosure of Participation or Interest in
Primary or Secondary Distribution). Finally, brokerdealers may also adjust their practices consistent
with existing SRO guidance on specific
disclosures—such as FINRA Regulatory Notice 13–
23, Brokerage and Individual Retirement Account
Fees (July 2013) on fee disclosure. See Proposing
Release at footnotes 175, 176, 177, and 192; supra
footnotes 303 and 985–988 for a more detailed
discussion on existing disclosure practices.
1192 See supra footnote 1072 for a discussion of
potential information asymmetries between brokerdealers and retail customers.

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when making a recommendation. We
also clarify above that the use of the
terms ‘‘adviser’’ or ‘‘advisor’’ in a name
or title by (i) a broker-dealer that is not
also registered as an investment adviser,
or (ii) a financial professional that is not
also a supervised person of an
investment adviser would
presumptively violate this particular
disclosure requirement. Second,
Regulation Best Interest requires that
any disclosure made by a broker-dealer
be ‘‘full and fair,’’ meaning that the
broker-dealer is required to provide
sufficient information to enable a retail
investor to make an informed decision
with regard to the recommendation,
even where this information is about
aspects of the relationship between a
retail customer and a broker-dealer that
may already require disclosure,
implicitly or explicitly, under the
baseline. We expect the ‘‘full and fair’’
requirement to benefit retail customers
in cases where it results in disclosures
that are not currently required under
broker-dealer antifraud provisions.
Finally, Regulation Best Interest
requires that broker-dealers provide
these disclosures to retail customers in
writing at or before the time of a
recommendation. However, we are
permitting oral disclosures prior to or at
the time of a recommendation and
written disclosures after a
recommendation under the
circumstances outlined in Section II.C.1,
Oral Disclosure or Disclosure After a
Recommendation.1193 We focus our
discussion of both the benefits and costs
of the Disclosure Obligation on these
changes relative to the baseline.1194
Regulation Best Interest’s Disclosure
Obligation is different from the
Proposing Release’s Disclosure
Obligation in two ways. First, while the
Proposing Release required that a
broker-dealer ‘‘reasonably disclose’’
material facts to retail customers,
Regulation Best Interest requires that a
broker-dealer provide retail customers
with ‘‘full and fair’’ disclosure of
material facts. As discussed above, this
change from the Proposing Release does
not have a substantive effect on the
expected economic effect of the
Disclosure Obligation. Specifically, in
both the Proposing Release and
Regulation Best Interest, the formulation
of the Disclosure Obligation, as
1193 For example, when oral disclosures are used
prior to or at the time of a recommendation, brokerdealers must maintain a record of the fact that oral
disclosure was provided. See supra footnotes 301
and 507–508 and surrounding discussion for more
detail on when oral disclosure prior to or at the
time of a recommendation and disclosure in writing
after a recommendation are permitted.
1194 See supra footnotes 1157–1159.

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described in the release text, required
that a broker-dealer provide sufficient
information to enable a retail investor to
make an informed decision with regard
to a recommendation.1195 Therefore, we
do not expect this change to affect our
assessment of Regulation Best Interest’s
costs and benefits. Second, whereas the
Proposing Release’s Disclosure
Obligation did not explicitly require a
broker-dealer to disclose particular
types of material facts relating to the
scope and terms of its relationship with
a retail customer, Regulation Best
Interest explicitly requires that these
material facts include the capacity in
which the broker-dealer is acting, fees
and costs, and the type and scope of
services provided, including material
limitations on the securities or
investment strategies that may be
recommended. We include any
economic effects associated with this
change in our discussion of Regulation
Best Interest’s benefits and costs.
Finally, while we discuss the direct
benefits and costs of the Disclosure
Obligation in this section, retail
customers, broker-dealers, investment
advisers, and their financial
professionals may experience indirect
benefits or costs due to competitive
effects caused by the Disclosure
Obligation. We discuss any competitive
effects below in Section III.D.1.
a. Benefits
Regulation Best Interest requires that
brokers, dealers, or natural persons
associated with a broker-dealer disclose
that they are acting as a broker, dealer,
or an associated person of a brokerdealer prior to or at the time of a
recommendation to a retail customer.
Broker-dealers are not explicitly
required to disclose this information
prior to or at the time of a
recommendation under the baseline,
though they may disclose it to comply
with other federal securities laws and
SRO rules, or because they consider it
to be a market best practice.1196 This
requirement is most likely to have
economic effects when retail customers
have both brokerage and advisory
accounts with the same financial
professional, as may be the case if the
financial professional is duallyregistered. It is designed to make all
1195 See

Proposing Release at Section II.D.1.c.
example, under the baseline, brokerdealers may decide that disclosing the capacity in
which it is acting is necessary in order to meet its
duty of fair dealing under the antifraud provisions
of the federal securities laws. In addition, brokerdealers must disclose whether they effected the
transaction as a principal or agent in the customer
confirmation statement pursuant to Exchange Act
Rule 10b–10, which a retail customer generally
receives after the trade is completed.
1196 For

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retail customers aware of the capacity in
which their broker-dealer is acting when
a recommendation is made, which may
help the retail customer better evaluate
the advice they receive. For instance,
the cost to the retail customer of acting
on such advice will typically depend on
whether the advice is tied to the retail
customer’s brokerage or advisory
account. In addition, understanding the
capacity in which a financial
professional is acting may provide the
retail customer with context for, and
facilitate review of, other relevant
disclosures by the broker-dealer.
Knowing that she is receiving advice
from a broker-dealer, or an associated
person of a broker-dealer, may focus the
retail customer’s attention on any
potential conflicts of interest
specifically associated with receiving a
recommendation from a broker-dealer.
For example, a disclosure that a firm is
acting in the capacity of a broker-dealer
may encourage a retail customer to seek
additional information about
commissions, which could give the firm
or its financial professional an incentive
to recommend transactions that may be
inconsistent with the client’s most
efficient investment strategy, such as a
buy-and-hold strategy.
While the capacity disclosure
requirement and the disclosures
investors will receive in Form CRS will
increase the likelihood that retail
customers understand the nature of
their relationship with a broker-dealer
or financial professional, and hence
how this relationship might affect the
recommendations retail customers
receive, some investors may form beliefs
about the nature of their relationship
with a broker-dealer or financial
professional based on their use of
particular names and titles such as
‘‘adviser’’ or ‘‘advisor,’’ as well as how
their services are marketed. In cases
where these terms are used by (i) a
broker-dealer that is not also registered
as an investment adviser, or (ii) a
financial professional that is not also a
supervised person of an investment
adviser, some retail customers may not
fully understand that their broker-dealer
or financial professional is not acting in
the capacity of an investment adviser,
even though investors receive some
information about the capacity their
broker-dealer or financial professional is
acting in on Form CRS or other
disclosures.1197
1197 Investors may not fully understand this
capacity disclosure because, for example, their
financial professional is not a supervised person of
an investment adviser but works for a dualregistrant, and they interpret Form CRS as
suggesting the financial professional also provides
both types of services. Alternatively, even if an

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To the extent that, despite the
disclosures provided on Form CRS, the
use of the titles ‘‘adviser’’ and ‘‘advisor’’
causes investor confusion about the
nature of the relationship retail
investors have, or will have, with a
broker-dealer or financial professional,
the presumption that the use of these
titles by (i) a broker-dealer that is not
also registered as an investment adviser,
or (ii) a financial professional that is not
also a supervised person of an
investment adviser would violate the
capacity disclosure requirement will
potentially benefit investors in two
ways.1198 First, certain investors may
seek an advisory relationship and would
be better off receiving advice from an
investment adviser. In situations where
confusion associated with titles might
cause such an investor to mistakenly
engage in a relationship with a brokerdealer or an associated person of a
broker-dealer, the presumption should
mitigate costs the investor might incur
associated with receiving and,
potentially, acting on recommendations
from a broker-dealer, as well as costs
associated with correcting this
mismatch by switching to an investment
adviser.1199 Second, to the extent that,
as a result of the use of the titles
‘‘advisor’’ or ‘‘adviser,’’ any confusion
might remain about the capacity in
which a broker-dealer or its associated
person is acting, the presumption
should alleviate that confusion and thus
increase the likelihood that retail
customers focus their attention on any
potential conflicts of interest
specifically associated with receiving a
recommendation from a broker-dealer.
Any benefits associated with the
presumption will apply for current and
potential retail customers of the
approximately 100 broker-dealers with
retail customers that are not also
investment advisers and use the terms
‘‘adviser’’ or ‘‘advisor’’ in their names,
and for current and potential retail
customers of the approximately 16% of
all registered representatives that use
these titles and are not dually
investor’s broker-dealer or financial professional
solely offers services in a broker-dealer capacity, the
use of the titles ‘‘adviser’’ or ‘‘advisor’’ may leave
her confused about the nature of the services
provided, despite the capacity disclosure on Form
CRS. See Relationship Summary Proposal at
footnotes 411–412.
1198 Several commenters generally ascribed
benefits to restricting the usage of the terms
‘‘adviser’’ and ‘‘advisor.’’ See supra footnotes 326–
330.
1199 See Relationship Summary Proposal at
footnote 674 for further discussion of the costs
associated with a mismatch between an investor
and their preferred type of investment advice
provider.

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registered.1200 These benefits will be
limited to the extent that broker-dealers
and their financial professionals choose
other names or titles that may indicate
that they provide advisory services or
use marketing materials that hold them
out as providing advisory services but
do not trigger the presumption or
preclude application of the solely
incidental prong of the broker-dealer
exception to the definition of
investment adviser.1201
As discussed above, under the
baseline, broker-dealers may, in
practice, already disclose information
about the fees they charge, the type and
scope of services they provide, and any
conflicts of interest associated with their
recommendations.1202 However,
Regulation Best Interest’s explicit
requirement that broker-dealers disclose
all material facts related to the scope
and terms of their relationship with a
retail customer and all material facts
relating to conflicts of interest that are
associated with a recommendation may
provide retail customers with useful
information that they may not currently
receive, enabling them to make more
informed investment decisions. The
magnitude and nature of this benefit
will depend on the extent to which a
broker-dealer already discloses these
material facts and how broker-dealers
choose to disclose this information. For
example, if broker-dealers choose to
disclose all material facts in one
consolidated document, the disclosure
may, depending on the facts and
circumstances of the disclosure, be more
informative to some retail customers
than disclosures that are provided
across many documents. In other cases,
layered disclosures may allow brokerdealers to target their disclosures to
their particular retail customer base at
the relevant point in time, increasing
1200 Staff analysis found that 100 retail-facing
broker-dealers as of December 2018 use either
‘‘adviser’’ or ‘‘advisor’’ in their firm names. See
Relationship Summary Proposal at footnote 685 for
more discussion of the estimate that approximately
16% of all registered representatives use these titles
and are not dually registered.
1201 See supra footnotes 336–340.
1202 These disclosures may stem from implicit or
explicit requirements under federal securities laws.
For example, broker-dealers are explicitly required
to disclose certain aspects of the fees their retail
customers pay, directly and indirectly, under
Exchange Act Rule 10b–10 (see, e.g., 913 Study at
footnotes 256–259). In other cases, courts have
found that broker-dealers may implicitly be
required to disclose conflicts of interest or other
material facts related to the scope and terms of their
relationship with retail customers (see, e.g., 913
Study at footnotes 249–255). See also NASD Notice
to Members 92–11.

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the likelihood that investors read these
disclosures.1203
While the Proposing Release’s
Disclosure Obligation did not explicitly
require a broker-dealer to disclose
particular types of material facts relating
to the scope and terms of its
relationship with a retail customer,
Regulation Best Interest explicitly
requires that these material facts
include: (1) The capacity in which the
broker-dealer is acting; (2) fees and
costs; and (3) the type and scope of
services provided, including material
limitations on the securities or
investment strategies that may be
recommended. We generally anticipate
greater benefits under Regulation Best
Interest than under the Proposing
Release. Specifically, to the extent that
broker-dealers may not have disclosed
the types of information we are
requiring under Regulation Best Interest,
Regulation Best Interest should increase
the consistency of disclosure practices
across broker-dealers, which may make
it easier for investors to compare
disclosures from and services offered by
different broker-dealers or other firms.
In addition, if some broker-dealers
would not have disclosed the specific
types of information required under
Regulation Best Interest, and retail
customers find that information useful,
Regulation Best Interest may facilitate
more informed decisions by retail
customers when they are deciding
whether or not to open an account or
use a recommendation. For example,
disclosures about the scope and terms of
services offered by a broker-dealer or
about their fees and costs may facilitate
more informed decisions by retail
customers as to which type of account
is appropriate for them and whether
they should open an account with a
given broker-dealer. Alternatively,
disclosures about conflicts of interest or
fees and costs may facilitate more
informed decisions by retail customers
as to whether or not they should use a
recommendation of a securities
transaction or investment strategy.
Regulation Best Interest also explicitly
requires that disclosures be ‘‘full and
fair,’’ and thus that a broker-dealer must
provide sufficient information to enable
a retail customer to make an informed
decision with regard to a
recommendation.1204 Broker-dealers
may disclose, for example, certain
conflicts of interest associated with their
recommendations under the baseline.
However, under existing federal
1203 See the discussion of layered disclosure in
supra Section II.C.1.c. See also supra footnote 540
on the potential benefits of layered disclosure.
1204 See discussion at supra footnotes 463–469.

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securities laws and SRO rules, they are
not expressly required to provide full
and fair disclosure in the manner
required under Regulation Best Interest.
As a result, existing disclosure practices
may not be designed to specifically help
retail customers make informed
decisions about the recommendations
they receive. By explicitly requiring that
broker-dealers provide sufficient
information to enable retail investors to
make an informed decision with regard
to a recommendation, Regulation Best
Interest imposes a minimum standard
on disclosures that may increase the
consistency of disclosure practices
across broker-dealers relative to the
baseline. This may also cause such
disclosures to be more useful to retail
customers in evaluating the advice they
receive, thereby enabling them to make
more informed decisions about the
recommendations they receive. To the
extent that disclosure obligations under
the baseline already result in brokerdealers providing sufficient information
to enable a retail customer to make an
informed decision with regard to a
recommendation, the magnitude of the
benefits from this component of the
Disclosure Obligation is likely to be
correspondingly reduced.1205
Regulation Best Interest’s Disclosure
Obligation also establishes a standard
for the form and timing of disclosures
by requiring that they be made in
writing prior to or at the time of a
recommendation. While broker-dealers
may already disclose information on the
fees they charge, the type and scope of
services they provide, and any conflicts
of interest associated with their
recommendations under the baseline,
federal securities laws and SRO rules
may not explicitly specify the form and
timing of such disclosures. In cases
where these requirements are explicit,
they may not require delivery at or prior
to a retail customer’s evaluation of the
recommendations they receive and any
corresponding investment decision. In
contrast, while broker-dealers will have
some flexibility regarding the form and
timing of their disclosures under
Regulation Best Interest, retail
customers will receive standardized
disclosures about the fees and costs, as
well as any conflicts of interest,
associated with a recommendation prior
to or at the time of receiving the
recommendation. The Disclosure
Obligation should increase the
consistency of disclosure practices
across broker-dealers and across
different types of information relative to
1205 See supra footnote 1191 for more on
disclosure obligations and requirements under the
baseline.

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the baseline, thereby increasing the
likelihood that retail customers have the
information they need to make a more
informed and efficient investment
decision at the time they receive a
recommendation.
As noted above, we are permitting
oral disclosure prior to or at the time of
a recommendation and written
disclosure after a recommendation has
been made under the circumstances
outlined in Section II.C.1, Oral
Disclosure or Disclosure After a
Recommendation.1206 Because oral
disclosure is permitted in cases where
written disclosure prior to or at the time
of recommendation is not feasible or
practical, investors may benefit by
receiving information that otherwise
may not have been available to them at
the time they make an investment
decision. In contrast, because written
disclosure is permitted in instances
where existing regulations permit
disclosure after a recommendation, the
benefits associated with the form and
timing of disclosures under Regulation
Best Interest may be reduced if the
information in such disclosures would
have been useful to investors in making
an investment decision. However, for
both oral disclosure prior to or at the
time of a recommendation and written
disclosure after a recommendation has
been made as permitted under the
circumstances outlined in Section II.C.1,
Oral Disclosure or Disclosure After a
Recommendation, retail customers will
still receive disclosures in writing prior
to a recommendation regarding the
circumstances under which oral
disclosure or disclosure after a
recommendation will occur and the
material facts that will be disclosed
under these circumstances.1207
Several commenters stated that there
are limits to the effectiveness of
disclosure and cited a number of studies
suggesting that disclosure alone is
unlikely to solve the issues surrounding,
for example, the conflicts of interest
between a broker-dealer or the
associated person of a broker-dealer and
a retail customer.1208 Another
commenter cited the 2008 RAND Study,
concluding that investors do not have
the education or background to
understand financial disclosures and do
not read long, formulaic documents.1209
Other commenters claimed that
1206 See

supra footnote 1193.
discussion following supra footnote 301.
1208 See Morningstar Letter; EPI Letter; Better
Markets August 2018 Letter; St. John’s U. Letter;
Letter from Tom C.W. Lin, Professor of Law,
Temple University Beasley School of Law (Jul. 11,
2018) (‘‘Lin Letter’’).
1209 See Galvin Letter and discussion of 2008
RAND Study.
1207 See

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numerous academic studies
demonstrate that disclosing conflicts of
interest does not adequately address the
potential harm they cause to
investors.1210 Another commenter
provided studies showing that
disclosure can encourage better
behavior by broker-dealers, improving
investor welfare.1211
As discussed above, we acknowledge
studies showing disclosure can vary in
its effectiveness depending on the issue
it is intended to address, its intended
audience, and the format in which it is
delivered.1212 To the extent some retail
customers are not able to understand the
information disclosed by a broker-dealer
regarding the scope of services it
provides and the conflicts of interest
associated with the recommendations it
makes, the benefits of the Disclosure
Obligation will not directly affect those
investors, and may not increase the
efficiency of their investment decisions.
However, Regulation Best Interest is not
limited to disclosure; rather, the
Disclosure Obligation is just one
component of Regulation Best Interest
that as a whole will enhance the
efficiency of recommendations that
broker-dealers provide to retail
customers, help retail customers
evaluate the recommendations received,
and improve retail customer protection
when receiving recommendations from
broker-dealers. In particular, in addition
to the Disclosure Obligation, both the
Care Obligation and the Conflict of
Interest Obligation, discussed below, are
designed to promote more efficient
investment decisions by imposing
affirmative obligations on the brokerdealer that cannot be fulfilled through
disclosure alone, regardless of whether
the retail customer fully incorporates
disclosed information into its
investment decisions.
Additionally, to the extent that the
information disclosed by broker-dealers
as a result of Regulation Best Interest
increases the comparability of the
securities and services offered by
different broker-dealers, it may foster
competition between broker-dealers that
benefits even those retail customers who
are not able to understand the
information disclosed by brokerdealers.1213 For example, if an increase
in comparability promotes competition
on the basis of recommendation quality,
it may cause broker-dealers to mitigate
1210 See State Treasurers Letter; Better Markets
August 2018 Letter; PIABA Letter.
1211 See Morningstar Letter.
1212 See supra Section III.B.4.c.
1213 See Relationship Summary Adopting Release
at footnote 1035 for similar discussion of the
potential benefits comparability can have on
competition.

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or eliminate conflicts even in cases
where the Conflict of Interest Obligation
does not expressly require policies and
procedures to mitigate or eliminate such
conflicts. Because the Disclosure
Obligation provides broker-dealers with
some flexibility as to the form and
timing of their disclosures, the
magnitude of this benefit will depend
on the extent to which these disclosures
are comparable across broker-dealers or
to which the disclosures made by one
broker-dealer draw attention to practices
at other broker-dealers that may not be
in the best interest of retail customers.
The magnitude of the Disclosure
Obligation’s benefits will depend on a
number of factors, including which facts
about the scope and terms of their
relationship with retail customers are
material, the extent to which brokerdealers already disclose information in
a manner that is consistent with the
Disclosure Obligation under the
baseline, the manner in which they
choose to disclose this information, the
extent to which retail customers
understand such disclosures and would
use them in making investment
decisions, and the extent to which such
disclosures would improve the
efficiency of retail customers’
investment decisions, which varies with
the specific circumstances of each retail
customer.
b. Costs
We expect broker-dealers and their
financial professionals to incur costs as
a result of Regulation Best Interest’s
Disclosure Obligation, and retail
customers may incur indirect costs as
well. In this section, we analyze these
costs in terms of how Regulation Best
Interest changes disclosure
requirements for broker-dealers relative
to the baseline.
The requirement that broker-dealers
or their associated persons disclose the
capacity in which they or their
associated persons are acting prior to or
at the time of making a recommendation
may be fulfilled by delivering the
Relationship Summary, depending on
the facts and circumstances.1214 For
example, a standalone broker-dealer
may satisfy this requirement of the
Disclosure Obligation by delivering the
Relationship Summary to the retail
customer, as required pursuant to Form
CRS. In contrast, for broker-dealers who
are dually registered, and associated
persons who are either dually registered
or who are not dually registered but
only offer broker-dealer services through
a firm that is dually registered,
1214 See supra footnotes 320–321 and surrounding
discussion.

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33441

delivering the Relationship Summary
will not be sufficient to disclose the
capacity in which they are acting. Thus,
while standalone broker-dealers that
deliver the Relationship Summary
generally will not incur additional costs
to comply with this requirement of the
Disclosure Obligation, dual-registrants
will incur additional costs, which could
include the creation of disclosure
materials as well as policies and
procedures to assist their associated
persons in determining when they are
acting in a broker-dealer capacity.
However, dual-registrants and their
associated persons will have some
flexibility with respect to the form,
timing, or method of satisfying this
requirement of the Disclosure
Obligation when they or their associated
persons make recommendations acting
as brokers, dealers, or associated
persons of a broker or dealer.1215
The presumption that the use of the
titles ‘‘adviser’’ and ‘‘advisor’’ would
violate the capacity disclosure
requirement may impose costs on
certain broker-dealers and their
financial professionals, investors, and
other affected parties. Broker-dealers
and their associated persons currently
using names and titles containing the
terms ‘‘adviser’’ and ‘‘advisor’’ will
incur direct costs, including those
associated with changing firm names,
written and/or electronic marketing
materials, advertisements, and personal
communication tools that use these
titles, among other items, as well as any
costs associated with voluntary outreach
to customers to inform them of these
changes.1216 While commenters did not
provide specific estimates of these costs,
they described them as ‘‘very real
costs,’’ 1217 ‘‘significant costs and
disruption,’’ 1218 and ‘‘burdensome and
1215 See

supra footnote 306.
e.g., HD Vest Letter (stating that ‘‘[t]he
term ‘Advisor’ permeates nearly every HD Vest
disclosure, representative agreement, selling
agreement, client agreement, client communication,
marketing piece, and website’’ and noting that
broker-dealers would need to develop compliance
policies to ensure oversight of the names and titles
used by their financial professionals); LPL August
2018 Letter (stating that ‘‘legal entities with socalled ‘doing business as’ (d/b/a) names containing
the term ‘advisor’ or ‘adviser’—through which
many securities professionals operate their business
practices—will be required to rename their
businesses and incur significant costs and
disruption in updating all marketing materials with
the prior name.’’); SIFMA August 2018 Letter;
Morgan Stanley Letter.
1217 See HD Vest Letter.
1218 See LPL August 2018 Letter. See also NAIFA
Letter (noting the ‘‘significant costs to update all
materials, marketing, signage, legally-required
disclosure documents, etc. . . .’’); SIFMA August
2018 Letter (noting the ‘‘significant costs and
burdens’’ that would be involved with ‘‘[e]xtensive
repapering.’’).
1216 See

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costly.’’ 1219 To the extent that a brokerdealer’s company name that includes
‘‘adviser’’ or ‘‘advisor’’ is recognized as
a brand in the market and therefore
represents a valuable intangible asset to
the broker-dealer, the broker-dealer may
also incur indirect costs if some of its
‘‘brand value’’ is lost following a
company name change.1220 Additionally
to the extent that investors who have a
preference for receiving advice from a
broker-dealer or an associated person of
a broker-dealer search exclusively for
such advice using the terms ‘‘adviser’’
or ‘‘advisor,’’ they may experience a
reduction in the choice of service
providers available to them (e.g., they
might only find dual-registrants).1221
Finally, organizations that award
credentials or certifications to brokerdealers and financial professionals that
include the terms ‘‘adviser’’ or
‘‘advisor’’ may lose revenues associated
with a reduction in future demand for
these credentials and certifications, or
lose revenues associated with the
maintenance of current credentials or
certifications by awardees.1222
Relatedly, affected financial
professionals may experience a loss
associated with any value they currently
derive from the use of these credentials
or certifications.1223 Rather than incur
any of the costs associated with
changing names and titles discussed
above, some broker-dealers may choose
to register as investment advisers if they
determine it will be less costly, in
which case these broker-dealers will
incur any costs associated with dual
registration. The potential costs
associated with the presumption apply
for the approximately 100 brokerdealers, as of December 2018, with retail
customers that are not also investment
advisers and use either ‘‘adviser’’ or
‘‘advisor’’ in their firm names, and for
the approximately 16% of all registered
representatives that use these titles and
1219 See

Morgan Stanley Letter.
evidence suggest corporate brands
are valuable intangible assets to firms. See, e.g.,
Mary E. Barth et al., Brand Values and Capital
Market Valuation, 3 Rev. Acct. Stud. 41 (1998).
1221 The extent of this potential cost depends on
how likely it is that investors rely on the titles
‘‘adviser’’ and ‘‘advisor’’ in finding a broker-dealer.
For example, one survey suggests that 40–50% of
investors find their financial professionals through
personal recommendations, not via searches for
these titles (see supra footnote 946 and discussion
in Relationship Summary Adopting Release at
Section IV.B.2.a).
1222 See IWI Letter (noting that ‘‘Title Restrictions,
as proposed, have a potential to impact the longterm growth of two of the Institute’s registered
marks.’’). This commenter did not provide specific
data or estimates on the potential magnitude of this
effect.
1223 See NAIFA Letter. This commenter did not
provide specific data or estimates on the potential
magnitude of this effect.

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might be affected by the
presumption.1224
The requirement that broker-dealers
disclose material facts relating to the
material fees and costs that apply to a
retail customer’s transactions, holdings,
and accounts may also be partially
fulfilled by delivering the Relationship
Summary. Form CRS will require
broker-dealers to provide retail investors
a high-level summary of principal fees
and costs, including transaction-based
fees, as well as a narrative discussion of
other fees that retail investors will pay
directly or indirectly. However, while
providing such high-level summaries
partially complies with the Disclosure
Obligation, the Relationship Summary
is unlikely to provide retail customers
with all of the material facts about the
fees and costs that apply to a particular
recommendation.1225 As a result,
Regulation Best Interest will impose
costs on broker-dealers associated with
assessing whether facts about the fees
and costs that apply to a retail
customer’s transactions, holdings, and
accounts are material and delivering
those material facts to retail customers.
Broker-dealers will have some
flexibility in how they comply with this
requirement, which will allow them to
tailor these disclosures to the needs of
their retail customers and to implement
them in a manner that is as cost efficient
as possible, given their business models.
In addition, the Disclosure Obligation
may be satisfied by providing
documents that broker-dealers are
already required to produce or
voluntarily produce under the baseline,
such as prospectuses, in which case
they may only incur costs associated
with determining the timing and
method by which they deliver these
disclosures.1226 For example, under the
baseline, broker-dealers may currently
deliver prospectuses to retail customers
after the completion of a transaction
under the baseline, but would need to
deliver them prior to or at the time of
a recommendation under Regulation
Best Interest, unless made under the
circumstances outlined in Section II.C.1,
Oral Disclosure or Disclosure After a
Recommendation, allowing them to rely
on delivery of information after the fact.
In cases where required disclosures are
already produced under the baseline,
broker-dealers and their associated
persons may still incur costs associated
with delivering these disclosures prior
to or at the time of a recommendation
1224 See
1225 See

supra footnote 1200.
the discussion following supra footnote

if they are not delivered by that time
under the baseline.
Broker-dealers may also incur costs as
a result of Regulation Best Interest’s
requirement that they disclose material
facts about the type and scope of
services provided to a retail customer,
including any material limitations on
the securities or investment strategies
involving securities that may be
recommended to the retail customer. As
discussed above, some broker-dealers
may be able to fulfill their obligation to
disclose these material facts, such as
those related to account monitoring,
account minimums, or material
limitations on the securities or
investment strategies that may be
recommended, by complying with Form
CRS or by using disclosures included in
account opening agreements or other
customer disclosures.1227 For these
broker-dealers, this requirement of the
Disclosure Obligation should not cause
them to incur additional costs beyond
an initial assessment of whether they
can comply with the Disclosure
Obligation using Form CRS or preexisting disclosures. In cases where a
broker-dealer is not able to disclose all
material facts relating to the type and
scope of services they provide by
complying with Form CRS or in
combination with existing disclosures,
broker-dealers will incur costs
associated with assessing which facts
about the type and scope of services
provided to retail customers are material
and delivering written disclosure of
those material facts to retail customers.
As discussed above, broker-dealers will
have some flexibility in how they
comply with this requirement, allowing
them to tailor these disclosures to the
needs of their retail customers and to
their business models and to implement
these disclosures in a cost efficient
manner.
While the Proposing Release’s
Disclosure Obligation did not explicitly
require broker-dealers or their
associated persons to disclose particular
types of material facts relating to the
scope and terms of their relationship
with a retail customer, Regulation Best
Interest explicitly requires that these
material facts include the capacity in
which the broker-dealer or its associated
person is acting; material fees and costs;
the type and scope of services provided,
including material limitations on the
securities or investment strategies that
may be recommended; and all material
facts relating to conflicts of interest that
are associated with a recommendation.
To the extent that broker-dealers are not
disclosing this information or are not

368.

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1226 See

discussion at supra footnotes 495–496.

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1227 See

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Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations
disclosing it by the time of a
recommendation, broker-dealers may
incur higher costs associated with
disclosing these material facts under
Regulation Best Interest compared to the
baseline.
In general, for any material facts
relating to the scope and terms of its
relationship with retail customers, a
broker-dealer may have to determine
how to disclose those facts in a manner
that is ‘‘full and fair,’’ as required by
Regulation Best Interest, which will
cause it to incur costs. Similarly, the
requirement that broker-dealers disclose
all material facts in writing prior to or
at the time of a recommendation may
also impose costs on broker-dealers. For
example, even if a broker-dealer
currently discloses some information
about its fees under the baseline, it may
not currently disclose that information
prior to the time of a recommendation,
and may incur costs updating systems
and processes to ensure the information
is disclosed in a manner that complies
with Regulation Best Interest’s
requirements, including any costs
associated with delivery of the
information to retail customers.
Broker-dealers may incur costs
associated with the full and fair
disclosure of all material facts relating
to conflicts of interest that are
associated with a recommendation. As
discussed below in our analysis of the
Conflict of Interest Obligation, brokerdealers currently have obligations to
disclose certain material conflicts of
interest under the baseline.1228 To the
extent that broker-dealers will be
required to disclose material facts about
conflicts of interest that they do not
currently disclose to retail customers
under the baseline, broker-dealers will
incur costs associated with assessing
whether facts about these conflicts are
material and delivering those facts to
retail customers. They also may incur
costs associated with identifying
particular conflicts of interest to
disclose.1229
As discussed above, there are
circumstances where broker-dealers and
their associated persons may make oral
disclosures or written disclosures after
the time of a recommendation under the
circumstances outlined in Section II.C.1,
Oral Disclosure or Disclosure After a
Recommendation. Where oral
disclosures are made, broker-dealers
and their associated persons may incur
costs associated with subsequently

documenting such disclosures. These
costs may include the time spent
documenting such disclosures, the
development of systems and processes
necessary to document such disclosures,
training associated persons to use these
systems and processes, and supervising
the compliance by associated persons
with this obligation. For both oral
disclosures and written disclosures
made after a recommendation, brokerdealers and their associated persons
may incur costs associated with
developing initial disclosures about the
material facts subject to oral disclosures
and written disclosures after a
recommendation, the circumstances
under which such disclosures will be
made, as well as costs associated with
training financial professionals to make
such disclosures in a manner that
complies with Regulation Best Interest.
While most of the costs associated
with preparing and delivering
disclosures are likely to be incurred by
broker-dealers, their associated persons
may incur costs as well. For example,
when a financial professional is aware
that the broker-dealer’s disclosure is
insufficient to describe ‘‘all material
facts,’’ the associated person must
supplement that disclosure, and may
incur costs in developing such
disclosure on their own to ensure they
are in compliance with the Disclosure
Obligation.1230 The magnitude of this
cost will depend on the extent to which
the financial professional cannot rely on
the disclosure made by the brokerdealer.
As discussed above, while we are
unable to quantify the full costs of
Regulation Best Interest, including the
Disclosure Obligation, we are able to
estimate some of the costs associated
with the Disclosure Obligation,
specifically the costs related to
information collection requirements as
defined by the Paperwork Reduction
Act. As discussed further below in
Section IV.B.1, the Commission
estimates that the preparation and
delivery of standardized language, fee
schedules, and standardized conflict
disclosures that broker-dealers are
required to provide to retail customers
to comply with the Disclosure
Obligation will impose on brokerdealers an initial aggregate burden of
6,216,125 hours and an additional
initial aggregate cost of $42.84 million
as well as an ongoing aggregate burden

1228 See infra footnote 1261. See also supra
footnotes 985–988.
1229 See infra Section III.C.4 for a discussion of
costs associated with identifying conflicts of
interest as part of the Conflict of Interest Obligation.

1230 See discussion following supra footnote 307
for an example of a case where an associated person
of a broker-dealer may be required to provide her
own disclosures in order to comply with the
Disclosure Obligation.

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33443

of 2,101,493 hours.1231 Thus, the
Disclosure Obligation will impose an
estimated initial aggregate cost of at
least $1,508.88 million and an ongoing
aggregate annual cost of at least $499.59
million on broker-dealers.1232 We note
1231 The estimate of the initial aggregate burden
is based on the following calculation: 5,630 hours
+ 7,560 hours + 40,200 hours + 2,040,000 hours +
3,780 hours + 20,100 hours + 2,040,000 hours +
3,780 hours + 15,075 hours + 2,040,000 hours =
6,216,125 hours. As discussed in more detail in
infra Section IV.B.1, 5,630, 7,560, and 40,200 hours
are estimates of the initial aggregate burden for the
preparation of disclosure of capacity, type, and
scope, for dual-registrants and small and large
broker-dealers, respectively. 2,040,000 hours is the
estimate of the initial aggregate burden for the
delivery of the disclosure of capacity, type, and
scope to retail customers. 3,780 and 20,100 hours
are estimates of the initial aggregate burden for the
preparation of disclosure of fees for small and large
broker-dealers, respectively. 2,040,000 hours is the
estimate of the initial aggregate burden for the
delivery of the disclosure of fees to retail customers.
3,780 and 15,075 hours are estimates of the initial
aggregate burden for the preparation of disclosure
of material conflicts of interest for small and large
broker-dealers, respectively. 2,040,000 hours is the
estimate of the initial aggregate burden for the
delivery of the disclosure of material conflicts of
interest to retail customers. The estimate of the
initial aggregate cost is based on the following
calculation: $2.80 million + $3.80 million + $15.00
million + $1.88 million + $9.99 million + $1.88
million + $7.49 million = $42.84 million. As
discussed in more detail in supra Section V.D,
$2.80 million, $3.80 million, and $15.00 million are
estimates of the initial aggregate cost for the
preparation of disclosure of capacity, type, and
scope, for dual-registrants and small and large
broker-dealers, respectively. $1.88 million and
$9.99 million are estimates of the initial aggregate
cost for the preparation of disclosure of fees for
small and large broker-dealers, respectively. $1.88
million and $7.49 million are estimates of the initial
aggregate cost for the preparation of disclosure of
material conflicts of interest for small and large
broker-dealers, respectively. The estimate of the
ongoing aggregate burden is based on the following
calculation: 3,941 hours + 3,024 hours + 40,200
hours + 408,000 hours + 1,512 hours + 8,040 hours
+ 816,000 hours + 756 hours + 4,020 hours +
816,000 hours = 2,101,493 hours. As discussed in
more detail in supra Section V.D, 3,941, 3,024, and
40,200 hours are estimates of the ongoing aggregate
burden for the preparation of disclosure of capacity,
type, and scope, for dual-registrants and small and
large broker-dealers, respectively. 408,000 hours is
the estimate of the ongoing aggregate burden for the
delivery of the disclosure of capacity, type, and
scope to retail customers. 1,512 and 8,040 hours are
estimates of the ongoing aggregate burden for the
preparation of disclosure of fees for small and large
broker-dealers, respectively. 816,000 hours is the
estimate of the ongoing aggregate burden for the
delivery of the disclosure of fees to retail customers.
756 and 4,020 hours are estimates of the ongoing
aggregate burden for the preparation of disclosure
of material conflicts of interest for small and large
broker-dealers, respectively. 816,000 hours is the
estimate of the ongoing aggregate burden for the
delivery of the disclosure of material conflicts of
interest to retail customers.
1232 These estimates are calculated as follows:
(96,125 hours of in-house legal counsel) × ($415.72/
hour for in-house counsel) + (6,120,000 hours for
delivery for each customer account) × ($233.02/
hour for registered representative) + (90,763 hours
for outside legal counsel) × ($497/hour for outside
legal counsel) = $1,508.88 million, and (35,056
hours of in-house legal counsel) × ($415.72/hour for

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that these estimates assume brokerdealers are not currently producing and
delivering documents associated with
the Disclosure Obligation. To the extent
that broker-dealers are already doing so,
these estimates may overstate the costs
associated with the information
collection requirements as defined by
the Paperwork Reduction Act.
Several commenters stated that we
underestimated the compliance costs of
Regulation Best Interest in the
Proposing Release, particularly with
respect to the potential transactionbased nature of the Disclosure
Obligation and the resultant recordmaking and recordkeeping
requirements.1233 One commenter stated
that if the Disclosure Obligation is a
transaction-based requirement, its costs
were significantly underestimated in the
Proposing Release, citing an estimate
that an earlier proposal of a point-of-sale
disclosure requirement would cost
between $1 million and $1.2 million per
firm.1234 We first note that, given that
there are approximately 2,766 brokerdealers with retail-facing operations, the
commenter’s cited estimate implies
initial costs of approximately $1.4
billion and ongoing costs of
approximately $1.4 billion,1235 so the
commenter’s implied estimate of $1.4
billion in initial costs associated with
the Disclosure Obligation is consistent
with our estimate of initial costs
above.1236 Second, we note that, as
discussed in more detail above in
Section II.C.1.d, the Disclosure
Obligation only requires that certain
disclosures be made prior to or at the
time of a recommendation, and brokerdealers may use standardized
disclosures at an earlier point than the
time of a recommendation to the extent
in-house counsel) + (2,040,000 hours for delivery
for each customer account) × ($233.02/hour for
registered representative) + (26,437 hours for inhouse compliance counsel) × ($365.39/hour for
outside legal counsel) = $499.59 million. The
hourly wages for in-house legal and compliance
counsel and registered representatives are obtained
from SIFMA. The hourly rates for outside legal
counsel are discussed in supra Section V.D.
1233 See Schwab Letter; ICI Letter; Angel Letter;
Vanguard Letter; LPL August 2018 Letter; NSCP
Letter.
1234 See Schwab Letter, citing April 12, 2004
comment letter from George Kramer of the
Securities Industry Association (‘‘SIA’’). This
estimate is based on a point-of-sale disclosure
requirement in proposed rule 15c2–3, for which
SIA estimated that implementation costs would be
in the order of $500,000 per firm, as would annual
costs associated with maintaining and updated
necessary systems and procedures. See also SIFMA
August 2018 Letter at footnote 38 referencing the
same estimate.
1235 These estimates are calculated as follows:
(2766 retail-facing broker-dealers) × ($500,000 per
firm in initial costs) = $1.383 billion. Implied
ongoing costs are calculated the same way.
1236 See supra footnote 1232.

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such disclosures satisfy the Disclosure
Obligation. In this regard, while the
commenter’s estimate may be indicative
for some firms, the cost per firm will
vary widely depending on the scope and
business model of each broker-dealer.
Because Regulation Best Interest
provides broker-dealers with some
flexibility regarding both the form and
timing of the Disclosure Obligation, its
costs are likely to be lower than a pure
point-of-sale requirement.1237
Beyond the estimates provided above
for that are derived from estimates
developed for purposes of the
Paperwork Reduction Act in Section
IV.B.1, the Commission is unable to
fully quantify the costs of the Disclosure
Obligation because the magnitude of
these costs depend on firm-specific
factors that are inherently difficult to
quantify given the principles-based
nature of Regulation Best Interest.1238
These factors include the extent to
which current disclosure practices
under the baseline are different from the
requirements of the Disclosure
Obligation, the manner in which brokerdealers choose to comply with the
Disclosure Obligation given the
flexibility it provides, how brokerdealers assess whether facts relating to
the scope and terms of their relationship
with a retail customer are material, how
they determine whether their disclosure
of such material facts is full and fair, or
the extent to which they will satisfy the
Disclosure Obligation’s requirements by
delivering the Relationship Summary or
pre-existing documents.
3. Care Obligation
Under the baseline, broker-dealers are
subject to suitability obligations and
requirements under the anti-fraud
provisions of the federal securities laws
and the Suitability Rule when making
recommendations to retail customers.
The Care Obligation incorporates and
adds to existing suitability requirements
applicable to broker-dealers, thereby
reducing the incidence of inefficient
recommendations to retail customers.
FINRA rules require broker-dealers
making recommendations to have, based
on a particular customer’s investment
profile, a reasonable basis to believe that
the recommendation is suitable for that
customer. In addition, FINRA guidance
and Commission opinions interpret
suitability as prohibiting a broker-dealer
from placing its interests ahead of the
customer’s interest and requiring the
recommendations to be consistent with
1237 See supra footnotes 531–533 for a discussion
of layered disclosure and footnotes 541–542 for a
discussion of the Disclosure Obligation’s
requirements with respect to timing of disclosures.
1238 See supra Section III.C.1.

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the customer’s best interest.1239
However, this obligation is not
explicitly required by FINRA’s rule (or
its supplementary material). Under the
baseline, a recommendation by a brokerdealer or its associated persons may be
consistent with a retail customer’s best
interest but broker-dealers and their
associated persons are not required to
make recommendations in the best
interest of these customers, as will be
required under Regulation Best Interest.
Relative to the baseline, the Care
Obligation will change how brokerdealers and their associated persons
make recommendations to retail
customers in several ways, some of
which differ from the Proposing
Release.
First, the Care Obligation explicitly
includes cost as a factor for
consideration when determining
whether a recommendation is in a retail
customer’s best interest. In contrast, the
Proposing Release emphasized cost as
an important factor to consider and
stated that broker-dealers may be
required to consider cost as a factor
when making recommendations, but did
not explicitly require its consideration
when making a recommendation.1240 In
addition, we clarify above in Section
II.C.2 that, when determining whether a
recommendation is in a retail
customer’s best interest with respect to
cost or other relevant factors, brokerdealers and their associated persons
should consider reasonably available
alternatives. Conversely, under FINRA
suitability obligations, broker-dealers
and their associated persons are not
required to consider reasonably
available alternatives when determining
whether a recommendation is suitable
for a retail customer.1241
Second, under the baseline, FINRA
rules require that a broker-dealer or
associated person who has actual or de
facto control over a customer’s account
must have a reasonable basis for
believing that a series of recommended
transactions, even if suitable when
viewed in isolation, is not excessive and
unsuitable for the customer when taken
together in light of the customer’s
investment profile. In contrast, the Care
Obligation requires that a broker-dealer
or its associated person has a reasonable
basis to believe that a series of
recommended transactions is not
excessive and is in that retail customer’s
best interest. This is the case at all
times—when the broker-dealer or
associated person has actual or de facto
1239 See supra footnote 570 and 913 Study at
footnote 270.
1240 See supra footnote 572 and preceding text.
1241 See id.

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control over a customer’s account as
well as when no control exists (whether
actual or de facto).
Finally, FINRA’s suitability standard
applies to recommendations of rollover
decisions that involve securities
transactions, but not necessarily in the
absence of a securities transaction.1242
In addition, FINRA’s suitability
standard does not explicitly apply to
recommendations of account types and
implicit hold recommendations
resulting from agreed upon account
monitoring.1243 In contrast, Regulation
Best Interest explicitly applies to
account recommendations as an
‘‘investment strategy involving
securities,’’ including recommendations
of securities account types, as well as
rollovers or transfers of assets from one
account to another. In addition, under
Regulation Best Interest, implicit hold
recommendations resulting from agreed
upon account monitoring constitute
recommendations of ‘‘any securities
transaction or investment strategy
involving securities,’’ and are therefore
within the scope of Regulation Best
Interest. Moreover, recommendations to
open an IRA or to roll over assets into
an IRA are subject to Regulation Best
Interest, including the Care Obligation,
thereby requiring a broker-dealer or its
associated persons to have a reasonable
basis to believe that the IRA or IRA
rollover is in the best interest of the
retail customer at the time of the
recommendation, taking into
consideration the retail customer’s
investment profile and other relevant
factors, as well as the potential risks,
rewards, and costs of the IRA or IRA
rollover compared to the retail
customer’s existing 401(k) or other
retirement account. We focus our
discussion of both the benefits and costs
of the Care Obligation under Regulation
Best Interest on these changes relative to
the baseline.
Regulation Best Interest’s Care
Obligation differs from the Proposing
Release’s Care Obligation in two ways
that respond to commenter concerns but
that we do not expect to have significant
economic effects.1244 First, the general
best interest standard of conduct from
the Proposing Release is incorporated
into Regulation Best Interest’s Care
Obligation, which, as adopted, also
requires that a broker-dealer or its
associated persons have a reasonable
basis to believe that a recommendation,
or series of recommendations, does not
1242 See FINRA Regulatory Notice 13–45 and
supra footnote 172.
1243 See supra footnote 170.
1244 See discussion at supra footnotes 147, 606,
and 577–584.

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place the financial or other interest of
the broker-dealer or its associated
persons ahead of the interest of the
particular retail customer. Brokerdealers and their associated persons can
comply with Regulation Best Interest as
a whole by complying with its four
component obligations, which now
explicitly include the Proposing
Release’s general best interest standard
in elements of the Care Obligation. This
change to the Care Obligation, as
compared to the Proposing Release, is
intended to emphasize the importance
of determining that each
recommendation is in the best interest
of the retail customer and that it does
not place the broker-dealer’s interests
ahead of the retail customer’s interest;
however, we do not believe there will be
significant economic effects associated
with this change from the Proposing
Release.1245 Second, Regulation Best
Interest, as adopted, does not explicitly
require broker-dealers or their
associated persons to exercise
‘‘prudence’’ in making
recommendations. Instead they must
exercise reasonable diligence, care, and
skill in making such recommendations.
While we removed the term ‘‘prudence’’
to address commenter concerns that it
might create legal confusion and
uncertainty, this does not change the
requirements or obligations under the
Care Obligation as compared to the
Proposing Release.1246 Therefore, we do
not expect this change to have a
significant economic effect, as compared
to the Proposing Release.
a. Benefits
As described in the Proposing
Release, the Care Obligation did not
explicitly require broker-dealers and
their associated persons to consider the
costs associated with a recommendation
when determining whether it was in a
retail customer’s best interest, though
the Proposing Release discussed cost as
a relevant factor in making this
determination, and noted that brokerdealers might be required to consider
cost as a factor when making
recommendations under the
baseline.1247 The Care Obligation under
Regulation Best Interest includes an
explicit requirement to consider the cost
1245 If anything, to the extent that broker-dealers
or their associated persons might have
misunderstood the Proposing Release with respect
to their obligation to provide recommendations that
are in the best interest of retail customers,
Regulation Best Interest, as adopted, emphasizes the
importance of determining that each
recommendation is in the best interest of the retail
customer will benefit retail customers.
1246 See supra footnotes 579–585 and surrounding
discussion.
1247 See supra footnote 572.

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33445

of a recommendation. If this causes
broker-dealers and their associated
persons to more carefully consider cost
in relation to other factors, compared to
the baseline, it should reduce the
incidence of recommendations of higher
cost investments from a set of
reasonably available alternatives that
achieve the retail customer’s objective.
If the explicit requirement to consider
the cost of a recommendation
encourages broker-dealers and their
associated persons to more carefully
consider cost, compared to the baseline,
the final rule makes it less likely that a
broker-dealer or its associated persons
could have a reasonable basis to believe
such investments are in the retail
customer’s best interest because it
would be difficult to have such a belief
for investments that are identical
beyond their costs. Therefore, including
cost as a required factor in Regulation
Best Interest should enhance the
efficiency of recommendations to retail
customers relative to the baseline.1248
As discussed above, while a
‘‘quantitative suitability’’ requirement
applies to series of recommended
transactions under the baseline, it only
applies in cases where a broker-dealer
has ‘‘control’’ over a customer account.
Relative to the baseline, broker-dealers
and their associated persons will be
required to have a reasonable basis to
believe that any series of recommended
transactions is in the retail customer’s
best interest, not just series of
recommended transactions that occur in
an account they control. This change
relative to the baseline should enhance
investor protection by reducing the
incidence of cases where a broker-dealer
or its associated persons recommend an
excessively high rate of portfolio
turnover, or ‘‘churn,’’ for accounts that
they do not control. In addition, the
discussion above regarding the potential
benefits from the increased standard of
conduct required by the Care Obligation
in the context of individual
recommendations also applies to series
of recommended transactions.
Enhancing the standard of conduct that
applies to series of recommended
transactions and reducing the incidence
of recommendations that result in
excess portfolio turnover should result
in more efficient recommendations,
benefiting retail customers. We are
unable to specifically quantify these
potential benefits because, in addition
to the reasons cited above, we do not
have and cannot reasonably obtain
comprehensive data on how often
broker-dealers, for accounts they do not
1248 See discussion surrounding supra footnotes
563–565.

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control, recommend series of
transactions that result in excessive
portfolio turnover and are therefore not
in the best interest of their retail
customers.
Regulation Best Interest applies to
account recommendations, including
recommendations to open an IRA or to
participate in an IRA rollover.
Accordingly, these types of
recommendations are subject to the Care
Obligation (as well as the other
components of Regulation Best Interest).
Several commenters highlighted the
heightened risk of harm associated with
IRA and IRA rollover recommendations
because the amount of assets associated
with such recommendations can be a
significant portion of a retail customer’s
net worth, and one commenter cited
academic and industry studies that
identify activities that are particularly
prone to conflicts of interest, including
IRA rollovers.1249 We acknowledge the
heightened effect that recommendations
to open an IRA or to participate in an
IRA rollover can have on the financial
well-being of retail customers.1250 While
FINRA’s suitability standard under the
baseline applies to rollover
recommendations involving securities
transactions, the suitability standard
does not necessarily apply to a rollover
recommendation if that
recommendation does not involve a
securities transaction.1251 To the extent
that broker-dealers and their associated
persons currently make
recommendations to open an IRA or to
participate in an IRA rollover that do
not involve securities transactions
under the baseline, Regulation Best
Interest should result in IRA and IRA
rollover recommendations to retail
customers that are more efficient
because they will be in the retail
customer’s best interest regardless of
whether or not they involve securities
transactions.
Regulation Best Interest also applies
to other account type recommendations.
Broker-dealers may offer different types
of brokerage accounts that include
different levels of services and costs.
The choice of account type can have a
significant effect on the financial
wellbeing of a retail customer. For
example, a recommendation to open an
advisory over a brokerage account, or
vice versa, can have a substantial longterm effect on a retail customer’s assets.
This effect may depend on the costs the
retail customer incurs through the
1249 See CFA August 2018 Letter; AARP August
2018 Letter; Morningstar Letter; CFA Institute
Letter.
1250 See supra footnotes 191–192. See also
Fiduciary Benchmarks Letter.
1251 See supra footnote 1242.

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particular account as well as the retail
customer’s investment profile.1252
Regulation Best Interest should result in
recommendations regarding account
type that are in the best interest of the
retail customer, particularly with
respect to cost, increasing the efficiency
of the account type recommendations
retail customers receive relative to the
baseline.
Finally, by clarifying that implicit
hold recommendations resulting from
agreed-upon account monitoring
services constitute recommendations of
‘‘any securities transaction or
investment strategy involving
securities,’’ the Care Obligation will
apply at the point in time at which their
broker-dealer or associated person
performs the agreed-upon monitoring,
regardless of whether the broker-dealer
or an associated person communicates
any recommendation. This should
increase the efficiency of the implicit
hold recommendations retail customers
receive relative to the baseline.
b. Costs
We expect broker-dealers and their
associated persons to incur costs as a
result of the Care Obligation, and, to the
extent broker-dealers pass these costs on
to retail customers, these customers may
incur costs as well. In this section, we
analyze these costs in terms of how
Regulation Best Interest, as adopted,
changes the required standard of care
broker-dealers owe their retail
customers relative to the baseline. We
also highlight any changes in our
assessment of these costs as compared
to the Proposing Release. We discuss the
costs of complying with the Care
Obligation, such as those associated
with training employees or developing
policies and procedures, in Section
III.C.5.
To comply with the Care Obligation,
some broker-dealers may stop offering
certain securities to retail customers, or
their associated persons may stop
recommending certain securities to
retail customers. These decisions may
be based on determinations that offering
or recommending those securities
typically would not satisfy the Care
Obligation. To the extent that they earn
revenue from offering and
recommending such securities, brokerdealers and their associated persons
may incur costs associated with the
determination to cease offering or
recommending these products.
Commenters stated that our analysis
should not consider lost revenue as a
cost of complying with Regulation Best
Interest, except to the extent that the

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lost revenue is passed on to investors in
the form of higher fees, because these
types of costs are a direct result of
policies that make investors better
off.1253 As discussed above, our
economic analysis must consider the
costs Regulation Best Interest may
impose on all affected parties, including
broker-dealers. However, we believe
that any loss of revenues associated
with recommendations that would not
satisfy the Care Obligation is
compensated by the corresponding
benefit to retail customers—namely the
provision of more efficient
recommendations by their financial
professionals.1254 In addition, even if
broker-dealers or their associated
persons have a reasonable basis to
believe that a certain investment could
be in the best interest of some retail
customers, they may forgo offering or
recommending the investment if, for
example, they think that it may increase
their exposure to regulatory
enforcement risk over their compliance
with Regulation Best Interest.1255 This
could result in costs to both the brokerdealer and any retail customers for
whom the investment would be an
efficient investment choice.
Because the Care Obligation holds
broker-dealers and their associated
persons to an enhanced standard of
conduct, they may incur costs
associated with increased legal exposure
if, for example, Regulation Best Interest
results in increased retail customer
arbitrations or litigation. For example,
one commenter stated that the lack of
clarity in how to weight various factors
associated with the potential risks and
rewards of a recommendation could
lead to arbitrary claims regarding other
alternative recommendations that, expost, would have performed better.1256
Similarly, because the Care Obligation
also requires that a series of
recommended transactions be in the
best interest of a retail customer,
regardless of whether a broker-dealer or
an associated person controls the retail
customer’s account, a broker-dealer
could incur the same types of costs
associated with increased arbitration or
litigation risk relative to the baseline.
We cannot anticipate the extent to
which Regulation Best Interest will
increase retail customer claims, but
many retail customer arbitrations are
already predicated in whole or in part
on facts alleging that a broker-dealer
1253 See

supra footnote 1164.
supra Section III.A.2 for a more detailed
discussion of efficient recommendations.
1255 See, e.g., Iowa Insurance Commissioner
Letter.
1256 See CCMC Letters.
1254 See

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breached a fiduciary duty or its
suitability obligations. Additionally, the
clarity in the rule text and this release
regarding the Care Obligation, as well as
the other aspects of Regulation Best
Interest that bring enhanced conduct
and clarity (e.g., the policies and
procedures requirement and that
Regulation Best Interest applies only at
the time a recommendation is made)
should mitigate against an increase in
the likelihood and cost of such claims.
The Care Obligation explicitly
requires that cost be considered as a
factor when determining whether a
recommendation is in the best interest
of a retail customer. Several commenters
stated that the Proposing Release’s
guidance emphasizing cost as a specific
factor in the Care Obligation could
create uncertainty around how the cost
of a recommendation should be weighed
with other factors.1257 As discussed
above, the inclusion of cost as a factor
in the Care Obligation does not require
that the ‘‘least expensive’’
recommendation be made by a brokerdealer or its associated person; cost is
one factor, but not the only relevant
factor. Nonetheless, to the extent that
the inclusion of cost as a factor in the
Care Obligation increases the arbitration
or litigation risk to which broker-dealers
or their associated persons are exposed,
this change could impose additional
costs on broker-dealers.
Regulation Best Interest also expressly
applies to account recommendations,
including recommendations of
securities account types, as well as
rollovers or transfers of assets from one
account to another. We also clarify
above that implicit hold
recommendations resulting from agreedupon account monitoring are within the
scope of Regulation Best Interest and are
therefore subject to the Care Obligation.
Should they choose to discontinue
offering certain services, as a result of
Regulation Best Interest, broker-dealers
could lose revenue associated with
making recommendations for account
types (including IRAs). They may also
decide to cease offering monitoring
services on retail customer accounts.
However, as we discussed above with
respect to recommendations more
generally, we believe that any loss of
revenues associated with
recommendations that would not satisfy
the Care Obligation is compensated by
the corresponding benefits to retail
customers associated with more
efficient account recommendations.
The Commission is unable to fully
quantify the costs that the Care
1257 See ICI Letter; CCMC Letters; LPL August
2018 Letter.

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Obligation will impose on brokerdealers, their associated persons, or
their retail customers because the
magnitude of these costs depends on
firm-specific factors that are inherently
difficult to quantify given the
principles-based nature of Regulation
Best Interest.1258 These factors include
the extent to which broker-dealers and
their associated persons currently
engage in practices under the baseline
that would satisfy the Care Obligation,
either of their own volition or as a result
of complying with other regulations; the
extent to which broker-dealers and their
associated persons will cease
recommending certain securities or
investment strategies; the likelihood
that retail customers file more
arbitration or litigation claims; and the
extent to which broker-dealers pass on
any cost increases to their retail
customers.1259
4. Conflict of Interest Obligation
The Conflict of Interest Obligation
under Regulation Best Interest is
intended to reduce the agency costs that
arise when a broker-dealer and its
associated persons provide a
recommendation to a retail customer by
addressing the effect of the associated
person’s or broker-dealer’s conflicts of
interest on the recommendation.
The Conflict of Interest Obligation
would require that broker-dealers
establish, maintain, and enforce written
policies and procedures that are
reasonably designed to address the
effect of the broker-dealer’s and the
associated persons’ conflicts of interest
on a recommendation. At a minimum, a
broker-dealer is required to address the
effect of conflicts of interest on a
recommendation. At a minimum, a
broker-dealer is required to address the
effect of an identified conflict on a
recommendation by disclosing the
material facts associated with that
conflict and by disclosing material
limitations of the menu of securities
when the conflict stems from such
limitations. In certain cases, a brokerdealer is required to address the effect
of an identified conflict by either
mitigating the conflict, or, in certain
cases, by eliminating certain sales
practices.
The Conflict of Interest Obligation is
intended to reduce the information
asymmetry between a retail customer
and a broker-dealer and its associated
persons with respect to the brokerdealer’s conflicts of interest or those of
also supra Section III.C.1.a.
discussion following infra footnote 1329
for discussion of factors affecting whether brokerdealers pass on costs to their retail customers and
the resultant competitive effects.

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1259 See

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33447

its associated persons that may have an
effect on the recommendations provided
to the retail customer. This disclosure
may help the retail customer form a
better assessment of the efficiency of the
recommendation received. Moreover,
reducing this information asymmetry
may discourage broker-dealers from
acting on incentives that differ from
retail customer objectives.
Similarly, by addressing the effect of
certain conflicts of interest through
mitigation, the Conflict of Interest
Obligation is intended to reduce the
effect incentives created by those
conflicts may have on a
recommendation provided to the retail
customer. Depending on how effective
the mitigation method is in reducing
these incentives, the efficiency of the
recommendation provided to the retail
customer may increase.
Similarly, by addressing the effect of
certain conflicts of interest through
elimination, the Conflict of Interest
Obligation is intended to neutralize the
effect of incentives created by those
conflicts may have on a
recommendation provided to the retail
customer. In this case, the efficiency of
the recommendations provided to the
retail customer may increase.
The conflicts of interest that the
broker-dealer or its associated persons
have, and the incentives that these
conflicts create, arise from, among other
things, the manner in which brokerdealers generate revenue and the
manner in which broker-dealers
compensate their associated persons
with respect to their dealings with retail
customers.
The compensation arrangement
between a broker-dealer and its
associated persons may reflect the
amount of revenues that the associated
persons generate for the broker-dealer
from activities performed, including
providing recommendations to retail
customers. Such arrangements between
the broker-dealer and its associated
persons may create incentives for the
associated person to take actions
consistent with maximizing the brokerdealer’s objectives (e.g., expected
profits). For instance, if an associated
person’s compensation from providing
recommendations to retail customers is
tied to the amount of revenues that the
associated person generates for the
broker-dealer, the associated person
may have an incentive to recommend
securities or investment strategies that
would bring more revenue to the brokerdealer, relative to other comparable
securities or investment strategies.
Furthermore, even if the compensation
arrangement does not create an explicit
incentive for the associated person, the

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broker-dealer may direct the attention of
the associated person to certain
securities. For instance, even if the
revenues that the broker-dealer receives
when its associated persons provide
recommendations to retail customers are
not passed on to the associated persons,
the broker-dealer’s receipt of
compensation from some securities or
their sponsors may lead the brokerdealer to emphasize to its associated
persons the securities that are the source
of such compensation.
The revenues that a broker-dealer
receives when a retail customer acts on
an investment recommendation may
depend on the broker-dealer’s
compensation arrangement with the
product sponsor. The broker-dealer may
receive different compensation from
different product sponsors for
distributing comparable securities or
investment strategies. If the objectives of
the broker-dealer are tied to the amount
of revenues it receives from
recommended securities or investment
strategies, the broker-dealer may have
an incentive to advise only, or
predominantly, on securities or
investment strategies that come with
attractive compensation arrangements
and less so, or not at all, on other
comparable securities or investment
strategies. Accordingly, the incentives
created by the compensation
arrangements with the product sponsors
may cause a broker-dealer to limit the
menu of securities from which the
broker-dealer or its associated persons
make recommendations.
The conflicts of interest that can arise
from the compensation arrangement
between the broker-dealer and its
associated persons, and from the
compensation arrangement between the
broker-dealer and the product sponsors,
can create incentives that may affect the
broker-dealer’s or its associated persons’
recommendations to retail customers. In
certain circumstances, a broker-dealer’s
conflicts of interest, or its associated
persons’ conflicts of interest, may result
in recommendations that are not in the
best interest of the retail customer.1260
As discussed above, in Section III.B.2,
broker-dealers are currently subject to
Commission and SRO regulations and
rules that govern their business conduct.
For example, with respect to the
provision of advice, courts have found
broker-dealers liable under the antifraud
provisions of the federal securities laws
for not giving ‘‘honest and complete
information’’ or for not disclosing
‘‘material adverse facts of which it is
aware’’ with regard to certain conflicts
1260 See

FINRA Conflicts Report.

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of interest, in certain circumstances.1261
Furthermore, broker-dealers are
generally prohibited from making an
unsuitable recommendation to a
customer.1262
In addition, broker-dealers may be
liable under the Exchange Act for failure
to supervise their associated persons
when providing advice to retail
customers.1263 Broker-dealers are
generally required to establish policies
and procedures that are reasonably
designed to prevent and detect
violations of the federal securities laws
and regulations, as well as applicable
SRO rules. Broker-dealers are also
required to establish and maintain
systems for applying these procedures
(e.g., identifying and reviewing red flags
with respect to the recommendations
provided by their associated
persons).1264
As discussed above, a number of
studies and papers provide evidence
suggesting that despite the current
regulatory regime and observations that
agency costs to retail customers from
broker-dealer relationships may be
trending downward, the effect of
conflicts of interest on the provision of
advice remains a concern.1265 We also
noted in Section III.A.2 above that, more
generally, the conflicts of interest of the
broker-dealer and its associated persons
and the incentives that these conflicts
create may result in agency costs for the
retail customers that persist despite the
current regulatory regime.
The Conflict of Interest Obligation in
Regulation Best Interest is intended to
reduce the agency costs associated with
the conflicts of interest of the brokerdealers and its associated persons when
they provide recommendations on
securities transactions and investment
strategies to retail customers. Below we
discuss the economic implications of
different requirements of this obligation,
including their benefits and costs
relative to the current regulatory regime.
1261 See the Suitability Rule; see also 913 Study
at 55 for a detailed discussion of the broker-dealers’
disclosure obligations and liabilities under the
current regulatory regime.
1262 See FINRA Rule 2111.03 (Recommended
Strategies).
1263 See 913 Study at 74.
1264 Id. at 75. In addition, FINRA Rule 3010
requires broker-dealers to establish and maintain a
system to supervise the activities of their associated
persons that is reasonably designed to achieve
compliance with the applicable securities laws and
regulations and FINRA rules. FINRA Rule 3120
requires broker-dealers to have a system of
supervisory control policies and procedures that
tests and verifies supervisory procedures.
1265 See supra Section III.B.3.c.

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a. Overarching Obligation Related to
Conflicts of Interest
The overarching obligation of the
Conflict of Interest Obligation states that
broker-dealers must establish, maintain,
and enforce written policies and
procedures reasonably designed to
identify and at a minimum disclose, or
eliminate, all conflicts of interest
associated with recommendations to
retail customers.
The requirement to establish written
policies and procedures reasonably
designed to identify conflicts of interest
is a new requirement relative to the
current regulatory regime. This
requirement may impose costs on those
broker-dealers that currently do not
implement such policies and
procedures voluntarily. These costs
stem from the resources that a brokerdealer would have to expend to identify
existing and potential conflicts of
interest and to design policies and
procedures that can reasonably identify
and manage circumstances when a
conflict of interest arises within the
broker-dealer. These circumstances
would have to take into account, among
other things, how the broker-dealer
generates revenue from providing
recommendations to retail customers
and how associated persons of the
broker-dealer are compensated for
providing recommendations. In
addition, these circumstances would
have to account for the limitations of the
menu of securities from which brokerdealers provide recommendations.
Furthermore, broker-dealers may incur
costs of reviewing and updating such
policies and procedures as new conflicts
of interest arise or as new circumstances
develop that may cause the brokerdealer to identify an existing conflict of
interest. The Commission is providing
below a quantitative estimate of the cost
to broker-dealers associated with
designing and updating such policies
and procedures under certain
assumptions
The requirement to establish policies
and procedures reasonably designed to
identify conflicts of interest may also
create benefits for retail customers. As
noted above, the policies and
procedures would require brokerdealers to: (1) Identify existing conflicts
of interest and new circumstances in
which an existing conflict of interest
may arise, and (2) new conflicts of
interest and the circumstances in which
they may arise. Having a process in
place to identify and address the
conflicts of interest associated with a
recommendation at the time the
recommendation is made to a retail
customer would reduce the likelihood

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that a broker-dealer may fail to disclose
material facts relating to conflicts of
interest. Thus, the process a brokerdealer develops as a result of complying
with the Conflict of Interest Obligation
may improve the quality of the content
of the disclosure of conflicts of interest
that may affect a recommendation. To
the extent such disclosure helps retail
customers make a better assessment of
the efficiency of the recommendation
they receive, the requirement may
benefit the retail customers.
The Commission continues to believe
that it is not possible to meaningfully
quantify the potential costs and benefits
of the Conflict of Interest Obligations
because such analysis would depend on
many contingent factors that render any
estimate insufficiently precise to inform
our policy choices.1266 For example,
such an analysis of the Conflict of
Interest Obligation would require strong
assumptions about the circumstances
under which a broker-dealer may fail to
identify a given conflict of interest, and
also about the extent to which the
disclosure of the conflicts of interest
may enhance decision making for retail
customers.
The requirement to establish policies
and procedures reasonably designed to,
at a minimum, disclose identified
conflicts of interest may help a retail
customer evaluate the efficiency of the
recommendation provided by a brokerdealer and its associated persons, and
may affect the retail customer’s decision
of whether, and how, to act on the
recommendation. As noted in Section
III.A.2 above, reducing the information
asymmetry between a retail customer
and a broker-dealer and its associated
persons may help the retail customer
form a better assessment of the
efficiency of the received
recommendation.
Disclosure requirements generally are
intended to reduce information
asymmetries between transacting
parties. Whether such a reduction is
likely to occur depends largely on the
effectiveness of the disclosure. If the
disclosure provides new information,
transacting parties may make more
informed decisions than they would
without this new information, and, from
this perspective, the disclosure may be
effective. However, disclosure can be
effective even if no new information is
provided, to the extent the form and
manner in which a disclosure
requirement reaches the transacting
1266 See discussion following supra footnote 1156
for a general discussion of these factors. See also
infra Section III.C.7, where we have endeavored to
quantify some of the potential benefits of
Regulation Best Interest based on many
assumptions.

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parties facilitates a more informed
decision. There is extensive academic
literature on the factors that contribute
to disclosure effectiveness.1267 Among
these factors, those associated with
bounded rationality, including financial
literacy, are generally important.1268 In
particular, disclosure effectiveness
generally increases with the level of
financial literacy of the transacting
party.1269 It is also possible that if a
broker-dealer’s retail customers have
different degrees of financial literacy,
the potential anticipated reaction of the
retail customers that are financially
literate to the disclosure of conflicts of
interest may cause the broker-dealer to
choose to eliminate certain conflicts,
which, in turn, would benefit the
population of retail customers that are
less financially literate. Specifically, the
requirement to establish policies and
procedures reasonably designed to, at a
minimum, disclose identified conflicts
of interest may have a deterrent effect
on some broker-dealers to the extent
that they anticipate that disclosing
material facts about certain conflicts of
interest may be effective in dissuading
certain retail customers from seeking or
accepting recommendations from their
associated persons in the future. As
noted above, such broker-dealers may
choose to eliminate those conflicts
instead.
i. Disclosing Conflicts of Interest
The requirement under the Conflict of
Interest Obligation to develop
reasonably designed policies and
procedures to, at a minimum, disclose
identified conflicts of interest would
obligate a broker-dealer to provide
information (e.g., material facts) about
its conflicts of interest and those that its
associated persons have when making a
recommendation to a retail customer. As
discussed above, this information may
already be disclosed under the
regulatory baseline and by brokerdealers that adopt best practices.
However, it is currently not clear in
what form and what manner this
disclosure reaches the retail
customer.1270 Under Regulation Best
Interest, the Conflict of Interest
Obligation is intended to require that
such disclosure reach the retail
customer more directly and in a more
timely manner.1271 In addition, the
1267 See supra Section III.B.4.c for a detailed
discussion of the academic literature on disclosure
effectiveness.
1268 Id.
1269 Id.
1270 See e.g., 913 Study.
1271 Broker-dealers satisfy their current disclosure
obligations in the account opening agreement,

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33449

material facts disclosed may increase
the salience of the conflicts of interest
to retail customers as being a potential
factor contributing to an associated
person’s recommendation. Salience
detection is a key feature of human
cognition allowing individuals to focus
their limited mental resources on a
subset of the available information and
causing them to over-weight this
information in their decision making
processes.1272 Limited attention among
individuals increases the importance of
focusing on salient disclosure signals.
Research suggests that increasing signal
salience is particularly helpful in
reducing limited attention of consumers
with lower education levels and
financial literacy.1273 To the extent that
this manner of disclosure and the
associated increase in salience results in
more informed decisions with respect to
whether to act on a received
recommendation, the disclosure
requirement resulting from the Conflict
of Interest Obligation will benefit retail
customers.
It is also possible that the disclosure
of material facts about a broker-dealer’s
conflicts of interest or those of its
associated persons related to a
recommendation may not benefit the
retail customer receiving that
recommendation. As noted by one
commenter, the academic literature on
disclosure effectiveness notes that in
certain circumstances, disclosure of
financial information may induce a
‘‘panhandler effect’’, whereby disclosure
increases the pressure to comply with
the advice if the advisee (e.g., the retail
customer) feels obliged to satisfy the
financial interest of the advice provider
(e.g., the associated person).1274
account statements, and information made public
on their websites.
1272 See Daniel Kahneman, Thinking, Fast and
Slow (2013); Susan T. Fiske & Shelley E. Taylor,
Social Cognition: From Brains to Culture (3rd ed.
2017).
1273 See, e.g., Victor Stango & Jonathan Zinman,
Limited and Varying Consumer Attention: Evidence
from Shocks to the Salience of Bank Overdraft Fees,
27 Rev. Fin. Stud. 990 (2014).
1274 See, e.g., EPI Letter at 11, noting that ‘‘[a]s the
SEC itself noted in its analysis of one of the
proposed regulations, disclosure may even induce
a ‘panhandler effect,’ whereby clients may go
through with a transaction in response to social
pressure to meet the professional’s financial
interests.’’ The Commenter also notes that generally
disclosure may not incentivize a financial
professional to change her behavior: ‘‘The SEC also
noted that disclosure could have an effect on the
behavior of financial professionals through ‘moral
licensing’—the belief that they have already
fulfilled their moral obligations through disclosure,
and ‘strategic biasing’—the desire to compensate for
an anticipated loss of profit from disclosure.’’ As
discussed above, Regulation Best Interest recognizes
that certain conflicts of interest cannot be
reasonably addressed with disclosure alone. See

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ii. Elimination of Conflicts of Interest
The policies and procedures that
broker-dealers will need to maintain
and implement to comply with the
Conflict of Interest Obligation will also
give them the option of addressing
conflicts of interest associated with
recommendations by eliminating such
conflicts entirely, rather than just
disclosing them to the retail customer.
Depending on the effectiveness of the
policies and procedures that a brokerdealer implements to comply with the
Conflict of Interest Obligation, conflicts
of interest that are not required to be
eliminated and that remain may still
have a significant effect on an associated
person’s recommendation. If a brokerdealer considers that the effect of a
conflict of interest on the
recommendations of its associated
persons cannot be adequately addressed
by the broker-dealer, as required by the
Conflict of Interest Obligation
(discussed further below), the brokerdealer may consider modifying its
practices to eliminate that conflict. By
eliminating a conflict, the broker-dealer
would neutralize the effect of this
conflict on the recommendations
provided by the broker-dealer or its
associated persons to retail customers.
The absence of this conflict of interest
when the associated person is
considering reasonably available
alternatives for a recommendation to a
retail customer, as noted above in the
discussion of the Care Obligation,
would likely result in an increase in the
efficiency of the customers. As
discussed above in Section III.A.2, this
outcome would be consistent with the
goals of Regulation Best Interest by
reducing the agency costs associated
with an associated person’s incentives
created by these conflicts of interest,
which would benefit the retail
customer.
Furthermore, the option to address
conflicts of interest through elimination
allows broker-dealers to reduce the
compliance costs associated with
managing conflicts of interest. For
example, if a broker-dealer determines it
is too costly to just disclose a conflict of
interest as required under the Conflict of
Interest Obligation, the broker-dealer
could choose to eliminate the conflict.
On the other hand, by eliminating a
conflict of interest, a broker-dealer may
forgo the potential revenues associated
with that conflict of interest.
also supra Section III.B.4.c, which discusses in
more detail these effects.

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b. Mitigation of Certain Incentives to the
Associated Persons
The requirement to establish,
maintain, and enforce written policies
and procedures reasonably designed to
identify and mitigate conflicts of
interest that create an incentive for the
associated person of the broker-dealer to
place the interest of the broker-dealer or
the associated person ahead of the
interest of the retail customer will likely
affect the relationship between the
broker-dealer and its associated persons,
the menu of securities that the brokerdealer makes available to its associated
persons, and the recommendations that
the broker-dealer and its associated
persons provide to retail customers. In
the employment relationship between a
broker-dealer and its associated persons,
the broker-dealer generally hires and
compensates associated persons to
perform certain services (e.g., providing
recommendations on securities
transactions and investment strategies to
retail customers) using the brokerdealer’s framework (e.g., policies and
procedures to ensure compliance with
applicable laws and rules, supervisory
systems that monitor for potential
violations of policies and procedures,
etc.). The compensation that the
associated person receives from the
broker-dealer may reflect the level of
effort that the broker-dealer expects the
associated person to exert when
performing a service, given the brokerdealer’s infrastructure. As noted above,
the broker-dealer may also structure the
associated person’s compensation to
create incentives that are consistent
with maximizing the broker-dealer’s
objectives.
The requirement to establish,
maintain, and enforce written policies
and procedures reasonably designed to
identify and mitigate conflicts of
interest that create an incentive for the
associated person of the broker-dealer to
put the interest of the broker-dealer or
the associated person ahead of the
interest of the retail customer may affect
the employment relationship between
the broker-dealer and the associated
person in several ways. First, the
requirement may change a brokerdealer’s existing policies and
procedures that are designed to achieve
compliance with the regulatory baseline
as well as the supervisory systems that
allow the broker-dealer to monitor for
potential violations by the associated
persons of these policies and
procedures. To this end, broker-dealers
will need to consider the amount of
time and level of resources to devote to
design and establish policies and
procedures that seek to reduce the

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likelihood of an associated person
placing its interest or the interest of the
broker-dealer ahead of the interests of a
retail customer when providing
recommendations to retail customers.
Another way that this requirement
may affect the employment relationship
between the broker-dealer and the
associated person is by changing the
level of effort that the associated person
would have to exert to ensure that all
recommendations supplied to retail
customers are compliant with the
Conflict of Interest Obligation. As a
corollary, this requirement may also
affect the level of effort that a supervisor
would have to exert to ensure that the
recommendations supplied by its
associated persons to a retail customer
comply with the obligations of
Regulation Best Interest.
As discussed above in the context of
the Care Obligation, an associated
person would have to not only consider
a number of factors when making a
recommendation to a retail customer,
but also ensure that the
recommendation is in the best interest
of the retail customer. The
determination that a recommendation is
in the retail customer’s best interest may
depend on the conflicts of interest that
exist at the time the associated person
makes the recommendation, and,
importantly, on how the broker-dealer
complies with the requirement to
establish, maintain, and enforce policies
and procedures reasonably designed to
identify and mitigate or eliminate
conflicts of interest that create an
incentive for the associated person to
put the interest of the broker-dealer or
the associated person ahead of the
interest of the retail customer. It is
possible that more effective policies and
procedures may lower the level of effort
an associated person would have to
exert to have a reasonable basis to
believe that recommendations are
compliant with Regulation Best Interest,
in the sense that a supervisor or the
broker-dealer would determine whether
the effect of the associated person’s or
the broker-dealer’s conflicts of interest
is reduced to the point where the
incentives created by these conflicts do
not have a negative effect on the
recommendations. However, the
potential increase in the supervisor’s
level of effort may substitute for the
potential decrease in the associated
person’s level of effort.
One commenter had concerns about
the discussion in the Proposing Release
about the effect of the compensation
arrangements between the broker-dealer
and the associated person on the effort
exerted by the associated person when

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providing a recommendation.1275 This
commenter stated that if the
compensation leads to lower effort, the
associated person would not make
recommendations that are in the retail
customer’s best interest. As discussed
above, the Commission notes that the
relationship between the effort exerted
to make a recommendation and the
efficiency of the recommendation is
complex, and that lower effort may not
necessarily be inconsistent with
increasing the efficiency of the
recommendation.
Finally, the Conflict of Interest
Obligation may affect the compensation
arrangement between the broker-dealer
and its associated persons. Certain
compensation arrangements may create
incentives for an associated person to
place his or her interest of the interest
of the broker-dealer ahead of the interest
of the customer, and therefore create
conflicts of interest for the brokerdealer’s associated persons. For
example, as discussed above in Section
III.B.1.f, broker-dealers commonly
compensate their associated persons
based on commissions and
performance-based awards. These
compensation arrangements create
incentives for associated persons to
recommend securities or investment
strategies that generate more
commissions to the broker-dealer and
potentially themselves over other
securities or investment strategies.
The Conflict of Interest Obligation
requires a broker-dealer to have policies
and procedures that are reasonably
designed to identify and disclose and
mitigate, or eliminate, any conflicts of
interest associated with
recommendations that create an
incentive for the associated person or
the firm to place the interest of the
associated person or the firm ahead of
the interest of the retail customer,
including conflicts of interest that arise
from compensation arrangements
between broker-dealers and their
associated persons. Depending on how
a broker-dealer complies with the
Conflict of Interest Obligation,
compensation arrangements between
broker-dealers and their associated
persons may change as a result of
establishing these policies and
procedures. For example, as discussed
above in Section III.B.2.e, in response to
the DOL Fiduciary Rule, which among
other things, was designed to restrict
broker-dealer activities and reduce the
conflicts of interest of a broker-dealer
and those of its associated persons,
some broker-dealers altered the
compensation for their associated
1275 See

AARP August 2018 Letter.

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persons. Specifically, some brokerdealers chose to equalize commissions
and deferred sales charges charged
across similar securities or investment
strategies. Others chose to restrict or
eliminate sales quotas, contests, special
awards, and bonuses, including deferred
bonuses as part of the recruitment
efforts.1276 It is possible that some
broker-dealers may choose to comply
with the Conflict of Interest Obligation
by establishing policies and procedures
that would address conflicts using these
or similar methods. It is also possible
that some broker-dealers may rely on
existing policies and procedures that
address conflicts through methods such
as compliance and supervisory systems
that are consistent with the Conflict of
Interest Obligation.
Some of these methods may reduce
the overall compensation of the
associated person from providing
recommendations (e.g., altering certain
bonuses). The same methods or others
(e.g., altering deferred recruiting
bonuses) may complicate a brokerdealer’s hiring of new associated
persons. However, to the extent that
these methods address the conflicts of
interest of a broker-dealer or those of its
associated persons in an effective
manner, these methods may enhance
the efficiency of the recommendations
provided by a broker-dealer and its
associated persons, and, therefore
benefit retail customers.
In general, if a broker-dealer
implements policies and procedures
pursuant to the Conflict of Interest
Obligation that may result in a
significant reduction in the overall
compensation that an associated person
receives from providing
recommendations, the associated person
may have an incentive to register as an
investment adviser, if not already
registered as one, and provide advice
mostly or only in an investment adviser
capacity.
To the extent broker-dealers establish,
maintain, and enforce policies and
procedures that are effective at reducing
the incentives of an associated person to
put the interest of the broker-dealer or
the associated person ahead of the
interest of the retail customer, the
Conflict of Interest Obligation would
reduce the effect of these conflicts on
the recommendations provided by
associated persons to retail customers.
1276 However, we understand that following the
decision by the Fifth Circuit to vacate the DOL
Fiduciary Rule, some broker-dealers may have
reverted back to compensation arrangements that
they had in place prior to the DOL Fiduciary Rule.
For instance, as discussed in Section III.B.2.e.ii,
supra, some broker-dealers reinstated their deferred
recruiting bonuses.

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In this way, complying with the Conflict
of Interest Obligation would increase
the efficiency of the recommendations
for retail customers, relative to the
regulatory baseline. This, in turn, would
reduce the agency costs associated with
the broker-dealer’s and its associated
persons’ incentives that are created by
their conflicts of interest. Lower agency
costs at these broker-dealers would
benefit retail customers.
One commenter noted that the size of
these benefits of Regulation Best Interest
should be quantified relative to the
baseline that includes the current
regulatory regime as well as current
practices.1277 The Commission agrees
with the commenter and notes that, as
discussed in Section III.B, brokerdealers may already have compliance
and supervisory systems in place that
are effective at reducing to a reasonable
extent the effect of an associated
person’s conflicts of interest on the
recommendations provided to retail
customers.1278 Therefore, for the retail
customers of these broker-dealers, the
potential benefits above may be small.
In contrast, for the retail customers of
the broker-dealers that are not currently
addressing conflicts of interest in a
manner consistent with Regulation Best
Interest, the potential benefits above
may be large.
This commenter further stated that
the economic analysis in the Proposing
Release did not provide a thorough
discussion of the relationship between
the broker-dealer and its associated
persons with a focus on the incentives
of the associated persons.1279 The
Commission notes that the analysis
above about the incentives of the
associated persons expands the analysis
in the Proposing Release and establishes
a clear link between compensation and
incentives.
As noted in the economic analysis of
the Proposing Release,1280 brokerdealers may also adjust their menus of
securities in response to the
requirement to establish, maintain, and
enforce written policies and procedures
reasonably designed to identify and
mitigate conflicts of interest that create
an incentive for the associated person to
place his or her interest or the interest
of the broker-dealer ahead of the interest
of the retail customer. It is possible that
some broker-dealers may decide to
expand their offerings to better comply
with the process required pursuant to
the Conflict of Interest Obligation. For
instance, broker-dealers that currently
1277 See

CFA August 2018 Letter.
FINRA Conflicts Report.
1279 See CFA August 2018 Letter.
1280 See Proposing Release at 21658.
1278 See

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offer advice only on a limited set of
securities (e.g., proprietary securities)
would have to disclose and evaluate
their menu of securities to ensure that
their policies and procedures regarding
their limited menus of securities and the
disclosures of any conflicts associated
with such limitations do not result in
recommendations that place the interest
of the broker-dealer or its associated
persons ahead of the retail customer’s
interest.
Broker-dealers may also manage
conflicts of interest by limiting their
menu of securities on which they offer
recommendations. Broker-dealers may
prefer a limited menu of securities to
better mitigate the potential costs
associated with compliance of
Regulation Best Interest. For instance, a
limited menu of securities may result in
more homogenous product fees across
comparable securities or investment
strategies, which would help reduce the
effect of certain conflicts of interest on
the recommendations provided to retail
customers. Broker-dealers may also
respond by limiting their menus of
securities because they may have
conflicts of interest due to variation in
the compensation they receive from
product sponsors, as discussed above.
It is possible that complying with the
Conflict of Interest Obligation in this
manner may result in securities menus
that limit an associated person’s choices
of investments when providing a
recommendation to a retail
customer.1281 However, as discussed
below, the requirements of the Conflict
of Interest Obligation and the Care
Obligation are intended to reduce the
likelihood that limitations on securities
menus result in recommendations that
are not in the best interest of the retail
customer.1282
It is also possible that broker-dealers
that limit their menus of securities in
response to the Conflict of Interest
Obligation may eliminate securities or
investment strategies that are inferior
relative to other securities or investment
strategies in terms of performance and
costs. Recommendations based on
menus of securities that do not contain
inferior securities or investment
strategies are more likely to be efficient
for the retail customer. To the extent
broker-dealers eliminate inferior
investments from their securities menus
as a result of complying with the
Conflict of Interest Obligation,
Regulation Best Interest would provide
1281 See

supra Section II.C.2.
example, if none of the securities on the
menu would be in the best interest of the retail
customer in a given set of circumstances, the
associated person may not recommend any of the
securities on the menu to the retail customer.
1282 For

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c. Material Limitations on
Recommendations to Retail Customers
The Conflict of Interest Obligation
includes a requirement that specifically
addresses material limitations on
recommendations to retail customer
(e.g., offering only proprietary or other
limited range of securities). This
provision requires broker-dealers to
establish, maintain, and enforce written
policies and procedures reasonably
designed to identify and disclose any

material limitations placed on securities
or investment strategies that may be
recommended to a retail investor and
any conflicts of interest associated with
such limitations in accordance with the
Disclosure Obligation. It further requires
such policies and procedures to be
reasonably designed to prevent such
limitations and associated conflicts of
interest from causing the broker-dealer
or its associated persons to make
recommendations that place the interest
of the broker-dealer or associated
persons ahead of the interest of the
retail customer.
As noted above, broker-dealers may
limit their menus of securities in
response to certain requirements of the
Conflict of Interest Obligation. The
requirements that address limited
menus of securities are designed to help
ensure that these limitations and
associated conflicts of interest do not
create incentives for the broker-dealer or
its associated persons to make
recommendations that are not in the
best interest of the retail customer. The
second aspect of the requirement would
seek to ensure that the menu of
securities is not limited to the point
where it restricts a broker-dealer and its
associated persons from complying with
the Care Obligation, and in particular
with the requirement to provide
recommendations that are in the
customer’s best interest.1284 To the
extent these requirements reduce the
effect of the limitations of the menu of
securities and the associated conflicts of
interest on the recommendations
provided by a broker-dealer or its
associated persons, the Conflict of
Interest Obligation would result in
recommendations that are more likely to
be efficient, relative to the baseline.
The requirements that address
limitations of the menu of securities
may have additional implications for
certain product markets, and ultimately,
retail customers. To better understand
these implications we focus the
discussion on the market for mutual
funds.
As discussed in Section III.B.3,
academic literature has noted that in
certain product markets, such as mutual
funds, the different distribution
channels that product sponsors use to
reach the retail customer may cause
these markets to fragment. In the market
for mutual fund products, some
products are sold to retail customers
only through broker-dealers—the socalled ‘‘broker-sold’’ distribution
channel—while other products are sold

1283 See, e.g., CFA August 2018 Letter; AARP
August 2018 Letter; EPI Letter; Better Markets
August 2018 Letter.

1284 Broker-dealers that offer a limited menu of
securities may not be able to offer recommendations
to certain clients. See also supra footnote 1282.

a benefit for the retail customers of these
broker-dealers.
Broker-dealers may pass on some of
the compliance costs to their retail
customers. For instance, broker-dealers
may increase their fees on the services
that they provide to retail customers as
part of the relationship, or may adopt
new fees. Alternatively, broker-dealers
may seek to renegotiate their
compensation arrangements with the
product sponsors in the hopes of
extracting greater compensation (e.g.,
more attractive revenue-sharing
agreements), relative to current
practices. The likelihood of a favorable
outcome for the broker-dealers may
depend on whether product sponsors
can charge their retail customers higher
fees. However, it is likely that product
sponsors are already charging fees that
are privately optimal (e.g., maximize
their revenue net of costs), and thus any
deviations from these fees would lead to
a suboptimal outcome for the product
sponsors. In other words, product
sponsors may not have an incentive to
increase their fees.
A number of commenters stated that
policies and procedures that address
how broker-dealers manage conflicts of
interest relating to limited menus of
securities could impose costs on a retail
customer when all securities on the
menu have high fees or create a benefit
for retail customers if securities with
high fees are eliminated.1283 As noted in
the Proposing Release and above, the
Commission acknowledges the benefits
to the retail customers of the brokerdealers that comply with Regulation
Best Interest by eliminating inferior
securities or investment strategies. The
Commission also acknowledges the
potential costs of limited menus of
securities by expanding the Conflict of
Interest Obligation to include
requirements that would address
specifically limited menus of securities
and by providing a detailed analysis of
the economic implications of these
requirements, below.

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directly to retail customers—the socalled ‘‘direct-sold’’ distribution
channel.1285 The products that are sold
through the broker-sold channel usually
carry higher fees relative to comparable
products that are sold through the
direct-sold channel.1286 Higher fees on
the broker-sold products reflect brokerdealers’ compensation for distributing
the product. In general, all transactions
linked to the broker-sold distribution
channel are triggered by a
recommendation provided by an
associated person of the broker-dealer.
Most product sponsors currently rely on
one of the two channels to distribute
their products, but not on both.1287
A retail customer that has an account
with a broker-dealer that provides
advice is not necessarily constrained to
accessing products only through the
broker-sold channel. A retail customer
could access products from the directsold channel to transact on his or her
own (for example, if the broker-dealer
may not provide recommendations on a
particular product).1288 A retail
customer who has access to products
from both distribution channels and
who understands the effect of fees on a
product’s performance may prefer to
access a product through the broker-sold
channel if, for example, the combined
cost of identifying (e.g., search costs)
and accessing comparable direct-sold
products (e.g., product fee) is higher
than the total cost of the broker-sold
product recommended by the associated
person of the broker-dealer.1289 As more
direct-sold products enter the
market,1290 the retail customer’s cost of
identifying 1291 direct-sold products that
1285 In this discussion, the broker-sold
distribution channel includes sales that are the
result of a recommendation provided by the brokerdealer but may also include sales that are solicited
by the retail customer where no advice or
recommendation was provided by the broker-dealer
(i.e., unadvised sales). The direct-sold distribution
channel includes unadvised sales through brokerdealer open platforms as well as sales that the retail
customer solicits directly from the product sponsor.
Investment advisers may also access products
through the direct-sold distribution channel.
1286 See, e.g., Del Guercio & Reuter (2014).
1287 See, e.g., Del Guercio & Reuter (2014), supra
footnote 1081, and Reuter (2015), supra footnote
1095.
1288 A retail customer could also access securities
through financial professionals that are not brokerdealers, including investment advisers.
1289 Some broker-dealers may offer securities to
retail customers through both distribution channels,
but these broker-dealers provide recommendations
only on securities offered through the broker-sold
channel. For example, some broker-dealers with
open platforms may only provide recommendations
on proprietary securities.
1290 See, e.g., ICI Letter, which shows an
increasing trend in the number of mutual funds
with no 12b-1 fees over the past 10 years. These
funds are available through the direct-sold channel.
1291 Broker-dealers with open platforms that
allow retail customers to access securities on this

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are comparable alternatives to a brokersold product recommended by an
associated person of the broker-dealer
may become lower.1292 In turn, the
retail customer’s demand for broker-sold
products may decline.1293
According to economic first
principles, when enough retail
customers exhibit a preference for
direct-sold products over broker-sold
products, the aggregate demand for
broker-sold products should decline. To
remain competitive, product sponsors
that rely on the broker-sold channel to
distribute their products would have to
lower the fees on their products. Lower
fees on broker-sold products may result
in lower compensation for brokerdealers and their associated persons
from providing recommendations on
these products. Lower fees on brokersold products would benefit retail
customers who access mutual fund
products through the broker-sold
channel.
This market mechanism would allow
retail customers’ demand to affect how
product sponsors compensate brokerdealers for recommending broker-sold
products. While this mechanism is
currently available to retail customers
and is considered generally effective, it
is not clear how effective this
mechanism is in all aspects of the
market, particularly in the short run.1294
platform without a recommendation from the
broker-dealer and its associated persons generally
provide extensive research and analytical tools. The
Commission has recently adopted rule amendments
that address research reports that broker-dealers
make available to their retail customers. See
Covered Investment Fund Research Reports,
Release 33–10580 (Nov 30, 2018); 83 FR 64180
(Dec. 13, 2018).
1292 See, e.g., Ali Hortacsu & Chad Sylverson,
Product Differentiation, Search Costs, and
Competition in the Mutual Fund Industry: A Case
Study of S&P 500 Index Funds, 119 Q. J. Econ. 403
(2004), who estimate an investor’s search costs for
S&P500 index funds and show that, as the number
of S&P500 index funds increased over their sample
period spanning 1995 to 2000, the investor’s search
costs generally declined. The authors further show
that this downward trend was driven by funds that
are in lower end of the search cost distribution and
that these funds were mostly no-load funds. These
no-load funds are usually available through the
direct-sold channel.
1293 However, a retail customer may value the
services provided by a broker-dealer that extend
beyond the provision of recommendations on
securities transactions and investment strategies
and continue to maintain an account with the
broker-dealer. To counter the potential decline in
the demand for broker-sold products, a brokerdealer may respond by offering more services and
increasing the fee for the package of services or by
trying to shift the retail customer to a potentially
more profitable advisory account (to the extent that
the broker-dealer offers this type of accounts).
1294 Recent academic research questions the
effectiveness of the market mechanism, at least in
the short run. See. e.g., Yang Sun, Does Competition
Protect Retail Investors? Role of Financial Advice
(Working Paper, Apr. 2017), available at https://

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As noted by one commenter, the
expense ratio for domestic equity
mutual funds declined from 0.86
percent in 2007 to 0.59 percent in 2017,
a 31% reduction over the ten year
period.1295 This commenter further
notes that this downward trend in
expense ratios reflects, among other
things, a ‘‘long-running shift by
investors toward lower-cost funds.’’
Because the number of low-cost funds
that enter the market over the period
2007–2017 has increased substantially,
the assessment of this commenter would
appear to be consistent with the market
mechanism being effective in the long
run.1296
As noted above, the effectiveness of
the market mechanism may depend on
a number of factors, including the retail
customer’s ability to understand the
effect of fees on the performance of a
product and willingness to shop around
for comparable products, the product
sponsor’s ability to signal how its
broker-sold products stand out among
comparable products, and the brokerdealer’s menu and the disclosure about
potential limitations of this menu.1297
The Conflict of Interest Obligation
may improve the effectiveness of this
market mechanism through the
requirement that broker-dealers
establish, maintain, and implement
written policies and procedures
reasonably designed to identify and
disclose all material limitations of
products that may be recommended and
any associated conflicts of interest. This
requirement would result in disclosures
that, while not necessarily new relative
to the regulatory baseline, may increase
the salience of the limitations of product
menus and the associated conflicts of
coller.tau.ac.il/sites/coller-english.tau.ac.il/files/
media_server/Recanati/management/conferences/
finance/2017/61.pdf. This research shows that the
sudden entry of several low-cost index funds
caused direct-sold actively managed funds with
similar investment objectives to cut their fees by 6.4
basis points. In contrast, broker-sold actively
managed funds with similar investment objectives
as the new entrant funds increased their fees by
12.2 basis points. The study further shows that
while some of the fee increase in the broker-sold
funds is accompanied by increased levels of active
management, most of the fee increase (more than
60%) was passed on to broker-dealers. The author
argues that the broker-sold actively managed funds
are able to increase their fees only to the extent that
they can signal to the market that they are not
employing strategies that mimic index funds.
1295 See ICI Letter.
1296 Id. at 42.
1297 As noted in supra footnote 1292, the
effectiveness of this market mechanism may also
depend on whether broker-dealers offer advisory
accounts and whether these broker-dealers can
convince retail customers to switch to an advisory
account rather than to a self-directed account.

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interest for the retail customers.1298 The
added focus on these limitations may
cause some retail customers to question
whether the recommendations that they
are receiving are taking into
consideration a reasonable set of
alternatives. Thus, this disclosure may
encourage retail customers to shop for
comparable products that they may
prefer (e.g., based on cost factors) over
the broker-sold products that are being
recommended to them.
As an example, a broker-dealer that is
providing recommendations only for
proprietary products would have to
disclose, the material limitation that the
products on the menu are all
proprietary, and the material fact of the
conflict of interest that the broker-dealer
and its associated persons are being
compensated for selling these products.
As discussed above in Section II.C.3.f,
there are a number of other potential
conflicts of interest associated with
proprietary products. While brokerdealers may disclose this information
under the regulatory baseline, it is not
clear the manner in which this
disclosure currently reaches the retail
customer.1299 The new required
disclosure with respect to conflicts of
interest (under the Disclosure
Obligation) is intended to be more
comprehensive and more specific, and
is also intended to reach the retail
customer more directly. From this
perspective, the disclosure of the
limitations of the product menu and its
associated conflict of interest may better
inform retail customers’ choices and,
therefore, may be more effective,
compared to current disclosure forms of
the same information. While, generally,
the effectiveness of disclosure depends
on many factors that are well known in
the academic literature, the disclosure
requirement of the Conflict of Interest
Obligation may also depend on the
range of material facts that the brokerdealer deems necessary to disclose in
order to be in compliance with the
obligation.1300
The Conflict of Interest Obligation
addresses limited product menus by
requiring that broker-dealers take
measures through reasonably designed
written policies and procedures to
evaluate and prevent the limitations and
the associated conflicts of interest from
causing associated persons of the
broker-dealer to make recommendations
that are inconsistent with the
requirements of Regulation Best Interest.
1298 See

supra footnote 1272 and accompanying

text.
1299 See,

e.g., 913 Study.
supra Section III.B.4.c for a detailed
discussion of the academic literature on disclosure
effectiveness.

The requirement seeks to address
specific firm-level conflicts—namely,
the conflicts associated with the
establishment of a product menu—
which are likely to affect
recommendations made to retail
customers and may result in
recommendations that place the interest
of the broker-dealer or its associated
persons ahead of the interest of the
retail customer.
This requirement may have a direct
effect on the relationship between
broker-dealers and product sponsors. To
the extent that enough broker-dealers
decide to no longer offer
recommendations on certain types of
products that carry higher fees (i.e.,
exclude them from the menus), the
aggregate demand for such products
may decline. Product sponsors that face
declining demand for some of their
products may respond by lowering the
fees on these products or by repackaging
these products into new and more
competitive products that may again
draw the interest of the broker-dealers.
d. Elimination of Certain Sales Practices
As part of the Conflict of Interest
Obligation in Regulation Best Interest,
broker-dealers are required to establish,
maintain, and enforce written policies
and procedures reasonably designed to
identify and eliminate any sales
contests, sales quotas, bonuses, and
non-cash compensation that are based
on the sales of specific securities or
specific types of securities within a
limited period of time. The Commission
believes that the conflicts of interest
associated with these practices that may
create high-pressure situations for the
associated persons of the broker-dealer
to recommend a specific security over
another cannot be reasonably addressed
through disclosure and mitigation and
should be addressed through
elimination in order to comply with the
requirements of Regulation Best
Interest.1301
Relative to the regulatory baseline,
this requirement would provide benefits
to retail customers. Conflicts of interest
that create incentives for the associated
persons to recommend a specific
security (or specific types of securities)
over another are likely to have a
significant effect on an associated
person’s recommendation, even if such
conflicts were disclosed and mitigated
via policies and procedures established,
maintained and enforced by the brokerdealer. By explicitly requiring policies
and procedures reasonably designed to
eliminate sales practices that may result

1300 See

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1301 See

also the discussion in Section II.C.3.g,

supra.

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in such conflicts, the requirement
should neutralize the effect of these
conflicts on the recommendations
provided by associated persons to retail
customers. The absence of these
conflicts when the associated person is
considering reasonably available
alternatives for a recommendation to a
retail customer, as noted in the
discussion of the Care Obligation, may
increase the efficiency of the
recommendation for their retail
customers. As discussed above in
Section III.A.2, this outcome is
consistent with Regulation Best Interest
reducing the agency costs associated
with a broker-dealer’s incentives or the
incentives of its associated persons
created by these conflicts of interest,
which, in turn, would benefit the retail
customer.
The requirement to establish policies
and procedures reasonably designed to
eliminate certain sales practices may
reduce the total compensation that a
broker-dealer and its associated person
receives from providing
recommendations to retail customers.
As discussed above, to the extent that
the reduction in an associated person’s
total compensation is sufficiently large,
the associated person may have an
incentive to register as an investment
adviser and provide investment advice
only in his or her advisory capacity.
Furthermore, the potential decline in
the total compensation of an associated
person of the broker-dealer due to this
requirement may dissuade financial
professionals from providing advice in
the capacity of a broker-dealer, and as
a result, broker-dealers may find it more
difficult to hire new associated persons,
relative to the baseline.
In addition, the types of sales
practices that this requirement is meant
to address generally create incentives
for associated persons to recommend
certain types of securities or investment
strategies over certain time periods over
other types of securities or investment
strategies. By requiring broker-dealers to
establish policies and procedures
reasonably designed to eliminate certain
sales practices that create these types of
incentives, broker-dealers may
experience a reduction in the revenue
stream associated with certain securities
or investment strategies. Thus, through
this requirement, Regulation Best
Interest may impose a cost on the
broker-dealers that currently rely on
these types of practices in order to
incentivize sales. On the other hand,
retail customers who have born costs
associated with such practices will
benefit from the cessation of these sales
practices.

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As discussed above, while we are
unable to quantify the full costs of
Regulation Best Interest, including the
Conflict of Interest Obligation, we are
able to estimate some of the costs
associated with the Conflict of Interest
Obligation, specifically the costs related
to information collection requirements
as defined by the Paperwork Reduction
Act. As discussed further in Section
IV.B.1, the Commission believes that
broker-dealers would update their
policies and procedures to comply with
this requirement and would incur an
initial aggregate burden of
approximately 128,160 hours and an
additional initial aggregate cost of
approximately $25 million, as well as an
ongoing aggregate annualized burden of
approximately 27,900 hours, and an
ongoing aggregate annualized cost of
approximately $2.91 million.1302
Furthermore, the Commission believes
that in order to identify conflicts of
interest and determine whether the
conflicts are material, broker-dealers
would incur an initial aggregate burden
of approximately 69,150 hours and an
additional initial aggregate cost of
approximately $15.71 million as well as
an ongoing aggregate annualized burden
of approximately 27,660 hours.1303
Thus, we estimate the Conflict of
Interest Obligation of proposed
Regulation Best Interest would impose
an initial aggregate cost of at least
$110.73 million and an ongoing
aggregate annual cost of at least $20.44
million on broker-dealers.1304
1302 These estimates are based on the following
calculations: 120,600 hours + 7,560 hours = 128,160
hours; $10 million + $15 million = $25 million; and
24,120 hours + 3,780 hours = 27,900 hours. As
discussed in more detail in infra Section V.D,
120,600 hours and 7,560 hours are preliminary
estimates for the initial aggregate burdens for large
and small broker-dealers, respectively, $10 million
and $15 million are preliminary estimates for the
initial aggregate costs for large and small brokerdealers, respectively, and 24,120 hours and 3,780
hours are preliminary estimates for the ongoing
aggregate burdens for large and small brokerdealers, respectively.
1303 The estimate of the initial aggregate burden
is based on the following calculations: 13,830 hours
+ 55,320 hours = 69,150 hours, where, as discussed
in more detail in Section V.D, 13,830 hours and
55,320 hours are estimates for the initial aggregate
burdens for identifying conflicts of interest and
determining whether the conflicts are material for
all broker-dealers, respectively.
1304 These estimates are calculated as follows:
(90,450 hours of in-house legal counsel) × ($415.72/
hour for in-house counsel) + (27,660 hours for inhouse compliance counsel) × ($365.39/hour for inhouse compliance counsel) + (27,660 hours for
identifying conflicts of interest) × ($229.74/hour for
business line personnel) + (51,540 hours for review
of policies and procedures) × ($309.60/hour for inhouse compliance manager) + (50,302 hours for
outside legal counsel) × ($497/hour for outside legal
counsel) + (55,317 hours for modifying existing
technology) × ($284/hour for outside senior
programmer) = $110.73 million, and (8,040 hours of

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5. Compliance Obligation
The Compliance Obligation of
Regulation Best Interest requires brokerdealers to establish, maintain, and
enforce written policies and procedures
reasonably designed to achieve
compliance with Regulation Best
Interest.1305 This obligation creates an
affirmative obligation under the
Exchange Act with respect to Regulation
Best Interest as a whole, while
providing sufficient flexibility to allow
broker-dealers to establish compliance
policies and procedures that
accommodate a broad range of business
models.1306
The Compliance Obligation is
designed to ensure that broker-dealers
have internal controls in place to
prevent violations of Regulation Best
Interest. The policies and procedures
required to comply with this obligation
would allow the Commission to identify
and address potential compliance
deficiencies or failures (such as
inadequate or inaccurate policies and
procedures, or failure to follow the
policies and procedures) early on,
reducing the chance of retail customer
harm.1307
As discussed above in Section
III.B.2.d, under the regulatory baseline,
broker-dealers are subject to supervisory
obligations that, among other things,
require them to establish policies and
procedures reasonably designed to
prevent and detect violations of, and
achieve compliance with, the federal
securities laws and regulations,1308 as
well as applicable SRO rules.1309
Broker-dealers would have the ability to
update these policies and procedures to
comply with the Compliance
Obligation, rather than create new
policies and procedures.
in-house legal counsel) × ($415.72/hour for inhouse counsel) + (21,870 hours for in-house
compliance counsel) × ($365.39/hour for in-house
compliance counsel) + (21,870 hours for identifying
conflicts of interest) × ($229.74/hour for business
line personnel) + (3,780 hours for review of policies
and procedures) × ($309.60/hour for compliance
manager) + (3,783 hours for outside legal counsel)
× ($497/hour for outside legal counsel) + (3,773
hours for outside compliance services) × ($273/hour
for outside compliance services) = $20.44 million.
The hourly wages for in-house legal and
compliance counsel, registered representatives,
senior business analyst, compliance manager, and
business-line personnel are obtained from SIFMA.
The hourly rates for outside legal counsel, outside
senior programmer, systems analyst or programmer
and outside compliance services are discussed in
infra Section V.D.
1305 These policies and procedures are in addition
to the policies and procedures required under the
Conflict of Interest Obligation.
1306 See supra Section II.C.4.
1307 See supra Section II.C.4.
1308 See Section 15(b)(4)(E) of the Exchange Act.
1309 See FINRA Rule 3110 (Supervision).

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The obligation indirectly benefits
retail customers by ensuring that brokerdealers have sufficient internal controls
in place to support compliance with
Regulation Best Interest.
The obligation will impose
compliance costs on broker-dealers.
However, these costs are likely to be
smaller for those broker-dealers that
already have effective compliance
systems in place, including effective
policies and procedures.
Broker-dealers may incur operational
costs related to training their associated
persons and developing policies and
procedures to ensure compliance with
the Care Obligation. For example,
broker-dealers may have to provide
training to their employees and other
associated persons on how to make
recommendations that do not place the
interest of the broker-dealer or their
associated persons ahead of the interest
of the retail customer. In the Proposing
Release, these training costs were
discussed as part of a separate general
best interest obligation, and our
assessment of those costs has not
changed.1310 Broker-dealers also may
incur costs related to training their
associated persons on how to determine
that they have a reasonable basis to
believe that a recommendation is in a
retail customer’s best interest. This may
include training on how to evaluate the
potential risks, rewards, and costs
associated with a recommendation as
well as how a retail customer’s
investment profile affects this
determination. Additionally, brokerdealers may incur costs related to
training their associated persons on any
relevant factors specific to making
recommendations regarding IRAs, IRA
rollovers, or other account types, as well
as implicit hold recommendations
resulting from agreed-upon account
monitoring. These training costs will be
lower for broker-dealers that already
operate in a manner that is consistent
with the requirements of the Care
Obligation and higher for those that do
not. Firms may already comply with the
requirements of the Care Obligation, to
varying degrees, either of their own
volition or because they are already
subject to and comply with similar
obligations.
As discussed above, while we are
unable to quantify the full costs of
Regulation Best Interest, including the
Compliance Obligation, we are able to
estimate some of the costs associated
with the Compliance Obligation,
specifically the costs related to
information collection requirements as
defined by the Paperwork Reduction
1310 See

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Act. As discussed further in Section
IV.B.1, the Commission believes that
broker-dealers would update their
policies and procedures to comply with
this requirement. We estimate that
broker-dealers would incur an initial
aggregate burden of 524,404 hours and
an additional initial aggregate cost of
approximately $76.3 million, as well as
an ongoing aggregate annualized burden
of 452,524 hours, and an ongoing
aggregate annualized cost of
approximately $2.91 million.1311 Thus,
the Compliance Obligation of
Regulation Best Interest would impose
an initial aggregate cost of at least
$214.66 million and an ongoing
aggregate annual cost of at least $110.86
million on broker-dealers.1312

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6. Record-Making and Recordkeeping
Regulation Best Interest will also
impose record-making and
1311 These estimates are based on the following
calculations: 80,400 hours + 4,536 hours + 11,064
hours + 428,404 hours= 524,404 hours; $6 million
+ $7.5 million + $62.8 million = $76.3 million; and
24,120 hours + 428,404 hours = 452,524 hours. As
discussed in more detail in infra Section V.D,
80,400 hours, 4,536 hours, 11,064 hours and
428,404 hours are estimates for the initial aggregate
burdens for large and small broker-dealers,
updating training module, and training,
respectively. In addition, $6 million, $7.5 million,
and $62.8 million are estimates for the initial
aggregate costs for large and small broker-dealers
and updating training modules, respectively.
Furthermore, 24,120 hours and 428,404 hours are
estimates for the ongoing aggregate burdens for
large broker-dealers and training, respectively.
Finally, $2.91 million is the estimate of the ongoing
aggregate cost for small broker-dealers.
1312 These estimates are calculated as follows:
(65,832 hours of in-house legal counsel) × ($415.72/
hour for in-house counsel) + (4,536 hours for inhouse compliance counsel) × ($365.39/hour for inhouse compliance counsel) + (10,050 hours for
reviewing policies and procedures) × ($446.04/hour
for in-house general counsel) + (15,582 hours for
reviewing policies and procedures and update
existing training systems) × ($309.60/hour for inhouse compliance manager) + (428,404 hours for
training) × ($233.02/hour for registered
representative) + (27,163 hours for outside legal
counsel) × ($497/hour for outside legal counsel) +
(221,127 hours for updating training module) ×
($284/hour for outside senior programmer or
systems analyst)= $214.66 million, and (8,040 hours
of in-house legal counsel) × ($415.72/hour for inhouse counsel) + (8,040 hours for in-house
compliance counsel) × ($365.39/hour for in-house
compliance counsel) + (8,040 hours for updating
policies and procedures) × ($229.74/hour for
business line personnel) + (8,040 hours for
reviewing policies and procedures) × ($309.60/hour
for compliance manager) + (3,783 hours for outside
legal counsel) × ($497/hour for outside legal
counsel) + (3,773 hours for outside compliance
services) × ($273/hour for outside compliance
services) + (428,404 hours of training) × ($233.02/
hour for registered representative) = $110.86
million. The hourly wages for in-house legal and
compliance counsel, registered representatives,
senior business analyst, compliance manager, and
business-line personnel are obtained from SIFMA.
The hourly rates for outside legal counsel, outside
senior programmer, systems analyst or programmer
and outside compliance services are discussed in
infra Section V.D.

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recordkeeping requirements on brokerdealers with respect to certain
information collected from, or provided
to, retail customers. The Commission is
amending Rules 17a–3 and 17a–4 of the
Exchange Act, which specify minimum
requirements with respect to the records
that broker-dealers must make, and how
long those records and other documents
must be kept, respectively. We are
amending Rule 17a–3 by adding a new
paragraph (a)(35) that requires a record
of all information collected from, and
provided to, the retail customer
pursuant to Regulation Best Interest, as
well as the identity of each natural
person who is an associated person of
a broker or dealer, if any, responsible for
the account. This requirement applies to
each retail customer to whom a
recommendation of any securities
transaction or investment strategy
involving securities is provided. The
neglect, refusal, or inability of a retail
customer to provide or update any
information about the customer
investment profile will, however,
excuse the broker-dealer from obtaining
that information. Rule 17a–4(e)(5) will
be amended to require that brokerdealers retain all records of the
information collected from or provided
to each retail customer pursuant to
Regulation Best Interest for at least six
years after the earlier of the date the
account was closed or the date on which
the information was last replaced or
updated.
The requirement to create certain
written records of information collected
from or provided to a retail customer
under the Disclosure Obligation will
trigger a record-making obligation under
paragraph (a)(35) of Rule 17a–3 and a
recordkeeping obligation under Rule
17a–4(e)(5) that may impose additional
compliance costs on broker-dealers. In
cases where broker-dealers choose to
meet part of the Disclosure Obligation
orally under the circumstances outlined
above in Section II.C.1, Oral Disclosure
or Disclosure After a Recommendation,
the requirement to maintain a record of
the fact that oral disclosure was
provided to the retail customer will
trigger a record-making obligation under
paragraph (a)(35) of Rule 17a–3 and a
recordkeeping obligation under Rule
17a–4(e)(5) that may impose additional
compliance costs on broker-dealers.
Furthermore, the Care Obligation may
require creating new documents or
modifying existing documents to reflect
standardized questionnaires seeking
customer investment profile
information. These requirements will
also trigger a record-making obligation
under paragraph (a)(35) of Rule 17a–3

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and a recordkeeping obligation under
Rule 17a–4(e)(5) that will impose
additional compliance costs on brokerdealers. Currently, under Rule 17a–
3(a)(17), broker-dealers that make
recommendations for accounts with a
natural person as customer or owner are
required to create, and periodically
update, specified customer account
information. However, the information
collection requirements of Rule 17a–
3(a)(17) do not cover all aspects of the
‘‘customer investment profile’’ that
broker-dealers may attempt to obtain to
make a customer-specific suitability
determination under the Suitability
Rule.
As noted above, the Conflict of
Interest Obligation requires brokerdealers to establish policies and
procedures that are reasonably designed
to address conflicts of interest,
including disclosing material facts
associated with the conflicts. The
disclosures will be made pursuant to the
Disclosure Obligation and are not
expected to trigger record-making or
recordkeeping obligations outside the
Disclosure Obligation.
The Commission is providing
estimates of the initial and ongoing
burden hours associated with the
record-making and recordkeeping
obligations of the Disclosure, Care, and
Conflict of Interest Obligations, under
certain assumptions. These estimates
are discussed in Section IV.B.5. Based
on these burden hours estimates, the
Commission expects that the recordmaking and recordkeeping obligations
of Regulation Best Interest will impose
an initial aggregate burden of 17,684,020
hours and an additional initial aggregate
cost of $375,732 as well as an ongoing
aggregate annualized burden of
5,520,800 hours on broker-dealers.1313
1313 These estimates are based on the
Commission’s estimates, discussed in Section
IV.B.5, with respect to the initial and ongoing
aggregate costs and burdens imposed on brokerdealers by the record-making obligation of proposed
Rule 17a–3(a)(35) and the recordkeeping obligation
of the proposed amendment to Rule 17a–4(e)(5)
associated with all component obligations of
Regulation Best Interest. The estimate of the initial
aggregate burden is based on the following
calculation: 4,020 hours + 4,080,000 hours +
13,600,000 hours = 17,684,020 hours, where, as
discussed in more detail in Section IV.B.5, 4,020
hours is the estimate of amending the account
disclosure agreement by large broker-dealers,
4,080,000 hours is the estimate of the burden
associated with filling out the information disclosed
pursuant to Regulation Best Interest in the account
disclosure agreement, and 13,600,000 hours is the
estimate of the burden to broker-dealers for adding
new documents or modifying existing documents to
the broker-dealer’s existing retention system.
$375,732 is the estimate of amending the account
disclosure agreement by small broker-dealers
pursuant to the record-making obligation of Rule
17a–3(a)(35). The estimate of the ongoing annual
burden is 3,400,00 hours + 1,060,000 hours +

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After monetizing the burden hours, the
record-making and recordkeeping
obligations will impose an initial
aggregate cost of at least $4,121.73
million and an ongoing aggregate annual
cost of at least $1,736.52 million on
broker-dealers.1314
7. Approaches to Quantifying the
Potential Benefits

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As discussed above, several
commenters suggested that we quantify
the existing harm to investors under the
baseline and the corresponding benefit
resulting from Regulation Best Interest.
We continue to believe that it is not
possible to quantify, with meaningful
precision, either the existing harm or
the specific benefits we expect to flow
from Regulation Best Interest. Such an
analysis, including one that would
produce ranges, depends on many
contingent factors that render any
estimate insufficiently precise to inform
our policy choices.1315 Nonetheless, the
Commission has endeavored to estimate
some of the potential benefits that may
result from Regulation Best Interest
using a variety of methodologies, which
are explained below in more detail
along with certain caveats and the
principal assumptions relied on.
Specifically, we have attempted to
estimate the benefit that may result from
a reduction in fees due to increased
competition; we also consider the
potential benefit arising from a
reduction in the relative performance
1,060,000 hours = 5,520,800 hours where 3,400,00
hours is the estimate of complying with the
recordkeeping obligation of the amendment to Rule
17a–4(e)(5) and 1,060,000 hours are estimates of
both the record-making and recordkeeping
obligations associated with oral disclosure.
1314 These estimates are calculated as follows:
(2,010 hours of in-house legal counsel) × ($415.72/
hour for in-house counsel) + (17,680,000 hours for
entering and adding new or modifying existing
documents in each customer account) × ($233.02/
hour for registered representative) + (2,010 hours
for in-house compliance counsel) × ($365.39/hour
for in-house compliance counsel) + (756 hours for
outside legal counsel) × ($497/hour for outside legal
counsel) = $4,121.73 million, and (3,400,000 hours
for recordkeeping) × ($365.39/hour for in-house
compliance counsel) + (1,060,000 hours for recordmaking associated with oral disclosure) × ($233.02/
hour for registered representative) + (1,060,000
hours for record-keeping associated with oral
disclosure) × ($233.02/hour for registered
representative) = $1,736.52 million. The hourly
wages for in-house legal and compliance counsel
and registered representatives are obtained from
SIFMA. The hourly rates for outside legal counsel
are discussed in infra Section IV.B.5.
1315 See supra footnote 1156 and subsequent text
for a discussion of these factors. For these reasons
and because we believe that quantification of the
costs and benefits of the alternatives discussed in
infra Section III.E would require still further
assumptions, lead to additional imprecision, and
yield less meaningful results, we have not included
quantified estimates of the economic effects of these
alternatives.

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differences of broker-sold and directsold mutual funds.
The quantification exercise below
provides an estimate for some of the
potential benefits associated with
Regulation Best Interest. For example, as
discussed in more detail below, a
potential reduction in fees can benefit
retail customers in other ways beyond
reducing the total dollar amount paid
for investment services. Furthermore, as
discussed elsewhere in this economic
analysis, the rule is expected to generate
other benefits for retail customers that
we are not able to meaningfully
quantify.
a. Benefit to Investors Due to a Potential
Reduction in Fees
As discussed above, Regulation Best
Interest may reduce the attractiveness of
certain products to broker-dealers due to
the Care Obligation (e.g., the emphasis
on the need to consider cost, among
other things) and the Conflict of Interest
Obligation (e.g., addressing conflicts of
interest, including product menu
limitations) and/or may reduce retail
customers’ aggregate demand for certain
products due to the Disclosure
Obligation (e.g., due to a reduction in
any information asymmetry with respect
to fees). To the extent that Regulation
Best Interest produces these effects on
certain products, the affected product
sponsors may react by lowering the fees
that they charge retail customers on
these products to be more competitive,
or by repackaging these products into
new products that are more
competitively priced. The increased
competition generated by the lower fees
for affected products may further
incentivize other product sponsors (i.e.,
those not directly affected by Regulation
Best Interest) to lower their fees as
well.1316 Alternatively, a product
sponsor may preempt the potential
decline in the aggregate demand for its
products by lowering the fees before
other sponsors do.
For the purposes of calculation, we
assume that this potential competition
in prices results in a new long-run
equilibrium in this product market, in
which product sponsors charge fees that
are close to or equal to their marginal
costs. Lower fees translate into direct
savings to retail customers. If a portion
of fees collected from retail customers
serves to compensate broker-dealers for
selling certain investment products,
then lowering those fees could also
1316 A product sponsor that does not lower its fees
on a given product may risk experiencing low retail
customer aggregate demand or low demand from
broker-dealers as a result of Regulation Best
Interest. To stay competitive this product sponsor
may have to lower the fees on its product.

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translate into less severe conflicts of
interest. Thus, a reduction in fees may
improve the efficiency of the
recommendations that broker-dealers
make to retail customers. This potential
increase in the efficiency of the
recommendations received also benefits
retail customers.1317
The market for mutual fund products
may illustrate the potential for attaining
such a new long-run equilibrium as a
result of Regulation Best Interest. We
focus on mutual funds for this analysis
because of the available data for mutual
funds, but we expect the same or similar
dynamics could apply to other financial
products. As this market transitions
toward this new long-run equilibrium,
total fund expenses (i.e., distribution
expenses and management fees) that are
in excess of the marginal cost of
distributing and operating the fund may
be reduced in a number of ways,
including by lowering fees, reliance on
alternative distribution channels, or
exiting the market in whole or in part
(i.e., by limitations on offerings). Below
we attempt to quantify the benefits
associated with this potential long-run
equilibrium in the market for mutual
fund products as a result of such
reduction in fees, relative to the
baseline, assuming all funds reduced
fees to marginal costs. To this end, we
start with the current distribution of fees
of funds within each Center for
Research in Security Prices (CRSP)
objective class.1318 We focus on funds
that have reported this information in
2018 in CRSP. We perform the analysis
using total fees (i.e., fund expense
ratios). As an alternative, we also
perform the analysis using the
component of the total fees that are
allocated toward distribution and
1317 For purposes of this analysis, we assume that
product sponsors respond to competitive pressures
by lowering their fees. However, competition may
affect quality in addition to price. For example,
product sponsors may choose to offer higher quality
products which may be costlier to produce (e.g.,
because they must hire more skilled managers or
apply more costly technology) and as such require
higher fees. Alternatively, product sponsors may
lower fees by reducing the quality of their product
(e.g., hiring fewer skilled managers) and, as a result,
offering lower fee products that may produce lower
average returns. Competition along both of these
dimensions may allow retail customers to choose
different combinations of quality and price,
depending on their individual preferences.
1318 Calculated based on data from the Center for
Research in Security Prices (CRSP), University of
Chicago Booth School of Business. Funds with
different objectives may incur different marginal
costs due to the frequency of trading in the markets
that are reflective of the objective of the fund,
advertising to reach a certain clientele, distribution
costs, etc. The CRSP Mutual Fund dataset includes
a breakdown of mutual funds by their objective
types.

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marketing expenses, and that we can
observe, namely 12b–1 fees.1319
We estimate the marginal cost of
distributing and operating a non-index
fund in a given CRSP objective class
(i.e., strategy) as the minimum total fee
of the funds in that class, after
excluding index funds. Similarly, we
estimate the marginal cost of operating
an index fund in a given CRSP objective
class as the minimum total fee of the
index funds in that class. We then
calculate the maximum ‘‘excess fee’’ for
a fund (index or non-index) as the
difference between the actual total fee of
the fund and the marginal cost of the
CRSP objective class that contains the
fund. By construction, the excess fee
cannot be negative.
We obtain an aggregate amount of
reduced fees of approximatively $22.2
billion for non-index funds and $1.4
billion for index funds annually at the
new potential equilibrium.1320 The
aggregate amount of saved fees across
index and non-index funds becomes
approximatively $23.6 billion.
Similarly, if we focus on 12b–1 fees
only, the aggregate amount of saved fees
are $9.13 billion for non-index funds
and $0.32 billion for index funds, or
$9.45 billion across both index and nonindex funds.
Using certain assumptions to
calculate the present value of this
potential fee reduction,1321 we calculate
1319 12b–1 fees are paid out of fund assets to cover
the costs of marketing and selling fund shares.
‘‘Distribution fees’’ include fees to compensate
brokers and others who sell fund shares, and to pay
for advertising and printing and mailing
prospectuses to new investors. ‘‘Shareholder service
fees’’ are fees that cover the cost of responding to
investor inquiries and providing investors with
information. This analysis excludes loads because,
unlike 12b–1 fees, loads cannot be separately
broken out.
1320 We calculate the dollar value associated with
these excess fees by multiplying the excess fees of
a fund with total net assets (TNA) of the fund and
then aggregating across funds. This amount
represents the capital that would be reallocated
towards more efficient funds and can be thought of
as ‘‘fees saved’’ by retail customer as this product
market shifts from the baseline equilibrium to the
new equilibrium.
1321 First, we note that expense ratios for equity
mutual funds have declined at a rate of about 3%
per year since 2000. This rate doubles to 6% if we
focus on the period following FINRA’s adoption of
the Suitability Rule in 2011. We assume that under
the current equilibrium, or ‘‘baseline equilibrium,’’
excess fees—as defined above—would continue to
decline at the rate of 3% per year. This rate of decay
corresponds to a half-life of approximatively 23
years. We further assume that as the product market
shifts towards the new equilibrium, excess fees
decline at a rate that is at least as high as the post2011 rate. Because Regulation Best Interest
enhances the broker-dealer standard of conduct
established by the Suitability Rule—particularly
with respect to the disclosure, mitigation, or
elimination of conflicts of interest, which is not
addressed by the Suitability Rule—and the federal
securities laws, we believe that a rate of decay that

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the net benefit of the new equilibrium
as the difference between the two
present values of declining perpetuities
that pay the dollar value associated with
excess fees under the baseline
equilibrium and the new equilibrium,
respectively, for each of the three
scenarios. When using the total fees, we
obtain an expected net benefit of $35.21
billion in the moderate decay scenario,
$59.15 billion in the accelerated decay
scenario, and $76.49 billion in the rapid
decay scenario. Similarly, when using
12b–1 fees only, we obtain an expected
net benefit of $14.10 billion in moderate
decay scenario, $23.69 billion in the
accelerated decay scenario, and $30.63
billion in the rapid decay scenario.
b. Benefits to Investors Due to a
Potential Reduction in the Relative
Underperformance of Broker-Versus
Direct Sold Mutual Funds
Another way to estimate the potential
benefits of Regulation Best Interest is to
use aspects of the approach used in the
CEA Study and the DOL RIA, as
suggested by several commenters.1322
Specifically, we rely on academic
literature claiming that, to varying
degrees, broker-sold mutual funds
underperform direct-sold mutual funds
and assume that underperformance
reflects agency costs associated with the
conflicts of interest that may be present
in recommendations provided by
broker-dealers. Although this literature
addresses only a portion of the AUM
affected by Regulation Best Interest, we
use methods from these studies to
estimate the monetary effect the final
rule might produce by reducing the
effect that conflicts of interest have on
the recommendations provided by
broker-dealers.
Total AUM of load and no-load longterm mutual funds in the U.S. as of the
end of 2018 are approximately $12.4
trillion, with $10.4 trillion attributable
to no-load funds and $2.1 trillion
attributable to load funds.1323 To
estimate the monetary effect of potential
is at least as large as the one observed in the post2011 period is not unreasonable. Under this
assumption, we consider three scenarios: (1)
Moderate decay at 6%; (2) accelerated decay at 9%;
and (3) rapid decay at 12%. The half-life for each
of these scenarios is 11.5 years, 7.7 years, and 5.8
years, respectively. Finally, we assume that the
opportunity cost of the excess fees is equal to the
expected rate of return on the value-weighted
market portfolio, as defined in CRSP, as these fees
encumber capital that would have otherwise been
invested in efficient funds. To estimate the
expected return on the market portfolio, we assume
that the discount rate is the geometric average of the
annual rate of return on the market portfolio over
the period 1927–2018, namely 9.76%.
1322 See supra footnote 1167.
1323 See Investment Company Institute 2019 Fact
Book, Figure 6.12.

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conflicts of interest as they pertain to
mutual funds, we use estimates of the
difference in net returns (gross returns
on a fund’s performance less fees and
other expenses associated with the
fund) between broker-sold funds and
funds that are direct-sold from Reuter
(2015).1324 We then apply this
difference to the aggregate market
capitalization of load funds, which we
assume are sold with a recommendation
from a broker-dealer because we cannot
identify the channel through which
mutual funds are sold or whether each
sale through the broker-sold channel
involves a recommendation. To the
extent that no-load funds are also sold
by broker-dealers, this assumption may
cause us to underestimate the portion of
mutual fund AUM that are sold with a
recommendation from a brokerdealer.1325 Because the data in Reuter
(2015) ends in 2012, for the purposes of
this approach we assume that the
relative underperformance of brokersold funds, and hence our application of
this underperformance to load funds as
a proxy for funds sold with a
recommendation from a broker-dealer,
remains unchanged from 2012.1326
Reuter (2015) employs a variety of
methods in computing the difference in
net returns between broker-sold and
direct-sold actively managed funds,
including different ways of computing
net returns (e.g., net return, net return
plus 12b–1 fees, net alphas, and
ordinary least-squares and weighted
least-squares regression methods),
different samples (e.g. ‘‘non-specialized
domestic equity’’), and different
weighting schemes (e.g. equally
weighted or value weighted returns).
Reuter concludes by noting that the
performance difference between brokersold and direct-sold actively managed
mutual funds is likely to fall between
0.20% and 0.47%, depending whether
or not 12b–1 fees are included in the
estimation. Given that the
underperformance only affects brokersold funds, and applying these
underperformance estimates to load
funds, the estimated monetized
underperformance of broker-sold funds
1324 See Reuter (2015), supra footnote 1095. In
contrast to the DOL RIA, we do not base our
analysis on excess loads, as estimated in
Christoffersen et al. (2013), supra footnote 1081.
Prior commenters noted that the average excess
load, by definition, is zero and would likely yield
a much lower estimate of aggregate harm, than the
estimate published by the CEA and include in the
DOL RIA. See, e.g., Lewis (2017), supra footnote
1099. See also supra footnotes 1169 and 1170.
1325 Brokers may still be compensated for selling
no-load funds by 12b–1 fees, revenue sharing, or
other arrangements.
1326 See supra footnote 1102 for discussion of
how trends in the relative performance of load
funds may have changed in more recent years.

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ranges from $4.1 billion per year to $9.7
billion per year.
As discussed elsewhere in this
release, we expect Regulation Best
Interest will reduce the severity of
conflicts of interest that may contribute
to the underperformance between
broker-sold and direct-sold mutual
funds. However, the range noted above
most likely overestimates the expected
reduction in harm associated with
broker-sold mutual funds due to
Regulation Best Interest for a number of
reasons. First, as discussed by
Bergstresser et al. (2009), broker-sold
funds can be sold by both broker-dealers
and investment advisers (e.g., dually
registered investment advisers), and the
data these studies relied upon is not
sufficiently granular to identify the
fraction of broker-sold funds sold by
each type of financial professional.1327
Because Regulation Best Interest applies
to registered broker-dealers, this range
would need to be narrowed to reflect the
proportion of broker-sold funds sold by
registered broker-dealers.
Second, the estimated range fully
attributes the differences between
direct-sold funds and broker-sold funds
to conflicts of interest between retail
customers and broker-dealers. This
might over-estimate the benefits of
Regulation Best Interest because there
might be other unobservable systematic
differences between investors who
choose direct-sold funds versus those
who choose to employ a financial
professional. For example, retail
customers that buy broker-sold funds
might be willing to pay more for those
funds if they receive intangible benefits
from a broker-dealer’s recommendation
that are not reflected in the relative
performance between funds sold
through these two channels.
Furthermore, not all sales in the brokersold channel are triggered by
recommendations provided by brokerdealers or their associated persons. For
example, customer-directed transactions
may not involve a recommendation at
all.
Third, measuring a fund’s
performance using its net return relative
to a benchmark might not be the most
accurate measure of a fund manager’s
skill or the value created by a fund to
an investor.1328 Therefore, estimating
investor harm assuming this definition
of the value created by a fund might
potentially overstate or understate this
harm.
1327 See

Bergstresser et al. (2009), supra footnote

1048.
1328 See

supra footnote 1176.

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Taking into account these caveats,1329
to the extent that Regulation Best
Interest mitigates, and in the limit,
eliminates the adverse effects of
conflicts of interest on broker-dealers’
recommendations, we estimate that the
benefits attributable to Regulation Best
Interest could be as large as $4.1 billion
per year to $9.7 billion per year when
estimated assuming that the relative
underperformance of broker-sold
mutual funds estimated in the academic
literature reflects conflicts of interest
that will eventually be eliminated.
As with our other estimates of the
benefits above, we assume that there is
already a decreasing trend in the
underperformance gap under the
baseline that is consistent with the
decreasing trend in mutual fund
expense ratios of 3%, and that
Regulation Best Interest will accelerate
this trend to a decay rate under three
scenarios: (1) Moderate decay at 6%; (2)
accelerated decay at 9%; and (3) rapid
decay at 12%. Similarly, we assume a
discount rate of 9.76% as above to value
these cash flows. Under these
assumptions, the present value of the
potential benefits of Regulation Best
Interest in the mutual fund sector,
relative to the baseline, from limiting or
eliminating the adverse effects of
conflicts of interest could be as large as
approximately $6.8 to $16 billion in the
moderate decay scenario, $11.4 to $26.7
billion in the accelerated decay
scenario, and $14.7 to $34.5 billion in
the rapid decay scenario.
Finally, we can obtain an approximate
estimate of the present value of the costs
associated with Regulation Best Interest
using the costs estimated in Section IV
for purposes of the Paperwork
Reduction Act, which imply aggregate
initial costs of approximately $5.96
billion and ongoing costs of $2.37
billion. Assuming the initial costs are
incurred one year from the rule’s
enactment, and using a discount rate of
9.76% as above, the present value of
these costs is approximately $27.5
billion. Note that this cost estimate
cannot be directly compared with the
benefit estimates above as the benefits
estimates are with respect to mutual
funds only.
D. Efficiency, Competition, and Capital
Formation
As discussed above, Regulation Best
Interest is designed to address the
agency costs that arise when an
associated person of the broker-dealer
1329 See supra footnotes 1172–1178 for further
discussion of the limitations that apply in using the
relative underperformance of broker-sold mutual
funds as an estimate of investor harm and,
therefore, the benefits of Regulation Best Interest.

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provides a recommendation to a retail
customer that may not be fully
addressed by the regulatory baseline.
Regulation Best Interest is intended to
reduce agency costs and other costs by
enhancing the standard of conduct of
broker-dealers, increasing the
effectiveness of disclosure to allow
retail customers to make a more
informed decision with respect to the
recommendation they receive and by
requiring broker-dealers to implement
policies and procedures reasonably
designed to reduce the effect of conflicts
of interest on recommendations to retail
customers. Specifically, the Disclosure
Obligation and Conflict of Interest
Obligation require broker-dealers to
disclose information that, while not
necessarily new in all instances, will
reach retail customers more directly and
more timely than under the regulatory
baseline. In addition, the disclosed
information would raise a retail
customer’s salience of fees, scope of the
relationship, conflicts of interest, and
limitations of the menu of securities
from which the retail customer receives
recommendations as potential factors
affecting the recommendations of a
broker-dealer or its associated persons.
The content and form of disclosure may
help some retail customers make more
informed decisions with regards to
whether to act on a recommendation
provided by an associated person of the
broker-dealer. Regulation Best Interest
may also reduce the agency costs faced
by these retail customers.
The Conflict of Interest Obligation
also requires broker-dealers to
implement policies and procedures to
reduce the effect of conflicts of interest
and securities menu limitations on
recommendations to retail customers.
For broker-dealers that implement more
effective policies and procedures, the
obligation may increase the efficiency of
the recommendations for their retail
customers. As a result, Regulation Best
Interest may reduce the agency costs
faced by these retail customers.
The Care Obligation requires a brokerdealer and its associated persons to have
a reasonable basis to believe that a
recommendation provided to a retail
customer is in the customer’s best
interest. This reasonable basis should
include factors similar to those
identified by the Suitability Rule of the
current regulatory regime as well as
additional factors. For example, relative
to the regulatory baseline, the Care
Obligation requires that a broker-dealer
and its associated persons consider
costs, among other factors, and establish
a direct link between the attributes of a
security or investment strategy and the
retail customer’s best interest. By

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requiring consideration of costs and by
including an explicit link between the
investment-related factors and the best
interest, the obligation may increase the
efficiency of the recommendations for
the retail customer. As a result,
Regulation Best Interest may reduce the
agency costs faced by these retail
customers.
Through these effects, as discussed
below, Regulation Best Interest may
have an effect on competition, capital
formation, and efficiency.
1. Competition
Regulation Best Interest may have
competitive effects for the market for
investment advice and may affect how
broker-dealers compete with each for
retail customers. As discussed in
Section III.C, the brokerage industry
currently recognizes that broker-dealers
and their associated persons may have
conflicts of interest that create
incentives for broker-dealers or their
associated persons to make
recommendations that, while suitable
for their retail customers, may not be in
the best interest of (and may not be the
most efficient recommendations for)
such customers. As noted above in
Section III.B.2.c, a FINRA survey
suggested that broker-dealers currently
employ different methods for managing
conflicts of interest, with some methods
being more effective than others at
reducing the effect of conflicts of
interest on recommendations. These
methods generally depend on the size
and complexity of a broker-dealer’s
business model. Against this backdrop,
the cost of complying with Regulation
Best Interest, scaled by the size and
complexity of a broker-dealer’s business
activities, may be higher for brokerdealers that currently employ less
effective methods for managing conflicts
of interest.
Relative to broker-dealers that face
lower compliance costs, broker-dealers
that face higher compliance costs may
be at a disadvantage when competing
for retail customers and may not be able
to fully pass on these costs to their retail
customers. For example, the
presumption related to the titles
‘‘adviser’’ and ‘‘advisor’’ may impose
higher costs on broker-dealers that use
these terms in their names or titles, but
that are not dual-registrants.1330 The
extent to which broker-dealers are able
to pass on costs to their retail customers
depends on a number of factors that
include the availability of close
substitutes for the services provided by
broker-dealers and the cost to retail
customers of switching accounts to a
1330 See

supra footnotes 1216–1220.

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competing broker-dealer, investment
adviser, or other financial services
provider. If broker-dealers are unable to
pass costs through to customers, it is
possible that some of the broker-dealers
that face high compliance costs may
decide to exit the market for investment
advice in the capacity of a broker-dealer.
The potential competitive effects
associated with compliance costs could
be further exacerbated by how brokerdealers choose to comply with the
component obligations of Regulation
Best Interest. As discussed in Section
III.C.4, broker-dealers are given
flexibility when addressing conflicts of
interest through policies and
procedures. Because Regulation Best
Interest and the component obligations
are generally principles-based, a brokerdealer would have to determine what
constitutes effective means of
addressing a given conflict of interest,
and how it should relate to the size and
complexity of a broker-dealer’s business
model. For a broker-dealer that is dually
registered or for a broker-dealer that is
affiliated with an investment adviser,
the overall costs of complying with
Regulation Best Interest may encourage
the broker-dealer to exit the market for
providing investment advice in the
capacity of a broker-dealer and, instead,
provide advice only in the capacity of
an investment adviser. Whereas brokerdealers have explicit requirements to
establish written policies and
procedures reasonably designed to
disclose, mitigate or eliminate identified
conflicts of interest that create an
incentive for the associated persons to
place their interest ahead of the retail
customer, the fiduciary standard for
investment advisers relies on full and
fair disclosure and informed consent to
address conflicts of interest.1331
Investment advisers must also adopt
and implement written policies and
procedures reasonably designed to
prevent violations of the Advisers Act,
including violations related to
undisclosed conflicts of interest.1332
More generally, compliance costs may
drive such firms to no longer offer
advice in the capacity of a broker-dealer
if firms anticipate the profitability of
1331 As discussed in supra Section I.C, some
broker-dealer commenters also expressed the view
that by requiring mitigation of financial incentives,
Regulation Best Interest would require more of
broker-dealers than what is required of investment
advisers under their fiduciary duty, which could
create a competitive issue for broker-dealers that
could further encourage migration from the brokerdealer to investment adviser model and result in a
loss of choice for retail customers. Because of this
competitive issue, dually registered financial
professionals could be incentivized to recommend
advisory accounts through compensation.
1332 See Advisers Act Rule 206(4)–7.

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their broker-dealer business under
Regulation Best Interest to be lower than
the profitability of their advisory
business.
Similar concern over costs of
complying with Regulation Best Interest
may deter some broker-dealers from
entering the market for investment
advice. Higher entry costs may have
long-run competitive effects on prices
paid by retail customers, as incumbents
adjust their strategic behavior to reflect
a lower threat of competition from new
entrants, relative to the baseline.1333
Regulation Best Interest may also
encourage competition for retail
customers to the extent that the
Disclosure Obligation increases the
retail customers’ salience to variables
such as fees and conflicts of interest that
would facilitate comparability across
broker-dealers. For example, retail
customers may form preferences over
some or all of the disclosed variables,
such as fees, securities or service
offerings, and range of conflicts of
interest, and may choose one brokerdealer over another or over an
investment adviser based on these
preferences. In turn, if firms anticipate
that there is a possibility that retail
customers may use the disclosed
variables for comparability purposes,
broker-dealers may compete over some
or all of these variables to attract more
retail customers. This potential
competition may result in greater
securities or service offerings, or lower
fees for retail customers.
Regulation Best Interest may also
affect how broker-dealers compete with
each other when negotiating with
investment sponsors for access to
securities. The findings of the
aforementioned FINRA survey suggest
that broker-dealers may face different
degrees of competition when negotiating
with product sponsors for access to
certain securities. For instance, the
survey observed that some product
sponsors rate the broker-dealers that are
interested in distributing their securities
based on criteria such as product
expertise and experience, the quality of
the control environment, and the
strength of their sales practices. Brokerdealers that have higher ratings, based
on these criteria may be given access to
a broader range of securities, including
more complex securities. In contrast,
broker-dealers that have lower ratings
may be given access to a narrower range
of securities. To the extent Regulation
Best Interest has the effect of increasing
and homogenizing the product expertise
and experience (e.g., the Care
Obligation) and the quality of the
1333 See,

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control environment (e.g., the Conflict
of Interest Obligation) across the
complying broker-dealers, the final rule
may increase the competition across
firms when negotiating with product
sponsors. This increased competition
may allow product sponsors to
economize on the distribution costs, and
may result in lower fees for retail
customers.
Regulation Best Interest may also have
competitive effects for the market for
investment advice, more generally.
Regulation Best Interest may affect how
broker-dealers compete with firms that
provide advice in a capacity other than
as a broker-dealer, such as an
investment adviser. Under the
regulatory baseline, investment advisers
owe a fiduciary duty to their clients.
Some commenters describe this
standard of conduct as a ‘‘higher’’
standard compared to the standard of
conduct applies to broker-dealers under
the regulatory baseline.1334
For some retail customers the duty
owed to them by their firm or financial
professional may be a determining
factor when deciding which type of firm
or financial professional they want to
use. As previously noted, key elements
of the standard of conduct that applies
to broker-dealers, at the time a
recommendation is made, under
Regulation Best Interest will be
substantially similar to key elements of
the standard of conduct that applies to
investment advisers pursuant to their
fiduciary duty under the Advisers Act.
As such, the standard of conduct under
Regulation Best Interest may make
broker-dealers more attractive to certain
retail customers who seek
recommendations for securities
transactions or investment strategies in
a more cost effective manner, but worry
about the duties owed to them by their
financial professional. As a result,
Regulation Best Interest may increase
the competition between broker-dealers
and investment advisers for retail
customers interested in obtaining
investment advice. In competing for
business, broker-dealers and investment
advisers may lower their fees, resulting
in retail customers paying less for
obtaining investment advice. To the
extent that this potential lower cost
causes an increase in the demand for
investment advice in the capacity of a
broker-dealer, this positive competitive
effect may offset some of the negative
potential competitive effects of
Regulation Best Interest, such as higher
1334 See Letter from Ken Fisher, Fisher
Investments (Jul. 31, 2018) (‘‘Fisher Letter’’); PIABA
Letter; FPC Letter; NASAA August 2018 Letter; U.
of Miami Letter; Rhoades August 2018 Letter.

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cost of entry in the market for
investment advice in the capacity of a
broker-dealer relative to the baseline, as
discussed above.
The Disclosure Obligation may also
encourage competition for retail
customers across broker-dealers and
investment advisers. As noted above,
the Disclosure Obligation would require
broker-dealers to make full and fair
disclosure of all material facts relating
to the scope and terms of the
relationship with the retail customer
and all material facts relating to
conflicts of interest that are associated
with a recommendation. Investment
advisers are also required to provide full
and fair disclosure of material facts
about similar elements under the
current regulatory regime. To the extent
that the Disclosure Obligation raises the
salience of variables that may facilitate
comparison across broker-dealers and
investment advisers, Regulation Best
Interest may encourage competition
between broker-dealers and investment
advisers.
Regulation Best Interest may also have
competitive effects for financial
professionals that offer investment
advice in a capacity other than that of
a broker-dealer (e.g., investment
advisers and other financial
professionals that are not registered
with the Commission, such as insurance
companies, banks, and trust companies).
As discussed above in Section III.C.4,
depending on the effectiveness of
disclosure and the effectiveness of
policies and procedures that address
securities menu limitations (e.g., the
Disclosure Obligation and Conflict of
Interest Obligation), Regulation Best
Interest may reduce the retail customers’
aggregate demand for certain securities
that are distributed by broker-dealers
and securities on which broker-dealers
or their associated persons provide
recommendations. Instead, retail
customers may access some of these or
comparable securities from other
financial professionals. For example, a
retail customer may access certain
securities offered by broker-dealers
through corporate fiduciaries such as
commercial banks or trust companies.
Alternatively, a retail customer may
open an advisory account and access
securities that are comparable to those
offered by the broker-dealer. To the
extent that Regulation Best Interest
causes a potential reduction in the retail
customers’ aggregate demand for
securities offered by broker-dealers,
retail customers’ aggregate demand may
increase for securities offered by nonbroker-dealers. Regulation Best Interest
may also affect how product sponsors
compete for flows from retail customers.

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As discussed above in Section III.C.4,
depending on the effectiveness of
disclosure and the effectiveness of
policies and procedures that address
limitations of the menu of securities
(e.g., Disclosure and Conflict of Interest
Obligations), Regulation Best Interest
may reduce the aggregate demand for
certain sponsors’ securities. To remain
competitive, product sponsors that face
decreased demand as a result of
Regulation Best Interest may reprice
their securities (e.g., by offering
different share classes), lower their fees,
or seek alternative distribution channels
that are not affected by Regulation Best
Interest. For example, product sponsors
may choose to distribute their securities
through investment advisers or through
commercial banks to the extent that the
banks can engage in limited brokerdealer activity, subject to certain
conditions, without having to register as
broker-dealers.1335 Finally, product
sponsors may choose to distribute their
securities directly to retail investors
rather than indirectly, through brokerdealers. The potential competitive effect
of Regulation Best Interest on product
sponsors may manifest itself in lower
product fees for retail customers.
2. Capital Formation and Efficiency
Regulation Best Interest is designed to
reduce the agency and other costs to
retail customers associated with
obtaining recommendations from
broker-dealers. As discussed above, to
reduce these costs, Regulation Best
Interest would impose obligations on
broker-dealers that are designed to
increase the efficiency of the
recommendations to retail customers
relative to the recommendations that
broker-dealers and their associated
persons provide to retail customers
under the regulatory baseline.
To the extent retail customers receive
recommendations that are more efficient
relative to the baseline, Regulation Best
Interest would increase the efficiency of
the portfolio allocation that a retail
customer makes as a result of the
recommendation received. As discussed
above in Sections III.A.2 and III.C, this
would occur when a retail customer
increases the allocative efficiency of his
or her portfolio when the
recommendation leads to a reallocation
of resources across time and market and
economic conditions that generate a
higher net benefit to the retail customer,
relative to the baseline. Thus, to the
extent that Regulation Best Interest
1335 See Exchange Act Sections 3(a)(4)(B) and
3(a)(5)(B) and rules thereunder (providing banks
exceptions from ‘‘broker’’ and ‘‘dealer’’ status for
specified securities activities).

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increases the efficiency of the associated
persons’ recommendations to retail
customers, the final rule would have a
positive effect on the retail customers’
allocative efficiency.
Regulation Best Interest may also
increase the efficiency of the
recommendations involving rollovers or
transfers of assets from retirement
accounts to other taxable or non-taxable
accounts, relative to the baseline. As
noted above, the incentives associated
with this type of recommendation are
particularly acute because of the size of
the transaction and the importance to
the retail customer (e.g., given that the
amount of assets associated with such
recommendations can be a significant
portion of a retail customer’s net worth).
The potential increase in the efficiency
of this type of recommendation may
improve the allocative efficiency of
assets held in retirement accounts, and
may encourage retail customers to
consider a rollover or transfer of assets
recommendation to potentially increase
the efficiency of their retirement asset
allocation.
Similarly, Regulation Best Interest
may increase the efficiency of the
recommendations regarding account
types. As discussed above, currently, a
dual-registrant may have an incentive to
recommend the account type that
benefits the dual-registrant at the
expense of the retail customer. The
potential increase in the efficiency of
this type of recommendation under
Regulation Best Interest relative to a
similar recommendation that the dualregistrant may provide under the
baseline may improve the allocative
efficiency of the retail customer’s assets
held in this account.
The possibility that Regulation Best
Interest may increase the efficiency of
the recommendations provided by the
associated persons of the broker-dealer
may enhance the attractiveness of
broker-dealer services for those
investors who currently do not invest
through broker-dealers. Although there
are costs associated with these
requirements, the protections deriving
from these requirements may benefit
investors, issuers, and intermediaries by
helping to create a marketplace where a
higher number of retail customers invest
through broker-dealers, relative to the
current regulatory regime. If retail
customers are more willing to
participate in the securities markets
through broker-dealers, Regulation Best
Interest would have a positive effect on
capital formation.
E. Reasonable Alternatives
Regulation Best Interest establishes a
new standard of conduct for broker-

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dealers under the Exchange Act that is
intended to address the agency costs
that retail customers face when
obtaining recommendations of securities
transactions and investment strategies
from broker-dealers and their associated
persons. This new standard is intended
to enhance investor protection, while
preserving, to the extent possible, retail
investor access (in terms of choice and
cost) to differing types of investment
services and securities. As noted above,
the Commission considered several
reasonable alternative policy choices,
including (1) applying the fiduciary
standard under the Advisers Act to
broker-dealers, and (2) adopting a
‘‘new’’ uniform fiduciary standard of
conduct applicable to both brokerdealers and investment advisers, such as
that recommended by the staff in the
913 Study. The Commission also
considered adopting similar standards
to those the DOL had provided under its
fiduciary rule to broker-dealers and
investment advisers.1336 We examine
the effects of these primary alternatives,
as well as several other alternatives that
we considered both in the Proposing
Release and in response to comments.
1. Fiduciary Standard for Broker-Dealers
As discussed in the Proposing Release
and as raised by commenters, instead of
adopting our approach in Regulation
Best Interest, the Commission could
have alternatively imposed a form of
fiduciary standard on broker-dealers
providing recommendations to retail
customers. The Commission recognized
that fiduciary standards vary among
investment advisers, banks acting as
trustees or fiduciaries, or ERISA plan
providers, but fiduciaries are generally
required to act in the best interest of
their clients.1337
Under any of the options considered,
the Commission would have to craft a
mechanism to apply a uniform standard
of conduct to all financial professionals
regardless of how they engage with their
retail customers. This approach was
advocated by certain commenters, many
of whom asserted that it would reduce
retail investor confusion as it would
ensure that investors are provided the
1336 We had additionally discussed in the
Proposing Release an alternative of a principlesbased best interest standard. See Proposing Release
at 21663. Some of the economic effects of this
alternative would be similar to the economic effects
of any of the fiduciary alternatives, which would
also be principles-based.
1337 See Proposing Release at footnotes 328–329.
For example, an investment adviser’s fiduciary duty
under the Advisers Act comprises a duty of care
and a duty of loyalty. This combination of care and
loyalty obligations has been characterized as
requiring the investment adviser to act in the ‘‘best
interest’’ of its client at all times. See Fiduciary
Interpretation.

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same standard of care and loyalty
regardless of what type of financial
professional they engage.1338 As
discussed above and in detail further
below we believe, in practice, that such
uniformity would be difficult to
implement and disruptive to pursue as
a result of various factors, including the
key differences in the ways brokerdealers and investment advisers engage
with retail clients. Achieving such
uniformity could require narrowing the
type and scope of services permitted to
be provided by various types of
financial professionals. If we were to
pursue such an approach, it could
reduce retail customers’ confusion with
respect to the duties owed to them by
the broker-dealers and investment
advisers and could reduce potential
costs to some investors associated with
choosing a type of relationship that is
not well suited to them, because under
a uniform standard, retail customers of
each type of financial professional
would be subject to the same standard
of conduct.
However, this uniformity could come
at a cost to both investors and financial
service providers. Such an approach
could result in a standard of conduct for
broker-dealers that is not appropriately
tailored to the structure and
characteristics of the broker-dealer
model (i.e., transaction specific
recommendations and compensation),
and might not properly take into
account, or build upon, existing
obligations that apply to broker-dealers,
including under FINRA rules.1339 A
potential implication of this paradigm
shift would be that broker-dealers
would face significant compliance costs,
at least in the short run, relative to the
regulatory baseline. Potentially higher
compliance costs could increase the
incentive to offer investment advice in
the capacity of investment adviser and
could decrease the incentive to offer
investment advice in the capacity of
broker-dealer. To the extent brokerdealers act on the increased incentives
and decide to participate in the market
for investment advice only in the
capacity of investment advisers, retail
customers could experience an increase
in the cost of obtaining investment
advice, relative to the baseline.
Furthermore, as noted above, the
potential exit of broker-dealers from the
market for investment advice in the
broker-dealer capacity could limit how
retail customers would access certain
securities or investment strategies and
how they would pay for investment
advice, which, in turn, could increase
1338 See,
1339 See

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their costs of obtaining investment
advice, relative to the baseline.1340 To
the extent broker-dealers decide to
continue to participate in the market for
investment advice in the capacity of
broker-dealers, they could pass on
increased compliance costs, in full or in
part, to their retail customers. As a
result, retail customers could experience
an increase in the cost of obtaining
investment advice, relative to the
baseline. The potential increase in the
cost of accessing investment advice
could push some retail customers
outside the market for investment
advice from Commission-registered
broker-dealers and investment
advisers.1341
We discuss each of the three options
for applying a uniform fiduciary
standard in more detail below. We
compare each of the three alternatives
against the regulatory baseline, which is
the current broker-dealer regulatory
regime. In addition, we briefly discuss
the differences between the standard of
conduct imposed by Regulation Best
Interest and the fiduciary standard
under the Advisers Act. As discussed
above in Section I, we believe that our
approach in adopting Regulation Best
Interest will best achieve the
Commission’s important goals of
enhancing retail investor protection and
decision making, while preserving, to
the extent possible, retail investor
access (in terms of choice and cost) to
differing types of investment services
and securities.

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a. Fiduciary Standard Under the
Advisers Act Applied to Broker-Dealers
A number of commenters discussed
the viability of this alternative and
stated that it would provide superior
investor protection benefits relative to
the standard that the Commission
proposed.1342 At the outset, we note
that, at the time a recommendation is
made, key elements of the standard of
conduct that applies to broker-dealers
under Regulation Best Interest will be
substantially similar to key elements of
the standard of conduct that applies to
investment advisers pursuant to their
fiduciary duty under the Advisers Act.
Both standards of conduct require that,
when making a recommendation or
providing advice, firms and financial
professionals act in the best interest of
the retail investor and not place the
financial professionals’ interests ahead
1340 See

supra Section III.D.1.
supra Section I.A for a discussion of
access to investment advice in the context of the
DOL Fiduciary Rule.
1342 See Betterment Letter; Warren Letter; Fein
Letter; State Treasurers Letter; AARP August 2018
Letter; ACLI Letter; Schwab Letter.
1341 See

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of the retail investor.1343 Both standards
provide methods for addressing
conflicts of interest, although the
mechanics of those methods and their
outcomes may be different,1344 and both
standards require full and fair
disclosure of material facts that affect
the relationship, including costs. Both
standards allow each type of financial
professional to agree to provide account
monitoring services to retail investor
accounts, although continuous
monitoring is embedded in the
regulatory regime and market practices
for investment advisers, whereas a
broker-dealer may agree to provide
account monitoring services only to the
extent that it is solely incidental to the
primary brokerage business.1345
We recognize that there are certain
notable differences between the
Advisers Act fiduciary standard and the
Regulation Best Interest standard we are
adopting. In particular, the investment
adviser fiduciary duty is generally
principles-based, in keeping with the
regulatory tradition and market
practices for advisers,1346 whereas
Regulation Best Interest, while also
largely principles-based, establishes
minimum, obligations that are generally
more prescriptive than the fiduciary
obligations under Advisers Act. Further,
advisers are able to address conflicts of
interest through full and fair disclosure
and informed consent,1347 while brokerdealers must have policies and
procedures that are reasonably designed
to identify and disclose and mitigate, or
eliminate, any conflicts of interest
associated with recommendations that
create an incentive for the broker-dealer
or its associated persons to place the
interest of the broker-dealer or its
associated persons ahead of the interest
of the retail customer. With regard to the
substance of both standards, the
investment adviser fiduciary duty
generally is broader and applies to the
entire relationship between adviser and
client, including providing nonsecurities advice,1348 whereas
supra Section I.A.
pursuant to Regulation Best
Interest, broker-dealers are required to (i) to
establish written policies and procedures
reasonably designed to identify and at a minimum,
disclose, or eliminate, all conflicts of interest; and
(ii) to establish written policies and procedures
reasonably designed to mitigate or eliminate
identified conflicts of interest, the fiduciary
standard for investment adviser relies on full and
fair disclosure and informed consent.
1345 See Solely Incidental Interpretation. See also
supra Section II.B.2.b.
1346 See Fiduciary Interpretation.
1347 See id.
1348 For example, an investment adviser may
consider both securities annuity products (e.g.,
variable annuities) and non-securities annuity
products (e.g., fixed annuities) when providing

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1344 Whereas,

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Regulation Best Interest only applies at
the time of a recommendation of any
securities transaction or investment
strategy by a broker-dealer to its retail
customers.1349 Where application of the
Advisers Act fiduciary standard to
broker-dealers would impose on brokerdealers obligations similar to those of
Regulation Best Interest, we anticipate
similar economic effects; in contrast,
where this alternative would result in
different obligations, it would generate
economic effects distinct from those of
Regulation Best Interest.
i. Fiduciary Standard Under the
Advisers Act Relative to the Baseline
Relative to the regulatory baseline, the
fiduciary standard of this alternative
applied to broker-dealers could benefit
retail customers in some circumstances
by extending the obligations of all firms
and financial professionals to act in the
best interest of retail customers (and to
not place the interest of the firm or the
interest of the financial professionals
ahead of those of the retail customers)
to aspects of the relationship other than
providing personalized investment
advice through recommendations. For
example, retail customers might benefit
if broker-dealers were required (as
advisers are under their current
fiduciary standard) to disclose any
material conflicts related to their
execution of trades for retail customers
in the case when the broker-dealer has
not provided a recommendation
regarding the transaction (e.g., selfdirected trade). In addition, under the
fiduciary standard that applies to
investment advisers, if an investment
adviser cannot fully and fairly disclose
a material conflict of interest to a client
such that the client could reasonably be
expected to provide informed consent,
the investment adviser would be
expected to either eliminate the conflict
or adequately mitigate (i.e., modify its
practices to reduce) the conflict to the
point where full and fair disclosure of
the conflict to the client and informed
advice on annuity products to a client with an
advisory retirement account.
1349 However, under the current legal and
regulatory regime, broker-dealers are subject to
other rules that apply outside the context of a
recommendation, including rules regarding how
broker-dealers market securities and services
(communications with the public), how they
execute trades (best execution), and the fees that
they charge (fair and reasonable compensation
obligations). Moreover, broker-dealers always a
have a duty of fair dealing with their retail
customers under SRO rules. In addition, brokerdealers are subject to a number of obligations that
attach when a broker-dealer makes a
recommendation to a customer, as well as general
and specific requirements aimed at addressing
certain conflicts of interest, including requirements
to eliminate, mitigate, or disclose certain conflicts
of interest. See Proposing Release Section I.A.1.

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consent is possible.1350 To the extent
that this approach of addressing
conflicts of interest would extend to the
fiduciary standard in this alternative, a
broker-dealer would also have to
eliminate or modify a conflict of interest
to the point where full and fair
disclosure and informed consent is
possible. The potential reduction in the
effect of conflicts of interest on
recommendations and the potential
reduction in the information asymmetry
between a retail customer and a brokerdealer would likely increase the
efficiency of the recommendation
provided by the firm to the retail
customer, relative to the baseline. Thus,
this alternative may reduce the agency
costs of the relationship between a
broker-dealer and a retail customer,
which would benefit retail customers,
relative to the baseline.
However, any such benefits would
come at a cost. As an initial matter, the
fiduciary standard under this alternative
is a principles-based regime and shaped
by decades of case law specific to
investment advisory model. In contrast,
the standard of conduct that applies to
broker-dealers under the baseline is
more prescriptive, and governed by
detailed SRO rules. Therefore, if this
alternative were adopted, broker-dealers
would face increased compliance costs
resulting from having to conform their
advice models to a regulatory regime
that was not formed for a transactionbased model governed by detailed SRO
rules.
The potential increased compliance
costs associated with applying the
fiduciary standard in this alternative to
broker-dealers would likely increase the
broker-dealers’ incentives to offer
investment advice in the capacity of
investment adviser and may decrease
their incentive to continue offering
investment advice in the capacity of
broker-dealer dealer (on a transactionby-transaction basis), relative to the
baseline.1351 For example, if this
1350 See

Fiduciary Interpretation.
Vivek Bhattacharya, Gaston Illanes, &
Manisha Padi, Fiduciary Duty and the Market for
Financial Advice (Working Paper, Apr. 2019) for a
recent paper providing an empirical analysis on the
effect of state-level standards of conduct on the
structure of the market for investment advice in the
context of variable annuities. The study finds
differences in broker-dealer behavior when
comparing states with and without a fiduciary
obligation for broker-dealers. The states with the
obligation are associated with fewer variable
annuity sales and are also associated with some
broker-dealers exiting the industry. Specifically, the
paper observes, among other things, that a statelevel obligation reduces the number of brokerdealers that are not dually registered by about 16%
but has no meaningful effect on the number of dualregistrants. The authors argue that this
compositional shift in the number of broker-dealers

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alternative were to create situations
where the compensation to a brokerdealer for providing a recommendation
in a commission-based brokerage
account would be less than the
compensation under a fee-based
advisory account and/or where the
perceived regulatory burden for an
investment adviser is lower, relative to
the baseline, a broker-dealer’s incentive
to offer advice in the capacity of
investment adviser would likely
increase, relative to the baseline.1352
To the extent broker-dealers act on the
increased incentives and decide to
participate in the market for investment
advice only in the capacity of
investment advisers—for example, dualregistrants may prefer to offer
investment advice only in the capacity
of investment adviser—retail customers
may experience an increase in the cost
of obtaining investment advice, relative
to the baseline. Furthermore, as noted
above, the potential exit of brokerdealers from the market for investment
advice in the capacity of broker-dealer
may limit how retail customers can
access certain securities or investment
strategies and how they can pay for
investment advice, which, in turn, may
further increase the cost of obtaining
investment advice, relative to the
baseline.1353 Alternatively, to the extent
is due to firms exiting the market. The paper also
observes that a state-level obligation on brokerdealers may cause a compositional shift in the pool
of variable annuities sold by broker-dealers toward
annuities that offer a larger and more diverse set of
investment options, which, in certain
circumstances, may also generate higher expected
returns for retail customers. The paper also observes
that under certain circumstances a state-level
obligation on broker-dealers may increase the
quality of the variable annuities sold by brokerdealers. ‘‘Quality’’ is defined by the authors as ‘‘the
return on variable annuities assuming optimal
allocation.’’ The authors interpret these results as
suggesting that a state-level obligation on brokerdealers may (i) cause some broker-dealers to exit the
market, and (ii) cause a compositional shift in the
variable annuities sold by the broker-dealers that do
not exit the market toward annuities of higher
quality as defined in the paper. However, the
limitations of the data sample and of the empirical
methodology make it difficult to (i) generalize these
results to the entire market of annuities sold by
broker-dealers, (ii) extrapolate these results to the
entire universe of securities that broker-dealers offer
advice on, (iii) extrapolate the results to the
population of broker-dealers not captured by the
data sample, or (iv) use the results as a basis for
comparing the investor protections offered by statelevel standards of conduct, SRO rules, existing
federal standards of conduct, and Regulation Best
Interest. See also supra footnote 1163 and
surrounding discussion noting that there is
substantial variation in the sources, scope, and
application of state fiduciary law.
1352 Broker-dealers that choose to deregister
would eliminate the costs of complying with FINRA
rules, which are broader than retail customer sales
practice obligations, and submitting to FINRA
examinations as well as compliance with other
specific rules, which do not apply to advisers.
1353 See supra Section III.D.1.

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broker-dealers decide to continue to
participate in the market for investment
advice in the capacity of broker-dealers,
they may pass on the increased
compliance costs, in full or in part, to
their retail customers in the form of
higher prices for services rendered. In
particular, retail customers may
experience an increase in the cost of
obtaining investment advice, relative to
the baseline.
It is also possible that the fiduciary
standard of this alternative may result in
a different menu of choices that allows
retail customers to access investment
advice in a more cost-efficient manner
relative to the baseline. For example, if
more financial professionals decide to
participate in the market for investment
advice in the capacity of investment
advisers, competitive pressure may
result in investment advisers providing
better pricing and/or more choices of
accessing investment advice for retail
customers.
To the extent that the cost of
accessing investment advice increases
under the fiduciary standard of this
alternative, some retail customers may
be pushed outside the market for
investment advice. For example,
currently, a retail customer that prefers
to receive recommendations from a
broker-dealer or its associated persons
to implement a buy-and-hold strategy
may find a brokerage account to be
better suited to his or her needs
compared to an advisory account.1354
Under the fiduciary standard in this
alternative, this retail customer may
have to pay more for the broker-dealer
services that come with his or her
account, including obtaining investment
advice, relative to the baseline. If this
increase in the cost for broker-dealer
services outweighs the benefits of the
potential improved efficiency of the
recommendations provided by the
1354 For example, Del Guercio & Reuter (2014),
supra footnote 1081, document (Table 1 on page
1682) that retail customers can access index funds
through both broker-dealers (i.e., the broker-sold
channel, as discussed above) and directly from the
fund sponsor (i.e., the direct-sold channel).
Furthermore, in their sample, the average expense
ratio for an index fund is 0.86 if sold through the
broker-sold channel and 0.44 if sold through the
direct channel. Assuming that a retail customer is
interested in implementing a buy-and-hold strategy
using index funds that carry no loads, the cost to
the retail customer of implementing this strategy
through a broker-dealer would be on average 86
basis points of the assets invested per year. In
contrast, the cost to the retail customer of
implementing the same strategy through an
investment adviser would be on average 44 basis
points plus the investment adviser’s AUM-based fee
per year. Assuming that in the investment adviser’s
fee is 100 basis points of AUM per year, the cost
to the retail customer of implementing his or her
strategy with an investment adviser would be on
average 144 basis points.

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Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations
broker-dealer for this retail customer, as
noted above, the retail customer may
prefer to switch to a more-limited
brokerage account that does not come
with personalized investment advice
(e.g., an execution-only brokerage
account).1355 Alternatively, and as noted
by one commenter, the retail customer
may switch to a light version of an
advisory account that implements
automated investment strategies tailored
around a retail customer’s goals.1356
However, this type of advisory account
may not offer the flexibility of
personalized investment advice to the
evolving needs of the customer and may
not be as responsive to market
movements not anticipated by the
automated investment strategies.

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b. Uniform Fiduciary Standard Under
913(g)
Another alternative approach to the
standard of conduct imposed by
Regulation Best interest is a ‘‘new’’
uniform fiduciary standard of conduct
applicable to both broker-dealers and
investment advisers, such as that
recommended by the staff in the 913
Study.1357 The fiduciary standard under
this alternative would require firms ‘‘to
act in the best interest of the customer
without regard to the financial or other
interest of the broker, dealer, or
investment adviser providing the
advice.’’ Based on the Commission
staff’s recommendations about ways in
which the fiduciary standard proposed
1355 Relative to a brokerage account that offers
personalized investment advice, execution-only
brokerage accounts may also come with enhanced
research tools, more investment choices, and,
potentially, other forms of impersonal advice.
1356 See, e.g., CFA August 2018 Letter at 79,
noting that ‘‘[f]or example, Vanguard charges 0.30%
for its Personal Advisor Services, Schwab charges
0.28% for its Intelligent Advisory Services, and
Betterment charges 0.25% for its Digital offering
and 0.40% for its Premium offering.’’
1357 One of the staff’s primary recommendations
was that the Commission engage in rulemaking to
adopt and implement a uniform fiduciary standard
of conduct for broker-dealers and investment
advisers when providing personalized investment
advice about securities to retail customers. The
staff’s recommended standard would require firms
‘‘to act in the best interest of the customer without
regard to the financial or other interest of the
broker, dealer, or investment adviser providing the
advice.’’ The staff made a number of specific
recommendations for implementing the uniform
fiduciary standard of conduct, including that the
Commission should: (1) Require firms to eliminate
or disclose conflicts of interest; (2) consider
whether rulemaking would be appropriate to
prohibit certain conflicts, to require firms to
mitigate conflicts through specific action, or to
impose specific disclosure and consent
requirements; and (3) consider specifying uniform
standards for the duty of care owed to retail
customers, such as specifying what basis a brokerdealer or investment adviser should have in making
a recommendation to a retail customer by referring
to and expanding upon broker-dealers’ existing
suitability requirements. See 913 Study.

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by the 913 study could be implemented,
the fiduciary standard under this
alternative could have imposed any or
all of the following requirements: (1)
Eliminate or disclose conflicts of
interest; (2) prohibit certain conflicts of
interest by requiring firms to mitigate
conflicts through specific action, or to
impose specific disclosure and consent
requirements; and (3) specify the basis
a broker-dealer or investment adviser
has in making a recommendation to a
retail customer by referring to and
expanding upon broker-dealers’ existing
suitability requirements.
Some of the benefits of the investment
advisers’ fiduciary standard of the
previous alternative would carry over to
the new uniform standard of this
alternative. In particular, relative to the
baseline, the new fiduciary standard of
this alternative applied to broker-dealers
could benefit retail customers in some
circumstances by extending the
obligations of all firms and financial
professionals to act in the best interest
of retail customers (and to not place the
interest of the firm or those of the
financial professionals ahead of the
interest of the retail customer) to aspects
of the relationship other than providing
personalized investment advice through
recommendations.
In addition, the new fiduciary
standard of this alternative applied to
broker-dealers may create additional
benefits for their retail customers,
relative to the baseline. For example,
requirements (1) and (2) may enhance
the obligations under the baseline by
requiring broker-dealers to disclose
conflicts of interest and to take actions
to mitigate or eliminate certain conflicts
of interest. To the extent that these
requirements reduce of the effect of the
conflicts of interest on the
recommendation provided by a brokerdealer or its associated persons and
reduce the information asymmetry
between retail customers and brokerdealers, the new fiduciary standard of
this alternative may increase, relative to
the baseline, the efficiency of the
recommendations made by brokerdealers and their associated persons.
Furthermore, requirement (3) may
enhance the existing suitability
requirements that apply to brokerdealers and, to the extent that this
requirement results in recommendations
that are better aligned with the
objectives of the retail customers, the
new fiduciary standard of conduct of
this alternative may further increase,
relative to the baseline, the efficiency of
the recommendations provided by
broker-dealers and their associated
persons. The potential increase in the
efficiency of the recommendations

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provided by broker-dealers and their
associated persons under the new
fiduciary standard of this alternative
would benefit retail customers, relative
to the baseline.
Similarly, the new fiduciary standard
of this alternative applied to investment
advisers may create benefits for their
clients, relative to the baseline.
Requirements (1) and (2) would enhance
the obligations of the investment
advisers under the current fiduciary
standard that applies to investment
advisers by requiring investment
advisers to take actions to mitigate or
eliminate certain conflicts of interest. To
the extent that these requirements
reduce of the effect of the conflicts of
interest on the recommendation
provided by an investment adviser or its
associated persons and reduce the
information asymmetry between retail
customers and investment advisers, the
new fiduciary standard under this
alternative may increase the efficiency
of the recommendations made by
investment advisers and their associated
persons, relative to the baseline.
The new fiduciary duty of this
alternative may also result in increased
competition across financial
professionals for retail customers or
clients, relative to the baseline. This
potential increase in competition,
relative to the baseline, may benefit
retail customers of broker-dealers and
clients of investment advisers in the
form of lower prices for investment
advice.
Turning to the potential costs
imposed by this alternative, we note
that some of the costs of the investment
advisers’ fiduciary standard of the
previous alternative carry over to the
new fiduciary standard of this
alternative. As noted above, this
alternative would impose a new
regulatory paradigm on broker-dealers
relative to the baseline. The fiduciary
standard of this alternative would be
principles-based and shaped by
common law. In contrast, the standard
of conduct that applies to broker-dealers
under the baseline is more prescriptive
and governed by detailed SRO rules. A
paradigm shift from the standards of
conduct under the current baseline to
the uniform standard in this alternative
may increase compliance costs relative
to the baseline.1358
Furthermore, the potential increased
compliance costs associated with
applying the fiduciary standard of this
alternative to broker-dealers may
increase, relative to the baseline, a
broker-dealer’s incentives to offer
investment advice in the capacity of an
1358 See

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investment adviser and may decrease
their incentive to offer investment
advice in the capacity of broker-dealer.
For example, if this alternative creates
situations where the compensation to a
broker-dealer for providing a
recommendation in a commission-based
brokerage account would be less than
the compensation under a fee-based
advisory account while the perceived
regulatory burden is equal to that of an
investment adviser, a broker-dealer’s
incentive to offer advice in the capacity
of investment adviser may increase,
relative to the baseline.1359
To the extent broker-dealers act on the
increased incentives and decide to
participate in the market for investment
advice only in the capacity of
investment advisers—for example, dualregistrants may prefer to offer
investment advice only in the capacity
of investment adviser—retail customers
may experience an increase in the cost
of obtaining investment advice, relative
to the baseline. Alternatively, to the
extent broker-dealers decide to continue
to participate in the market for
investment advice in the capacity of
broker-dealers, they may pass on the
increased compliance costs, in full or in
part, to their retail customers in the
form of higher prices for services
rendered, relative to the baseline. In
particular, retail customers may
experience an increase in the cost of
obtaining investment advice, relative to
the baseline.1360
Similarly, the new fiduciary standard
of this alternative may also impose
additional compliance costs for
investment advisers relative to the
baseline.1361 For example, to the extent
that investment advisers currently
provide investment advice to their
clients in a manner that is not fully
consistent with the requirements (2) and
(3), investment advisers may incur
compliance costs in adhering to these
potentially more stringent requirements.
Investment advisers would likely pass
on the potential increase in the costs of
complying with the new fiduciary
standard of this alternative to their
clients. In turn, under the new fiduciary
standard of this alternative, clients may
experience an increase in the cost of
obtaining investment advice, relative to
the baseline.
It is also possible that the new
fiduciary standard of this alternative
may result in a different menu of
choices that allows retail customers and
clients to access investment advice in a
more cost-efficient manner relative to
1359 See

supra footnote 1351.
also 913 Study at 159–162.
1361 See id. at 159.
1360 See

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the baseline. For example, if more
financial professionals decide to
participate in the market for investment
advice as investment advisers,
competitive pressure may result in
better pricing and/or greater choice in
accessing investment advice for retail
customers and clients that choose to use
an investment adviser.
However, to the extent that the cost of
accessing investment advice increases
under the new fiduciary standard of this
alternative, some retail customers may
be pushed outside the market for
investment advice, relative to the
baseline. For example, currently, a retail
customer who prefers to receive
recommendations from a broker-dealer
or its associated persons to implement
a buy-and-hold strategy may find a
brokerage account to be better suited to
his or her needs than an advisory
account. Under the new fiduciary
standard of this alternative, this retail
customer may have to pay more for the
broker-dealer services that come with
his or her account, including obtaining
investment advice, relative to the
baseline. If, from the perspective of a
retail customer, this increase in the cost
for broker-dealer services outweighs the
expected benefits of the potential
improved efficiency of the
recommendations provided by the
broker-dealer, the retail customer may
prefer to switch to a more limited
brokerage account that does not come
with personalized investment advice
(e.g., an execution-only brokerage
account).1362
Alternatively, and as noted by one
commenter, the retail customer may
switch to an advisory account that
implements automated investment
strategies.1363 However, this type of
advisory account may not offer the
flexibility of personalized investment
advice to the evolving needs of the
customer, the level of contact a retail
customer seeks from a relationship with
a financial professional, and may not be
as responsive to market movements not
anticipated by the automated
investment strategies.
Similarly, under the new fiduciary
standard of this alternative, clients of
investment advisers may experience an
increase in the cost of obtaining
investment advice. Some of these clients

may not be able to afford the additional
cost and may be pushed outside the
market for investment advice, relative to
the baseline. As noted above, the
options available to these clients may
not offer the flexibility of tailored
investment advice that may benefit a
client with evolving needs.

1362 Relative to a brokerage account that offers
personalized investment advice, execution-only
brokerage accounts may also come with enhanced
research tools, more investment choices, and,
potentially, other forms of impersonal advice.
1363 See, e.g., CFA August 2018 Letter at 79,
noting that ‘‘[f]or example, Vanguard charges 0.30%
for its Personal Advisor Services, Schwab charges
0.28% for its Intelligent Advisory Services, and
Betterment charges 0.25% for its Digital offering
and 0.40% for its Premium offering.’’

1364 For a discussion of key conditions of the BIC
Exemption, see Section I.A.2 of the Proposing
Release at 21581. As discussed above, the DOL
Fiduciary Rule—including the BIC Exemption—was
vacated by the United States Court of Appeals for
the Fifth Circuit on March 15, 2018, although some
firms may continue to seek comply with certain of
its conditions under a DOL temporary enforcement
policy. See also supra Section III.B.2.e. See also
supra footnote 32.
1365 See Galvin Letter.

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c. Fiduciary Standard Under the DOL
Rule and BIC Exemption
A third alternative approach to
addressing the agency costs associated
with obtaining advice from brokerdealers is a fiduciary standard coupled
with a series of disclosures and other
requirements akin to the full
complement of conditions of the DOL’s
BIC Exemption adopted in connection
with the DOL Fiduciary Rule. This
alternative would mirror the key
conditions that apply to an ‘‘adviser’’
under the BIC Exemption.1364 This
alternative approach would apply to
broker-dealers when providing
recommendations to retail customer for
all types of retail accounts rather than
retirement accounts only. At least one
commenter signaled support for this
alternative.1365
Unlike other alternatives considered
in this section, or Regulation Best
Interest, this alternative can be
analyzed, at least in part, based upon its
previous adoption by the DOL and
partial implementation. Because this
alternative was already partly
implemented, the market for investment
advice, the securities market, and,
ultimately investors have had an
opportunity to partially adjust to it.
Section III.B.2.e.ii summarizes the
evidence about the response of firms,
investors and product markets in
response to the DOL Fiduciary Rule.
The requirements of the standard of
conduct in this alternative would
enhance the obligations under the
baseline by requiring broker-dealers to
adhere to the impartial conduct
standard, which included requirements
to act in their retail customers’ best
interest, disclose material conflicts of
interest and designate a person
responsible for addressing material
conflicts of interest and monitoring the
adherence of the associated persons of
the broker-dealer to the impartial
conduct standard. To the extent that

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Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations
these requirements reduce the effect of
the conflicts of interest on the
recommendation provided by a brokerdealer or its associated persons and
reduce the information asymmetry
between retail customers and brokerdealers, the new standard of conduct in
this alternative would increase the
efficiency of the recommendations made
by broker-dealers and their associated
persons, relative to the regulatory
baseline. Furthermore, the requirement
to act in the retail customers’ best
interest would enhance the existing
suitability standard that applies to
broker-dealers and, to the extent that the
new standard of conduct of this
alternative would result in
recommendations that are better aligned
with the objectives of the retail
customers, this new standard would
further increase the efficiency of the
recommendations provided by brokerdealers and their associated persons,
relative to the regulatory baseline. The
potential increase in the efficiency of
the recommendations provided by
broker-dealers and their associated
persons under the new standard in this
alternative would benefit retail
customers, relative to the baseline.
This alternative may also affect
product markets. As discussed above in
Section III.B.2.ii, certain product
sponsors introduced new products in
the market for mutual funds, such as
clean and T shares that were designed
to facilitate compliance with various
anticipated regulations, including the
DOL Fiduciary Rule. In certain
circumstances, these products may
come with lower fees for retail
customers. To the extent that this
alternative would enhance this trend in
product innovation, retail customers
may benefit from this trend.
However this alternative would also
impose costs on broker-dealers and
retail customers.
Compliance costs would include costs
associated with the contract provision,
and the disclosure, policies and
procedure, and record-making and
recordkeeping requirements. It is
possible that broker-dealers would pass
on these direct compliance costs, in part
or in full, to retail customers.
In addition to these costs, this
alternative would likely cause some
broker-dealers to change their current
practices, which, in turn, may impose
further costs on them or their retail
customers. As discussed above in
Section III.B.2.e.ii some studies find
evidence suggesting that firms have
adjusted their practices, at least in the
short-run, in response to the DOL
fiduciary Rule. In particular, certain of
these studies observe that in certain

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cases some broker-dealers have either
eliminated or reduced access to
brokerage advice services. Other studies
observe that some broker-dealers
migrated toward fee-based advisory
services or limited brokerage services
(i.e., no provision of advice) and, in the
process, offered their retail customers
the option to shift from commissionbased brokerage accounts to fee-based
accounts, automated investment
accounts or self-directed accounts.
Some of their customers chose to not
move to a fee-based account.
Certain studies provide evidence
suggesting that some broker-dealers
adjusted the range of their offerings.1366
Specifically, according to these studies,
some of the respondents reduced or
eliminated access to certain assets or
share classes, such as certain mutual
funds or mutual fund share classes, and
or annuity securities offered.
Finally, there is some anecdotal
evidence that suggests that certain firms
changed the compensation structure for
their associated persons.1367
Specifically, some firms equalize
commissions and deferred sales charges
across similar securities, while other
firms banned sales quotas, contests, and
certain bonuses.
To the extent that the fiduciary
standard in this alternative would result
in similar responses by broker-dealers,
the alternative would impose cost on
retail customers relative to the baseline.
For example, switching a retail
customer from a commission-based
brokerage account to a different type of
account, such as fee-based advisory
account, may leave a customer worse off
in certain circumstances. For instance, a
retail customer who is a buy-and-hold
investor may overpay for the advice
typically associated with this type of
investment strategy if the retail
customer were to shift from a brokerage
account to a fee-based account.1368 As
another example, a retail customer
would lose access to occasional
personalized advice if he or she were to
shift from his or her brokerage account
to a self-directed account.
The cost to retail customers from
switching to a suboptimal account is
particularly important in the context of
IRA brokerage accounts, because of the
larger size of these accounts and the
importance of these accounts for retail
investors to meet their retirement needs.
These costs may also be higher for IRA
brokerage accounts than for other
account types to the extent that these
accounts include long-term, buy-and-

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supra Section III.B.2.e.ii.
id.
1368 See supra footnote 1354.
1367 See

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33467

hold investments. As discussed in
Section III.B.2.e.ii, one study provided
an estimate for this potential cost.1369
However, as discussed above, the
estimates provided by various studies,
including this one, or by commenters
are generally subject to assumptions or
methodological limitations which may
affect the inferences based on such
estimates.
In addition to the evidence discussed
above, there are other potential
economic implications of this
alternative. For instance, this alternative
may exclude from the market for
investment advice those retail
customers that have account balances
that are below the account minimum for
typical advisory accounts. The
investment advisory industry might
adjust to a lack of supply by
accommodating lower account balances.
However, because investment advisers
have a fiduciary duty to all their clients,
and because they have limited time and
resources, there is likely a limit to how
much an investment adviser can lower
his or her account minimum to
accommodate more advisory clients.
Similarly, the product market may
adjust by innovating new products to
accommodate retail customers with
account balances that are below the
typical advisory account minimum. For
example, hybrid products that
implement automated investment
strategies tailored to a retail customer’s
goals may substitute for the services of
an investment adviser for customers
with lower account balances.
2. Prescribed Format for Disclosure
Although Regulation Best Interest
specifies the required content of
disclosure necessary to meet a brokerdealer’s Disclosure Obligation, it does
not prescribe a specific format for that
disclosure. As an alternative, and as
suggested by commenters,1370 we
1369 See

SIFMA Study.
e.g., LPL August 2018 Letter that notes
that ‘‘all investors should be provided with general
disclosures somewhat akin to those contained in
Form ADV Part 2A—e.g., which set forth the ranges
of remuneration payable to a broker-dealer in
connection with its recommendations of different
products . . . [W]e believe that detailed productspecific disclosures should be required prior to or
at the time of a recommendation only in instances
where the remuneration associated with the
recommendation exceeds the previously disclosed
range or where the recommendation implicates a
conflict of interest that has not previously been
disclosed. In all other cases, a broker-dealer should
be permitted to satisfy its Disclosure Obligation by
directing an investor in writing to review the
recommended product’s offering documents and
providing hyperlinks to those documents (or
providing a hyperlink to a central page on the
broker-dealer’s website that contains hyperlinks to
the product documents), either prior to the
1370 See,

Continued

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considered requiring broker-dealers to
use a specific form similar to, for
example, Form ADV.
Because this alternative would still
impose all the obligations of Regulation
Best Interest, all the benefits and the
costs identified in Regulation Best
Interest would carry over to this
alternative as well. However, by
changing the way broker-dealers would
meet the Disclosure Obligation, this
alternative may create additional
benefits and impose additional costs.
The requirement to use a form similar
to Form ADV to meet the Disclosure
Obligation would put more structure on
the disclosure of material facts relating
to the scope and terms of the
relationship with the retail customer
and material facts relating to conflicts of
interest that are associated with a
recommendation. This added structure
would facilitate retail customers’
comparison of multiple broker-dealers,
which would benefit retail customers.
For example, the evidence provided by
the investor testing surveys suggests that
retail customers form preference over
various variables that are being
disclosed.1371 On the backdrop of this
evidence, the structured disclosure
provided by a specific form may
enhance a retail customer’s ability to
select a broker-dealer in a manner
consistent with his or her preferences.
In addition, the structured disclosure
provided by a form may allow a third
party to collect the information
disclosed by firms, process it, and
present it to retail customers in a way
that would make it easier for the retail
customer to select a broker-dealer. To
the extent the format of disclosure
under this alternative would result in
this potential outcome, the alternative
would further benefit retail customers.
However, the requirement to use a
form similar to Form ADV to meet the
Disclosure Obligation may also impose
costs on broker-dealers, at least in the
short run, to the extent that this form of
disclosure is different from the form of
disclosure that firms employ currently
to satisfy their disclosure obligations
and liabilities under the baseline. In
general it may be difficult to design a

form that, while comprehensive in
terms of capturing the diversity of
business practices that broker-dealers
employ, remains easy to understand for
retail customers. In general, given that
there is a wide variety of business
models and practices, there is value in
providing broker-dealers with flexibility
to enable them to better tailor disclosure
and information that their retail
customers can understand and may be
more likely to read at relevant points in
time, rather than, for example,
mandating a standardized all-inclusive
(and likely lengthy) disclosure.
Depending on the specific form that is
eventually mandated, some firms may
incur more costs than others. To the
extent firms pass on those costs to retail
customers, the alternative would impose
a cost on retail customers.

recommendation via a general Form ADV Part 2Alike disclosure document or shortly thereafter via a
trade confirmation.’’ See also Morningstar Letter,
noting ‘‘publicly available disclosures with a
standard taxonomy work best because they
empower third parties such as ‘fintech’ and ‘regtech’ firms to analyze and contextualize critical
information and amplify a call to action for
ordinary investors.’’ See also Letter from Peter J.
Chepucavage (May 31, 2018) (‘‘Chepucavage
Letter’’), noting that ‘‘[c]osts for the small bd’s
however can be reduced with a commission
approved standard disclosure which would add
certainty and ought to be considered especially for
the small investor. [. . .] A standard disclosure

document would also be useful for the small bd that
cannot afford the legal assistance needed to
evaluate this 1,000 page proposal and draft
appropriate documents. [. . .] The Commission
should therefore reconsider the impact of its
proposal on small investors and small bd’s with the
assumption that retirement accounts are
significantly more important than regular brokerage
accounts especially for small and elderly investors.
A standard disclosure for small firms would reduce
costs for the firms and their customers.’’
1371 See Relationship Summary Adopting Release
for a discussion of the evidence provided by the
investor testing surveys.

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3. Disclosure-Only
Another potential alternative to
addressing the agency costs of obtaining
advice from broker-dealers is a
disclosure-only alternative, which
would require that broker-dealers satisfy
only the Disclosure Obligation of
Regulation Best Interest. In other words,
broker-dealers would be required to
provide the retail customer, in writing,
full and fair disclosure of all material
facts relating to the scope of the
relationship with the retail customer
and all material facts relating to the
conflicts of interest associated with the
recommendations to the retail customer,
prior to or at the time of the
recommendation. However, this
alternative would not impose either the
Care Obligation or the Conflict of
Interest Obligation.
As discussed in Sections III.C.2 and
III.C.4, there may be substantial overlap
between the disclosure requirements of
Regulation Best Interest and the
disclosure requirements under the
regulatory baseline. From this
perspective, relative to the regulatory
baseline, the cost of this alternative to
the broker-dealers may be small, at least
for some broker-dealers. However, as
pointed out above, a disclosure-only
alternative is not likely to address the
agency costs associated with obtaining

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advice from broker-dealers. As a result,
the Commission believes both specific
disclosure and mitigation requirements
are needed to address those conflicts.
Also, we noted above that sales contests,
sales quotas, bonuses, and non-cash
compensation that are based on the
sales of specific securities within a
limited period of time create highpressure situations for associated
persons to increase the sales of specific
securities by compromising the best
interest of their customers; the
Commission does not believe such
conflicts of interest can be reasonably
mitigated, let alone disclosed, in a
manner that adequately prevents harm
to retail customers and, accordingly,
believes that these conflicts must be
eliminated in their entirety.
Finally, as we discussed earlier,
commenters noted that there are limits
to the effectiveness of disclosure and
cited a number of studies suggesting
that disclosure alone is unlikely to solve
the issues surrounding, for example, the
conflicts of interest between a brokerdealer (or their associated persons) and
a retail customer.1372
IV. Paperwork Reduction Act
Certain provisions of Regulation Best
Interest and the rule amendments that
we are adopting today contain
‘‘collection of information’’
requirements within the meaning of the
Paperwork Reduction Act of 1995
(‘‘PRA’’).1373 The Commission
submitted Regulation Best Interest and
the rule amendments to the Office of
Management and Budget (‘‘OMB’’) for
review and approval in accordance with
the PRA.1374 The Commission’s earlier
PRA assessments have been revised to
reflect the modifications to the rule and
amendments from the Proposing
Release, as well as additional
information and data provided to the
Commission by commenters. An agency
may not conduct or sponsor, and a
person is not required to respond to, a
collection of information unless it
displays a currently valid OMB control
number. The titles and OMB control
numbers for the collections of
information are:
1372 See supra footnote 1208 and accompanying
text. See also supra Section III.B.4.c for a discussion
of the literature on the effectiveness of disclosure.
1373 44 U.S.C. 3501 et seq.
1374 See 44 U.S.C. 3507(d); 5 CFR 1320.11.
1375 See 17 CFR 240.17a–3. The addition of
paragraph (a)(35) to Rule 17a–3 would amend the
existing PRA for Rule 17a–3.
1376 See 17 CFR 240.17a–4. The amendment to
Rule 17a–4(e)(5) would amend the existing PRA for
Rule 17a–4.

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OMB control
No.

Rule

Rule title

Rule 15l–1 ...............
Rule 17a–3 ..............
Rule 17a–4 ..............

Regulation Best Interest.
Records to be made by certain exchange members, brokers and dealers 1375 ...........................................
Records to be preserved by certain exchange members, brokers and dealers 1376 ....................................

Regulation Best Interest enhances the
broker-dealer standard of conduct
beyond existing suitability obligations,
and aligns the standard of conduct with
retail customers’ reasonable
expectations by requiring brokerdealers, among other things, to: (1)
Comply with specific obligations to
make recommendations that are in the
best interest of the retail customer, and
that do not place the broker-dealer’s
interests ahead of the interests of the
retail customer; and (2) address conflicts
of interest by fully and fairly disclosing
material facts about conflicts of interest,
and in instances where we believe
disclosure is insufficient to reasonably
address the conflict, establish, maintain
and enforce policies and procedures
reasonably designed to mitigate or, in
certain instances, eliminate the conflict.
Generally, in crafting Regulation Best
Interest, we aimed to provide brokerdealers flexibility in determining how to
satisfy the component obligations. For
purposes of this analysis, we have made
assumptions regarding how a brokerdealer would comply with the
obligations of Regulation Best Interest,
as well as the amendments under Rule
17a–3(a)(35) and Rule 17a–4(e)(5).
In the Proposing Release, we
requested comment on the matters
discussed in the PRA, including our
estimates for the new and recurring
burdens and associated costs described
in connection with Regulation Best
Interest and the amendments under
Rule 17a–3(a)(35) and Rule 17a–
4(e)(5).1377 In particular, we sought
comment on estimates as to: (1) The
number of natural persons who are
associated persons; (2) the number of
broker-dealers that make securitiesrelated recommendations to retail
customers; (3) the number of natural
persons who are associated persons that
make securities-related
recommendations to retail customers;
and (4) any other costs or burdens 1378
associated with proposed Regulation
1377 The Proposing Release proposed to add new
paragraph (a)(25) of Rule 17a–3. As noted above, we
are adopting the provision substantially as
proposed but redesignating it as new paragraph
(a)(35) of Rule 17a–3. See supra footnote 820 and
accompanying text.
1378 Throughout the PRA analysis in the
Proposing Release, the burdens on in-house
personnel were measured in terms of burden hours,
and external costs were expressed in dollar terms.

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Best Interest that had not been
identified in the Proposing Release.
As discussed in Sections I, II, and III,
we received comments that addressed
whether we could minimize the burden
of the proposed collections of
information. We received several
comments suggesting that our estimated
burdens and costs for the rule as a
whole were too low.1379 In addition, the
Commission received some comments
specifically addressing the costs to
smaller broker-dealers.1380 Also, as
discussed in the Economic Analysis
section above, we received comments
regarding the potential costs and
burdens of proposed Regulation Best
Interest on broker-dealers.1381 In
response, we have modified several
substantive requirements to the rule by,
among other things, providing more
specificity in the rule text in the
Disclosure and Conflict of Interest
Obligations, which we believe will
mitigate some of these burdens and
costs relative to the Proposing
Release.1382 At the same time, certain
modifications, such as maintaining a
written record of oral disclosure,
resulted in new burdens and costs,
relative to those addressed in the
Proposing Release, which are reflected
below.
1379 See, e.g., NSCP Letter; see also CCMC Letters
(costs to implement the proposal were
underestimated and greater than 40% of firms
surveyed anticipate having to spend a moderate or
substantial amount to implement Regulation Best
Interest and Form CRS); Raymond James Letter
(noting the significant implementation costs of
Regulation Best Interest and Form CRS for the
industry); SIFMA August 2018 Letter (stating that
implementation costs of Regulation Best Interest
and Form CRS would be significant).
1380 See, e.g., Chepucavage Letter (finding that the
estimates in the proposal are severely understated
unless they are excluding time needed for review
of the proposal and final rule and suggesting the
Commission reconsider the impact on small
investors and small broker-dealers); NSCP Letter
(requesting the Commission to consider the
financial and operational impacts of the proposed
rule, particularly on small firms, and to minimize
those impacts, given that small firms do not have
compliance departments adequate to deal with
increasing regulatory demands). See also, e.g., Iowa
Insurance Commissioner Letter; Letter from David
S. Addington, National Federation of Independent
Business (May 30, 2018) (‘‘NFIB Letter’’).
1381 See supra Section III.
1382 Throughout this PRA analysis, the burdens
on in-house personnel are measured in terms of
burden hours, and external costs are expressed in
dollar terms.

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33469

3235–0033
3235–0279

A. Respondents Subject to Regulation
Best Interest and Amendments to Rule
17a–3(a)(35) and Rule 17a–4(e)(5)
1. Broker-Dealers
Regulation Best Interest imposes a
best interest obligation on a brokerdealer when making recommendations
of any securities transaction or
investment strategy involving securities
to retail customers. Except where noted,
we have assumed that a dually
registered firm, already subject to the
Advisers Act, would be subject to new,
distinct burdens under Regulation Best
Interest.
As of December 31, 2018, 3,764
broker-dealers were registered with the
Commission, either as standalone
broker-dealers or as dually registered
entities.1383 Based on data obtained
from Form BR, the Commission believes
that approximately 73.5% of this
population, or 2,766 broker-dealers,
have retail customers and therefore
would be subject to Regulation Best
Interest and the amendments under
Rules 17a–3(a)(35) and 17a–4(e)(5).1384
Further, based on FOCUS Report
data,1385 the Commission estimates that
as of December 31, 2018, approximately
985 broker-dealers may be deemed
small entities under the Regulatory
Flexibility Act.1386 Of these,
1383 The Commission estimated the number of
respondents in the Proposing Release as of
December 31, 2017. The Commission is updating its
estimated number of broker-dealers to reflect the
number of broker-dealers registered with the
Commission as of December 31, 2018.
1384 As of December 31, 2018, 3,764 brokerdealers filed Form BD. Retail sales by broker-dealers
were obtained from Form BR. As discussed above
in Section III.B.1.a, the number of broker-dealers
that serve retail customers (i.e., 2,766) likely
overstates the number of broker-dealers that will be
subject to Regulation Best Interest, because not all
broker-dealers that serve retail investors provide
recommendations to retail investors. We do not
have reliable data to determine the precise number
of broker-dealers that provide recommendations,
and as a result, we have assumed, for purposes of
this analysis that 2,766 broker-dealers will be
subject to Regulation Best Interest.
1385 FOCUS Reports, or ‘‘Financial and
Operational Combined Uniform Single’’ Reports,
are monthly, quarterly, and annual reports that
broker-dealers are generally required to file with the
Commission and/or SROs pursuant to Exchange Act
Rule 17a–5. See 17 CFR 240.17a–5.
1386 See infra Section V for an explanation of
which brokers-dealers, subject to Regulation Best
Interest, are ‘‘small entities,’’ for purposes of the
Regulatory Flexibility Act analysis.

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approximately 756 have retail
business.1387 Therefore, we estimate
that 2,010 broker-dealers would qualify
as large broker-dealers with retail
customers for purposes of this
analysis.1388
2. Natural Persons Who Are Associated
Persons of Broker-Dealers
As with broker-dealers, Regulation
Best Interest imposes a best interest
obligation on natural persons who are
associated persons of broker-dealers
when making recommendations of any
securities transaction or investment
strategy involving securities to retail
customers.
The Commission believes that
approximately 428,404 natural persons
would qualify as retail-facing, registered
representatives at standalone brokerdealers or dually registered firms,1389
and would therefore be subject to
Regulation Best Interest.1390

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B. Summary of Collections of
Information
Regulation Best Interest requires
broker-dealers and their associated
persons 1391 when making a
recommendation of any securities
The Commission’s estimate is obtained from
Form BD filings. Although Form BD filings are
updated on a more frequent basis than annually,
FOCUS data, which also informs this baseline with
respect to broker-dealers, is only sparsely updated
throughout the year. Moreover, instead, brokerdealers tend to make their most complete updates
in the fourth calendar quarter of each year.
Therefore, in order to minimize discrepancies in the
broker-dealer data between Form BD and FOCUS
data, we have normalized all of the data to the most
recently complete FOCUS data, which is for
December 2018.
1387 Id.
1388 This calculation was made as follows: (2,766
total retail broker-dealers)¥(756 total small retail
broker-dealers) = 2,010 large retail broker-dealers.
1389 See supra Section III.B.1 at Table 5. This
estimate is based on the following calculation:
(504,005 total licensed representatives (including
representatives of investment advisers)) × (15% (the
percentage of total licensed representatives who are
standalone investment adviser representatives)) =
approximately 75,601 representatives at standalone
investment advisers. To isolate the number of
representatives at standalone broker-dealers and
dually registered firms, we have subtracted 75,601
from 504,005, for a total of 428,404 retail-facing,
licensed representatives at standalone brokerdealers or dually registered firms.
1390 Unless otherwise noted, for purposes of the
PRA, we use the term ‘‘registered representatives’’
to refer to associated persons of broker-dealers who
are registered, have series 6 or 7 licenses, and are
retail-facing, and we use the term ‘‘dually registered
representatives of broker-dealers’’ to refer to
registered representatives who are dually registered
and are associated persons of a standalone brokerdealer (who may be associated with an unaffiliated
investment adviser) or a dually registered brokerdealer.
1391 However, in certain instances, as described
more fully below, the Commission assumes that
broker-dealers will undertake certain Disclosure
Obligations on behalf of their registered
representatives. See, e.g., infra footnote 1396.

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transaction or investment strategy
involving securities to a retail customer
to act in the best interest of the retail
customer at the time the
recommendation is made, without
placing the financial or other interest of
the broker-dealer ahead of the interest of
the retail customer. As discussed above,
Regulation Best Interest specifically
provides that this best interest
obligation shall be satisfied if the
broker-dealer complies with the specific
Disclosure, Care, Conflict of Interest,
and Compliance Obligations.
Rule 17a–3 requires a broker-dealer to
make and keep current certain records.
The Commission is amending this rule
by adding new paragraph (a)(35) to
impose new record-making obligations
on broker-dealers subject to Regulation
Best Interest. Rule 17a–4 requires a
broker-dealer to preserve certain records
if it makes or receives them. The
Commission is amending Rule 17a–
4(e)(5) to impose new record retention
obligations on broker-dealers subject to
Regulation Best Interest.
The obligations arising under
Regulation Best Interest and the
amendments under Rule 17a–3(a)(35)
and Rule 17a–4(e)(5) would give rise to
distinct collections of information and
associated costs and burdens for brokerdealers subject to the rules. The
collections of information associated
with Regulation Best Interest and rule
amendments are described below.
1. Disclosure Obligation
The Disclosure Obligation under
Regulation Best Interest requires a
broker, dealer, or natural person who is
an associated person of a broker or
dealer, prior to or at the time of
recommending a securities transaction
or strategy involving securities to a
retail customer, to provide the retail
customer, in writing, full and fair
disclosure of: (1) All material facts
relating to the scope and terms of the
relationship with the retail customer,
including (a) that the broker, dealer, or
such natural person is acting as a
broker, dealer, or an associated person
of a broker or dealer with respect to the
recommendation, (b) the fees and costs
that apply to the retail customer’s
transactions, holdings, and accounts,
and (c) the type and scope of services
provided to the retail customer,
including any material limitations on
the securities or investment strategies
involving securities that may be
recommended to the retail customer;
and (2) all material facts relating to
conflicts of interest that are associated
with the recommendation. The
Commission believes that requiring
broker-dealers to disclose to a retail

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customer, in writing, all material facts
relating to the scope and terms of the
relationship with the retail customer
would facilitate the retail customer’s
understanding of the nature of his or her
account, the broker-dealer’s fees and
costs, as well as the nature of services
that the broker-dealer provides, as well
as any limitations to those services. It
would also provide retail customers
with information to better understand
the differences among certain financial
service providers, such as brokerdealers, investment advisers, and dually
registered firms and dually registered
financial professionals. In addition, the
obligation to disclose all material facts
relating to conflicts of interest that are
associated with a recommendation
would raise retail customers’ awareness
of the potential effects of conflicts of
interest, and increase the likelihood that
broker-dealers would make
recommendations that are in the retail
customer’s best interest.
We are explicitly requiring in the rule
text of Regulation Best Interest, items
that the Proposing Release had only
provided as examples of ‘‘material facts
relating to the scope and terms of the
relationship with the retail customer’’
that must be disclosed, namely: (1) That
the broker, dealer or such natural person
is acting as a broker, dealer or an
associated person of a broker-dealer
with respect to the recommendation; (2)
the material fees and costs that apply to
the retail customer’s transactions,
holdings, and accounts; and (3) the type
and scope of services provided to the
retail customer, including: any material
limitations on the securities or
investment strategies involving
securities that may be recommended to
the retail customer. We generally
believe the proposed burdens and costs
identified in the Proposing Release were
accurate but have updated estimates to
reflect changes in the number of brokerdealers and costs of certain services
since the last estimate. The collections
of information associated with the
Disclosure Obligation, as well as the
associated record-making and
recordkeeping obligations are addressed
below.
a. Obligation To Provide to the Retail
Customer Full and Fair Disclosure, in
Writing, of all Material Facts Relating to
the Scope and Terms of the Relationship
With the Retail Customer
The Commission assumes for
purposes of this analysis that brokerdealers would meet the obligation to
disclose to the retail customer, in
writing, the material facts related to the
scope and terms of the relationship with
the retail customer through a

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combination of delivery of the
Relationship Summary, creating account
disclosures to include standardized
language related to capacity and type
and scope of services, and the
development of fee schedules.

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(1) Disclosure of Capacity
As discussed above, the Commission
believes that a standalone broker-dealer
would be able to satisfy its obligation to
disclose that it is acting in a brokerdealer capacity by providing the retail
customer with the Relationship
Summary in the manner prescribed by
the rules and guidance in the
Relationship Summary Adopting
Release.1392
We assume, for purposes of this PRA
analysis, that a dually registered brokerdealer would satisfy its obligation to
disclose it is acting in a broker-dealer
capacity by creating an account
disclosure with standardized language,
and by providing it to the retail
customer at the beginning of the
relationship. The account disclosure
would set forth when the broker-dealer
would be acting in a broker-dealer
capacity, and the method the brokerdealer planned to use to clarify its
capacity at the time of the
recommendation. We understand that
many broker-dealers already include
such information in account
disclosures.
(2) Disclosure of Fees and Costs and
Type and Scope of Services, Including
Any Material Limitations on the
Securities or Investment Strategies That
may be Recommended
While many broker-dealers provide
fee information to retail customers in a
fee schedule, the Commission believes
that to comply with the Disclosure
Obligation broker-dealers will either
amend their existing schedules or
develop a new standardized fee
schedule to disclose the fees and costs
applicable to retail customers’
transactions, holdings, and accounts.
This fee schedule would be delivered to
retail customers at the beginning of a
relationship. If, at the time the
recommendation is made, the disclosure
made to the retail customer is not
current or does not contain all material
facts regarding the fees and costs of the
particular recommendation, the brokerdealer would need to deliver an
amended fee schedule or provide an
oral update, under the circumstances
outlined in Section II.C.1.
With respect to disclosure of the type
and scope of services provided by the
broker-dealer, including any material
1392 See

Relationship Summary Adopting Release.

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limitations on the securities or
investment strategies that may be
recommended to the retail customer, we
assume for purposes of this PRA
analysis that a broker-dealer would
satisfy the Disclosure Obligation by
including this information in the
account disclosure provided to the retail
customer at the beginning of the
relationship, as described above. The
broker-dealer would need to deliver an
amended account disclosure to the retail
customer in the case of any material
changes made to the type and scope of
services or provide an oral update,
under the circumstances outlined in
Section II.C.1.
b. Obligation To Provide to the Retail
Customer Full and Fair Disclosure, in
Writing, of All Material Facts Relating to
Conflicts of Interest That are Associated
With the Recommendation
Regulation Best Interest requires a
broker-dealer to provide the retail
customer, in writing, full and fair
disclosure of all material facts relating
to conflicts of interest that are
associated with a recommendation.
As discussed above, we assume that
broker-dealers will satisfy the obligation
to disclose all material facts relating to
conflicts of interest through the use of:
(1) A standardized, written disclosure
document provided to all retail
customers and (2) supplemental
disclosure provided to certain retail
customers for recommendations of
specific products.
We assume for purposes of this
analysis that delivery of written
disclosure will occur at the beginning of
a relationship, such as together with the
account opening agreement. For existing
retail customers, the disclosure will
need to occur ‘‘prior to or at the time’’
of a recommendation. Subsequent
disclosures may be delivered or the
broker-dealer may provide an oral
update, under the circumstances
outlined in Section II.C.1, in the event
of a material change or if the brokerdealer determines additional disclosure
is needed for certain types of products.
The corresponding estimated total
annual reporting costs and burdens are
addressed below.1393
c. Estimated Costs and Burdens
(1) Disclosure of Capacity, Type and
Scope of Services
Standalone broker-dealers will satisfy
the obligation to disclose the capacity in
1393 The costs and burdens arising from the
obligation to identify all material conflicts of
interest that are associated with the
recommendation are addressed below, in the
context of the Conflict of Interest Obligation, in
Section V.B.1.

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33471

which they are acting through the
delivery to retail customers of the
Relationship Summary, in accordance
with the rules and guidance set forth in
the Relationship Summary Adopting
Release. Additionally, although we
understand that many dual-registrants
and standalone broker-dealers, as a
matter of best practice, already disclose
the capacity in which they are acting as
well as the and type and scope of
services they offer to retail customers,
for purposes of this analysis, we assume
that dual-registrants would create new
account disclosure related to capacity
and all broker-dealers would create or
update account disclosure related to
type and scope of services specifically
for purposes of compliance with
Regulation Best Interest. The
Commission assumes that brokerdealers would provide the account
disclosure to each retail customer
account, regardless of whether the retail
customer has multiple accounts with
the broker-dealer.
While the Commission recognizes that
the Disclosure Obligation applies to the
broker-dealer entity and its associated
persons, we do not expect associated
persons to incur any initial or ongoing
burdens with respect to the scope and
terms of the relationship, as we assume
for purposes of this analysis that this
information would be addressed by the
broker-dealer entity’s account
disclosure.1394 With regard to disclosure
of the capacity in which the associated
person is acting, the Commission
believes that dually registered
representatives of broker-dealers will
incur initial and ongoing burdens.1395
Following is a discussion of the
estimated initial and ongoing burdens
and costs.
i. Initial Costs and Burdens
Because, as noted above, standalone
broker-dealers will satisfy the obligation
to disclose the capacity in which they
are acting through the delivery to retail
customers of the Relationship Summary,
we estimate zero burden hours for
standalone broker-dealers to disclose
the capacity in which they are acting.
1394 A broker-dealer or an associated person may
satisfy the Disclosure Obligation by using oral
disclosure if it has previously provided written
disclosure to the retail customer beforehand as well
as the method it planned to use to clarify the
disclosure at the time of the recommendation. In
addition, a record of the fact of such oral disclosure
having been made must be created and retained. We
assume that any disclosure required of a registered
representative will be made orally, and that any
ongoing costs and burdens will be associated with
the record-making memorializing the fact of the oral
disclosure. See Section IV.B.5 (discussing the costs
and burdens associated with record-making).
1395 See supra Section IV.B.5 (discussing the costs
and burdens associated with record-making).

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We estimate that a dually registered firm
will incur an initial internal burden of
10 hours for in-house counsel and inhouse compliance 1396 to draft language
regarding the capacity in which they are
acting for inclusion in the standardized
account disclosure that is delivered to
the retail customer.1397
In addition, we estimate that dualregistrants will incur an estimated
external cost of $4,970 for the assistance
of outside counsel in the preparation
and review of standardized language
regarding capacity.1398 For the
estimated 563 dually registered firms
with retail business,1399 we project an
aggregate initial burden of 5,630
hours,1400 and $2.8 million in aggregate
initial costs relating to disclosure of the
capacity in which they are acting.1401
Similarly, to comply with Regulation
Best Interest, we believe that brokerdealers 1402 will draft standardized
language for inclusion in the account
disclosure to provide the retail customer
with more specific information
regarding the type and scope of services
1396 The ten hour estimate includes five hours for
in-house counsel to draft and review the
standardized language, and five hours for
consultation and review of compliance personnel.
1397 As discussed above, the following estimates
include the costs and burdens that broker-dealers
would incur in drafting standardized account
disclosure language related to the scope and terms
of the relationship on behalf of their dually
registered representatives. For purposes of this
analysis, the Commission assumes that brokerdealers will undertake these tasks on behalf of their
registered representatives. See Section IV.B.5
(discussing the costs and burdens associated with
record-making).
1398 Data from the Securities Industry Financial
Markets Association’s Management & Professional
Earnings in the Securities Industry 2013 (‘‘SIFMA
Management and Professional Earnings Report’’),
modified by Commission staff to account for an
1,800-hour work-year and inflation, and multiplied
by 5.35 (professionals) or 2.93 (office) to account for
bonuses, firm size, employee benefits, and
overhead, suggests that costs for this position is
$497 per hour. The SIFMA Management and
Professional Earnings Report was updated in 2019
to reflect inflation. The numbers in the report are
higher than the numbers we used in the Proposing
Release. This estimate is based on the following
calculation: (10 hours for outside counsel review/
drafting) × ($497/hour for outside counsel services)
= $4,970 in initial outside counsel costs.
1399 See supra Section III.B.1.a, at Table 1, Panel
B. The number of dually registered broker-dealers
includes broker-dealers that are also Commissionand state-licensed investment advisers.
1400 This estimate is based on the following
calculation: (563 dually registered retail firms) × (10
hours) = 5,630 initial aggregate burden hours.
1401 This estimate is based on the following
calculation: (563 dually registered retail firms) ×
($4,970 in external cost per firm) = $2.8 million in
aggregate initial costs.
1402 In the Proposing Release, we inadvertently
referred to ‘‘standalone broker-dealers’’ in this
discussion, but our subsequent references and
estimates reflected our intent to capture initial costs
and burdens relating to disclosure of type and scope
of services on all broker-dealers (distinguishing
between small and large).

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that they provide. We expect that the
associated costs and burdens will differ
between small and large broker-dealers,
as large broker-dealers generally offer
more products and services and
therefore will need to evaluate a larger
number of products and services.
Given these assumptions, we estimate
that a small broker-dealer will incur an
internal initial burden of 10 hours for
in-house counsel and in-house
compliance to draft this standardized
language.1403 In addition, a small
broker-dealer will incur an estimated
external cost of $4,970 for the assistance
of outside counsel in the preparation
and review of this standardized
language.1404 For the estimated 756
small broker-dealers,1405 we project an
aggregate initial burden of 7,560
hours,1406 and aggregate initial costs of
$3.8 million.1407
Given the broader array of products
and services offered, we estimate that a
large broker-dealer will incur an
internal burden of twenty hours to draft
this standardized language.1408 A large
broker-dealer will also incur an
estimated cost of $7,470 for the
assistance of outside counsel in the
preparation and review of this
standardized language.1409 For the
estimated 2,010 large retail brokerdealers, we estimate an aggregate initial
burden of 40,200 hours 1410 and $15
million in aggregate initial costs.1411
We estimate that all broker-dealers
will each incur approximately 0.02
1403 The 10-hour estimate includes 5 hours for inhouse counsel to draft and review the standardized
language, and 5 hours for consultation and review
by in-house compliance.
1404 This estimate is based on the following
calculation: (10 hours for outside counsel review/
drafting) × ($497/hour for outside counsel services)
= $4,970 in initial outside counsel costs.
1405 See supra footnote 1384 and accompanying
text.
1406 This estimate is based on the following
calculation: (756 small broker-dealers) × (10 hours
per small broker-dealer) = 7,560 initial aggregate
burden hours.
1407 This estimate is based on the following
calculation: (756 small broker-dealers) × ($4,970 in
external cost per small broker-dealer) = $3.8 million
in aggregate initial outside counsel costs.
1408 The 20-hour estimate includes 10 hours for
in-house counsel to draft and review the
standardized language, and 10 hours for
consultation and review by in-house compliance.
1409 This estimate is based on the following
calculation: (15 hours for outside counsel review/
drafting) × ($497/hour for outside counsel services)
= $7,455 in initial outside counsel costs.
1410 This estimate is based on the following
calculation: (2,010 large broker-dealers) × (20
burden hours) = 40,200 aggregate initial burden
hours.
1411 This estimate is based on the following
calculation: (2,010 large broker-dealers) × ($7,455
initial outside counsel costs) = $15 million in
aggregate initial costs.

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burden hours 1412 for delivery of the
account disclosure document.1413 Based
on FOCUS data, we estimate that the
2,766 broker-dealers that report retail
activity have approximately 139 million
customer accounts, and that
approximately 73.5%, or 102 million, of
those accounts belong to retail
customers.1414 We therefore estimate
that broker-dealers will have an
aggregate initial burden of 2,040,000
hours, or approximately 738 hours 1415
per broker-dealer for the first year after
Regulation Best Interest is in effect.1416
We estimate a total initial aggregate
burden for all broker-dealers to develop
and deliver to retail customers account
disclosures relating to capacity and type
and scope of services of 2,093,390
burden hours.1417 We estimate a total
initial aggregate cost of $21.6
million.1418
1412 This is the same estimate the Commission
makes in the Relationship Summary Adopting
Release. It is also the same estimate the Commission
made in the Amendments to Form ADV Adopting
Release, and for which we received no comment.
See Amendments to Form ADV, 17 CFR parts 275
and 279 at 49259. We expect that delivery
requirements will be performed by a general clerk.
The general clerk’s time is included in the initial
burden estimate.
1413 As noted above, for new retail customers, we
expect delivery to occur at the beginning of the
relationship; for existing customers, we expect
delivery to occur prior to or at the time of a
recommendation.
1414 We have revised our estimates from the
Proposing Release to reflect the updated FOCUS
Report data. Therefore, the 2,766 broker-dealers
(including dual-registrants) with retail customers
report 139 million customer accounts. See Section
III.B.1.a, at Table 1, Panel B. Assuming the amount
of retail customer accounts is proportionate to the
percentage of broker-dealers that have retail
customers, or 73.5% of broker-dealers, then the
number of retail customer accounts would be 73.5%
of 139 million accounts = 102 million retail
customer accounts. This number likely overstates
the number of deliveries to be made due to the
double-counting of deliveries to be made by dualregistrants to a certain extent, and the fact that one
customer may own more than one account.
1415 These estimates are based on the following
calculations: (0.02 hours per customer account ×
(102 million retail customer accounts) = 2,040,000
aggregate burden hours. Conversely, (2,040,000
hours)/(2,766 broker-dealers) = approximately 738
burden hours per broker-dealer for the first year
after Regulation Best Interest is in effect.
1416 We estimate that broker-dealers will not incur
any incremental postage costs because we assume
that they will make such deliveries with another
mailing the broker-dealer was already delivering to
retail customers.
1417 This estimate is based on the following
calculation: (5,630 aggregate initial burden hours
for dual-registrants) + (7,560 aggregate initial
burden hours for small broker-dealers) + (40,200
burden hours for large broker-dealers) + (2,040,000
aggregate initial burden hours for all broker-dealers
to deliver the account disclosures) = 2,093,390 total
aggregate initial burden hours.
1418 This estimate is based on the following
calculation: ($2.8 million in initial aggregate costs
for dual-registrants) + ($3.8 million in initial
aggregate costs for small broker-dealers) + ($15
million in initial aggregate costs for large broker-

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ii. Ongoing Costs and Burdens
For purposes of this analysis, we
assume that broker-dealers will review
and amend the standardized language in
the account disclosure, on average, once
a year.1419 Further, we assume that
broker-dealers will not incur outside
costs in connection with updating
account disclosures, as in-house
personnel will be more knowledgeable
about changes in capacity, and the type
and scope of services offered by the
broker-dealer. Additionally, with
respect to standalone broker-dealers,
because they will meet their obligation
to disclose capacity by delivering the
Relationship Summary, and will be
subject to requirements to amend the
Relationship Summary consistent with
Form CRS, we estimate zero burden
hours annually for ongoing costs
relating to disclosure of capacity under
the Disclosure Obligation.
We estimate that each dually
registered broker-dealer will incur
approximately five burden hours
annually for in-house compliance and
business-line personnel to review
changes in the dual-registrant’s
capacity,1420 and another two burden
hours annually for in-house counsel to
amend the account disclosure to
disclose material changes to the dualregistrant’s capacity, for a total of seven
burden hours. The estimated ongoing
aggregate burden to amend dualregistrants’ account disclosures to
reflect changes in capacity is therefore
3,941 hours per year.1421
dealers) = $21.6 million in total initial aggregate
costs.
1419 We believe this annual timeframe is
consistent with other obligations imposed on
broker-dealers. For example, FINRA rules set an
annual supervisory review as a minimum threshold
for broker-dealers, for example, in FINRA Rules
3110 (requiring an annual review of the businesses
in which the broker-dealer engages), 3120 (requiring
an annual report detailing a broker-dealer’s system
of supervisory controls, including compliance
efforts in the areas of antifraud and sales practices);
and 3130 (requiring each broker-dealer’s CEO or
equivalent officer to certify annually to the
reasonable design of the policies and procedures for
compliance with relevant regulatory requirements).
1420 In the Proposing Release, we referred to
capacity and type and scope of services, however,
we captured the ongoing costs and burdens relating
to disclosure of type and scope of services in the
paragraphs that followed, where we inadvertently
referred to ‘‘small standalone broker-dealers’’ and
‘‘large standalone broker-dealers,’’ but where our
calculations reflected the burdens on all ‘‘small
broker-dealers’’ and all ‘‘large broker-dealers.’’ See
Proposing Release, footnotes 600–601. We believe it
is appropriate to distinguish between standalone
and dually registered broker-dealers in assessing the
costs and burdens relating to disclosure of capacity,
and to distinguish between small and large firms in
assessing the costs and burdens relating to
disclosure of type and scope of services, as reflected
in this section.
1421 This estimate is based on the following
calculation: (7 burden hours per dually registered

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With respect to small broker-dealers,
we estimate an internal burden of two
hours for in-house compliance and
business-line personnel to review and
update changes in types or scope of
services, and another two burden hours
annually for in-house counsel to amend
the account disclosure to disclose
material changes to type and scope of
services—for a total of four burden
hours. The estimated ongoing aggregate
burden for small broker-dealers to
amend account disclosures to reflect
changes in type and scope of services is
therefore 3,024 hours per year.1422
We estimate that large broker-dealers
would incur ten burden hours annually
for in-house compliance and businessline personnel to review and update
changes the type and scope of services,
and another ten burden hours annually
for in-house counsel to amend the
account disclosure to disclose material
changes to the type and scope of
services, for a total of twenty burden
hours. We therefore believe the ongoing,
aggregate burden is 40,200 hours per
year for large broker-dealers.1423
With respect to delivery of the
amended account agreements in the
event of material changes to the capacity
disclosure or disclosure related to type
and scope of services, we estimate that
this would take place among 20% of a
broker-dealer’s retail customer accounts
annually. We therefore estimate brokerdealers to incur a total annual aggregate
burden of 408,000 hours, or 148 hours
per year per broker-dealer.1424
The total ongoing aggregate burden for
all broker-dealers to review, amend, and
deliver updated account disclosures to
reflect changes in capacity, type and
scope of services would be 455,165
burden hours per year.1425
The Commission acknowledges that
the types of services and product
firm per year) × (563 dually registered brokerdealers) = 3,941 ongoing aggregate burden hours per
year.
1422 This estimate is based on the following
calculation: (4 burden hours per broker-dealer per
year) × (756 small broker-dealers) = 3,024 ongoing
aggregate burden hours per year.
1423 This estimate is based on the following
calculation: (20 burden hours per broker-dealer per
year) × (2,010 large broker-dealers) = 40,200
ongoing aggregate burden hours per year.
1424 (20%) × (102 million retail customer
accounts) × (.02 hours for delivery to each customer
account) = 408,000 aggregate burden hours.
Conversely, 408,000 aggregate burden hours/2,766
broker-dealers = 148 burden hours per year per
broker-dealer.
1425 This estimate is based on the following
calculation: (3,941 ongoing aggregate burden hours
for dually registered broker-dealers) + (3,024
ongoing aggregate burden hours for small brokerdealers) + (40,200 ongoing aggregate burden hours
for large broker-dealers) + (408,000 ongoing
aggregate burden hours for delivery of amended
account disclosures) = 455,165 total ongoing
aggregate burden hours per year.

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33473

offerings vary greatly by broker-dealer,
and therefore the costs and burdens
associated with updating the account
disclosure might also vary.
(2) Disclosure of Fees and Costs
The Commission assumes for
purposes of this analysis that a brokerdealer will disclose its fees and costs
through a standardized fee schedule,
delivered to the retail customer at the
beginning of the relationship, or, for
existing retail customers, prior to or at
the time of a recommendation and, as
discussed below, will amend such fee
schedules in the event of material
changes. Although we understand that
many broker-dealers already provide fee
schedules to retail customers, we are
assuming for purposes of this analysis
that a fee schedule would be created
specifically for purposes of compliance
with Regulation Best Interest.1426 While
the Commission recognizes that the fee
disclosure included in Disclosure
Obligation applies to the broker-dealer
entity and its associated persons, we do
not expect any burdens or costs on
associated persons related to the fees
and costs as this information would be
addressed in the broker-dealer entity’s
fee schedule.
i. Initial Costs and Burdens
We assume that, for purposes of this
analysis, the associated costs and
burdens will differ between small and
large broker-dealers, as large brokerdealers generally offer more products
and services and therefore will need to
evaluate a wider range of fees in their
fee schedules. As stated above, while we
anticipate that many broker-dealers may
already create fee schedules, we believe
that small broker-dealers will initially
spend five hours for in-house
compliance and large broker-dealers
will spend ten hours for in-house
compliance to internally create a new
fee schedule in consideration of the
requirements of Regulation Best Interest.
We additionally estimate a one-time
external cost of $2,485 for small brokerdealers 1427 and $4,970 for larger brokerdealers for outside counsel to review the
fee schedule.1428 We therefore estimate
the initial aggregate burden for small
broker-dealers to be 3,780 burden
1426 Our estimates may be higher than actual,
since firms may be able to use or simply update
existing disclosures depending on the facts and
circumstances.
1427 This cost estimate is based on the following
calculation: (5 hours of review) × ($497/hour for
outside counsel services) = $2,485 outside counsel
costs.
1428 This cost estimate is based on the following
calculation: (10 hours of review) × ($497/hour for
outside counsel services) = $4,970 outside counsel
costs.

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hours,1429 and the initial aggregate cost
to be $1.88 million.1430 We estimate the
aggregate burden for large broker-dealers
to be 20,100 burden hours,1431 and the
aggregate cost to be $9.99 million.1432
Similar to delivery of the account
disclosure regarding capacity and type
and scope of services, we estimate the
burden for broker-dealers to make the
initial delivery of the fee schedule to
new retail customers, at the beginning of
the relationship, and existing retail
customers, prior to or at the time of a
recommendation, will require
approximately 0.02 hours to deliver to
each retail customer.1433 As stated
above, we estimate that the 2,766
broker-dealers that report retail activity
have approximately 139 million
customer accounts, and that
approximately 73.5%, or 102 million, of
those accounts belong to retail
customers.1434 We therefore estimate
that broker-dealers will have an
aggregate initial burden of 2,040,000
hours, or approximately 738 hours per
broker-dealer for the first year after
Regulation Best Interest is in effect.1435
The total aggregate initial burden for
broker-dealers is therefore estimated at
2,063,880 1436 hours, and the total
aggregate initial cost is estimated at
$11.87 million.1437

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ii. Ongoing Costs and Burdens
For purposes of this PRA analysis, we
assume that broker-dealers will review
and amend the fee schedule on average,
1429 This estimate is based on the following
calculation: (5 burden hours of review per small
broker-dealer) × (756 small broker-dealers) = 3,780
aggregate initial burden hours.
1430 This estimate is based on the following
calculation: ($2,485 for outside counsel costs per
small broker-dealer) × (756 small broker-dealers) =
$1.88 million in aggregate initial outside costs.
1431 This estimate is based on the following
calculation: (10 burden hours of review per large
broker-dealer) × (2,010 large broker-dealers) =
20,100 aggregate initial burden hours.
1432 This estimate is based on the following
calculation: ($4,970 for outside counsel costs per
large broker-dealer) × (2,010 large broker-dealers) =
$9.99 million in aggregate initial costs.
1433 See supra footnote 1411.
1434 See supra footnote 1412.
1435 This estimate is based on the following
calculation: (102 million retail customer accounts)
× (.02 hours for delivery to each customer account)
= 2,040,000 aggregate burden hours. Conversely,
(2,040,000 aggregate burden hours)/(2,766 brokerdealers) = 738 burden hours per broker-dealer for
the first year after Regulation Best Interest is in
effect.
1436 This estimate is based on the following
calculations: (3,780 aggregate burden hours for
small broker-dealers) + (20,100 burden hours for
large broker-dealers) + (2,040,000 burden hours for
delivery) = 2,063,880 total aggregate initial burden
hours.
1437 This estimate is based on the following
calculation: ($1.88 million for small broker-dealer
costs) + ($9.99 million large broker-dealer costs) =
$11.87 million in total initial aggregate costs.

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once a year. With respect to small
broker-dealers, we estimate that
reviewing and updating the fee schedule
will require approximately two hours
for in-house compliance per year, and
for large broker-dealers, we estimate that
the recurring, annual burden to review
and update the fee schedule will be four
hours for in-house compliance for each
large broker-dealer. Based on these
estimates, we estimate the recurring,
aggregate, annualized burden will be
1,512 hours for small broker-dealers 1438
and 8,040 hours for large brokerdealers.1439 We do not anticipate that
small or large broker-dealers will incur
outside legal, compliance, or consulting
fees in connection with updating their
standardized fee schedule since inhouse personnel would be more
knowledgeable about these facts, and we
therefore do not expect external costs
associated with updating the fee
schedule.
With respect to delivery of the
amended fee schedule in the event of a
material change, we estimate that this
would take place among 40% of a
broker-dealer’s retail customer accounts
annually, and that broker-dealers will
require approximately 0.02 hours to
deliver the amended fee schedule to
each retail customer.1440 We therefore
estimate broker-dealers would incur a
total annual aggregate burden of 816,000
hours, or 295 hours per brokerdealer.1441
The total ongoing aggregate burden for
all broker-dealers to review, amend, and
deliver updated account disclosures to
reflect changes in fees and costs would
be 825,552 burden hours per year.1442
The Commission acknowledges that
the type of fee schedule may vary
greatly by broker-dealer, and therefore
that the costs or burdens associated with
updating the standardized fee schedule
might similarly vary.
1438 This estimate is based on the following
calculation: (2 burden hours per broker-dealer) ×
(756 small broker-dealers) = 1,512 aggregate burden
hours per broker-dealer per year.
1439 This estimate is based on the following
calculation: (4 burden hours per broker-dealer) ×
(2,010 large broker-dealers) = 8,040 aggregate
burden hours per broker-dealer per year.
1440 See supra footnote 1411.
1441 This estimate is based on the following
calculation: (40% of 102 million retail customer
accounts) × (.02 hours) = 816,000 aggregate burden
hours. Conversely, (816,000 aggregate burden
hours)/(2,766 broker-dealers) = 295 burden hours
per broker-dealer per year.
1442 This estimate is based on the following
calculation: (1,512 ongoing aggregate burden hours
for small broker-dealers) + (8,040 ongoing aggregate
burden hours for large broker-dealers) + (816,000
ongoing aggregate burden hours for delivery of
amended account disclosures) = 825,552 total
ongoing aggregate burden hours per year.

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(3) Disclosure of All Material Facts
Relating to Conflicts of Interest
Associated With the Recommendation
Regulation Best Interest requires
broker-dealers to provide a retail
customer, in writing, full and fair
disclosure of all material facts relating
to conflicts of interest that are
associated with the recommendation.
Because the Disclosure Obligation
applies to both the broker-dealer entity
and its associated persons, the
Commission expects that the brokerdealer entity and its associated persons
will incur initial and ongoing burdens.
However, as with the disclosure of the
capacity in which they are acting and
type and scope of services, we assume
for purposes of this analysis that the
broker-dealer entities will incur the
costs and burdens of disclosing material
conflicts of interest on behalf of their
associated persons.1443
i. Initial Costs and Burdens
The Disclosure Obligation provides
broker-dealers with the flexibility to
choose the form and manner of conflict
disclosure. However, we believe that
many or most broker-dealers will
develop a standardized conflict
disclosure document and deliver it to
their retail customers.1444 We also
assume for purposes of this PRA
analysis that broker-dealers will update
and deliver the standardized conflict
disclosure document yearly on an
ongoing basis, following the brokerdealer’s annual conflicts review process.
For purposes of this PRA analysis, we
assume that a standardized conflict
disclosure document will be developed
by in-house counsel and reviewed by
outside counsel. For small brokerdealers, we estimate it will take inhouse counsel, on average, five burden
hours to create the standardized conflict
disclosure document and outside
counsel five hours to review and revise
the document. We estimate that the
initial aggregate burden for the
development of a standardized
disclosure document, based on an
estimated 756 small broker-dealers, will
be 3,780 burden hours.1445 We
additionally estimate an initial cost of
1443 See Section IV.B.5 (discussing the costs and
burdens associated with record-making, including
for associated persons of a broker-dealer).
1444 As noted above, we assume that delivery for
new customers will occur at the beginning of the
relationship, and that delivery for existing
customers will occur prior to or at the time a
recommendation is made.
1445 This estimate is based on the following
calculation: (5 hours) × (756 small broker-dealers)
= 3,780 aggregate initial burden hours.

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$2,485 per small broker-dealer,1446 and
an aggregate initial cost of $1.88 million
for all small broker-dealers.1447
We expect the development and
review of the standardized conflict
disclosure document to take longer for
large broker-dealers because, as
discussed above, we believe large
broker-dealers generally offer more
products and services and employ more
individuals, and therefore will need to
disclose a larger number of conflicts. We
estimate that for large broker-dealers, it
will take 7.5 burden hours for in-house
counsel to create the standardized
conflict disclosure document, and
outside counsel will take another 7.5
hours to review and revise the
disclosure document. As a result, we
estimate the initial aggregate burden,
based on an estimated 2,010 large
broker-dealers, to be approximately
15,075 burden hours.1448 We
additionally estimate initial costs of
$3,728 per broker-dealer,1449 and an
aggregate initial cost for large brokerdealers of approximately $7.49
million.1450
We assume that broker-dealers will
deliver the standardized conflict
disclosure document to new retail
customers at the inception of the
relationship, and to existing retail
customers prior to or at the time of a
recommendation. We estimate that
broker-dealers will require
approximately 0.02 hours to deliver the
standardized conflict disclosure
document to each retail customer.1451
We therefore estimate that brokerdealers will incur an aggregate initial
burden of 2,040,000 hours, or
approximately 738 hours per brokerdealer for delivery of the standardized
conflict disclosure document the first
year after Regulation Best Interest is in
effect.1452
1446 This estimate is based on the following
calculation: ($497/hour) × (5 hours) = $2,485 in
initial costs.
1447 This estimate is based on the following
calculation: ($497/hour × 5 hours) × (756 small
broker-dealers) = $1.88 million in aggregate initial
costs.
1448 This estimate is based on the following
calculation: (7.5 hours × 2,010 large broker-dealers)
= 15,075 aggregate initial burden hours.
1449 This estimate is based on the following
calculation: ($497/hour) × (7.5 hours) = $3,728 in
initial costs per broker-dealer.
1450 This estimate is based on the following
calculation: ($497/hour) × (7.5 hours) × 2,010 large
broker-dealers) = $7.49 million in aggregate costs.
1451 See supra footnote 1411. For purposes of this
PRA analysis, we have assumed any initial
disclosures made by the broker-dealer related to
material conflicts of interest will be delivered
together.
1452 These estimates are based on the following
calculations: (0.02 hours per customer account ×
102 million retail customer accounts) = 2,040,000
aggregate initial burden hours. Conversely,

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The total aggregate initial burden for
broker-dealers is therefore estimated at
2,058,855 1453 hours, and the total
aggregate initial cost is estimated at
$9.37 million.1454
ii. Ongoing Costs and Burdens
We believe that broker-dealers will
incur ongoing annual burdens and costs
to update the disclosure document to
include newly identified conflicts. We
assume for purposes of this analysis that
broker-dealers will update their conflict
disclosure document annually, after
conducting an annual conflicts review.
We estimate that the conflicts
disclosures will be updated internally
by both small and large broker-dealers.
We estimate that in-house counsel at
a small broker-dealer will require
approximately one hour per year to
update the standardized conflict
disclosure document, for an ongoing
aggregate, annual burden of
approximately 756 hours.1455 For large
broker-dealers, we estimate that the
ongoing, aggregate annual burden would
be two hours for each broker-dealer:
One hour for in-house compliance and
one hour for in-house counsel for legal
personnel. We therefore estimate the
ongoing, aggregate burden for large
broker-dealers to be approximately
4,020 burden hours.1456 We do not
anticipate that small or large brokerdealers will incur outside legal,
compliance, or consulting fees in
connection with updating their
standardized conflict disclosure
document, since in-house personnel
would presumably be more
knowledgeable about conflicts of
interest.
With respect to ongoing delivery of
the updated conflict disclosure
document, we estimate that this will
take place among 40% of a brokerdealer’s retail customer accounts
annually, and that broker-dealers will
require approximately 0.02 hours to
deliver the updated conflict disclosure
(2,040,000 hours)/(2,766 broker-dealers) = 738
burden hours per broker-dealer.
1453 This estimate is based on the following
calculations: (3,780 aggregate burden hours for
small broker-dealers) + (15,075 burden hours for
large broker-dealers) + (2,040,000 burden hours for
delivery) = 2,058,855 total aggregate initial burden
hours.
1454 This estimate is based on the following
calculation: ($1.88 million for small broker-dealer
costs) + ($7.49 million large broker-dealer costs) =
$9.37 million in total aggregate initial costs.
1455 This estimate is based on the following
calculation: (1 hour per broker-dealer) × (756 small
broker-dealers) = 756 aggregate burden hours per
year.
1456 This estimate is based on the following
calculation: (2 hours per broker-dealer) × (2,010
large broker-dealers) = 4,020 aggregate burden hours
per year.

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33475

document to each retail customer.1457
We therefore estimate that brokerdealers will incur an ongoing, aggregate
annual burden of 816,000 hours, or 295
burden hours per broker-dealer.1458 The
total aggregate ongoing burden for
broker-dealers is therefore estimated at
820,776 hours.1459
Based on the calculation describe
above, we estimate that broker-dealers
will incur an aggregate total initial
burden of 6,216,125 hours 1460 and a
total initial cost of $42.84 million,1461 as
well as an aggregate total ongoing
annual burden of 2,101,493 hours 1462 to
comply with the Disclosure Obligation.
2. Care Obligation
The Care Obligation requires a brokerdealer to have a reasonable basis to
believe, based on its understanding of
the potential risks, rewards, and costs of
the recommended security or
investment strategy involving securities,
1457 See supra footnote 1411. The Commission
estimates that broker-dealers will update their
disclosures of fees and costs and material facts
relating to conflicts of interest that are associated
with their recommendation more frequently than
disclosure related to capacity or type and scope of
services.
1458 This estimate is based on the following
calculation: (40% of 102 million retail customer
accounts) × (.02 hours) = 816,000 aggregate burden
hours per year. Conversely, (816,000 aggregate
burden hours)/(2,766 broker-dealers) = 295 hours
per broker-dealer per year.
1459 This estimate is based on the following
calculations: (756 aggregate burden hours for small
broker-dealers) + (4,020 aggregate burden hours for
large broker-dealers) + (816,000 aggregate burden
hours for delivery) = 820,776 total aggregate
ongoing burden hours.
1460 This estimate is based on the following
calculation: (2,093,390 aggregate initial burden
hours for initial compliance with disclosure of
capacity and type and scope of services) +
(2,063,880 aggregate initial burden hours for initial
compliance with disclosure of fees and costs) +
(2,058,855 aggregate initial burden hours for initial
compliance with disclosure of all material facts
regarding disclosure of conflicts of interest
associated with the recommendation) = 6,216,125
total aggregate initial burden hours for compliance
with the Disclosure Obligation.
1461 This estimate is based on the following
calculation: ($21.6 million aggregate initial cost for
compliance with disclosure of capacity and type
and scope of services) + ($11.87 million aggregate
initial cost for compliance with disclosure of fees
and costs) + ($9.37 aggregate initial cost for
compliance with disclosure of all material facts
regarding disclosure of conflicts of interest
associated with the recommendation) = $42.84
million total aggregate initial cost for compliance
with the Disclosure Obligation.
1462 This estimate is based on the following
calculation: (455,165 aggregate annual burden hours
for ongoing compliance with disclosure of capacity
and type and scope of services) + (825,552 aggregate
annual burden hours for ongoing compliance with
disclosure of fees and costs) + (820,776 aggregate
annual burden hours for ongoing compliance with
disclosure of all material facts regarding disclosure
of conflicts of interest associated with the
recommendation) = 2,101,493 total aggregate
burden hours per year for ongoing compliance with
the Disclosure Obligation.

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and in light of the retail customer’s
investment profile, that the
recommendation is in the best interest
of the particular retail customer and
does not place the broker-dealer’s
interest ahead of the retail customer’s
interest. However, any PRA burdens or
costs associated with the Care
Obligation are duplicative of costs
associated with other obligations in
Regulation Best Interest, including the
Disclosure Obligation and the RecordMaking Obligation under Rule 17a–
3(a)(35) and Recordkeeping Obligation
under Rule 17a–4(e)(5).
3. Conflict of Interest Obligation
The Conflict of Interest Obligation
creates an overarching obligation to
require broker-dealers 1463 to establish
written policies and procedures
reasonably designed to identify and at a
minimum disclose, pursuant to the
Disclosure Obligation, or eliminate all
conflicts of interest associated with a
recommendation. More specifically,
broker-dealers are specifically required
to establish, maintain, and enforce
written policies and procedures
reasonably designed to: (i) Identify and
mitigate any conflicts of interest
associated with recommendations that
create an incentive for a natural person
who is an associated person of a broker
or dealer to place the interest of the
broker or dealer, or such natural person
making the recommendation, ahead of
the interest of the retail customer; (ii)
(A) identify and disclose any material
limitations placed on the securities or
investment strategies involving
securities that may be recommended to
a retail customer and any conflicts of
interest associated with such
limitations, in accordance with the
Disclosure Obligation, and (B) prevent
such limitations and associated conflicts
of interest from causing the broker,
dealer, or a natural person who is an
associated person of the broker or dealer
to make recommendations that place the
interest of the broker, dealer, or such
natural person ahead of the interest of
the retail customer; and (iii) identify
and eliminate sales contests, bonuses,
and non-cash compensation that are
based on the sales of specific securities
or specific types of securities within a
limited period of time.1464
Written policies and procedures
developed pursuant to the Conflict of
Interest Obligation of Regulation Best
Interest would help a broker-dealer to
develop a process reasonably designed
1463 As

discussed above, the Conflict of Interest
Obligation and Compliance Obligation apply solely
to the broker or dealer entity, and not to the
associated persons of a broker or dealer.
1464 Rule 15l–1 under the Exchange Act.

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for its business, for identifying conflicts
of interest, and then determining
whether to eliminate, or disclose and/or
mitigate the conflict and the appropriate
means of eliminating, disclosing and/or
mitigating the conflict. In addition,
establishing and maintaining written
policies and procedures would
generally (1) assist a broker-dealer in
supervising its associated persons and
assessing compliance with the Conflict
of Interest Obligation; and (2) assist the
Commission and SRO staff in
connection with examinations and
investigations.1465
In light of the modifications to several
substantive requirements of the rule
relative to the Proposing Release,
including the Conflict of Interest
Obligation, as discussed in more detail
above, we believe these changes will
allow broker-dealers’ to more easily
incorporate the requirements of
Regulation Best Interest into existing
supervisory and compliance systems
and streamline compliance with
Regulation Best Interest.1466 Therefore,
we generally believe our proposed
burdens and costs are accurate but have
updated estimates to reflect changes in
the number of broker-dealers and costs
of certain services since the last estimate
in the Proposing Release.
Following is a detailed discussion of
the estimated costs and burdens
associated with the Conflict of Interest
Obligation.
a. Written Policies and Procedures
i. Initial Costs and Burdens
We believe that most broker-dealers
have policies and procedures in place to
address conflicts of interest, but do not
necessarily have written policies and
procedures regarding the identification
and management of conflicts as required
by Regulation Best Interest. To comply
with the Conflict of Interest Obligation,
we believe that broker-dealers would
utilize a combination of in-house and
outside legal and compliance counsel to
update existing policies and
procedures.1467 We assume that, for
Section II.C.3.a.
Any written policies and procedures developed
pursuant to Regulation Best Interest would be
required to be retained pursuant to Exchange Act
Rule 17a–4(e)(7), which requires broker-dealers to
retain compliance, supervisory, and procedures
manuals (and any updates, modifications, and
revisions thereto) describing the policies and
procedures of the broker-dealer with respect to
compliance with applicable laws and rules, and
supervision of the activities of each associated, for
a specified period of time. The record retention
requirements of Rule 17a–4(e)(7) include any
written policies and procedures that broker-dealers
may produce pursuant to the Conflict of Interest
Obligation of Regulation Best Interest.
1466 See Section II.C.3.
1467 See footnote 1381 and accompanying text.

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purposes of this analysis, the associated
costs and burdens would differ between
small and large broker-dealers, as large
broker-dealers generally offer more
products and services and therefore
would need to evaluate and address a
greater number of potential conflicts of
interest. As discussed above, we
estimate that 2,010 broker-dealers
would qualify as large broker-dealers for
purposes of this analysis and 756 would
qualify as small broker-dealers that have
retail business.1468
In the Proposing Release, we
estimated that a large broker-dealer
would incur a one-time internal burden
of 60 hours for in-house legal and inhouse compliance counsel to update
existing policies and procedures to
comply with Regulation Best
Interest.1469 We also estimated a cost of
$4,720 for outside counsel to review
updated policies and procedures on
behalf of a large broker-dealer, with an
aggregate initial burden of 123,300
burden hours and aggregate initial cost
of $9.70 million for large brokerdealers.1470
In the Proposing Release, we assumed
that small broker-dealers would
primarily rely on outside counsel to
update existing policies and procedures,
as small broker-dealers generally have
fewer in-house legal and compliance
personnel. Given that smaller brokerdealers generally have fewer conflicts of
interest, we estimated that 40 hours of
outside legal counsel services would be
required, for a one-time cost of $18,800
per small broker-dealer, and an
aggregate cost of $15.1 million for all
small broker-dealers, and we also
expected that in-house compliance
personnel would require 10 hours to
review and approve the updated
policies and procedures, for an
aggregate burden of 8,020 hours.1471
Therefore, we estimated the total initial
aggregate burden to be 131,320 hours
and the total initial aggregate cost to be
$24.8 million.1472
We believe our estimates are generally
accurate in light of the increased
specificity in Regulation Best Interest as
to how a broker-dealer must address
specified conflicts of interest but due to
changes in the number of broker-dealers
and cost estimates for certain services,
we are revising our burden and cost
estimates.1473
1468 See
1469 See

footnote 1387 and accompanying text.
Proposing Release at 21666.

1470 Id.
1471 Id.
1472 Id.
1473 We have revised our cost estimates to reflect
the updated SIFMA Management and Professional
Earnings Report which was updated in 2019 to
reflect inflation. Therefore, the hourly rates used

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For purposes of Regulation Best
Interest as adopted, we estimate that a
large broker-dealer would incur an
initial burden of 50 hours for in-house
counsel and in-house compliance to
update existing policies and procedures
to comply with Regulation Best Interest
and an initial burden of 5 hours for
general counsel and 5 hours for a Chief
Compliance Officer to review and
approve the updated policies and
procedures, for a total of 60 burden
hours.1474 We also estimate ten hours of
outside counsel services will be
required at a cost of $4,970 to review
updated policies and procedures on
behalf of a large broker-dealer.1475 We
therefore estimate the aggregate initial
burden for large broker-dealers to be of
120,600 burden hours 1476 and initial
aggregate cost of approximately $10.0
million for large broker-dealers.1477
For small broker-dealers, we believe
that they would primarily rely on
outside counsel to update existing
policies and procedures, as small
broker-dealers generally have fewer inhouse legal and compliance personnel.
Given that smaller broker-dealers
generally have fewer conflicts of
interest, we estimate that 40 hours of
outside legal counsel would be required
to update existing policies and
procedures, for a one-time cost of
$19,880 per small broker-dealer,1478 and
an aggregate cost of $15.0 million for all
small broker-dealers.1479 We also expect
that in-house compliance would require
10 hours to review and approve the
here for certain services, for example, outside legal
counsel and outside compliance costs, are higher
than the numbers in the Proposing Release.
1474 This estimate is based on the following
calculation: (50 hours of review for in-house
counsel and in-house compliance counsel) + (5
hours of review for general counsel) + (5 hours of
review for Chief Compliance Officer) = 60 initial
burden hours per large broker-dealer.
1475 Data from the SIFMA Management and
Professional Earnings Report suggests that the
average hourly rate for legal services is $497/hour.
This cost estimate is therefore based on the
following calculation: (10 hours of review) × ($497/
hour for outside counsel services) = $4,970 in
outside counsel costs per large broker-dealer.
1476 This estimate is based on the following
calculation: (60 burden hours of review per large
broker-dealer) × (2,010 large broker-dealers) =
120,600 aggregate burden hours for large brokerdealers.
1477 This estimate is based on the following
calculation: ($4,970 for outside counsel costs per
large broker-dealer) × (2,010 large broker-dealers) =
approximately $10.0 million in outside counsel
costs for large broker-dealers.
1478 This cost estimate is based on the following
calculation: (40 hours of review) × ($497/hour for
outside counsel services) = $19,880 in outside
counsel costs per small broker-dealer.
1479 This cost estimate is based on the following
calculation: ($19,880 for outside attorney costs per
small broker-dealer) × (756 small broker-dealers) =
approximately $15.0 million in outside counsel
costs for small broker-dealers.

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updated policies and procedures, for an
aggregate burden of 7,560 hours.1480
Therefore, we estimate the total initial
aggregate burden to be 128,160
hours 1481 and the total initial aggregate
cost to be approximately $25.0
million.1482
ii. Ongoing Costs and Burdens
For purposes of this analysis, we
assume that small and large brokerdealers would review and update
policies and procedures on an annual
basis to accommodate the addition of,
for example, new products or services,
new business lines, and/or new
personnel. We also assume that brokerdealers would review and update their
policies and procedures for compliance
with the Conflict of Interest Obligation
on an annual basis, and in-house
personnel would perform the review
and make any updates.
In the Proposing Release, we
estimated that large broker-dealers
would incur an annual internal burden
of 12 hours to review and update
existing policies and procedures to
identify new conflicts for an ongoing,
aggregate burden of 24,660 hours with
no ongoing costs as they would rely on
internal personnel.1483 We assumed
small broker-dealers would rely on
outside legal counsel and compliance
consultants to review and update
policies and procedures, with final
review and approval from in-house
compliance 1484 with an aggregate,
annual ongoing cost of $3.08 million per
year.1485 In addition to these costs, we
believed that small broker-dealers
would incur an internal an ongoing,
aggregate burden of 28,670 hours. While
the Commission believes our time
estimates from the Proposing Release
are generally accurate, we have revised
our burdens and estimates to account
for changes in both the number of
broker-dealers and external costs of
services.
We estimate that large broker-dealers,
which generally have more numerous
and complex products and services, as
well as and higher rates of hiring and
1480 This estimate is based on the following
calculation: (10 burden hours) × (756 small brokerdealers) = 7,560 aggregate burden hours.
1481 This estimate is based on the following
calculation: (120,600 aggregate burden hours for
large broker-dealers) + (7,560 aggregate burden
hours for small broker-dealers) = 128,160 total
aggregate burden hours.
1482 This estimate is based on the following
calculation: ($10 million in aggregate costs for large
broker-dealers) + ($15.0 million in aggregate costs
for small broker-dealers) = $25.0 million total
aggregate costs.
1483 Proposing Release at 21667.
1484 Id.
1485 Id.

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33477

turnover would incur an annual internal
burden of 12 hours to review and
update existing policies and procedures:
Four hours for in-house counsel, four
hours for in-house compliance, and four
hours for business-line personnel to
identify new conflicts. We therefore
estimate an ongoing, aggregate burden
for large broker-dealers of
approximately 24,120 hours.1486
Because we assume that large brokerdealers would rely on internal
personnel to update policies and
procedures on an ongoing basis, we do
not believe large broker-dealers would
incur ongoing external costs.
We assume for purposes of this
analysis that small broker-dealers,
generally have fewer and less complex
products and lower rates of hiring. We
also assume they would primarily rely
on outside legal counsel and outside
compliance consultants for review and
update of their policies and procedures,
with final review and approval from an
in-house compliance manager. We
estimate that outside legal counsel
would require approximately five hours
per year to update policies and
procedures, for an annual cost of $2,485
for each small broker-dealer.1487 The
projected aggregate, annual ongoing cost
for outside legal counsel to update
policies and procedures for small
broker-dealers would be $1.88 million
per year.1488 In addition, we expect that
small broker-dealers would require five
hours of outside compliance services
per year to update their policies and
procedures, for an ongoing cost of
$1,365 per year,1489 and an aggregate
ongoing cost of $1.03 million.1490 The
total aggregate, ongoing cost for small
1486 This estimate is based on the following
calculation: (12 burden hours per large brokerdealer) × (2,010 large broker-dealers) = 24,120
aggregate ongoing burden hours.
1487 This estimate is based on the following
calculation: (5 hours per small broker-dealer) ×
($497/hour for outside counsel services) = $2,485 in
outside counsel costs.
1488 This estimate is based on the following
calculation: ($2,485 in outside counsel costs per
small broker-dealer) × (756 small broker-dealers) =
$1.88 million in aggregate, ongoing outside legal
costs per year.
1489 We believe that performance of this function
will most likely be equally allocated between a
senior compliance examiner and a compliance
manager. Data from the SIFMA Management and
Professional Earnings Report suggests that costs for
these positions are $237 and $309 per hour,
respectively for an average of $273 per hour. This
cost estimate is based on the following calculation:
(5 hours of review) × ($273/hour for outside
compliance services) = $1,365 in outside
compliance service costs.
1490 This estimate is based on the following
calculation: ($1,365 in outside compliance costs per
small broker-dealer) × (756 small broker-dealers) =
$1.03 million in aggregate, ongoing outside
compliance costs per year.

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broker-dealers is therefore projected at
$2.91 million per year.1491
In addition to the costs described
above, we additionally believe small
broker-dealers would incur an internal
burden of approximately 5 hours for an
in-house compliance manager to review
and approve the updated policies and
procedures per year. The ongoing,
aggregate burden for small brokerdealers would be 3,780 hours for inhouse compliance manager review.1492
We therefore estimate the total
ongoing aggregate ongoing burden to be
27,900 hours per year 1493 and the total
ongoing aggregate cost to be $2.91
million per year.1494
The Commission acknowledges that
policies and procedures may vary
greatly by broker-dealer, given the
differences in size and the complexity of
broker-dealer business models.
Accordingly, we expect that the need to
update policies and procedures might
also vary greatly.
b. Identification and Management of
Conflicts of Interest
With respect to identifying and
determining whether a conflict of
interest exists in connection with a
recommendation and whether it needs
to be addressed through disclosure,
mitigation and/or elimination, a brokerdealer would first need to establish
mechanisms to proactively and
systematically identify conflicts of
interest in its business on an ongoing or
periodic basis.1495 For purposes of this
analysis, we assume that most brokerdealers already have an existing
technological infrastructure in place,
and we assume it would need to be
modified to comply with the Conflict of
Interest Obligation.

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i. Initial Costs and Burdens
As stated in the Proposing Release, we
believed that costs and burdens may
vary greatly depending on the size of the
1491 This estimate is based on the following
calculation: ($1.88 million for outside legal counsel
costs) + ($1.03 million for outside compliance costs)
= $2.91 million total aggregate ongoing costs per
year.
1492 This estimate is based on the following
calculation: (5 hours compliance manager review
per small broker-dealer) × (756 small brokerdealers) = 3,780 aggregate ongoing burden hours per
year.
1493 This estimate is based on the following
calculation: (24,120 aggregate ongoing burden hours
for large broker-dealers) + (3,780 aggregate ongoing
burden hours for small broker-dealers) = 27,900
total aggregate ongoing burden hours per year.
1494 This estimate is based on the following
calculation: ($2.91 million per year in total
aggregate ongoing costs for small broker-dealers) +
($0 projected ongoing costs for large broker-dealers)
= $2.91 million per year in total aggregate ongoing
costs.
1495 See supra Section III.C.3.

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broker-dealer, but we expected that
modification of a broker-dealer’s
existing technology would initially
require the retention of an outside
programmer as well as coordination
between the programmer and the
broker-dealer’s in-house compliance
manager. The costs and burdens for this
process were estimated to be $15.43
million and 14,285 burden hours.1496 In
addition to these costs and burdens, we
expected that a broker-dealer would
spend time to determine whether the
conflict of interest identified were
material and would have required an
additional 14,285 burden hours for all
broker-dealers for an aggregate burden
of 28,570 hours for identification of
conflicts of interest.1497
As stated above, we believe the
process would be largely the same as set
forth in the Proposing Release but have
revised our estimates and costs below to
account for changes in the number of
broker-dealers and external costs as well
as to account for some changes to the
structure of the Conflict of Interest
Obligation.
To comply with the Conflict of
Interest Obligation, we expect that
broker-dealers will modify existing
technology through the work of an
outside programmer which would
require, on average, an estimated 20
hours, for an estimated cost per brokerdealer of $5,680.1498 We additionally
continue to estimate (as was set forth in
the Proposing Release) that coordination
between the programmer and the
broker-dealer’s compliance manager
would involve five burden hours.1499
The aggregate initial costs and burdens
for the modification of existing
technology to identify conflicts of
interest would therefore be $15.71
million,1500 and 13,830 burden
hours.1501
As a result of the changes made to the
rule text of the Conflict of Interest
Obligation, we believe that brokerdealers would incur burdens to: (1)
Identify conflicts of interest and
determine whether the conflict involves
1496 Proposing

Release at 21667.

1497 Id.
1498 Data from the SIFMA Management and
Professional Earnings Report suggests that the
average hourly rate for technology services in the
securities industry is $284. This cost estimate is
based on the following calculation: (20 hours of
review) × ($284/hour for technology services) =
$5,680.
1499
1500 This cost estimate is based on the following
calculation: ($5,680 in outside programmer costs
per broker-dealer) × (2,766 broker-dealers) = $15.71
million in aggregate outside programmer costs.
1501 This burden estimate is based on the
following calculation: (5 burden hours for in-house
compliance manager) × (2,766 broker-dealers) =
13,830 aggregate burden hours.

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an incentive to an associated person to
place the interest of the broker-dealer or
natural person making the
recommendation ahead of the interest of
the retail customer, a material limitation
on the product menu, or a sales practice
that is based on the sales of specific
securities or specific types of securities
within a limited period of time and (2)
determine whether and how the conflict
would be disclosed, disclosed and
mitigated, or eliminated in accordance
with the Conflict of Interest Obligation.
In order to complete this process, we
believe a broker-dealer, on average,
would require approximately 20
hours 1502 of review per brokerdealer,1503 for an aggregate of 55,320
burden hours for all broker-dealers.1504
We therefore estimate the total initial
aggregate burden for identification and
management of conflicts of interest is
69,150 hours.1505
ii. Ongoing Costs and Burdens
To maintain compliance with the
Conflict of Interest Obligation, we
assume for purposes of this analysis that
a broker-dealer would seek to identify
additional conflicts of interest as its
business evolves. As noted above, the
Commission recognizes that brokerdealers vary in the types of services and
product offerings and therefore vary in
the types of conflicts of interest that
exist within and across brokerdealers.1506
However, for purposes of the PRA
analysis in the Proposing Release, we
assumed that broker-dealers would, at a
minimum, engage in a material conflicts
identification process on an annual
basis, and we estimated that in the
aggregate broker-dealers would spend
approximately 28,570 hours each to
complete this process per year.1507
Similar to the Proposing Release, we
believe that for purposes of this
analysis, broker-dealers would, through
the help of the business line and
compliance personnel, spend on average
10 hours 1508 to perform an annual
1502 In light of the changes made to the rule text
of the Conflict of Interest Obligation and the
comments received, we have increased our estimate
to 20 burden hours per broker-dealer.
1503 This burden estimate consists of 10 hours for
review by business line personnel, and 10 hours for
review by in-house compliance manager.
1504 This burden estimate is based on the
following calculation: (20 burden hours) × (2,766
broker-dealers) = 55,320 aggregate burden hours.
1505 This burden estimate is based on the
following calculation: (13,830 burden hours for
modification of technology) + (55,320 burden hours
for evaluation of managing conflicts) = 69,150 total
aggregate burden hours.
1506 See supra Section II.C.3.
1507 See Proposing Release at 21668.
1508 This burden estimate consists of five hours
for review by business line personnel, and five

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conflicts review using the modified
technology infrastructure.1509 Therefore,
the Commission estimates that the
aggregate ongoing burden for an annual
conflicts review, based on an estimated
2,766 retail broker-dealers, would be
approximately 27,660 burden hours per
year.1510 Because we assume that
broker-dealers would use in-house
personnel to identify and evaluate new,
potential conflicts, we continue to
believe they would not incur additional
ongoing external costs.

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c. Training
As discussed in the Proposing
Release, we expect that broker-dealers
would develop training programs to
comply with Regulation Best Interest,
including the Conflict of Interest
Obligation. However, we believe that
any burdens and costs associated with
a training program would fall under the
new Compliance Obligation as it would
be developed to comply with Regulation
Best Interest as a whole, including each
of the component obligations.
In total, to comply with the Conflict
of Interest Obligation, the Commission
estimates that the total initial burdens
and costs to be 197,310 hours 1511 and
$40.71 million,1512 and the total
ongoing burdens and costs to be 55,560
hours 1513 per year and $2.91 million
per year.1514
hours for review by an in-house compliance
manager.
1509 FINRA rules set an annual supervisory
review as a minimum threshold for broker-dealers.
See, e.g., FINRA Rules 3110 (requiring an annual
review of the businesses in which the broker-dealer
engages); 3120 (requiring an annual report detailing
a broker-dealer’s system of supervisory controls,
including compliance efforts in the areas of
antifraud and sales practices); and 3130 (requiring
each broker-dealer’s CEO or equivalent officer to
certify annually to the reasonable design of the
policies and procedures for compliance with
relevant regulatory requirements).
1510 This estimate is based on the following
calculation: (10 hours per retail broker-dealer) ×
(2,766 retail broker-dealers) = 27,660 aggregate
burden hours per year.
1511 This estimate is based on the following
calculation: (128,160 initial burden hours for
policies and procedures) + (69,150 initial burden
hours for identification and management of
conflicts of interest) = 197,310 initial burden hours
to comply with the Conflict of Interest Obligation.
1512 This estimate is based on the following
calculation: ($25.0 million initial costs for policies
and procedures) + ($15.71 million initial costs for
identification and management of conflicts of
interest) = $40.71 million initial total costs to
comply with the Conflict of Interest Obligation.
1513 This estimate is based on the following
calculation: (27,900 ongoing burden hours for
policies and procedures) + (27,660 ongoing burden
hours for identification and management of
conflicts of interest) = 55,560 aggregate ongoing
burden hours per year to comply with Conflict of
Interest Obligation.
1514 This estimate is based on the following
calculation: ($2.91 million ongoing costs for
policies and procedures) + ($0 ongoing costs for

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4. Compliance Obligation
As discussed above, in response to
comments that we should require
policies and procedures to comply with
Regulation Best Interest as a whole, we
are adopting the Compliance
Obligation.1515 The Compliance
Obligation requires that the brokerdealer 1516 establish, maintain and
enforce written policies and procedures
reasonably designed to achieve
compliance with Regulation Best
Interest. This Compliance Obligation
creates an explicit obligation under the
Exchange Act with respect to Regulation
Best Interest as a whole. Similar to the
policies and procedures requirement of
the Conflict of Interest Obligation,
broker-dealers will have flexibility to
design policies and procedures that are
reasonable for the scope, size and risks
associated with the operations of the
firm and the types of business in which
the broker-dealer engages. Because we
did not include the Compliance
Obligation in the Proposing Release, we
did not previously include costs and
burdens associated with the Compliance
Obligation, but we have provided a
detailed explanation of these costs and
burdens below.1517
a. Written Policies and Procedures
i. Initial Costs and Burdens
While the Compliance Obligation
creates an explicit requirement under
the Exchange Act, we believe that
broker-dealers would likely establish
policies and procedures to comply with
Regulation Best Interest pursuant to
Section 15(b)(4)(E) and SRO rules by
adjusting their current systems of
supervision and compliance, as opposed
to creating new systems. While brokerdealers must already have policies and
procedures in place to address other
Commission and SRO rules, they would
need to update their systems of
supervision and compliance to account
for Regulation Best Interest.
To comply with the Compliance
Obligation, we believe that brokerdealers would employ a combination of
in-house and outside legal and
compliance counsel to update existing
policies and procedures to account for
the Disclosure and Care Obligations.1518
We assume that, for purposes of this
identification and management of conflicts of
interest) = $2.91 million aggregate ongoing total
costs per year to comply with the Conflict of
Interest Obligation.
1515 Section II.C.4.
1516 See supra footnote 1462 and accompanying
text.
1517 We note that any burdens and costs to
comply with the Conflict of Interest Obligation are
included in the estimates in Section IV.B.3 above.
1518 Id.

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33479

analysis, the associated costs and
burdens would differ between small and
large broker-dealers, as large brokerdealers generally offer more products
and services and employ more
individuals and therefore would need to
evaluate and update a greater number of
systems. As discussed above, we
estimate that 2,010 broker-dealers
would qualify as large broker-dealers for
purposes of this analysis and 756 would
qualify as small broker-dealers that have
retail business.1519
For purposes of this analysis we
estimate that a large broker-dealer
would incur a one-time average internal
burden of 30 hours for in-house legal
personnel and in-house compliance
counsel to update existing policies and
procedures to comply with the
Compliance Obligation and a one-time
burden of five hours for general counsel
and five hours for a Chief Compliance
Officer to review and approve the
updated policies and procedures, for a
total of 40 burden hours.1520 We also
estimate six hours of outside counsel
services a cost of $2,982 for outside
counsel to review updated policies and
procedures on behalf of a large brokerdealer.1521 We therefore estimate the
aggregate burden for large broker-dealers
to be of 80,400 burden hours 1522 and
aggregate cost of $6.0 million for large
broker-dealers.1523
For small broker-dealers, we believe
that they would primarily rely on
outside counsel to update existing
policies and procedures, as small
broker-dealers generally have fewer inhouse legal and compliance personnel.
We estimate that only 20 hours of
outside legal counsel services would be
required, for a one-time cost of $9,940
per small broker-dealer,1524 and an
aggregate cost of $7.5 million for all
1519 See

supra footnote 1387 and accompanying

text.
1520 This estimate is based on the following
calculation: (30 hours of review for in-house legal
and in-house compliance) + (5 hours of review for
general counsel) + (5 hours of review for Chief
Compliance Officer) = 40 burden hours.
1521 Data from the SIFMA Management and
Professional Earnings Report suggests that the
average hourly rate for legal services is $497/hour.
This cost estimate is therefore based on the
following calculation: (6 hours of review) × ($497/
hour for outside counsel services) = $2,982 in
outside counsel costs.
1522 This estimate is based on the following
calculation: (40 burden hours of review per large
broker-dealer) × (2,010 large broker-dealers) =
80,400 aggregate burden hours.
1523 This estimate is based on the following
calculation: ($2,982 for outside counsel costs per
large broker-dealer) × (2,010 large broker-dealers) =
$6.0 million in outside counsel costs.
1524 This cost estimate is based on the following
calculation: (20 hours of review) × ($497/hour for
outside counsel services) = $9,940 in outside
counsel costs.

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small broker-dealers.1525 We also expect
that in-house compliance personnel
would require 6 hours to review and
approve the updated policies and
procedures, for an aggregate burden of
4,536 hours.1526 Therefore, we estimate
the total initial aggregate burden to be
84,936 hours 1527 and the total initial
aggregate cost to be $13.5 million.1528
ii. Ongoing Costs and Burdens

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For purposes of this analysis, we
assume that small and large brokerdealers would review and update
policies and procedures on a periodic
basis to accommodate the addition of,
among other things, new products or
services, new business lines, and/or
new personnel. We also assume that
broker-dealers would review and update
their policies and procedures for
compliance with Regulation Best
Interest on an annual basis, and for
purposes of this analysis, we assume
they would perform the review and
update using in-house personnel. Under
the Compliance Obligation, we do not
believe that broker-dealers would incur
any costs or burdens associated with
compliance with the Conflict of Interest
Obligation, as those are included in the
discussion above, but would for ongoing
compliance with the Disclosure and
Care Obligations.
For large broker-dealers with more
numerous and complex products and
services, as well as higher rates of hiring
and turnover, we estimate that each
broker-dealer would annually incur an
internal burden of 12 hours to review
and update existing policies and
procedures: four hours for legal
personnel, four hours for compliance
personnel, and four hours for businessline personnel. We therefore estimate an
ongoing, aggregate burden for large
broker-dealers of approximately 24,120
hours per year.1529
We assume for purposes of this
analysis that small broker-dealers, who
1525 This cost estimate is based on the following
calculation: ($9,940 for outside counsel costs per
small broker-dealer) × (756 small broker-dealers) =
$7.5 million in outside counsel costs.
1526 This estimate is based on the following
calculation: (6 burden hours) × (756 small brokerdealers) = 4,536 initial aggregate burden hours.
1527 This estimate is based on the following
calculation: (80,400 aggregate burden hours for
large broker-dealers) + (4,536 aggregate burden
hours for small broker-dealers) = 84,936 total initial
aggregate burden hours.
1528 This estimate is based on the following
calculation: ($6 million in aggregate costs for large
broker-dealers) + ($7.5 million in aggregate costs for
small broker-dealers) = $13.5 million total initial
aggregate costs.
1529 This estimate is based on the following
calculation: (12 burden hours per large brokerdealer) × (2,010 large broker-dealers) = 24,120
aggregate ongoing burden hours per year.

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generally have fewer and less complex
products, and lower rates of hiring and
turnover, would mostly rely on outside
legal counsel and compliance
consultants for review and update of
their policies and procedures, with final
review and approval from an in-house
compliance manager. We estimate that
outside counsel would require
approximately five hours per year to
update policies and procedures, for an
annual cost of $2,485 for each small
broker-dealer.1530 The projected
aggregate, annual ongoing cost for
outside legal counsel to update policies
and procedures for small broker-dealers
would be $1.88 million.1531 In addition,
we expect that small broker-dealers
would require five hours of outside
compliance services per year to update
their policies and procedures, for an
ongoing cost of $1,365 per year,1532 and
an aggregate ongoing cost of $1.03
million.1533 The Commission estimates
the total aggregate, ongoing cost for
small broker-dealers is therefore $2.91
million per year.1534
b. Training
Pursuant to the Compliance
Obligation’s requirement to ‘‘maintain
and enforce’’ written policies and
procedures, we additionally believe
broker-dealers will develop training
programs that promote compliance with
Regulation Best Interest. We believe that
a training program would cover
compliance with Regulation Best
Interest as a whole and would therefore
cover the Disclosure, Care and Conflict
of Interest Obligations. The initial and
1530 Data from the SIFMA Management and
Professional Earnings Report suggests that the
average hourly rate for legal services is $497/hour.
This estimate is therefore based on the following
calculation: (5 hours per small broker-dealer) ×
($497/hour for outside counsel services) = $2,485 in
outside counsel costs per year.
1531 This estimate is based on the following
calculation: ($2,485 in outside counsel costs per
small broker-dealer) × (756 small broker-dealers) =
$1.88 million in aggregate, ongoing legal costs per
year.
1532 We believe that performance of this function
will most likely be equally allocated between a
senior compliance examiner and a compliance
manager. Data from the SIFMA Management and
Professional Earnings Report suggests that costs for
these positions are $237 and $309 per hour,
respectively for an average of $273 per hour. This
estimate is therefore based on the following
calculation: (5 hours per small broker-dealer) ×
($273/hour for outside counsel services) = $1,365 in
outside compliance service costs per year.
1533 This estimate is based on the following
calculation: ($1,365 in outside compliance costs per
small broker-dealer) × (756 small broker-dealers) =
$1.03 million in aggregate, ongoing outside
compliance costs per year.
1534 This estimate is based on the following
calculation: ($1.88 million for outside legal counsel
costs) + ($1.03 million for outside compliance costs)
= $2.91 million total aggregate ongoing costs per
year.

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ongoing costs and burdens associated
with such a training program are
estimated below.
i. Initial Costs and Burdens
We believe that broker-dealers would
likely use a computerized training
model to train their associated persons
regarding the policies and procedures
pertaining to Regulation Best Interest.
We estimate that a broker-dealer would
retain an outside systems analyst,
outside programmer, and an outside
programmer analyst to create the
training module, at 20 hours, 40 hours,
and 20 hours, respectively. The total
cost to develop the training module
would be approximately $20,920,1535 for
an aggregate initial cost of $62.8
million.1536
Additionally, we expect that the
training module would require the
approval of the Chief Compliance
Officer, as well as in-house counsel,
each of whom would require
approximately 2 hours to review and
approve the training module. The initial
aggregate burden for broker-dealers is
therefore estimated at 11,064 burden
hours.1537
In addition, broker-dealers would
incur an initial cost for associated
persons to undergo training through the
training module. We estimate the
training time at one hour per associated
person, for an aggregate burden of
428,404 burden hours, or an initial
burden of 154.9 hours per brokerdealer.1538 We estimate the total initial
aggregate burden to approve the training
module and implement the training
program would be 439,486 burden
hours.1539
1535 Data from the SIFMA Management and
Professional Earnings Report suggests that the
average hourly rate in the securities industry is
$263 for a systems analyst, $271 for a programmer,
and $241 for a programmer analyst.. This cost
estimate is based on the following calculation: ((20
hours for a systems analyst) × ($263/hour)) + ((40
hours of labor for a programmer) × ($271/hour)) +
((20 hours of labor for a programmer analyst) ×
($241/hour)) = $20,920 in external technology costs
per broker-dealer.
1536 This estimate is based on the following
calculation: (2,766 broker-dealers) × ($20,920in
external technology costs per broker-dealer) = $57.9
million in aggregate costs for technology services.
1537 This estimate is based on the following
calculation: (2,766 broker-dealers) × (4 burden
hours per broker-dealer) = 11,064 burden hours.
1538 This estimate is based on the following
calculation: (1 burden hour) × (428,404 registered
representatives at standalone or dually registered
broker-dealers) = 428,404 aggregate burden hours.
Conversely, (428,404 aggregate burden hours)/
(2,766 retail broker-dealers) = 154.9 initial burden
hours per broker-dealer per year.
1539 This estimate is based on the following
calculation: (428,404 burden hours for training of
registered representatives) + (11,064 burden hours
to approve training program) = 439,468 total
aggregate burden hours per year.

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ii. Ongoing Costs and Burdens
We believe that, as a matter of best
practice, broker-dealers would likely
require registered representatives to
repeat the training module for
Regulation Best Interest on an annual
basis. The ongoing aggregate cost for the
one-hour training would be 428,404
burden hours per year, or 154.9 burden
hours per broker-dealer per year.1540
In total, to comply with the
Compliance Obligation, the Commission
estimates the total initial burdens and
costs to be 524,414 hours 1541 and $71.4
million,1542 and the total ongoing
burdens and costs to be 463,588
hours 1543 and $2.91 million.1544
5. Record-Making and Recordkeeping
Obligations
The record-making and recordkeeping
obligations will impose record-making
and recordkeeping requirements on
broker-dealers with respect to certain
information collected from, or provided
to, retail customers. Specifically, the
Commission is amending Rules 17a–3
and 17a–4 of the Exchange Act, which
set forth minimum requirements with
respect to the records that brokerdealers must make, and how long those
records and other documents must be
kept, respectively. Records made and
retained in accordance with the
amendments to Rule 17a–3(a)(35) and
17a–4(e)(5) will (1) assist a broker-dealer
in supervising and assessing internal
compliance with Regulation Best
Interest; and (2) assist the Commission
and SRO staff in connection with
examinations and investigations.
Due to changes in the number of
broker-dealers and costs estimated for
certain services, we are revising our
estimates from those in the Proposing

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1540 This

estimate is based on the following
calculation: (1 burden hour) × (428,404 registered
representatives at standalone or dually registered
broker-dealers) = 428,404 burden hours.
Conversely, (428,404 aggregate burden hours) /
(2,766 retail broker-dealers) = 154.9 initial burden
hours per broker-dealer.
1541 This estimate is based on the following
calculation: (84,946 initial burden hours for policies
and procedures) + (439,468 initial burden hours
training) = 524,414 initial burden hours to comply
with the Compliance Obligation.
1542 This estimate is based on the following
calculation: ($13.5 million initial costs for policies
and procedures) + ($57.9 million initial costs for
training) = $71.4 million initial total costs to
comply with the Compliance Obligation.
1543 This estimate is based on the following
calculation: (24,120 ongoing burden hours for
policies and procedures) + (439,468 ongoing burden
hours for training) = 463,588 ongoing burden hours
to comply with Compliance Obligation.
1544 This estimate is based on the following
calculation: ($2.91 million ongoing costs for
policies and procedures) + ($0 million ongoing
costs for training) = $2.91 million ongoing costs to
comply with the Compliance Obligation.

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Release. However, while we understand
commenters’ concerns that the estimates
are lower than what would actually be
required to comply with Regulation Best
Interest, we believe the estimates are
generally accurate in light of the
increased specificity in Regulation Best
Interest on how to comply with the
component obligations, including the
Disclosure Obligation.1545 The recordmaking and recordkeeping costs and
burdens associated with the
amendments to Rule 17a–3(a)(35) and
Rule 17a–4(e)(5) are addressed below.
a. Record-Making Obligation
We are amending Rule 17a–3 by
adding a new paragraph (a)(35) that
requires a record of all information
collected from, and provided to, the
retail customer pursuant to Regulation
Best Interest, as well as the identity of
each natural person who is an
associated person of a broker or dealer,
if any, responsible for the account.1546
This requirement applies with respect to
each retail customer to whom a
recommendation of any securities
transaction or investment strategy
involving securities is provided. The
neglect, refusal, or inability of a retail
customer to provide or update any such
information will, however, excuse the
broker-dealer from obtaining that
information.
We indicated in the Proposing
Release, and we continue to believe that
broker-dealers currently make records of
relevant customer investment profile
information, and we therefore assume
that no additional record-making
obligations would arise as a result of
broker-dealers’ or their registered
representatives’ collection of
information from retail customers.1547
1545 See, e.g., Raymond James Letter; CCMC
Letters; SIFMA August 2018 Letter.
1546 As indicated in the Proposing Release, we
understand that broker-dealers likely make such
records in the ordinary course of their business
pursuant to Exchange Act Rules 17a–3(a)(6) and (7).
We continue to believe, for purposes of compliance
with Rule 17a–3(a)(35), that broker-dealers would
need to create a record, or modify an existing
record, to identify the associated person, if any,
responsible for the account in the context of
Regulation Best Interest. See Proposing Release at
21673.
1547 The PRA burdens and costs arising from the
requirement that a record be made of all
information provided to the retail customer are
accounted for in Regulation Best Interest and the
Relationship Summary Adopting Release. With
respect to the requirement that a record be made of
all information from the retail customer, we believe
that Rule 17a–3(a)(35) will not impose any new
substantive burdens on broker-dealers. As
discussed above, we continue to believe that the
obligation to exercise reasonable diligence, care,
and skill will not require a broker-dealer to collect
additional information from the retail customer
beyond that currently collected in the ordinary
course of business even though a broker-dealer’s

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33481

In addition, we continue to believe that
broker-dealers likely make records of
the ‘‘identity of each natural person who
is an associated person, if any,
responsible for the account.’’ However,
we are assuming, for purposes of
compliance with Rule 17a–3(a)(35), that
broker-dealers will need to create a
record, or modify an existing record, to
identify the associated person, if any,
responsible for the account in the
context of Regulation Best Interest. In
addition, in cases where broker-dealers
choose to meet part of the Disclosure
Obligation orally under the
circumstances outlined in Section II.C.1,
Oral Disclosure or Disclosure After a
Recommendation, we believe the
requirement to maintain a record of the
fact that oral disclosure was provided to
the retail customer will trigger a recordmaking obligation under paragraph
(a)(35) of Rule 17a–3 and a
recordkeeping obligation under
paragraph (e)(5) of Rule 17a–4 that may
impose additional compliance costs and
burdens on broker-dealers.
i. Initial Costs and Burdens
In the Proposing Release, we assumed
that broker-dealers would satisfy the
record-making requirement of the
proposed amendment to Rule 17a–
3(a)(25) by amending an existing
account disclosure document to include
the ‘‘identity of each natural person who
is an associated person, if any,
responsible for the account.’’ We
estimated that the inclusion of this
information in an account disclosure
document would require an
approximate total aggregate initial
burden of 3,808,000 hours, or
approximately 1,333 hours per brokerdealer for the first year after Regulation
Best Interest is in effect.1548
As discussed above, we continue to
believe that broker-dealers will satisfy
the record-making requirements of the
amendment to Rule 17a–3(a)(35) by
amending an existing account
disclosure document to include the
‘‘identity of each natural person who is
an associated person, if any, responsible
for the account.’’ We believe that the
inclusion of this information in an
account disclosure document will
require, on average, approximately 1
analysis of that information and any resulting
recommendations will need to adhere to the
enhanced best interest standard of Regulation Best
Interest. See supra Section II.C.2.
1548 These estimates were based on the following
calculations: (0.04 hours per customer account) ×
(95.2 million retail customer accounts) = 3,808,000
aggregate burden hours. Conversely, (3,808,000
aggregate burden hours)/(2,857 broker-dealers) =
1,333 hours per broker dealer for the first year after
Regulation Best Interest is in effect. See Proposing
Release at 21673.

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hour per year for outside legal counsel
at small broker-dealers, at an updated
average rate of $497/hour, for an average
annual cost of $497 for each small
broker-dealer to update an account
disclosure document. The projected
aggregate initial cost for small brokerdealers is therefore estimated to be
$375,732 per year.1549 For brokerdealers that are not small entities, we
estimate that the initial burden will be
2 hours for each broker-dealer: 1 hour
for compliance personnel and 1 hour for
legal personnel. We therefore estimate
the aggregate initial burden for brokerdealers that are not small entities to be
approximately 4,020 burden hours.1550
Finally, we estimate it will require an
additional 0.04 hours for the registered
representative responsible for the
information (or other clerical personnel)
to fill out that information in the
account disclosure document, for an
approximate total aggregate initial
burden of 4,080,000 hours, or
approximately 1,475 hours per brokerdealer for the first year after Regulation
Best Interest is in effect.1551 Because we
have already included the costs and
burdens associated with the creation of
a record to memorialize an oral
disclosure, and the delivery of the
amended account disclosure document
discussed above, they are not included
in this section of the analysis.1552
The total aggregate initial burden for
broker-dealers is therefore estimated at
4,084,020 hours,1553 and the total
aggregate initial cost is estimated at
$375,732.1554

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ii. Ongoing Costs and Burdens
We do not believe that the identity of
the registered representative responsible
for the retail customer’s account will
change. Accordingly, we continue to
1549 This estimate is based on the following
calculation: (1 hour per small broker-dealer) × (756
small broker-dealers) × ($497/hour) = $375,732 in
aggregate costs per year.
1550 This estimate is based on the following
calculation: (2 burden hours per broker-dealer) ×
(2,010 large broker-dealers) = 4,020 aggregate
burden hours per year.
1551 These estimates are based on the following
calculations: (0.04 hours per customer account) ×
(102 million retail customer accounts) = 4,080,000
aggregate burden hours. Conversely, (4,080,000
burden hours)/(2,766 broker-dealers) = 1,475 hours
per broker-dealer for the first year after Regulation
Best Interest is in effect.
1552 See supra Section IV.B.1.
1553 This estimate is based on the following
calculation: (0 aggregate burden hours for small
broker-dealers) + (4,020 burden hours for large
broker-dealers) + (4,080,000 burden hours for
personnel to fill out information in the account
disclosure document) = 4,080,000 initial burden
hours.
1554 This estimate is based on the following
calculation: ($375,732 for small broker-dealer costs)
+ ($0 for large broker-dealer costs) = ($375,732 in
total aggregate initial costs).

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believe that there are no ongoing costs
and burdens associated with this recordmaking requirement of the amendment
to Rule 17a–3(a)(35).
With respect to memorializing oral
disclosures in cases where brokerdealers choose to meet part of the
Disclosure Obligation orally under the
circumstances outlined in Section II.C.1,
Oral Disclosure or Disclosure After a
Recommendation, we estimate that this
would take place among 52% of a
broker-dealer’s retail customer accounts
(and thus 52% of a registered
representative’s retail customer
accounts) annually.1555 We therefore
estimate broker-dealers to incur a total
annual aggregate burden of 1.06 million
hours, or 383.5 burden hours per year
per broker-dealer.1556
b. Recordkeeping Obligation
We are amending Rule 17a–4(e)(5) to
require that broker-dealers retain all
records of the information collected
from or provided to each retail customer
pursuant to Regulation Best Interest for
at least six years after the earlier of the
date the account was closed or the date
on which the information was last
replaced or updated. We assume that,
for purposes of this analysis, the
following records would likely be
retained pursuant to amended Rule 17a–
3(a)(35): (1) Existing account disclosure
documents; (2) comprehensive fee
schedules; (3) disclosures identifying
material conflicts; and (4) memorialized
oral disclosures under the
circumstances outlined in Section II.C.1,
Oral Disclosure or Disclosure After a
Recommendation.1557
1555 We believe (and our experience indicates)
that broker-dealers will use oral disclosure rarely,
and primarily when making disclosures regarding a
change in capacity. We do not have reliable data to
determine the precise number of retail customers
that have both a brokerage and an advisory account
with a dually registered associated person. As
indicated above, approximately 52% of registered
representatives were dually registered as
investment adviser representatives at the end of
2018. See supra footnote 945 and accompanying
text. As a result, we have assumed for purposes of
this analysis that this will take place among 52%
of all retail customer accounts at broker-dealers
annually. This estimate is likely over inclusive, as
it includes all retail customer accounts at all brokerdealers (as opposed to only retail customer accounts
where the retail customer has both a brokerage and
advisory account with a dually registered financial
professional), and under inclusive, as it assumes
that such an oral disclosure will happen annually
(as opposed to multiple times a year).
1556 (52%) × (102 million retail customer
accounts) × (0.02 hours for recording each oral
disclosure relating to a retail customer’s account) =
1,060,800 aggregate burden hours. Conversely,
1,060,800 aggregate burden hours/2,766 brokerdealers = 383.5 burden hours per broker-dealer per
year.
1557 In the Proposing Release, we identified four
records that would likely need to be retained
pursuant to amended Rule 17a–3(a)(25) (now

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i. Initial Costs and Burdens
We believe that, to reduce costs and
for ease of compliance, broker-dealers
will utilize their existing recordkeeping
systems in order to retain the forgoing
records made pursuant to Regulation
Best Interest, and as required to be kept
under the amendment to Rule 17a–
4(e)(5). As noted above, broker-dealers
currently are subject to recordkeeping
obligations pursuant to Rule 17a–4,
which require, for example, brokerdealers to ‘‘preserve for a period of not
less than six years, the first two years in
an easily accessible place, all records
required to be made pursuant to’’ Rule
17a–3(a)(1), (a)(2), (a)(3), (a)(5), (a)(21),
(a)(22), and analogous records created
pursuant to paragraph 17a–3(f). Thus,
for example, broker-dealers are already
required to maintain documents such as
account blotters and ledgers for six
years.
We continue to believe that brokerdealers will utilize their existing
recordkeeping systems to include any
additional or amended records required
by Regulation Best Interest or pursuant
to the amendment to Rule 17a–4(e)(5),
and would similarly utilize their
existing recordkeeping systems to
account for any differences in the
retention period. Thus, where brokerdealers currently retain documents on
an electronic database to satisfy existing
Rule 17a–4 or otherwise, we continue to
expect broker-dealers to maintain any
additional documents required by
Regulation Best Interest or the
amendment to Rule 17a–4(e)(5) by the
same means. Likewise, where brokerdealers maintain documents required by
existing Rule 17a–4 by paper, we would
expect broker-dealers to continue to do
so.
Based on our belief that brokerdealers will rely on existing
infrastructures to satisfy the
recordkeeping obligations of Regulation
Best Interest and the amendment to Rule
17–a(4)(e)(5), we believe the burden for
broker-dealers to add new documents or
reflected as Rule 17a–3(a)(35)): (1) A standardized
Relationship Summary document; (2) existing
account disclosure documents; (3) a comprehensive
fee schedule; and (4) disclosures identifying
material conflicts. However, in calculating the
estimated burden for broker-dealers to add new
documents or modify existing documents to the
broker-dealer’s existing retention system, we
erroneously assumed a broker-dealer would upload
or file five account documents, as opposed to the
four account documents identified in the Proposing
Release. See Proposing Release at 21673–21674. In
addition, while the burden for broker-dealers to
retain a standardized relationship summary was
included in the Regulation Best Interest Proposing
Release, it is excluded here because its associated
burden is reflected in the Relationship Summary
Proposal and Relationship Summary Adopting
Release.

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modify existing documents to the
broker-dealer’s existing retention system
will be approximately 13.6 million
burden hours for all broker-dealers,
assuming a broker-dealer will need to
upload or file each of the four account
documents discussed above for each
retail customer account.1558 We do not
believe there will be additional
substantive internal or external costs
relating to the uploading or filing of the
documents. In addition, because we
have already included the costs and
burdens associated with the delivery of
the amended account opening
agreement and other documents above,
we do not include them in this section
of the analysis.
ii. Ongoing Costs and Burdens
We estimate that the approximate
ongoing burden associated with the
recordkeeping requirement of the
amendment to Rule 17a–4(e)(5) is 4.46
million burden hours per year.1559 We
do not believe that the ongoing costs
associated with ensuring compliance
with the retention schedule would
change from the current costs of
ensuring compliance with existing Rule
17a–4 and as outlined above.
V. Final Regulatory Flexibility Act
Analysis

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The Commission has prepared this
Final Regulatory Flexibility Analysis
1558 This estimate is based on the following
calculation: (4 documents per customer account) ×
(102 million retail customer accounts) × (2 minutes
per document)/60 minutes = 13,600,000 aggregate
burden hours. As indicated above, the following
records would likely need to be retained: (1)
Existing account disclosure documents; (2)
comprehensive fee schedules; (3) disclosures
identifying material conflicts; and (4) memorialized
oral disclosures under the circumstances outlined
in Section II.C.1, Disclosure Obligation, Oral
Disclosure or Disclosure After a Recommendation.
1559 This estimate is based on the percentage of
account records we expect would be updated each
year as described in Section IV.B.1, supra, and the
following calculation: (40% of fee schedules × 102
million retail customer accounts) × (2 minutes per
document) + (40% of conflict disclosure forms ×
102 million retail customer accounts) × (2 minutes
per document) + (20% of account opening
documents × 102 million retail customer accounts)
× (2 minutes per document) = 204 million minutes/
60 minutes = 3.4 million aggregate ongoing burden
hours. In addition, with respect to ongoing
memorialization of the updated oral disclosures, we
estimate that this will take place among 52% of a
broker-dealer’s retail customer accounts annually.
We therefore estimate that broker-dealers will incur
an aggregate ongoing burden of 1.06 million hours
per year (calculated as follows: (52% of updated
oral disclosures x 102 million retail customer
accounts) × (1.2 minutes per document) = 63.6
million minutes/60 minutes = 1.06 million
aggregate ongoing burden hours); or 383.5 burden
hours per broker-dealer (1.06 million hours/2,766
broker-dealers = 383.5). 3.4 million burden hours
per year + 1.06 million burden hours per year =
4,460,000 total aggregate ongoing burden hours per
year.

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(‘‘FRFA’’) in accordance with the
provisions of the Regulatory Flexibility
Act (‘‘RFA’’) 1560 relating to Regulation
Best Interest. An Initial Regulatory
Flexibility Analysis (‘‘IRFA’’) was
prepared in accordance with the RFA
and included in the Proposing
Release.1561
A. Need for and Objectives of the Rule
Broker-dealers play an important role
in helping Americans organize their
financial lives, accumulate and manage
retirement savings, and invest toward
other important long-term goals, such as
buying a house or funding a child’s
college education.
As discussed in Section I, concerns
exist regarding: (1) The potential harm
to retail customers resulting from
broker-dealer recommendations
provided in the presence of conflicts of
interest and (2) the insufficiency of
existing broker-dealer regulatory
requirements to address these conflicts
when broker-dealers make
recommendations to retail customers.
More specifically, there are concerns
that existing requirements do not
require a broker-dealer’s
recommendations to be in the retail
customer’s best interest.
As a result, we are adopting
Regulation Best Interest, which creates
an enhanced standard of conduct
applicable to broker-dealers at the time
they recommend to a retail customer a
securities transaction or investment
strategy involving securities. This
includes recommendations of account
types and rollovers or transfers of assets
and also covers implicit hold
recommendations, resulting from
agreed-upon account monitoring. When
making a recommendation, a brokerdealer must act in the retail customer’s
best interest and cannot place its own
interests ahead of the customer’s
interests. This General Obligation is
satisfied only if the broker-dealer
complies with four specified component
obligations: (1) Disclosure Obligation,
(2) Care Obligation, (3) Conflict of
Interest Obligation, and (4) Compliance
Obligation. In addition, the Commission
is amending Rules 17a–3 and 17a–4 of
the Exchange Act, which set forth
minimum requirements with respect to
the records that broker-dealers must
make, and how long those records and
other documents must be kept,
respectively.
First, as described in Section II.C.1,
under the Disclosure Obligation, before
or at the time of making a
U.S.C. 603.
Proposing Release, supra footnote 7, at
Section VII.

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1561 See

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recommendation, a broker-dealer must
disclose, in writing,1562 material facts
about the scope and terms of its
relationship with the customer. This
includes a disclosure that the brokerdealer or associated person is acting in
a broker-dealer capacity; the material
fees and costs the customer will incur;
and the type and scope of the services
to be provided, including any material
limitations on the recommendations
that could be made to the retail
customer. Moreover, the broker-dealer
must disclose all material facts relating
to conflicts of interest associated with
the recommendation that might incline
a broker-dealer to make a
recommendation that is not
disinterested, including, for example,
proprietary products, payments from
third parties, and compensation
arrangements.
Second, as described in Section II.C.2,
under the Care Obligation, a brokerdealer must exercise reasonable
diligence, care, and skill when making
a recommendation to a retail customer.
The broker-dealer must understand
potential risks, rewards, and costs
associated with the recommendation.
The broker-dealer must then consider
those risks, rewards, and costs in light
of the retail customer’s investment
profile and have a reasonable basis to
believe that the recommendation is in
the customer’s best interest and does not
place the broker-dealer’s interest ahead
of the retail customer’s interest. When
recommending a series of transactions,
the broker-dealer must have a
reasonable basis to believe that the
transactions taken together are not
excessive, even if each is in the retail
customer’s best interest when viewed in
isolation.
Third, as described in Section II.C.3,
under the Conflict of Interest Obligation,
a broker-dealer must establish,
maintain, and enforce reasonably
designed written policies and
procedures addressing conflicts of
interest associated with its
recommendations to retail customers.
These policies and procedures must be
reasonably designed to identify all such
conflicts and at a minimum disclose or
eliminate them. Additionally, the
policies and procedures must be
reasonably designed to mitigate
conflicts of interests that create an
incentive for an associated person of the
broker-dealer to place its interests or the
1562 As discussed above, there are circumstances
where broker-dealers and their associated persons
may make oral disclosures or written disclosures
after the time of a recommendation under the
circumstances outlined in Section II.C.1, Disclosure
Obligation, Oral Disclosure or Disclosure After a
Recommendation.

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interest of the firm ahead of the retail
customer’s interest. Moreover, when a
broker-dealer places material limitations
on recommendations that may be made
to a retail customer (e.g., offering only
proprietary or other limited range of
products), the policies and procedures
must be reasonably designed to disclose
the limitations and associated conflicts
and to prevent the limitations from
causing the associated person or brokerdealer to place the associated person’s
or broker-dealer’s interests ahead of the
customer’s interest. Finally, the policies
and procedures must be reasonably
designed to identify and eliminate sales
contests, sales quotas, bonuses, and
non-cash compensation that are based
on the sale of specific securities or
specific types of securities within a
limited period of time.
Fourth, as described in Section II.C.4,
under the Compliance Obligation, a
broker-dealer must also establish,
maintain, and enforce written policies
and procedures reasonably designed to
achieve compliance with Regulation
Best Interest as a whole. Thus, a brokerdealer’s policies and procedures must
address not only conflicts of interest but
also compliance with its Disclosure and
Care Obligations under Regulation Best
Interest.
The enhancements contained in
Regulation Best Interest will improve
investor protection by enhancing the
quality of broker-dealer
recommendations to retail customers
and reducing the potential harm to retail
customers that may be caused by
conflicts of interest. Regulation Best
Interest will complement the related
rules, interpretations, and guidance that
the Commission is concurrently
issuing.1563 Individually and
collectively, these actions are designed
to help retail customers better
understand and compare the services
offered by broker-dealers and
investment advisers and make an
informed choice of the relationship best
suited to their needs and circumstances,
provide clarity with respect to the
standards of conduct applicable to
investment advisers and broker-dealers,
and foster greater consistency in the
level of protections provided by each
regime, particularly at the point in time
that a recommendation is made.
All of these requirements are
discussed in detail in Section II above.
The costs and burdens of these
requirements on small broker-dealers
are discussed below as well as above in
our Economic Analysis and PRA
1563 See Relationship Summary Adopting Release;
Fiduciary Interpretation; Solely Incidental
Interpretation.

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Analysis, that discuss the costs and
burdens on all broker-dealers.
B. Significant Issues Raised by Public
Comments
The Commission is sensitive to the
burdens that the new rule may have on
small entities. In the Proposing Release,
we requested comment on matters
discussed in the IRFA. In particular, we
sought comments on the number of
small entities that may be affected by
proposed Regulation Best Interest, and
whether proposed Regulation Best
Interest would have an effect on small
entities that had not been considered.
We requested that commenters describe
the nature of any impact on small
entities and provide empirical data to
support the extent of such impact. We
also requested comment on the
proposed compliance burdens and the
effects these burdens would have on
smaller entities.
As discussed in the Economic
Analysis and PRA Analysis above, we
received comments regarding the
potential costs and burdens of the
proposal on broker-dealers, including
those that are small entities.1564
Additionally, the Commission received
some comments specifically addressing
the costs to smaller broker-dealers.
One commenter stated that for a small
firm with $500,000 in net capital, a
compliance cost of $60,000 1565 could
constitute 12% of that net capital,
making compliance with the rule
burdensome for such firms and
potentially forcing many small firms to
hire additional compliance
personnel.1566 Another commenter
raised concerns that replacing the term
supra Sections III and IV.
NSCP Letter (‘‘Consider the estimated
$60,000 in additional compliance costs referenced
in the Release which would represent 12% of net
capital of a $500,000 firm.’’)
1566 See id (‘‘Several small firms estimate that
they incur approximately $80,000 in compliance
costs to meet basic ongoing regulatory
requirements. Notably, this amount does not
include expenses associated with new rules,
regulatory changes, regulatory exams or running a
compliance department. In isolation, it may seem
that this single proposal by one regulatory agency
would have manageable marginal impact on costs.
But in fact, it would be one of many changes (and
importantly, a major change) that smaller firms
must address. Many small firms do not have large
Compliance Departments adequate to shoulder
these ever increasing regulatory demands. In fact,
many small firm Compliance Departments are
comprised of just one or two persons.’’). See also,
generally, NFIB Letter (‘‘America’s small and
independent businesses in the financial industry
cannot afford the army of lawyers and clerks
needed to comply with the welter of complex rules
issued or proposed by the U.S. Department of Labor
(DOL) (Reference 1 above), the U.S. Securities and
Exchange Commission (SEC) (Reference 2 above),
and the several states to govern the duties of
financial businesses toward their retail customers.’’)

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1565 See

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‘‘suitable’’ with ‘‘best interest’’ could
create legal risk and cause smaller and
mid-sized professional firms to leave the
market.1567 As noted above in Section
III, we acknowledge that the costs of the
rule could be more burdensome for
small firms and discuss any
corresponding competitive effects in
Section III.D.1.1568 Further, as described
above, we acknowledge the requests by
commenters for further clarity on what
it means to ‘‘act in the best interest’’ of
the retail customer, and particularly
what it means to make a
recommendation in a retail customer’s
‘‘best interest’’ under the Care
Obligation. Consequently, in Section
II.A, and in the detailed discussion of
each of the Disclosure, Care, Conflict of
Interest, and Compliance Obligations in
Section II.C, we have provided further
clarity on how a broker-dealer can
comply with Regulation Best Interest.
However, with respect to the comment
concerning the term ‘‘suitable,’’ we are
adopting a ‘‘best interest’’ standard as
proposed—which enhances the brokerdealer standard of conduct beyond
existing suitability obligations—in light
of our goal to enhance retail investor
protection and decision making.
Another commenter stated that costs
for small broker-dealers could be
reduced if the Commission approved a
standard disclosure, which would add
certainty and reduce costs for small
firms and their customers.1569 We
1567 See Iowa Insurance Commissioner Letter
(‘‘Striking ‘‘suitability,’’ and its history and legal
precedence, will usher in an age of legal and
marketing confusion. Additionally, smaller and
mid-sized professional firms, to avoid the risks of
this confusion and the resulting litigation, will
leave the market, and the larger firms will remain,
increasing market concentration. A decision to
replace the term ‘‘suitable’’ in the text of traditional
suitability rules with the phrase ‘‘best interest’’ will
disrupt the market, decrease competition, increase
the price of services out of the reach of thousands
of middle class Americans, and significantly reduce
consumer options for selecting valuable
professional services.’’) But see NAIFA Letter
(‘‘NAIFA supports a best interest standard of
conduct for securities-licensed firms and
individuals, and we appreciate the SEC’s
considerable efforts to establish such a standard
without imposing unduly prescriptive or
burdensome implementation or compliance
requirements. The SEC’s general approach, we
believe, will preserve choices for consumers at all
income levels and account sizes—and should not
unnecessarily increase costs for consumers or
businesses.’’)
1568 See also infra Section V.E., noting that we
believe that Regulation Best Interest will result in
multiple investor protection benefits, and these
benefits should apply to retail customers of smaller
entities as well as retail customers of large brokerdealers.
1569 See Chepucavage Letter (‘‘Costs for the small
bd’s however can be reduced with a commission
approved standard disclosure which would add
certainty and ought to be considered especially for
the small investor. [. . .] A standard disclosure
document would also be useful for the small bd that

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considered, as an alternative to the
Disclosure Obligation, mandating a
standardized disclosure.1570 However,
as described in Section II.C.1, after
careful consideration of the comments
concerning the proposed Disclosure
Obligation, we have decided not to
require any standard written disclosures
under Regulation Best Interest at this
time. We recognize the wide variety of
business models and practices and we
continue to believe it is important to
provide broker-dealers with flexibility
to enable them to better tailor disclosure
and information that their retail
customers can understand and may be
more likely to read at relevant points in
time, rather than, for example,
mandating a standardized all-inclusive
(and likely lengthy) disclosure.
The vast majority of commenters
supported the Commission’s rulemaking
efforts to address the standards of
conduct that apply to broker-dealers
when making recommendations, but
nearly all commenters suggested
modifications to proposed Regulation
Best Interest. These suggestions touch
on almost every aspect of the proposal,
as summarized in Section I.C above and
as discussed in more detail, along with
explanations of modifications made in
light of the comments, throughout the
release.

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C. Small Entities Subject to the Rule
For purposes of a Commission
rulemaking in connection with the RFA,
a broker-dealer will be deemed a small
entity if it: (i) Had total capital (net
worth plus subordinated liabilities) of
less than $500,000 on the date in the
prior fiscal year as of which its audited
financial statements were prepared
pursuant to Rule 17a–5(d) under the
Exchange Act,1571 or, if not required to
file such statements, had total capital
(net worth plus subordinated liabilities)
of less than $500,000 on the last
business day of the preceding fiscal year
(or in the time that it has been in
business, if shorter); and (ii) is not
affiliated with any person (other than a
natural person) that is not a small
business or small organization.1572
As discussed in Section IV above, the
Commission estimates that as of
cannot afford the legal assistance needed to
evaluate this 1,000 page proposal and draft
appropriate documents. [. . .] The Commission
should therefore reconsider the impact of its
proposal on small investors and small bd’s with the
assumption that retirement accounts are
significantly more important than regular brokerage
accounts especially for small and elderly investors.
A standard disclosure for small firms would reduce
costs for the firms and their customers.’’)
1570 See supra Section III.E and infra Section V.E.
1571 17 CFR 240.17a–5(d).
1572 See 17 CFR 240.0–10(c).

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December 31, 2018, approximately
2,766 retail broker-dealers will be
subject to Regulation Best Interest and
the amendments to Rules 17a–3 and
17a–4.1573 Based on FOCUS Report
data,1574 the Commission estimated that
as of December 31, 2018, approximately
756 of those retail broker-dealers might
be deemed small entities for purposes of
this analysis.1575 For purposes of this
RFA analysis, we refer to broker-dealers
that might be deemed small entities
under the RFA as ‘‘small entities,’’ and
we continue to use the term ‘‘brokerdealers’’ to refer to broker-dealers
generally, as the term is used elsewhere
in this release.1576 Of these 756 small
entities, the Commission estimates that
623 are standalone broker-dealers and
133 are dually registered as investment
advisers.1577
D. Projected Reporting, Recordkeeping,
and Other Compliance Requirements
The new requirements impose certain
reporting and compliance requirements
on certain broker-dealers, including
those that are small entities. The new
requirements are summarized in this
FRFA (Section V.A. above). All of these
requirements are also discussed in
detail, in Section II above, and these
requirements as well as the costs and
burdens on broker-dealers, including
those that are small entities, are
discussed above in Sections III and IV
(the Economic Analysis and PRA
Analysis) and below.
1. Disclosure Obligation
The Disclosure Obligation under
Regulation Best Interest requires a
broker-dealer or its associated persons,
prior to or at the time of recommending
a securities transaction or strategy
involving securities to a retail customer,
to provide the retail customer, in
writing, full and fair disclosure of: (1)
All material facts relating to the scope
and terms of the relationship with the
retail customer, including: (a) That the
broker, dealer, or such natural person is
acting as a broker, dealer, or an
associated person of a broker or dealer
with respect to the recommendation, (b)
the fees and costs that apply to the retail
customer’s transactions, holdings, and
accounts, and (c) the type and scope of
services provided to the retail customer,
1573 As noted above, this estimate likely
overstates the number that would be impacted by
Regulation Best Interest. See supra Section III.C.1.a.
1574 See supra footnote 1384.
1575 See supra footnote 1386.
1576 Consistent with the PRA, unless otherwise
notes, we use the terms ‘‘registered representative’’
and ‘‘dually registered representative of a brokerdealer’’ herein.
1577 These estimate are based on FOCUS Report
Data, see supra footnote 1384

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including any material limitations on
the securities or investment strategies
involving securities that may be
recommended to the retail customer;
and (2) all material facts relating to
conflicts of interest that are associated
with the recommendation. The
estimated costs and burdens incurred by
small entities in relation to this
Disclosure Obligation are discussed in
detail below.1578
a. Obligation To Provide to the Retail
Customer Full and Fair Disclosure, in
Writing, of All Material Facts Relating to
the Scope and Terms of the Relationship
With the Retail Customer
The Commission assumes for
purposes of this analysis that small
entities would meet the obligation to
disclose to the retail customer, in
writing, the material facts related to the
scope and terms of the relationship with
the retail customer through a
combination of delivery of the
Relationship Summary,1579 creating
account disclosures to include
standardized language related to the
capacity in which they are acting and
type and scope of services, and the
development of fee schedules.
b. Estimated Costs and Burdens
In addition to the costs described
below, additional costs associated with
Regulation Best Interest are described
above in Section III.C.1580
(1) Disclosure of Capacity, Type and
Scope of Services
As explained above, standalone
broker-dealers that are small entities
will satisfy the obligation to disclose the
capacity in which they acting through
the delivery to the retail customer of the
Relationship Summary, and
accordingly, we estimate zero burden
hours for standalone broker-dealers that
are small entities to disclose the
capacity in which they are acting.
We estimate that a dually registered
firm that is a small entity will incur an
initial internal burden of 10 hours for
in-house counsel and in-house
compliance to draft language regarding
the capacity in which it is acting for
inclusion in the standardized account
disclosure that is delivered to the retail
customer.1581 In addition, we estimate
1578 For a discussion of additional costs and
burdens as well as monetized burdens, related to
the Disclosure Obligation, see supra Section
III.C.2.b.
1579 See Exchange Act Rule 17a–14 and
Relationship Summary Adopting Release, supra
footnote 12.
1580 See Sections III.C.2.b, III.C.3.b, III.C.4, III.C.5,
and III.C.6.
1581 See supra footnotes 1395–1396.

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that dual-registrants that are small
entities will incur an estimated external
cost of $4,970 for the assistance of
outside counsel in the preparation and
review of standardized language
regarding capacity.1582 For the
estimated 133 dually registered brokerdealers that are small entities, we
project an aggregate initial burden of
1,330 hours,1583 and $661,010 in
aggregate initial costs for drafting
language regarding capacity.1584
Similarly, to comply with Regulation
Best Interest, we believe that small
entities will draft standardized language
for inclusion in the account disclosure
to provide the retail customer with more
specific information regarding the type
and scope of services that they provide.
We estimate that a small entity will
incur an internal initial burden of 10
hours for in-house counsel and in-house
compliance to draft this standardized
language.1585 In addition, a small entity
will incur an estimated external cost of
$4,970 for the assistance of outside
counsel in the preparation and review of
this standardized language.1586 For the
estimated 756 small entities,1587 we
project an aggregate initial burden of
7,560 hours,1588 and aggregate initial
costs of $3.8 million for drafting
language regarding type and scope of
services.1589
We estimate that small entities will
each incur approximately 0.02 burden
hours 1590 for delivery of the account
disclosure document.1591 Based on
FOCUS data, we believe that the 756
small entities have a total of 5,281
customer accounts, and that
approximately all of those accounts
belong to retail customers.1592 We
therefore estimate that small entities
will have an aggregate initial burden of
106 hours, or approximately 0.14
1582 See

supra footnote 1397.
supra footnote 1395. This estimate is
based on the following calculation: (133 dually
registered retail firms that are small entities) × (10
hours) = 1,330 initial aggregate burden hours.) The
professional skills associated with the estimated
burden hours are specified in Section IV above.
1584 This estimate is based on the following
calculation: (133 dually registered retail firms that
are small entities) × ($4,970 in external cost per
firm) = $661,010 in aggregate initial costs.
1585 See supra footnote 1402.
1586 See supra footnote 1403.
1587 See supra footnote 1385 and accompanying
text.
1588 See supra footnote 1405.
1589 See supra footnote 1406.
1590 See supra footnote 1411.
1591 See supra footnote 1412.
1592 This estimate may overstate the number of
retail customer accounts at small entities and/or
may overstate the number of deliveries to be made
due to the double-counting of deliveries to be made
by dual-registrants to a certain extent, and the fact
that one customer may own more than one account.

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hours 1593 per small entity for the first
year after Regulation Best Interest is in
effect for delivery of the account
disclosure document.1594
We therefore estimate a total initial
aggregate burden for small entities to
develop and deliver to retail customers
account disclosures relating to the
capacity in which they are acting and
type and scope of services of 7,666
burden hours.1595
In terms of ongoing costs, we estimate
that each dually registered broker-dealer
that is a small entity will incur
approximately 5 burden hours annually
for in-house compliance and businessline personnel to review changes in the
dual-registrant’s capacity, and another 2
burden hours annually for in-house
counsel to amend the account
disclosure to disclose material changes
to the dual-registrant’s capacity, for a
total of 7 burden hours. The estimated
ongoing aggregate burden to amend
account disclosures of dual-registrants
that are small entities to reflect changes
in capacity is therefore 931 hours per
year.1596
With respect to small entities, we
estimate an internal burden of 2 hours
for in-house compliance and businessline personnel to review and update
changes in types or scope of
services,1597 and another 2 burden
hours annually for in-house counsel to
amend the account disclosure to
disclose material changes to type and
scope of services—for a total of 4 burden
hours per year. The estimated ongoing
aggregate burden for standalone brokerdealers that are small entities to amend
account disclosures to reflect changes in
type and scope of services is therefore
2,492 hours per year.1598
1593 These estimates are based on the following
calculations: (0.02 hours per customer account ×
(5,281 retail customer accounts) = 106 aggregate
burden hours. Conversely, (106 hours) / (756 small
entities) = approximately 0.14 burden hours per
small entity for the first year after Regulation Best
Interest is in effect.
1594 See supra footnote 1415.
1595 This estimate is based on the following
calculation: (1,330 aggregate initial burden hours
for dually registered broker-dealers that are small
entities) + (6,230 aggregate initial burden hours for
standalone broker-dealers that are small entities) +
(106 aggregate initial burden hours for small entities
to deliver the account disclosures) = 7,666 total
aggregate initial burden hours.
1596 This estimate is based on the following
calculation: (7 burden hours per dually registered
firm per year) × 133 dually registered broker-dealers
that are small entities) = 931 ongoing aggregate
burden hours per year.
1597 As noted above, we estimate zero burden
hours annually for standalone broker-dealers that
are small entities relating to disclosure of capacity
under the Disclosure Obligation. See supra Section
IV.B.1.a.ii.
1598 This estimate is based on the following
calculation: (4 burden hours per small entity per
year) × (623 standalone broker-dealers that are small

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With respect to delivery of the
amended account agreements in the
event of material changes to the capacity
disclosure or disclosure related to type
and scope of services, we estimate that
this would take place among 20% of a
small entity’s retail customer accounts
annually. We therefore estimate small
entities to incur a total annual aggregate
burden of 21 hours, or 0.03 hours per
small entity per year.1599
The total ongoing aggregate burden for
small entities to review, amend, and
deliver updated account disclosures to
reflect changes in capacity, type and
scope of services would be 3,444 burden
hours per year.1600
The Commission acknowledges that
the types of services and product
offerings vary greatly by broker-dealer,
and therefore the costs or burdens
associated with updating the account
disclosure might also vary.
(2) Disclosure of Fees and Costs
As stated above, while we anticipate
that many small entities may already
create fee schedules, we believe that
small entities will initially spend 5
hours to internally create a new fee
schedule in consideration of the
requirements of Regulation Best Interest.
We additionally estimate a one-time
external cost of $2,485 for small
entities.1601 We therefore estimate the
initial aggregate burden for small
entities to be 3,780 burden hours,1602
and the initial aggregate cost to be $1.88
million.1603
Similar to delivery of the account
disclosure regarding capacity and type
and scope of services, we estimate the
burden for small entities to make the
initial delivery of the fee schedule to
new retail customers, at the inception of
the relationship, and existing retail
customers, prior to or at the time of a
recommendation, will require
approximately 0.02 hours to deliver to
each retail customer.1604 We therefore
estimate that small entities will have an
aggregate initial burden of 106 hours, or
entities) = 2,492 ongoing aggregate burden hours
per year.
1599 (20%) × (5,281 retail customer accounts) ×
(0.02 hours for delivery to each customer account)
= 21 aggregate burden hours per year. Conversely,
21 aggregate burden hours/756 small entities = 0.03
burden hours per small entity per year.
1600 This estimate is based on the following
calculation: (931 ongoing aggregate burden hours
for dually registered broker-dealers that are small
entities) + (2,492 ongoing aggregate burden hours
for standalone broker-dealers that are small entities)
+ (21 ongoing aggregate burden hours for delivery
of amended account disclosures) = 3,444 total
ongoing aggregate burden hours per year.
1601 See supra footnote 1426.
1602 See supra footnote 1428.
1603 See supra footnote 1429.
1604 See supra footnote 1411.

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approximately 0.14 hours per small
entity for the first year after Regulation
Best Interest is in effect.1605
With respect to small entities, we
estimate that reviewing and updating
the fee schedule will require
approximately 2 hours per year. Based
on these estimates, we estimate the
recurring, aggregate, annualized burden
will be 1,512 hours for small
entities.1606 We do not anticipate that
small entities will incur outside legal,
compliance, or consulting fees in
connection with updating their
standardized fee schedule since inhouse personnel would be more
knowledgeable about these facts, and we
therefore do not expect external costs
associated with updating the fee
schedule.
With respect to delivery of the
amended fee schedule in the event of a
material change, we estimate that this
would take place among 40% of a small
entity’s retail customer accounts
annually, and that small entities will
require approximately 0.02 hours to
deliver the amended fee schedule to
each retail customer. We therefore
estimate small entities would incur a
total annual aggregate burden of 42
hours, or 0.06 hours per small
entity.1607
The Commission acknowledges that
the type of fee schedule may vary
greatly by small entity and therefore that
the costs or burdens associated with
updating the standardized fee schedule
might similarly vary.
(3) Disclosure of All Material Facts
Relating to Conflicts of Interest
Associated With the Recommendation

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We believe that many or most small
entities will develop a standardized
conflict disclosure document and
deliver it to their retail customers.1608
For small entities, we estimate it will
take in-house counsel, on average, 5
burden hours to create the standardized
conflict disclosure document and
outside counsel 5 hours to review and
revise the document. We estimate that
the initial aggregate burden for the
development of a standardized
1605 This estimate is based on the following
calculation: (5,281 retail customer accounts) × (0.02
hours for delivery to each customer account) = 106
aggregate burden hours. Conversely, (106 aggregate
burden hours) / (756 small entities) = 0.14 burden
hours per small entity for the first year after
Regulation Best Interest is in effect.
1606 See supra footnote 1437.
1607 This estimate is based on the following
calculation: (40% of 5,281 retail customer accounts)
× (0.02 hours) = 42 aggregate burden hours.
Conversely, (42 aggregate burden hours)/(756 small
entities) = 0.06 burden hours per small entity per
year.
1608 See supra footnote 1443.

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disclosure document, based on an
estimated 756 small entities, will be
3,780 burden hours.1609 We additionally
estimate an initial cost of $2,485 per
small entity,1610 and an aggregate initial
cost of $1.88 million for all small
broker-dealers.1611
We assume that small entities will
deliver the standardized conflict
disclosure document to new retail
customers at the inception of the
relationship, and to existing retail
customers prior to or at the time of a
recommendation. We estimate that
small entities will require
approximately 0.02 hours to deliver the
standardized conflict disclosure
document to each retail customer.1612
We therefore estimate that small entities
will incur an aggregate initial burden of
106 hours, or approximately 0.14 hours
per small entity for delivery of the
standardized conflict disclosure
document the first year after Regulation
Best Interest is in effect.1613
Accordingly, the total aggregate initial
burden for small entities is estimated at
3,886 hours,1614 and the total aggregate
initial cost is estimated at $1.88
million.1615
We believe that small entities will
incur ongoing annual burdens and costs
to update the disclosure document to
include newly identified conflicts. We
estimate that in-house counsel at a small
entity will require approximately 1 hour
per year to update the standardized
conflict disclosure document, for an
ongoing aggregate burden of
approximately 756 hours per year.1616
We do not anticipate that small entities
will incur outside legal, compliance, or
consulting fees in connection with
updating their standardized conflict
disclosure document, since in-house
personnel would presumably be more
knowledgeable about conflicts of
interest.
supra footnote 1444.
supra footnote 1445.
1611 See supra footnote 1446.
1612 See supra footnote 1411. For purposes of this
analysis, we have assumed any initial disclosures
made by the small entities related to material
conflicts of interest will be delivered together.
1613 These estimates are based on the following
calculations: (0.02 hours per customer account ×
5,281 retail customer accounts) = 106 aggregate
burden hours. Conversely, (106 hours)/(756 small
entities) = 0.14 burden hours per small entity for
the first year after Regulation Best Interest is in
effect.
1614 This estimate is based on the following
calculation: (3,780 aggregate initial burden hours
for the development of a standardized conflict
disclosure document) + (106 burden hours for
delivery of the standardized conflict disclosure
document) = 3,886 aggregate initial burden hours.
1615 See supra footnote 1429.
1616 See supra footnote 1453.

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1610 See

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33487

With respect to ongoing delivery of
the updated conflict disclosure
document, we estimate that this will
take place among 40% of a small
entity’s retail customer accounts
annually, and that small entities will
require approximately 0.02 hours to
deliver the updated conflict disclosure
document to each retail customer.1617
We therefore estimate that small entities
will incur an aggregate ongoing burden
of 42 hours, or 0.06 burden hours per
small entity per year.1618
2. Care Obligation
As discussed above in Section IV.B.2,
we believe that any burdens or costs
associated with the Care Obligation are
accounted for in other obligations under
Regulation Best Interest, including the
Disclosure Obligation and the Recordmaking Obligation under Rule 17a–
3(a)(35) and Recordkeeping Obligation
under Rule 17a–4(e)(5). Other costs
applicable to broker-dealers, including
small entities, associated with the Care
Obligation are discussed above in
Section III.C.3.b.
3. Conflict of Interest Obligation
As described more fully above in
Section IV.B.3, the Conflict of Interest
Obligation would generally include the
obligation to: (1) Update written policies
and procedures to comply with
Regulation Best Interest and (2)
establish mechanisms to proactively and
systematically identify and manage
conflicts of interest in its business on an
ongoing or periodic basis.1619
a. Written Policies and Procedures
i. Initial Costs and Burdens
To initially comply with this
obligation, we believe that small entities
would primarily rely on outside counsel
to update existing policies and
procedures, as small broker-dealers
generally have fewer in-house legal and
compliance personnel. We estimate that
40 hours of outside legal counsel
services would be required, for a onetime initial cost of $19,880 per small
entity,1620 and an aggregate initial cost
of $15.0 million for all small
entities.1621 We also expect that in1617 See

supra footnote 1455.
estimate is based on the following
calculation: (40% of 5,281 retail customer accounts)
× (0.02 hours) = 42 aggregate burden hours.
Conversely, (42 aggregate burden hours per year)/
(756 small entities) = 0.06 hours per small entity
per year.
1619 See supra Section IV.B.3. For a discussion of
additional costs and burdens, as well as monetized
burdens, related to the Conflict of Interest
Obligation, see supra Section III.C.4.
1620 See supra footnote 1477.
1621 See supra footnote 1478.
1618 This

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house compliance would require 10
hours to review and approve the
updated policies and procedures, for an
initial aggregate burden of 7,560
hours.1622 Therefore, we estimate the
total initial aggregate burden for small
entities to be 128,160 hours 1623 and the
total initial aggregate cost to be $25.0
million.1624
We believe that the related ongoing
costs for small entities (relating to
outside counsel reviewing and updating
policies and procedures on a periodic
basis) would be $2,485 annually for
each small entity,1625 and the projected
aggregate, annual ongoing cost for small
entities (relating to outside legal
counsel) would be $1.88 million.1626 In
addition, we expect that small entities
would require five hours of outside
compliance services per year to update
their policies and procedures, for an
ongoing cost of $1,365 per year per
small entity,1627 and an aggregate
ongoing cost of $1.03 million per
year.1628 The total aggregate, ongoing
cost for small entities is therefore
projected at $2.91 million per year.1629
In addition to the costs described
above, we additionally believe small
broker-dealers would incur an internal
burden of approximately five hours for
an in-house compliance manager to
review and approve the updated
policies and procedures per year. The
ongoing, aggregate burden for small
broker-dealers would be 3,780 hours for
in-house compliance manager review
per year.1630
b. Identification and Management of
Conflicts of Interest
To comply with Regulation Best
Interest, we expect that small entities
would modify existing technology
through an outside programmer which
would require, on average, an estimated
20 hours, for an estimated initial cost
per small entity of $5,680.1631 We
additionally continue to project that
coordination between the programmer
and the small entity’s compliance
manager would involve five initial
burden hours. The aggregate initial costs
and burdens for small entities for the
modification of existing technology to
identify conflicts of interest would
1622 See

supra footnote 1479.
supra footnote 1480.
1624 See supra footnote 1481.
1625 See supra footnote 1486.
1626 See supra footnote 1487.
1627 See supra footnote 1488.
1628 See supra footnote 1489.
1629 See supra footnote 1490.
1630 See supra footnote 1491.
1631 See supra footnote 1497.

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therefore be $4.29 million,1632 and 3,780
burden hours.1633
As a result of the changes made to the
rule text of the Conflict of Interest
Obligation of Regulation Best Interest,
we believe that small entities would
incur burdens to determine how to
manage the conflict of interest. We
believe that small entities would require
approximately 20 hours per small
entity,1634 for an aggregate of 15,120
initial burden hours for all small
entities.1635 The total initial aggregate
burden for small entities for
identification and management of
conflicts of interest is therefore 18,900
initial burden hours.1636
To maintain compliance with the
Conflict of Interest Obligation, we
believe that for purposes of this
analysis, small entities would, through
the help of the business line and
compliance personnel, spend on average
10 hours 1637 to perform an annual
conflicts review using the modified
technology infrastructure.1638 Therefore,
the aggregate ongoing burden for an
annual conflicts review, based on an
estimated 756 small entities, would be
approximately 7,560 burden hours per
year.1639 Because we assume that small
entities would use in-house personnel
to identify and evaluate new, potential
conflicts, we continue to believe they
would not incur additional ongoing
costs.
c. Training
As discussed in the Proposing
Release, we expect that small entities
would develop training programs to
comply with Regulation Best Interest,
including the Conflict of Interest
Obligation. However, we believe that
any burdens and costs associated with
a training program would fall under the
new Compliance Obligation as it would
be developed to comply with the rule as
1632 This cost estimate is based on the following
calculation: ($5,680 in outside programmer costs
per broker-dealer) × (756 small entities) = $4.29
million in aggregate initial outside programmer
costs.
1633 This burden estimate is based on the
following calculation: (5 burden hours) × (756 small
entities) = 3,780 aggregate initial burden hours.
1634 See supra footnotes 1501 and 1502.
1635 This burden estimate is based on the
following calculation: (20 burden hours) × (756
small entities) = 15,120 aggregate initial burden
hours.
1636 This burden estimate is based on the
following calculation: (3,780 burden hours for
modification of technology) + (15,120 burden hours
for evaluation of managing conflicts) = 18,900 total
aggregate initial burden hours.
1637 See supra footnote 1507.
1638 See supra footnote 1508.
1639 This estimate is based on the following
calculation: (10 hours of labor per small entity per
year) × (756 small entities) = 7,560 aggregate burden
hours per year.

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a whole, including each of the
component obligations.
In total, to comply with the Conflict
of Interest Obligation, the Commission
estimates that the total initial burdens
and costs for small entities to be 135,720
hours 1640 and $29.29 million 1641 and
the total ongoing burdens and costs for
small entities to be 11,340 hours 1642
and $2.91 million.1643
4. Compliance Obligation
As discussed above, in response to
comments that we should require
policies and procedures to comply with
the rule as a whole, we are adopting the
Compliance Obligation.1644 Because we
did not include the Compliance
Obligation in the Proposing Release, we
did not include costs and burdens
associated with the Compliance
Obligation, but have provided a detailed
explanation in Section IV.B.4 above,
and a summary below.
To comply with the Compliance
Obligation, we believe that small
entities would primarily rely on outside
counsel to update existing policies and
procedures, and that 20 hours of outside
legal counsel services would be
required, for a one-time cost of $9,940
per small entity,1645 and an aggregate
initial cost of $7.5 million for all small
entities.1646 We also expect that inhouse compliance personnel would
require 6 hours to review and approve
the updated policies and procedures, for
an aggregate initial burden of 4,536
hours.1647
In terms of ongoing costs, we assume
for purposes of this analysis that small
entities would mostly rely on outside
legal counsel and compliance
consultants for review and update of
their policies and procedures, with final
review and approval from an in-house
compliance manager. We estimate that
outside counsel would require
approximately five hours per year to
update policies and procedures, for an
1640 This estimate is based on the following
calculation: (128,160 burden hours for written
policies and procedures) + (7,560 burden hours for
identification and management of conflicts of
interest) = 135,720 hours.
1641 This estimate is based on the following
calculation: ($25 million initial aggregate costs
relating to written policies and procedures) + ($4.29
million initial aggregate costs for modification of
existing technology to identify conflicts of interest)
= $29.29 million initial aggregate costs.
1642 This estimate is based on the following
calculation: (3,780 burden hours for reviewing and
approving the updated policies and procedures) +
(7,560 burden hours for annual conflicts review) =
11,340 initial aggregate burden hours.
1643 See supra footnote 1629.
1644 Section II.C.4.
1645 See supra footnote 1523.
1646 See supra footnote 1524.
1647 See supra footnote 1525.

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annual cost of $2,485 for each small
entity.1648 The projected aggregate,
annual ongoing cost for outside legal
counsel to update policies and
procedures for small entities would be
$1.88 million per year.1649 In addition,
we expect that a small entity would
require five hours of outside compliance
services per year to update its policies
and procedures, for an ongoing cost of
$1,365 per year,1650 and an aggregate
ongoing cost of $1.03 million per
year.1651 The total aggregate, ongoing
cost for small entities is therefore
projected at $2.91 million per year.1652
a. Training
Pursuant to the obligation to
‘‘maintain and enforce’’ written policies
and procedures, we additionally believe
small entities will develop training
programs that promote compliance with
Regulation Best Interest.
We estimate that a small entity would
retain an outside systems analyst,
outside programmer, and an outside
programmer analyst to create a training
module, at 20 hours, 40 hours, and 20
hours, respectively. The total cost to
develop the training module would be
approximately $20,920 per small
entity,1653 for an aggregate initial cost to
small entities of $17.18 million.1654
Additionally, we expect that the
training module would require the
approval of the Chief Compliance
Officer, as well as in-house counsel,
each of whom would require
approximately 2 hours to review and
approve the training module. The initial
aggregate burden for small entities is
therefore estimated at 3,024 initial
burden hours.1655
In addition, small entities would
incur an initial cost for registered
representatives to undergo training
through the training module. We
estimate the training time at one hour
per associated person, for an aggregate
initial burden of 5,094 burden hours, or
an initial burden of 6.7 hours per small
entity.1656 The total aggregate burden to
1648 See

supra footnote 1529.
supra footnote 1530.
1650 See supra footnote 1531.
1651 See supra footnote 1532.
1652 See supra footnote 1533.
1653 See supra footnote 1534.
1654 This estimate is based on the following
calculation: (756 small entities) × ($20,920 initial
costs per broker-dealer) = $15.81 million in
aggregate initial costs for technology services.
1655 This estimate is based on the following
calculation: (756 small entities) × (4 initial burden
hours per small entity) = 3,024 initial burden hours.
1656 This estimate is based on the following
calculation: (1 burden hour) × (5,094 registered
representatives at small entities) = 5,094 aggregate
initial burden hours. Conversely, (5,094 aggregate
burden hours)/(756 small entities) = 6.7 initial
burden hours per broker-dealer.

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approve the training module and
implement the training program would
be 8,118 initial burden hours.1657
For purposes of this analysis, we
assume that small entities would likely
require registered representatives to
repeat the training module for
Regulation Best Interest on an annual
basis. The ongoing aggregate cost for the
one-hour training would be 5,094
burden hours per year, or 6.7 burden
hours per small entity per year.1658
In total, for small entities to comply
with the Compliance Obligation, the
Commission estimates the total initial
burdens and costs to be 12,654
hours 1659 and $23.31 million,1660 and
the total ongoing burdens and costs to
be 5,094 hours 1661 and $2.91
million.1662
5. Record-Making and Recordkeeping
Obligations
The record-making and recordkeeping
obligations will impose record-making
and recordkeeping requirements on
broker-dealers with respect to certain
information collected from, or provided
to, retail customers.
a. Record-Making Obligation
As discussed above, we continue to
believe that small entities will satisfy
the record-making requirements of the
amendment to Rule 17a–3(a)(35) by
amending an existing account
disclosure document to include certain
information.1663 We believe that the
inclusion of this information in an
account disclosure document will
require, on average, approximately 1
hour per year for outside counsel at
small entities, at an updated average
rate of $497/hour, for an annual cost of
$497 for each small entity to update an
account disclosure document. The
1657 This estimate is based on the following
calculation: (5,094 burden hours for training of
registered representatives) + (3,024 burden hours to
approve training program) = 8,118 total aggregate
initial burden hours.
1658 See supra footnote 1656.
1659 This estimate is based on the following
calculation: (4,536 initial burden hours for policies
and procedures) + (8,118 initial burden hours
training) = 12,654 initial burden hours to comply
with Compliance Obligation.
1660 This estimate is based on the following
calculation: ($7.5 million initial costs for policies
and procedures) + ($15.81 million initial costs for
training) = $23.31 million initial total costs to
comply with Compliance Obligation.
1661 This estimate is based on the following
calculation: (0 ongoing burden hours for policies
and procedures) + (5,094 ongoing burden hours for
training) = 5,094 ongoing burden hours to comply
with Compliance Obligation.
1662 This estimate is based on the following
calculation: ($2.91 million ongoing costs for
policies and procedures) + ($0 ongoing costs for
training) = $2.91 million ongoing total costs to
comply with Compliance Obligation.
1663 See supra Section IV.B.5.a.i.

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33489

projected initial, aggregate cost for small
entities is therefore estimated to be
$375,732.1664 Finally, we estimate it
will require an additional 0.04 hours for
the registered representative responsible
for the information (or other clerical
personnel) to fill out that information in
the account disclosure document, for an
approximate total aggregate initial
burden of 211 hours, or approximately
0.28 hours per small entity for the first
year after the rule is in effect.1665
Because we have already included the
costs and burdens associated with the
creation of a record to memorialize an
oral disclosure, and the delivery of the
amended account disclosure document
in Section V.D.1., we need not include
them in this section of the analysis.
We do not believe that the identity of
the registered representative responsible
for the retail customer’s account will
change. Accordingly, we continue
believe that there are no ongoing costs
and burdens associated with this recordmaking requirement of the amendment
to Rule 17a–3(a)(35). With respect to
memorializing oral disclosures, we
estimate that this would take place
among 52% of a small entity’s retail
customers (and thus 52% of a registered
representative’s retail customer
accounts) annually.1666 We therefore
estimate that small entities will incur a
total annual aggregate ongoing burden of
55 hours or 0.07 hours per small entity
per year.1667
b. Recordkeeping Obligation
For purposes of this analysis, we
assume the following records would
likely be retained pursuant to amended
Rule 17a–3(a)(35): (1) Existing account
disclosure documents; (2)
comprehensive fee schedules; (3)
disclosures identifying material
conflicts; and (4) memorialized oral
disclosures under the circumstances
outlined in Section II.C.1, Oral
Disclosure or Disclosure After a
Recommendation.
Based on our belief that small entities
will rely on existing infrastructures to
satisfy the recordkeeping obligations of
Regulation Best Interest and the
amendment to Rule 17–a(4)(e)(5), we
1664 See

supra footnote 1548.
estimates are based on the following
calculations: (0.04 hours per customer account) ×
(5,281 retail customer accounts at small entities) =
211 aggregate initial burden hours. Conversely, (211
burden hours)/(756 small entities) = 0.28 initial
burden hours per broker-dealer.
1666 See supra footnote 1554.
1667 (52%) × (5,281 retail customer accounts at
small entities) × (0.02 hours for recording each oral
disclosure relating to a retail customer’s account) =
55 aggregate burden hours per year. Conversely, 55
aggregate burden hours/756 small entities = 0.07
ongoing burden hours per small entity per year.
1665 These

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believe the burden for small entities to
add new documents or modify existing
documents to the small entity’s existing
retention system will be approximately
704 burden hours for small entities,
assuming a small entity will need to
upload or file each of the four account
documents discussed above for each
retail customer account.1668 We do not
believe there will be additional internal
or external costs relating to the
uploading or filing of the documents. In
addition, because we have already
included the costs and burdens
associated with the delivery of the
amended account opening agreement
and other documents in Section V.D.1
above, we do not include them in this
section of the analysis.
We estimate that the approximate
ongoing burden associated with the
recordkeeping requirement of the
amendment to Rule 17a–4(e)(5) is 231
burden hours per year.1669 We do not
believe that the ongoing costs associated
with ensuring compliance with the
retention schedule would change from
the current costs of ensuring compliance
with existing Rule 17a–4 and as
outlined above.

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E. Agency Action To Minimize Effect on
Small Entities
The RFA directs the Commission to
consider significant alternatives that
would accomplish the stated objective,
while minimizing any significant
adverse impact on small entities. As
described in the Proposing Release we
considered the following alternatives for
small entities in relation to the new
requirements: (1) The establishment of
differing compliance or reporting
1668 This estimate is based on the following
calculation: (4 documents per customer account) ×
(5,281 retail customer accounts at small entities) ×
(2 minutes per document)/60 minutes = 704
aggregate burden hours.
1669 This estimate is based on the percentage of
account records we expect would be updated each
year as described in Section IV.B.1, supra, and the
following calculation: ((40% of fee schedules ×
5,281 retail customer accounts at small entities) ×
(2 minutes per document) + (40% of conflict
disclosure forms × 5,281 retail customer accounts
at small entities) × (2 minutes per document) +
(20% of account opening documents × 5,281 retail
customer accounts at small entities) × (2 minutes
per document)) = 10,560 minutes/60 minutes = 176
aggregate ongoing burden hours. In addition, with
respect to ongoing memorialization of the updated
oral disclosures, we estimate that this will take
place among 52% of a small entity’s retail customer
accounts annually. We therefore estimate that small
entities will incur an aggregate ongoing burden of
55 hours, or 0.07 burden hours per broker-dealer
(calculated as follows: (52% of updated oral
disclosures × 5,281 retail customer accounts at
small entities) × (1.2 minutes per document) = 3,295
minutes/60 minutes = 55 aggregate ongoing burden
hours (or 55 aggregate burden hours/756 small
entities = 0.07 burden hours per small entity)). 176
hours + 55 hours = 231 total aggregate ongoing
burden hours.

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requirements or timetables that take into
account the resources available to small
entities; (2) the clarification,
consolidation, or simplification of
compliance and reporting requirements
for small entities; (3) the use of
performance rather than design
standards; and (4) an exemption from
coverage of the new requirements, or
any part thereof, for such small entities.
Regarding the first alternative, the
Commission does not believe that we
could effectively achieve our stated
objectives by establishing different
requirements applicable to brokerdealers of different sizes. We considered
adopting tiered compliance dates so that
smaller broker-dealers would have had
more time to comply. However, as
discussed in Section II.E above, we
believe the operational capability
needed to develop processes to comply
with Regulation Best Interest is
sufficiently established by firms of all
sizes and resources. The Commission
has determined, in light of the
importance of the protections afforded
by Regulation Best Interest to retail
customers, that a Compliance Date of
one year after the Effective Date is an
appropriate timeframe for firms to
conduct the requisite operational
changes to their systems to establish
internal processes to comply with
Regulation Best Interest. Further, as
discussed above in Section III, each of
the component obligations in Regulation
Best Interest shares features with
existing market best practices, as shaped
by FINRA’s guidance on relevant rules
or as described in its Report on Conflicts
of Interest.1670 To the extent that brokerdealer (and small entity) practices are
already aligned with the requirements of
Regulation Best Interest, the anticipated
magnitude of the costs associated with
a given component of the rule will be
correspondingly reduced.1671
As discussed above, we believe that
Regulation Best Interest will result in
important investor protection benefits,
and these benefits apply to retail
customers of smaller entities as well as
retail customers of large broker-dealers.
For example, a primary objective of this
rulemaking is to enhance the quality of
recommendations provided by brokerdealers to retail customers, by
establishing under the Exchange Act a
‘‘best interest’’ obligation. We do not
believe that the interest of investors who
are retail customers would be served by
establishing differing compliance or
reporting requirements or timetables for
broker-dealers that are small entities
under Regulation Best Interest and the

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1670 See
1671 See

supra Section III.C.1.b.
supra text following footnote 1159.

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amendments to Rules 17a–3 and 17a–
4(e)(5).
Moreover, we continue to believe that
providing an exemption or different
requirements for small entities would be
inconsistent with our goal of facilitating
more consistent regulation, in
recognition of the importance for both
investors and broker-dealers of having
the applicable standards for brokerage
recommendations be clear,
understandable, and as consistent as
possible across a brokerage relationship
(i.e., whether for retirement or nonretirement purposes) and better aligned
with other advice relationships (e.g., a
relationship with an investment
adviser). Further, as discussed above,
broker-dealers are subject to regulation
under the Exchange Act and the rules of
each SRO of which the broker-dealer is
a member, including a number of
obligations that attach when a brokerdealer makes a recommendation to a
customer, as well as general and specific
requirements aimed at addressing
certain conflicts of interest. We note that
these existing requirements do not
generally distinguish between small
entities and other broker-dealers.
For the same reasons as described in
the Proposing Release, we still do not
believe that additional clarification,
consolidation, or simplification of
compliance and reporting requirements
would be appropriate for small entities.
We note, however, in crafting
Regulation Best Interest, we generally
aimed to provide broker-dealers
flexibility in determining how to satisfy
the component obligations. We continue
to believe that this flexibility reflects a
general performance-based approach,
rather than design-based approach.
As discussed in the Economic
Analysis in Section III.E above, the
Commission also considered a number
of alternatives as they affect all firms,
including small entities. Specifically,
the Commission considered three
different options for imposing a
fiduciary standard on broker-dealers: (1)
Applying the fiduciary standard under
the Advisers Act to broker-dealers; (2)
adopting a ‘‘new’’ uniform fiduciary
standard of conduct applicable to both
broker-dealers and investment advisers,
such as that recommended by the staff
in the 913 Study, and, or (3) adopting
similar standards to what the DOL had
provided under its fiduciary rule to
broker-dealers and investment advisers.
The Commission further considered
requiring broker-dealers to use a specific
form for disclosure, similar to, for
example, Form ADV Part II in lieu of the
flexible approach of the Disclosure
Obligation, or in the alternative,
developing a disclosure-only standard,

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Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations
which would require that broker-dealers
satisfy only the Disclosure Obligation of
the final rule.
We acknowledge certain commenters
urged the Commission to take additional
or different regulatory actions than the
approach we have adopted, including
the alternatives discussed above. We do
not believe that any rulemaking
governing retail investor-advice
relationships can solve for every issue
presented. After careful consideration of
the comments and additional
information we have received, we
believe that Regulation Best Interest, as
modified, appropriately balances the
concerns of the various commenters in
a way that will best achieve the
Commission’s important goals of
enhancing retail investor protection and
decision making, while preserving, to
the extent possible, retail investor
access (in terms of choice and cost) to
differing types of investment services
and products.
VI. Statutory Authority and Text of the
Rule
Pursuant to Dodd-Frank Wall Street
Reform and Consumer Protection Act
Section 913(f), Public Law 111–203, 124
Stat. 1376, 1827 (2010), and Exchange
Act sections 3, 10, 15, 15(c)(6), 15(l), 17,
23 and 36 thereof, 15 U.S.C. 78c, 78j,
78o, 78o(c)(6), 78o(l), 78q, 78w and
78mm, the Commission is adopting
§ 240.15l–1 and adopting amendments
to § 240.17a–3 by adding new paragraph
(a)(25), and to revise § 240.17a–4(e)(5) of
Title 17 of the Code of Federal
Regulations in the manner set forth
below.
List of Subjects in 17 CFR Part 240
Brokers, Reporting and recordkeeping
requirements, Securities.
Text of the Rule
In accordance with the foregoing,
Title 17, Chapter II of the Code of
Federal Regulations is amended as
follows:
PART 240—GENERAL RULES AND
REGULATIONS, SECURITIES
EXCHANGE ACT OF 1934
1. The authority citation for part 240
is amended by adding sectional
authorities for section 240.15l–1 to read
as follows:

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■

Authority: 15 U.S.C. 77c, 77d, 77g, 77j,
77s, 77z–2, 77z–3, 77eee, 77ggg, 77nnn,
77sss, 77ttt, 78c, 78c–3, 78c–5, 78d, 78e, 78f,
78g, 78i, 78j, 78j–1, 78k, 78k–1, 78l, 78m,
78n, 78n–1, 78o, 78o–4, 78o–10, 78p, 78q,
78q–1, 78s, 78u–5, 78w, 78x, 78ll, 78mm,
80a–20, 80a–23, 80a–29, 80a–37, 80b–3, 80b–
4, 80b–11, 7201 et seq.; and 8302; 7 U.S.C.
2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C.

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1350; and Pub. L. 111–203, 939A, 124 Stat.
1887 (2010); and secs. 503 and 602, Pub. L.
112–106, 126 Stat. 326 (2012), unless
otherwise noted.

*

*

*

*

*

Section 240.15l–1 is also issued under Pub.
L. 111–203, sec. 913, 124 Stat. 1376, 1827
(2010).

*
■

*
*
*
*
2. Add § 240.15l–1 to read as follows:

§ 240.15l–1

Regulation Best Interest.

(a) Best interest obligation. (1) A
broker, dealer, or a natural person who
is an associated person of a broker or
dealer, when making a recommendation
of any securities transaction or
investment strategy involving securities
(including account recommendations) to
a retail customer, shall act in the best
interest of the retail customer at the time
the recommendation is made, without
placing the financial or other interest of
the broker, dealer, or natural person
who is an associated person of a broker
or dealer making the recommendation
ahead of the interest of the retail
customer.
(2) The best interest obligation in
paragraph (a)(1) of this section shall be
satisfied if:
(i) Disclosure obligation. The broker,
dealer, or natural person who is an
associated person of a broker or dealer,
prior to or at the time of the
recommendation, provides the retail
customer, in writing, full and fair
disclosure of:
(A) All material facts relating to the
scope and terms of the relationship with
the retail customer, including:
(1) That the broker, dealer, or such
natural person is acting as a broker,
dealer, or an associated person of a
broker or dealer with respect to the
recommendation;
(2) The material fees and costs that
apply to the retail customer’s
transactions, holdings, and accounts;
and
(3) The type and scope of services
provided to the retail customer,
including any material limitations on
the securities or investment strategies
involving securities that may be
recommended to the retail customer;
and
(B) All material facts relating to
conflicts of interest that are associated
with the recommendation.
(ii) Care obligation. The broker,
dealer, or natural person who is an
associated person of a broker or dealer,
in making the recommendation,
exercises reasonable diligence, care, and
skill to:
(A) Understand the potential risks,
rewards, and costs associated with the
recommendation, and have a reasonable

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33491

basis to believe that the
recommendation could be in the best
interest of at least some retail customers;
(B) Have a reasonable basis to believe
that the recommendation is in the best
interest of a particular retail customer
based on that retail customer’s
investment profile and the potential
risks, rewards, and costs associated with
the recommendation and does not place
the financial or other interest of the
broker, dealer, or such natural person
ahead of the interest of the retail
customer;
(C) Have a reasonable basis to believe
that a series of recommended
transactions, even if in the retail
customer’s best interest when viewed in
isolation, is not excessive and is in the
retail customer’s best interest when
taken together in light of the retail
customer’s investment profile and does
not place the financial or other interest
of the broker, dealer, or such natural
person making the series of
recommendations ahead of the interest
of the retail customer.
(iii) Conflict of interest obligation. The
broker or dealer establishes, maintains,
and enforces written policies and
procedures reasonably designed to:
(A) Identify and at a minimum
disclose, in accordance with paragraph
(a)(2)(i) of this section, or eliminate, all
conflicts of interest associated with such
recommendations;
(B) Identify and mitigate any conflicts
of interest associated with such
recommendations that create an
incentive for a natural person who is an
associated person of a broker or dealer
to place the interest of the broker,
dealer, or such natural person ahead of
the interest of the retail customer;
(C)(1) Identify and disclose any
material limitations placed on the
securities or investment strategies
involving securities that may be
recommended to a retail customer and
any conflicts of interest associated with
such limitations, in accordance with
subparagraph (a)(2)(i), and
(2) Prevent such limitations and
associated conflicts of interest from
causing the broker, dealer, or a natural
person who is an associated person of
the broker or dealer to make
recommendations that place the interest
of the broker, dealer, or such natural
person ahead of the interest of the retail
customer; and
(D) Identify and eliminate any sales
contests, sales quotas, bonuses, and
non-cash compensation that are based
on the sales of specific securities or
specific types of securities within a
limited period of time.
(iv) Compliance obligation. In
addition to the policies and procedures

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required by paragraph (a)(2)(iii) of this
section, the broker or dealer establishes,
maintains, and enforces written policies
and procedures reasonably designed to
achieve compliance with Regulation
Best Interest.
(b) Definitions. Unless otherwise
provided, all terms used in this rule
shall have the same meaning as in the
Securities Exchange Act of 1934. In
addition, the following definitions shall
apply for purposes of this section:
(1) Retail customer means a natural
person, or the legal representative of
such natural person, who:
(i) Receives a recommendation of any
securities transaction or investment
strategy involving securities from a
broker, dealer, or a natural person who
is an associated person of a broker or
dealer; and
(ii) Uses the recommendation
primarily for personal, family, or
household purposes.
(2) Retail customer investment profile
includes, but is not limited to, the retail
customer’s age, other investments,
financial situation and needs, tax status,
investment objectives, investment
experience, investment time horizon,
liquidity needs, risk tolerance, and any
other information the retail customer
may disclose to the broker, dealer, or a
natural person who is an associated
person of a broker or dealer in
connection with a recommendation.
(3) Conflict of interest means an
interest that might incline a broker,
dealer, or a natural person who is an
associated person of a broker or dealer
—consciously or unconsciously—to
make a recommendation that is not
disinterested.
■ 3. Amend § 240.17a–3 by adding
reserved paragraphs (a)(24) through (34)
and paragraph (a)(35) to read as follows:

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§ 240.17a–3 Records to be made by certain
exchange members, brokers and dealers.

(a) * * *
(24)–(34) [Reserved].
(35) For each retail customer to whom
a recommendation of any securities
transaction or investment strategy
involving securities is or will be
provided:
(i) A record of all information
collected from and provided to the retail
customer pursuant to § 240.15l–1, as
well as the identity of each natural
person who is an associated person, if
any, responsible for the account.
(ii) For purposes of this paragraph
(a)(35), the neglect, refusal, or inability
of the retail customer to provide or
update any information described in
paragraph (a)(35)(i) of this section shall
excuse the broker, dealer, or associated

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person from obtaining that required
information.
*
*
*
*
*
■ 4. Amend § 240.17a–4 by revising
paragraph (e)(5) to read as follows:
§ 240.17a–4 Records to be preserved by
certain exchange members, brokers and
dealers.

*

*
*
*
*
(e) * * *
(5) All account record information
required pursuant to § 240.17a–3(a)(17)
and all records required pursuant to
§ 240.17a–3(a)(35), in each case until at
least six years after the earlier of the
date the account was closed or the date
on which the information was collected,
provided, replaced, or updated.
*
*
*
*
*
By the Commission.
Dated: June 5, 2019.
Vanessa Countryman,
Acting Secretary.
[FR Doc. 2019–12164 Filed 7–11–19; 8:45 am]
BILLING CODE 8011–01–P

SECURITIES AND EXCHANGE
COMMISSION
17 CFR Parts 200, 240, 249, 275, and
279
[Release Nos. 34–86032; IA–5247; File No.
S7–08–18]
RIN 3235–AL27

Form CRS Relationship Summary;
Amendments to Form ADV
Securities and Exchange
Commission.
ACTION: Final rule.
AGENCY:

The Securities and Exchange
Commission (the ‘‘Commission’’ or the
‘‘SEC’’) is adopting new rules and forms
as well as amendments to its rules and
forms, under both the Investment
Advisers Act of 1940 (‘‘Advisers Act’’)
and the Securities Exchange Act of 1934
(‘‘Exchange Act’’) to require registered
investment advisers and registered
broker-dealers (together, ‘‘firms’’) to
provide a brief relationship summary to
retail investors. The relationship
summary is intended to inform retail
investors about: The types of client and
customer relationships and services the
firm offers; the fees, costs, conflicts of
interest, and required standard of
conduct associated with those
relationships and services; whether the
firm and its financial professionals
currently have reportable legal or
disciplinary history; and how to obtain
additional information about the firm.
The relationship summary will also

SUMMARY:

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Fmt 4701

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reference Investor.gov/CRS, a page on
the Commission’s investor education
website, Investor.gov, which offers
educational information to investors
about investment advisers, brokerdealers, and individual financial
professionals and other materials. Retail
investors will receive a relationship
summary at the beginning of a
relationship with a firm,
communications of updated information
following a material change to the
relationship summary, and an updated
relationship summary upon certain
events. The relationship summary is
subject to Commission filing and
recordkeeping requirements.
DATES:
Effective dates: The rules and form are
effective September 10, 2019.
Compliance dates: The applicable
compliance dates are discussed in
section II.D.
FOR FURTHER INFORMATION CONTACT: :
Gena Lai, James McGinnis, Elizabeth
Miller, Sirimal R. Mukerjee, Olawale´
Oriola, Alexis Palascak, Benjamin
Tecmire, Roberta Ufford, Jennifer Porter
(Branch Chief), Investment Adviser
Regulation Office at (202) 551–6787 or
[email protected]; Benjamin Kalish and
Parisa Haghshenas (Branch Chief), Chief
Counsel’s Office at (202) 551–6825 or
[email protected], Division of Investment
Management; Alicia Goldin, Emily
Westerberg Russell, Lourdes Gonzalez
(Assistant Chief Counsel), Office of
Chief Counsel, Division of Trading and
Markets, at (202) 551–5550 or
[email protected], Securities
and Exchange Commission, 100 F Street
NE, Washington, DC 20549.
SUPPLEMENTARY INFORMATION: The
Commission is adopting new rule 17
CFR 275.204–5 [rule 204–5] under the
Investment Advisers Act of 1940 [15
U.S.C. 80b] 1 and is adopting
amendments to Form ADV to add a new
Part 3: Form CRS [17 CFR 279.1] under
the Advisers Act. The Commission is
also adopting amendments to rules 17
CFR 275.203–1 [rule 203–1], 17 CFR
275.204–1 [rule 204–1], and 17 CFR
275.204–2 [rule 204–2] under the
Advisers Act. The Commission is
adopting new rule 17 CFR 240.17a–14
[rule 17a–14] 2 under the Securities
1 15 U.S.C. 80b. Unless otherwise noted, when we
refer to the Advisers Act, or any paragraph of the
Advisers Act, we are referring to 15 U.S.C. 80b, at
which the Advisers Act is codified, and when we
refer to rules under the Advisers Act, or any
paragraph of these rules, we are referring to Title
17, part 275 of the Code of Federal Regulations [17
CFR 275], in which these rules are published.
2 15 U.S.C. 78a. Unless otherwise noted, when we
refer to the Exchange Act, or any paragraph of the
Exchange Act, we are referring to 15 U.S.C. 78a, at
which the Exchange Act is codified, and when we

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