Form CRS Relationship Summary; Amendments to Form ADV; Required Disclosures in Retail Communications and Restrictions on the Use of Certain Names or Titles, 21416-21571 [2018-08583]

Download as PDF 21416 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules Comments may be submitted by any of the following methods: ADDRESSES: SECURITIES AND EXCHANGE COMMISSION 17 CFR Parts 240, 249, 275 and 279 Electronic Comments [Release No. 34–83063; IA–4888; File No. S7–08–18] RIN 3235–AL27 Form CRS Relationship Summary; Amendments to Form ADV; Required Disclosures in Retail Communications and Restrictions on the Use of Certain Names or Titles Securities and Exchange Commission. ACTION: Proposed rule. AGENCY: The Securities and Exchange Commission (‘‘Commission’’) is proposing new and amended 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 to inform them about the relationships and services the firm offers, the standard of conduct and the fees and costs associated with those services, specified conflicts of interest, and whether the firm and its financial professionals currently have reportable legal or disciplinary events. Retail investors would receive a relationship summary at the beginning of a relationship with a firm, and would receive updated information following a material change. The relationship summary would be subject to Commission filing and recordkeeping requirements. The Commission also is proposing two rules to reduce investor confusion in the marketplace for firm services, a new rule under the Exchange Act that would restrict broker-dealers and associated natural persons of broker-dealers, when communicating with a retail investor, from using the term ‘‘adviser’’ or ‘‘advisor’’ in specified circumstances; and new rules under the Exchange Act and Advisers Act that would require broker-dealers and investment advisers, and their associated natural persons and supervised persons, respectively, to disclose, in retail investor communications, the firm’s registration status with the Commission and an associated natural person’s and/or supervised person’s relationship with the firm. DATES: Comments should be received on or before August 7, 2018. amozie on DSK3GDR082PROD with PROPOSALS1 SUMMARY: VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 • Use the Commission’s internet comment form (https://www.sec.gov/ rules/proposed.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number S7– 08–18 on the subject line. Paper Comments • Send paper comments to Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549. All submissions should refer to File Number S7–08–18. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s internet website (https://www.sec.gov/ rules/proposed.shtml). Comments also are available for website viewing and printing in the Commission’s Public Reference Room, 100 F Street NE, Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. Investors seeking to comment on the relationship summary may want to submit our shortform tear sheet for providing feedback on the relationship summary, available at Appendix F. Studies, memoranda or other substantive items may be added by the Commission or staff to the comment file during this rulemaking. A notification of the inclusion in the comment file of any such materials will be made available on the Commission’s website. To ensure direct electronic receipt of such notifications, sign up through the ‘‘Stay Connected’’ option at www.sec.gov to receive notifications by email. FOR FURTHER INFORMATION CONTACT: Emily Rowland, Jennifer Songer, Gena Lai, Roberta Ufford, Jennifer Porter (Branch Chief), and Sara Cortes (Assistant Director), Investment Adviser Regulation Office at (202) 551–6787 or IArules@sec.gov, and Benjamin Kalish, Elizabeth Miller, Parisa Haghshenas (Branch Chief), and Holly Hunter-Ceci (Assistant Director), Chief Counsel’s Office at (202) 551–6825 or IMOCC@ sec.gov, Division of Investment PO 00000 Frm 00002 Fmt 4701 Sfmt 4702 Management, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549. SUPPLEMENTARY INFORMATION: The Commission is proposing new rule 204– 5 under the Investment Advisers Act of 1940 [15 U.S.C. 80b],1 and is proposing to amend Form ADV to add a new Part 3: Form CRS [17 CFR 279.1] under the Advisers Act. The Commission is also proposing to amend rules 203–1 [17 CFR 275.203–1], 204–1 [17 CFR 275.204–1], and 204–2 [17 CFR 275.204–2] under the Advisers Act. The Commission is proposing new rule 17a– 14 under the Securities Exchange Act of 1934 [17 CFR 240.17a–14],2 and new Form CRS [17 CFR 249.640] under the Exchange Act. The Commission is also proposing to amend rules 17a–3 [17 CFR 240.17a–3] and 17a–4 [17 CFR 240.17a– 4] under the Exchange Act. The Commission is further proposing new rule 15l–2 under the Exchange Act [17 CFR 240.15l–2], new rule 15l–3 under the Exchange Act [17 CFR 240.15l–3], and new rule 211h–1 under the Advisers Act [17 CFR 275.211h–1]. I. Background II. Form CRS Relationship Summary A. Presentation and Format B. Items 1. Introduction 2. Relationships and Services 3. Obligations to the Retail Investor— Standard of Conduct 4. Summary of Fees and Costs 5. Comparisons 6. Conflicts of Interest 7. Additional Information 8. Key Questions C. Delivery, Updating, and Filing Requirements 1. Filing Requirements 2. Delivery Requirements 3. Updating Requirements D. Transition Provisions E. Recordkeeping Amendments III. Restrictions on the Use of Certain Names and Titles and Required Disclosures A. Investor Confusion B. Restrictions on Certain Uses of ‘‘Adviser’’ and ‘‘Advisor’’ 1. Firms Solely Registered as BrokerDealers and Associated Natural Persons 2. Dually Registered Firms and Dual Hatted Financial Professionals 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 refer to rules under the Exchange Act, or any paragraph of these rules, we are referring to Title 17, Part 240 of the Code of Federal Regulations [17 CFR 240], in which these rules are published. E:\FR\FM\09MYP2.SGM 09MYP2 amozie on DSK3GDR082PROD with PROPOSALS1 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules C. Alternative Approaches D. Disclosures About a Firm’s Regulatory Status and a Financial Professional’s Association IV. Economic Analysis A. Baseline 1. Providers of Financial Services 2. Investor Account Statistics 3. Investor Perceptions About BrokerDealers and Investment Advisers B. Form CRS Relationship Summary 1. Broad Economic Considerations 2. Economic Effects of the Relationship Summary 3. Impact on Efficiency, Competition, and Capital Formation 4. Alternatives to the Proposed Relationship Summary 5. Request for Comments C. Restrictions on the Use of Certain Names and Titles and Required Disclosures 1. Broad Economic Considerations 2. Economic Effects of the Proposed Restrictions on the Use of Certain Titles and Required Disclosures 3. Impact on Efficiency, Competition, and Capital Formation 4. Alternatives to the Proposed Rules 5. Request for Comments D. Combined Economic Effects of Form CRS Relationship Summary and Restrictions on the Use of Certain Titles and Required Disclosures About a Firm’s Regulatory Status V. Paperwork Reduction Act Analysis A. Form ADV 1. Respondents: Investment Advisers and Exempt Reporting Advisers 2. Changes in Burden Estimates and New Burden Estimates 3. Total Revised Burden Estimates for Form ADV B. Rule 204–2 Under the Advisers Act 1. Changes in Burden Estimates and New Burden Estimates 2. Revised Annual Burden Estimates C. Rule 204–5 Under the Advisers Act 1. Respondents: Investment Advisers 2. Initial and Annual Burdens D. Form CRS and Rule 17a–14 Under the Exchange Act 1. Respondents: Broker-Dealers 2. Initial and Annual Burdens E. Recordkeeping Obligations Under Rule 17a–3 of the Exchange Act F. Record Retention Obligations Under Rule 17a–4 of the Exchange Act 1. Changes in Burden Estimates and New Burden Estimates 2. Revised Annual Burden Estimates G. Rule 151–3 Under the Exchange Act 1. Respondents: Broker-Dealers and Associated Natural Persons 2. Initial and Annual Burdens H. Rule 211h–1 Under the Advisers Act 1. Respondents: Investment Advisers and Supervised Persons 2. Initial and Annual Burdens I. Request for Comment VI. Initial Regulatory Flexibility Analysis A. Reason for and Objectives of the Proposed Action 1. Proposed Form CRS Relationship Summary 2. Proposed Rules Relating to Restrictions on the Use of Certain Terms and VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 Required Disclosure of Regulatory Status and a Financial Professional’s Firm Association B. Legal Basis C. Small Entities Subject to the Rule and Rule Amendments 1. Investment Advisers 2. Broker-Dealers D. Projected Reporting, Recordkeeping and Other Compliance Requirements 1. Initial Preparation of Form CRS Relationship Summary 2. Rule 15l–2 Relating to Restrictions on the Use of Certain Terms in Names and Titles 3. Rules 15l–3 and 211h–1 Relating to Disclosure of Commission Registration Status and Financial Professional Association E. Duplicative, Overlapping, or Conflicting Federal Rules F. Significant Alternatives 1. Form CRS Relationship Summary 2. Rule 15l–2 Relating to Restrictions on the Use of Certain Terms in Names and Titles 3. Rule 15l–3 Relating to Disclosure of Commission Registration Status and Financial Professional Association G. Solicitation of Comments VII. Consideration of the Impact on the Economy VIII. Statutory Authority IX. Text of Rule and Form Appendices Appendix A: Form ADV: General Instructions Appendix B: [Form ADV, Part 3:] Instructions to Form CRS Appendix C: Dual Registrant Mock-Up Appendix D: Broker-Dealer Mock-Up Appendix E: Investment Adviser Mock-Up Appendix F: Feedback on the Relationship Summary I. Background Individual investors rely on the services of broker-dealers and investment advisers when making and implementing investment decisions. Such ‘‘retail investors’’ can receive investment advice from a broker-dealer, an investment adviser, or both, or decide to make their own investment decisions.3 A number of firms are dually registered with the Commission as broker-dealers and investment advisers, and offer both types of services.4 Broker3 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), at 10–11, available at www.sec.gov/news/studies/2011/913studyfinal.pdf (‘‘913 Study’’). As discussed below, we have considered the findings, conclusions and recommendations of the 913 Study in developing this proposal. Retail investors also can choose to receive advisory services from other sources, such as banks, that are not required to be registered with the Commission. 4 Investment advisers also may be registered with one or more states if, among other things, they have less than a certain amount of assets under PO 00000 Frm 00003 Fmt 4701 Sfmt 4702 21417 dealers, investment advisers and dually registered firms all provide important services for individuals who invest in the markets. Studies show that retail investors are confused about the differences among them.5 These differences include the scope and nature of the services they provide, the fees and costs associated with those services, conflicts of interest, and the applicable legal standards and duties to investors. We recognize the benefits of retail investors having access to diverse business models and of preserving investor choice among brokerage services, advisory services, or both. We also believe that retail investors need clear and sufficient information in order to understand the differences and key characteristics of each type of service. Providing this clarity is intended to assist investors in making an informed choice when choosing an investment firm and professional, and type of account to help to ensure they receive services that meet their needs and expectations. The Commission, as the primary regulator of both broker-dealers and investment advisers, has considered ways to address this confusion and preserve investor choice for some time, including through the RAND study of investor perspectives commissioned in 2006, the 913 Study conducted in 2010– 2011, and a solicitation of data and other relevant information in 2013.6 A number of approaches with a range of formats have been considered to address this issue, such as a statement by broker-dealers that an account is a brokerage account and not an advisory management. See section 203A of the Advisers Act. References in this release to investment advisers generally refer only to SEC-registered investment advisers. 5 See, e.g., 913 Study, supra note 3. See also Letter from Barbara Roper, Director of Investor Protection, Consumer Federation of America, et al., (Sept. 15, 2010) (‘‘CFA Survey’’) (submitting the results of a national opinion survey regarding U.S. investors and the fiduciary standard conducted by ORC/Infogroup for the Consumer Federation of America, AARP, the North American Securities Administrators Association, the Certified Financial Planner Board of Standards, Inc., the Investment Adviser Association, the Financial Planning Association and the National Association of Personal Financial Advisors); Siegel & Gale, LLC/ Gelb Consulting Group, Inc., Results of Investor Focus Group Interviews About Proposed Brokerage Account Disclosures (Mar. 5, 2005), available at https://www.sec.gov/rules/proposed/s72599/ focusgrp031005.pdf (‘‘Siegel & Gale Study’’); Angela A. Hung, et al., RAND Institute for Civil Justice, Investor and Industry Perspectives on Investment Advisers and Broker-Dealers (2008), available at https://www.sec.gov/news/press/2008/2008-1_ randiabdreport.pdf (‘‘RAND Study’’). 6 See RAND Study, supra note 5; 913 Study, supra note 3; Duties of Brokers, Dealers, and Investment Advisers, Exchange Act Release No. 69013 (Mar. 1, 2013) [78 FR 14848 (Mar. 7, 2013)] (‘‘2013 Request for Data’’). E:\FR\FM\09MYP2.SGM 09MYP2 21418 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules amozie on DSK3GDR082PROD with PROPOSALS1 account, and encouraging investors to ask questions.7 Through these initiatives, we have heard and considered the views of a wide range of commenters—financial firms, investors, consumer advocates, academics, and others. Improving retail investors’ understanding of their different options for investment-related services through better disclosure is one key area on which commenters have focused. Commenters have suggested a range of presentations. Some commenters recommended a short disclosure document that explains the firm’s services, fees, certain conflicts of interest, and the scope and nature of its services to the retail investor.8 Others recommended a longer, more comprehensive narrative document such as the Form ADV Part 2 brochure that investment advisers are required to deliver to their clients.9 Similarly, the staff in the 913 Study and the Commission’s Investor Advisory Committee, as part of its recommendation that the Commission adopt a fiduciary duty for brokerdealers, recommended uniform, simple, and clear summary disclosures to retail customers about the terms of their relationships with broker-dealers and investment advisers, including any material conflicts of interests.10 7 See, e.g., Certain Broker-Dealers Deemed Not to Be Investment Advisers, Exchange Act Release No. 51523 (Apr. 12, 2005) [70 FR 20424, 20435 (Apr. 19, 2005)], at n.124 and accompanying text (‘‘2005 Broker Dealer Release’’). 8 See, e.g., Comment letters of Sammons Retirement Solutions (Jun. 4, 2013) and Insured Retirement Institute (Jul. 3, 2013) (recommending a short summary disclosure document together with a longer disclosure document similar to Form ADV, to be offered by both broker-dealers and investment advisers); Comment letter of AARP (Jul. 25, 2013); Comment letter of American Council of Life Insurers (Jul. 5, 2013) (incorporating by reference its comment letter, dated Aug. 30, 2010); Comment letter of Financial Services Institute (Jul. 5, 2013). 9 See, e.g., Comment letter of Committee of Annuity Insurers (Jul. 5, 2013); Comment letter of Edward D. Jones and Co., L.P. (Jul. 12, 2013); Comment letter of North American Securities Administrators Association, Inc. (Jul. 5, 2013); Comment letter of PFS Investments, Inc. (Jul. 5, 2013). 10 See 913 Study, supra note 3, at 114–117. The 913 Study contemplated that the general relationship guide would be akin to Part 2A of Form ADV, which is generally referred to as an investment adviser’s ‘‘brochure’’ and is the form investment advisers use to register with the Commission and states, which is provided to advisory clients. The 913 Study identified a number of potential disclosures that the Commission should consider including in such relationship guide. See also Recommendation of the Investor Advisory Committee: Broker-Dealer Fiduciary Duty, available at https://www.sec.gov/spotlight/investor-advisorycommittee-2012/fiduciary-duty-recommendation2013.pdf (‘‘Broker-Dealer Fiduciary Duty Recommendations’’). The recommendation of the Investor Advisory Committee suggested that the disclosure be provided at the start of the VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 Disclosure has also been a feature of other regulatory efforts that address investment advice, including those of the U.S. Department of Labor (‘‘DOL’’) applicable to services provided by broker-dealers and investment advisers,11 and rules applicable to broker-dealers issued by the Financial Industry Regulatory Authority (‘‘FINRA’’).12 In 2017, Commission Chairman Clayton continued the discourse on these issues by outlining a series of questions and welcoming the public to submit their views on standards of conduct and related disclosures for investment advisers and broker-dealers. More than 250 commenters responded.13 Many commenters recommended enhanced disclosures in addition to regulations that would raise the standard of conduct for brokerdealers providing advice.14 Some recommended that both broker-dealers and investment advisers should provide a uniform disclosure document to retail investors,15 while others suggested new disclosure requirements only for brokerdealers.16 Commenters also noted that investor confusion based on financial professionals’ titles persists, and made a range of suggestions.17 Specifically, some commenters believed that particular titles cause investors to either form misimpressions about whether the services received are those of an investment adviser and subject to a fiduciary duty, or these investors are misled by financial professionals to form such beliefs.18 Many commenters recommended a short disclosure document addressing the nature and scope of services, fees and material conflicts of interest.19 These suggestions are consistent with our staff’s financial literacy study,20 engagement and periodically thereafter, and that it cover basic information about the nature of the services offered, fees and compensation, conflicts of interest, and disciplinary record. 11 For example, DOL regulations relating to ‘‘reasonable plan service arrangements’’ require firms providing advisory and other services to workplace retirement plans covered by the Employee Retirement Income Security Act of 1974 (‘‘ERISA’’) and the prohibited transaction provisions under section 4975 of the Internal Revenue Code (‘‘Code’’) to disclose in writing (among other things) a description of services and applicable fees. See 29 CFR 2550.408b-2. See also 29 CFR 2550.408g–1 (regulation requires fiduciary advisers to plans and individual retirement accounts (‘‘IRAs’’) seeking to rely on the statutory exemption for participant investment advice to provide certain disclosures, among other conditions). See also infra Section IV.A.1.c, which further describes disclosure obligations under DOL regulations and exemptions, including the DOL’s ‘‘Best Interest Contract Exemption’’ (the ‘‘BIC Exemption’’). 12 Disclosure of Services, Conflicts and Duties, FINRA Notice 10–54 (Oct. 2010), available at https:// www.finra.org/sites/default/files/NoticeDocument/ p122361.pdf (‘‘FINRA Notice 10–54’’). 13 Public Comments from Retail Investors and Other Interested Parties on Standards of Conduct for Investment Advisers and Broker-Dealers, Chairman Jay Clayton (Jun. 1, 2017), available at https://www.sec.gov/news/public-statement/ statement-chairman-clayton-2017-05-31 (‘‘Chairman Clayton’s Request for Comment’’). 14 See, e.g., Comment letter of T. Rowe Price (Oct. 12, 2017) (‘‘T. Rowe 2017 Letter’’); Comment letter of Vanguard (Sept. 29, 2017) (‘‘Vanguard 2017 Letter’’); Comment letter of Teachers Insurance and Annuity Association of America (Sept. 26, 2017) (‘‘TIAA 2017 Letter’’); Comment letter of the Investment Adviser Association (Aug. 31, 2017) (‘‘IAA 2017 Letter’’); Comment letter of Stifel, Nicolaus & Co. (Jul. 25, 2017) (‘‘Stifel 2017 Letter’’); Comment letter of Bernardi Securities, Inc. (Sept. 11, 2017) (‘‘Bernardi Securities 2017 Letter’’); Comment letter of UBS Financial Services Inc. (Jul. 21, 2017) (‘‘UBS 2017 Letter’’); Comment letter of SIFMA (Jul 21, 2017) (‘‘SIFMA 2017 Letter’’); Comment letter of the Equity Dealers of America (Sept. 11, 2017) (‘‘Equity Dealers of America 2017 Letter’’); Comment letter of AARP (Sept. 6, 2017) (‘‘AARP 2017 Letter’’); Comment letter of Financial Services Institute (Oct. 30, 2017); Comment letter of Financial Services Roundtable (Oct. 17, 2017) (‘‘FSR 2017 Letter’’); Comment letter of Consumer Federation of America (Sept. 14, 2017) (‘‘CFA 2017 Letter’’). 15 See, e.g., Stifel 2017 Letter; Equity Dealers of America 2017 Letter; Comment letter of Michael Kiley (Jul. 6, 2017) (‘‘Kiley 2017 Letter’’); Comment letter of the American Council of Life Insurers (Oct. 3, 2017) (‘‘ACLI 2017 Letter’’); Comment letter of Allianz Life Insurance Company of North America (Oct. 13, 2017) (‘‘Allianz 2017 Letter’’); AARP 2017 Letter; Comment letter of Robert Shaw (Jun. 5, 2017) (‘‘Shaw 2017 Letter’’); Comment letter of Alan Syzdek (Jul. 2 2017); Comment letter of Americans for Financial Reform (Sept. 22, 2017) (‘‘AFR 2017 Letter’’). 16 See, e.g., SIFMA 2017 Letter; Comment letter of the Investment Company Institute (Feb. 5, 2018); IAA 2017 Letter; Comment letter of Fidelity Investments (Aug. 11, 2017) (‘‘Fidelity 2017 Letter’’); Vanguard 2017 Letter; T. Rowe 2017 Letter; FSR 2017 Letter; UBS 2017 Letter; TIAA 2017 Letter; Comment letter of Wells Fargo & Company (Sept. 20, 2017) (‘‘Wells Fargo 2017 Letter’’); Bernardi Securities 2017 Letter; Comment letter of State Farm Mutual Automobile Insurance Company (Aug. 21, 2017) (‘‘State Farm 2017 Letter’’); Comment letter of PFS Investments Inc. (Dec. 10, 2017); Comment letter of Davis & Harman LLP (Jan. 18, 2018); Comment letter of LPL Financial LLC (Feb. 22, 2018). 17 See, e.g., CFA 2017 Letter; Comment letter of the Public Investors Arbitration Bar Association (Aug. 11, 2017) (‘‘PIABA 2017 Letter’’); IAA 2017 Letter; Comment letter of Pefin (Sept. 13, 2017) (‘‘Pefin 2017 Letter’’); Comment letter of Jackson National Life Insurance Company (Nov. 1, 2017) (‘‘Jackson 2017 Letter’’); Comment letter of CFA Institute (Jan. 10, 2018); Comment letter of First Ascent Asset Management (Jan. 10, 2018) (‘‘First Ascent 2018 Letter’’). 18 See e.g., CFA 2017 Letter; IAA 2017 Letter; Comment letter of the National Employment Law Project (Oct. 20, 2017) (‘‘National Employment Law Project 2017 Letter’’). 19 See, e.g., SIFMA 2017 Letter; UBS 2017 Letter; Stifel 2017 Letter; AARP 2017 Letter; Bernardi Securities 2017 Letter; Fidelity 2017 Letter; Allianz 2017 Letter. 20 See, e.g., Staff of the Securities and Exchange Commission, Study Regarding Financial Literacy Among Investors as required by Section 917 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Aug. 2012), at iv, v, xiv, 37, 73, 121– 23 and 131–32, available at https://www.sec.gov/ news/studies/2012/917-financial-literacy-studypart1.pdf (‘‘917 Financial Literacy Study’’). PO 00000 Frm 00004 Fmt 4701 Sfmt 4702 E:\FR\FM\09MYP2.SGM 09MYP2 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules amozie on DSK3GDR082PROD with PROPOSALS1 which found that retail investors favor a summary document and find these categories of disclosures, plus a financial intermediary’s disciplinary history, to be important in choosing financial intermediaries.21 Regarding investor confusion based on titles, commenters also recommended, for example, prohibiting the use of certain terms in titles, and prohibiting a firm not registered as an investment adviser from holding itself out in a manner that implies it is an investment adviser.22 We agree that it is important to ensure that retail investors receive the information they need to understand the services, fees, conflicts, and disciplinary history of firms and financial professionals they are considering. Likewise, we believe that we should reduce the risk that retail investors could be confused or misled about the financial services they will receive as a result of the titles that firms and financial professionals use, and mitigate potential harm to investors as a result of that confusion. We also believe the information should be reasonably concise. Accordingly, we are proposing new rules to require broker-dealers and investment advisers to deliver to retail investors a customer or client relationship summary (‘‘Form CRS’’) that would explain general information about each of these topics.23 Second, we are proposing rules that would (i) restrict the use of the terms ‘‘adviser’’ and ‘‘advisor’’ by broker-dealers and their associated financial professionals, and (ii) require broker-dealers and investment advisers to disclose in retail investor communications the firm’s registration status while also requiring their associated financial professionals to disclose their association with such firm. Together, these requirements would complement a separate release that the Commission is proposing concurrently to enhance existing broker-dealer conduct obligations (‘‘Regulation Best Interest’’).24 Regulation Best Interest would establish a standard of conduct 21 See, e.g., 917 Financial Literacy Study, supra note 20, at iv, x–xiii, xxi, 37, 66–67, 73, 119. 22 See, e.g. Comment letter of Mark D. Moss (Jun. 2, 2017); Comment letter of Gimme Credit (Aug. 8, 2017); PIABA 2017 Letter; AFL–CIO 2017 Letter; IAA 2017 Letter; Pefin 2017 Letter; Jackson 2017 Letter; AFR 2017 Letter; National Employment Law Project 2017 Letter; First Ascent 2018 Letter. 23 For investment advisers, Form CRS would be required by Form ADV Part 3. For broker-dealers, Form CRS would be required by proposed new rule 17a–14 under the Exchange Act. When we refer to Form CRS in this release, we are referring to Form CRS for both broker-dealers and investment advisers. 24 Regulation Best Interest, Exchange Act Release No. 34–83062 (Apr. 18, 2018) (‘‘Regulation Best Interest Proposal’’). VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 for broker-dealers and associated natural persons of broker-dealers to act in the best interest of a retail customer when making a recommendation of a securities transaction or investment strategy involving securities. While Regulation Best Interest would enhance the standard of conduct owed by brokerdealers to retail customers, it would not make that standard of conduct identical to that of investment advisers, given important differences between investment advisers and broker-dealers. The requirements we are proposing in this release would help an investor better understand these differences, and distinguish among different firms in the marketplace, which in turn should assist the investor in making an informed choice for the services that best suit her particular needs and circumstances. II. Form CRS Relationship Summary We are proposing to require registered investment advisers and registered broker-dealers to deliver a relationship summary to retail investors. In the case of an investment adviser, initial delivery would occur before or at the time the firm enters into an investment advisory agreement with the retail investor; in the case of a broker-dealer, initial delivery would occur before or at the time the retail investor first engages the firm’s services. Dual registrants would deliver the relationship summary at the earlier of entering into an investment advisory agreement with the retail investor or the retail investor engaging the firm’s services.25 The relationship summary would be as short as practicable (limited to four pages or equivalent limit if in electronic format), with a mix of tabular and narrative information, and contain sections covering: (i) Introduction; (ii) the relationships and services the firm offers to retail investors; (iii) the standard of conduct applicable to those services; (iv) the fees and costs that retail investors will pay; (v) comparisons of brokerage and investment advisory services (for standalone broker-dealers and investment advisers); (vi) conflicts of interest; (vii) where to find additional information, including whether the firm and its financial professionals currently have reportable legal or disciplinary 25 For purposes of the relationship summary, we propose to define dual registrant as a firm that is dually registered as a broker-dealer and an investment adviser and offers services to retail investors as both a broker-dealer and investment adviser. Proposed General Instruction 9.(b) to Form CRS. Accordingly, a firm that is registered with the Commission as a broker-dealer and with one or more states as an investment adviser would be a dual registrant. PO 00000 Frm 00005 Fmt 4701 Sfmt 4702 21419 events and who to contact about complaints; and (viii) key questions for retail investors to ask the firm’s financial professional. Form CRS would be required by Form ADV Part 3 and rule 204–5 of the Advisers Act for investment advisers, and by Form CRS and rule 17a–14 of the Exchange Act for broker-dealers.26 We are proposing to define ‘‘relationship summary’’ as a written disclosure statement that firms must provide to retail investors.27 A ‘‘retail investor’’ would be defined as a prospective or existing client or customer who is a natural person (an individual).28 All natural persons would be included in the definition, regardless of the individual’s net worth (thus including, e.g., accredited investors, qualified clients or qualified purchasers).29 The definition would 26 We propose to amend Form ADV, which investment advisers must file to register with the Commission and with state securities regulators, to include a new Part 3: Form CRS that describes the requirements for the relationship summary, and we propose conforming technical amendments to the General Instructions of Form ADV. See proposed amendments to Advisers Act rule 203–1; proposed amendments to General Instructions to Form ADV. We also propose a rule 17a–14 to require a Form CRS for broker-dealers registered with the Commission. See Exchange Act proposed rule 17a– 14. Advisers use Form ADV to apply for registration with us (Part 1A) or with state securities authorities (Part 1B), and must keep it current by filing periodic amendments as long as they are registered. See Advisers Act rules 203–1 and 204–1. Form ADV has two parts. Part 1(A and B) of Form ADV provides regulators with information to process registrations and to manage their regulatory and examination programs. Part 2 is a uniform form used by investment advisers registered with both the Commission and the state securities authorities. See Instruction 2 of General Instructions to Form ADV. This release discusses the Commission’s proposal of Form ADV Part 3: Form CRS and related rules applicable to advisers registered with the Commission. To the extent that state securities authorities could consider making similar changes that affect advisers registered with the states, we can forward comments to the North American Securities Administrators Association (‘‘NASAA’’) for consideration by the state securities authorities. 27 Proposed General Instruction 9.(d) to Form CRS. 28 Proposed General Instruction 9.(e) to Form CRS. 29 Advisers Act proposed rule 204–5(d)(2) and Exchange Act proposed rule 17a–14(e)(2); proposed General Instruction 9.(e) to Form CRS. We recognize that the definition of ‘‘retail investor’’ would differ from that of ‘‘retail customer,’’ as used in Regulation Best Interest. ‘‘Retail customer’’ for broker-dealers under Regulation Best Interest would be defined 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.’’ Regulation Best Interest Proposal, supra note 24, section II.C.4. We believe it is beneficial to require firms to provide a relationship summary to all natural persons to E:\FR\FM\09MYP2.SGM Continued 09MYP2 21420 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules amozie on DSK3GDR082PROD with PROPOSALS1 include a trust or other similar entity that represents natural persons, even if another person is a trustee or managing agent of the trust.30 We believe that this definition is appropriate because section 913 of the Dodd-Frank Act defines ‘‘retail customer’’ to include natural persons and legal representatives of natural persons without distinction based on net worth, and because financial literacy studies report deficiencies in financial literacy among the general population.31 While studies also report variability in financial literacy among certain sub-sections of the general population,32 we believe that all individual investors would benefit from clear and succinct disclosure regarding key aspects of their advisory and brokerage relationships. As discussed further below, the relationship summary would be in addition to, and not in lieu of, current disclosure and reporting requirements for broker-dealers and investment advisers.33 The relationship summary would alert retail investors to important information for them to consider when choosing a firm and a financial professional, and would prompt retail investors to ask informed questions. In addition, the content of the relationship summary would facilitate comparisons across firms that offer the same or substantially similar services. We are promoting these goals through specifying much of the content and presentation of Form CRS in the form’s instructions (‘‘Instructions’’); while firms will be required to include firmspecific information in Form CRS, they will have limited discretion in the scope facilitate their understanding of account choices, regardless of whether they will receive investment advice primarily for personal, family, or household purposes. The relationship summary is intended for an earlier stage in the relationship between an investor and a financial professional, potentially before discussing the investment purposes of the investor. In contrast, Regulation Best Interest focuses on recommendations to ‘‘retail customers’’ who have chosen to engage the services of a brokerdealer after receiving the relationship summary. 30 Advisers Act proposed rule 204–5(d)(2) and Exchange Act proposed rule 17a–14(e)(2); proposed General Instruction 9.(e) to Form CRS. 31 See Federal Research Division, Library of Congress, Financial Literacy Among Retail Investors in the United States (Dec. 30, 2011), available at https://www.sec.gov/news/studies/2012/917financial-literacy-study-part2.pdf (‘‘Library of Congress Report’’). The Library of Congress Report is incorporated by reference into the 917 Financial Literacy Study, supra note 20, at Appendix 1. 32 See, e.g., 917 Financial Literacy Study, supra note 20, at viii (‘‘In addition, surveys demonstrate that certain subgroups, including women, AfricanAmericans, Hispanics, the oldest segment of the elderly population, and those who are poorly educated, have an even greater lack of investment knowledge than the average general population.’’); Library of Congress Report, supra note 31, at 1. 33 See infra Section II.C. VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 and presentation of that information. We are proposing that firms electronically file the relationship summary and any updates with the Commission, and therefore such filings would be subject to section 207 of the Advisers Act 34 and section 18 of the Exchange Act.35 Investment advisers would file on the Investment Adviser Registration Depository (‘‘IARD’’), broker-dealers would file on the Commission’s Electronic Data Gathering, Analysis and Retrieval System (‘‘EDGAR’’), and dual registrants would file on both IARD and EDGAR. To aid firms in understanding the type of disclosures we propose to require, we have created mock-ups of a relationship summary for an investment advisory firm, a brokerage firm, and a dual registrant, and have included them as Appendices C–E to this release. The mock relationship summaries are for illustrative purposes only, reflect the business models of hypothetical firms, and are not intended to imply that they reflect a ‘‘typical’’ firm. They do not provide a safe harbor and, depending on the circumstances of a particular firm, a relationship summary that merely copies the mock-ups may not provide sufficient or accurate information about the firm, including for purposes of meeting the firm’s obligations under the antifraud provisions of the federal securities laws. Investors seeking to comment on the relationship summary may want to submit our short-form tear sheet for providing feedback on the relationship summary, available at Appendix F. Below we request comments on all requirements of the relationship summary, including format, content, method of filing, method of delivery, updating, and other aspects as discussed below. We preliminarily believe that providing this information before or at the time a retail investor enters into an investment advisory agreement or first engages a brokerage firm’s services, as well as at certain points during the relationship (e.g., switching or adding account types), as further discussed below, is appropriate and in the public interest and will improve investor protection, and will deter potentially misleading sales practices by helping retail investors to make a more informed choice among the types of firms and services available to them.36 34 15 U.S.C. 80b–7. U.S.C. 78r. 36 See Exchange Act section 15(l)(2) and Advisers Act section 211(h)(2) (providing that the Commission shall examine and, where appropriate, promulgate rules prohibiting or restricting certain sales practices, among other things, for brokers, dealers, and investment advisers that the 35 15 PO 00000 Frm 00006 Fmt 4701 Sfmt 4702 A. Presentation and Format We are proposing requirements designed to make the relationship summary short and easy to read. We believe that the required disclosure provides an overview of information that would help retail investors when choosing a firm, financial professional, and account type. The proposed formatting requirements would help retail investors, many of whom may not be sophisticated in legal or financial matters, to understand the information in the relationship summary and be in a better position to ask informed questions. The proposal is also informed by our experience with the mutual fund summary prospectus, which has illustrated the benefits of highlighting certain information in summary form, coupled with layered disclosure and disclosure designed to facilitate comparisons across investments.37 We encourage firms to use innovative technology to create a relationship summary that is user-friendly, concise, easy-to-read, and more interactive than paper, and request comment below on ways to do so. The relationship summary would be provided to retail investors in addition to, and not in lieu of, any other required disclosures.38 As noted in the General Instructions, the requirements of the relationship summary are designed to promote effective communication between the firm and its retail investors.39 First, as several commenters have recommended, we propose requiring that firms use ‘‘plain language’’ principles for the organization, wording, and design of the entire relationship summary, taking into consideration retail investors’ level of financial sophistication.40 Specifically, Commission deems contrary to the public interest and the protection of investors). 37 In a previous study, Commission staff found that most of the retail investors agreed that it was important to read a summary prospectus prior to investing in a mutual fund, and a majority of the retail investors surveyed on the mutual fund summary prospectus panel agreed that the actual summary prospectus they reviewed highlighted important information, was well-organized, written using words that they understood, clear and concise, and user friendly, and agreed that summary prospectuses contain the ‘right amount’ of information. 917 Financial Literacy Study, supra note 20, at xvii and xix. 38 See Proposed General Instruction 3 to Form CRS. Broker-dealers and investment advisers have disclosure and reporting obligations under state and federal law, and broker-dealers are also subject to disclosure obligations under the rules of selfregulatory organizations. Delivery of the relationship summary would not necessarily satisfy a firm’s other disclosure obligations. 39 Proposed General Instruction 2 to Form CRS. 40 Proposed General Instruction 2 to Form CRS. See, e.g., PIABA 2017 Letter; State Farm 2017 Letter; Fidelity 2017 Letter; Comment letter of BlackRock (Aug. 7, 2017); Comment letter of the E:\FR\FM\09MYP2.SGM 09MYP2 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules amozie on DSK3GDR082PROD with PROPOSALS1 firms would be required to be concise and direct and to use short sentences, active voice, and definite, concrete, everyday words.41 Firms would not be permitted to use legal jargon, highly technical business terms or multiple negatives.42 Firms should write the relationship summary as if addressing the retail investor, using ‘‘you,’’ ‘‘us,’’ or ‘‘our firm.’’ 43 Second, we are proposing to require that, whether in electronic or paper format, the relationship summary should be no more than four 81⁄2 x 11 inch pages if converted to Portable Document Format (‘‘PDF’’), using at least an 11 point font size, and margins of at least 0.75 inches on all sides.44 For example, if delivered directly in the text of an email or in a mobile viewing format on the firm’s website, the content of the relationship summary should not exceed this four-page PDF-equivalent length. This approach is consistent with our experience and commenters’ suggestion that brief disclosure is more effective than a long-form narrative to focus retail investors on relevant information, and with suggestions from commenters who advocated for a clear, concise disclosure.45 If delivered in paper, the paper size, font, and margin requirements would also encourage a clear presentation for retail investors, for example, by presenting important disclosures in a readable font-size and eliminating fine print.46 Recognizing, however, that many firms deliver disclosures in electronic format and employ a variety of technologies to interact with prospective and existing retail investors, the Commission is requesting comment on formatting and other features of the relationship summary in electronic form. In the past, the Commission has declined to impose page limits on disclosures required by the Investment Company Act of 1940 (‘‘Investment Company Act’’), including the summary prospectus, expressing concern that page limits could constrain appropriate disclosure and lead funds to omit material information about fund Investor Advisory Committee (Aug. 24, 2017); CFA 2017 Letter; AFR 2017 Letter; ACLI 2017 Letter; FSR 2017 Letter. 41 Proposed General Instruction 2 to Form CRS. 42 Proposed General Instruction 2 to Form CRS. 43 Proposed General Instruction 2 to Form CRS. 44 Proposed General Instruction 1.(c) to Form CRS. 45 See, e.g., Shaw 2017 Letter; SIFMA 2017 Letter; AFL–CIO 2017 Letter; AARP 2017 Letter; CFA 2017 Letter; AFR 2017 Letter; TIAA 2017 Letter; Vanguard 2017 Letter; ACLI 2017 Letter; FSR 2017 Letter; Allianz 2017 Letter. 46 See, e.g., 917 Financial Literacy Study, supra note 20, at xiii and 32. VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 offerings.47 The proposed relationship summary is intended to serve different purposes than the summary prospectus, including to provide a general overview of firms that could prompt a more detailed, individualized, and open conversation between the retail investor and his or her financial professional. The Commission preliminarily believes that the utility and effectiveness of the relationship summary lie in its brevity and conciseness; accordingly, we believe a page limit (or equivalent limit if in electronic format) is appropriate. Brief disclosure would also facilitate a layered approach to disclosure in which firms would include certain information in the relationship summary, along with references and links to other disclosure where interested investors can find additional information.48 The proposed relationship summary also would encourage retail investors to seek additional information in other ways, including through suggested questions for retail investors to ask their financial professional, as discussed further below.49 These requirements are intended to create a concise summary that points out relevant areas for retail investors to focus on as they consider financial services, and the cross references and suggested questions facilitate investors’ ability to choose to seek additional information. In addition, providing retail investors with a relationship summary containing specified information about the firm in a standardized format should aid retail investors’ ability to compare firms at a higher level. The suggested questions and cross references to more information would enable them to more easily find and compare these details about the firms. We considered requiring more detailed disclosure for broker-dealers similar to many items in the Form ADV brochure that advisers currently must deliver to clients. This longer disclosure would provide, for example, more information about fee amounts for 47 See Enhanced Disclosure and New Prospectus Delivery Option for Registered Open-End Management Investment Companies, Investment Company Act Release No. 28584 (Jan. 13, 2009) [74 FR 4546 (Jan. 26, 2009)], at 24 (‘‘Enhanced Mutual Fund Disclosure Adopting Release’’). 48 Firms would be required to include crossreferences to where investors could find additional information, such as in the Form ADV Part 2 brochure and brochure supplement for investment advisers or on the firm’s website or in the account opening agreement for broker-dealers. For electronic versions of the relationship summary, we would require firms to use hyperlinks to the crossreferenced document if it is available online. See proposed Items 7.E.1. and 7.E.2. of Form CRS; proposed General Instruction 1.(g) to Form CRS. 49 See proposed Item 8 of Form CRS. PO 00000 Frm 00007 Fmt 4701 Sfmt 4702 21421 specific accounts and products and more detailed descriptions of a wider range of conflicts of interest. We believe, however, that brief disclosure that focuses on the proposed topics would be more effective in capturing the attention of retail investors, encouraging them to explore certain key areas further, including by asking questions, and allowing them to make a quick comparison among a number of options.50 We also encourage the use of methods, such as embedded hyperlinks, to direct retail investors to additional disclosures. Alternatively, we considered shorter disclosure, such as a one-page document (or equivalent length if in electronic format) that would provide either a much abbreviated general description of a firm’s services, fees, and conflicts, or a list of suggested questions for retail investors to discuss with their financial professional. We are concerned, however, that these approaches might not provide retail investors with enough information to compare firms and types of accounts. In addition, we are concerned that providing only a list of questions, without sufficient background information for investors to know why the question is important to ask, could make it less likely that investors would ask the questions or have an informed conversation. Only providing questions also would not ensure a standardized minimum of information that retail investors would receive across firms and therefore would not facilitate comparing firms or account types. The relationship summary would require eight separate items covering: (i) Introduction; (ii) relationships and services the firm provides to retail investors; (iii) standard of conduct applicable to those services; (iv) the fees and costs that retail investors will pay; (v) comparisons of brokerage and investment advisory services (for standalone broker-dealers and investment advisers); 51 (vi) conflicts of 50 See, e.g., 917 Financial Literacy Study, supra note 20, at 23–24 (citing CFA 2012 Letter, at 4–5). 51 For purposes of the relationship summary, we propose to define a standalone investment adviser as a registered investment adviser that offers services to retail investors and (i) is not dually registered as a broker-dealer or (ii) is dually registered as a broker-dealer but does not offer services to retail investors as a broker-dealer. We propose to define a standalone broker-dealer as a registered broker-dealer that offers services to retail investors and (i) is not dually registered as an investment adviser or (ii) is dually registered as an investment adviser but does not offer services to retail investors as an investment adviser. Proposed General Instruction 9.(f) to Form CRS. We are including certain dual registrants in these proposed definitions because we understand that dual E:\FR\FM\09MYP2.SGM Continued 09MYP2 21422 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules amozie on DSK3GDR082PROD with PROPOSALS1 interest; (vii) where to find additional information, including whether the firm and its financial professionals currently have reportable legal or disciplinary events and who to contact about complaints; and (viii) key questions for retail investors to ask the firm’s financial professional.52 In order to promote comparison across firms, we would require firms to present this information under prescribed headings in the same order.53 Firms also would be prohibited from including any information other than what the Instructions and the applicable item require or permit.54 We believe that allowing only the required and specified permitted information would promote consistency of information presented to investors, allow retail investors to focus on information that we believe would be particularly helpful in deciding among firms, and help retail investors to decide what further information is needed. It would also encourage impartial information by preventing firms from adding information commonly used in marketing materials, such as performance.55 For certain items, firms will have some flexibility in how they include the required information.56 For others, we are requiring firms to use prescribed wording, as discussed in the following sections. Firms may not include disclosure in the relationship summary other than disclosure that is required or permitted by the Instructions. We believe that this approach balances the need to provide firms flexibility in making the presentation of information consistent with their particular business model while ensuring that all investors receive certain information regardless of registrants do not always offer both brokerage and advisory accounts to retail investors. For example, some dual registrants offer advisory accounts to retail investors, but offer brokerage broker-dealer services only to institutions (e.g., for their underwriting services). 52 See proposed Items 1–8 of Form CRS. 53 Proposed General Instruction 1.(b) and (e) to Form CRS. See also e.g., proposed Items 2.A., 3.A., 4.A., 5.A. and 5.B., 6.A., 7.A., and 8 of Form CRS. 54 Proposed General Instruction 1.(d) to Form CRS. 55 Although performance disclosure is a subject on which the Commission focuses, including to promote accuracy, consistency, and comparability, such disclosure is not the subject of this initiative. 56 See, e.g., proposed General Instruction 1.(f) to Form CRS (‘‘You may use charts, graphs, tables, and other graphics or text features to explain the required information, so long as the information (i) is responsive to and meets the requirements in these instructions (including space limitations); (ii) is not inaccurate or misleading; and (iii) does not, because of the nature, quantity, or manner of presentation, obscure or impede understanding of the information that must be included. When using interactive graphics or tools, you may include instructions on their use and interpretation.’’); proposed Items 2.B., 2.C., and 6.B. of Form CRS. VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 the firm. The information in the relationship summary must accurately reflect the characteristics of the particular firm and the services that it offers. Accordingly, all information in the relationship summary must be true and may not omit any material facts necessary to make the required disclosures not misleading.57 If a statement is inapplicable to a firm’s business or would be misleading to a reasonable retail investor, the firm may omit or modify that statement.58 Based on studies that indicate the effectiveness of graphical presentation for retail investors,59 we are prescribing the use of graphical formats in specified circumstances. For example, dual registrants would be required to present all of the information required by Items 2 through 4 and Item 6 in a tabular format,60 comparing advisory services and brokerage services side-by-side, with prescribed headings.61 Similarly, standalone broker-dealers and investment advisers would be required to provide general information about fee types in tabular format, in a separate comparison section.62 All firms would be permitted to use charts, graphs, tables, and other graphics or text features to explain the information, so long as the information is responsive to and meets the requirements in the Instructions (including the space 57 Firms should keep in mind the applicability of the antifraud provisions of the federal securities laws, including section 206 of the Advisers Act, section 17(a) of the Securities Act, and section 10(b) of the Exchange Act and rule 10b–5 thereunder, in preparing the relationship summary. 58 See proposed General Instruction 3 to Form CRS. Firms may omit or modify prescribed wording or other statements required to be part of the relationship summary if such statements are inapplicable to a firm’s business or would be misleading to a reasonable retail investor. 59 See 917 Financial Literacy Study, supra note 20, at iv, xx, 21–22; see also Benbasat & Dexter, infra note 592. 60 Empirical evidence suggests that visualization improves individual perception of information (see Hattie, infra note 591) and that tabular reports may lead to better decision making (see Benbasat & Dexter, infra note 592). 61 Dual registrants must present the information in Items 2 through 4 and Item 6 in a tabular format, comparing advisory services and brokerage services side-by-side. In the column discussing brokerage services, firms must include the heading ‘‘BrokerDealer Services’’ and the sub-heading ‘‘Brokerage Accounts.’’ In the column discussing investment advisory services, firms must include the heading ‘‘Investment Adviser Services’’ and the sub-heading ‘‘Advisory Accounts.’’ See proposed General Instruction 1.(e) to Form CRS. 62 Standalone broker-dealers and investment advisers would be required to include the subheading ‘‘You can receive advice in either type of account, but you may prefer paying:’’ and present prescribed information comparing a transactionbased fee and an asset-based fee in side-by-side columns, in a tabular format. See proposed Items 5.A.4. and 5.B.6. of Form CRS. PO 00000 Frm 00008 Fmt 4701 Sfmt 4702 limitations).63 The use of a graphical presentation would be prohibited if it is inaccurate or misleading or, because of its nature, quantity, or manner of presentation, obscures or impedes understanding of the information that is required to be included. Firms that choose to use interactive graphics or tools may include Instructions on their use and interpretation.64 We believe that standardizing the relationship summaries among firms by specifying the headings, sequence, and content of the topics; prescribing language for firms to use as applicable; and limiting the length of the relationship summary will provide comparative information in a user-friendly manner that helps retail investors with informed decisionmaking.65 We request comment on the following for the relationship summary. • Should firms only be required to deliver the relationship summary to retail investors? Or should they be required to deliver one to other types of investors, too, such as individuals representing sole proprietorships or other small businesses, or institutional investors that are not natural persons, including workplace retirement plans and funds? Would such investors have the need for the information in the relationship summary to facilitate a choice among different firms, financial professionals, and account types? Or would these investors rely directly on the more detailed disclosures in the Form ADV Part 2 brochure or pursuant to Regulation Best Interest? • Should retail investors be defined for purposes of Form CRS to include all natural persons, as proposed? Should we instead exclude certain categories of natural persons based on their net worth or income level, such as accredited investors,66 qualified clients,67 or 63 Proposed General Instruction 1.(f) to Form CRS. 64 Id. 65 Empirical evidence suggests that users are better able to make coherent, rational decisions when they have comparative, standardized disclosure that allows them to assess relevant tradeoffs. See infra note 593 and accompanying text. 66 Accredited investors include natural persons who (i) have a net worth over $1 million, either individually or together with a spouse (excluding the value of the primary residence); (ii) had an individual income greater than $200,000 (or $300,000 together with a spouse) in each of the two most recent years, and has a reasonable expectation of reaching the same income level in the current year; or (iii) for purposes of a securities offering of a particular issuer, are directors, executive officers, or general partners of that issuer. Accredited investors also include non-natural persons, such as, banks, broker-dealers, insurance companies, investment companies registered under the Investment Company Act of 1940, and certain partnerships, corporations, nonprofit entities, retirement plans, and trusts. 17 CFR 230.501. 67 A qualified client is a client that meets one or more of the following criteria: (i) Is a natural person E:\FR\FM\09MYP2.SGM 09MYP2 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules amozie on DSK3GDR082PROD with PROPOSALS1 qualified purchasers? 68 If we did exclude certain categories of natural persons based on their net worth, what threshold should we use for measuring net worth? Should we exclude certain categories of natural persons for other reasons? • Should we conform the definition of retail investor to the definition of retail customer as proposed in Regulation Best Interest, which would include non-natural persons who use the recommendation primarily for personal, family, or household purposes? Should the definition of retail investor include trusts or similar entities that represent natural persons, as proposed? Are there other persons or entities that should be covered? Should we expand the definition to cover plan participants in workplace retirement plans who receive services from a broker-dealer or investment adviser for their individual accounts within a plan? or company that has at least $1 million in assets under management with the adviser immediately after entering into an investment advisory contract with the adviser; (ii) the adviser reasonably believes the natural person has a net worth (together with assets held jointly with a spouse) of more than $2.1 million immediately prior to entering into an advisory contract (excluding the value of the primary residence); (iii) the adviser reasonably believes the natural person or company is a ‘‘qualified purchaser’’ as defined in section 2(a)(51)(A) of the Investment Company Act at the time an advisory contract is entered into; (iv) is an executive officer, director, trustee, general partner, or person serving in a similar capacity, of the adviser; or (v) is an employee of the adviser who participates in the investment activities of the adviser, and has performed investment activities for at least twelve months. The dollar thresholds under the definition of qualified client are subject to inflation adjustments every five years. 17 CFR 275.205–3(d)(1); Order Approving Adjustment for Inflation of the Dollar Amount Tests in Rule 205– 3 under the Investment Advisers Act of 1940, Investment Advisers Act Release No. 4421 (Jun. 14, 2016) [81 FR 39985 (Jun. 20, 2016)]. 68 The term ‘‘qualified purchaser’’ has been defined for purposes of the Investment Company Act and for the Securities Act. Under the Investment Company Act, the term ‘‘qualified purchaser’’ includes any natural persons who or certain family-owned companies that own not less than $5 million in investments; certain trusts; and any person, acting for its own account or the accounts of other qualified purchasers, who in the aggregate owns and invests on a discretionary basis, not less than $25 million in investments. 15 U.S.C. 80a–2(a)(51)(A). For purposes of section 18(b)(3) of the Securities Act, the term ‘‘qualified purchaser’’ means any person to whom securities are offered or sold pursuant to a Tier 2 offering as defined in Regulation A. 17 CFR 230.256. Tier 2 offerings generally may be sold only to (i) accredited investors; (ii) natural persons for whom the aggregate purchase price to be paid by the purchaser for the securities is no more than 10% of the purchaser’s annual income or net worth; or (iii) non-natural persons for which the aggregate purchase price to be paid by the purchaser for the securities is no more than 10% of its revenue or net assets for the most recently completed fiscal year. 17 CFR 230.251. VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 • Should we include any additional definitions of terms or phrases in the relationship summary? Should we omit any definitions we have proposed for the relationship summary? Should any of the proposed definitions be changed? If so, why? • Will the length and presentation proposed for the relationship summary be effective for retail investors? Are there other approaches we should consider? What are the benefits and drawbacks of shorter or longer disclosure for retail investors relative to the proposed approach? • We are proposing that the relationship summary discuss all of the firm’s advisory and brokerage services in one relationship summary. Should we instead permit firms to prepare a separate relationship summary for different business lines or different programs or types of accounts and/or services that a broker-dealer or investment adviser offers? If we adopt such an approach, how could we modify the requirements to allow for comparison among account options within and across firms? For example, should we require that each such separate summary refer to the other summaries and include hyperlinks or other electronic features if presented on a firm’s website? Should we require the use of hyperlinks that direct the investor directly to specific disclosure (i.e., a ‘‘deep link’’) or a more general landing page? How would delivery obligations be formulated to ensure that retail investors receive sufficient but still user-friendly information? • In the alternative, should we permit or require firms to prepare one relationship summary for the entire affiliated group or firm complex, i.e., to summarize the services offered to retail investors of all affiliated companies together in a single relationship summary? What factors should dictate whether affiliates should be permitted or required to prepare a single relationship summary? For example, should we base any permissive instruction or requirement on whether the affiliates typically market services of multiple investment advisers and broker-dealer entities together? What about investment advisers and brokerdealers that are not affiliates but have partnership agreements, are part of one wrap fee program,69 or other arrangements? Should they be required 69 A wrap fee program would be defined as an advisory program under which a specified fee or fees not based directly upon transactions in a retail investor’s account is charged for investment advisory services and the execution of retail investor transactions. Proposed General Instruction 9.(g) to Form CRS. See infra note 173. PO 00000 Frm 00009 Fmt 4701 Sfmt 4702 21423 or permitted to cross-reference to other firms? • Should we permit the relationship summary, or any part of it, to substitute for other disclosure obligations that broker-dealers or investment advisers have, if the disclosure obligations overlap? If so, for what disclosures could the relationship summary substitute? If not, why not? • Does the proposal sufficiently encourage electronic design and delivery? Are there other ways we can modify the requirements to make clear that paper-based delivery is not the only permissible or desired delivery format? • With respect to firms that use paper delivery to meet investor preferences, are the proposed presentation and content requirements appropriate for a relationship summary provided in paper or in PDF (e.g., 11 point font, and have margins of at least 0.75 inches on all sides)? Would they be helpful in encouraging relationship summaries that address retail investors’ preferences for concise and user-friendly information? If not, what requirements would improve the document’s utility and accessibility for retail investors? In particular, are there any areas where requiring the use of a specific check-thebox approach, bullet points, tables, charts, graphs or other graphics or text features would be helpful in presenting any of the information or making it more engaging to retail investors? Should we include different requirements for font size, margins and paper size? Should we restrict certain types or sizes of font, color choices or the use of footnotes? • Are there special technical specifications we should consider for other forms of electronic or online delivery on phones, tablets and other devices, and for information conveyed via videos, interactive graphics, or tools and calculators? Are the Instructions to the relationship summary sufficiently flexible to permit delivery on phones, tablets and other devices and to accommodate information conveyed via videos, interactive graphics, or tools and calculators? Should we require that firms make the relationship summary available by specific forms of electronic delivery or certain electronic devices? How can the Commission encourage investment advisers and broker-dealers to make fuller use of innovative technology to enable more interactive, user-friendly relationship summary disclosure, while still creating a short, easy-to-read relationship summary that includes the proposed content? Are there potential tools that the Commission should encourage or require firms to use in order to make E:\FR\FM\09MYP2.SGM 09MYP2 amozie on DSK3GDR082PROD with PROPOSALS1 21424 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules their disclosures more interactive and understandable? For instance, should we permit or require a firm to use popups or hovers to provide retail investors with additional information required or permitted by the relationship summary, without retail investors having to scroll to find the information in another section of the relationship summary? Would this tool be useful for firms to use, for example, in the Introduction section of the relationship summary, so that a retail investor could access upfront additional information about the terms used (advisory and brokerage accounts) that is presented in other sections of the relationship summary? Instead of requiring and permitting hyperlinks in certain circumstances (e.g., to link to an adviser’s Form ADV or a fee schedule), are there other technological tools that would better help an investor find information that is cross-referenced in the relationship summary? Should we permit or require other technologies (such as QR codes 70) in addition to or in lieu of hyperlinks to connect to such information? • Would retail investors be more likely to read a firm’s relationship summary if we required or permitted firms to use certain design elements— such as larger font sizes or greater use of white space, colors, or visuals? Could this be accomplished while still providing retail investors with the information we are proposing to require in a short and easy-to-read relationship summary? • We are proposing that the firm use plain language principles and the Instructions refer to the SEC’s Plain English Handbook. Should we modify any of these principles? Should the Instructions refer to any other principles to promote understandable wording? • Do firms commonly market to nonEnglish speakers or provide information—including marketing materials—in languages other than English? To what extent would firms expect to deliver a relationship summary in a language other than English? Should we propose requirements to prepare relationship summaries in languages other than English? For example, should we require that firms prepare, file, and deliver a relationship summary in any language in which they disseminate marketing materials? Are there concerns with translating the relationship summary without also having to 70 A QR code is a two-dimensional barcode capable of encoding information such as a website address, text information, or contact information. These codes are becoming increasingly popular in print materials and can be read using the camera on a smartphone. VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 translate the firm’s other disclosures? If so, what are those concerns? • Should we limit the relationship summary to four pages (or equivalent limit if in electronic format), as proposed? Is this enough space for firms to provide meaningful information? Should we instead eliminate page limits (and their equivalent for electronic format) or increase the amount of permitted pages or their equivalent? Are there particular items that may require longer responses than others? If so, how should the Commission take these into account in considering page limits? For example, if commenters believe the use of graphics will be more effective to communicate fees, should we permit a greater number of pages to account for the use of graphics? Conversely, will retail investors read four pages? Should the page limit be shorter, such as one to three pages? If so, what information in the proposed requirements should we omit? Should we have different page limits for dual registrants than for firms that offer only brokerage or only advisory services? If we do require shorter disclosure, what information should firms be required to provide regardless of the length? • Are there too few or too many items that would be required in the relationship summary? Are there other items that we should also require or proposed items that we should delete? Do commenters agree that we should only permit the items required by the relationship summary? Is there other information that we should permit, but not require, firms to include? If so, what items are those? • Do commenters agree that all items should be presented in the same order under the same heading to promote comparability across firms? Why or why not? If the items are not listed in the same order, could retail investors still easily compare firm relationship summaries? Does the prescribed order work, or should we consider a different order? Is there information that we should always require to appear on the first page or at the beginning of an electronic relationship summary? Are there any specifications we should include to enhance comparability for electronic delivery of the relationship summary in various forms? • Should we, as proposed, prescribe headings for each item or allow firms to choose their own headings? Should we require or permit a different style of headings, such as a question and answer format or other wording to encourage retail investors to continue reading? • Should we permit firms to include additional disclosure with the relationship summary, such as a PO 00000 Frm 00010 Fmt 4701 Sfmt 4702 comprehensive fee table, or other disclosures? Would the inclusion of additional disclosures affect whether retail investors would view the relationship summary? What are the benefits and drawbacks of such an approach? • Should we generally permit firms to use charts, graphs, tables, and/or other graphics or text features to explain the information required by the relationship summary (so long as any such feature meets requirements as specified in the Instructions), as proposed? Should we permit firms to choose the graphical presentation that they will use? Are there specific graphical presentations that we should require? Should we permit other mediums of presentation, such as the use of video presentations? • Do any elements of the proposed presentation requirements impose unnecessary costs or compliance challenges? Please provide specific data. Are there any changes to the proposal that could lower those costs? Please provide examples. • Are the mock relationship summaries useful and illustrative of the proposed form requirements? Do they appropriately show the level of detail that firms might provide? With respect to each item for which we prescribe wording in the relationship summary, we request the following comment on each of those required disclosures: • Does the narrative style work for the prescribed wording or are there other presentation formats that we should require? Should the Commission instead require more prescribed wording? Conversely, is there prescribed wording we have proposed that we should modify or replace with a more general instruction that allows firms to use their own description? B. Items 1. Introduction We are proposing that the beginning of the relationship summary contain a title highlighting the types of investment services and accounts the firm offers to retail investors, specifically ‘‘Which Type of Account is Right for You—Brokerage, Investment Advisory or Both?’’ for dual registrants and ‘‘Is a[n] [Brokerage/Investment Advisory] Account Right for You?’’ for standalone brokerage firms or investment advisory firms, respectively.71 A firm also would be required to include its name, whether it is registered with the Commission as a broker-dealer, investment adviser, or 71 Proposed E:\FR\FM\09MYP2.SGM Items 1.B., 1.C. and 1.D. of Form CRS. 09MYP2 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules amozie on DSK3GDR082PROD with PROPOSALS1 both, and date of the relationship summary prominently on the first page or beginning of the electronic disclosure (this information could be included in the header or footer).72 An introductory paragraph would briefly explain the types of accounts (brokerage accounts and/or investment advisory accounts) and services the firm offers. Using prescribed wording, all firms would be required to state: ‘‘There are different ways you can get help with your investments. You should carefully consider which types of accounts and services are right for you.’’ In a new paragraph and using prescribed wording and bold font, a standalone brokerdealer would be required to state: ‘‘We are a broker-dealer and provide brokerage accounts and services rather than advisory accounts and services.’’ 73 Likewise, a standalone investment adviser would be required to state in bold font: ‘‘We are an investment adviser and provide advisory accounts and services rather than brokerage accounts and services.’’ 74 Dual registrants would include a similar statement in bold font that discusses both types of services, specifically: ‘‘Depending on your needs and investment objectives, we can provide you with services in a brokerage account, investment advisory account, or both at the same time.’’ 75 Finally, all firms would be required to include: ‘‘This document gives you a summary of the types of services we provide and how you pay. Please ask us for more information. There are some suggested questions on page [ ].’’ 76 The proposed introductory paragraph sets up a key theme of the relationship summary—helping retail investors to understand and make choices among account types and services. For example, some retail investors want to receive periodic recommendations while others prefer ongoing advice and monitoring. Some retail investors wish to pursue their own investment ideas and direct their own transactions, while others seek to delegate investment discretion to the firm. Emphasizing that there are different types of accounts and services from which a retail investor 72 Proposed Item 1.A. of Form CRS. The disclosure of Commission registration would make the relationship summary consistent with proposed rules 15l–3 of the Exchange Act and 211h–1 of the Advisers Act, which would require that a brokerdealer and a registered investment adviser prominently disclose that it is registered with the Commission as a broker-dealer or investment adviser, respectively, in print or electronic retail investor communications. 73 Proposed Item 1.B. of Form CRS. 74 Proposed Item 1.C. of Form CRS. 75 Proposed Item 1.D. of Form CRS. 76 Proposed Items 1.B.—1.D. of Form CRS. VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 may choose would help the retail investor make an informed choice about whether the firm provides services that are the right fit for his or her needs and help the retail investor to choose the right firm or account type. Although the disclosures are intentionally simplified and generalized, we believe they would help retail investors to obtain more detailed information. We request comment generally on the proposed requirement for firms to include specific information in the introduction. • In addition to the title, firm name and SEC registration status, and date, is there other information that we should require at the beginning of the relationship summary? Should we instead require a cover page? Are the titles we proposed in the Instructions appropriate? What alternatives should we consider? Should we allow firms to select their own title for the relationship summary? • Should we require firms to include the prescribed wording, as proposed, or should we allow more flexibility in the words they use? Should we modify the prescribed wording? Does the proposed wording capture the range of business models among investment advisers and broker-dealers? Would the prescribed wording require a firm to provide any inaccurate information given that firm’s circumstances? Instead of the proposed prescriptive wording, should the Commission permit or require a more open-ended narrative? • Is there additional information we should require in the introduction? • Should we require that standalone brokerage and investment advisory firms include a statement that the retail investor may instead prefer investment advisory or brokerage services, respectively? Why or why not? 2. Relationships and Services After the introduction, the proposed relationship summary would provide information about the relationships between the firm and retail investors and the investment advisory account services and/or brokerage account services the firm provides to retail investors.77 The section would begin with the heading ‘‘Relationships and Services’’ for a standalone broker-dealer or investment adviser.78 A dual registrant would use the heading ‘‘Types of Relationships and Services,’’ followed by this statement: ‘‘Our accounts and services fall into two categories.’’ 79 Each firm would discuss 77 Proposed 78 Proposed Item 2 of Form CRS. Item 2.A. of Form CRS. 79 Id. PO 00000 Frm 00011 Fmt 4701 Sfmt 4702 21425 specific information about the nature, scope, and duration of its relationships and services, including the types of accounts and services the firm offers, how often it offers investment advice, and whether the firm monitors the account. This item requires firms to provide specific information with a mix of prescribed wording and short narrative statements. As discussed above, if a prescribed statement is not applicable to the firm’s business or would be misleading to a reasonable retail investor, the firm would be permitted to omit or modify that statement.80 We have designed these requirements to provide retail investors with consistent, concise, and meaningful information about the services they would receive from a firm and help them to ask relevant questions, compare firms’ services against each other, and make more informed choices about the services they choose. We considered an approach whereby firms would be required to complete a prescribed checklist of common characteristics of brokerage and advisory accounts, indicating which characteristics applied to their accounts and services. This approach could improve comparability among firms. We are concerned, however, that this approach would not be sufficiently flexible to accommodate the variety of business models and services that broker-dealers and advisers provide, and that a mix of prescribed wording and narrative format would help investors better understand the firm’s services. We believe that our proposed approach provides enough information to help retail investors understand and choose between investment advisory accounts and brokerage accounts without overwhelming them with too much information. Brokerage Account Services. We propose requiring broker-dealers to summarize the principal brokerage services that they provide to retail investors.81 First, broker-dealers would include the following wording to explain the transaction-based nature of their fees (emphasis required): ‘‘If you open a brokerage account, you will pay us a transaction-based fee, generally referred to as a commission, every time you buy or sell an investment.’’ 82 Even though a separate section of the relationship summary would discuss a firm’s fees, we believe it is important for broker-dealers to explain transactionbased fees at the beginning of the 80 See supra note 58 and accompanying text. Item 2.B. of Form CRS. 82 Proposed Item 2.B.1. of Form CRS. 81 Proposed E:\FR\FM\09MYP2.SGM 09MYP2 21426 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules amozie on DSK3GDR082PROD with PROPOSALS1 disclosure because these types of fees are typically a critical distinction between brokerage and investment advisory accounts.83 Next, broker-dealers that offer accounts in which they offer recommendations to retail investors would state that the retail investor may select investments or the broker-dealer may recommend investments for the retail investor’s account, but that the retail investor will make the ultimate investment decision regarding the investment strategy and the purchase or sale of investments.84 Broker-dealers that offer accounts in which they do not offer recommendations to retail investors (e.g., execution-only brokerage services) would state that the retail investor will select the investments and make the ultimate investment decision regarding the investment strategy and the purchase or sale of investments.85 Starting with a clear description of the services provided in a brokerage account by a broker-dealer—including the retail investor’s choice of receiving recommendations or self-directing his or her investments, and the fact that the retail investor will make the ultimate investment decision—would help address confusion about the services that broker-dealers offer to retail investors.86 This language also highlights differences from the services that investment advisers would describe, discussed below. Next, we propose requiring brokerdealers to state if they offer additional services to retail investors, including, for example: (a) Assistance with developing or executing the retail investor’s investment strategy (e.g., the broker-dealer discusses the retail investor’s investment goals or designs with the retail investor a strategy to achieve the retail investor’s investment goals); or (b) monitoring the performance of the retail investor’s account.87 They would also state that a retail investor might pay more for these additional services, if applicable.88 Broker-dealers that offer performance monitoring as part of the standard brokerage account services would indicate how frequently they monitor 83 See infra note 126 (discussing our use of the term ‘‘transaction-based fees’’ in the relationship summary). 84 Proposed Item 2.B.2. of Form CRS. 85 Id. 86 We believe that retail investors have the ultimate investment decision for their investment strategy and the purchase or sale of investments, even if the broker-dealer has temporary or limited discretion over retail investors’ accounts. See Regulation Best Interest Proposal, supra note 24, at section II.F. 87 Proposed Item 2.B.3. of Form CRS. 88 Id. VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 the performance.89 While broker-dealers do not undertake to provide investment strategy and performance monitoring services when they give recommendations, we recognize that many broker-dealers offer these services to retail investors as part of their account agreement. We believe that retail investors would benefit from disclosure that such services exist, and that broker-dealers might charge higher fees for these services. Broker-dealers would also be required to briefly describe any regular communications they have with retail investors, such as providing account statements, giving an overview of transactions during a period, or evaluating the account’s performance.90 Firms would include the frequency (e.g., at least quarterly) and the method (e.g., by email, phone or in person) of the communications.91 Finally, broker-dealers would be required to include the following if they significantly limit the types of investments available to retail investors in any accounts: ‘‘We offer a limited selection of investments. Other firms could offer a wider range of choices, some of which might have lower costs.’’ 92 A broker-dealer would significantly limit the types of investments if, for example, the firm only offers one type of asset (e.g., mutual funds, exchange-traded funds, or variable annuities), the firm only offers mutual funds or other investments sponsored or managed by the firm or its affiliate (i.e., proprietary products), or the firm only offers a small choice of investments.93 In addition, if the limitations only apply to some of the accounts the firm offers, such as, for example, limiting the types of investments for retail investors within different asset tiers, then the firm would have to identify those accounts.94 Limitations on investments offered could have a significant effect on investor choice and performance of the account over time. In particular, firms that offer proprietary products exclusively preclude investor access to competing products that could offer lower fees or result in better performance over time. As a result, retail investors should understand these 89 Id. Broker-dealers that monitor the performance of the retail investor’s account, as market and customer conditions demand (rather than on a specific time schedule), could state so. 90 Id. 91 Id. We are proposing the same requirement for investment advisers, described below. See infra note 102 and accompanying text. 92 Proposed Item 2.B.4. of Form CRS. 93 Id. 94 Id. PO 00000 Frm 00012 Fmt 4701 Sfmt 4702 limitations before they enter into a relationship with a firm. Advisory Account Services. We propose requiring investment advisers that offer investment advisory accounts to retail investors to summarize the principal investment advisory services provided to retail investors.95 First, investment advisers would be required to state the type(s) of fee they receive as compensation if a retail investor opens an investment advisory account.96 For example, an investment adviser would state if it charges an on-going assetbased fee based on the value of the cash and investments in the advisory account, a fixed fee, or some other fee arrangement. A standalone adviser would also state how frequently it assesses the fee.97 Similar to the requirement for broker-dealers,98 we are proposing to require a statement about how investment advisers charge fees upfront because of the importance that investors understand how they will pay for services and to highlight this critical distinction between brokerage and advisory accounts. We are proposing to require that firms describe additional fees associated with these services in the discussion of fees and costs. Because the fees charged by each investment adviser may differ, we are not prescribing specific wording and instead are allowing firms flexibility in choosing the exact wording to use for this disclosure. Advisers would, however, emphasize the type of fee in bold and italicized font.99 Next, investment advisers would state that they offer advice on a regular basis, or, if they do not offer advice on a regular basis, they would state how frequently they offer advice.100 They would also state the services they offer to retail investors including, for example, (a) assistance with developing the retail investor’s investment strategy (e.g., the investment adviser discusses the retail investor’s investment goals or designs with the retail investor a strategy to achieve the retail investor’s investment goals), or (b) how frequently 95 Proposed Item 2.C. of Form CRS. Item 2.C.1. of Form CRS. The relationship summary would refer to ‘‘account advisory services’’ and ‘‘opening an account’’ to simplify the explanations for retail investors. When an investment adviser provides investment advisory services, the client may have a custodial account with another firm, such as a broker-dealer or bank. A dual registrant may maintain custody for an advisory client’s assets as broker-dealer. We are not proposing to require that firms include these nuances in the discussion of relationships and services. 97 Id. 98 See supra note 82 and accompanying text. 99 Proposed Item 2.C.1 of Form CRS. 100 Proposed Item 2.C.2. of Form CRS. 96 Proposed E:\FR\FM\09MYP2.SGM 09MYP2 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules they monitor the retail investor’s accounts.101 Similar to broker-dealers, advisers would include the frequency (e.g., at least quarterly) and the method (e.g., by email, phone or in person) of the communications.102 We believe that the regularity of advice and other services that investment advisers commonly provide, including, as applicable—discussions with the retail investor, designing a strategy to achieve investment goals, monitoring, and reporting on performance—are key aspects of services that advisers commonly provide.103 As discussed above with respect to broker-dealers, these services can distinguish advisory accounts from brokerage accounts and therefore the disclosure will help retail investors determine which type of account best suits their needs. Additionally, investment advisers would state if they offer advisory accounts for which they exercise investment discretion (i.e., discretionary accounts), accounts for which they do not exercise investment discretion (i.e., non-discretionary accounts), or both.104 For purposes of this Item in the relationship summary, investment advisers generally should use the same definition of ‘‘discretionary authority’’ as in Form ADV, which is the authority to decide which securities to purchase and sell for the client, or the authority to decide which investment advisers to retain on behalf of the client.105 If an investment adviser offers a discretionary account, the relationship summary would state that a discretionary advisory account allows the firm to buy and sell investments in the retail investor’s account, without asking the retail investor in advance. For a nondiscretionary advisory account, the relationship summary would state that the firm gives advice and the retail investor decides what investments to buy and sell.106 We believe it is important for retail investors considering an advisory account to understand the difference between discretionary services and nondiscretionary services, as that distinction would affect the degree of control the retail investor would provide to the adviser. Discretionary advice is also a common feature of many amozie on DSK3GDR082PROD with PROPOSALS1 101 Id. 102 Id. 103 An agreement for advisory services typically defines the scope and specific types of services provided. 104 Proposed Item 2.C.3. of Form CRS. Investment advisers would be required to emphasize the type of account (discretionary and non-discretionary) in bold and italicized font. 105 Term 12 of Glossary of Terms to Form ADV. 106 Proposed Item 2.C.3. of Form CRS. VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 investment advisory accounts,107 so explaining discretion would benefit a retail investor in choosing between brokerage and investment advisory services, as well as between different types of advisory accounts. Finally, as we are proposing for broker-dealers, investment advisers that significantly limit the types of investments available to retail investors in any accounts would include the same statement that broker-dealers would be required to include, and if such limits only apply to certain accounts, the investment adviser would identify those accounts, for the same reasons discussed above.108 Affiliate Services. We recognize that many investment advisers and brokerdealers that are not dual registrants nonetheless have affiliates that are broker-dealers or investment advisers, respectively. Often, these standalone firms offer their affiliates’ services to retail investors. For example, an affiliated sub-adviser also may manage a portion of a retail investor’s portfolio or an investment adviser may effect trades for client accounts through an affiliated broker-dealer. We would allow these firms to state that they offer retail investors their affiliates’ brokerage or advisory services, as applicable.109 We believe that the inclusion of this disclosure could make clear the choice investors have within affiliated firms and give financial professionals an opportunity to discuss these services. We request comment generally on the proposed requirement for firms to include specific information about the relationships and services offered in their advisory and brokerage accounts. • Would the proposed summary of relationships and services help retail investors to make informed choices about whether investment advisory or brokerage services better suit their needs? If not, how should we revise it? • Would the proposed requirements result in disclosure that is clear, 107 In 1992, only approximately three percent of SEC-registered advisers had discretionary authority over client assets; as of March 31, 2018, according to data collected on Form ADV, 91 percent of SECregistered advisers have that authority. 108 Proposed Item 2.C.4. of Form CRS. The required statement would be ‘‘Our investment advice will cover a limited selection of investments. Other firms could provide advice on a wider range of choices, some of which might have lower costs.’’ Also consistent with the requirements for brokerdealers, such limitations could include, for example, only offering a selection of mutual funds, equities, or proprietary products. 109 Proposed Item 2.D. of Form CRS. This disclosure only applies in the context of an affiliate of the firm. This is not intended to describe disclosure of a financial professional’s outside business activities, such as an outside investment advisory business of a broker-dealer registered representative. PO 00000 Frm 00013 Fmt 4701 Sfmt 4702 21427 concise, and meaningful to retail investors? Would this information help retail investors to better understand the general differences in the services that investment advisers and broker-dealers provide? Are there other differences in the services provided by investment advisers and broker-dealers that we should require firms to discuss in this section? If so, should we permit or require information about those differences in the summary of services? Are there any common misconceptions about services provided by brokerdealers, investment advisers, or dual registrants that the relationship summary should specifically seek to clarify or correct? • Would more or less information about a firm’s services be helpful for retail investors? Are there any elements of the proposed requirements that firms should or should not include? If so, why? Should any of the required disclosures be included in a different section of the relationship summary? Is the proposed order of the information appropriate, or should it be modified? If so, how should it be modified? Should we allow firms the flexibility to present this information in a different order if doing so makes their relationships and services more understandable to retail investors? • Is the proposed heading and the introductory wording for firms clear and useful to retail investors? Are there alternative headings we should consider? • Does the mix of prescribing wording for some information and requiring brief narratives for other information strike the right balance between having similar, neutral wording to promote comparisons and permitting firms to conform the language to reflect the services they offer? Should the Commission instead require more prescribed wording in this Item? Conversely, is there prescribed wording we have proposed that we should modify or replace with a more general instruction that allows firms to use their own description? • Does the prescribed wording we are proposing capture the range of business models of investment advisers and broker-dealers? Would the prescribed wording require any firm to state something inaccurate in the relationship summary? Should we instead provide more flexibility to change the prescribed wording? • Should we require broker-dealers to include prescribed wording about transaction-based fees and investment advisers to state the type of fee for an advisory account at the beginning of this E:\FR\FM\09MYP2.SGM 09MYP2 amozie on DSK3GDR082PROD with PROPOSALS1 21428 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules section, or should fees only be discussed in the fee section? • How should broker-dealers describe execution-only accounts, sometimes referred to as ‘‘discount’’ brokerage, and accounts in which they provide recommendations concerning securities, sometimes referred to as ‘‘full-service’’ brokerage? Should we, as proposed, require that broker-dealers offering recommendations to retail investors state that the retail investor may select investments or the broker-dealer may recommend investments, but the retail investor will make the ultimate investment decision? Should we also, as proposed, require that broker-dealers only offering discount brokerage accounts to retail investors state that the retail investor will select the investments and make the ultimate investment decision? Should we require prescribed language about these accounts, or should we permit a brief narrative as proposed? Should firms be permitted or required to use the terms ‘‘full-service’’ accounts and ‘‘discount’’ brokerage accounts, or other terms, so long as they are likely to be understood? Do investors understand the meanings of these terms? • Should investment advisers that provide investment advisory services be required to discuss both discretionary and non-discretionary account services, regardless of whether they offer both discretionary and non-discretionary accounts? Should they instead be permitted to describe only the service they offer? Do firms offer accounts that involve limited discretionary services that would not be covered in the proposed discussions of discretionary and non-discretionary accounts? If so, how should the requirements be changed to reflect these accounts? Should we also require investment advisers to state that they offer advice on a regular basis, or, if not on a regular basis, state how frequently they offer advice? Should we require the disclosure of any additional information about the advice an investment adviser provides? • We are proposing to require firms to disclose if they offer certain additional services, such as assistance with developing or executing the retail investor’s investment strategy, and performance monitoring, and to briefly describe any regular communications they have with retail investors. Are there services in addition to those in the Instructions that broker-dealers and investment advisers also should disclose? Should we require disclosure of the same types of additional services for both broker-dealers and investment advisers? VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 • We understand that, to some extent, all firms limit the investments offered to retail investors. Would other disclosures regarding a firm’s product offering limitations be helpful to investors, in addition to the proposed disclosures for firms that significantly limit the types of investments that are available? Why or why not? Should we, for example, require firms that only offer proprietary investments to also state that the only investments available to a retail investor are investments that the firm or its affiliates issue, sponsor, or manage? How feasible would this disclosure be for a firm that has several account types? Should we consider other alternatives? • Is it clear what we mean by ‘‘significantly limit’’ with regard to the requirement to disclose limitations on investment choices? Should we provide additional examples or more prescriptive instructions regarding when firms must disclose such limitations? Are there other ways a firm may significantly limit the types of investments that should be captured by this instruction? • Should we permit firms to prepare different relationship summaries for different types of services and lines of business, particularly where the firm offers a broad array of accounts and services? Would separate relationship summaries still promote comparability across firms and the ability to understand the differences between advisory and brokerage services? • Would the proposed summary of services allow retail investors to easily compare the services provided by different firms? If not, what changes to the requirements should we make to increase comparability? • Would other disclosures about a firm’s services be more helpful for retail investors? Should we permit or require firms to describe services they offer to retail investors, in addition to brokerage and advisory services, such as insurance services? Would such disclosure about other services give retail investors a more complete overview of a firm’s offerings, or would it detract from the other disclosures, for example, by overwhelming the more important information about a firm’s brokerage and advisory services? • Should we require firms to include more details about the specific services provided for each type of advisory account or brokerage account that they offer? Should the relationship summary help investors to choose among a variety of account options that the firm offers, rather than providing more summary information about the advisory and brokerage services that are offered? PO 00000 Frm 00014 Fmt 4701 Sfmt 4702 • Some dual registrants have implemented a default relationship for retail investors, where, for example, the firm will act as a broker-dealer with respect to the account unless specifically stated otherwise. Should we require these firms to disclose that they are acting as a broker-dealer (or investment adviser, as applicable) with respect to the account unless the firm specifically states otherwise? • Should we, as proposed, allow firms with affiliated broker-dealers or investment advisers to state that they offer retail investors additional brokerage or advisory services, as applicable, through their affiliates? Should we require such statements, if applicable? Should we permit or require firms to expand on the different types of services available to their retail investors through the firm’s affiliates? Should affiliates be required or permitted to use a single relationship summary that describes the services of all affiliates? If not, why not? What are the advantages and disadvantages to the retail investor? • Should we also permit or require disclosure regarding a firm’s relationships with other third parties, such as where the registered representatives of a broker-dealer are also investment adviser representatives of an unaffiliated investment adviser or where an investment adviser uses a single unaffiliated broker-dealer to provide execution and custody and generally does not consider execution through other firms? • Should we require investment advisers and broker-dealers to disclose whether they have a minimum account size and state that minimum (or range of minimums) if the account minimum varies by account? If applicable, should we require disclosure that the selection of investments or services is limited by account size? Would this help investors understand whether they are eligible for certain accounts or certain services and understand the ways in which their investment choices may be limited? Are there any drawbacks to requiring such disclosure? • So-called robo-advisers and online broker-dealers represent a fast-growing trend within the brokerage and investment advisory industries. They employ a wide range of business models. For example, differences among robo-advisers and online broker-dealers include: The degree of reliance on computer algorithms (as opposed to individualized human judgment) to generate financial advice; the level of human interaction between the client or customer and firm personnel; and the use of the internet to communicate with E:\FR\FM\09MYP2.SGM 09MYP2 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules amozie on DSK3GDR082PROD with PROPOSALS1 clients and customers. Are the Instructions pertaining to relationships and services sufficient and appropriate to capture the business models of roboadvisers and online broker-dealers? For example, would it be appropriate to require or permit descriptions regarding the degree of human involvement in the oversight and management of individual client accounts, how computer algorithms are used in generating investment advice, and the availability of financial professionals to answer retail investors’ questions? Do the requirements with respect to the content and delivery of the relationship summary, as further discussed below, allow retail investors to make informed decisions about entering into a relationship with a robo-adviser, other type of investment adviser, or brokerdealer? 3. Obligations to the Retail Investor— Standard of Conduct Following the relationships and services section, the relationship summary would include a brief section, using prescribed wording, to describe the firm’s legal standard of conduct to the retail investor.110 The section would begin with the heading ‘‘Our Obligations to You’’ and the following language: ‘‘We must abide by certain laws and regulations in our interactions with you.’’ Firms would then use prescribed wording describing the standard of conduct applicable to investment advisers and/or brokerdealers.111 As with certain other sections of the relationship summary, dual registrants would provide this information in tabular format to facilitate comparison. We understand that the standard of conduct that applies to firms and financial professionals has been a source of investor confusion.112 For example, the 913 Study noted that retail investors were not clear about the specific legal duties of broker-dealers and investment advisers.113 We believe that providing a brief overview of the standards of conduct to which brokerdealers and investment advisers must adhere, including the differences between the standards of care of brokerdealers and investment advisers, could help alleviate this confusion. We further believe that providing this overview, in combination with the key question 110 Proposed 111 Proposed Item 3.A. of Form CRS. General Instruction 1.(e) to Form CRS. 112 See, e.g., Siegel & Gale Study, supra note 5; and RAND Study, supra note 5. See also CFA Survey, supra note 5. 113 See 913 Study, supra note 3, at v. See also Rand Study, supra note 5. VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 about the financial professional’s legal obligations discussed below, would encourage a conversation between the retail investor and the financial professional about applicable legal obligations.114 We also believe that prescribing language is appropriate to promote consistency in communicating these standards to retail investors.115 Broker-Dealers. We are proposing a required description of the standard of conduct for broker-dealers based on the proposed standards in Regulation Best Interest, as well as existing obligations of broker-dealers when they provide services to customers. First, a brokerdealer that provides recommendations subject to Regulation Best Interest 116 would include the following wording: ‘‘We must act in your best interest and not place our interests ahead of yours when we recommend an investment or an investment strategy involving securities.’’ 117 Execution-only brokerdealers and other broker-dealers that do not provide such recommendations would not be required to include this 114 See infra at Section II.B.8. Similarly, certain DOL regulations already obligate firms and financial professionals to acknowledge fiduciary status when they provide certain advisory type services to workplace retirement plans subject to ERISA and to IRAs. See, e.g., 29 CFR 2550.408g– 1(b)(7)(i)(G) (regulation under statutory exemption for participant advice requires fiduciary advisers to plans and IRAs seeking exemptive relief to provide advice and receive compensation to acknowledge fiduciary status); 29 CFR 2550.408b–2(c)(1)(iv)(B) (regulation under statutory exemption for reasonable service arrangements requires certain ERISA-covered plan service providers to state, if applicable, that the service provider will provide or reasonably expects to provide services as a ‘‘fiduciary’’ as defined by ERISA). Similarly, the DOL’s BIC Exemption, see infra note 504, would require an investment advice fiduciary that seeks to rely on that exemption to receive compensation in connection with investment recommendations to state in writing that it is acting as a fiduciary under ERISA or the Code. 115 As noted above, if a prescribed statement is inapplicable to a firm’s business or would be misleading to a reasonable retail investor, the firm may omit or modify that statement, as further discussed below. Proposed General Instruction 3 to Form CRS. See supra note 58. 116 Regulation Best Interest Proposal, supra note 24. 117 Proposed Item 3.B.1. of Form CRS. This wording assumes Commission adoption of Regulation Best Interest. As noted above (see supra note 29 and accompanying text), the proposed definition of ‘‘retail customer,’’ to whom Regulation Best Interest would apply, differs from the proposed definition of ‘‘retail investor’’ under Form CRS. The relationship summary is intended for a broader range of investors than the intended focus of Regulation Best Interest. Accordingly, the proposed Regulation Best Interest standard may not apply to the recommendations of all retail investors receiving the relationship summary from brokerdealers. The Instructions for proposed Item 3.B.1 recognizes this possibility and seeks to ensure that broker-dealers provide accurate disclosure to their retail investors, even if the broker-dealer is not providing a recommendation subject to Regulation Best Interest. PO 00000 Frm 00015 Fmt 4701 Sfmt 4702 21429 sentence. We believe retail investors receiving recommendations that are subject to Regulation Best Interest would benefit from understanding the new obligation. Second, all broker-dealers providing services to retail investors would state, ‘‘When we provide any service to you, we must treat you fairly and comply with a number of specific obligations.’’ This would inform retail investors that broker-dealers have a duty of fair dealing under the federal securities laws and self-regulatory organization rules, as well as other obligations and standards to which they must adhere.118 Finally, broker-dealers would be required to state, ‘‘Unless we agree otherwise, we are not required to monitor your portfolio or investments on an ongoing basis.’’ This sentence reflects that neither Regulation Best Interest nor existing broker-dealer standards oblige the broker-dealer to monitor the performance of retail investor’s accounts,119 while making clear that broker-dealers could agree to provide monitoring as an additional service. We are proposing this wording because we believe that the episodic, rather than ongoing, nature of brokerdealers’ standard of conduct in Regulation Best Interest is a distinction from investment advisers’ obligations to clients that retail investors should be 118 See Report of the Special Study of Securities Markets of the Securities and Exchange Commission, H.R. Doc. No. 88–95, at 238 (1st Sess. 1963); In the Matters of Richard N. Cea, et al., Exchange Act Release No. 8662 (Aug. 6, 1969), at 18 (‘‘Release 8662’’) (involving excessive trading and recommendations of speculative securities without a reasonable basis); In the Matter of Mac Robbins & Co. Inc., Exchange Act Release No. 6846 (Jul. 11, 1962). See also FINRA Rule 2111.01 (Suitability) (‘‘Implicit in all member and associated person 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. The suitability rule is fundamental to fair dealing and is intended to promote ethical sales practices and high standards of professional conduct’’); see also FINRA Rule 2010 (Standards of Commercial Honor and Principles of Trade) (requiring a member, in the conduct of its business, to observe high standards of commercial honor and just and equitable principles of trade). 119 References to ‘‘monitoring’’ relate to monitoring the performance of a portfolio or investments, and are not intended to alter or diminish broker-dealers’ current supervisory obligations under the Exchange Act and detailed self-regulatory organization 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 self-regulatory rules. See section 15(b)(4)(E) of the Exchange Act; FINRA Rule 3110. E:\FR\FM\09MYP2.SGM 09MYP2 amozie on DSK3GDR082PROD with PROPOSALS1 21430 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules aware of from the outset of a relationship. After the description of the standard of conduct, broker-dealers would be required to state: ‘‘Our interests can conflict with your interests.’’ If the broker-dealer provides to retail investors recommendations that are subject to Regulation Best Interest, it would also include the language, ‘‘When we provide recommendations, we must eliminate these conflicts or tell you about them and in some cases reduce them.’’ 120 These statements reflect proposed requirements in Regulation Best Interest that broker-dealer would need to establish, maintain, and enforce reasonably designed policies and procedures relating to material conflicts of interest, including those arising from financial incentives, associated with recommendations to retail customers. While we are not using the exact words of the proposed standard, we believe that this information, in combination with the conflicts section below, can make the retail investor aware that conflicts exist and that the broker-dealer has obligations regarding disclosure, mitigation, or elimination of conflicts when the broker-dealer is subject to Regulation Best Interest. We believe this could help prompt a conversation between retail investors and their financial professionals about both the conflicts the firm and financial professional have and what steps the firm takes to reduce the conflicts.121 Investment Advisers. We propose to require that investment advisers state the standard of conduct that applies to them as an investment adviser by including the following wording: ‘‘We are held to a fiduciary standard that covers our entire investment advisory relationship with you.’’ In addition, unless the investment adviser does not provide ongoing advice (for example, provides only a one-time financial plan), the investment adviser would also state, ‘‘For example, we are required to monitor your portfolio, investment strategy and investments on an ongoing basis.’’ 122 While we are not proposing to include a specific definition of fiduciary, we believe that the proposed wording that the relationship covers the ‘‘entire investment advisory relationship’’ and wording regarding the ongoing duty to monitor would provide retail investors with information about aspects of the 120 Proposed Item 3.B.2. of Form CRS. This wording assumes Commission adoption of the Regulation Best Interest. 121 See discussion of the proposed conflicts of interest disclosure in the relationship summary, infra Section II.B.6. 122 Proposed Item 3.C.1. of Form CRS. VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 fiduciary duty that can help the retail investor understand the standard.123 Additionally, as with the proposed standard of conduct disclosure for broker-dealers, we believe that the ongoing, as opposed to episodic, nature of investment advisers’ standard of conduct is a distinction from brokerdealers’ typical obligations when providing recommendations that retail investors should be aware of from the outset of a relationship. After the description of the standard of conduct, investment advisers would then be required to state, ‘‘Our interests can conflict with your interests. We must eliminate these conflicts or tell you about them in a way you can understand, so that you can decide whether or not to agree to them.’’ As with broker-dealers, we believe that this information, in combination with the conflicts section below, can make retail investors aware that conflicts exist and that investment advisers, as part of their fiduciary duty, have obligations regarding conflicts.124 We believe this could help prompt a conversation between retail investors and their financial professionals about both the conflicts the firm and financial professional have and what steps the firm takes to reduce the conflicts. We request comment generally on the proposed standard of conduct descriptions, and in particular on the following issues: • Should we require, as proposed, that all firms include a brief prescribed statement about the legal standards of conduct that apply to them under the federal securities laws, including the new standard proposed in Regulation Best Interest and an investment adviser’s fiduciary duty? Is such disclosure likely to be meaningful to retail investors? Does the prescribed wording capture what retail investors should or want to understand about broker-dealers’ and investment advisers’ standards of conduct? Would the prescribed wording require any firm to provide any inaccurate information? Are there modifications to the proposed wording or alternative wording that would make the legal standards more clear in a succinct way? Should we require or permit additional information, and if so, what? 123 We are concurrently publishing for comment a proposed interpretation of the standard of conduct for investment advisers under the Advisers Act. See Proposed Commission Interpretation Regarding Standard of Conduct for Investment Advisers; Request for Comment on Enhancing Investment Adviser Regulation, Investment Advisers Act Release No. IA–4889 (Apr. 18, 2018) (‘‘Fiduciary Duty Interpretive Release’’). 124 See, e.g., General Instruction 3 to Form ADV, Part 2. PO 00000 Frm 00016 Fmt 4701 Sfmt 4702 Alternatively, would a briefer statement be appropriate? Are there any common misconceptions about broker-dealers’ and investment advisers’ standard of conduct that the relationship summary should specifically seek to clarify or correct? • Should we require or permit brokerdealers to include additional detail about the best interest standard proposed in Regulation Best Interest or their duty of fair dealing? Would this or other disclosure provide retail investors with useful information? Should we provide flexibility in how broker-dealers describe the best interest standard or duty of fair dealing? • We are proposing to require that broker-dealers state that they must comply with a number of specific obligations when providing any service to customers. Should we permit or require more detailed disclosure about these obligations? For example, should we permit or require broker-dealers to disclose their obligations to make sure that the prices a customer receives when a trade is executed are fair and reasonable, and to make sure that the commissions and fees the customer pays are not excessive? • Should we require disclosure that further describes the investment adviser fiduciary standard, including any additional details described in the proposed interpretation? If so, what wording should we require? Should we provide flexibility in describing the fiduciary standard? • For dual registrants, would the sideby-side descriptions of the standards of conduct for broker-dealers and investment advisers assist retail investors in understanding the differences between these standards? Are there modifications we can make to the wording or the presentation to facilitate this comparison? • Should we permit or require firms to disclose additional information about the legal differences between brokerdealers and investment advisers, such as explaining that broker-dealers are subject to regulation by self-regulatory organizations in addition to the SEC? Should we permit or require firms to disclose the differences in licensing requirements for financial professionals of broker-dealers and investment advisers, such as the frequency of licensing or qualifications examinations? Would such disclosure about financial professionals fit within this section of the relationship summary that focuses on the firm? What information would be most relevant to retail investors? E:\FR\FM\09MYP2.SGM 09MYP2 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules • We understand that state laws and other regulations,125 also may require broker-dealers and advisers to affirmatively acknowledge fiduciary status. Should we provide firms flexibility to include language in a relationship summary consistent with or to satisfy these other regulatory requirements? Would such flexibility enhance or potentially reduce the effectiveness of the relationship summary? 4. Summary of Fees and Costs We are proposing to require brokerdealers and investment advisers to include an overview of specified types of fees and expenses that retail investors will pay in connection with their brokerage and investment advisory accounts. This section would include a description of the principal type of fees that the firm will charge retail investors as compensation for the firm’s advisory or brokerage services, including whether the firm’s fees vary and are negotiable, and the key factors that would help a reasonable retail investor understand the fees that he or she is likely to pay.126 Investment advisers that provide advice to retail investors about investing in ‘‘wrap fee programs’’ would include an overview of the fees associated with those wrap fee programs.127 Both broker-dealers and investment advisers would state that some investments impose fees that will reduce the value of a retail investor’s investment over time, and would provide examples relevant to the firm’s business.128 In addition, each firm would include the incentives it and its financial professionals have to put their own interests ahead of their retail investors’ interests based on the account fee structure,129 and would state that depending on an investor’s investment 125 See. e.g., supra note 114. Item 4 of Form CRS. A broker-dealer would describe transaction-based fees as its principal type of fee, using prescribed wording. See proposed Item 4.B.1 of Form CRS. We use the term ‘‘transaction-based fees’’ in the relationship summary for plain language purposes to refer generally to broker-dealer compensation such as commissions, mark-ups, mark-downs, sales loads or similar fees, including 12b–1 fees, tied to specific transactions. An investment adviser would summarize the principal fees and costs that align with the type of fee(s) the adviser reports in response to Item 5.E. of Form ADV Part 1A that are applicable to retail investors. See proposed Item 4.C. of Form CRS. Investment advisers and associated persons that receive compensation in connection with the purchase or sale of securities should carefully consider the applicability of the broker-dealer registration requirements of the Exchange Act. 127 Proposed Items 4.C.3., 4.C.7., 4.C.9. and 4.C.10. of Form CRS. 128 Proposed Items 4.B.2.b. and 4.C.4. of Form CRS. 129 Proposed Items 4.B.5. and 4.C.8. of Form CRS. amozie on DSK3GDR082PROD with PROPOSALS1 126 Proposed VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 strategy, retail investors may prefer paying a different type of fee in certain specified circumstances.130 Having a clear, simple explanation of the fees a retail investor would pay firms for advisory accounts versus brokerage accounts, and the incentives that such fees create, would help the retail investor to understand the types of fees that they will pay and make a more informed choice about which account is right for them. As with other sections of the relationship summary, dual registrants would provide this information in tabular format to facilitate comparison.131 Fees and costs are important to retail investors,132 but many retail investors are uncertain about the fees they will pay.133 Many commenters have stressed the importance of clear fee disclosure to retail investors, including disclosure about differences between advisory and brokerage fees.134 Accordingly, the 130 Proposed Items 4.B.6. and 4.C.10. of Form CRS. Dual registrants would make these disclosures under the heading ‘‘Fees and Costs,’’ whereas standalone investment advisers and broker-dealers would make certain of these disclosures under the heading ‘‘Fees and Costs,’’ and certain of these disclosures under the heading, as applicable ‘‘Compare with Brokerage Accounts’’ or ‘‘Compare with Advisory Accounts,’’ as described below. Proposed Items 5.A.4. and 5.B.6. of Form CRS. 131 Proposed General Instruction 1.(e) to Form CRS. 132 See 917 Financial Literacy Study, supra note 20, at iv (‘‘With respect to financial intermediaries, investors consider information about fees, disciplinary history, investment strategy, conflicts of interest to be absolutely essential.’’). 133 See Rand Study, supra note 5, at xix (‘‘In fact, focus-group participants with investments acknowledged uncertainty about the fees they pay for their investments, and survey responses also indicate confusion about the fees.’’). In addition, we have brought enforcement actions against advisers providing inaccurate disclosure of all of the fees and costs that retail investors pay. See, e.g., In the Matter of Robert W. Baird & Co. Inc., Investment Advisers Act Release No. 4526 (Sept. 8, 2016) (settled action) (‘‘In re Robert W. Baird’’); In the Matter of Raymond James & Associates, Inc., Investment Advisers Act Release No. 4525 (Sept. 8, 2016) (settled action) (‘‘In re Raymond James’’); In the Matter of Barclays Capital Inc., Investment Advisers Act Release No. 3929 (Sep. 23, 2014) (settled action) (‘‘Release 3929’’). 134 See, e.g., Kiley 2017 Letter (recommending that investors receive disclosures about the differences in advisory and brokerage fees, and brokers’ specific fee and commission structure); Stifel 2017 Letter (recommending that firms explain the differences between brokerage and advisory accounts with the goal of improving understanding of a firm’s different service models, compensation arrangements, and conflicts of interests); Equity Dealers of America 2017 Letter (recommending disclosure of aspects of advisory and brokerage accounts, including the type of fees charged, to facilitate investors’ selection of an account type); Wells Fargo 2017 Letter; ACLI 2017 Letter; FSR 2017 Letter; SIFMA 2017 Letter; UBS 2017 Letter; Comment letter of the Investment Company Institute (Aug. 7, 2017) (‘‘ICI 2017 Letter’’); State Farm 2017 Letter; IAA 2017 Letter; Bernardi Securities 2017 Letter; Fidelity 2017 Letter; Vanguard 2017 Letter. PO 00000 Frm 00017 Fmt 4701 Sfmt 4702 21431 proposed relationship summary is intended to provide investors greater clarity concerning certain categories of fees they should expect to pay, how the types of fees affect the incentives of the firm and their financial professionals, and certain other fees and expenses that will reduce the value of the retail investor’s investment. The proposed relationship summary would focus on certain general types of fees, rather than describe all fees or provide a comprehensive schedule of fees. Specifically, the proposal would highlight certain differences in how broker-dealers and investment advisers charge for their services. We are not proposing a requirement that firms personalize the fee disclosure for their retail customers, or provide a comprehensive fee schedule, as some commenters had proposed.135 A personalized fee disclosure could be expensive and complex for firms to provide in a standardized presentation across all of their accounts and in a way that captures all fees, including embedded fees in various investments (which will vary for each investor depending on their portfolio). Many firms likely would seek to implement systems to automate the disclosure for each of their existing and prospective retail investors, and if such systems were expensive, some firms could choose to reduce the products and services that they offer as a result of the additional costs. Our proposal would encourage retail investors to ask financial professionals about their fees and request personalized information about the specific fees and expenses associated with their current or prospective accounts. As further discussed in Section II.B.8 below, one of the proposed questions for a retail investor to ask a financial professional is to ‘‘do the math for me,’’ and specifically encourages retail investors to ask about the amount that they would pay per year for the account, what would make the fees more or less, and the services included in those fees.136 Additionally, the beginning of the Fees and Costs section of the relationship summary would state: ‘‘Please ask your financial professional to give you personalized information on fees and 135 See, e.g., Comment letter of Mark J. Flannery, BankAmerica Professor of Finance, University of Florida (Jul. 27, 2017) (‘‘Flannery 2017 Letter’’); Pefin 2017 Letter (recommending that clients should receive information on a quarterly basis on fees charged to their account, the calculation used to determine fees, and a breakdown of the charges by category). 136 See infra Section II.B.8.; infra notes 299–303 and accompanying text; proposed Item 8 of Form CRS. E:\FR\FM\09MYP2.SGM 09MYP2 21432 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules costs that you will pay.’’ 137 We believe that financial professionals are well positioned to provide individualized fee information to their retail investors upon request. During the account opening process, for example, generally the relevant financial professional would have access to personalized information about the retail investor’s account and can put together personalized fee information estimates during the process. Likewise, we believe that requiring a comprehensive fee schedule in the relationship summary also could be more complex than a retail investor would find useful for an overview disclosure such as this. However, we believe our proposed layered disclosure would achieve similar results in a less costly and complex manner. The relationship summary would provide required information about fees, and a later section titled ‘‘Additional Information’’ would provide references and links to other disclosures where interested investors can find more detailed information.138 As discussed below, investment advisers would be required to direct retail investors to additional information in the firm’s Form ADV Part 2 brochure and any brochure supplement provided by a financial professional to the retail investor.139 An adviser’s Form ADV Part 2 contains more detailed information about the firm’s fees. Broker-dealers would likewise be required to direct retail investors to additional information at BrokerCheck, the firm’s website, and the retail investor’s account agreement.140 Up-to-date fee disclosures may appear on brokerdealers’ websites or in the retail investors’ account agreements, if applicable, where we understand broker-dealers typically provide information about fees, including, in some cases, comprehensive fee schedules.141 137 Proposed Item 4.A. of Form CRS. Item 7 of Form CRS. 139 Proposed Item 7.E.2. of Form CRS. Investment advisers that do not have a public firm website or do not maintain their current Form ADV brochure on its public website would be required to include a link to adviserinfo.sec.gov. Advisers that do not have a public firm website would also be required to include a toll-free telephone number where retail investors can request up-to-date information. 140 Proposed Item 7.E.1. of Form CRS. Brokerdealers that do not have a public firm website would be required to include a toll-free telephone number where retail investors can request up-todate information. 141 Under Regulation Best Interest, broker-dealers would also be required to disclose the material facts relating to the scope and terms of the relationship, which would include disclosure of fees and charges that apply to a customer’s transactions, holdings and accounts. Regulation Best Interest Proposal, supra note 24, at section II.D.1.a. amozie on DSK3GDR082PROD with PROPOSALS1 138 Proposed VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 We are also not proposing to require firms to include examples of how fees could affect a retail investor’s investment returns. We recognize that the Commission has required firms to disclose examples showing the effects of fees and other costs in certain contexts. For example, we have required mutual funds to provide in their summary prospectuses an example that is intended to help investors compare the cost of investing in the mutual fund with the cost of investing in other mutual funds.142 While we continue to believe that examples of the effect of fees on returns could be helpful to retail investors, they could also fail to capture the effect of a firm’s fees on a particular retail investor’s account. Transactional fees, in particular, can vary widely based on a number of circumstances, and it could be potentially misleading to present a typical example showing how sample transaction fees apply to a sample account over time. We believe requiring firms to provide an example for each type of account that would show the effect of fees on a sample account could overwhelm investors due to the number and variability of assumptions that would need to incorporated, explained, and understood in order for the example to be meaningful, and would not necessarily promote comparability. If the assumptions were standardized, such examples might not be useful, or might even be potentially misleading, to the retail investor, whose circumstances may be different from the assumptions used. Some commenters suggested requiring that a firm disclose the types of compensation firms and their financial professionals receive, including from third parties, in connection with providing investment recommendations.143 A few commenters suggested requiring disclosure of how much the firm and its financial professionals receive in fees, including commissions and fees from third parties.144 We agree with commenters that it is important to make investors aware of such fees and compensation because they create conflicts of interest for firms and financial professionals making investment recommendations for retail investors. We are proposing to require that firms disclose commissions and certain third-party fees related to mutual funds in this section, and certain compensation-related conflicts (e.g., conflicts related to revenue sharing) in the conflicts section of the relationship summary, as discussed in Section II.B.6 below. Heading. To emphasize the importance of fees, all firms would be required to include the following statement at the beginning of this section under the heading ‘‘Fees and Costs’’: ‘‘Fees and costs affect the value of your account over time. Please ask your financial professional to give you personalized information on the fees and costs that you will pay.’’ 145 We are proposing this precise wording because we believe it is applicable to retail investors regardless of any differences among the accounts and their fees. Understanding that fees and costs affect investment value over time would help retail investors to understand why they should review and understand this information. This introductory language also would highlight that retail investors could get more personalized information from the firm’s financial professionals. Brokerage Account Fees and Costs. Broker-dealers would be required to summarize the principal fees and costs that retail investors will incur.146 First, we are proposing prescribed language that describes the transactional nature of many brokerage fees.147 We are proposing different wording for dual registrants than for standalone brokerdealers to facilitate the side-by-side comparison with the description of the advisory fee in the dual registrant’s relationship summary. Specifically, dual registrants that offer retail investors both investment advisory accounts and brokerage accounts would include the following wording to assist with the side-by-side comparison with investment advisers: ‘‘Transactionbased fees. You will pay us a fee every time you buy or sell an investment. This fee, commonly referred to as a commission, is based on the specific transaction and not the value of your account.’’ 148 A standalone broker-dealer 145 Proposed 142 See Item 3 of Mutual Fund Summary Prospectus; Enhanced Mutual Fund Disclosure Adopting Release, supra note 47, at section III.A.3.b (‘‘The fee table and example are designed to help investors understand the costs of investing in a fund and compare those costs with the costs of other funds.’’). 143 See, e.g., SIFMA 2017 Letter; UBS 2017 Letter; ICI 2017 Letter; State Farm 2017 Letter; Bernardi Securities 2017 Letter; Fidelity 2017 Letter. 144 See, e.g., Flannery 2017 Letter; Pefin 2017 Letter. PO 00000 Frm 00018 Fmt 4701 Sfmt 4702 Item 4.A. of Form CRS. Item 4.B. of Form CRS. 147 As discussed above, we use the term ‘‘transaction-based fees’’ to refer to broker-dealer compensation such as commissions, mark-ups, mark-downs, sales loads or similar fees, including 12b–1 fees, tied to specific transactions. See supra note 126. 148 Proposed Item 4.B.1. of Form CRS. As discussed further below, dual registrants would include a parallel statement regarding their investment advisory account fees. Proposed Item 4.C.1. of Form CRS. 146 Proposed E:\FR\FM\09MYP2.SGM 09MYP2 amozie on DSK3GDR082PROD with PROPOSALS1 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules would include the following: ‘‘The fee you pay is based on the specific transaction and not the value of your account.’’ 149 In addition, both standalone and dual registrant broker-dealers would include the following (emphasis required): ‘‘With stocks or exchange-traded funds, this fee is usually a separate commission. With other investments, such as bonds, this fee might be part of the price you pay for the investment (called a ‘‘mark-up’’ or ‘‘mark down’’). With mutual funds, this fee (typically called a ‘‘load’’) reduces the value of your investment.’’ 150 Because of the importance of these transaction-based fees to brokerage services, as well as the variety of forms that such fees can take, we believe it will benefit investors to have specific examples to illustrate transaction-based fees with standardized, concise wording. We are proposing to require the example of mutual fund loads because they are common indirect fees associated with investments that compensate the brokerdealer. We are not proposing to require broker-dealers to provide the range of their transaction-based fees. We understand that these fees vary widely based on the specific circumstances of a transaction. For example, a brokerdealer that transacts in only one type of security—such as equities—can have a wide range of transaction fees for such securities, depending on factors such as the size of the transaction, the type of investment purchased, the type of account and services provided, and how retail investors place their orders (for example, online, telephone or with the assistance of a financial professional). A broker-dealer that transacts in multiple types of securities—for example, equities and real estate investment trusts (REITs)—could have an even wider range of transaction fees. Given this variability, and our intent that the relationship summary be short and that it be provided in addition to, and not in lieu of, other disclosure, we believe that requiring firms to provide a range of transaction-based fees in the relationship summary could be confusing or provide limited benefit to retail investors. Following the examples of transaction-based fees, broker-dealers would be required to state that some 149 Proposed Item 4.B.1. of Form CRS. As discussed above, standalone broker-dealers would be required to include wording that a transactionbased fee is generally referred to as a commission in the Relationships and Services section of the relationship summary. See proposed Item 2.B.1. of Form CRS. 150 Proposed Item 4.B.2.a. of Form CRS. VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 investments impose additional fees that will reduce the value of retail investors’ investments over time, and provide examples of such investments that they offer to retail investors.151 Mutual funds, variable annuities and exchangetraded funds are common examples, as well as any other investment that incurs fund management, 12b–1, custodial or transfer agent fees, or any other fees and expenses that reduce the value of the investment over time.152 Broker-dealers also would be required to state that a retail investor could be required to pay fees when certain investments are sold, for example, surrender charges for selling variable annuities.153 We believe that it is important to highlight for investors the costs associated with particular investments in addition to describing the transaction-based fee for brokerage services. Retail investors may not appreciate that they will bear costs for some investments in addition to the transaction-based brokerage fee they pay to their financial professional or firm.154 In addition, the investment fees and expenses we are proposing to require that firms disclose are ones that we believe are among the most common and can have a substantial impact on an investor’s return from a particular investment. Requiring the disclosure of these investment fees and expenses, sometimes described as ‘‘indirect fees,’’ follows commenters’ recommendations that investment advisers and brokerdealers disclose certain indirect costs to retail investors.155 We are not proposing 151 Proposed Item 4.B.2.b. of Form CRS. Investment advisers would also be required to make this disclosure. See proposed Item 4.C.4. of Form CRS. 152 We acknowledge that some fees, such as 12b– 1 fees, could be a broker-dealer’s principal fee for their brokerage services and are also fees that reduce the return on an investment. In such a case, the broker-dealer would describe transaction-based fees as its principal fees and costs pursuant to proposed Item 4.B.1, and would also describe these fees as additional fees that will reduce the return on an investor’s investments pursuant to proposed Item 4.B.2.b. of Form CRS. 153 Proposed Item 4.B.2.b. of Form CRS. Investment advisers would also be required to make this disclosure. See proposed Item 4.C.4. of Form CRS. 154 See, e.g., Enhanced Disclosure and New Prospectus Delivery Option For Registered OpenEnd Management Investment Companies, Investment Company Act Release No. 28064 (Nov. 21, 2007) [72 FR 67790 (Nov. 30, 2007)], at n.49 and accompanying text (‘‘In recent years, we have taken significant steps to address concerns that investors do not understand that they pay ongoing costs every year when they invest in mutual funds, including requiring disclosure of ongoing costs in shareholder reports.’’). 155 See, e.g., State Farm 2017 Letter; Bernardi Securities 2017 Letter; Pefin 2017 Letter; Flannery 2017 Letter; Comment letter of Dan Keppel (Jun. 5, 2017); Comment letter of Edward H. Weyler (Jun. 8, 2017). PO 00000 Frm 00019 Fmt 4701 Sfmt 4702 21433 a requirement that firms disclose the amount or range of mutual fund fees or other third-party fees that retail investors may pay related to their underlying investments, as a few commenters recommended.156 These expenses vary so greatly that attempts to quantify them or describe their range likely would not be useful to retail investors or would provide limited benefit to retail investors given that the relationship summary is designed to be short disclosure provided in addition to, and not in lieu of, other disclosures.157 Instead, we intend that our proposed summary disclosure would effectively highlight these costs in a simple, understandable way. Additionally, broker-dealers would be required to state whether or not the fees they charge retail investors for their brokerage accounts vary and are negotiable, including a description of the key factors that they believe would help a reasonable retail investor understand the fee that he or she is likely to pay for the firm’s services.158 Such factors could include, for example, how much the retail investor buys or sells, what type of investment the retail investor buys or sells, and what kind of account the retail investor has with the broker-dealer. We believe investors would benefit from knowing at account opening whether they have the ability to negotiate the fees they pay. Broker-dealers would next be required to state, if applicable, that a retail investor will also pay other fees in addition to the firm’s transaction-based fee, and to list those fees, including account maintenance fees, account inactivity fees, and custodian fees.159 We believe that it is important to highlight for investors the fees associated with an account that they will pay in addition to the principal type of fee that the firm charges retail investors for their brokerage account because these fees are common and they can have an impact on a retail investor’s return. Broker-dealers would then be required to disclose certain specified incentives they have to put their own interests ahead of retail investors’ interests based on charging transactionbased fees for brokerage accounts.160 156 See Flannery 2017 Letter; Pefin 2017 Letter. Amendments to Form ADV, Investment Advisers Act Release No. 3060 (Jul. 28, 2010) [75 FR 49233 (Aug. 12, 2010)] (‘‘Brochure Adopting Release’’); Amendments to Form ADV, Investment Advisers Act Release No. 2711 (Mar. 3, 2008) [73 FR 13958 (Mar. 14, 2008)] (‘‘2008 Brochure Proposing Release’’). 158 Proposed Item 4.B.3. of Form CRS. 159 Proposed Item 4.B.4. of Form CRS. 160 Proposed Item 4.B.5. of Form CRS. 157 See E:\FR\FM\09MYP2.SGM 09MYP2 21434 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules They would be required to include the following: ‘‘The more transactions in your account, the more fees we charge you. We therefore have an incentive to encourage you to engage in transactions.’’ 161 We believe this information would help retail investors understand how the fee structures for brokerage accounts could affect their investments and the incentives that firms and financial professionals have to place their interests ahead of retail investors’ interests by encouraging retail investors to engage in transactions to increase their fees.162 We are proposing to prescribe wording because we believe these particular incentives and considerations generally apply to most brokers that offer retail investors brokerage accounts, and using uniform wording would promote consistency. We believe that retail investors would benefit from understanding these incentives when they are considering broker-dealers. Additionally, we believe this disclosure would reinforce a key theme of the relationship summary, which is choice across account types and services. Finally, dual registrants would be required to include the following with respect to brokerage services: ‘‘From a cost perspective, you may prefer a transaction-based fee if you do not trade often or if you plan to buy and hold investments for longer periods of time.’’ 163 We believe that these factors—cost, trading frequency, and the desire to ‘‘buy and hold’’—are important for retail investors to consider when determining whether to use brokerage services or advisory services.164 We are 161 Id. amozie on DSK3GDR082PROD with PROPOSALS1 162 Pursuant to the federal securities laws, brokerdealers can violate the federal antifraud provisions by engaging in excessive trading that amounts to churning, switching, or unsuitable recommendations. Churning occurs when a brokerdealer, exercising control over the volume and frequency of trading in a customer account, abuses the customer’s confidence for personal gain by initiating transactions that are excessive in view of the character of the account and the customer’s investment objectives. Excessive trading is an excessive level of trading unjustified in light of the customer’s investment objectives. See Mihara v. Dean Witter & Co., Inc., 619 F.2d 814, 821 (9th Cir. 1980); Carras v. Burns, 516 F.2d 251, 258 (4th Cir. 1975). See also Regulation Best Interest Proposal, supra note 24, at section II.D.2.c. 163 Proposed Item 4.B.6. of Form CRS. 164 See e.g., Comment letter of The Capital Group Companies, Inc. (Mar. 12, 2018) (discussing considerations for buy and hold investors choosing among commission-based and fee-based arrangements). Standalone broker-dealers and standalone investment advisers would also be required to include similar wording under the headings ‘‘Compare with Typical Advisory Accounts’’ and ‘‘Compare with Typical Brokerage Accounts,’’ as applicable. See proposed Items 5.B.5 and 5.A.4 of Form CRS. Dual-registrants, standalone broker-dealers, and standalone investment advisers VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 proposing to prescribe the wording because we believe these factors reflect common circumstances in which a brokerage account could be more costeffective for a retail investor than an advisory account, and using uniform wording would promote consistency. We believe this disclosure, in conjunction with the corresponding disclosure regarding advisory accounts that would appear next to it, would help retail investors to compare the two services and make an informed choice about the account type that is the right fit for them based on their goals and preferences. Investment Advisory Account Fees and Costs. Investment advisers that offer advisory accounts to retail investors would be required to summarize the principal fees and costs that retail investors will incur.165 Dual registrants that charge ongoing asset-based fees for their advisory services would state the following: ‘‘Asset-based fees. You will pay an on-going fee [at the end of each quarter] based on the value of the cash and investments in your advisory account.’’ 166 replacing, as needed, the bracketed wording with how often they assess the fee. If the dual registrant charges another type of fee for advisory services, it would briefly describe that fee and how often it is assessed.167 Standalone investment advisers would state the following: ‘‘The amount paid to our firm and your financial professional generally does not vary based on the type of investments we select on your behalf.’’ 168 Standalone investment advisers that charge an ongoing assetbased fee would also state ‘‘The assetwould also be required to include a statement that retail investors may prefer an asset-based fee in certain circumstances, and that an asset-based fee may cost more than a transaction-based fee. See proposed Items 4.C.10, 5.B.5 and 5.A.4 of Form CRS. 165 Proposed Item 4.C. of Form CRS. An investment adviser would summarize the principal fees and costs that align with the type of fee(s) the adviser reports in response to Item 5.E. of Form ADV Part 1A that are applicable to retail investors. 166 Proposed Item 4.C.1. of Form CRS. 167 Id. Some investment advisers report on Form ADV Item 5.E that they receive ‘‘commissions.’’ These ‘‘commissions’’ may include deferred sales loads, including fees for marketing and service, as well as commissions as understood in the brokerdealer context. As a form of deferred sales load, all payments of ongoing sales charges to intermediaries would constitute transaction-based compensation. Intermediaries receiving those payments should consider whether they need to register as brokerdealers under section 15 of the Exchange Act. 168 Proposed Item 4.C.2. of Form CRS. We recognize that, in some cases, the amount paid to the advisory firm and the financial professional can vary based on the type of investment selected (e.g., advisory firms and financial professionals may recommend certain mutual funds that pay the adviser or the financial professional 12b–1 fees out of fund assets). PO 00000 Frm 00020 Fmt 4701 Sfmt 4702 based fee reduces the value of your account and will be deducted from your account.’’ 169 Standalone investment advisers that charge another type of fee would succinctly describe how the fee is assessed and the impact it has on the value of the retail investor’s account.170 These requirements are consistent with the current fee disclosure requirements for the Form ADV brochure and how investment advisers typically describe asset-based fees, and we believe that retail investors would find this type of disclosure helpful.171 We are not proposing to require that investment advisers provide the range of fees, as ranges an investment adviser charges can vary based on a number of factors individual to the retail investor and the services they choose. Additionally, although we do not believe that ranges for investment advisers’ asset based fees vary as much as broker-dealers’ transaction-based fees, we recognize that requiring firms to provide a fee range for advisory accounts and not brokerage accounts could cause confusion among retail investors and be of limited benefit when comparing advisory and brokerage services. However, we recognize that providing such a range could promote comparability between different advisers, and we request comment below on whether we should require disclosure of the adviser’s range of principal fees charged. An investment adviser that provides advice to retail investors about investing in a wrap fee program would be required to include specified language about the program fees.172 A ‘‘wrap fee program’’ would be defined as an advisory program that charges a specified fee not based directly upon transactions in the account for investment advisory services and the execution of transactions.173 The advisory services may include portfolio management or advice concerning selection of other advisers.174 An 169 Id. 170 Proposed Item 4.C.2. of Form CRS. Investment advisers that offer retail investors advisory accounts sometimes charge fees that are not ongoing, asset based fees. A financial planner, for example, sometimes charges a one-time fixed fee to prepare a plan. 171 As discussed above, when completing Form CRS, investment advisers should generally consider achieving consistency with the type(s) of fee(s) that the investment adviser reports on Item 5.E. of Form ADV Part 1A. See supra note 126. 172 Proposed Items 4.C.3., 4.C.6., 4.C.9. and 4.C.10. of Form CRS. We also refer to these types of investment advisers as ‘‘client-facing firms.’’ 173 Proposed General Instruction 9.(g) to Form CRS. This proposed definition is identical to the definition already used in Form ADV. 174 Proposed General Instruction 9.(g) to Form CRS. E:\FR\FM\09MYP2.SGM 09MYP2 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules amozie on DSK3GDR082PROD with PROPOSALS1 investment adviser that provides advice to retail investors about investing in a wrap fee program and does not also offer another type of advisory account would be required to include the following (emphasis required): ‘‘We offer advisory account programs called wrap fee programs. In a wrap fee program, the asset-based fee will include most transaction costs and fees to a broker-dealer or bank that will hold your assets (known as ‘‘custody’’), and as a result wrap fees are typically higher than non-wrap advisory fees.’’ 175 An investment adviser that provides advice about investing in a wrap fee program and offers another type of advisory account would be required to include similar prescribed wording, modified as applicable to reflect that the adviser also offers other types of advisory accounts.176 Many retail investors participate in wrap fee programs.177 We believe that retail investors would benefit from receiving information about certain characteristics of wrap fee programs, particularly with respect to their fees. Requiring investment advisers to describe the asset-based fee, what it includes, and that it is typically higher than non-wrap advisory fees would help a retail investor to distinguish wrap fee programs from other types of advisory accounts that charge or incur separate transaction fees. Next, investment advisers would be required to state that some investments impose additional fees that will reduce the value of a retail investor’s investment over time, and provide examples of such investments that the firm offers to retail investors.178 175 Proposed Item 4.C.3. of Form CRS. The assetbased fee in a wrap program does not always include all transaction costs. For example, in some cases retail investors pay mark-ups, mark-downs, or spreads, and mutual fund fees and expenses in addition to the wrap fee program’s asset-based fee. In addition, as discussed below, an investment adviser may select a broker-dealer outside of the wrap fee program to execute certain trades in a retail investor’s account—a practice sometimes referred to as ‘‘trading away’’—that results in the retail investor’s account incurring separate brokerage fees. See infra note 187 and accompanying text. 176 Such investment advisers would be required to include the following (emphasis required): ‘‘For some advisory accounts, known as wrap fee programs, the asset-based fee will include most transaction costs and custody services, and as a result wrap fees are typically higher than non-wrap advisory fees.’’ Proposed Item 4.C.3. of Form CRS. 177 Based on IARD data as of December 31, 2017, of the 12,667 SEC-registered investment advisers, 1,035 (8.17%) sponsor a wrap fee program, and 1,597 (12.61%) act as a portfolio manager for one or more wrap fee programs. 178 Proposed Item 4.C.4 of Form CRS. See supra notes 151–155 and accompanying text for a discussion of this requirement applicable to both investment advisers and broker-dealers. VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 Investment advisers also would state that a retail investor could be required to pay fees when certain investments are sold, for example, surrender charges for selling variable annuities.179 These proposed requirements are identical to the disclosure that broker-dealers would provide.180 In addition, investment advisers would be required to state whether or not the fees they charge retail investors for their advisory accounts vary and are negotiable.181 They would be required to describe the key factors that they believe would help a reasonable retail investor understand the fee that he or she is likely to pay for the firm’s services.182 Such factors could include, for example, the services the retail investor receives and the amount of assets in the account. As discussed above with regard to broker-dealers, we believe investors would benefit from knowing at account opening whether they have the ability to negotiate the fees they pay. Investment advisers would next be required to state, if applicable, that a retail investor will pay transactionbased fees when the firm buys and sells an investment for the retail investor (e.g., commissions paid to brokerdealers for buying or selling investments) in addition to the firm’s principal fee it charges retail investors for the firm’s advisory accounts.183 Investment advisers would also be required to state, if applicable, that a retail investor will pay fees to a brokerdealer or bank that will hold the retail investor’s assets and that this is called ‘‘custody,’’ and would be required to list other fees the retail investor will pay.184 Examples could include fees for account maintenance services. These other fees we are proposing to require firms to disclose are ones that we believe are among the most common or can have an impact on a retail investor’s return.185 As discussed above, we believe that investors would benefit from being aware of the fees associated with an account that they will pay in addition to the principal fee that the firm charges retail investors for their brokerage or advisory account. 179 Proposed Item 4.C.4. of Form CRS. proposed Item 4.B.2.b. of Form CRS. 181 Proposed Item 4.C.5. of Form CRS. 182 Id. 183 Proposed Item 4.C.6. of Form CRS. 184 Id. 185 See, e.g., Advisers Act rule 204–3; Item 5 of Form ADV Part 2A (requiring each adviser to describe the types of other costs, such as brokerage, custody fees and fund expenses that clients may pay in connection with the advisory services provided to them by the adviser). 180 See PO 00000 Frm 00021 Fmt 4701 Sfmt 4702 21435 An investment adviser that provides advice to retail investors about investing in a wrap fee program also would be required to state: ‘‘Although transaction fees are usually included in the wrap program fee, sometimes you will pay an additional transaction fee (for investments bought and sold outside the wrap fee program).’’ 186 The Commission is aware that wrap fee program portfolio managers employ, to varying degrees, ‘‘trading away’’ practices, in which they use a broker other than the sponsoring broker to execute trades for which a commission or other transaction-based fee is charged, in addition to the wrap fee, to the retail investor.187 The Commission has identified instances in which firms participating in wrap fee programs had poor disclosure about the overall cost of selecting a wrap fee program, including the effect of their trade away practices.188 We believe that investors would benefit from the relationship summary highlighting that, even in a wrap fee program, they sometimes will pay an additional transaction fee. As with broker-dealers, investment advisers that charge an ongoing assetbased fee for advisory services would next be required to address the incentives they have to put their own interests ahead of their retail investors’ interests based on the type of fee charged for investment advisory services.189 These advisers would be required to include the following statement: ‘‘The more assets you have in the advisory account, including cash, the more you will pay us. We therefore have an incentive to increase the assets in your account in order to increase our fees. You pay our fee [insert frequency of fee (e.g., quarterly)] even if you do not 186 Proposed Item 4.C.7. of Form CRS. wrap fee program portfolio manager may trade away because, for example, it believes that doing so will allow it to seek best execution of clients’ transactions, as investment advisers have an obligation to seek best execution of clients’ securities transactions where they have the responsibility to select broker-dealers to execute client trades (typically in the case of discretionary accounts). See Advisers Act rule 206(3)–2(c) (referring to adviser’s duty of best execution of client transactions). See also Commission Guidance Regarding Client Commission Practices Under Section 28(e) of the Securities Exchange Act of 1934, Exchange Act Release No. 54165 (Jul. 18, 2006) (stating that investment advisers have ‘‘best execution obligations’’) (‘‘Release 54165’’). See also Brochure Adopting Release at 9. 188 The Commission has brought enforcement actions in these circumstances. See, e.g., In re Robert W. Baird, supra note 133; In re Raymond James, supra note 133; In the Matter of Riverfront Investment Group, LLC, Investment Advisers Act Release No. 4453 (Jul. 14, 2016) (settled action); In the Matter of Stifel, Nicolaus & Company, Inc., Investment Advisers Act Release No. 4665 (Mar. 13, 2017) (settled action). 189 Proposed Item 4.C.8. of Form CRS. 187 A E:\FR\FM\09MYP2.SGM 09MYP2 amozie on DSK3GDR082PROD with PROPOSALS1 21436 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules buy or sell,’’ replacing the brackets with the frequency of their fee.190 Investment advisers that provide advice to retail investors about participating in a wrap fee program would, in addition, be required to include the following: ‘‘Paying for a wrap fee program could cost more than separately paying for advice and for transactions if there are infrequent trades in your account.’’ 191 We are proposing to require prescribed wording to promote consistency and because we believe these particular incentives and considerations generally apply to all advisers that charge retail investors ongoing asset-based fees or provide advice about participating in a wrap fee program. While we are not proposing any prescribed language for other fee types, such as fixed fees, we request comment, below, on whether advisers that charge other types of fees for their advisory services have incentives to act in their own interest based on the type of fee charged, and whether we should require disclosure of such incentives. These disclosures would help retail investors understand how the fee structures for advisory accounts could affect their investments and the incentives that firms and financial professionals have to place their interests ahead of retail investors’ interests. The disclosures for investment advisers that provide advice about investing in a wrap fee program also would help retail investors to understand that in certain circumstances a wrap fee would cost them more than separately paying for advice and for transactions in a different type of advisory account. Similarly, wrap fee sponsors that complete the Form ADV Wrap Fee Program Brochure are required to explain that the wrap fee program may cost the client more or less than purchasing such services separately and describe the factors that bear upon the relative cost of the program, such as the cost of the services if provided separately and the trading activity in the client’s account.192 As with some of the proposed requirements described above, we are proposing to prescribe wording because we believe these particular considerations generally apply to any investment in a wrap fee program and would promote consistency. Also, as discussed above, we believe this disclosure would reinforce a key theme of the relationship 190 Proposed Item 4.C.8. of Form CRS. Item 4.C.9. of Form CRS. 192 See Item 4.B. of Form ADV Part 2A; Appendix 1 of Form ADV: Wrap Fee Program Brochure. 191 Proposed VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 summary, which is choice across account types and services. Finally, dual registrants that charge ongoing asset-based fees for advisory accounts would be required to include the following with respect to their investment advisory services: ‘‘An assetbased fee may cost more than a transaction-based fee, but you may prefer an asset-based fee if you want continuing advice or want someone to make investment decisions for you.’’ 193 Dual registrants that provide advice to retail investors about investing in wrap fee programs would also be required to include the following with respect to wrap fee program accounts: ‘‘You may prefer a wrap fee program if you prefer the certainty of a [insert frequency of the wrap fee (e.g., quarterly)] fee regardless of the number of transactions you have.’’ 194 We believe that these features—ongoing advice, discretion, standards of conduct, and, for wrap fee programs, certainty in pricing— distinguish advisory accounts and wrap fee programs from brokerage accounts. We also believe it is important to highlight how costs relate to the services included.195 We are proposing to prescribe wording because we believe these particular considerations generally apply to all advisory accounts and wrap fee programs, and using uniform wording would promote consistency. We believe these disclosures, in conjunction with the corresponding disclosure regarding broker-dealer accounts that would appear next to it for dual registrants, would help retail investors to compare the two types of services and combinations of those services and make an informed choice about the account type that is the right fit for them based on their goals and preferences. We request comment generally on the proposed fees and costs disclosures, and in particular on the following issues: • Is the proposed disclosure discussing fees and expenses useful to investors? • Do the proposed requirements encourage disclosure that is simple, 193 Proposed Item 4.C.10. of Form CRS. Standalone investment advisers and standalone broker-dealers would also be required to include similar wording under the headings ‘‘Compare with Typical Brokerage Based Accounts,’’ and ‘‘Compare with Typical Advisory Accounts,’’ as applicable. Proposed Items 5.A.4 and 5.B.5. of Form CRS. 194 Proposed Item 4.C.10. of Form CRS. 195 We also propose to require dual registrants to include the following with respect to broker-dealer services: ‘‘From a cost perspective, you may prefer a transaction-based fee if you do not trade often or if you plan to buy and hold investments for longer periods of time.’’ See proposed Items 4.B.6. See also Items 5.A.4. and 5.B.5 of Form CRS (including similar disclosures to be made by standalone investment advisers and broker-dealers). PO 00000 Frm 00022 Fmt 4701 Sfmt 4702 clear and useful to retail investors? Would the proposed disclosure help investors to understand and compare the fees and costs associated with a firm’s advisory services and brokerage services? Are there any revisions to the descriptions of fees that would make the proposed disclosure more useful to investors? Is it clear that retail investors would incur different costs for different types of accounts and advice services? Are there common assumptions or misconceptions regarding account fees and services that firms should be required to discuss, clarify, or address? • Is the proposed order of the information appropriate, or should it be modified? If so, how should it be modified? • Do the proposed requirements strike the right balance between requiring specific wording and allowing firms to draft their own responses? Why or why not? Should the Commission permit or require a more open-ended narrative or require more prescribed wording? Do the proposed Instructions cover the range of business models and fee structures that investment advisers and broker-dealers offer fully and accurately? Are there other fees that should be required to be disclosed for broker-dealers or investment advisers? • Is the proposed format useful for retail investors to understand and compare fees and costs as between broker-dealers and investment advisers? Should we require further use of bullet points, tables, charts, graphs or other illustrative format? Should we require, as proposed, that dual registrants present the fee and cost information in a tabular format, comparing advisory services and brokerage services side-byside, or permit other formats such as in a bulleted format? • How would the required disclosures contribute to readability and length of the proposed relationship summary? Should each of these disclosures be required? Should any of these disclosures not be required but instead permitted? Should any of these disclosures be required to appear in the relationship summary, but outside the proposed summary of fees and costs? • Should any additional disclosures about fees and costs be included for investment advisers? In particular, should we require any disclosures from an investment adviser’s Form ADV Part 2A narrative brochure, such as more details about an investment adviser’s fees? Some other disclosures about fees that are included in Form ADV Part 2A, but that we have not included in the proposed relationship summary, include an adviser’s fee schedule; whether the adviser bills clients or E:\FR\FM\09MYP2.SGM 09MYP2 amozie on DSK3GDR082PROD with PROPOSALS1 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules deducts fees directly from clients’ accounts; and an explanation of how an adviser calculates and refunds prepaid fees when a client contract terminates (for an adviser charging fees in advance). Should we require some or all of such disclosures, or other disclosures about fees? • Should we require or permit advisers to disclose whether they charge performance-based fees, which is a type of compensation investment advisers may charge to ‘‘qualified clients,’’ that is based on a share of capital gains on, or capital appreciation of, such clients’ assets? 196 Advisers are required to disclose their receipt of performancebased fees on Form ADV, and they provide an incentive for the adviser to take additional investment risks with the account. • Should we permit or require each firm to provide the range of its fees? If so, should broker-dealers be required to include a range for each type of transaction-based fee it charges or the aggregate range for all of the firm’s transaction-based fees? Should investment advisers be required to include a range for each type of principal fee they charge retail investors for advisory services, or the aggregate range for all of its principal advisory fees? Do broker-dealers and investment advisers currently compute or have the ability to compute such aggregated fee information? What factors determine the type or amount of fee that firms charge (e.g., for broker-dealers, such factors could include the: means of placing an order, such as online, by telephone or in person; type of account, such as fullservice or discount brokerage, and; type of product)? Do commenters have suggestions for how best to convey one or more ranges in a space-limited disclosure in light of the different fee structures? Are there other ways to give retail investors a better sense of the amount of fees they will pay without providing account-specific disclosures? • Should we require firms to state whether their fees are ‘‘negotiable,’’ as we have proposed? At firms that offer negotiable fees, are retail investors generally able to negotiate their fees, and if not, would they find this disclosure helpful or could it be confusing? Will firms be able to succinctly describe the key factors they believe would help a reasonable retail investor understand the fee that he or she is likely to pay for a firm’s services (e.g., the size of the transaction, the type of investment purchased, and the type of account and services he or she receives)? 196 See Advisers Act rule 205–3. VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 • Will any of the required disclosures be misleading or make it more difficult for investors to select the right type of account for them? • Should we make the proposed relationship summary more personalized to individual retail investors, such as by requiring or permitting estimates for each retail investor, reflecting the fees and charges incurred for the retail investor’s brokerage or advisory account? Is personalization feasible for this type of relationship summary disclosure? If so, what information should be included in the personalized fees and cost disclosure, and how should such information be presented? How would firms calculate those estimates? How often should we require firms to update the personalized fees and compensation disclosure, and how should the personalized fee disclosure updates be delivered or made available to retail investors? What would be the costs to firms to prepare and update personalized fee and compensation disclosures? • Should we require firms to provide investors with personalized fee information in a different disclosure, such as an account statement? What would be the cost and benefits, including the costs of books and records requirements, of personalizing information to investors relative to the proposal? Do firms currently provide retail investors with personalized fee disclosure estimates at or before account opening? Do they provide personalized fee disclosures in periodic account statements? For firms that provide personalized fee disclosures, do they include all fees paid by the retail investor as well as compensation received by the firm and financial professionals, even if such compensation is not paid directly or indirectly by the retail investor, such as commissions, mark-ups, mark-downs, other fees embedded in the investment or fees from third parties? What other types of fee information do firms include? Do they automate such disclosures? How expensive and complex a process is creating and delivering such personalized fee disclosures? • Should we require firms to state where retail investors can find personalized information about account fees and costs, such as on account statements and trade confirmations? What other source of such information might be available for prospective customers and clients? Should we require firms to include hyperlinks to fee and cost calculators on investor.gov? PO 00000 Frm 00023 Fmt 4701 Sfmt 4702 21437 • Should we require firms to provide an example showing how sample fees and charges apply to a hypothetical advisory account and a hypothetical brokerage account, as applicable? Should we require a more general example that shows the impact of hypothetical fees on an account? If so, what assumptions should we require firms to make in preparing such an example? For example, should we specify assumptions such as the kinds of assets that are most typical for a broker-dealer’s customers, stated commission schedules, and aggregate third-party compensation? If the assumptions were standardized, would such examples be useful to the retail investor, whose circumstances may be different from the assumptions used or would they help give an investor a better idea about what kind of fees are being charged? Would such examples provide retail investors with a clear understanding of the application of ongoing asset-based, transaction-based and product-level fees to an account? Should we require one example for an advisory account and one example for a brokerage account? How should the information be presented (e.g., mandated graphical presentation)? Should we require firms to present more than one hypothetical example showing a range of fees instead (e.g., based on representative holdings or recommendations)? Should specific assumptions be included in calculating the hypothetical example? What disclosures would need to accompany the example? Should the example(s) track the effect of the fees over time, and if so, over what time period (e.g., over one, five and 10 years)? Or should firms describe the impact of different amounts or types of fees over a longer period of time, such as 20 years? • Should firms be permitted or required to include in the relationship summary a detailed fee table or schedule? Should we permit or require firms to create a fee schedule as separate disclosure, and then include it as an attachment (or cross reference it with a website address and hyperlink) to the relationship summary? What should be included in such a fee table or schedule? Should it include compensation received by the firm and financial professionals, even if such compensation is not paid directly or indirectly by the retail investor, such as commissions or fees from third parties? • Regarding fees related to funds and other investments that reduce the value of the investment over time, would the required disclosures by investment advisers and broker-dealers be clear and understandable to retail investors? E:\FR\FM\09MYP2.SGM 09MYP2 amozie on DSK3GDR082PROD with PROPOSALS1 21438 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules Should we, as proposed, permit firms to select their own example that they offer to retail investors? Are there other considerations related to fees for funds and other investments that we should require firms to highlight for retail investors? Would our proposed requirement that firms disclose the existence of such fees, along with examples of investments that impose such fees, adequately inform retail investors of these costs? Should we require an example showing how investment fees and expenses and other account fees and expenses may affect a retail investor’s investment over time? Should we require a reference to such an example if available elsewhere (e.g., in mutual fund, ETF or variable annuity prospectuses)? • Should firms describe the types of compensation they and their financial professionals receive from sources other than the retail investor in the description of their conflicts of interest, as we have proposed (for example, with respect to revenue sharing arrangements, such as payments for ‘‘shelf space,’’ i.e., product distribution by broker-dealers)? Or, should we require firms to state in the fees and costs section of the relationship summary that they and their financial professionals receive such compensation? If so, what types of additional compensation should we require firms to disclose in the summary of fees and costs? Should we require firms to disclose how the amount of fees received from retail investors relates to the amount of fees received from others in connection with recommendations or other services to those investors? Would such disclosure be confusing to retail investors? Should we require firms only to disclose which source of fees is greater or to provide a reasonable estimate of the relative magnitude of the categories of such fees (e.g., that on average for retail customers that the amount the firm receives from third parties is twice as much as the firm charges investors)? • Should we require firms to state, as proposed, that a retail investor will also pay other fees in addition to the firm’s principal fee for brokerage or advisory services, and to list such fees? Should we also require firms to state ranges for such fees? • We are proposing disclosures that are intended to help retail investors understand how the principal types of fees firms charge for advisory and brokerage accounts affect the incentives of the firm and their financial professionals. Are these disclosures clear? Do they capture all incentives that broker-dealers or investment VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 advisers may have from their fee structures? Are there other considerations related to fees and compensation that we should require firms to highlight for retail investors that are not captured here or elsewhere in the relationship summary? Should we require firms to include the prescribed wording, as proposed, or should we allow more flexibility in the words they use? Should we modify the prescribed wording? For example, should we expressly permit or require broker-dealers to modify the prescribed wording regarding their incentive to encourage retail investors to engage in transactions, to the extent they also receive compensation that might lower such incentive, such as asset-based compensation (e.g., rule 12b–1 fees, subtransfer agent or other similar service fees)? • For our prescribed wording for investment advisers regarding the adviser’s incentive to increase the assets in a retail investor’s advisory account, would different wording better reflect this incentive? Does the proposed wording capture the conflict of interest, or does the wording suggest that advisers will increase retail investors’ assets by generating higher investment returns? Because many advisers do not charge ongoing asset-based fees as their principal fees for retail investor advisory accounts, and instead charge fixed fees, hourly fees, commissions or other types of fees, should we require these firms to state the incentives they have as a result of receiving such other types of fees? If so, what are the incentives that such firms have that are important for retail investors to understand and would be relevant to the relationship summary? • These proposed disclosures about a firm’s incentives can also be considered to involve conflicts, as they address the incentives that investment advisers and broker-dealers have as a result of receiving certain types of fees. Should we require this disclosure in the conflicts of interest disclosure instead of the summary of fees and costs? Should we require firms to include in the summary of fees and costs any other feerelated conflicts that we propose to include in the conflicts of interest disclosure, as discussed in Section II.B.6 below? Should we require firms to include other fee-related conflicts in these sections that are not included elsewhere in the relationship summary? • Would our proposed disclosure for advisers and broker-dealers, that retail investors may, in certain circumstances, prefer one type of fee over another, be useful to retail investors? Are these proposed disclosures clear? Do they PO 00000 Frm 00024 Fmt 4701 Sfmt 4702 adequately capture the typical circumstances in which retail investors would prefer one fee type over another? Are there other considerations related to fees and compensation that we should require or permit firms to highlight for retail investors that are not captured here or elsewhere in the relationship summary? Should we require firms to include the prescribed wording, as proposed, or should we allow more flexibility in the words they use? Should we modify the prescribed wording? Does the proposed prescribed wording capture the range of business models among investment advisers and broker-dealers? Would the prescribed wording require a firm to provide any inaccurate information given that particular firm’s circumstances? • Should we require firms to make disclosures about wrap fee programs, as proposed? Would the proposed disclosures help investors to understand the fees and costs associated with a wrap fee program as compared to unbundled advisory accounts and brokerage accounts? Would the proposed disclosures help retail investors to make informed choices about whether a wrap fee program suits their needs, as compared with unbundled investment advisory or brokerage services? If not, how could we revise it? Are there any revisions to the descriptions of wrap fee programs that would make the proposed disclosures more useful to investors? • Are there other differences between wrap fee programs, unbundled advisory accounts, and brokerage accounts that we should require firms to include, such as other differences in fees and services? Would more or less information about wrap fee programs be helpful for retail investors? For instance, should we require firms to disclose information about the firms that participate in the wrap fee programs they recommend (e.g., the wrap fee program sponsors or managers), and any particular conflicts relevant to investors in wrap fee programs? Should we require more or less disclosure, or different disclosure, about the amount and frequency of additional transaction fees retail investors incur in wrap fee programs? Are there any elements of the proposed requirements that we should exclude? If so, why? Should any of the required disclosures be included in a different section of or an appendix to the relationship summary? • Have we appropriately tailored the information required for advisers that provide advice about investing in both a wrap fee and a non-wrap fee program, and advisers that only provide advice about investing in a wrap fee program? E:\FR\FM\09MYP2.SGM 09MYP2 amozie on DSK3GDR082PROD with PROPOSALS1 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules Should we require firms that provide advice about investing in both a wrap fee and a non-wrap fee program to prepare a separate relationship summary for the wrap fee program? Should we instead require firms to prepare an appendix with information about the wrap fee program, in addition to the relationship summary, as we do for the Form ADV brochure? If so, what types of information should we require firms to include about wrap fee programs in a separate relationship summary or appendix, and why should we require such disclosure? • Should we require broker-dealers that sponsor wrap fee programs to include any additional disclosures about wrap fee programs, other than the disclosures that would be made by dual registrants? • We understand that client-facing firms—or advisers that provide advice to retail investors about investing in wrap fee programs—are not necessarily the same firms that sponsor wrap fee programs (we define a wrap fee program sponsor in Form ADV General Instructions as a firm that sponsors, organizes, or administers the program or selects, or provides advice to clients regarding the selection of, other investment advisers in the program). Should we require each client-facing firm to include the proposed wrap fee disclosures in its relationship summary, even if the firm is not the wrap fee program sponsor, as proposed? Please describe how this information is currently provided to wrap fee program clients. • Should we require only sponsors of wrap fee programs (and not all clientfacing firms) to include the proposed wrap fee disclosures in the relationship summary, similar to the Form ADV wrap fee brochure delivery requirement, which requires only investment advisers that sponsor wrap fee programs to deliver to their wrap fee clients the Form ADV wrap fee brochure? If so, should we permit only one sponsor of a wrap fee program that has multiple sponsors to include the proposed wrap fee disclosures in the relationship summary, similar to the delivery requirements for the Form ADV wrap fee brochure? • In addition to wrap fee programs, are there other types of retail investor programs and services for which it would be useful to require investment advisers and broker-dealers to disclose additional information about the nature and scope of services, fees and conflicts of interest? If so, which programs and services, and why should we require such disclosure? VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 • Are there any common misconceptions about broker-dealers’ and investment advisers’ compensation that the relationship summary should specifically seek to clarify or correct (e.g., that the firm or financial professional will only be compensated if the retail investor makes money on the investment)? 5. Comparisons We are proposing to require standalone investment advisers and standalone broker-dealers to prepare this section under the following headings: ‘‘Compare with Typical Brokerage Accounts’’ (for standalone investment advisers) or ‘‘Compare with Typical Advisory Accounts’’ (for standalone broker-dealers).197 Specifically, standalone broker-dealers would include the following information about a generalized retail investment adviser: (i) The principal type of fee for investment advisory services; (ii) services investment advisers generally provide, (iii) advisers’ standard of conduct; and (iv) certain incentives advisers have based on the investment adviser’s asset-based fee structure.198 For investment advisers, this section would include parallel categories of information regarding broker-dealers.199 We are proposing to require these disclosures to help retail investors choose among different account types and services. Having a clear explanation of differences in the fees, scope of services, standard of conduct, and 197 Proposed Items 5.A. and 5.B. of Form CRS. As discussed above, for purposes of the relationship summary, we propose to define a standalone investment adviser as a registered investment adviser that offers services to retail investors and (i) is not dually registered as a broker-dealer or (ii) is dually registered as a broker-dealer but does not offer services to retail investors as a broker-dealer. We propose to define a standalone broker-dealer as a registered broker-dealer that offers services to retail investors and (i) is not dually registered as an investment adviser or (ii) is dually registered as an investment adviser but does not offer services to retail investors as an investment adviser. Proposed General Instruction 9.(f) to Form CRS. See supra note 51. A dually registered firm that offers retail investors only advisory or brokerage services (but not both) may in the future decide to offer retail investors both services. We would expect a firm to update its relationship summary within 30 days whenever any information in the relationship summary becomes materially inaccurate. See proposed General Instruction 6.(a). to Form CRS and infra note 350 and accompanying text. In addition, the firm would communicate the information in its amended relationship summary to retail investors who are existing clients or customers of the firm within 30 days after the updates are required to be made and without charge. See proposed General Instruction 6.(b) to Form CRS and infra note 354 and accompanying text. 198 Proposed Item 5.B. of Form CRS. 199 Proposed Item 5.A. of Form CRS. PO 00000 Frm 00025 Fmt 4701 Sfmt 4702 21439 incentives that are generally relevant to advisory and brokerage accounts would help retail investors that are considering one such type of relationship to compare whether their needs might be better met with the other type of relationship. In addition, we are proposing to prescribe wording in this section because it is intended to provide a general comparison of what we believe is a typical brokerage or investment adviser account that is offered to retail investors. Moreover, we believe prescribing language will promote uniformity and allow retail investors to receive the same information to use in comparing choices from different standalone firms. Standalone investment advisers would be required to include the following prescribed language (emphasis required): ‘‘You could also open a brokerage account with a brokerdealer, where you will pay a transaction-based fee, generally referred to as a commission, when the brokerdealer buys or sells an investment for you.’’ 200 They would be required to include prescribed statements in bullet point format (except as otherwise specified) under the lead-in ‘‘Features of a typical brokerage account include:’’ 201 First, there would be a general description of brokerage accounts: ‘‘With a broker-dealer, you may select investments or the broker-dealer may recommend investments for your account, but the ultimate decision as to your investment strategy and the purchase and sale of investments will be yours.’’ 202 This statement would highlight for the retail investor two aspects of a typical broker-dealer’s services that differ from that of an investment adviser—specifically, that an investor may select investments without advice or he or she may receive recommendations from the brokerdealer, and that the investor will make the ultimate investment decision. Standalone investment advisers would then include the following information about the standard of conduct applicable to broker-dealers: ‘‘A broker-dealer must act in your best interest and not place its interests ahead of yours when the broker-dealer recommends an investment or an investment strategy involving securities. When a broker-dealer provides any service to you, the broker-dealer must treat you fairly and comply with a number of specific obligations. Unless you and the broker-dealer agree otherwise, the broker-dealer is not 200 Id. 201 Id. 202 Proposed E:\FR\FM\09MYP2.SGM Item 5.A.1. of Form CRS. 09MYP2 amozie on DSK3GDR082PROD with PROPOSALS1 21440 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules required to monitor your portfolio or investments on an ongoing basis.’’ 203 As discussed above in Section II.B.3, above, the applicable standard of conduct for financial professionals has been a source of confusion among retail investors. This statement would provide information to retail investors about the obligations of broker-dealers, including some differences from investment advisers’ obligations so that they can consider this factor when determining whether brokerage services might better suit their needs. Standalone investment advisers would then include the following statement discussing incentives created by a typical broker-dealer’s fee: ‘‘If you were to pay a transaction-based fee in a brokerage account, the more trades in your account, the more fees the brokerdealer charges you. So it has an incentive to encourage you to trade often.’’ 204 This disclosure is substantially similar to the disclosure we propose a broker-dealer would be required to include in the ‘‘Fees and Costs’’ section of its relationship summary.205 As discussed above, we believe this information would help retail investors understand how the fee structures for brokerage accounts could affect their investments, which they could compare with the incentives advisers have based on their fee structure.206 Finally, a tabular chart would compare certain specified characteristics of a transaction-based fee and an ongoing asset-based fee side-byside, set off by the wording ‘‘You can receive advice in either type of account, but you may prefer paying:’’ 207 One column would include the following (emphasis required): ‘‘a transactionbased fee from a cost perspective, if you do not trade often or if you plan to buy and hold investments for longer periods of time.’’ 208 The other column would include the following (emphasis required): ‘‘an asset-based fee if you want continuing advice or want someone to make investment decisions for you, even though it may cost more than a transaction-based fee.’’ 209 This disclosure is substantially similar to the disclosure we propose that each dual registrant would include in the ‘‘Fees and Costs’’ section of its relationship summary.210 For the reasons discussed 203 Proposed Item 5.A.2. of Form CRS. Item 5.A.3. of Form CRS. 205 See supra Section II.B.4. 206 Id. 207 Proposed Item 5.A.4. of Form CRS. 208 Id. 209 Id. 210 See supra Section II.B.4. 204 Proposed VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 above, we are proposing this requirement to encourage choice across account types and services.211 We are also proposing that advisers include this information in the specified side-by-side manner in order to promote comparisons between the relevant considerations for both types of relationships. Standalone broker-dealers would be required to include the following prescribed language (emphasis required), which would highlight for the retail investor the different fee structure of many investment advisers: ‘‘You could also open an advisory account with an investment adviser, where you will pay an ongoing asset-based fee that is based on the value of the cash and investments in your advisory account.’’ 212 Standalone broker-dealers would list prescribed statements describing certain differences from investment advisers in bullet point format (except as otherwise specified) under the lead-in ‘‘Features of a typical advisory account include:’’.213 First, there would be a general description of investment advisory accounts as follows: ‘‘Advisers provide advice on a regular basis. They discuss your investment goals, design with you a strategy to achieve your investment goals, and regularly monitor your account.’’ 214 The next bullet would highlight that investment advisers offer discretionary accounts and nondiscretionary accounts by including the following (emphasis included): ‘‘You can choose an account that allows the adviser to buy and sell investments in your account without asking you in advance (a ‘‘discretionary account’’) or the adviser may give you advice and you decide what investments to buy and sell (a ‘‘non-discretionary account’’).’’ 215 Together, these statements would highlight for the retail investor two aspects of a typical investment adviser’s services that differ from the typical services of a brokerdealer—specifically, ongoing advice and monitoring and discretionary accounts. Standalone broker-dealers would then include the following disclosure about an investment adviser’s standard of 211 Id. 212 Proposed Item 5.B. of Form CRS. We recognize that some investment advisers charge other types of fees for their advisory services, including fixed fees for one-time services such as financial planning. However, because asset-based fees are a common type of fee for advisory services, we think it would be useful for firms to describe asset-based fees in this section of the relationship summary for comparison with broker-dealers’ transaction-based fees. 213 Proposed Item 5.B. of Form CRS. 214 Proposed Item 5.B.1. of Form CRS. 215 Proposed Item 5.B.2. of Form CRS. PO 00000 Frm 00026 Fmt 4701 Sfmt 4702 conduct: ‘‘Advisers are held to a fiduciary standard that covers the entire relationship. For example, advisers are required to monitor your portfolio, investment strategy and investments on an ongoing basis.’’ 216 As discussed above, the applicable standard of conduct for financial professionals has been a source of confusion among retail investors. This statement would provide information to retail investors about the obligations of investment advisers so that they can consider this factor when determining whether investment advisory services might better suit their needs. Standalone broker-dealers would then include the following disclosure about a typical investment advisory asset-based fee, as follows: ‘‘If you were to pay an asset-based fee in an advisory account, you would pay the fee periodically, even if you do not buy or sell.’’ 217 They would also be required to include the following prescribed disclosure about hourly fees and one-time flat fees, which are common among investment advisers that offer financial planning services and other advisory services to retail investors: ‘‘You may also choose to work with an investment adviser who provides investment advice for an hourly fee, or provides a financial plan for a one-time fee.’’ 218 The next statement would note certain incentives created by an investment adviser’s ongoing assetbased fee. Broker-dealers would include the following: ‘‘For an adviser that charges an asset-based fee, the more assets you have in an advisory account, including cash, the more you will pay the adviser. So the adviser has an incentive to increase the assets in your account in order to increase its fees.’’ 219 This statement is substantially similar to the disclosure an investment adviser would be required to include in the ‘‘Fees and Costs’’ section of its relationship summary.220 For the reasons discussed above, we believe this information would help retail investors understand how the principal fee structures for typical advisory accounts could affect their investments and the incentives financial professionals may have based on charging ongoing assetbased fees for investment advisory services. This proposed disclosure would encourage retail investors to compare these incentives with certain incentives broker-dealers have based on their fee structure, which broker-dealers 216 Proposed 217 Proposed Item 5.B.3. of Form CRS. Item 5.B.4. of Form CRS. 218 Id. 219 Proposed 220 See E:\FR\FM\09MYP2.SGM Item 5.B.5. of Form CRS. supra Section II.B.4. 09MYP2 amozie on DSK3GDR082PROD with PROPOSALS1 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules would describe under ‘‘Fees and Costs.’’ 221 Finally, standalone broker-dealers would be required to include the same tabular chart that standalone investment advisers would include.222 As discussed above, requiring this information sideby-side would promote comparisons of typical advisory and brokerage relationships. We request comment generally on the proposed comparison disclosures to be provided by standalone investment advisers and broker-dealers, and in particular on the following issues: • Is it useful to require firms to include disclosures about services and fees they do not offer, so that investors know other choices are available and are better able to compare different types of firms? • Is it clear from the headings that the information provided in this section describes a typical investment adviser and broker-dealer, and does not describe the circumstances of all investment advisers and broker-dealers? Why or why not? Should we modify the headings or provide additional information at the beginning of this section? • Do the proposed requirements encourage disclosure that is simple, clear, and useful to retail investors? Would the proposed disclosure help investors to understand and compare the fees, services and standard of conduct associated with a firm’s advisory services and brokerage services? Are there any revisions to the descriptions of fees, services, standard of conduct, and incentives that would make the proposed disclosure more useful to investors? • Is the proposed order of the information appropriate, or should it be modified? If so, how should it be modified? • Is the proposed disclosure about how often a typical advisory firm monitors retail investors’ accounts useful to retail investors, given that different firms may view ‘‘ongoing monitoring’’ differently? • Is the proposed format useful for retail investors to understand and compare fees, services, standard of conduct and incentives among brokerdealers and investment advisers? Should we permit or require further use of tables, charts, graphs or other graphics or text features? • Should we require firms to include the prescribed wording, as proposed, or should we allow more flexibility in the words they use? Does the proposed prescribed wording capture the range of typical business models and fee structures that investment advisers and broker-dealers offer? Would the prescribed wording require a firm to provide any inaccurate information given that particular firm’s circumstances? If so, how should it be modified? Instead of the proposed prescriptive wording, should the Commission permit or require a more open-ended narrative? • How would the required explanations and various disclosures contribute to readability and length of the proposed relationship summary? Should each of these explanations be required, permitted, or prohibited? Should any of these explanations be required to appear in the relationship summary, but outside the comparisons section? • Are there other considerations related to investment advisers and broker-dealers that we should require or permit firms to highlight for retail investors? For example, should we require advisers to state that brokerdealers sometimes offer both full-service and discount brokerage accounts, and the differences between them, including fees? Are there any disclosures that we should omit? • Is the proposed prescriptive wording describing the standard of conduct required for investment advisers and broker-dealers clear and useful to retail investors? Would the proposed disclosure help investors to understand the standard of conduct associated with a firm’s advisory services and brokerage services? Should such disclosure be modified? If so, how should it be modified? • Should we amend the proposed wording that describes the standard of conduct for broker-dealers to incorporate or refer to any fiduciary obligations that certain broker-dealers have under state law or other laws or regulations? • Our proposal would require a standalone investment adviser to include prescribed disclosure about a broker-dealer’s incentives based on a typical broker-dealer’s principal fee structure, and vice versa. Should these disclosures be substantially similar to the disclosures we propose certain dual registrants to include, as proposed? 223 Or should we modify these disclosures for firms that do not offer retail investors both brokerage and advisory services? If so, how should these disclosures be modified? • Our proposal would require a standalone investment adviser and a 221 Id. 222 Proposed VerDate Sep<11>2014 Item 5.B.6. of Form CRS. 19:30 May 08, 2018 Jkt 244001 223 See PO 00000 supra Section II.B.4. Frm 00027 Fmt 4701 Sfmt 4702 21441 standalone broker-dealer to include prescribed disclosure that a retail investor may prefer one type of fee over another in certain circumstances. Should these disclosures be substantially similar to the disclosures we propose certain dual registrants to include, as proposed? Or should we modify these disclosures for firms that do not offer retail investors both brokerage and advisory services? If so, how should these disclosures be modified? 6. Conflicts of Interest We are proposing to require that investment advisers and broker-dealers summarize their conflicts of interest related to certain financial incentives. Specifically, firms would be required to disclose conflicts relating to: (i) Financial incentives to offer to, or recommend that the retail investor invest in, certain investments because (a) they are issued, sponsored or managed by the firm or its affiliates, (b) third parties compensate the firm when it recommends or sells the investments, or (c) both; (ii) financial incentives to offer to, or recommend that the retail investor invest in, certain investments because the manager or sponsor of those investments or another third party (such as an intermediary) shares revenue it earns on those products with the firm; and (iii) the firm buying investments from and selling investments to a retail investor for the firm’s own account (i.e., principal trading).224 Investment advisers, broker-dealers, and their financial professionals have incentives to put their interests ahead of the interests of their retail investor clients and customers. The federal securities laws do not preclude brokerdealers or investment advisers from having conflicts of interest that might adversely affect the objectivity of the advice they provide; however, firms and financial professionals have obligations regarding their conflicts. Investment advisers are required to eliminate, or, at a minimum, fully and fairly disclose conflicts of interest clearly enough for a client to make an informed decision to consent to such conflicts and practices, 224 Proposed Item 6 of Form CRS. Studies have shown, for example, that for broker-dealers, the most frequently identified disclosures concerned issues of compensation—e.g., how clients compensate the firm, how other firms compensate it, and how employees are compensated. See, e.g., Rand Study, supra note 5, at xviii. We sometimes refer interchangeably to payments, compensation and benefits that firms and financial professionals receive. These terms are all meant to capture the various ways through which firms and financial professionals have financial incentives to favor a product, service, account type, investor, or provider over another. E:\FR\FM\09MYP2.SGM 09MYP2 21442 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules amozie on DSK3GDR082PROD with PROPOSALS1 or reject them.225 For broker-dealers, the federal securities laws and rules and self-regulatory organization rules address broker-dealer conflicts in one (or more) of the following ways: Express prohibitions,226 mitigation,227 or disclosure.228 Under Regulation Best Interest, broker-dealers would be required to 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 recommendation,229 as well as to disclose, in writing, all material conflicts of interest that are associated with the recommendation.230 Conflicts of interest with retail investors often arise when firms and/or their financial professionals recommend or sell proprietary products or products offered by third parties, recommend products that have revenue sharing 225 See SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 194 (1963) (An adviser must deal fairly with clients and prospective clients, seek to avoid conflicts with its clients and, at a minimum, make full disclosure of any material conflict or potential conflict.); see also Instruction 3 of General Instructions to Part 2 of Form ADV. See Fiduciary Duty Interpretive Release, supra note 123. 226 For example, FINRA rules establish restrictions on the use of non-cash compensation in connection with the sale and distribution of mutual funds, variable annuities, direct participation program securities, public offerings of debt and equity securities, and real estate investment trust programs. These rules generally limit the manner in which members can pay for or accept non-cash compensation and detail the types of non-cash compensation that are permissible. See FINRA Rules 2310, 2320, 2341, and 5110. 227 See, e.g., FINRA Rule 3110(c)(3) (firm must have procedures to prevent the effectiveness of an internal inspection from being compromised due to conflicts of interest); FINRA Rule 3110(b)(6)(C) (supervisory personnel generally cannot supervise their own activities); FINRA Rule 3110(b)(6)(D) (firm must have procedures reasonably designed to prevent the required supervisory system from being compromised due to conflicts of interest). 228 For example, when engaging in transactions directly with customers on a principal basis, a broker-dealer violates Exchange Act rule 10b–5 when it knowingly or recklessly sells a security to a customer at a price not reasonably related to the prevailing market price and charges excessive markups, without disclosing the fact to the customer. See, e.g., Grandon v. Merrill Lynch & Co., 147 F.3d 184, 189–90 (2d. Cir. 1998). See also Exchange Act rule 10b–10 (requiring a broker-dealer effecting transactions in securities to provide written notice to the customer of certain information specific to the transaction at or before completion of the transaction, including the capacity in which the broker-dealer is acting (i.e., agent or principal) and any third party remuneration it has received or will receive. 229 Broker-dealers would also be required to establish, maintain, and enforce written policies and procedures reasonably designed to identify and at a minimum disclose, or eliminate, all material conflicts of interest that are associated with such recommendation. See Regulation Best Interest Proposal, supra note 24, section II.D.3. 230 See Regulation Best Interest Proposal, supra note 24, section II.D.1. VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 arrangements, and engage in principal trading.231 For example, a firm could have a financial incentive to recommend proprietary products because the firm (or its affiliate) would receive additional revenue or an affiliate could pay a firm for recommending affiliate products. A broker-dealer making a platform available for selfdirected transactions may select investments available for purchase on the platform based on financial incentives the broker-dealer receives. Similarly, a financial professional could be paid for recommending affiliated products or could get a bonus or greater promotion potential for recommending certain investments.232 These conflicts create an incentive for firms and their financial professionals to make available for sale or base investment recommendations on the compensation or profit that firms will receive, rather than on the client’s best interests.233 The Commission’s enforcement actions underscore how these types of compensation arrangements and 231 See, e.g., Rand Study, supra note 5, at 13 (‘‘Examples of such conflicts include various practices in which an adviser may have pecuniary interest (through, e.g., fees or profits generated in another commercial relationship, finder’s fees, outside commissions or bonuses) in recommending a transaction to a client.’’) and 15 (noting that the formation of the Committee on Compensation Practices was, in part, motivated by concerns that commission-based compensation may encourage registered representatives to churn accounts or make unsuitable recommendations). 232 Jason Zweig & Anne Tergesen, Advisers at Leading Discount Brokers Win Bonuses to Push Higher-Priced Products, Wall Street Journal (Jan. 10, 2018), available at https://www.wsj.com/articles/ advisers-at-leading-discount-brokers-win-bonusesto-push-higher-priced-products-1515604130. 233 See, e.g., Brochure Adopting Release, supra note 157, at n.62 and accompanying text and n.132; Report of the Committee on Compensation Practices (Apr. 10, 1995), at 3, available at https:// www.sec.gov/news/studies/bkrcomp.txt (‘‘The prevailing commission-based compensation system inevitably leads to conflicts of interest among the parties involved.’’). See also FINRA Report on Conflicts of Interest (Oct. 2013), available at https:// www.finra.org/sites/default/files/Industry/ p359971.pdf (discussing conflicts of interest in the broker-dealer industry and highlighting effective conflicts management practices); SEC v. Capital Gains Research Bureau Inc., 375 U.S. at 191, 196– 97 (‘‘The Investment Advisers Act of 1940 thus reflects a congressional recognition of the delicate fiduciary nature of an investment advisory relationship. . . . An investor seeking the advice of a registered investment adviser must, if the legislative purpose is to be served, be permitted to evaluate such overlapping motivations, through appropriate disclosure, in deciding whether the adviser is serving two masters or only one, especially if one happens to be economic selfinterest.’’); In the Matter of Feeley & Willcox Asset Management Corp., Investment Advisers Act Release No. 2143 (Jul. 10, 2003) (Commission opinion) (‘‘It is the client, not the adviser, who is entitled to make the determination whether to waive the adviser’s conflict. Of course, if the adviser does not disclose the conflict, the client has no opportunity to evaluate, much less waive, the conflict.’’). PO 00000 Frm 00028 Fmt 4701 Sfmt 4702 activities may produce conflicts of interest that can lead firms and their financial professionals to act in their own interests, rather than the interests of their retail investors.234 We are not proposing to require or permit the relationship summary disclosure to include specific information about all of the conflicts of interests that are or could be present in a firm’s relationship with retail investors. For example, conflicts that can be applicable to investment advisers include using certain affiliated service providers,235 charging performancebased fees to some accounts but not others,236 personal trading by an adviser’s personnel,237 receipt of soft dollar products and services provided by brokers in connection with client transactions,238 and voting client securities.239 Likewise, a broker-dealer 234 See infra notes 243, 255, 256, 260 and 267, citing examples of where we have brought enforcement actions regarding conflicts of interest arising from one or more of the following categories of compensation practices and activities: the compensation of the firm’s financial professionals; payments from others; incentives for selling the firm’s own products, and principal trading. 235 Item 10.C. of Form ADV Part 2A. Item 10 requires an investment adviser to describe in its brochure material relationships or arrangements the adviser (or any of its management persons) has with related financial industry participants, any material conflicts of interest that these relationships or arrangements create, and how the adviser addresses the conflicts. The disclosure that Item 10 requires highlights for clients their adviser’s other financial industry activities and affiliations that can create conflicts of interest and may impair the objectivity of the adviser’s investment advice. See Brochure Adopting Release, supra note 157, at 29. 236 Item 6 of Form ADV Part 2A. An adviser faces a variety of conflicts of interest that it is required to address in its Form ADV brochure, including that the adviser can potentially receive greater fees from its accounts having a performance-based compensation structure than from those accounts it charges a fee unrelated to performance (e.g., an asset-based fee). See Brochure Adopting Release, supra note 157, at n.64 and accompanying text; 2008 Brochure Proposing Release, supra note 157, at n.51 and accompanying text. 237 Items 11.C. and 11.D. of Form ADV Part 2A. For example, because of the information they have, advisers and broker-dealers and their personnel are in a position to abuse clients’ positions by, for example, placing their own trades before or after client trades are executed in order to benefit from any price movements due to the clients’ trades. An investment adviser is required to address this conflict in its Form ADV brochure. See Brochure Adopting Release, supra note 157, at n.83 and accompanying text. 238 Item 12 of Form ADV Part 2A. Use of client commissions to pay for research and brokerage services presents money managers with significant conflicts of interest, and may give incentives for managers to disregard their best execution obligations when directing orders to obtain client commission services as well as to trade client securities inappropriately in order to earn credits for client commission services. See Brochure Adopting Release, supra note 157, at n.128 (citing Release 54165, supra note 187). 239 Item 17 of Form ADV Part 2A. Each adviser must describe how the adviser addresses conflicts E:\FR\FM\09MYP2.SGM 09MYP2 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules amozie on DSK3GDR082PROD with PROPOSALS1 may have several conflicts of interest with its retail investors that we are not proposing to include in the relationship summary. These include, for example, a broker-dealer’s incentive to favor its institutional customers over its retail customers when making available proprietary research or certain investment opportunities, such as widely anticipated initial public offerings, acting as a market maker for a recommended security, using certain service providers, or voting client securities.240 In addition, broker-dealers are subject to Exchange Act rules that require them to disclose in writing to the customer if they have any control, affiliation, or interest in a security they are offering or the issuer of such security.241 It is important for firms to disclose information about each of these conflicts to retail investors; however, we believe that requiring an exhaustive discussion of all conflicts in the relationship summary would make the relationship summary too long for its intended purpose—that is, focusing on key aspects of a firm and its services, as well as helping retail investors to make an informed choice between receiving the services of a broker-dealer or an investment adviser or among different broker-dealers or investment advisers. Since investment advisers already report conflicts of interest in Form ADV Part 2, a more exhaustive discussion of conflicts by investment advisers would be duplicative of certain disclosures provided in Form ADV Part 2, which is provided to clients of investment advisers, including retail investors.242 of interest when it votes securities pursuant to its proxy voting authority, as applicable. See Brochure Adopting Release, supra note 157, at n.172 and accompanying text. 240 See 913 Study, supra note 3, at nn.251 and 254 and accompanying text (discussing that courts have found that broker-dealers should have disclosed these conflicts). 241 See Exchange Act rules 15c1–1, 15c1–5, and 15c1–6. Similarly, rule 15c1–6 requires written disclosure of the broker-dealer’s interest in a security it is offering at or before the completion of the transaction. Self-regulatory organizations require similar disclosures. See, e.g., FINRA Rules 2262 and 2269; and MSRB Rule G–22. 242 For investment advisers, the Form ADV Part 2 brochure and the brochure supplement address many of the conflicts an adviser may have. Items in Part 2 of Form ADV may not address all conflicts an adviser may have, and may not identify all material disclosure that an adviser may be required to provide clients. As a result, delivering a brochure prepared under Form ADV’s requirements may not fully satisfy an adviser’s disclosure obligations under the Advisers Act. See Brochure Adopting Release, supra note 157, at n.7. Broker-dealers also must make a variety of disclosures, but the extent, form and timing of the disclosures are different. See 913 Study, supra note 3, at 55—58. In accordance with the Instructions to Form CRS, if a relationship summary is posted on a firm’s website or otherwise VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 While we are not proposing to require such detailed disclosures for brokerdealers in the relationship summary, Regulation Best Interest would require broker-dealers to disclose, in writing, all material conflicts of interest that are associated with a recommendation to a retail customer.243 We are proposing to require specific information about conflicts of interest related to financial incentives for recommending or selling proprietary products or products offered by third parties, and from revenue sharing arrangements. Such incentives could include, for example, the firm earning more money or the financial professional receiving compensation or other benefits, including an increase in compensation such as a bonus, when a retail investor invests in the product. Disclosure of these conflicts would highlight for retail investors that firms and financial professionals have financial incentives to place their own interests first when making investment recommendations. Including these disclosures prominently, in one place, at or before the start of a retail investor’s relationship with a firm or financial professional would facilitate retail investors’ understanding of the incentives that may be present throughout the course of the relationship. Retail investors also have indicated they find information about the sources and amount of compensation from third parties useful and relevant to making informed financial decisions before engaging a firm.244 In addition, a number of provided electronically, the firm must use hyperlinks for any document that is crossreferenced in the relationship summary if the document is available online. See proposed General Instruction 1.(g) to Form CRS. 243 See supra notes 229– 230 and accompanying text. 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-interest. See, e.g., De Kwiatkowski v. Bear, Stearns & Co., 306 F.3d 1293, 1302 (2d Cir. 2002); Chasins v. Smith, Barney & Co., 438 F.2d 1167, 1172 (2d Cir. 1970); In the Matter of Richmark Capital Corp., Exchange Act Release No. 48758 (Nov. 7, 2003) (Commission opinion) (‘‘Release 48758’’) (‘‘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). 244 See 917 Financial Literacy Study, supra note 20, at xxi. (‘‘The most useful and relevant information that the online survey respondents indicated that they favored to make informed financial decisions before engaging a financial intermediary includes information about . . . [s]ources and amount of compensation that a financial intermediary may receive from third PO 00000 Frm 00029 Fmt 4701 Sfmt 4702 21443 commenters responding to Chairman Clayton’s Request for Comment suggested disclosure that would focus on incentives associated with the products and services offered and how associated persons are compensated.245 We are also proposing to require disclosures about conflicts relating to principal transactions. Commenters recognized the importance of principal trading, with appropriate safeguards, including disclosure.246 As we explain further below, we believe that investors should be aware of and understand this conflict at or before the start of the relationship. Specifically, we are proposing that firms use the heading ‘‘Conflicts of Interest’’ under which a broker-dealer, investment adviser or dual registrant would describe three categories of conflicts, as applicable to the firm.247 To emphasize the importance of conflicts, broker-dealers would be required to state the following language after the heading: ‘‘We benefit from our recommendations to you.’’ 248 Similarly, investment advisers would be required to state: ‘‘We benefit from the advisory services we provide you.’’ 249 Dual registrants would be required to state: ‘‘We benefit from the services we provide you.’’ 250 If all or a portion of a conflict is not applicable to the firm’s business, the firm should omit that conflict or portion thereof.251 If a conflict only applies to a dual registrant’s brokerage accounts or investment advisory accounts, the firm would include that conflict in the applicable column.252 First, we propose that a firm be required to state, as applicable, that it has a financial incentive to offer or parties in connection with and [sic] investment transaction . . .’’). 245 See, e.g., SIFMA 2017 Letter; UBS 2017 Letter; ICI 2017 Letter; State Farm 2017 Letter; IAA 2017 Letter; Bernardi Securities 2017 Letter; Fidelity 2017 Letter. 246 See, e.g., SIFMA 2017 Letter (recommending that a best interest standard of conduct for brokerdealers would not prohibit principal trading, provided that such transactions be accompanied by written disclosure and corresponding client consent); Wells Fargo 2017 Letter. See also ICI 2017 Letter (recommending that a broker-dealer would be able to engage in principal trading, subject to appropriate limitations, disclosure, and customer consent); Bernardi Securities 2017 Letter (recommending that any revised standard of conduct for broker-dealers permit principal transactions, and suggesting that firms could implement disclosures and policies and procedures to protect investors from the related potential conflicts). 247 Proposed Items 6.A. and 6.B. of Form CRS. 248 Proposed Item 6.A. of Form CRS.. 249 Id. 250 Id. 251 Proposed Item 6.B. of Form CRS. 252 Id. E:\FR\FM\09MYP2.SGM 09MYP2 21444 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules amozie on DSK3GDR082PROD with PROPOSALS1 recommend to the retail investor certain investments because: (a) They are issued, sponsored or managed by the firm or the firm’s affiliates, (b) third parties compensate the firm when it recommends or sells the investments, or (c) both.253 The firm also would provide examples of such types of investments, and state if its financial professionals receive additional compensation if the retail investor buys these investments.254 This conflict disclosure would highlight that a variety of financial incentives affects the incentives of the firm or its financial professional to offer or recommend certain investments to the retail investor.255 These financial incentives can range from cash and noncash compensation that a firm or financial professional receives for selling those investments as well as less direct financial incentives. In particular, investors might not be aware that the firm or its affiliate offers proprietary products that provide a financial incentive to the firm to recommend those products, that a third party provides incentives for a firm to recommend investments, or that the firm’s financial professional will receive additional compensation if the retail investor buys certain investments. We believe that requiring this disclosure is consistent with indications that retail investors find information about sources and amount of compensation that firms receive from third parties useful to make informed financial decisions.256 253 Proposed Item 6.B.1. of Form CRS. We are not prescribing the specific language that firms must use to discuss each of these conflicts, which would give firms some flexibility to structure their disclosure, particularly if they offer proprietary products and receive compensation from third parties. 254 Proposed Items 6.B.1. of Form CRS. 255 The Commission has brought enforcement actions against firms that the Commission alleged to have failed to disclose fees, such as referral fees, that financial professionals receive as a result of recommending certain investments to retail investors. See, e.g., In the Matter of Financial Design Associates, Inc. and Albert Coles Jr., Investment Advisers Act Release No. 2654 (Sept. 25, 2007) (settled action) (respondents failed to disclose to investment advisory clients payments received from a company in which clients were advised to invest); In the Matter of Energy Equities, Inc. and David G. Snow, Investment Advisers Act Release No. 1811 (Aug. 2, 1999) (settled action) (respondents received finder’s fees or other compensation from issuers, the securities of which were recommended to clients or prospective clients); Vernazza v. SEC, 327 F.3d 851 (9th Cir. 2003). 256 See 917 Financial Literacy Study, supra note 20, at xxi. The Commission’s enforcement actions also have underscored how these types of compensation and benefits from third parties for recommending certain investments may produce conflicts of interest that lead firms and their financial professionals to favor those investments over others. See, e.g., In the Matter of the Robare VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 Additionally, we believe that it is important for firms to separately and explicitly disclose if the financial professionals benefit from these payments because these individuals are making the recommendations to the retail investors and their compensation is an incentive that could affect their advice. We are also proposing to require examples of the types of investments associated with each of these conflicts (e.g., mutual funds and variable annuities) because we believe it would be helpful for investors to be aware of the types of products for which firms and financial professionals have these incentives.257 We considered whether to require a complete list of investments; however, we believe that a long list of the names of each of the affected products would not necessarily benefit investors or be helpful to them in their review of the firm’s conflicts and could detract from the other information in the relationship summary. Next, we propose that firms disclose revenue sharing arrangements by stating that the firm has an incentive to offer or recommend the retail investor to invest in certain investments because the manager or sponsor of those investments or another third party (such as an intermediary) shares with the firm revenue it earns on those investments.258 The firm also would provide examples of such types of investments.259 This disclosure would highlight another type of compensation firms receive that affects their incentives to offer or recommend certain investments to the retail investor, and like the disclosures regarding proprietary products and third party payments, would provide retail investors with information about sources of compensation the firm receives from third parties.260 This Group, LTD., Investment Advisers Act Release No. 3907 (Sep. 2, 2014) (Commission opinion) (investment adviser failed to disclose compensation it received through agreements with a registered broker-dealer and conflicts arising from that compensation). 257 See proposed Items 6.B.1. of Form CRS. 258 Proposed Item 6.B.2. of Form CRS. 259 Id. 260 The Commission has pursued enforcement actions against firms that the Commission alleged to have failed to disclose revenue sharing arrangements. See, e.g., In re Edward D. Jones & Co, Securities Act Release No. 8520 (Dec. 22, 2004) (broker-dealer violated antifraud provisions of Securities Act and Exchange Act by failing to disclose conflicts of interest arising from receipt of revenue sharing, directed brokerage payments and other payments from ‘‘preferred’’ fund families that were exclusively promoted by broker-dealer); In re Morgan Stanley DW Inc., Securities Act Release No. 8339 (Nov. 17, 2003) (‘‘Release 8339’’) (brokerdealer violated antifraud provisions of Securities Act by failing to disclose special promotion of PO 00000 Frm 00030 Fmt 4701 Sfmt 4702 requirement is intended to capture arrangements pursuant to which a firm receives payments or other benefits from third parties for recommending certain investments, including, for example, conflicts related to payment for distribution support or ongoing services from distributors or advisers of mutual funds, annuity products or other products. We are proposing that firms would be required to describe these and other conflicts of interest even if the compensation the firm receives is not shared with the firm’s financial professionals, as the compensation can create incentives for the firm to promote certain investments over others. These types of distribution-related arrangements may give broker-dealers heightened incentives to market the shares of particular mutual funds, or particular classes of fund shares. Those incentives may be reflected in a brokerdealer’s use of ‘‘preferred lists’’ that explicitly favor the distribution of certain funds, or they may be reflected in other ways, including incentives or instructions that the broker-dealer provides to its managers or its salespersons.261 Finally, we propose that firms address principal trading by stating that the firm can buy investments from a retail investor, and sell investments to a retail investor, from its account (called ‘‘acting as principal’’).262 Firms must state that they can earn a profit on those trades, and disclose that the firm has an incentive to encourage the retail investor to trade with it.263 If this activity is part of the firm’s investment advisory business, it must state that the retail investor’s specific approval is required on each transaction.264 While access to securities that are traded on a principal basis, such as certain types of municipal bonds, is important to many investors, principal trades by broker-dealers and investment advisers raise potential conflicts of funds from fund families that paid revenue sharing and portfolio brokerage); In the Matter of KMS Financial Services, Inc., Investment Advisers Act Release No. 4730 (Jul. 19, 2017) (dually-registered investment adviser and broker-dealer that failed, in its capacity as an investment adviser, to disclose to its advisory clients compensation it received from a third party broker-dealer for certain investments it selected for its advisory clients); In the Matter of Voya Financial Advisors, Inc., Investment Advisers Act Release No. 4661 (Mar. 8, 2017) (registered investment adviser failed to disclose to its clients compensation it received through an arrangement with a third party broker-dealer and conflicts arising from that compensation). 261 See, e.g., Release 8339, supra note 260. 262 Proposed Item 6.B.3. of Form CRS. 263 Id. 264 Section 206(3) of the Advisers Act. Proposed Item 6.B.3. of Form CRS. E:\FR\FM\09MYP2.SGM 09MYP2 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules interest.265 Principal trading raises concerns because of the risks of price manipulation or the placing of unwanted securities into client accounts (i.e., ‘‘dumping’’).266 Under the Advisers Act, an adviser may not 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.267 Broker-dealers also are subject to a number of requirements when they engage in principal transactions with customers, including disclosure of such capacity on the trade confirmation.268 There is no specific requirement for broker-dealers, however, to provide written disclosure prior to the trade or obtain consent for each principal transaction.269 Our proposal to require firms to disclose, if applicable, that they engage in principal transactions, and to summarize the conflict of interest raised by principal transactions, would not replace the disclosure and consent requirements under the Advisers Act or any other requirement, such as under the Exchange Act. Rather, our disclosure requirement would supplement such disclosures by alerting retail investors to this practice and the related conflicts of interest at the start of the relationship. We request comment generally on the conflicts of interest disclosures proposed to be included in the relationship summary, and in particular on the following issues: • Do the proposed conflicts of interest disclosures encourage firms to provide information that is simple, clear, and useful to retail investors? Would the proposed disclosures help retail 265 See 913 Study, supra note 3, at 120. id., at 118. 267 Section 206(3) of the Advisers Act. See also Opinion of Director of Trading and Exchange Division interpreting the reference to ‘‘the transaction’’ to require separate disclosure and consent for each transaction. Investment Advisers Act Release No. 40 (Feb. 5, 1945) (‘‘[T]he requirements of written disclosure and of consent contained in this clause must be satisfied before the completion of each separate transaction. A blanket disclosure and consent in a general agreement between investment adviser and client would not suffice.’’); 913 Study, supra note 3, at n.534 and accompanying text. An investment adviser must provide written disclosure to a client and obtain the client’s consent at or prior to the completion of each transaction. 913 Study, supra note 3, at n.535 and accompanying text. See also, e.g., Release 3929, supra note 133; In the Matter of JSK Associates, et al., Investment Advisers Act Release No. 3175 (Mar. 14, 2011) (settled action). 268 As an example of one such requirement, broker-dealers must disclose their capacity in the transactions (typically on the confirmation statement). See Exchange Act rule 10b–10. 269 See 913 Study, supra note 3, at n.540 and accompanying text. amozie on DSK3GDR082PROD with PROPOSALS1 266 See VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 investors to compare the conflicts of interest associated with advisory services and brokerage services and the conflicts among firms? Does the relationship summary help retail investors understand that compensation to firms and financial professionals creates incentives that could impact the advice or recommendations that they provide? If not, should it do so and if so, what modifications should be made to the summary to address this concern? • Should we require brief statements about particular conflicts of interest, as proposed, or should we require a more open-ended narrative or more prescribed wording? Would an openended narrative permit firms to tailor the disclosure and describe all of the conflicts they believe retail investors should know? Or would firms seek to provide so much information about their conflicts that the proposed page limit (or equivalent limit in electronic format) would not provide enough space for all of the disclosures? How would the required explanations of various items contribute to the readability and length of the relationship summary? • Our intent in using layered disclosure for conflicts (i.e., short summaries of certain types of conflicts of interest with information later in the relationship summary on where retail investors can find more information) is to highlight these conflicts and encourage retail investors to ask questions and seek more information about the firm’s and its financial professionals’ conflicts of interest. Do our proposed requirements achieve this goal? In light of our objective of keeping the relationship summary short, should we instead prescribe general language concerning the importance of understanding conflicts, while simply requiring cross-references to the relevant sections of Form ADV Part 2 brochure or brochure supplement (for investment advisers) and relevant disclosures typically included in account opening documents or websites (for broker-dealers)? Should we provide wording to encourage retail investors to ask questions about conflicts, including advising customers to go through all of the firm’s and financial professional’s conflicts with the financial professional? Are there other modifications or alternatives we should consider? • Should we instead require firms to make the conflicts of interest disclosure more detailed, even if it results in a lengthier relationship summary? • Are the proposed conflicts of interest disclosures too limited? Are there other types of conflicts we should include, such as additional disclosure PO 00000 Frm 00031 Fmt 4701 Sfmt 4702 21445 currently required in the Form ADV Part 2 brochure or brochure supplement (for investment advisers), or disclosure typically included in account opening documents or websites (for brokerdealers)? Should we, for example, require firms to describe all of their conflicts and how they address them, such as specific information about incentives to favor certain clients over others, agency cross-trades, relationships with certain clients, personal trading by personnel, soft dollar practices, directed brokerage, proxy voting practices, or acting as a market maker for a recommended security? Or should we require firms to list all of their conflicts and provide cross references to where additional information about each conflict can be found (i.e., cross referencing the relevant sections of Form ADV Part 2 and analogous broker-dealer disclosures)? Would this detract from the brevity of the disclosure? Is there another way to provide additional information about conflicts to retail investors in a way that would be meaningful to them and would facilitate their ability to obtain additional information? • Are there certain types of investments that should be disclosed by firms as ones that the firm ‘‘issues, sponsors, or manages?’’ For example, should we require firms to disclose that any investment with a firm’s name in the title is generally an investment that the firm issues, sponsors, or manages? If a firm uses a name other than its own name to market proprietary investments, should we require firms disclose such other names? • Should we require firms to disclose whether they provide ancillary services to retail investors themselves or through their affiliates so that retail investors better understand that the firm has incentives to select its affiliates over third parties? • With respect to the required disclosure regarding financial incentives a firm has to offer or recommend investment in certain investments because they are offered by the firm’s affiliates, or third parties compensate the firm for selling their investments, or both, would firms understand what types of financial incentives would be covered by this item—and what would not be covered? Should the Commission provide additional guidance or instructions to clarify? • Should we require firms to disclose that they use third-party service providers that offer the firms or their financial professionals additional compensation? For example, some investment advisers select broker- E:\FR\FM\09MYP2.SGM 09MYP2 amozie on DSK3GDR082PROD with PROPOSALS1 21446 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules dealers to execute their clients’ transactions that provide the adviser or financial professionals with compensation or other benefits, including in the form of client referrals. Should we highlight that compensation can be in the form of advisory client referrals? • Firms would be required to provide examples of investments that firms have a financial incentive to offer. Are these requirements clear? Should we provide additional guidance? Should firms also be required to identify specific account types for which financial professionals receive incentives? Or should firms list all of their services or products that create the stated conflicts (or crossreference to such disclosure elsewhere)? Should additional information be provided in this section of the relationship summary or should it be provided in an attachment? • Should firms explicitly state that other firms offer similar products that could be less expensive for the retail investor? Should we require firms to disclose if the firm engages in principal trading, as proposed, including that the firm can earn a profit on these trades and may have an incentive to encourage the retail investor to trade with the firm? Should we require investment advisers to state the retail investor’s specific approval on each principal transaction is required? Are there additional disclosures that we should require for broker-dealers? • Should we require firms to disclose any additional conflicts of interest related to the compensation of financial professionals? For example, should firms be required to include any specific conflicts related to financial professionals’ outside business activities? Should we require firms to include additional disclosure on compensation that a financial professional receives from third parties, such as compensation that an investment adviser representative receives in his or her capacity as a registered representative of an unrelated broker-dealer? • Should we allow firms to choose the order they present the conflicts? For example, should firms be permitted to base the order on the conflicts they believe are most relevant in their business, or is a standardized order preferable to increase the comparability of the disclosures among different firms? If a firm does not engage in any practices that would be required to be disclosed, should we permit or require a firm to state that it does not have that conflict, or should we require firms to say nothing, as proposed? Would it be confusing to investors if, as proposed, VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 the order was prescribed but some firms omit certain conflicts because they do not have the particular conflict? Would such presentation lessen the ability to compare conflicts across firms? • Is the proposed format useful for retail investors in understanding and comparing conflicts of interest among firms? Would the use of tables, charts, graphs or other graphics or text features be helpful in explaining all or any particular conflict? If so, how could firms structure that disclosure? • Should any of the conflicts be required to appear in the relationship summary, but outside of the conflicts of interest section? 7. Additional Information We are proposing to require that firms include information on where retail investors can find more information about the firm’s disciplinary events, services, fees, and conflicts, which facilitates the layered disclosure that the relationship summary provides.270 This section would be titled ‘‘Additional Information’’ and firms would include the following after the title: ‘‘We encourage you to seek out additional information.’’ First, firms would be required to state whether or not they or their financial professionals currently disclose or are currently required to disclose certain legal or disciplinary events to the Commission, selfregulatory organizations, state securities regulators or other jurisdictions, as applicable. We are including information about a firm’s and its financial professionals’ disciplinary information because this information may assist retail investors in evaluating the integrity of a firm and its financial professionals.271 For example, a prior disciplinary event could reflect upon 270 See supra notes 37, 48–50 and 139–141 and accompanying text (regarding the use of layered disclosure and alternative approaches to presentation). 271 See Brochure Adopting Release, supra note 157, at n.81 and accompanying text. See also Electronic Filing by Investment Advisers; Proposed Amendments to Form ADV, Investment Advisers Act Release No. 1862 (Apr. 5, 2000) [65 FR 20524 (Apr. 17, 2000)], at nn.148–149 and accompanying text (‘‘2000 Brochure Proposing Release’’) (‘‘When assessing whether an adviser will fulfill its obligations to clients, an investor would likely give great weight to whether the adviser has met its fiduciary and other legal obligations in the past.’’); Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Approving a Proposed Rule Change to Amend FINRA Rule 8312 (FINRA BrokerCheck Disclosure) to Expand the Categories of Civil Judicial Disclosures Permanently Included in BrokerCheck, Release No. 34–71196 (Dec. 27, 2013) [79 FR 417 (Jan. 3, 2014)] (‘‘By making certain of this information publicly available, BrokerCheck, among other things, helps investors make informed choices about the individuals and firms with which they conduct business.’’). PO 00000 Frm 00032 Fmt 4701 Sfmt 4702 the firm’s integrity, affect the degree of trust and confidence a client would place in the firm, or impose limitations on the firm’s activities.272 Knowledge of a firm’s and financial professional’s disciplinary history is among the most important items for retail investors when deciding whether to receive financial services from a particular firm, according to one study.273 Approximately 67.5% of the online survey respondents considered information about an adviser’s disciplinary history to be absolutely essential, and about 20.0% deemed it important, but not essential.274 But despite its importance, many investors do not review this information prior to engaging a firm.275 A study also found that many retail investors would check the Investment Adviser Public Disclosure site (‘‘IAPD’’) for comparative information on investment advisers, including disciplinary history, if they were made aware of its existence.276 We believe that requiring firms to state the existence of 272 See Brochure Adopting Release, supra note 157, at n.85. 273 See 917 Financial Literacy Study, supra note 20, at nn.308 and 498 and accompanying text (‘‘When asked how important certain factors would be to them if they were to search for comparative information on investment advisers, the majority of online survey respondents identified the fees charged and the adviser’s disciplinary history as the most important factors.’’). 274 Id. 275 917 Financial Literacy Study, supra note 20, at n.770 (citing Applied Research Consulting LLC for FINRA Investor Education Foundation, Financial Capability in the United States: Initial Report of Research Findings from the 2009 National Survey (Dec. 1, 2009), available at https:// www.usfinancialcapability.org/downloads/NFCS_ 2009_Natl_Full_Report.pdf (‘‘2009 National Survey Initial Report’’), which revealed that only 15% of respondents claimed that they had checked a financial professional’s background or credentials with a state or federal regulator, although the Commission notes that the study encompasses a wide group of advisors, such as debt counselors and tax professionals.). In addition, the FINRA 2015 Investor Survey found that only 24% of investors were aware of Investor.gov; only 16% were aware of BrokerCheck; only 14% were aware of the IAPD website, and only 7% had used BrokerCheck. FINRA, Investors in the United States 2016 (Dec. 2016), available at https://www.usfinancial capability.org/downloads/NFCS_2015_Inv_Survey_ Full_Report.pdf). 276 See 917 Financial Literacy Study, supra note 20, at nn.317–319 and accompanying text ([A]bout 76.5% of the online survey respondents reported that, in selecting their current adviser, they did not use an SEC-sponsored website to find information about the adviser. 73% of respondents stated that they would check IAPD if they were made aware of its existence. Of that subset—those who reported not using an SEC-sponsored website— approximately 85.2% indicated that they did not know that such a website was available for that purpose. Of that majority (i.e., a further subset)— those who were unaware of such a website— approximately 73.5% reported that they would review information about their adviser on an SECsponsored website if they knew it were available). E:\FR\FM\09MYP2.SGM 09MYP2 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules amozie on DSK3GDR082PROD with PROPOSALS1 disciplinary events, provide specific questions for retail investors to ask, and provide information on where retail investors can find more information, would cause more retail investors to seek out this information and would make them better informed when they choose a firm and a financial professional.277 Specifically, in the relationship summary, firms would state ‘‘We have legal and disciplinary events’’ if they are required to disclose (i) disciplinary information per Item 11 of Part 1A or Item 9 of Part 2A of Form ADV,278 or (ii) legal or disciplinary events per Items 11A–K of Form BD (‘‘Uniform Application for Broker-Dealer Registration’’) 279 except to the extent such information is not released through BrokerCheck pursuant to FINRA Rule 8312 or in IAPD.280 Regarding their 277 In addition, this would address an issue that was highlighted by the Commission’s Investor Advisory Committee, which, among other things, encouraged the Commission to develop an enhanced approach to the disclosure of disciplinary events. Broker-Dealer Fiduciary Duty Recommendations, supra note 10 (recommending a summary disclosure document that includes, among other disclosures, basic information about a firm’s disciplinary record). 278 Proposed Item 7.B. of Form CRS. Generally, investment advisers are required to disclose on Form ADV Part 2A any legal or disciplinary event, including pending or resolved criminal, civil and regulatory actions, if it occurred in the previous 10 years, that is material to a client’s (or prospective client’s) evaluation of the integrity of the adviser or its management personnel, and include events of the firm and its personnel. See Brochure Adopting Release, supra note 157, at 22–27. Items 9.A., 9.B., and 9.C. provide a list of disciplinary events that are presumptively material if they occurred in the previous 10 years. However, Item 9 requires that disciplinary events more than 10 years old be disclosed if the event is so serious that it remains material to a client’s or prospective client’s evaluation of the adviser and the integrity of its management. 279 Item 11 of Form BD requires disclosure on the relevant Disclosure Reporting Page (‘‘DRP’’) with respect to: (A) felony convictions, guilty pleas, ‘‘no contest’’ pleas or charges in the past ten years; (B) investment-related misdemeanor convictions, guilty pleas, ‘‘no contest’’ pleas or charges in the past ten years; (C) certain SEC or the Commodity Futures Trading Commission (CFTC) findings, orders or other regulatory actions (D) other federal regulatory agency, state regulatory agency, or foreign financial regulatory authority findings, orders or other regulatory actions; (E) self-regulatory organization or commodity exchange findings or disciplinary actions; (F) revocation or suspension of certain authorizations; (G) current regulatory proceedings that could result in ‘‘yes’’ answers to items (C), (D) and (E) above; (H) domestic or foreign court investment-related injunctions, findings, settlements or related civil proceedings; (I) bankruptcy petitions or SIPC trustee appointment; (J) denial, pay out or revocation of a bond; and (K) unsatisfied judgments or liens. Some of these disclosures are only required if the relevant action occurred within the past ten years, while others must be disclosed if they occurred at any time. 280 FINRA Rule 8312 governs the information FINRA releases to the public via BrokerCheck. FINRA established BrokerCheck in 1988 (then VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 financial professionals, firms would determine whether they need to include the statement based on legal and disciplinary information on Form U4,281 Form U5 282 and Form U6.283 In particular, firms would be required to state, ‘‘We have legal and disciplinary events’’ if they have financial professionals for whom disciplinary events are reported per Items 14 A–M on Form U4, Items 7(a) and 7(c)–(f) on Form U5,284 and Form U6 except to the extent such information is not released through BrokerCheck pursuant to FINRA Rule 8312 or in IAPD.285 We considered requiring firms to provide additional details about the reported legal and disciplinary events of the firms and their financial professionals. For example, we could known as the Public Disclosure Program) to provide the public with information on the professional background, business practices, and conduct of FINRA member firms and their associated natural persons. The information that FINRA releases to the public through BrokerCheck is derived from the CRD system, the securities industry online registration and licensing database. Firms, their associated natural persons and regulators report information to the CRD system via the uniform registration forms (Form U4 (Uniform Application for Securities Industry Registration or Transfer), Form U5 (Uniform Termination Notice for Securities Industry Registration), Form U6 (Uniform Disciplinary Action Reporting Form), Form BD (Uniform Application for Broker-Dealer Registration), Form BDW (Uniform Request for Broker-Dealer Withdrawal), and Form BR (‘‘Uniform Branch Office Registration Form’’)). Under FINRA Rule 8312, FINRA limits the information that is released to BrokerCheck in certain respects. For example, pursuant to FINRA Rule 8312(d)(2), FINRA shall not release ‘‘information reported on Registration Forms relating to regulatory investigations or proceedings if the reported regulatory investigation or proceeding was vacated or withdrawn by the instituting authority.’’ We believe it is appropriate to limit disclosure in the relationship summary to disciplinary information or history that would be released to BrokerCheck. 281 Form U4 (Uniform Application for Securities Industry Registration or Transfer) requires disclosure of registered representatives’ criminal, regulatory, and civil actions similar to those reported on Form BD as well as certain customerinitiated complaints, arbitration, and civil litigation cases. See generally Form U4. 282 Form U5 (Uniform Termination Notice for Securities Industry Registration) requires information about representatives’ termination from their employers. See Form U5. 283 Form U6 (Uniform Disciplinary Action Reporting Form) is used by SROs, regulators, and jurisdictions to report disciplinary actions against broker-dealers and associated persons. This form is also used by FINRA to report final arbitration awards against broker-dealers and associated persons. See Form U6. 284 The disclosure would be triggered by reportable information on Items 7(a) and 7(c) through (f). Item 7(b) (Internal Review Disclosure) is not released to BrokerCheck by FINRA, pursuant to FINRA Rule 8312(d)(3). As noted above (see supra note 280), we believe it is appropriate to limit disclosure in the relationship summary to disciplinary information or history that would be released to BrokerCheck. 285 Proposed Item 7.B.3. of Form CRS. PO 00000 Frm 00033 Fmt 4701 Sfmt 4702 21447 have proposed to require firms to include details about the type and number of the reported events. Brokerdealers and investment advisers do not report all of the same types of disciplinary events. We also considered whether to require firms to only discuss the types of disciplinary events that both broker-dealers and investment advisers report, require investment advisers to disclose complaints and other disciplinary events that only broker-dealers report, or create separate requirements to require firms to disclose certain types of events in the relationship summary without reference to information in other disclosures. We are not proposing to take any of these approaches because this is summary disclosure rather than a comprehensive discussion of a firm’s legal and disciplinary history. We believe that for many firms, requiring additional information would include too much detail for short summary disclosure, and updating these details in the relationship summary on an ongoing basis would add significant costs without compensating benefit. The information already is required to be disclosed elsewhere, and the relationship summary as proposed would direct retail investors to those resources. We believe that requiring an affirmative statement that the firm and its financial professionals have reportable legal or disciplinary events, if applicable, will flag this important issue for retail investors and help them to determine whether they want additional information in other disclosures. By proposing to base the new disclosure on information that is already reported elsewhere and also to include details about where to find more information, we would give retail investors the tools to learn more.286 Furthermore, as discussed below, the statement encouraging retail investors to visit Investor.gov for more information would help retail investors to more easily learn additional details from the firms themselves and from their existing disclosures.287 Next, all firms would be required to include the following wording to highlight where retail investors can find more information about the disciplinary history of the firm and its financial professionals, whether or not the firm is required to state the existence of legal or disciplinary events in the relationship summary: ‘‘Visit Investor.gov for a free and simple search tool to research our 286 Proposed Item 7.D. of Form CRS. 287 Id. E:\FR\FM\09MYP2.SGM 09MYP2 21448 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules firm and our financial professionals.’’ 288 Retail investors would further benefit from understanding how to report problems and complaints to the firm and regulators. Accordingly, we propose to require that firms include the following wording next in this section: ‘‘To report a problem to the SEC, visit Investor.gov or call the SEC’s toll-free investor assistance line at (800) 732– 0330. [To report a problem to FINRA, [ ].] If you have a problem with your investments, account or financial professional, contact us in writing at [insert your primary business address].289 Broker-dealers and dual registrants also would include the bracketed language regarding how to report a problem to FINRA. Firms would be required to review and update (if needed) the current telephone numbers for the SEC and FINRA at least annually.290 Firms would be required to state where the retail investor can find additional information about their brokerage and investment advisory services, as applicable. Broker-dealers would be required to direct retail investors to additional information about their brokers and services on BrokerCheck (https:// brokercheck.finra.org), their firm websites (including a link to the portion of the website that provides up-to-date information for retail investors), and the retail investor’s account agreement.291 Broker-dealers that do not have public websites would be required to state where retail investors can find up-todate information.292 Investment advisers likewise would be required to direct retail investors to additional information in the firm’s Form ADV Part 2 brochure and any brochure supplement provided by a financial professional to the retail investor.293 If an adviser has a public website and maintains a current version of its firm brochure on the website, the firm would be required to provide the website address.294 If an adviser does not have a public website or does not maintain its current brochure on its public website, then the adviser would provide the IAPD website address (https://adviserinfo.sec.gov).295 amozie on DSK3GDR082PROD with PROPOSALS1 288 Proposed 289 Proposed Item 7.C. of Form CRS. Item 7.D. of Form CRS. 290 Id. 291 Proposed Item 7.E.1. of Form CRS. 292 Id. 293 Proposed Item 7.E.2. of Form CRS. 294 Id. 295 Id. SEC- and state-registered investment advisers are required to file their brochures and brochure amendments through the IARD system. See rules 203–1 and 204–1 of the Advisers Act and VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 Unlike investment advisers, which deliver brochures and brochure supplements to clients, broker-dealers are not currently required to deliver to their retail investors written disclosures covering their services, fees, conflicts, and disciplinary history in one place.296 However, under Regulation Best Interest, broker-dealers would be required to disclose, in writing, the material facts relating to the scope and terms of the relationship with the retail customer including all material conflicts of interest that are associated with the recommendation.297 We understand that, under current practice, brokerdealers typically provide information about some or all of the categories of disclosure included in this relationship summary on their firm websites and in their account opening agreements. We recognize that the different disclosure requirements for investment advisers and broker-dealers may result in retail investors having access to more information about investment advisers on a particular topic as compared to information about broker-dealers and vice versa. We request comment on whether we should take additional steps to ensure that retail investors have access to a similar amount of additional information about each of the topics covered by the relationship summary, such as by requiring firms to include appendices or hyperlinks with specific information. We request comment generally on the disclosure about where to find additional information, and in particular on the following issues: • Do commenters agree that it is important for retail investors to know of a firm and its financial professionals’ legal and disciplinary events before entering into an agreement with a firm? Why or why not? • Is including the disciplinary history disclosure in the additional information section sufficient to draw a retail investors’ attention or encourage retail investors to ask follow-up questions on this topic? • Would the proposed format with prescribed wording effectively similar state rules. Members of the public can view an adviser’s most recent Form ADV online at the IAPD website: www.adviserinfo.sec.gov. 296 Broker-dealers are required under certain circumstances, such as when effecting certain types of transactions, to disclose certain conflicts of interest to their customers in writing, in some cases at or before the time of the completion of the transaction. See, e.g., supra notes 228 and 241 and accompanying text. See also 913 Study, supra note 3, at nn.256–259 and accompanying text; supra notes 230 and 243–243 and accompanying text (describing broker-dealer obligations under proposed Regulation Best Interest). 297 See Regulation Best Interest Proposal, supra note 24, at section II.D.1. PO 00000 Frm 00034 Fmt 4701 Sfmt 4702 communicate information about disciplinary events to retail investors? Or should we use a table with yes/no check boxes or another graphical format to describe this information, or should we permit a firm to state in its own words whether it has reported any events? What approach would permit easier comparison by retail investors across firms, including dual registrants? • Would more detail about these events be more beneficial and easily understandable for retail investors? For example, should firms be required to provide background about the types of events that would trigger the disclosure (such as criminal, civil, and regulatory actions and, for broker-dealers and financial professionals, customer complaints, arbitrations and bankruptcies)? Should we require separate disclosures for firms and their financial professionals? Should we consider requiring a more specific list of the types of disciplinary events that firms and financial professionals report and require firms to state whether there are reported disclosures for each type? For example, should firms be required to state they have reported disclosures for criminal actions, civil actions and administrative proceedings, and for broker-dealers specifically, arbitrations and complaints? Should we instead require firms to disclose the total number of the legal and disciplinary events that are reported on Form BD, Form ADV, and/or Forms U4, U5, and U6, as applicable? Or should we require firms to report the total number of all reported criminal actions, civil actions, administrative proceedings, arbitrations, and complaints for them and their financial professionals, as applicable? Would this information be confusing for retail investors without more information about each reported event? If we do require this information, should we require firms to disclose the percentage of a firm’s total financial professionals that have reported disciplinary events? As part of this approach, should we require a firm to disclose its total number of financial professionals to provide additional context for the percentage? • Should we require firms to include specific wording directing retail investors to ask them questions about these events and to review more detailed disclosures by searching Investor.gov? • Should firms be required or permitted to state that they do not currently have reportable legal and/or disciplinary events, if that is the case? Should we require firms to distinguish whether they or their financial professionals have reportable E:\FR\FM\09MYP2.SGM 09MYP2 amozie on DSK3GDR082PROD with PROPOSALS1 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules disciplinary events, for example by stating ‘‘Our firm has legal and disciplinary events’’ or ‘‘We have financial professionals who have legal and disciplinary events’’? • Do commenters agree with requiring disclosure if firms or financial professionals have reported legal and/or disciplinary events on Form BD, Forms U4, U5 or U6, and Form ADV, as applicable? Do commenters agree with the specific items on those forms that we have identified as triggering reportable events? Should we only require disclosure of the types of legal events that both broker-dealers and investment advisers report? For example, should we require all firms to disclose financial information, which broker-dealers are required to report pursuant to Items 11 (I, J, and K) on Form BD but investment advisers do not report? Or, in the alternative, should we exclude financial disclosures from a broker-dealer’s reportable legal or disciplinary events? Do commenters agree that the legal or disciplinary events triggering disclosure on the relationship summary should be the same for financial professionals working for broker-dealers as for investment advisers? If not, why not? • Do commenters agree that, for broker-dealers and financial professionals of broker-dealers and investment advisers, we should exclude information that is not released to BrokerCheck or IAPD pursuant to FINRA Rule 8312? BrokerCheck and IAPD include additional information, including summary information about certain arbitration awards against a financial professional, or against a firm in BrokerCheck, involving a securities or commodities dispute with a public customer. Although broker-dealers are not required to report arbitrations on Form BD, should we include arbitrations as reportable events in light of the BrokerCheck disclosures? If so, how would commenters suggest articulating the required disclosure? • Pursuant to FINRA Rule 4530, broker-dealers are required to disclose certain information to FINRA that is not reported on Form BD (e.g., customer complaints and arbitrations). Should we include disclosures made to FINRA pursuant to FINRA Rule 4530 as reportable events? If so, should we require disclosure of similar events by investment advisers? Why or why not? • Do commenters believe that stating whether a firm has legal and disciplinary events and then providing hyperlinks on where to find additional information is the correct approach? Should we explicitly require deep links? Why or why not? Do commenters VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 believe that retail investors will check Investor.gov? Should we require firms to cross reference other sources of disciplinary information, including providing direct links to the IAPD or BrokerCheck? Why or why not? • Rather than asking firms to identify whether they have legal and disciplinary events, should the relationship summary note that retail investors may want to consider this information and then encourage retail investors to ask their financial professional for more details and include cross references to where further information can be found? Why or why not? With respect to roboadvisers or broker-dealers providing online services, will a financial professional be available to answer these types of questions? 298 • Should we adopt a definition of ‘‘financial professional’’ for purposes of this disclosure? If so, how would commenters suggest formulating the definition? • Our intent in using layered disclosure, with short summaries of selected disclosures and information on where retail investors can find more information, is to encourage retail investors to ask questions and seek more information about the firm’s and their financial professionals’ services, fees, conflicts of interest and disciplinary events. Does the proposed relationship summary, in general, and this additional information section, in particular, achieve this goal? Are there modifications or alternatives we should consider to achieve this goal? • In addition or as an alternative to the proposed cross references to an investment adviser’s Form ADV brochure and brochure supplement(s) and account agreement, and to a brokerdealer’s public website, account agreement and BrokerCheck, should the relationship summary direct retail investors to other sources of information? Should we require firms to include public website addresses and hyperlinks to the sources of additional information, if available? Do firms’ websites typically include additional information about topics included in the relationship summary? Given that not all firms have a public website or maintain current information on a public website (e.g., its current brochure or other current information), are there other places to which firms should 298 Robo-advisers should also keep in mind the considerations set forth in the robo-adviser guidance update specifically as it relates to the substance and presentation of disclosures. See Robo-Advisers, IM Guidance Update No. 2017–02 (Feb. 23, 2017), available at https://www.sec.gov/ investment/im-guidance-2017-02.pdf. PO 00000 Frm 00035 Fmt 4701 Sfmt 4702 21449 direct retail investors to look for up-todate information? Should we require firms that do not already maintain a public website to establish one for purposes of making the relationship summary publicly available? 8. Key Questions We are proposing to require that firms include questions for retail investors to ask their financial professionals in the relationship summary. By requiring these questions, we intend to encourage retail investors to have conversations with their financial professionals about how the firm’s services, fees, conflicts and disciplinary events affect them. We encourage financial professionals to engage in balanced and meaningful conversations with their retail investors to facilitate investors making informed decisions, using these key questions as a guide. Firms should use formatting to make the questions more noticeable and prominent (for example, by using a larger font, a text box, different font, or lines to offset the questions from the other sections).299 Firms would be required to include ten questions, as applicable to their particular business, under the heading ‘‘Key Questions to Ask’’ after stating the following: ‘‘Ask our financial professionals these key questions about our investment services and accounts.’’ The required questions would be: 1. Given my financial situation, why should I choose an advisory account? Why should I choose a brokerage account? 2. Do the math for me. How much would I pay per year for an advisory account? How much for a typical brokerage account? What would make those fees more or less? What services will I receive for those fees? 3. What additional costs should I expect in connection with my account? 4. Tell me how you and your firm make money in connection with my account. Do you or your firm receive any payments from anyone besides me in connection with my investments? 5. What are the most common conflicts of interest in your advisory and brokerage accounts? Explain how you will address those conflicts when providing services to my account. 6. How will you choose investments to recommend for my account? 7. How often will you monitor my account’s performance and offer investment advice? 8. Do you or your firm have a disciplinary history? For what type of conduct? 299 Proposed E:\FR\FM\09MYP2.SGM Item 8 of Form CRS. 09MYP2 amozie on DSK3GDR082PROD with PROPOSALS1 21450 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules 9. What is your relevant experience, including your licenses, education, and other qualifications? Please explain what the abbreviations in your licenses are and what they mean. 10. Who is the primary contact person for my account, and is he or she a representative of an investment adviser or a broker-dealer? What can you tell me about his or her legal obligations to me? If I have concerns about how this person is treating me, who can I talk to? 300 We are proposing to allow firms to modify or omit portions of these questions, as applicable to their business.301 We are also proposing to require a standalone broker-dealer and a standalone investment adviser, to modify the questions to reflect the type of account they offer to retail investors (e.g., advisory or brokerage account).302 In addition, we are proposing that firms could include any other frequently asked questions they receive following these questions. Firms would not, however, be permitted to exceed fourteen questions in total in order to limit the length of the relationship summary.303 We recognize that advisers providing computer-generated, automated advice, often referred to as ‘‘robo-advisers,’’ and online-only broker-dealers may employ business models that offer varying levels of interaction or no interaction with a financial professional. We are proposing to require advisers providing automated advice or broker-dealers providing online-only services without a particular individual with whom a retail investor can discuss these questions to include a section or page on their website that answers each of the above questions, and provide a hyperlink in the relationship summary to that section or page.304 If the firm provides automated advice, but makes a financial professional available to discuss the existing account with a retail investor, that firm generally should also make the financial professional available to discuss these questions with the retail investor. We believe that many of these questions would help retail investors to elicit more detail concerning the items discussed in the relationship summary. For example, the questions asking why an investor should choose an advisory or brokerage account and how much the investor can expect to pay are intended to help the retail investor receive information about services and fees that 300 Proposed Item 8 of Form CRS. 301 Id. 302 Id. 303 Id. 304 Id. VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 are tailored to that particular investor’s circumstances. We believe that the financial professional generally would have access to the information needed to provide this information to a particular retail investor during the account opening process.305 Questions about how the financial professional and the firm make money and about conflicts of interest would assist investors in understanding the extent to which compensation creates incentives for a financial professional to take his or her own interests into account in providing services. Similarly, the last question in the list of questions, which asks about a retail investor’s primary contact at the firm and that financial professional’s legal obligations, is intended to elicit a conversation about the different legal obligations of firms and financial professionals acting in an investment advisory capacity and in a brokerage capacity. Other items allow the investor to learn more specific information about the firms and financial professional, such as additional conflicts the firms or its financial professionals might have or disciplinary history. The proposed questions cover all of the sections in the relationship summary. They also include one additional topic about the financial professional’s relevant experience, including licenses and other qualifications. In our experience, the relevant experience, including licenses, education, and other qualifications for a particular financial professional are important to retail investors.306 However, if we required firms to disclose the educational and professional certifications of each financial professional, firms would have to attach a separate disclosure for each particular financial professional (similar to the Form ADV brochure supplement or the information about financial professionals provided on BrokerCheck and IAPD) or would have to include lengthy disclosure with information about all of their financial professionals. We believe this would be more burdensome than prompting retail 305 See supra Section II.B.4, ‘‘Summary of Fees and Costs.’’ 306 See 917 Financial Literacy Study, supra note 20, at 24 (‘‘Some examples of information that commenters indicated should be included in a summary disclosure document for an investment product or service include descriptions of . . . any eligibility requirements.’’); Brochure Adopting Release, supra note 157, at nn.213–216 and accompanying text (discussing commenters that supported the brochure supplement, which contains information about the educational background, business experience, and disciplinary history (if any) of the supervised persons who provide advisory services to the client). PO 00000 Frm 00036 Fmt 4701 Sfmt 4702 investors to ask their financial professionals these questions to encourage a conversation about these topics, if such a conversation is important to that investor. We understand that including ‘‘Key Questions to Ask’’ would result in some firms creating policies and procedures, including supervision and compliance reviews, relating to how their financial professionals respond to the questions. We request comment generally on the questions proposed to be included in the relationship summary, and in particular on the following issues: • Would our proposed questions encourage discussions between retail investors and their financial professionals? Would they help retail investors become informed about how a firm’s services, fees, conflicts, and disciplinary events affect them? Would they help investors to compare investment advisers and broker-dealers? • Would financial professionals be able to answer these ‘‘Key Questions to Ask’’? Do they have access to personalized information about the retail investor and the retail investor’s account to be able to, for example, put together personalized fee information and estimates during the account opening process? To the extent responses would require information about the particular retail investor, would firms need to change the account opening process in order to obtain that information and provide responses? • Should we require or permit firms to include these questions throughout the relationship summary rather than, or in addition to, including the questions in the ‘‘Key Questions to Ask’’? In our proposal, for example, the fees and costs section of the relationship summary directs retail investors to ask their financial professionals for personalized fee information. Are there other disclosures in the relationship summary for which we should require or permit firms to also include a question to ask as part of the disclosure? If so, which disclosures? Could firms use technology such as pop-ups or hovers, or internal links, to connect the relevant question(s) in the key questions to ask to the disclosure in the relationship summary? • Would firms create policies and procedures, including supervision and compliance reviews, relating to how their financial professionals respond to these questions? Would implementing and maintaining such processes be burdensome or costly for firms? Why or why not? Do investment advisers and broker-dealers currently have systems in place to answer these questions, particularly the request to ‘‘do the math for me’’ and provide not only fee E:\FR\FM\09MYP2.SGM 09MYP2 amozie on DSK3GDR082PROD with PROPOSALS1 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules information related to the relationship and certain externalized fees, but also information about fees that are implicit to a given product? • Do firms anticipate that they would implement recordkeeping policies and procedures to address communications between financial professionals and retail investors about the ‘‘Key Questions to Ask’’? What kind of recordkeeping policies and procedures would firms anticipate implementing in order to address such communications? Should we require financial professionals to highlight these key questions when they deliver a relationship summary to a retail investor? How could the questions be highlighted when the relationship summary is delivered electronically? • Should we require financial professionals to initiate a conversation about these key questions if the retail investor does not raise these questions? • Should we, as proposed, permit firms to omit any of the proposed questions that are not applicable to their business, and permit firms to add additional questions for retail investors to ask about the disclosures in their relationship summaries? For example, should robo-advisers and online brokerdealers be allowed to omit the questions concerning the financial professional’s relevant experience and whether the investor’s primary contact is an investment adviser or broker-dealer? Should we add questions specific to investment advisers offering automated advice, such as how the robo-adviser’s models are designed, including the underlying assumptions? • Should we include any additional questions in our proposed list of questions, or remove any proposed questions? If so, what additional questions should we add, and which questions should we remove, and why? For example, instead of including a question about a financial professional’s licenses and other qualifications in this section, should we instead require firms to discuss information about licensing and other qualifications in the relationship summary, including educational background, designations held, and examinations passed? Should we add a question comparing services offered with financial planning and wrap fee programs? • Do commenters agree that including a question about a financial professional’s licenses and other qualifications would provide useful information to retail investors, given the expansive list of professional designations? Should we instead permit or require financial professionals to include a list of certain licenses or other VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 21451 qualifications in a separate disclosure and, if so, which designations should be included? • We are proposing to permit firms to include up to fourteen questions. Do commenters agree with this approach? Should we allow firms to include more or fewer questions? • We are proposing to require that robo-advisers and online-only brokers include a section or page on their websites that answers each of these proposed questions, and include a hyperlink in the relationship summary to where the answers are posted. How will these advisers and broker-dealers be able to answer the fact specific questions in a generalized format on the website? Are there alternative ways in which such advisers or broker-dealers should be required to provide answers to these proposed questions? For example, should robo-advisers use a chat or other message function, or answer questions by email? Would this work for robo-advisers that offer recommendations to retail investors without providing them any way to reach a financial professional at the firm? Should we require all advisers to include the responses to these questions on their websites, including roboadvisers that make available financial professionals to answer retail investors’ questions? • Should we require the order of the questions to be fixed? Does the proposed order advance our goal? What changes, if any, should be made to the proposed order? Should there be subcategories of questions? are liable under the antifraud provisions of the federal securities laws for failure to disclose material information to their customers when they have a duty to make such disclosure.309 When recommending a security, brokerdealers may be 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-interest.310 Among other specific disclosure obligations, broker-dealers are required to disclose certain potential conflicts to their customers under certain circumstances, such as disclosing at or before the time of the completion of the transaction whether the broker-dealer is acting as agent or principal, and its compensation and any third-party remuneration it has received or will receive.311 Brokerdealers typically provide information about their services, fees, and conflicts on their websites and in their account opening agreements. Disciplinary history on broker-dealers, details on the background, qualifications, and disciplinary history of financial professionals associated with brokerdealers, and customer complaints and arbitrations against them, are available on FINRA’s BrokerCheck website.312 Investment advisers deliver to clients a ‘‘brochure’’ (and/or a ‘‘wrap fee program brochure,’’ as applicable) and ‘‘brochure supplement’’ required by Form ADV Part 2.313 The brochure is a plain language, narrative document that addresses, among other things, an investment adviser’s advisory business, C. Delivery, Updating, and Filing Requirements Our proposal would require registered investment advisers, registered brokerdealers that serve retail customers and dual registrants to deliver a relationship summary.307 Delivery of the relationship summary would not necessarily relieve the firm of any other disclosure obligations it has to its retail investors or prospective retail investors under any federal or state laws or regulations. The relationship summary requirement would be in addition to, and not in lieu of, current disclosure and reporting requirements or other obligations for broker-dealers and investment advisers.308 Broker-dealers scope and terms of the relationship with the retail customer, including all material conflicts of interest that are associated with the recommendation. Regulation Best Interest Proposal, supra note 24, at section II.D.1 (noting that the relationship summary would reflect initial layers of disclosure, and the disclosure obligation of proposed Regulation Best Interest would reflect more specific and additional, detailed layers of disclosure). 309 See Basic v. Levinson, 485 U.S. 224, 239 n.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’’). 310 See, e.g., De Kwiatkowski v. Bear, Stearns & Co., 306 F.3d at 1302; Chasins v. Smith, Barney & Co., 438 F.2d at 1172. 311 17 CFR 240.10b–10(a)(2). 312 See https://brokercheck.finra.org. 313 See Advisers Act rule 204–3; Instructions 1 and 2 of Instructions for Part 2A of Form ADV; Instructions 2 and 3 of Instructions for Part 2B of Form ADV. An investment adviser that sponsors a wrap fee program is generally required to complete a wrap fee program brochure. See Appendix 1 to Form ADV Part 2A. 307 See Advisers Act proposed rule 204–5 and Exchange Act proposed rule 17a–14. 308 For example, the relationship summary would not necessarily satisfy the disclosure requirements under proposed Regulation Best Interest. Regulation Best Interest would require broker-dealers to disclose in writing, before or at the time of a recommendation, the material facts related to the PO 00000 Frm 00037 Fmt 4701 Sfmt 4702 E:\FR\FM\09MYP2.SGM 09MYP2 21452 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules conflicts of interest with its clients, fees, and disciplinary history.314 The brochure supplement contains information about the advisory personnel providing clients with investment advice.315 The wrap fee program brochure provides prospective wrap fee program clients with important information regarding the cost of the programs and the services provided. The current Form ADV Parts 1 and 2A are filed by investment advisers, and details about the background qualifications, registrations and disciplinary history of financial professionals supervised by the investment adviser, are available on IAPD.316 The current disclosure requirements and obligations result in varying degrees and kinds of information to investors, but we believe that all retail investors would benefit from a short summary that focuses on certain key aspects of the firm and its services. By requiring both investment advisers and brokerdealers to deliver a relationship summary that discusses both types of services and their differences, the relationship summary would help all retail investors, whether they are considering an investment adviser or a broker-dealer. A relationship summary would help retail investors to understand key aspects of a particular firm, to compare different types of accounts, and to compare that firm with other firms. While the information required by the relationship summary is generally already provided in greater detail for investment advisers by Form ADV Part 2, the relationship summary would provide in one place, for the first time, summary information about the services, fees, conflicts, and disciplinary history for broker-dealers. amozie on DSK3GDR082PROD with PROPOSALS1 1. Filing Requirements As proposed, firms would be required to file their relationship summary with the Commission, and the relationship summary will be available on the Commission’s public disclosure website. The essential purpose of the 314 Much of the disclosure in Part 2A addresses an investment adviser’s conflicts of interest with its clients, and is disclosure that the adviser, as a fiduciary, must make to clients in some manner regardless of the form requirements. See Brochure Adopting Release, supra note 157, at 9. 315 Form ADV Part 2B includes information about certain advisory personnel on whom clients may rely for investment advice, including their educational background, disciplinary history, and the adviser’s supervision of the advisory activities of its personnel. Investment advisers are not required to file with the Commission the brochure supplements required by Form ADV Part 2B. Advisers Act rules 203–1(a), 204–1(b). 316 IAPD is available at https:// www.adviserinfo.sec.gov. VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 relationship summary is to provide information to retail investors to help them decide whether to engage a particular firm or financial professional and open an investment advisory or brokerage account. If a firm does not have retail investor clients or customers and is not required to deliver a relationship summary to any clients or customers, the firm would not be required to prepare or file a relationship summary.317 Broker-dealers would file their relationship summaries electronically in a text-searchable format with the Commission on EDGAR. Investment advisers would file their relationship summaries electronically in a text-searchable format through IARD in the same manner as they currently file Form ADV Parts 1A and 2A. Dual registrants would file on both EDGAR and IARD. All previously filed versions of relationship summaries filed via EDGAR will remain available to the public. Although previously filed versions of an adviser’s relationship summary would remain stored as Commission records in IARD, only the most recent version of an adviser’s relationship summary will be available through the Commission’s public disclosure website. We considered proposing other electronic filing platforms, either maintained by the Commission or by a third-party contractor. We are proposing IARD and EDGAR because they are familiar filing systems for investment advisers and broker-dealers. Investment advisers registered with the Commission file Form ADV on IARD.318 Many broker-dealers submit documents to the Commission on EDGAR and all brokerdealers have an EDGAR CIK number.319 As mentioned above, a dual registrant would be required to file the relationship summary on EDGAR and IARD. The information for dual registrants would be accessible through IARD or EDGAR, which are both available through the Commission’s website www.Investor.gov. Exact processes for firms to follow in filing under each system is specified on the 317 See proposed amended Advisers Act rule 203– 1 note to paragraph (a)(1); proposed Exchange Act rule 17a–14(a), (b). See infra Section II.C.2 for a discussion of the delivery requirements. 318 Investment advisers may instead file a paper copy of the Form ADV with the Commission if they apply for a hardship exemption by filing Form ADV–H. 319 During fiscal year 2017, approximately 1,100 broker-dealers submitted documents to the Commission using EDGAR. Broker-dealers can file their annual reports on EDGAR and broker-dealers that also conduct another business activity (e.g., broker-dealers that are also municipal advisers or large traders) use EDGAR for other required filings. PO 00000 Frm 00038 Fmt 4701 Sfmt 4702 IARD system website and in the EDGAR filer manual, respectively. There are several reasons we propose having the relationship summaries filed with the Commission. First, every relationship summary would be easily accessible through the Commission’s website. The public would benefit by being able to use a central location to find any firm’s relationship summary. Easy access to various relationship summaries through one source may facilitate simpler comparison across firms. Second, some firms may not maintain a website, and therefore their relationship summaries would not otherwise be accessible to the public. Although we are proposing that firms without a website include a toll-free telephone number in their relationship summaries that retail investors can call to obtain up-to-date information,320 requiring filing with the Commission will allow the public to access any firm’s relationship summary. Lastly, by having firms file the relationship summaries with the Commission, the Commission can more easily monitor the filings for compliance with Form CRS. 2. Delivery Requirements We propose to require that a firm deliver the relationship summary to each retail investor, in the case of an investment adviser, before or at the time the firm enters into an investment advisory agreement or, in the case of a broker-dealer, before or at the time the retail investor first engages the firm’s services.321 A dual registrant should deliver the relationship summary at the earlier of entering into an investment advisory agreement with the retail investor or the retail investor engaging the firm’s services.322 We encourage delivery of the relationship summary far enough in advance of a final decision to engage the firm to allow for meaningful discussion between the financial professional and retail investor, including by using the Key Questions, and for the retail investor to understand the information and weigh the available options. The delivery requirement 320 Proposed General Instruction 8.(a) to Form CRS. 321 Advisers Act proposed rule 204–5(b)(1) and Exchange Act proposed rule 17a–14(c)(1); proposed General Instruction 5.(b) to Form CRS. 322 Advisers Act proposed rule 204–5(b)(1) (investment advisers or their supervised persons must deliver to each retail investor a current Form CRS before or at the time the investment adviser enters into an investment advisory contract with the retail investors) and Exchange Act proposed rule 17a–14(c)(1) (broker-dealers must deliver to each retail investor a current Form CRS before or at the time the retail investor first engages the brokerdealer’s services). See also proposed General Instruction 5.(b) to Form CRS. E:\FR\FM\09MYP2.SGM 09MYP2 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules applies to investment advisers even if the investment advisory agreement is oral, and to broker-dealers even if a transaction is executed outside of an account or without an account opening agreement, as further discussed below. In the case of paper delivery, if firms do not deliver the relationship summary as the sole document, firms should ensure that it is the first among any documents that are delivered at that time.323 A firm would be permitted to deliver the relationship summary (including updates) electronically, consistent with the Commission’s guidance regarding electronic delivery.324 We are also proposing a requirement for firms that maintain a public website to post their relationship summaries on their websites in a way that is easy for retail investors to find.325 Firms that do not maintain a website would be required to include in their relationship summaries a toll-free number for investors to call to obtain documents.326 The timing of the initial delivery of the relationship summary for investment advisers generally tracks that of Form ADV Part 2A.327 The requirement for broker-dealers is intended to capture the earliest point in time at which a retail investor engages the services of a broker-dealer, including instances when a customer opens an account with the brokerdealer, or effects a transaction through the broker-dealer in the absence of an account, for example, by purchasing a mutual fund through the broker-dealer via ‘‘check and application.’’ 328 We 323 Proposed General Instruction 8.(c) to Form amozie on DSK3GDR082PROD with PROPOSALS1 CRS. 324 See Use of Electronic Media by BrokerDealers, Transfer Agents, and Investment Advisers for Delivery of Information; Additional Examples Under the Securities Act of 1933, Securities Exchange Act of 1934, and Investment Company Act of 1940, Exchange Act Release No. 37182 (May 9, 1996) [61 FR 24644 (May 15, 1996)] (‘‘96 Guidance’’). See also Use of Electronic Media, Exchange Act Release No. 42728 (Apr. 28, 2000) [65 FR 25843 (May 4, 2000)] (‘‘2000 Guidance’’); and Use of Electronic Media for Delivery Purposes, Exchange Act Release No. 36345 (Oct. 6, 1995) [60 FR 53458 (Oct. 13, 1995)] (‘‘95 Guidance’’). 325 Advisers Act proposed rule 204–5(b)(3) and Exchange Act proposed rule 17a–14(c)(3); proposed General Instruction 8.(a) to Form CRS. 326 Proposed General Instruction 8.(a) to Form CRS. 327 See Instruction 1 of General Instructions for Part 2A of Form ADV. 328 The obligation for a broker-dealer to deliver a relationship summary is broader than the proposed application of Regulation Best Interest, which would apply when a broker-dealer provides a recommendation. See supra note 29. Broker-dealers and investment advisers that offer online services would be required to provide the relationship summary to retail investors even if the only services provided to the customer or client is to offer a choice of investment options from an online menu of products, i.e., even if the broker-dealer does not provide a recommendation, provided that the retail VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 believe that providing the retail investor the relationship summary at this first juncture would better assist the retail investor in making a determination whether to open an account with a broker-dealer. The rule does not require delivery to a retail investor to whom a broker-dealer makes a recommendation, if that retail investor does not open or have an account with the broker-dealer, or that recommendation does not lead to a transaction with that broker-dealer. If the recommendation leads to a transaction with the broker-dealer who made the recommendation, we would consider the retail investor to be ‘‘engaging the services’’ of that brokerdealer at the time the customer places the order or an account is opened, whichever occurs first. In addition, a firm would be required to provide a relationship summary to an existing client or customer who is a retail investor before or at the time a new account is opened or changes are made to the retail investor’s account(s) that would materially change the nature and scope of the firm’s relationship with the retail investor.329 Such changes would include a recommendation that the retail investor transfer from an investment advisory account to a brokerage account or from a brokerage account to an investment advisory account, or move assets from one type of account to another in a transaction that is not in the normal, customary, or already agreed course of dealing.330 A move of assets from one type of account to another in a transaction not in the normal, customary, or already agreed course of dealing could include, for example, asset transfers due to an IRA rollover; deposits or the investment of monies based on infrequent events or unusual size, such as an inheritance or receipt from a property sale; or a significant migration of funds from savings to an investment account. If a firm does not have any retail investors to whom it must deliver a relationship summary, it would not be required to prepare one.331 A firm would be required to deliver the relationship summary to a retail investor within 30 days upon request.332 investor engages its services. See also infra note 337 and accompanying text. 329 Advisers Act proposed rule 204–5(b)(2) and Exchange Act proposed rule 17a–14(c)(2); proposed General Instruction 7.(a) to Form CRS. 330 Advisers Act proposed rule 204–5(b)(2) and Exchange Act proposed rule 17a–14(c)(2); proposed General Instruction 7.(a) to Form CRS. 331 Proposed General Instruction 5.(a) to Form CRS. 332 Advisers Act proposed rule 204–5(b)(5) and Exchange Act proposed rule 17a–14(c)(5); proposed General Instruction 7.(b) to Form CRS. PO 00000 Frm 00039 Fmt 4701 Sfmt 4702 21453 We are proposing different triggers for initial delivery of the relationship summary by investment advisers (before or at the time the firm enters into an investment advisory agreement with the retail investor) and by broker-dealers (before or at the time the retail investor first engages the firm’s services). These proposed requirements are intended to make the relationship summary readily accessible to retail investors at the time when they are choosing investment services and are generally consistent with the approach many commenters recommended.333 In addition, the trigger for investment advisers is consistent with current requirements for investment advisers to deliver the Form ADV Part 2 brochure.334 A few commenters suggested that disclosures be delivered before a broker-dealer first executes a transaction based on a recommendation to a retail investor.335 Along these lines, we believe that retail investors should receive the relationship summary as part of the process of engaging the services of a financial professional or firm so the retail investor has the relevant information to make that decision.336 In particular, because broker-dealers are not required to enter into a formal agreement with a customer in order to provide services, there may be instances in which retail investors engage the services of a broker-dealer without (or before) formally opening a brokerage account (e.g., by entering an agreement 333 Many commenters suggested that the document be provided at the beginning of the relationship with a firm; such as before or at the time the retail investor enters into the agreement. See, e.g., Stifel 2017 Letter; Equity Dealers of America 2017 Letter; Fidelity 2017 Letter; AARP 2017 Letter; State Farm 2017 Letter; AFL–CIO 2017 Letter; CFA 2017 Letter; Wells Fargo 2017 Letter. 334 An investment adviser is required to give a firm brochure to each client before or at the time the adviser enter into an advisory agreement with that client. See Advisers Act rule 204–3(b). 335 See, e.g., SIFMA 2017 Letter. 336 See, e.g., 917 Financial Literacy Study, supra note 20, at iv (‘‘Generally, retail investors prefer to receive disclosures before making a decision on whether to engage a financial intermediary or purchase an investment product or service.’’); Equity Dealers of America 2017 Letter, at 2 (‘‘[W]e believe that [a relationship summary] should be a pillar to any new standard when establishing a new brokerage or advisory account relationship . . . Whether a client wants incidental advice, the ability to provide their own investment ideas or to direct their own transactions as associated with a brokerage account or whether a client wants ongoing advice, monitoring, and a level fee as associated with an advisory account will determine the type of account they choose.’’); State Farm 2017 Letter; AARP 2017 Letter; AFL–CIO 2017 Letter, at 3 (‘‘If [a proposed enhanced standard of conduct] were supplemented by pre-engagement disclosures that briefly and clearly describe the sales nature of the broker’s services, . . . investors would be modestly better off than they are today.’’); Fidelity 2017 Letter; Kiley 2017 Letter; CFA 2017 Letter. E:\FR\FM\09MYP2.SGM 09MYP2 21454 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules amozie on DSK3GDR082PROD with PROPOSALS1 with the broker-dealer). For example, some broker-dealers assist their customers in purchasing mutual funds or variable insurance products to be held with the mutual fund or variable insurance product issuer, by sending checks and applications directly to the fund or issuer (this is sometimes referred to as ‘‘check and application,’’ ‘‘application-way,’’ ‘‘subscription-way’’ or ‘‘direct application’’ business; we use the term ‘‘check and application’’ for simplicity).337 In light of these types of circumstances, we are proposing to require broker-dealers to deliver the relationship summary before or at the time the retail investor first engages the firm’s services. As noted above, we would not interpret the term ‘‘engage the firm’s services’’ to capture a recommendation by a broker-dealer to a retail investor who does not already have an account with that broker-dealer, if that recommendation does not lead to a transaction with that broker-dealer. We also believe that retail investors who are existing clients and customers should be reminded of the information highlighted in the relationship summary before or at the time (i) a new account is opened that is different from the retail investor’s existing account(s); or (ii) changes are made to the retail investor’s existing accounts that would materially change the nature and scope of the firm’s relationship with the retail investor.338 For example, firms would be required to provide a current version of the relationship summary before or at the time a recommendation is made that the retail investor transfers from an investment advisory account to a brokerage account, transfers from a brokerage account to an investment advisory account, or moves assets from one type of account to another in a transaction not in the normal, customary or already agreed course of dealing.339 In these instances, retail investors are again making decisions about whether to invest through an advisory account or a brokerage account and would benefit from information about the different services and fees that the firm offers to make an informed choice. Therefore, we are proposing that 337 The broker-dealer is typically listed as the broker-dealer of record on the retail investor’s account application, and generally receives fees or commissions resulting from the retail investor’s transactions in the account. See, e.g., Transfers of Mutual Funds and Variable Annuities, FINRA Notice to Members 04–72 (Oct. 2004), available at https://www.finra.org/sites/default/files/Notice Document/p011634.pdf. See also supra note 328 and accompanying text. 338 Advisers Act proposed rule 204–5(b)(2) and Exchange Act proposed rule 17a–14(c)(2); proposed General Instruction 7.(a) to Form CRS. 339 Id. VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 firms be required to deliver the relationship summary to existing retail investors before or at the time these changes occur. Whether a change would require delivery of the relationship summary would depend on the specific facts and circumstances.340 For example, transfers among accounts that occur in the ordinary course of business, such as a periodic rebalancing of assets among two accounts or quarterly investments in a retirement account, would not require the delivery of a relationship summary.341 As with other disclosures firms must deliver, firms would be able to deliver the relationship summary (including updates) electronically, within the framework of the Commission’s guidance regarding electronic delivery of documents.342 The Commission’s previously issued guidance applicable to electronic delivery of certain documents by investment advisers and broker-dealers consists of the following elements: (i) Notice to the investor that information is available electronically; (ii) access to information comparable to that which would have been provided in paper form and that is not so burdensome that the intended recipients cannot effectively access it; and (iii) evidence to show delivery, i.e., reason to believe that electronically delivered information will result in the satisfaction of the delivery requirements under the federal securities laws.343 We believe that retail investors who are prospective clients or customers of a firm would benefit from receiving the relationship summary as early as possible when engaging the services of a financial professional or firm, so the retail investor has the relevant information to make that decision. Further to that goal, and in an effort to provide flexibility and recognize the proliferation of means of electronic communications that firms and retail investors may utilize, a firm would be able to deliver the relationship summary to new or prospective clients or customers in a manner that is consistent with how the retail investor requested information about the firm or financial professional.344 This method of initial delivery for the relationship summary would be consistent with the 340 Id. 341 Id. 342 Proposed General Instruction 8.(b) to Form CRS. See 96 Guidance, supra note 324. 343 96 Guidance, supra note 324. 344 For example, a retail investor without access to a computer or email would likely request information in person or by telephone, and the financial professional would deliver a hard copy of the relationship summary in person or by mail. PO 00000 Frm 00040 Fmt 4701 Sfmt 4702 Commission guidance.345 With respect to existing clients or customers, firms should deliver the relationship summary in a manner consistent with the firm’s existing arrangement with that client or customer and with the Commission guidance. In connection with account openings conducted online, the Commission previously stated in its 2000 Guidance that broker-dealers could obtain consent from a new customer to electronic delivery of documents through an account-opening agreement that contains a separate section with a separate e-delivery authorization, or through a separate document altogether.346 The Commission noted that a global consent to e-delivery would not be an informed consent if the opening of a brokerage account were conditioned upon providing the consent; in such cases other evidence of delivery would be required.347 However, the 2000 Guidance made an exception for brokerage firms that require accounts to be opened online and all account transactions to be initiated and conducted online, stating, ‘‘In these instances only, the opening of a brokerage account may be conditioned upon providing global consent to electronic delivery.’’ 348 We understand that for some robo-advisers, the account opening process and subsequent investment decisions and transactions may involve similarly limited interaction with a financial professional. Therefore, it would be consistent with the Commission’s prior guidance if firms that offer only online account openings and account transactions, including robo-advisers and online broker-dealers, made global consent to electronic delivery a condition of account opening, for purposes of delivering the relationship summary. We request comment on whether the Commission should provide additional guidance with respect to electronic delivery of the relationship summary to 345 Firms could meet the elements of the Commission’s electronic delivery guidance in other ways as well when delivering the relationship summary to new or prospective clients or customers. See 2000 Guidance, supra note 324, at 65 FR 25845–46; 96 Guidance, supra note 324, at 61 FR at 24647; 95 Guidance, supra note 324, at 60 FR at 53461. 346 2000 Guidance, supra note 324, at 65 FR 25846. 347 Id. Evidence of delivery could include, for example: Obtaining evidence that an investor actually received the information such as by electronic mail return receipt or confirmation of access, downloading, or printing; an investor’s accessing a document with hyperlinking to a required document; or using other forms or material available only by accessing the information. See 1995 Guidance, supra note 324, at section II.C. 348 Id. at n.27. E:\FR\FM\09MYP2.SGM 09MYP2 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules gives the benefit of certainty of when the updates must be made. Our proposal would also require firms 3. Updating Requirements to communicate without charge the The relationship summary is designed information in an amended relationship summary to retail investors who are to provide information to assist retail existing clients or customers of the firm investors in making a decision about within 30 days after the updates are whether to engage a firm and open a required to be made.354 Firms could particular type of account, but it is also communicate this information by important for retail investors to know delivering the amended relationship when there have been changes to this summary or by communicating the information to inform their continuing information another way to the retail choice to keep their account with the investor.355 For example, if an firm. For example, as noted above, the investment adviser communicated a staff’s 917 Financial Literacy Study material change to information indicates that retail investors find the nature and scope of a firm’s services, its contained in its relationship summary to a retail investor by delivering an fees and conflicts of interest, and the amended Form ADV brochure or Form disciplinary history of financial ADV summary of material changes professionals to be important in containing the updated information, this choosing financial intermediaries.349 To would support a reasonable belief that the extent that this information changes the information had been in a material way, existing clients and communicated to the retail investor, and customers should be made aware so that the investment adviser would not be they can decide whether the choice of required to deliver an updated that particular firm or financial relationship summary to that retail professional remains appropriate and investor. This requirement provides consistent with their decision-making firms the ability to disclose changes criteria. Therefore, we are proposing to without requiring them to duplicate require a firm to update its relationship disclosures and incur additional costs. summary within 30 days whenever the A retail investor also would be able to relationship summary becomes find the latest version of the materially inaccurate.350 Firms also relationship summary on the firm’s would be required to post the latest website, if it has one, and firms would version on their websites (if they have be required to deliver it upon the retail one), and electronically file the investor’s request.356 relationship summary with the For purposes of this requirement, it is 351 We believe this Commission. important that broker-dealers identify approach is consistent with the current their existing customers who are retail requirements for investment advisers to investors and recognize that a customer update the Form ADV Part 2 relationship may take many forms. For 352 and with broker-dealers’ brochure, example, under this requirement, a current obligations, including to update broker-dealer would be required to Form BD if its information is or becomes provide the relationship summary to inaccurate for any reason, which customers who have so-called ‘‘check information generally would be made and application’’ arrangements with the available through EDGAR.353 We believe broker-dealer, under which a brokerallowing 30 days for firms to make dealer directs the customer to send the updates provides sufficient time for application and check directly to the firms to make the necessary changes and issuer. We believe this approach would facilitate broker-dealers building upon 349 See 917 Financial Literacy Study, supra notes their current compliance infrastructure 20–21 and accompanying text. in identifying existing customers 357 and 350 Advisers Act proposed rule 204–1(a)(2) and amozie on DSK3GDR082PROD with PROPOSALS1 new and prospective or existing clients and customers. Exchange Act proposed rule 17a–14(b)(3); proposed General Instruction 6.(a) to Form CRS. 351 Advisers Act proposed rules 203–1(a)(1), 204– 5(b)(3) and Exchange Act proposed rule 17a– 14(b)(2), 17a–14(c)(3); proposed General Instructions 5.(a), 6.(c) and 8 to Form CRS. 352 See, e.g., Advisers Act proposed rule 204– 5(b)(4) and Exchange Act proposed rule 17a– 14(a)(3); proposed General Instruction 6 to Form CRS. Generally, an investment adviser registered with the SEC or a state securities authority is required to amend its Form ADV promptly if information it provided in its brochure becomes materially inaccurate. See Advisers Act rule 204– 1(a)(2); Instruction 4 of General Instructions to Form ADV. 353 See, e.g., Exchange Act rule 15b3–1. VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 354 Advisers Act proposed rule 204–5(b)(4) and Exchange Act proposed rule 17a–14(c)(4); proposed General Instruction 6.(b) to Form CRS. 355 Id. 356 Advisers Act proposed rules 204–5(b)(3) and 204–5(b)(5) and Exchange Act proposed rules 17a– 14(c)(3) and 17a–14(c)(5); proposed General Instructions 7 and 8 to Form CRS. 357 For example, broker-dealers may already have compliance infrastructure to identify customers pursuant to FINRA’s suitability rule, which applies to dealings with a person (other than a broker or dealer) who opens a brokerage account at a brokerdealer or who purchases a security for which the broker-dealer receives or will receive, directly or indirectly, compensation even though the security PO 00000 Frm 00041 Fmt 4701 Sfmt 4702 21455 would enhance investor protections to retail investors engaging the financial services of broker-dealers. Finally, our proposal would require a firm to file its relationship summary with the Commission and to maintain the relationship summary and all updates as part of its books and records and make it available to Commission staff upon request, as discussed in Section IV below.358 We request comment on filing, delivery, and updating requirements generally, and on the following areas specifically: • Does this approach to filing, delivery, and updating create unique challenges for firms that are providing the relationship summary electronically? Does this approach provide retail investors with ready access to the information that they need and want in connection with the decision to engage a broker-dealer or investment adviser? • Should a relationship summary be required for all investment advisers, broker-dealers and dual registrants that provide services to retail investors, or should there be any exceptions? For example, should execution-only brokerdealers be excluded from the requirement to provide the relationship summary because they do not provide investment advice to their customers? Should clearing broker-dealers be excluded from the requirement to prepare and deliver the relationship summary to the extent their customers are introduced by an introducing broker-dealer pursuant to a clearing agreement? If so, why? Should the Commission consider any other exclusions for clearing broker-dealers or other entities? If so, why? • Should a clearing broker-dealer and introducing broker-dealer be allowed to agree to allocate the responsibility to deliver the relationship summary pursuant to applicable self-regulatory rules? 359 Should investment advisers with sub-advisory relationships be allowed to receive the relationship summary, and any updated information in relationship summaries, from the is held at an issuer, the issuer’s affiliate or custodial agent, or using another similar arrangement. See Guidance on FINRA’s Suitability Rule, FINRA Regulatory Notice 12–55 (Dec. 2012), at Q6(a), available at https://finra.complinet.com/net_file_ store/new_rulebooks/f/i/FINRANotice12_55.pdf. 358 See Advisers Act proposed rule 204–2(a)(14)(i) and Exchange Act proposed rule 17a–3(a)(24). 359 See, e.g., FINRA Rule 4311(c) (Carrying Agreements) (requiring each carrying agreement in which accounts are to be carried on a fully disclosed basis to specify the responsibilities of each party to the agreement), available at https:// finra.complinet.com/en/display/display.html?rbid= 2403&element_id=10028. E:\FR\FM\09MYP2.SGM 09MYP2 amozie on DSK3GDR082PROD with PROPOSALS1 21456 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules sub-advisers, on behalf of the primary investment adviser’s clients? Should such clients receive the relationship summary of the sub-adviser? • Should the relationship summary be required in addition to firms’ existing disclosure requirements, as proposed? Is the relationship summary duplicative of or does it conflict with any existing disclosure requirements in any way? What, if any, changes would we need to make to the relationship summary if we were to permit its delivery in lieu of other disclosures and why would those changes be appropriate? Should the Commission instead make any changes to existing rules to permit the relationship summary to serve as the venue for disclosures required by those rules? • Should investment advisers that deliver a relationship summary have different delivery requirements for the Form ADV brochure and brochure supplement? • Is IARD the optimal system for investment advisers to file Form CRS with the Commission? Is EDGAR the optimal system for broker-dealers to file Form CRS with the Commission? Should dual registrants be required to file on both EDGAR and IARD? 360 Should broker-dealers instead be required to file Form CRS solely through IARD? What would be the costs or benefits associated with broker-dealers becoming familiar with and filing through IARD system rather than through EDGAR? Is there another method of electronic filing the Commission should consider for Form CRS and why? If broker-dealers should file using a system other than EDGAR, what would be the costs and benefits associated with creation of, and/or becoming familiar with and filing through, that system? Should investment advisers and broker-dealers be required to file on the same system? • How important to investors and other interested parties is the fact that IAPD serves as the single public disclosure website to access an adviser’s current filings with the Commission, and compare certain filings of other advisers? What would be the impact of retail investors having to access a separate website for the relationship summary? • How should the relationship summary be filed? Should it be filed as a text-searchable PDF, similar to how Form ADV is currently filed? Would a structured PDF, a web-fillable form, HTML, XML, XBRL, Inline XBRL or another format be more appropriate, and 360 See proposed General Instruction 5.(a) to Form CRS. VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 why? Should the Commission require a single, specified format for all firms, require one format for EDGAR filings and another format for IARD filings, or permit filers to select from two or more possible formats? Would retail investors use the relationship summary to obtain information about one particular firm, or to compare information among firms? What type of format would make it easier for retail investors to use the relationship summary in these ways? For example, would retail investors seek to compare the information about fees across a number of firms, and if so, would a structured format, such as XML or Inline XBRL or an unstructured format, such as PDF or HTML, better facilitate such a comparison? Which filing formats would illustrate the formatting of relationship summaries that are provided electronically, for example, relationship summaries sent in the body of an email, posted on the firm’s website, or formatted for a mobile device? Which formats might be most beneficial to retail investors? • What time or expense is associated with particular formats? What time or expense would be required of the public to view disclosures in a particular format? Would open source, freely available formats be preferred by users and filers, or would commercial proprietary formats be preferred? Would a particular format require any filers or users to license commercial software they otherwise would not, and, if so, at what expense? Would a particular format or formats provide more or fewer features with respect to comparability, reusability, validation, or analysis? What other considerations are related to specific formats? Would a particular format make it possible to confirm that a firm complied with the Form CRS requirements and validate the information provided before filing? If so, which format would filers or users find the most useful? • We propose to require that an investment adviser deliver the relationship summary before or at the time the firm enters into an investment advisory agreement with a retail investor or, in the case of a brokerdealer, before or at the time the retail investor first engages the firm’s services. Would this requirement give a retail investor ample time to process the information and ask questions before entering into an agreement? Or should we require that the relationship summary be delivered a certain amount of time before the firm enters into an agreement with a retail investor (e.g., 48 hours or a 15 minute waiting period)? For broker-dealers, should we require delivery of the relationship summary at PO 00000 Frm 00042 Fmt 4701 Sfmt 4702 the earlier of a recommendation or engagement, as opposed to just engagement? We also propose that a broker-dealer would not need to deliver the relationship summary to a retail investor to whom a broker-dealer makes a recommendation, if that retail investor does not open or have an account with the broker-dealer, or that recommendation does not lead to a transaction with that broker-dealer. Should we instead require that brokerdealers deliver the relationship summary to prospective customers regardless of whether that leads to a transaction or account opening? • Would the delivery requirements applicable to firms that offer only online account openings, investment advice, and transactions provide sufficient notice to retail investors of the relationship summary’s availability and content? Should the Commission require such firms to ensure that the relationship summary is delivered separately from other disclosures, with additional prominence and emphasis? For example, should firms consider employing the technology to require a retail investor to scroll through the entirety of the relationship summary before entering the next stage in the account opening process, accessing a different part of the website in order to obtain more information, or permitting the retail investor to check a box in order to accept the client agreement? Are there other requirements that should be considered for such firms in the delivery of the relationship summary when entering into the brokerage or advisory relationship, when the nature of that relationship changes, or when updates to the relationship summary are made? • We also propose to require that a firm deliver a relationship summary before or at the time the firm implements changes that would materially change the nature and scope of the existing relationship with a retail investor, for example by the opening of an additional account or accounts and/ or the migration of assets from one account type to another. Should the Commission provide more guidance for what might constitute a material change to the nature and scope of the relationship or the moving of a significant amount of assets from one type of account to another? If so, do commenters have suggestions on how the Commission should interpret ‘‘material change to the nature and scope of the relationship’’ and ‘‘significant amount of assets’’? Should the delivery of the relationship summary under these circumstances be accompanied by additional oral E:\FR\FM\09MYP2.SGM 09MYP2 amozie on DSK3GDR082PROD with PROPOSALS1 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules disclosures or other types of supplemental information? Would this requirement give retail investors sufficient opportunity to process the information and ask questions before the changes are made? Should we specify how far in advance a firm should deliver the relationship summary before making such changes? • Should we require that firms deliver an updated relationship summary to retail investors periodically (e.g., quarterly, semi-annually or annually) or whenever there is a material change, as proposed, such as a change in fees or commission structure? • We propose to require that a firm deliver the relationship summary to a retail investor upon request. Would that requirement be helpful for retail investors? Would that requirement be burdensome for firms? Should we require firms to deliver the relationship summary upon request by any investor, not just retail investors and any trust or other similar entity that represents natural persons? • We propose to require brokerdealers to initially deliver the relationship summary ‘‘before or at the time the retail investor first engages the firm’s services.’’ Would the proposed formulation capture instances where a retail investor engages the services of a broker-dealer to carry out a transaction outside of an account, for example, by purchasing a mutual fund or variable annuity product through the brokerdealer via ‘‘check and application’’? We do not intend to capture instances in which a broker-dealer makes a recommendation to a retail investor who does not already have an account with that broker-dealer, if that recommendation does not lead to a transaction with that broker-dealer. Would such recommendations be captured by the proposed language? Would a different formulation be clearer (e.g., ‘‘before or at the time the retail investor first enters a relationship,’’ or ‘‘before or at the time the retail investor engages in a transaction or opens an account, whichever occurs first,’’ or ‘‘before or at the time the retail investor indicates an intent to open an account or engage in a transaction, whichever occurs first’’)? Why or why not? Should the delivery requirements for investment advisers and broker-dealers be identical? Why or why not? • For investment advisers, our proposal generally tracks the initial delivery requirements for Form ADV Part 2.361 Should we instead follow a different disclosure delivery requirement? Should we adopt a 361 See Advisers Act rule 204–3. VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 different delivery requirement, recognizing that the purpose of the relationship summary is to provide information to retail investors to help them decide whether to engage a particular firm and open an investment advisory or brokerage account? • We propose to permit firms to deliver the relationship summary electronically consistent with prior Commission guidance on electronic delivery, as discussed above. Is the guidance clear on how firms may meet their obligations with respect to delivering the relationship summary, or should we provide more guidance? Should any additional guidance be more or less prescriptive? Would our proposed approach adequately protect investors who have no internet access or limited internet access or who prefer not to receive information about firms electronically? Is the guidance workable for a disclosure delivered at or before the retail investor enters into an agreement with an investment adviser or first engages the services of a brokerdealer? • Should we permit firms to meet their relationship summary obligations by filing their relationship summary with the Commission or by posting it online without giving or sending it to specific retail investors? • Should firms also be required to notify retail investors that an updated relationship summary is available online? Should we require firms to highlight the information that has changed since the prior version in an updated relationship summary? If firms communicate the changes in the relationship summary by means other than delivery of the updated relationship summary, should they be required to inform existing retail investors that the existing version is outdated? Are there additional requirements that we should consider for amendments to relationship summaries, particularly for firms without a website? • How can we encourage the prominence of the relationship summary for retail investors? We are proposing that, if the relationship summary is delivered on paper and not as a standalone document, firms should ensure that it is the first among any other materials or documents that are delivered at that time. Should we require that the relationship summary be given greater prominence than other materials that accompany it in some other way or that the relationship summary not be bound together with any of those materials? Should we impose additional requirements to encourage the prominence and PO 00000 Frm 00043 Fmt 4701 Sfmt 4702 21457 separateness of the relationship summary? Should we include additional or different requirements for relationship summaries that are delivered electronically? Should we require that the entire text of the relationship summary be provided in the text of an email or other form of electronic messaging, instead of an attachment or a link to the summary disclosure on the firm’s website? Are there more dynamic ways to present the relationship summary information online, such as with the use of tool tips, explanatory videos, or chat bots to provide answers to questions? Are there other ways of increasing the prominence of the relationship summary, whether delivered in paper format or electronically? • Should we require a financial professional to make certain oral disclosures at time of delivery? For example, should we require that a financial professional ask the retail investor if he or she has any questions about the relationship summary? How would this be satisfied in the context of a primarily or exclusively online or electronic delivery? • Should a firm be required to communicate any material changes made to the relationship summary within 30 days, as proposed, or sooner, for example in the case of transactions not in the normal, customary, or already agreed course of dealing? Should a firm have the option of choosing to communicate the new information by either filing an amended Form CRS or by communicating the new information to retail investors in another way? Should we provide more guidance on the types of ways in which the information may be communicated? Should we instead require a firm to deliver an amended relationship summary to its existing retail investors? • Are there other changes in conditions that should trigger a delivery requirement? • We are proposing that firms that do not maintain a website include in their relationship summaries a toll-free phone number for investors to call to obtain documents. Are there additional requirements or different approaches that we should consider for firms that do not maintain websites, to make it easier for the public to access their relationship summaries? D. Transition Provisions To provide adequate notice and opportunity to comply with the proposed relationship summary filing requirements, newly registered brokerdealers and new applicants for registration with the Commission as E:\FR\FM\09MYP2.SGM 09MYP2 21458 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules amozie on DSK3GDR082PROD with PROPOSALS1 investment advisers would not be required to file or deliver their relationship summaries until the date six months after the effective date of the proposed new rules and rule amendments.362 After that date, newly registered broker-dealers would be required to file their Form CRS with the Commission by the date on which their registration with the Commission becomes effective, and the Commission would not accept any initial application for registration as an investment adviser that does not include a relationship summary that satisfies the requirements of Form ADV, Part 3: Form CRS.363 Similarly, we believe it would be helpful to provide sufficient time for advisers and broker-dealers already registered with us to prepare the new Form CRS and file it electronically with the Commission. Accordingly, we propose to require a broker-dealer that is registered with us as of the effective date of the proposed new rules and rule amendments to comply with the new Form CRS filing requirements by the date that is six months after the effective date of the proposed new rules and rule amendments.364 We also propose requiring an investment adviser or a dual registrant that is registered with us as of the effective date to comply with the new filing requirements as part of the firm’s next annual updating amendment to Form ADV that is required after six months after the rule’s effective date.365 Such an adviser or dual registrant would be required to include Form CRS as part of its next such annual updating amendment filing with the Commission.366 We are proposing to require that a firm deliver its relationship summary to all of its existing clients and customers who are retail investors on an initial one-time basis within 30 days after the date the firm is first required to file its relationship summary with the Commission.367 This proposed requirement would allow existing retail investor clients and customers to receive the important disclosures in the relationship summary that will be provided to new and prospective retail investor customers and clients. A firm would be required to give its 362 See Advisers Act proposed rule 203–1(a)(2) and Exchange Act proposed rule 17a–14(f)(1). 363 See Advisers Act proposed rule 203–1(a)(2) and Exchange Act proposed rule 17a–14(f)(3). 364 See Exchange Act proposed rule 17a–14(f)(1); proposed General Instruction 5.(c)(i) to Form CRS. 365 See Advisers Act proposed rule 204–1(b)(3); proposed General Instruction 5.(c)(i) to Form CRS. 366 See id. 367 See Advisers Act proposed rule 204–5(e)(1) and Exchange Act proposed rule 17a–14(f)(2); proposed General Instruction 5.(c)(iii) to Form CRS. VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 relationship summary to its new and prospective clients and customers who are retail investors beginning on the date the firm is first required to electronically file its relationship summary with the Commission, and would be required to give the relationship summary to its existing clients and customers who are retail investors within 30 days, pursuant to the rule’s requirements for initial delivery and updating.368 We request comment on our proposed implementation requirements. • Would a six-month period from the effective date of Form CRS provide enough time for newly registered broker-dealers and investment advisers that are filing their initial applications for registration with the Commission to complete Form CRS? If not, please explain why and how much time these advisers and broker-dealers would need to complete Form CRS. • Should implementation of Form CRS filing requirements for brokerdealers be on a separate timetable from implementation of Form CRS filing requirements for investment advisers, as we have proposed, because registered investment advisers are not all required to file their Form ADV annual updating amendments on the same timetable? If not, please explain why and whether, in order to have one uniform initial filing date for broker-dealers and investment advisers, we should require investment advisers to potentially file their initial Form CRS more than once. • Should a firm be required to comply with the rule’s requirements for initial delivery to new and prospective clients and customers and for updating beginning on the date the firm is first required to electronically file its relationship summary with the Commission, as proposed? Should a firm deliver the relationship summary to all existing clients and customers who are retail investors within 30 days after first filing the relationship summary with the Commission, as proposed? These requirements would result in a different delivery timetable for broker-dealers and investment advisers because investment advisers would file Form CRS with their Form ADV annual updating amendments. Should we instead require all firms to deliver the relationship summary to retail investors beginning on the same date (e.g., within six months from the effective date of Form CRS), even if investment advisers file Form CRS after 368 See Advisers Act proposed rule 204–5(e) and Exchange Act proposed rule 17a–14(f)(1), (2); proposed General Instruction 5.(c)(ii), (iii) to Form CRS. PO 00000 Frm 00044 Fmt 4701 Sfmt 4702 that date? Or should we require firms to deliver to existing retail investor customers and clients initial relationship summaries at a later date? For example, firms could be required to deliver the relationship summary only before or at the time a new account is opened or changes are made to the retail investor’s account(s) that would materially change the nature and scope of the firm’s relationship with the retail investor (including before or at the time the firm recommends that the retail investor transfers from an investment advisory account to a brokerage account or from a brokerage account to an investment advisory account, or moves assets from one type of account to another in a transaction not in the normal, customary or already agreed course of dealing). E. Recordkeeping Amendments We are also proposing conforming amendments to Advisers Act rule 204– 2 and Exchange Act rules 17a–3 and 17a–4, which set forth requirements for maintaining, making and preserving specified books and records, to require SEC-registered investment advisers and broker-dealers to retain copies of each relationship summary.369 Firms would also be required to maintain each amendment to the relationship summary as well as to make and preserve a record of dates that each relationship summary and each amendment was delivered to any client or to any prospective client who subsequently becomes a client, as well as to any retail investor before such retail investor opens an account.370 Requiring maintenance of these disclosures as part of the firm’s books and records would facilitate the Commission’s ability to inspect for and enforce compliance with firms’ obligations with respect to Form CRS. These proposed changes are designed to update the books and records rules in light of our proposed addition of Form ADV Part 3 for registered investment advisers and Form CRS for brokerdealers, and they mirror the current recordkeeping requirements for the Form ADV brochure and brochure supplement. The records for investment advisers would be required to be maintained in the same manner, and for the same period of time, as other books and records required to be maintained under rule 204–2(a), and the records for broker-dealers would be required to 369 Advisers Act proposed rule 204–2(a)(14)(i); Exchange Act proposed rules 17a–3(a)(24) and 17a– 4(e)(10). 370 Id. E:\FR\FM\09MYP2.SGM 09MYP2 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules amozie on DSK3GDR082PROD with PROPOSALS1 maintained for a period of six years.371 The proposed required documentation, like other records, would be required to be provided to the staff ‘‘promptly’’ upon request.372 We request comment on these proposed amendments. • Are there other records related to the relationship summary or its delivery that we should require firms to keep? Should we require them to maintain copies of the relationship summary for a longer or shorter period than we have proposed? Should broker-dealers and investment advisers be required to keep relationship summary-related records for the same amount of time? Should firms be required to document their responses to the ‘‘key questions’’ from investors? Form CRS, as set out in Section II above, should help to ameliorate this confusion by helping retail investors understand the services that a particular firm offers, and how those services differ based on whether the firm is a registered brokerdealer, registered investment adviser, or both. We preliminarily believe, however, that Form CRS is not a complete remedy for investor confusion. The education and information that Form CRS provides to retail investors could potentially be overwhelmed by the way in which financial professionals present themselves to potential or current retail investors, including through advertising and other communications. This could particularly be the case where the presentation could be misleading in nature, or where advertising and III. Restrictions on the Use of Certain communications precede the delivery of Names and Titles and Required Form CRS and may have a Disclosures disproportionate impact on shaping or As discussed above, both brokerinfluencing retail investor perceptions. dealers and investment advisers provide Specifically, we believe that certain investment advice to retail investors, names or titles used by broker-dealers, but the regulatory regimes and business including ‘‘financial advisor,’’ models under which they give that contribute to retail investor confusion advice are different. For example, the about the distinction among different principal services, compensation firms and investment professionals, and structures, conflicts, disclosure thus could mislead retail investors into obligations, and legal standards of believing that they are engaging with an conduct can differ.373 We therefore investment adviser—and are receiving believe that it is vital that retail services commonly provided by an investors understand whether the firm investment adviser and subject to an is a registered investment adviser or adviser’s fiduciary duty, which applies registered broker-dealer, and whether to the retail investors’ entire the individual providing services is relationship—when they are not.375 associated with one or the other (or Additionally, broker-dealers and both), so that retail investors can make investment advisers, and the financial an informed selection of their financial professionals that are associated with professional, and then appropriately them, currently engage in monitor their financial professional’s communications with prospective or conduct. existing retail investors without making While investors should understand clear whether they are a broker-dealer or who their financial professional is, and an investment adviser, which can why that matters, studies indicate that further confuse retail investors if this retail investors do not understand these distinction is not clear from context differences and are confused about (whether intentionally or not). As discussed below, our proposed whether their firm or financial restriction seeks to mitigate the risk that professional is a broker-dealer or an investment adviser, or both.374 Proposed the names or titles used by a firm or financial professional result in retail 371 See Advisers Act rule 204–2(e)(1); Exchange investors being misled, including Act rule 17a–4(e)(10). Pursuant to Advisers Act rule believing that the financial professional 204–2(e)(1), investment advisers will be required to is a fiduciary, leading to uninformed maintain the relationship summary for a period of decisions regarding which firm or five years, while Exchange Act proposed rule 17a– financial professional to engage, which 4(e)(10) would require broker-dealers to maintain the relationship summary for a period of six years. may in turn result in investors being 372 See Advisers Act rule 204–2(g)(2); Exchange harmed. Additionally, we believe that Act rule 17a–4(j). requiring firms and their associated 373 See, e.g., 913 Study, supra note 3. natural persons or supervised persons to 374 See, e.g., Siegel & Gale Study, supra note 5; RAND Study, supra note 5; 913 Study, supra note 3. Additionally, the RAND Study noted that participants ‘‘commented that the interchangeable titles and ‘we do it all’ advertisements [by brokerdealers] made it difficult to discern broker-dealers from investment advisers.’’ Those participants also stated that these lines were further blurred by the VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 marketing efforts which depicted an ‘‘ongoing relationship between the broker and the investor. . . .’’ See RAND Study, supra note 5, at xix, 19. 375 See supra notes 122 and 216 and accompanying texts. PO 00000 Frm 00045 Fmt 4701 Sfmt 4702 21459 disclose whether the firms are brokerdealers or investment advisers and whether such financial professionals are associated with or supervised by, respectively, such firms would also help to address investor confusion and mitigate potential harm to investors resulting from that confusion. We preliminarily believe that restricting certain persons from using the term ‘‘adviser’’ or ‘‘advisor’’ coupled with the requirement that firms disclose their regulatory status in retail investor communications would deter potentially misleading sales practices. Investors who understand whether their financial professional or firm is a broker-dealer or investment adviser will be better consumers of the information presented in Form CRS, and less likely to mistakenly obtain the services of a broker-dealer when they intend to engage an investment adviser, or vice versa.376 A. Investor Confusion Over the past decade, various studies have documented that retail investors are confused regarding the services offered by, and the standards of conduct applicable to, broker-dealers and investment advisers, including their use of certain titles.377 In 2005, the Siegel & Gale Study found that with respect to titles specifically, ‘‘[r]espondents in all focus groups were generally unclear about the distinctions among the titles brokers, financial advisors/financial consultants, investment advisers, and financial planners . . .’’ 378 The following year, the Commission retained RAND to conduct a study of broker-dealers and investment advisers for the purpose of examining, among other things, whether investors understood the duties and obligations owed by investment advisers and broker-dealers.379 The RAND Study 376 Section 15(l)(2) of the Exchange Act and section 211(h)(2) of the Advisers Act. 377 See, e.g., Siegel & Gale Study, supra note 5; RAND Study, supra note 5; 913 Study, supra note 3. 378 See Siegel & Gale Study, supra note 5, at 2. The study used focus groups in both Baltimore, MD and Memphis, TN to ‘‘explore investor opinions regarding the services, compensation and legal obligations of several types of financial services professionals.’’ Id., at 5. 379 See RAND Study, supra note 5, at xiv. In conducting the study, RAND used several methods to study current practices in the financial industry and analyze whether investors understand differences between types of financial service professionals. Among these methods, RAND sent out national household surveys through the internet which studied ‘‘household investment behavior and preferences, experience with financial service providers, and understanding of the different types of financial service providers.’’ Additionally, RAND conducted six focus groups with investors in E:\FR\FM\09MYP2.SGM Continued 09MYP2 21460 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules amozie on DSK3GDR082PROD with PROPOSALS1 noted that ‘‘thousands of firms’’ are structured in a variety of ways and provide various different combinations of services and products.380 The RAND Study concluded that ‘‘partly because of this diversity of business models and services, investors typically fail to distinguish broker-dealers and investment advisers along the lines defined by federal regulations.’’ 381 The RAND Study concluded that, based on interviews with industry representatives, investor surveys, and focus groups, there was generally investor confusion about the distinction between broker-dealers and investment advisers. In particular, ‘‘[interview] participants [in the RAND Study] mentioned that the line between investment adviser and broker-dealers has become further blurred, as much of the recent marketing by broker-dealers focuses on the ongoing relationship between the broker and the investor and as brokers have adopted such titles as ‘financial advisor’ and ‘financial manager.’ ’’ 382 Additionally, participants in RAND’s survey believed that financial professionals using the title ‘‘financial advisor’’ were ‘‘more similar to investment advisers than to brokers . . .’’ 383 Moreover, focus group participants shed further light on this confusion when they ‘‘commented that the interchangeable titles and ‘we do it all’ advertisements by broker-dealers made it difficult to discern broker-dealers from investment advisers.’’ 384 More specifically, focus group participants observed that ‘‘common job titles for investment advisers and broker-dealers are so similar that people can easily get confused over the type of professional with which they are working.’’ 385 The focus group results also showed that when ‘‘[c]omparing beliefs on services provided by investment advisers to services provided by brokers, participants were more likely to say that investment advisers provide advice about securities, recommend specific investments, and provide planning Alexandria, Virginia, and Fort Wayne, Indiana to gain additional evidence on investor beliefs about and experience with financial service providers. RAND also conducted two sets of [in person] interviews: one set of interviews with interested parties and one set with financial service firms. See RAND Study, supra note 5, at 3-4. 380 See RAND Study, supra note 5, at 118. 381 Id. 382 See id., at 19. 383 See id., at xix. 384 See id., at xix. Interview participants also stated that these lines were further blurred by the marketing efforts which depicted an ‘‘ongoing relationship between the broker and the investor. . . .’’. See id., at 19. 385 See id., at 111. VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 services.’’ 386 According to the RAND Study, focus-group participants were more likely to say that brokers rather than investment advisers execute stock transactions and earn commissions and believed ‘‘that investment advisers and brokers are required to act in the client’s best interest’’ and ‘‘were more likely to say that brokers rather than investment advisers are required to disclose any conflicts of interest.’’ 387 In highlighting part of the confusion, the RAND Study noted that the responses from survey participants indicated the opposite conclusion from those of the focusgroup participants, namely, that investment advisers are more likely to disclose conflicts of interest.388 As discussed above, in light of significant intervening market developments and advances in technology, Chairman Clayton in 2017 invited input on, among other things, investor concerns about the current regulatory framework. Commenters highlighted the risk of harm to investors who obtain services from broker-dealers under the misimpression that they are receiving services protected by the fiduciary duty that applies to investment advisers.389 For example, one commenter examined the websites of nine different brokerage firms and ‘‘found that the firms’ advertising presents the image that the firms are acting in a fiduciary capacity’’ with many firm advertisements continuing to present the firm ‘‘as providing allencompassing advice, with no differentiation between the firms’ investment adviser services and brokerage services.’’ 390 This commenter also noted that ‘‘[w]ithout uniform standards, persons seeking financial advice are left to fend for themselves in deciding whether their financial advisor is serving two masters or only one, and whether one of those masters is the advisor’s financial self-interest.’’ 391 In 386 See id., at 109. 387 Id. 388 Id. 389 See, e.g., CFA 2017 Letter; PIABA 2017 Letter; IAA 2017 Letter; Pefin 2017 Letter; First Ascent 2018 Letter. 390 See PIABA 2017 Letter, at 7. See also IAA 2017 Letter, at 11 (‘‘investor confusion persists where certain financial professionals are permitted to use terms such as ‘‘financial adviser’’ or ‘‘financial advisor’’ that imply a relationship of trust and confidence but, in effect, disclaim fiduciary responsibility for such a relationship’’); Pefin 2017 Letter, at 3 (noting that ‘‘ ‘Investment Advisor’ or ‘Financial Advisor’ are not defined terms, and are currently a ‘‘catch all’’ for firms with wildly different practices, standards, and responsibilities to their clients. Many of these firms attempt to imply in external communication that they are a Fiduciary, while disclaiming their responsibilities in the fine print.’’); CFA 2017 Letter. 391 See PIABA 2017 Letter, at 17. PO 00000 Frm 00046 Fmt 4701 Sfmt 4702 addition, a different commenter argued that the use of certain titles, such as ‘‘advisor,’’ should be standardized by the Commission because they are currently ‘‘catch all’’ terms for firms with ‘‘wildly different practices, standards, and responsibilities to their clients.’’ 392 Some of the commenters to Chairman Clayton’s Request for Comment also noted that this confusion is the result of the misleading nature of these titles. Specifically, one commenter stated that ‘‘[t]he problem is that investors are being misled into relying on biased sales recommendations as if they were objective, best interest advice and are suffering significant financial harm as a result.’’ 393 The commenter noted that ‘‘these titles and marketing materials are misleading’’ [if] . . . broker-dealers truly are the ‘‘mere salespeople they’ve claimed to be in their legal challenge to the DOL fiduciary rule.’’ 394 A different commenter stated that ‘‘a financial professional should not be able to use a title that conveys a standard of conduct to which the professional is not in fact held under the law. . . .’’ 395 Additionally, another commenter noted that customer confusion is ‘‘also driven by misleading marketing and misleading titles.’’ 396 Finally, one commenter stated that ‘‘having SEC registered entities and their agent, claim such title gives false credence and implies a responsibility which the agent never claims to provide (numerous brokers go by the title ‘Financial Advisor’, implying Fiduciary standard that is not being upheld).’’ 397 For many years, the Commission has considered approaches for remedying investor confusion about the differing services and obligations of brokerdealers and investment advisers. In particular, in 2005 we considered addressing how investors perceive the differences between broker-dealers and investment advisers by proposing to proscribe the use of certain brokerdealer titles.398 In adopting our final rule, which was subsequently vacated on other grounds by the Court of 392 See Pefin 2017 Letter, at 3. See also First Ascent 2017 Letter. 393 See CFA 2017 Letter, at 2. 394 See id., at 11. 395 See Comment letter of the U.S. Chamber of Commerce (Dec. 13, 2017), at 10. 396 See Comment letter of the Steering Group for the Committee for the Fiduciary Standard (Nov. 8, 2017) (‘‘Committee for the Fiduciary Standard 2017 Letter’’), at 3. 397 See Pefin 2017 Letter, at 9. 398 Certain Broker-Dealers Deemed Not To Be Investment Advisers, Exchange Act Release No. 50980 (Jan. 6, 2005), [70 FR 2716 (Jan. 14, 2005)] (‘‘Broker Dealer Reproposing Release’’). E:\FR\FM\09MYP2.SGM 09MYP2 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules amozie on DSK3GDR082PROD with PROPOSALS1 Appeals for the D.C. Circuit,399 we declined to follow this approach, believing that the better approach was to require broker-dealers to clearly inform their customers receiving investment advice that they are entering into a brokerage, and not an advisory, relationship.400 However, in light of comments in response to Chairman Clayton’s Request for Comment and our experience, we believe that it is appropriate to revisit that approach. A broker-dealer can, and does, provide investment advice to retail investors without being regulated as an investment adviser, provided that such advice is ‘‘solely incidental to’’ its brokerage business and the brokerdealer receives no ‘‘special compensation’’ for the advice.401 While we believe such advice is important for providing retail investors access to a variety of services, products, and payment options, for example, thereby increasing investor choice, we are concerned that use of the terms ‘‘adviser’’ and ‘‘advisor’’ in a name or title would continue to result in some retail investors being misled that their firm or financial professional is an investment adviser (i.e., a fiduciary), resulting in investor harm. We believe that these terms can obscure the fact that investment advisers and brokerdealers typically have distinct business models with varying services, fee 399 Financial Planning Association v. Securities and Exchange Commission, 482 F.3d 481 (D.C. Cir. 2007). 400 As further discussed in the 2005 final rule release, we considered but did not adopt a rule which would have placed limitations on how a broker-dealer may hold itself out or titles it may employ without registering as an investment adviser and complying with the Advisers Act. In deciding to not prohibit the use of specific titles such as ‘‘financial advisor,’’ ‘‘financial consultant’’ or other similar names, we noted that ‘‘the statutory broker-dealer exception is a recognition by Congress that a broker-dealer’s regular activities include offering advice that could bring the broker-dealer within the definition of investment adviser, but which should nonetheless not be covered by the Act.’’ As a result, we noted that the ‘‘terms ‘financial advisor’ and ‘financial consultant,’ for example, were descriptive of such services provided by broker-dealers.’’ We also stated our view that these titles were generic terms that describe what various persons in the financial services industry do, including banks, trust companies, insurance companies, and commodity professionals. See 2005 Broker Dealer Release, supra note 7; see also Broker Dealer Reproposing Release, supra note 398. 401 The Advisers Act regulates the activities of certain ‘‘investment advisers,’’ which are defined in section 202(a)(11) as persons who receive compensation for providing advice about securities as part of a regular business. Broker-dealers are excluded from the definition of investment adviser by section 202(a)(11)(C) provided that they meet two prongs: (i) The broker-dealer’s advisory services must be ‘‘solely incidental to’’ its brokerage business; and (ii) the broker-dealer must receive no ‘‘special compensation’’ for the advice. VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 structures, standards of conduct, and conflicts of interest.402 It is important for retail investors to better understand the distinction between investment advisers and broker-dealers and to have access to the information necessary to make an informed choice and avoid potential harm. Investor choices of firm type and financial professionals can, for example, affect the extent or type of services received, the amount and type of fees investors pay for such services, and the conflicts of interest associated with any such services. For example, if a retail investor prefers an advisory relationship with an active trading strategy, and he or she mistakenly retains a broker-dealer ‘‘financial adviser,’’ this investor potentially could incur more costs if he or she is placed in a brokerage account than he or she would have paid in an advisory account with an asset-based fee. Likewise, an investor could also be misled into believing that the brokerdealer is subject to a fiduciary standard that may not apply,403 and provides services it may not offer, such as regular monitoring of the account, offering advice on a regular basis, and communicating with the investor on a regular basis. While we are proposing to require broker-dealers and investment advisers to provide retail investors with a relationship summary that would highlight certain features of an investment advisory or brokerage relationship, that information might be provided after the retail investor has initially decided to meet with the firm or its financial professional. The retail investor may make a selection based on such person’s name or title. If firms and 402 See RAND Study, supra note 5, at 18 (‘‘There were also concerns as to what investors understand regarding similarities and differences of brokerage and advisory accounts, the legal obligations of each type of account, and the effect of titles and marketing used by investment professionals on the expectations of investors.’’). 403 See supra note 375. Cf. Comment letter of Russel Walker (Jun. 17, 207); Comment letter of Jeanne Davis (Jul. 20, 2017); Comment letter of Nancy Lowell (Jul. 20, 2017); Comment letter of John Dalton (Jul. 21, 2017); Comment letter of Nancy Tew (Jul. 21, 2017); Comment letter of Bonitta Knapp (Jul. 21, 2017); Comment letter of Alan Gazetski (Jul. 21, 2017); Comment letter of A. Arias (Jul. 21, 2017); Comment letter of Al Cohen (Jul. 21, 2017); Comment letter of James Melloh (Jul. 21, 2017); Comment letter of Mary Pellecchia (Jul. 21, 2017); Comment letter of William Muller (Jul. 21, 2017); Comment letter of Susan Lee (Jul. 22, 2017); Comment letter of Steve Daniels (Jul. 22, 2017); AARP 2017 Letter; AFL–CIO 2017 Letter; Pefin 2017 Letter; PIABA 2017 Letter; IAA 2017 Letter; CFA 2017 Letter. These commenters argued that as a result of the use of certain titles and communications, retail investors are confused and are erroneously led to believe that their financial professionals are required to act ‘‘in their best interest.’’ PO 00000 Frm 00047 Fmt 4701 Sfmt 4702 21461 financial professionals that are not investment advisers are restricted from using ‘‘adviser’’ or ‘‘advisor’’ in their names or titles, retail investors would be less likely to be confused or potentially misled about the type of financial professional being engaged or nature of the services being received. Conversely, an associated natural person of a brokerdealer using the term ‘‘adviser’’ or ‘‘advisor’’ may result in an investor believing that such financial professional is an adviser with a fiduciary duty, as discussed in the relationship summary the investor would receive.404 Similarly, requiring firms and their associated natural persons or supervised persons, as applicable, to disclose whether the firms are broker-dealers or investment advisers would help to address investor confusion and complement the information provided in the proposed relationship summary. B. Restrictions on Certain Uses of ‘‘Adviser’’ and ‘‘Advisor’’ We are proposing to restrict any broker or dealer, and any natural person who is an associated person of such broker or dealer, when communicating with a retail investor, from using as part of its name or title the words ‘‘adviser’’ or ‘‘advisor’’ unless such broker or dealer, is registered as an investment adviser under the Advisers Act or with a state, or any natural person who is an associated person of such broker or dealer is a supervised person of an investment adviser registered under section 203 of the Advisers Act or with a state and such person provides investment advice on behalf of such investment adviser.405 1. Firms Solely Registered as BrokerDealers and Associated Natural Persons In relevant part, the proposed rule would restrict a broker-dealer’s or its associated natural persons’ use of the term ‘‘adviser’’ or ‘‘advisor’’ as part of a name or title when communicating with a retail investor in particular circumstances.406 This would include names or titles which include, in whole or in part, the term ‘‘adviser’’ or ‘‘advisor’’ such as financial advisor (or adviser), wealth advisor (or adviser), trusted advisor (or adviser), and advisory (e.g., ‘‘Sample Firm Advisory’’) when communicating with any retail investor. In addition, we believe that the proposed rule should apply to communications with retail investors (i.e., natural persons), rather than 404 See proposed Item 5.B.3. of Form CRS. Exchange Act proposed rule 151–2. 406 See id. 405 See E:\FR\FM\09MYP2.SGM 09MYP2 21462 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules institutions, for reasons similar to those detailed above for the relationship summary.407 Additionally, our proposed rule appropriately applies to retail investors and not to institutions, as institutions generally would be less likely to be misled by such names or titles. The proposed rule, however, would not restrict a broker-dealer’s or its associated natural persons’ use of the terms ‘‘adviser’’ or ‘‘advisor’’ when acting on behalf of a bank or insurance company, or when acting on behalf of a municipal advisor or a commodity trading advisor. We acknowledge that there may be titles other than ‘‘adviser’’ or ‘‘advisor’’ used by financial professionals that might confuse and thus potentially mislead investors. We considered whether we should restrict brokerdealers from using additional terms, such as, for example, ‘‘financial consultant.’’ Given this concern, we focused our proposal on the terms ‘‘adviser’’ or ‘‘advisor’’ because they are more closely related to the statutory term ‘‘investment adviser.’’ Thus, as compared to additional terms such as ‘‘financial consultant,’’ ‘‘adviser’’ and ‘‘advisor’’ are more likely to be associated with an investment adviser and its advisory activities rather than with a broker-dealer and its brokerage activities. Moreover, the term ‘‘investment adviser,’’ as compared to terms like ‘‘financial consultant,’’ is a defined term under the Advisers Act as any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities.408 As discussed above, we believe that use of the terms ‘‘adviser’’ and ‘‘advisor’’ by broker-dealers and their associated natural persons has particularly contributed to investor confusion about the typical services, fee structures, conflicts of interest, and legal standards of conduct to which brokerdealers and investment advisers are subject.409 Conversely, we preliminarily amozie on DSK3GDR082PROD with PROPOSALS1 407 See supra note 29 and accompanying text. See also Exchange Act proposed rule 151–2(b). 408 See section 202(a)(11)(A) of the Advisers Act, defining an ‘‘investment adviser’’ as ‘‘any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities.’’ 409 See supra note 402 and accompanying text. We are not proposing restrictions on names or titles for investment advisers. Our staff is not aware of an investment adviser using a name or title that could cause retail investors to mistakenly believe that such adviser provides brokerage services. Studies and commenters also have not identified retail investor confusion as relating to an investment VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 believe that other terms, even if investors might find them confusing, unclear, or misleading (as some commenters have suggested), do not necessarily imply that a firm or its financial professional is an ‘‘investment adviser’’ who would have the principal services, compensation structures, conflicts of interest, disclosure obligations, and legal standards of conduct that are typically associated with being an investment adviser.410 Accordingly, we preliminarily do not believe these terms would cause retail investors to believe that their financial professional is an investment adviser when he or she is, in fact, a brokerdealer. We therefore preliminarily believe that restricting use of terms that are similar to ‘‘investment adviser’’ appropriately tailors the rule to terms that are likely to result in confusion or mislead retail investors about whether such broker-dealer is an investment adviser and thus a fiduciary. As we discuss in more detail above, the proposed relationship summary is designed to provide clarity to retail investors regarding information about broker-dealers and investment advisers under a prescribed set of topics (e.g., services, fees, standards of conduct, conflicts). While the proposed relationship summary is designed to help retail investors to distinguish between investment advisers and broker-dealers, we are concerned that the effectiveness of the relationship summary could be undermined if we do not restrict a broker-dealer from using in a name or title the terms ‘‘adviser’’ and ‘‘advisor.’’ For instance, we preliminarily believe that restricting a broker-dealer or its associated natural persons from using ‘‘adviser’’ or ‘‘advisor’’ in a name or title would mitigate the risk that a retail investor would be misled into believing and expecting that his or her ‘‘financial advisor,’’—who may solely provide brokerage services at a broker-dealer—is adviser’s use of names or titles. We request comment on our understanding below. 410 Firms and 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 section 10(b) of the Exchange Act and rule 10b–5 thereunder, to the use of names or titles. See also generally FINRA Rule 2210 (stating in part ‘‘[a]ll retail communications and correspondence must: (A) Prominently disclose the name of the member, or the name under which the member’s broker-dealer business primarily is conducted as disclosed on the member’s Form BD, and may also include a fictional name by which the member is commonly recognized or which is required by any state or jurisdiction; (B) reflect any relationship between the member and any nonmember or individual who is also named; and (C) if it includes other names, reflect which products or services are being offered by the member.’’) PO 00000 Frm 00048 Fmt 4701 Sfmt 4702 an investment adviser because of the name or title. For example, if a retail investor were to engage a financial professional with the title ‘‘wealth advisor’’ who solely provides brokerage services but who is associated with a dually registered firm,411 such investor would likely receive the dually registered firm’s relationship summary. The relationship summary would include a description of both business models; however, the retail investor could incorrectly match the services he or she would receive from such ‘‘wealth advisor’’ to the description in the relationship summary of investment advisory services. As a result, the retail investor may be misled to believe that the brokerage services provided by the ‘‘wealth advisor’’ are in fact the investment advisory services as described in the relationship summary. Similarly, a retail investor who engages a financial professional with the title ‘‘wealth advisor’’ who is associated solely with a broker-dealer entity would likely receive the broker-dealer’s relationship summary, which focuses on the characteristics of the broker-dealer business model. As a result, there would be an inconsistency between the description of the broker-dealer business model and the investors’ likely perceptions that their professional is an investment adviser. Therefore, the proposed restriction on the use of names or titles would increase the effectiveness of the relationship summary by reducing the risk of a mismatch between investor preferences and type of services received. We acknowledge that studies have demonstrated that many retail investors select financial professionals and firms based on personal referrals by family, friends, or colleagues.412 Even if the name or title of the firm or professional may not impact choices made by such investors, we preliminarily believe that the protections offered to other investors by the proposed restriction and disclosure requirements justify the rules. 2. Dually Registered Firms and Dual Hatted Financial Professionals The proposed rule would permit firms that are registered both as investment advisers (including state-registered investment advisers) and broker-dealers to use the term ‘‘adviser’’ or ‘‘advisor’’ in their name or title.413 The proposed 411 For the purposes of Section III, we are defining a ‘‘dually registered firm’’ in the same manner as it is defined in the baseline of the Economic Analysis. See infra Section IV, note 453. 412 See infra note 546 and accompanying text. See also Section IV.A.3.g. 413 See Exchange Act proposed rule 151–2(a)(1). E:\FR\FM\09MYP2.SGM 09MYP2 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules rule would, however, only permit an associated natural person of a dually registered firm to use these terms where such person is a supervised person of a registered investment adviser and such person provides investment advice on behalf of such investment adviser.414 This would limit the ability of natural persons associated with a broker-dealer who do not provide investment advice as an investment adviser from continuing to use the term ‘‘adviser’’ or ‘‘advisor’’ simply by virtue of the fact that they are associated with a dually registered firm.415 We discuss these aspects of the rule in further detail below. amozie on DSK3GDR082PROD with PROPOSALS1 a. Dually Registered Firms We are not proposing to apply the restriction to dually registered firms. We believe that it is inappropriate to restrict a dually registered firm from using a name or title that accurately describes its registration status. We recognize that under our proposed rule there might be occasions where a dually registered firm provides a particular retail investor only brokerage services, which could lead to some investor confusion. At the firm level, we do not believe that the determination of when the restriction applies should be based on what capacity a dually registered firm is acting in a particular circumstance, i.e., whether a dually registered firm is acting solely as a broker-dealer and not offering investment advisory services. If we were to apply the restriction in this manner, it could result in firms using multiple names and titles, which may lead to further confusion and create operational and compliance complexities. Accordingly, this could lead to dually registered firms avoiding the use of the title ‘‘adviser’’ or ‘‘advisor’’ unless they believe they would always offer investment advisory services, which we believe is not necessary to avoid the potential investor harm. Additionally, we also seek to avoid the potential misimpression that may result should a firm use a name or title to reflect only its brokerage services and not its investment advisory services. In such a circumstance, a retail investor may not know that such firm offers both business models and could be led to believe that only brokerage services are available. 414 See Exchange Act proposed rule 151–2(a)(2). section 202(a)(25) of the Advisers Act [15 U.S.C. 80b–2(a)(25)] defining ‘‘supervised person’’ as ‘‘any partner, officer, director (or other person occupying a similar status or performing similar functions), or employee of an investment adviser, or other person who provides investment advice on behalf of the investment adviser and is subject to the supervision and control of the investment adviser’’. 415 See VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 b. Dual Hatted Financial Professionals Dual hatted financial professionals of dually registered firms (including stateregistered investment advisers) can provide brokerage services, advisory services, or both. We believe it is appropriate for financial professionals that provide services as an investment adviser to retail investors to be permitted to use names or titles which include ‘‘adviser’’ and ‘‘advisor,’’ even if, as a part of their business, they also provide brokerage services. As such, our proposed rule would not restrict, for example, a financial professional that is both a supervised person of an investment adviser and an associated person of a broker-dealer from using the term ‘‘adviser’’ or ‘‘advisor’’ in his or her name or title if such person provides investment advice to retail investors on behalf of the investment adviser.416 We believe that the relationship summary can sufficiently reduce the risk of investors being misled and avoid investor harm because it contains parallel information with respect to each of the services the dual hatted financial professional offers. By contrast, we recognize that some financial professionals of dually registered firms only provide brokerage services. We are concerned that if these financial professionals use ‘‘adviser’’ or ‘‘advisor’’ in their names or titles, retail investors may be misled about the nature of services they are receiving, and may incorrectly believe that such person would provide them investment advisory services rather than brokerage services. Therefore, we believe that a financial professional who does not provide investment advice to retail investors on behalf of the investment adviser, i.e., a financial professional that only offers brokerage services to retail investors, should be restricted from using the title ‘‘adviser’’ or ‘‘advisor’’ despite such person’s association with a dually registered firm. We recognize that, as with dually registered firms, some dual hatted financial professionals may under some circumstances only offer brokerage services to a particular retail investor, which has the potential to cause confusion. For the same reasons discussed above regarding dually registered firms, however, we do not believe that the determination of when the restriction applies should be based on what capacity a dual hatted financial professional is acting in a particular circumstance, i.e., whether a dual hatted professional is offering only brokerage services to that particular investor and 416 See PO 00000 Exchange Act proposed rule 151–2(a)(2). Frm 00049 Fmt 4701 Sfmt 4702 21463 not offering investment advisory services.417 Moreover, we are proposing in Regulation Best Interest to require a broker-dealer to make certain disclosures, including the capacity of the financial professional and firm.418 We request comment below on whether and if so how the proposed rule should address this particular circumstance. C. Alternative Approaches Over the past decade, we and commenters have expressed concern about broker-dealer marketing efforts, including through the use of titles, and whether these efforts are consistent with a broker-dealer’s reliance on the exclusion from the definition of investment adviser under section 202(a)(11)(C) of the Advisers Act.419 Under section 202(a)(11)(C), a brokerdealer is excluded from the definition of investment adviser if its ‘‘performance of [advisory] services is solely incidental to the conduct of his business as a broker or dealer and who receives no special compensation therefor.’’ 420 In this regard, and as an alternative to our proposed rule today, we considered proposing a rule which would have stated that a broker-dealer that uses the term ‘‘adviser’’ or ‘‘advisor’’ as part of a name or title cannot be considered to provide investment advice solely incidental to the conduct of its business as a broker-dealer and therefore is not excluded from the definition of investment adviser under section 202(a)(11)(C). We also considered proposing a rule that would preclude a broker-dealer from relying on the exclusion when such a broker-dealer held itself out as an investment adviser. We are not proposing these alternatives for the reasons discussed below. However, we request comment on these alternatives below. Our concerns regarding broker-dealer marketing efforts are not new. For example, we have previously requested comment on whether we should preclude broker-dealers from relying on the solely incidental prong of the exclusion if they market their services 417 See supra note 410. Firms and 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 section 10(b) of the Exchange Act and rule 10b– 5 thereunder, to the use of names or titles. 418 See Regulation Best Interest Proposal, supra note 24. 419 See, e.g., Comment letter of Investment Counsel Association of America (Feb. 7, 2005) (‘‘ICAA 2005 Letter); Comment letter of T. Rowe Price (Feb. 22, 2005) (‘‘T. Rowe Price 2005 Letter’’) on Broker Dealer Reproposing Release, supra note 398. See also Certain Broker-Dealers Deemed Not to Be Investment Advisers, Exchange Act Release No. 42099 (Nov. 4, 1999) (‘‘Release 42099’’). 420 Section 202(a)(11)(C) of the Advisers Act. E:\FR\FM\09MYP2.SGM 09MYP2 21464 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules in a manner that suggests that they are offering advisory accounts, including through the use of names or titles.421 While we have never viewed the brokerdealer exclusion as precluding a brokerdealer from marketing itself as providing some amount of advisory services, we have noted that these marketing efforts raised ‘‘troubling questions as to whether the advisory services are not (or would be perceived by investors not to be) incidental to the brokerage services.’’ 422 Certain commenters have voiced similar concerns, arguing that the use of certain titles, such as ‘‘financial advisor,’’ is inconsistent with the broker-dealer exclusion, with some noting that the marketing of advisory services by a broker-dealer is inconsistent with those services being solely incidental to the brokerage business.423 Others, however, contended that the titles are consistent with the services provided by brokerdealers, whether in fee-based or commission-based accounts.424 Taking into account our concerns and the views of commenters, we considered proposing a rule which would have stated that a broker-dealer that uses the term ‘‘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 brokerage business and therefore would not be excluded from the definition of investment adviser under section 202(a)(11)(C) of the Advisers Act.425 In considering this alternative, we questioned whether a broker-dealer that uses these terms to market or promote its services to retail investors is doing so because its advice is significant or even instrumental to its brokerage business. Consequently, we questioned whether that broker-dealer’s provision of advice is therefore no longer solely incidental to its brokerage business. Similarly, we believe that if a broker-dealer invests its capital into marketing, branding, and creating intellectual property in using the terms ‘‘adviser’’ or ‘‘advisor’’ in its name or its financial professionals’ titles, the broker-dealer is indicating that advice is an important part of its 421 See, e.g., Release 42099, supra note 419. id. 423 See, e.g., ICAA 2005 Letter; T. Rowe Price 2005 Letter. See also e.g. AFL–CIO 2017 Letter; CFA 2017 Letter; Comment letter of CFA Institute (Jan. 10, 2018); Comment letter of The Committee for the Fiduciary Standard (Jan. 12, 2018). 424 See Broker Dealer Reproposing Release. 425 As with the proposal, our alternative approach would likewise preclude an associated natural person of a dually registered firm from using the term ‘‘adviser’’ or ‘‘advisor’’ in a name or title unless he or she is a supervised person of an investment adviser and provides investment advice on behalf of such investment adviser. amozie on DSK3GDR082PROD with PROPOSALS1 422 See VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 retail investor broker-dealer business. As compared to the more principlesbased ‘‘holding out’’ approach below, this alternative may offer more certainty and clarity to broker-dealers. It also specifically addresses our concerns about the use of ‘‘adviser’’ and ‘‘advisor,’’ as discussed in this release. We also considered a broader approach that would have precluded a broker-dealer from relying on the solely incidental exclusion of section 202(a)(11)(C) if a broker-dealer ‘‘held itself out’’ as an investment adviser to retail investors.426 For example, ‘‘holding out’’ could encompass a broker-dealer that represented or implied through any communication or other sales practice (including through the use of names or titles) that it was offering investment advice to retail investors subject to a fiduciary relationship with an investment adviser. As with our alternative approach above, we questioned whether these activities could suggest, or could reasonably be understood as suggesting, that such broker-dealer or its associated natural persons were performing investment advisory services in a manner that was not solely incidental to their business as a broker-dealer. In particular, this approach could reduce the risk that if we restricted certain titles (or limited the use of certain titles used to market services) other potentially misleading titles could proliferate. Certain commenters to Chairman Clayton’s Request for Comment also supported this approach, so that retail investors receiving advice from firms ‘‘holding out’’ as investment advisers would receive appropriate protections, either under the Advisers Act or through a heightened standard of conduct for broker-dealers.427 However, we 426 See AFL–CIO 2017 Letter, at 3 (stating that ‘‘[o]ne way for the SEC to proceed is to clarify that those firms that offer advisory services, or hold themselves out as offering such services, cannot take advantage of the existing broker-dealer ‘solely incidental to’ exemption from the Investment Advisers Act.’’); IAA 2017 Letter; AICPA 2017 Letter. 427 See IAA 2017 Letter, at 11 (‘‘We urge the Commission to address this source of investor confusion by prohibiting firms or individuals from holding themselves out as trusted advisers without being subject to either the Advisers Act fiduciary principles or a new equally stringent best interest standard under the Exchange Act, discussed above.’’). See also, e.g. AFL–CIO 2017 Letter, at 3 (‘‘clarify that those firms that offer advisory services, or hold themselves out as offering such services, cannot take advantage of the existing broker-dealer ‘‘solely incidental to’’ exemption from the Investment Advisers Act. Permitting brokers to rely on this exemption when engaged in advisory activities has had the effect of exempting them from the fiduciary duty appropriate to that advisory role. Adopting this approach would require the SEC to determine what constitutes ‘‘holding out’’ as an adviser, addressing marketing practices, as well as PO 00000 Frm 00050 Fmt 4701 Sfmt 4702 preliminarily believe that a ‘‘holding out’’ approach would create uncertainty regarding which activities (and the extent of such activities) would be permissible. Such an approach could also reduce investor choice, as brokerdealers may decide to provide fewer services out of an abundance of caution. We are not proposing any of these approaches however, because we preliminarily believe that a restriction on the use of ‘‘adviser’’ and ‘‘advisor’’ in names and titles in combination with the requirement to deliver a relationship summary would be a simpler, more administrable approach to address the confusion about the difference between investment advisers and broker-dealers, and to prevent investors from being potentially misled, compared to the alternatives presented above. While we acknowledge that there are other titles or marketing communications that may contribute to investor confusion or mislead investors, our proposal is tailored toward creating greater clarity with respect to the names and titles that are most closely related to the statutory term investment adviser. In particular, our proposed rule, in combination with the relationship summary, would help distinguish between who is and who is not an investment adviser and allow retail investors to select the business model that best suits their financial goals. The restriction of the use of the terms ‘‘adviser’’ and ‘‘advisor’’ that we are proposing is intended to augment protections provided to investors by applicable provisions of the federal securities laws. Broker-dealers and their natural associated persons can face liability for intentionally, recklessly, or negligently misleading investors about the nature of the services they are providing through, among other things, materially misleading advertisements or other communications that include statements or omissions, or deceptive practices or courses of business.428 We request comment generally on our proposed restriction on the use of certain titles and in particular on the following issues: • Given the required relationship summary, is it necessary to impose any restrictions on the use of names or titles? • Do you agree with our proposed restriction on the use of ‘‘adviser’’ and ‘‘advisor’’? Why or why not? To what extent does the disclosure provided in Form CRS complement our proposed job titles, that create the reasonable expectation among investors that they will receive advice and not just sales recommendations.’’). 428 See, e.g., rule 10b–5 under the Securities Exchange Act and section 17(a) of the Securities Act. E:\FR\FM\09MYP2.SGM 09MYP2 amozie on DSK3GDR082PROD with PROPOSALS1 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules restriction? To what extent could it be a substitute? • Is our approach too broad or too narrow? Are there additional terms that we should explicitly include in the rule? For example, do any of the following names or titles have the potential to confuse investors about the differences between investment advisers and broker-dealers: Wealth manager; financial consultant; financial manager; money manager; investment manager; and investment consultant? Why or why not? What are the names or titles most commonly used that have the potential for investor confusion? Should we consider restricting the use of names, titles, or terms that are synonymous with ‘‘adviser’’ or ‘‘advisor’’ and if so, what would those names, titles, or terms be? • Do commenters believe that names or titles are a main factor contributing to investor confusion and the potential for investors to be misled, or are there other more significant factors? For example, do particular services offered by broker-dealers contribute to, or primarily cause, investor confusion and the potential for the broker-dealer’s customers to be misled into believing that the broker-dealer is an investment adviser? If so, which services specifically? For example, do commenters believe that retirement and financial planning is more often associated with investment advisers rather than broker-dealers or vice versa? Additionally, do commenters believe that monitoring is more often associated with investment advisers than brokerdealers or vice versa? • Our proposed rule does not apply to financial professionals of a brokerdealer when acting in the capacity, for example, as an insurance broker on behalf of an insurance company or a banker on behalf of a bank. Do you believe our proposed rule is clear that such persons are excluded from the restriction? If not, how should we provide such clarification? • As discussed above, our proposed rule would not prohibit dually registered firms from using the term ‘‘adviser’’ or ‘‘advisor’’ in their name or title. However, it would restrict the use of such names or titles by some associated natural persons and supervised persons of those firms, depending on whether they provide investment advice to retail investors on behalf of the investment adviser. Do you agree with our proposed approach? Is there investor confusion concerning what capacity a dually registered firm, a dual hatted financial professional, or an associated or supervised person of a dually registered firm is acting in when VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 communicating with a retail investor? If such confusion exists, how should we address it, in addition to the proposed relationship summary? For example, are retail investors confused about which type of account their financial professional is referring to when he or she makes a particular recommendation? If this is a source of confusion, how should we address it (e.g., should we address it through affirmative disclosures of account types in account statements or another form of disclosure)? • Given the prevalence of dually registered firms and their associated dual hatted financial professionals, do retail investors typically believe they are engaging a financial professional who is solely a broker-dealer or investment adviser, or do investors understand that such person is a dual hatted professional and therefore may be able to engage with them as a broker-dealer and an investment adviser? Or do retail investors currently not understand enough to distinguish among these options in any meaningful manner? • Do commenters believe that retail investors will understand that there is, and will continue to be under proposed Regulation Best Interest, differences in the standards of conduct, compensation structures, and services offered (among other items) depending on the capacity in which such professional engages a retail investor? • We are proposing to permit or restrict financial professionals associated with dually registered firms from using the term ‘‘adviser’’ or ‘‘advisor’’ in their name or title based on whether they provide investment advice on behalf of such investment advisers. Are there alternatives we should consider in implementing this portion of the rule? For example, should we only allow a supervised person to use such names or titles where ‘‘a substantial part of his or her business consists of rendering investment supervisory services’’ to retail investors, based upon a facts and circumstances determination? 429 • Our proposed rule would not prohibit dually registered firms or dually hatted financial professionals from using ‘‘adviser’’ or ‘‘advisor’’ in their names or titles, even in circumstances where the firm or 429 See section 208(c) of the Advisers Act: ‘‘[i]t shall be unlawful for any person registered under section 203 of this title to represent that he is an investment counsel or to use the name ‘investment counsel’ as descriptive of his business unless (1) his or its principal business consists of acting as investment adviser, and (2) a substantial part of his or its business consists of rendering investment supervisory services.’’ PO 00000 Frm 00051 Fmt 4701 Sfmt 4702 21465 financial professional provides only brokerage services to a particular retail investor. Do you agree with our approach? Why or why not? For example, should the proposed rule’s application depend on the capacity in which a financial professional engages a particular retail investor? If so, should financial professionals use multiple titles that would vary based on the capacity in which they are acting, and what titles would they use? Are there compliance challenges associated with this approach? Conversely, would this discourage dually registered firms or dually hatted financial professionals from using any title with ‘‘adviser’’ or ‘‘advisor,’’ even when they are providing advisory services? Would this discourage dually hatted financial professionals from providing brokerage services? Would a firm use different names or titles for different subsets of their financial professionals? • Do you agree that the use of the terms ‘‘adviser’’ or ‘‘advisor’’ by brokerdealers are the main sources of investor confusion? If so, what do these terms confuse investors about (e.g., the differences as to the standard of conduct their financial professional owes, the duration of the relationship, fees charged, compensation)? Are investors harmed by this confusion? If so, how? Do you agree that ‘‘adviser’’ and ‘‘advisor’’ are often associated with the statutory term ‘‘investment adviser’’? Do you believe that retail investors understand what the terms ‘‘adviser’’ and ‘‘broker-dealer’’ mean and can correctly identify what type of financial professional they have engaged? • We understand that the terms ‘‘adviser’’ or ‘‘advisor’’ are included in some professional designations earned by financial professionals.430 We also understand that particular professional designations have been an area of concern for FINRA and NASAA.431 Should we include an exception to permit the use of professional designations that use the terms ‘‘adviser’’ or ‘‘advisor’’? What factors should the Commission consider if it were to include such an exception? For example, should such an exception be conditioned on prominent disclosure 430 See FINRA, Professional Designations, available at https://www.finra.org/investors/ professional-designations. 431 See Senior Designations, FINRA Notice 11–52 (Nov. 2011), available at https://www.finra.org/sites/ default/files/NoticeDocument/p125092.pdf; NASAA, NASAA Model Rule on the Use of SeniorSpecific Certifications and Professional Designations (Mar. 20, 2008), available at https:// www.nasaa.org/wp-content/uploads/2011/07/3Senior_Model_Rule_Adopted.pdf. E:\FR\FM\09MYP2.SGM 09MYP2 amozie on DSK3GDR082PROD with PROPOSALS1 21466 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules that the individual is not an investment adviser or supervised by one? • Do you agree with the proposed approach in Exchange Act proposed rules 15l–2 and 15l–3 and Advisers Act proposed rule 211h–1 of limiting our proposed rules to ‘‘retail investors’’ where such persons are defined to include all natural persons as discussed above? 432 Should we instead exclude certain categories of natural persons based on their net worth or income level, such as accredited investors,433 qualified clients 434 or qualified purchasers? 435 If we did exclude certain categories of natural persons based on their net worth, what threshold should we use for measuring net worth? Should we exclude certain categories of natural persons for other reasons? • Should we conform the definition of retail investor to the definition of retail customer as proposed in Regulation Best Interest, which would include non-natural persons, provided the recommendation is primarily for personal, family, or household purposes? What kind of compliance burdens would it create to base Form CRS delivery off of a definition of retail investor that only included recommendations primarily for personal, family, or household purposes? Should the definition of retail investor include trusts or similar entities that represent natural persons, as proposed? Are there other persons or entities that should be covered? Should we expand the definition to cover plan participants in workplace retirement plans who receive services from a broker-dealer or investment adviser for their individual accounts within a plan? • What costs would broker-dealers impacted by our proposed rule incur as a result of having to rebrand themselves and their financial professionals along with revising their communications? Are there means to mitigate such costs? Would the costs differ if we made the broker-dealer exclusion in the Advisers Act unavailable to broker-dealers that use the terms ‘‘adviser’’ or ‘‘advisor’’? • How would broker-dealers and associated natural persons of brokerdealers who would be impacted by our proposed rule change the way they market themselves or communicate with retail investors as a result of our proposed rule? Would this cause any other changes to their business? For example, would more broker-dealer firms also register with the Commission or the states as investment advisers as 432 See supra notes 28–32 and accompanying text. supra note 66. 434 See supra note 67. 435 See supra note 68. 433 See VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 a result of our proposed rule? Will firms exit the brokerage business as a result of our proposed rule? Would more associated natural persons of brokerdealers become dual hatted? • Would our proposed rule impact the marketing and communications of dually registered firms and their professionals in any manner? If so, how? • Do investment advisers and their supervised persons also use names, titles, or professional designations that can lead or contribute to retail investor confusion? If so, please provide examples of these names or titles and how they can lead or contribute to confusion. Should we restrict investment advisers and their supervised persons from using these names or titles? • What costs would our proposed restriction on certain names and titles impose? Are there greater or lower costs associated with our proposed rules as compared to alternative approaches that consider whether certain titles or marketing practices are consistent with advice being ‘‘solely incidental’’ to the firm’s brokerage activities and thus permissible for a firm relying on the broker-dealer exclusion from the Advisers Act? If so, what are the specific cost estimates of each approach and the components of those estimates? Are there ways to mitigate their impact and if so, what methods could be taken? Are there operational and compliance challenges associated with our proposed approach as compared to the alternatives approaches, and if so, what are they? • We request comment on the alternative approach in which a brokerdealer would not be considered to provide investment advice solely incidental to the conduct of its brokerage business if it uses the term ‘‘adviser’’ or ‘‘advisor’’ to market or promote its services and would instead treat such practices as indicating that the broker-dealer’s advisory services are not ‘‘solely incidental’’ to its conduct of business as a broker-dealer. What would be the advantages or disadvantages of using this approach instead of the approach we have proposed? Would the alternative approach address and mitigate investor confusion about the differences between broker-dealers and investment advisers? Would the alternative approach reduce the likelihood that investors may be misled as to the type of firm they are engaging with and therefore make an uninformed decision? Would the alternative approach have other effects on the analysis of when advisory activities are or are not solely incidental to brokerage activities? How would this alternative PO 00000 Frm 00052 Fmt 4701 Sfmt 4702 approach impact dually registered firms and dual hatted financial professionals? Are there operational and compliance challenges associated with this approach, and if so, what are they? How would broker-dealers and associated natural persons of broker-dealers impacted by the alternative approach change the way they market themselves or communicate with retail investors as a result of our proposed rule? Would this cause any other changes to their business? • Would the alternative approach discussed above that would preclude a broker-dealer or an associated natural person of a broker-dealer from relying on the broker-dealer exclusion of section 202(a)(11)(C) of the Advisers Act if it ‘‘held itself out’’ as an investment adviser address investor confusion? What would be the advantages or disadvantages of using this approach instead of the approach we have proposed? Which communications or level of advice do you think imply that a broker-dealer or its associated natural person is ‘‘holding out’’ as an investment adviser? How would an approach that focuses on ‘‘holding out’’ as an investment adviser impact access to advice from different kinds of firms, and how retail investors pay for this advice? How would this approach affect competition? Would this ‘‘holding out’’ approach address any confusion that may arise from broker-dealer marketing efforts focusing on the ongoing relationship between the broker and the investor? Are there operational and compliance challenges associated with this approach, and if so, what are they? • Instead of a prohibition or restriction on the use of certain terms, should we permit such terms but require broker-dealers and their associated natural persons other than dual registrants and dual hatted financial professionals to include a disclaimer in their communications that they are not an investment adviser or investment adviser representative, respectively, each time they use or refer to the term ‘‘adviser’’ or ‘‘advisor’’? Would this approach address investor confusion or mitigate the likelihood that investors may be misled when brokerdealers and their associated natural persons use the term ‘‘adviser’’ or ‘‘advisor’’? Should this approach be coupled with an affirmative obligation that a dually registered broker-dealer or its dual hatted associated natural persons disclose that it is an investment adviser or an investment adviser representative, respectively, when using terms other than ‘‘adviser’’ or ‘‘advisor’’? Would this requirement discourage broker-dealers from using E:\FR\FM\09MYP2.SGM 09MYP2 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules these terms even if they were not prohibited? How would this approach impact our proposed rule requiring disclosure of the firm’s regulatory status and the financial professional’s association with the firm? How would this approach impact dually registered firms and dually hatted financial professionals? Are there operational and compliance challenges associated with this approach, and if so, what are they? • We recognize that the term ‘‘adviser’’ is used differently in connection with the regulation of investment advisory services provided to workplace retirement plans and IRAs under ERISA and the prohibited transaction provisions of the Internal Revenue Code. For example, a statutory exemption for the provision of investment advice to participants of ERISA-covered workplace retirement plans and IRAs, and related DOL regulations, define the term ‘‘fiduciary adviser’’ broadly to include a variety of persons acting in a fiduciary capacity in providing investment advice, including investment advisers registered under the Advisers Act or under state laws, registered broker-dealers, banks or similar financial institutions providing advice through a trust department, and insurance companies, and their affiliates, employees and other agents.436 Given that there are definitions of ‘‘adviser’’ under other federal regulations that capture entities and individuals who are not regulated under the Advisers Act, would a restriction on the use of the term ‘‘adviser’’ that applies only to registered broker-dealers and their registered representatives contribute to investor confusion or result in conflicting regulations, and possibly increased compliance burdens, or affect competition? • What would be the effect on competition by prohibiting brokerdealers from using these terms? What would be the effect on competition by the alternative approaches described? amozie on DSK3GDR082PROD with PROPOSALS1 D. Disclosures About a Firm’s Regulatory Status and a Financial Professional’s Association We are also proposing rules under the Exchange Act and the Advisers Act to require a broker-dealer and an investment adviser registered under 436 See ERISA § 408 (g)(11)(A); Code § 4975(f)(8)(J)(i) and 29 CFR 2550.408g–1. In addition, under the DOL’s BIC Exemption, the term ‘‘Adviser’’ would mean an individual who is an employee or other agent (including a registered representative) of a state or federally registered investment adviser, registered broker-dealer, bank or similar financial institution, or an insurance company. See Corrected BIC Exemption, infra note 504, section VIII(a). VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 section 203 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.437 We are also proposing as part of our proposed Exchange Act rule to require an associated natural person of a broker or dealer to prominently disclose that he or she is an associated person of a broker-dealer registered with the Commission in print or electronic retail investor communications.438 In addition, we are proposing as part of our Advisers Act rule to require a supervised person of an investment adviser registered under section 203 to prominently disclose that he or she is a supervised person of an investment adviser registered with the Commission in print or electronic retail investor communications.439 For example, an investment adviser registered with the Commission would prominently disclose the following on its print or electronic communications: ‘‘[Name of Firm], an investment adviser registered with the Securities and Exchange Commission’’ or ‘‘[Name of Firm], an SEC-registered investment adviser.’’ Dually registered firms would similarly be required to prominently disclose both registration statuses in their print or electronic communications, for example: ‘‘[Name of Firm], an SECregistered broker-dealer and SECregistered investment adviser.’’ Similarly, an associated natural person of a broker-dealer would prominently disclose the following, for example, on his or her business card or signature block: ‘‘[Name of professional], a [title] of [Name of Firm], an associated person of an SEC-registered broker-dealer.’’ Alternatively, a supervised person of an investment adviser would prominently disclose the following on, for example, his or her business card or signature block: ‘‘[Name of professional], a [title] of [Name of Firm], a supervised person of an SEC-registered investment adviser.’’ Finally, a financial professional who is both an associated person of a broker-dealer and a supervised person of an investment adviser would prominently disclose the following, for example: ‘‘[Name of professional], a [title] of [Name of Firm], 437 See Exchange Act proposed rule 15l–3(a) and Advisers Act proposed rule 211h–1(a). We note that in Form ADV investment advisers are required to state that registration with the Commission does not imply a certain level of skill or training. See Item 1.C. of Form ADV Part 2A. We are requesting comment on whether we should require brokerdealers and investment advisers to include this statement in addition to disclosing their applicable regulatory status. 438 See Exchange Act proposed rule 15l–3(b). 439 See Advisers Act proposed rule 211h–1(b). PO 00000 Frm 00053 Fmt 4701 Sfmt 4702 21467 an associated person of an SECregistered broker-dealer and a supervised person of an SEC- registered investment adviser.’’ Our proposed registration disclosure rules, like the proposed restriction on names and titles, or our proposed alternative approaches, complement our proposed requirement that brokerdealers and investment advisers deliver a relationship summary to retail investors. Even if a firm uses various titles, such as ‘‘wealth consultant’’ or ‘‘wealth manager,’’ the legal term for these firms is ‘‘investment adviser’’ and/ or ‘‘broker-dealer.’’ These statutory terms have meaning because they relate to a particular regulatory framework that is designed to address the nature and scope of the firm’s activities, which the firm would describe for a retail investor in the relationship summary.440 Accordingly, we preliminarily believe that requiring a firm to disclose whether it is a broker-dealer or an investment adviser in print or electronic communications to retail investors would assist retail investors to determine which type of firm is more appropriate for their specific investment needs. For similar reasons, we preliminarily believe that because retail investors interact with a firm primarily through financial professionals, it is important that financial professionals disclose the firm type with which they are associated. We acknowledge that in the studies and the comments received, retail investors generally believe brokerdealers and investment advisers are similar, and that they did not understand differences between them.441 As discussed above, while we acknowledge that broker-dealers and investment advisers are similar in that they provide investment advice, they commonly are dissimilar in a variety of key areas such as disclosure of conflicts of interest, types of fees charged, and standard of conduct. In particular, the 440 For similar reasons, we are requiring the use of the terms ‘‘supervised person’’ and ‘‘associated person’’ as they are defined legal terms generally describing the financial professional’s association with the investment adviser or broker-dealer, respectively. 441 See supra Section III.A. See also, e.g., RAND Study, supra note 5, at 19, 20 (‘‘Many [industry interview] participants reported that they thought that offering such [fee-based account] products and services meant that broker-dealers and investment advisers became less distinguishable from one another. They claimed that bundling of advice and sales by broker-dealers also added to investor confusion . . . . [Industry Representative] interviews suggest that individual investors do not distinguish between investment advisers and broker-dealers. Marketplace changes that have resulted in investment advisers and broker-dealers offering similar services have added to investor confusion.’’). E:\FR\FM\09MYP2.SGM 09MYP2 21468 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules amozie on DSK3GDR082PROD with PROPOSALS1 proposed relationship summary would inform retail investors about many of these differences, and in so doing, would be addressing investor confusion. As a result, even if investors are currently confused, over time they should better understand that investment advisers and broker-dealers may be different, and how they are different. Similarly, our proposed rules to require a firm to disclose whether it is a broker-dealer or an investment adviser in print or electronic communications to retail investors would help to facilitate investor understanding, even if investors currently may not understand the differences between investment advisers and broker-dealers. We believe that disclosures that are as important as whether a firm is a brokerdealer or an investment adviser or whether a financial professional is associated with a broker-dealer or is a supervised person of an investment adviser, should not be inconspicuous or placed in fine print. Accordingly, we are proposing to require a firm and its financial professionals to disclose their registration statuses in print communications in a type size at least as large as and of a font style different from, but at least as prominent as, that used in the majority of the communication.442 To be ‘‘prominent,’’ for example, we believe the disclosures should be included, at a minimum, on the front of a business card or in another communication, in a manner clearly intended to draw attention to it. In addition, we are proposing to require the disclosure to be presented in the body of the communication and not in a footnote.443 If a communication is delivered through an electronic communication or in any publication by radio or television, the disclosure must be presented in a manner reasonably calculated to draw retail investors’ attention to it.444 For example, in a televised or video presentation, a voice overlay and on-screen text could clearly convey the required information. Finally, we propose to stage the compliance date to ensure that firms 442 See Exchange Act proposed rule 15l–3(c)(1) and Advisers Act proposed rule 211h–1(c)(1). 443 See supra note 442. 444 See Exchange Act proposed rule 15l–3(c)(2) and Advisers Act proposed rule 211h–1(c)(2). See also Proposed Amendments to Investment Company Advertising Rules, Investment Company Act Release No. 25575 (May 17, 2002); Amendments to Investment Company Advertising Rules, Investment Company Act Release No. 26195 (Sept. 29, 2003) (stating that ‘‘radio and television advertisements [must] give the required narrative disclosures emphasis equal to that used in the major portion of the advertisement’’). See also 17 CFR 230.420. VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 and financial professionals can phase out certain older communications from circulation through the regular business lifecycle rather than having to retroactively change them.445 We request comment generally on our proposed requirement to disclose a firm’s regulatory status and, for financial professionals, their association with such firm, and in particular on the following issues: • Does our proposed rule requiring disclosure of a firm’s registration status, either alone or in combination with the proposed relationship summary, sufficiently address the concerns addressed by our proposed restriction on certain names or titles? If not, why not? • Would the proposed rules requiring disclosure of registration status and the financial professional’s association with the firm give retail investors greater clarity about various aspects of their relationship with a financial professional (e.g., his or her services, compensation structures, conflicts of interest, and legal obligations)? • To what extent do firms already clearly and conspicuously disclose their federal and/or state registration as investment advisers or broker-dealers? To what extent do financial professionals already disclose their association with the broker-dealer or investment adviser? If such status is disclosed, is it typically in fine print or presented in a manner that it is not easily recognizable to investors? • Do retail investors understand what it means for a firm to be ‘‘registered’’ with the Commission or a state? Additionally, do retail investors understand what it means for a financial professional to be an ‘‘associated person’’ of a broker-dealer or a ‘‘supervised person’’ of an investment adviser? • Would our proposed rules improve clarity and consistency for investors in identifying a firm’s regulatory status and a financial professional’s association with a firm or will it lead to unnecessary, wordy, and possibly redundant disclosure? If the latter, how can we address this? • Are we correct that investors would find it helpful to know whether a firm is registered as an investment adviser or a broker-dealer or a financial professional is associated with a brokerdealer or supervised by an investment adviser so that they can refer to the relationship summary to better 445 Similarly, we are not requiring firms to send new communications to replace all older print communications as this would be overly burdensome and costly for firms. PO 00000 Frm 00054 Fmt 4701 Sfmt 4702 understand the practical implications of the firm’s registration and such financial professional’s association with that firm? • Should dually registered firms be required to disclose both registration statuses? Would this requirement cause more confusion or help to address it? If so, how? By requiring a financial professional to disclose whether he or she is an associated person of a brokerdealer or a supervised person of an investment adviser, would we be assisting retail investors in understanding the capacity in which their financial professional services them? For example, would retail investors serviced by dual hatted financial professionals understand that their financial professional may act in dual capacities (i.e., brokerage and advisory)? • Are our proposed requirements prescribing the presentation of the disclosure appropriate? Should we consider removing any of these requirements? Alternatively, are there requirements we should add? If so, which requirements and why? Are there requirements that we should modify? For example, could the Commission’s objective of ensuring prominence of disclosure be served through a more principles-based approach, or through different requirements (e.g., that the disclosure be not 20% smaller than the principal text)? • Should the account statement or other disclosure clarify whether a retail investor has an advisory or a brokerage account? If so, how? • Should our proposed rules define ‘‘communication’’? For example, should we include in the rule a definition that tracks FINRA’s definition of ‘‘communication’’ in Rule 2210? In particular, FINRA Rule 2210 defines a ‘‘communication’’ as correspondence, retail communications and institutional communications. ‘‘Correspondence’’ means any written (including electronic) communication that is distributed or made available to 25 or fewer retail investors within any 30 calendar day period and ‘‘Retail communication’’ means any written (including electronic) communication that is distributed or made available to more than 25 retail investors within any 30 calendar day period. Finally, ‘‘Institutional communication’’ means any written (including electronic) communication that is distributed or made available only to institutional investors, but does not include a member’s internal communications. Are there other definitions of ‘‘communication’’ we should consider? As an alternative to the word E:\FR\FM\09MYP2.SGM 09MYP2 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules amozie on DSK3GDR082PROD with PROPOSALS1 ‘‘communication’’ in our proposed rules, should we use ‘‘advertisements’’ as defined in rule 206(4)–1 under the Advisers Act, or a different term? 446 • Should the proposed rules apply to all communications to retail investors, including oral communications? On the other hand, are there certain types of written communications that could be exempted, e.g. communications that do not make any financial or investment recommendation or otherwise promote a product or service of the member? 447 • Should we permit the use of hyperlinks to the registration status disclosure statement for electronic communications rather than requiring the disclosure statement on the communication itself? Would permitting hyperlinks limit or promote the effectiveness of this disclosure requirement, and if so, how? • Should we require broker-dealers, investment advisers and financial professionals to state that registration with the Commission does not imply a certain level of skill or training? Are there potential benefits or drawbacks to requiring this type of statement? IV. Economic Analysis We are sensitive to the economic effects, including the costs and benefits that stem from the proposed rules. Whenever the Commission engages in rulemaking 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 requires the Commission to consider whether the action would promote efficiency, competition, and capital formation, in addition to the protection of investors.448 Further, when making rules under the Exchange Act, section 23(a)(2) of the Exchange Act requires the Commission to consider the impact such rules would have on competition.449 Section 23(a)(2) of the Exchange Act also prohibits the Commission from adopting any rule that would impose a burden on competition not necessary or appropriate in furtherance of the purposes of the Exchange Act.450 Section 202(c) of the Advisers Act requires the Commission, when engaging in rulemaking and required to consider or determine whether an action is necessary or appropriate in the public interest, also to consider whether the 446 See FINRA Rule 2210(a); rule 206(4)–1 under the Advisers Act. 447 See FINRA Rule 2210(b)(1)(D)(iii) (exempting certain communications from principal preapproval). 448 See 15 U.S.C. 77b(b) and 15 U.S.C. 78c(f). 449 See 15 U.S.C. 78w(a)(2). 450 Id. VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 action will promote efficiency, competition, and capital formation, in addition to the protection of investors.451 The Commission provides both a qualitative assessment of the potential effects and, where feasible, quantitative estimates of the potential aggregate initial and aggregate ongoing costs. In some cases, however, quantification is particularly challenging due to the difficulty of predicting how market participants would act under the conditions of the proposed rules. For example, although we expect that the proposal would increase retail investors’ understanding of the services provided to them, investors could respond differently to the increased understanding—by transferring to a different financial firm or professional, hiring a financial professional for the first time, or entirely abandoning the financial services market while moving their assets to other products or markets (e.g., bank deposits or insurance products). The Commission encourages commenters to provide any data and information that could help us quantify these long-term effects. In the economic analysis that follows, we first examine the current regulatory and economic landscape to form a baseline for our analysis. We then analyze the likely economic effects— including benefits and costs and impact on efficiency, competition, and capital formation—arising from the proposed rules relative to the baseline discussed below. A. Baseline This section discusses, as it relates to this proposal, the current state of the broker-dealer and investment adviser markets, the current regulatory environment, and the current state of retail investor perceptions in the market. 1. Providers of Financial Services a. Broker-Dealers As noted above, one market that would be affected by these proposed rules 452 is the market for broker-dealer services, including firms that are dually registered as broker-dealers and investment advisers.453 The market for 451 15 U.S.C. 80b–2(c). rules’’ used in this economic analysis is inclusive of Form CRS and related proposed forms as well as the proposed rules themselves. 453 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 dual registrants offer advisory accounts to retail investors but offer only brokerage services, such as underwriting services, 452 ‘‘Proposed PO 00000 Frm 00055 Fmt 4701 Sfmt 4702 21469 broker-dealer services encompasses a small set of large broker-dealers and thousands of small broker-dealers competing for niche or regional segments of the market.454 As of December 2017, there were approximately 3,841 registered brokerdealers with over 130 million customer accounts. In total, these broker-dealers have close to $4 trillion in total assets.455 More than two-thirds of all brokerage assets and close to one-third of all customer accounts are held by the 16 largest broker-dealers, as shown in Table 1, Panel A.456 Of the brokerdealers registered with the Commission as of December 2017, 366 broker-dealers were dually registered as investment advisers; 457 however, these firms hold nearly 90 million (68%) customer accounts.458 Approximately 546 brokerto institutional clients. For purposes of the discussion of the baseline in this economic analysis, a dual registrant is any firm that is dually registered with the Commission as an investment adviser and a broker-dealer. For the purposes of the relationship summary, however, we propose to define dual registrant as a firm that is dually registered as a broker-dealer and an investment adviser and offers services to retail investors as both a broker-dealer and investment adviser. See supra note 25. 454 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)]. 455 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. 456 Approximately $3.91 trillion of total assets of broker-dealers (98%) are at firms with total assets in excess of $1 billion. Of the 30 dual registrants in the group of broker-dealers with total assets in excess of $1 billion, total assets for these dual registrants are $2.46 trillion (62%) of aggregate broker-dealer assets. Of the remaining 88 firms, 81 have affiliated investment advisers. 457 Because this number does not include the number of broker-dealers who are also registered as state investment advisers, the number undercounts the full number of broker-dealers that operate in both capacities. Further, not all firms that are dually registered as an investment adviser and a brokerdealer offer both brokerage and advisory accounts to retail investors—for example, some dual registrants offer advisory accounts to retail investors but offer only brokerage services, such as underwriting services, to institutional customers. For purposes of the discussion of the baseline in this economic analysis, a dual registrant is any firm that is dually registered with the Commission as an investment adviser and a broker-dealer. 458 Some broker-dealers may be affiliated with investment advisers without being dually registered. From Question 10 on Form BD, 2,145 broker-dealers report that directly or indirectly, they either control, are controlled by, or under common control with an entity that is engaged in the securities or investment advisory business. Comparatively, 2,478 (19.57%) SEC-registered investment advisers report an affiliate that is a E:\FR\FM\09MYP2.SGM Continued 09MYP2 21470 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules dealers (14%) reported at least one type of non-securities business, including insurance, retirement planning, mergers & acquisitions, and real estate, among others.459 Approximately 74% of over $3.6 trillion in assets (90% of total broker-dealer assets) and 128 million (96%) customer accounts.461 Of those broker-dealers serving retail investors, 360 are dually registered as investment advisers.462 registered broker-dealers report retail customer activity.460 Panel B of Table 1 limits the brokerdealers to those that report some retail investor activity. As of December 2017, there were approximately 2,857 brokerdealers that served retail investors, with TABLE 1—PANEL A: REGISTERED BROKER-DEALERS AS OF DECEMBER 2017 463 [Cumulative Broker-Dealer Total Assets and Customer Accounts 464] Size of broker-dealer (total assets) Total number of BDs Number of dual-registered BDs >$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 ........................................................................................................ 16 102 38 118 482 1,035 2,055 10 20 7 26 94 141 68 Total .......................................................................................................... 3,841 366 Cumulative total assets $2,717 1,196 26 26 17 4 1 Cumulative number of customer Accounts 465 bil. bil. bil. bil. bil. bil. bil. 40,969,187 81,611,933 4,599,330 1,957,981 2,970,133 233,946 5,588 3,987 bil. 132,348,098 TABLE 1—PANEL B: REGISTERED RETAIL BROKER-DEALERS AS OF DECEMBER 2017 [Cumulative Broker-Dealer Total Assets and Customer Accounts] Size of broker-dealer (total assets) Total number of BDs Number of dual-registered BDs Cumulative total assets Cumulative number of customer accounts 15 70 23 93 372 815 1,469 10 19 7 25 94 139 66 $2,647 923 16 20 14 3 $.4 bil. bil. bil. bil. bil. bil. bil. 40,964,945 77,667,615 4,547,574 1,957,981 2,566,203 216,158 5,588 Total .......................................................................................................... amozie on DSK3GDR082PROD with PROPOSALS1 >$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 ........................................................................................................ 2,857 360 $3,624 bil. 127,926,064 broker-dealer in Section 7A of Schedule D of Form ADV, including 1,916 SEC-registered investment advisers that report an affiliate that is a registered broker-dealer. Approximately 75% of total assets under management of investment advisers are managed by these 2,478 investment advisers. 459 We examined Form BD filings to identify broker-dealers reporting non-securities business. For the 546 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 (208), management/financial/other consulting (101), advisory/retirement planning (80), mergers & acquisitions (71), foreign exchange/swaps/other derivatives (31), real estate/property management (31), tax services (15), and other (141). Note that a broker-dealer may have more than one line of nonsecurities business. 460 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 VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 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. We request comment on whether firms that intermediate both retail and institutional customer activity generally market only ‘‘sales’’ on Form BR. 461 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. 462 Of the 36 dual registrants in the group of retail broker-dealers with total assets in excess of $500 million, total assets for these dual registrants are $2.19 trillion (60%) of aggregate retail broker-dealer assets. Of the remaining 72 retail broker-dealers, 67 have affiliated investment advisers. 463 The data is obtained from FOCUS filings as of December 2017. Note that there may be a doublecounting of customer accounts among in particular PO 00000 Frm 00056 Fmt 4701 Sfmt 4702 the larger broker-dealers as they may report introducing broker-dealer accounts as well in their role as clearing broker-dealers. 464 In addition to the approximately 130 million individual accounts at broker-dealers, there are approximately 293,000 omnibus accounts (0.2% of total accounts at broker-dealers), across all 3,841 broker-dealers, of which approximately 99% are held at broker-dealers with greater than $1 billion in total assets. See also supra note 455. Omnibus accounts reported in FOCUS data are the accounts of non-carrying 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 unaware from the data available to determine 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 underinclusive of all customer accounts held at broker-dealers. 465 Customer Accounts includes both brokerdealer and investment adviser accounts for dual registrants. E:\FR\FM\09MYP2.SGM 09MYP2 21471 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules Table 2 reports information on brokerage commissions,466 fees, and selling concessions from the fourth quarter of 2017 for all broker-dealers, including dual registrants.467 On average, broker-dealers, including those that are dually registered as investment advisers, earn about $2.1 million per quarter in revenue from commissions and more than double that amount in fees,468 although the Commission notes that fees encompass a variety of fees, not just those related to advisory services.469 The level of revenues earned from broker-dealers for commissions and fees increases with broker-dealer size, but also tends to be more heavily weighted towards commissions for broker-dealers with less than $10 million in assets and is weighted more heavily towards fees for broker-dealers with assets in excess of $10 million. For example, for the 102 broker-dealers with assets between $1 billion and $50 billion, average revenues from commissions are $25 million, while average revenues from fees are approximately $91 million.470 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 44% of total revenues earned by these firms. Table 2, Panel B, below provides aggregate revenues by revenue type (commissions, fees, or selling concessions) for broker-dealers delineated by whether the broker-dealer is also a dual registrant. 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 generated approximately 43% of their advicerelated revenues as commissions and only 32% 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 471 Size of broker-dealer in total assets N Commissions Fees 472 Sales of IC shares >$50 billion ....................................................................................................... $1 billion–$50 billion ........................................................................................ $500 million–$1 billion ..................................................................................... $100 million–$500 million ................................................................................ $10 million–$100 million .................................................................................. $1 million–$10 million ...................................................................................... <$1 million ........................................................................................................ 16 102 38 118 483 1,035 2,049 $176,193,599 25,109,619 6,322,803 7,698,889 1,801,079 633,720 66,503 $365,014,954 91,966,559 11,312,112 11,338,175 2,811,290 372,757 38,618 $20,493,769 18,808,687 6,724,401 4,536,407 3,653,475 217,444 26,270 Average of All Broker-Dealers .................................................................. 3,841 2,132,544 4,897,521 1,322,759 TABLE 2—PANEL B: AGGREGATE TOTAL REVENUES FROM REVENUE GENERATING ACTIVITIES FOR BROKER-DEALERS BASED ON DUAL REGISTRANT STATUS Broker-dealer type N Commissions Fees 473 Sales of IC shares 366 3,475 $4.27 bil. 3.92 bil. $15.88 bil. 2.93 bil. $2.8 bil. 2.28 bil. All .............................................................................................................. amozie on DSK3GDR082PROD with PROPOSALS1 Dual Registered as IAs .................................................................................... Standalone Registered BDs ............................................................................ 3,841 8.19 bil. 18.81 bil. 5.08 bil. 466 FOCUS data does not provide mark-ups or mark-downs as a separate revenue category and they are not included as part of the brokerage commission revenue. 467 Source: FOCUS data. 468 Fees, as detailed in the FOCUS data, include fees for account supervision, investment advisory and administrative services. Beyond the broad classifications of fee types included in fee revenue, we are unable to determine whether fees such as 12b–1 fees, sub-accounting, or other such service fees are included. The data covers both brokerdealers and dually-registered firms. FINRA’s Supplemental Statement of Income, Line 13975 (Account Supervision and Investment Advisory Services) denotes that fees earned for account VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 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). 469 With respect to the FOCUS data, additional granularity of what services comprise ‘‘advisory services’’ is not available. PO 00000 Frm 00057 Fmt 4701 Sfmt 4702 470 A rough estimate of total fees in this size category would be 102 broker-dealers with assets between $1 billion and $50 billion multiplied by the average fee revenue of $91 million, or $9.381 billion in total fees. Divided by the number of customer accounts in this size category (81,611,933), the average account would be charged approximately $115 in fees per quarter, or $460 per year. 471 The data obtained from December 2017 FOCUS reports and averaged across size groups. 472 Fees, as detailed in the FOCUS data, include fees for account supervision, investment advisory and administrative services. The data covers both broker-dealers and dually-registered firms. 473 See id. E:\FR\FM\09MYP2.SGM 09MYP2 21472 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules i. Disclosures for Broker-Dealers Broker-dealers register with and report information to the Commission, the SROs, and other jurisdictions through Form BD. Form BD requires information about the background of the applicant, its principals, controlling persons, and employees, as well as information about the type of business the broker-dealer proposes to engage in and all control affiliates engaged in the securities or investment advisory business.474 Broker-dealers report whether a broker-dealer or any of its control affiliates have been subject to criminal prosecutions, regulatory actions, or civil actions in connection with any investment-related activity, as well as certain financial matters.475 Once a broker-dealer is registered, it must keep its Form BD current by amending it promptly when the information is or becomes inaccurate for any reason.476 In addition, firms report similar information and additional information to FINRA pursuant to FINRA Rule 4530.477 The current Paperwork Reduction Act estimate for the total industry-wide annual filing burden to comply with rule 15b1–1 and file Form BD is approximately 4,999 hours, with an estimated internal cost of compliance associated with those burden hours for all broker-dealers of $1,394,721. A significant amount of information concerning broker-dealers and their associated natural persons, including information from Form BD, Form BDW, and Forms U4, U5, and U6, is publicly available through FINRA’s BrokerCheck system. This information includes violations of and claims of violations of the securities and other financial laws by broker-dealers and their financial professionals; criminal or civil litigation, regulatory actions, arbitration, or customer complaints against brokerdealers and their financial professionals; and the employment history and licensing information of financial professionals associated with brokerdealers, among other things.478 Broker-dealers are subject to other disclosure requirements under the 474 See generally Form BD. Item 11 and Disclosure Reporting Pages, Form BD. 476 See Exchange Act rule 15b3–1(a). 477 See supra Section II.B.7. 478 FINRA Rule 8312 governs the information FINRA releases to the public via BrokerCheck. See supra note 280 and accompanying text. amozie on DSK3GDR082PROD with PROPOSALS1 475 See VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 federal securities laws and SRO rules. For instance, under existing antifraud provisions of the Exchange Act, a broker-dealer has a duty to disclose material information to its customers conditional on the scope of the relationship with the customer.479 Disclosure has also been a feature of other regulatory efforts related to financial services, including those of DOL and certain FINRA rules.480 b. Investment Advisers Other parties that would be affected by the proposed rules and proposed Form CRS are SEC-registered investment advisers.481 This section first discusses SEC-registered investment advisers, followed by a discussion of state-registered investment advisers. As of December 2017, there are approximately 12,700 investment advisers registered with the Commission. The majority of SECregistered investment advisers report that they provide portfolio management services for individuals and small businesses.482 479 A broker-dealer also may be liable if it does not disclose ‘‘material adverse facts of which it is aware’’. See, e.g., Chasins v. Smith, Barney & Co., 438 F.2d at 1172; SEC v. Hasho, 784 F. Supp. at 1110; Release 48758, supra note 243 (‘‘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). 480 See, infra Section IV.A.1.c; FINRA Notice 10– 54, supra note 12. Generally, all registered brokerdealers 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 brokerdealer’s regulatory requirements when providing advice, we focus on FINRA’s regulation, examination and enforcement with respect to member broker-dealers. FINRA disclosure rules include but are not limited FINRA rules 2210(d)(2) (communications with the public), 2260 (disclosures), 2230 (customer account statements and confirmations), and 2270 (day-trading risk disclosure statement). 481 In addition to SEC-registered investment advisers, which are the focus of this section, the proposed rules and proposed Form CRS could also affect banks, trusts, insurance companies, and other providers of financial advice. 482 Of the approximately 12,700 SEC-registered investment advisers, 7,979 (64%) 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 PO 00000 Frm 00058 Fmt 4701 Sfmt 4702 Of all SEC-registered investment advisers, 366 identified themselves as dually registered broker-dealers.483 Further, 2,478 investment advisers (20%) reported an affiliate that is a broker-dealer, including 1,916 investment advisers (15%) that reported an SEC-registered broker-dealer affiliate.484 As shown in Panel A of Table 3 below, in aggregate, investment advisers have over $72 trillion in assets under management (‘‘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, although the dollar value of AUM for investment advisers and of customer assets in broker-dealer accounts is comparable, the total number of accounts for investment advisers is only 27% of the number of customer accounts for broker-dealers. Based on staff analysis of Form ADV data, approximately 60% of investment advisers (7,600) have some portion of their business dedicated to retail investors, including both high net worth and non-high net worth individual clients, as shown in Panel B of Table 3.485 In total, these firms have approximately $32 trillion of assets under management.486 Approximately 6,600 registered investment advisers (52%) serve 29 million non-high net worth individual clients and have approximately $5.33 trillion in assets under management, while nearly 7,400 registered investment advisers (58%) serve approximately 4.8 million high net worth individual clients with $6.56 trillion in assets under management.487 17,800 state-registered investment advisers, of which 145 are also registered with the Commission. Approximately 13,800 state-registered investment advisers are retail facing (see Item 5.D of Form ADV). 483 See supra note 457. 484 Item 7.A.1 of Form ADV. 485 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. 486 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. 487 Estimates are based on IARD system data as of December 31, 2017. The AUM reported here is specifically that of those non-high net worth clients. Of the 7,600 investment advisers serving retail investors, 360 may also be dually registered as broker-dealers. E:\FR\FM\09MYP2.SGM 09MYP2 21473 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules TABLE 3—PANEL A: REGISTERED INVESTMENT ADVISERS (RIAS) AS OF DECEMBER 2017 [Cumulative RIA assets under management (AUM) and accounts] Size of investment adviser (AUM) Number of RIAs Number of dual-registered RIAs >$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 ........................................................................................................ 246 3,238 1,554 5,568 1,103 172 778 15 115 53 129 24 2 28 Total .......................................................................................................... 12,659 366 Cumulative AUM $48,221 21,766 1,090 1,303 59 1 .02 Cumulative number of accounts bil. bil. bil. bil. bil. bil. bil. 17,392,968 11,560,805 2,678,084 3,942,639 198,659 5,852 31,291 72,439 bil. 35,810,298 TABLE 3—PANEL B: RETAIL REGISTERED INVESTMENT ADVISERS (RIAS) AS OF DECEMBER 2017 [Cumulative RIA assets under management (AUM) and accounts] Size of investment adviser (AUM) Number of RIAs Number of dual-registered RIAs >$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 ........................................................................................................ 106 1,427 934 4,114 711 98 198 15 114 52 126 24 1 29 Total .......................................................................................................... 7,588 361 amozie on DSK3GDR082PROD with PROPOSALS1 As an alternative to registering with the Commission, smaller investment advisers could register with state regulators.488 As of December 2017, there are 17,635 state registered investment advisers,489 of which 145 are also registered with the Commission. Of the state-registered investment advisers, 488 Pursuant to the Dodd-Frank Act, Item 2.A. of Part 1A of Form ADV requires an investment adviser to register with the SEC if it (i) is a large adviser that has $100 million or more of regulatory assets under management (or $90 million or more if an adviser is filing its most recent annual updating amendment and is already registered with the SEC); (ii) is a mid-sized adviser that does not meet the criteria for state registration or is not subject to examination; (iii) meets the requirements for one or more of the revised exemptive rules under section 203A discussed below; (iv) is an adviser (or subadviser) to a registered investment company; (v) is an adviser to a business development company and has at least $25 million of regulatory assets under management; or (vi) received 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 for those investment advisers that do not already file with the SEC. 489 There are 79 investment advisers with latest reported Regulatory Assets Under Management in excess of $110 million but are not listed as registered with the SEC. For the purposes of this rulemaking, these are considered erroneous submissions. VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 236 are dually registered as brokerdealers, while 5% (920) report a brokerdealer affiliate. In aggregate, stateregistered investment advisers have approximately $341 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 just 64% for SEC-registered investment advisers. Approximately 77% of stateregistered investment advisers (13,470) have some portion of their business dedicated to retail investors,490 and in aggregate, these firms have approximately $308 billion in AUM.491 Approximately 12,700 (72%) stateregistered advisers serve 616,000 nonhigh net worth retail clients and have approximately $125 billion in AUM, while over 11,000 (63%) state-registered advisers serve approximately 194,000 490 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. 491 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. PO 00000 Frm 00059 Fmt 4701 Sfmt 4702 Cumulative AUM $22,788 8,472 652 917 40 .4 .02 Cumulative number of accounts bil. bil. bil. bil. bil. bil. bil. 16,638,548 10,822,275 2,602,220 3,814,900 231,663 5,804 31,271 32,870 bil. 34,146,681 high net worth retail clients with $138 billion in AUM.492 Table 4 details the compensation structures employed by approximately 12,700 investment advisers. Approximately 95% are compensated through a fee-based arrangement, where a percentage of assets under management are remitted to the investment adviser from the investor for advisory services. As shown in the table below, most investment advisers rely on a combination of different compensation types, beyond fee-based compensation, including fixed fees, hourly charges, and performance based fees. Less than 4% of investment advisers charge commissions 493 to their investors. 492 Estimates are based on IARD system data as of December 31, 2017. The AUM reported here is specifically that of those non-high net worth investors. Of the 13,471 investment advisers serving retail investors, 144 may also be dually registered as broker-dealers. 493 Some investment advisers report on Item 5.E. of Form ADV that they receive ‘‘commissions.’’ As a form of deferred sales load, all payments of ongoing sales charges to intermediaries would constitute transaction-related compensation. Intermediaries receiving those payments should consider whether they need to register as brokerdealers under section 15 of the Exchange Act. E:\FR\FM\09MYP2.SGM 09MYP2 21474 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules TABLE 4—REGISTERED INVESTMENT ADVISERS COMPENSATION BY TYPE Compensation type Yes A percentage of assets under management ........................................................................................................... Hourly charges ......................................................................................................................................................... Subscription fees (for a newsletter or periodical) .................................................................................................... Fixed fees (other than subscription fees) ................................................................................................................ Commissions ........................................................................................................................................................... Performance-based fees ......................................................................................................................................... Other ........................................................................................................................................................................ As discussed above, many investment advisers participate in wrap fee programs. As of December 31, 2017, more than 5% of the SEC-registered investment advisers sponsor a wrap fee program and more than 9% act as a portfolio manager for one or more wrap fee programs.494 From the data available, we are unable to determine how many advisers provide advice about investing in wrap fee programs, because advisers providing such advice may be neither sponsors nor portfolio managers. amozie on DSK3GDR082PROD with PROPOSALS1 ii. Disclosures for Investment Advisers As fiduciaries, investment advisers have a duty to provide full and fair disclosure of material facts and are subject to express disclosure requirements in Form ADV.495 Consistent with this duty and those requirements, investment advisers file Form ADV to register with the Commission or state securities authorities, as applicable, and provide an annual update to the form.496 Part 1 494 A wrap fee program sponsor is as a firm that sponsors, organizes, or administers the program or selects, or provides advice to clients regarding the selection of, other investment advisers in the program. See General Instructions to Form ADV. 495 See SEC v. Capital Gains Research Bureau, Inc., 375 U.S. at 194; see also Brochure Adopting Release, supra note 157. See also 913 Study, supra note 3, at n.92. For example, if an adviser selects or recommends other advisers to investors, it must disclose any compensation arrangements or other business relationships between the advisory firms, along with the conflicts created, and explain how it addresses these conflicts. See Item 10 of Form ADV Part 2A. See also 913 Study, supra note 3, at n.93. Other potential conflicts of interest include acting as a principal in transactions with investors and compensation received thereof; incentives provided by third parties to sell their services and products; and agency cross-trades, where the advisers is also a broker-dealer and executes a client’s order by crossing the orders with those of non-advisory clients. See Interpretation of Section 206(3) of the Investment Advisers Act of 1940, Investment Advisers Act Release No. 1732 (Jul. 20, 1998), at n.3. 496 See Advisers Act rules 203–1 and 204–1. Part 1A (1B) of Form ADV is the registration application for the Commission (and state securities authorities). Part 2 of Form ADV consists of a narrative ‘‘brochure’’ about the adviser and ‘‘brochure supplements’’ about certain advisory personnel on whom clients may rely for investment advice. See Brochure Adopting Release, supra note 157. VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 of Form ADV provides information to regulators, and made available to clients, prospective clients, and the public, about the registrants’ ownership, investors, and business practices. Advisers also prepare a Form ADV Part 2A narrative brochure that contains information about the investment adviser’s business practices, fees, conflicts of interest, and disciplinary information,497 in addition to a Part 2B brochure supplement that includes information about the specific individuals, acting on behalf of the investment adviser, who actually provide investment advice and interact with the client.498 Currently, the Part 2A brochure is the primary client-facing disclosure document,499 however, Parts 1 and 2A are both made publicly available by the Commission through IAPD,500 and advisers are generally required to deliver Part 2A and Part 2B to their clients. The current Paperwork Reduction Act estimate of the average annual cost and hour burden for investment advisers to complete, amend, and file all parts of Form ADV are $6,051 and 23.77 hours.501 497 Part 2A of Form ADV contains 18 mandatory disclosure items about the advisory firm, including information about an adviser’s: (1) Range of fees; (2) methods of analysis; (3) investment strategies and risk of loss; (4) brokerage, including trade aggregation polices and directed brokerage practices, as well as the use of soft dollars; (5) review of accounts; (6) client referrals and other compensation; (7) disciplinary history; and (8) financial information, among other things. Much of the disclosure in Part 2A addresses an investment adviser’s conflicts of interest with its investors, and is disclosure that the adviser, as a fiduciary, must make to investors in some manner regardless of the form requirements. See Brochure Adopting Release, supra note 157. 498 Part 2B, or the ‘‘brochure supplement,’’ includes information about certain advisory personnel that provide retail client investment advice, and contains educational background, disciplinary history, and the adviser’s supervision of the advisory activities of its personnel. See Instruction 5 of General Instructions for Form ADV. Registrants are not required to file Part 2B (brochure supplement) electronically, but must preserve a copy of the supplement(s) and make them available upon request. 499 See Brochure Adopting Release, supra note 157. 500 See Investment Adviser Public Disclosure, available at https://adviserinfo.sec.gov/. 501 See infra Section V.A.2. PO 00000 Frm 00060 Fmt 4701 Sfmt 4702 12,041 3,670 119 5,406 490 4,780 1,846 No 617 8,988 12,539 7,252 12,168 7,878 10,812 c. Disclosure Obligations for BrokerDealers and Investment Advisers Under DOL Rules and Exemptions As noted, firms and financial professionals providing services to customers in retirement accounts, including workplace retirement plans and IRAs, are subject to certain disclosure obligations under rules and exemptions issued by the DOL under ERISA and the prohibited transaction provisions of the Code.502 For example, DOL regulations under a statutory exemption for investment advice services provided to plan participants and IRAs requires firms and financial professionals to disclose information about the services that they will provide and their fees and other compensation, and to acknowledge that the adviser is acting as a fiduciary.503 More recently, the DOL’s BIC Exemption would require that firms seeking to rely on the exemption to receive commissions and other fees in connection with making investment recommendations to IRAs and participants of ERISA-covered plans (including advice relating to rollovers from plans or between account types) 504 502 See supra note 11. 29 CFR 2550.408g–1(b)(7). In general, firms and financial professionals who receive commissions or other transaction-related compensation in connection with providing certain fiduciary investment recommendations relating to the assets of ERISA-covered workplace retirement plans and IRAs could violate provisions under the Code prohibiting fiduciaries from engaging in selfdealing and receiving compensation from third parties in connection with investments by these plans and IRA (and, with respect to such plans, substantially similar prohibited transaction rules that apply under ERISA to transactions involving ERISA plans but not IRAs). To receive such compensation, firms have historically complied with one or more prohibited transaction exemptions (‘‘PTEs’’) issued by the DOL over time, which generally required (among other conditions) disclosures about, e.g., direct and indirect compensation received in connection with a recommended transactions. See Definition of the Term ‘‘Fiduciary;’’ Conflict of Interest Rule— Retirement Investment Advice, 81 FR 20945, 20991–92 (Apr. 8, 2016) (to be codified at 20 C.F.R. pts. 2509, 2510 and 2550) (‘‘DOL Fiduciary Rule Adopting Release’’) (describing action to adopt new and amended PTEs and revoke certain PTEs applicable to investment advice services). 504 See Best Interest Contract Exemption, 81 FR 21002, 21006–7 (Apr. 8, 2016) (‘‘BIC Exemption 503 See E:\FR\FM\09MYP2.SGM 09MYP2 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules generally must (among other conditions) provide disclosure about the services to be performed (including monitoring of recommendations, offering proprietary products and limiting recommendations) and how the investor will pay for services, material conflicts of interest (including third party compensation to the firm, affiliates and financial professionals), and must also make certain ongoing disclosures on a public website.505 The DOL adopted the BIC Exemption in connection with the amendment of its regulation defining ‘‘investment advice,’’ which had the effect of expanding the circumstances under which broker-dealers and investment advisers may be fiduciaries for purposes of the prohibited transaction provisions under ERISA and the Code (the ‘‘DOL Fiduciary Rule’’).506 amozie on DSK3GDR082PROD with PROPOSALS1 Release’’) Best Interest Contract Exemption; Correction (Prohibited Transaction Exemption 2016–01), 81 FR 44773 (July 11, 2016) (‘‘Corrected BIC Exemption’’), as amended 18-Month Extension of Transition Period and Delay of Applicability Dates; Best Interest Contract Exemption (PTE 2016– 01); Class Exemption for Principal Transactions in Certain Assets Between Investment Advice Fiduciaries and Employee Benefit Plans and IRAs (PTE 2016–02); Prohibited Transaction Exemption 84–24 for Certain Transactions Involving Insurance Agents and Brokers, Pension Consultants, Insurance Companies, and Investment Company Principal Underwriters (PTE 84–24), 82 FR 56545 (Nov. 29, 2017). Depending on how they are compensated, investment advisers receiving a level fee may not be subject to the full set of contract, disclosure and other conditions of the BIC Exemption. 505 See Corrected BIC Exemption, supra note, 504, at sections II and III. Ongoing website disclosure would include information about certain material conflicts of interest and third party payments, a schedule of typical fees and service charges, a description of the compensation and incentive arrangements for individual financial professionals, and a written description of the financial institution’s policies and procedures. Id., at section III. In the case of recommendations provided to an IRA, the firm also would be required to enter into a written contract with the IRA owner that includes an acknowledgement of fiduciary status and an enforceable promise to adhere to certain ‘‘impartial conduct standards’’ (including a best interest standard of conduct). Id., at section II(a). 506 See DOL Fiduciary Rule Adopting Release, supra note 503. VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 Although a decision of the Court of Appeals for the Fifth Circuit recently vacated the DOL Fiduciary Rule,507 we understand that many firms already have taken steps to implement conditions under the BIC Exemption.508 The Commission does not currently have data on the number of firms that are subject to disclosure obligations under applicable DOL rules and exemptions.509 However, because we understand that most broker-dealers expected that they would be required to comply with the BIC Exemption to continue to provide services to retail investors in IRAs and participantdirected workplace retirement plans,510 the Commission can broadly estimate the maximum number of broker-dealers that could be subject to disclosure obligations under DOL rules and exemption including the BIC Exemption from the number of broker-dealers that have retail investor accounts. Approximately 74.4% (2,857) of registered broker-dealers report sales to retail customers.511 Similarly, approximately 60% (7,600) of investment advisers serve high net 507 See Chamber of Commerce of the U.S.A., e. al. v. U.S. Dep’t of Labor, et. al., No. 17–10238 (5th Cir. Mar 15, 2018). 508 See SIFMA and 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-Fiduciary-RuleAugust-2017.pdf. 509 In order to obtain this information, the Commission would need to know which financial firms have retirement-based accounts as part of their business model. Under the current reporting regime 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-based accounts. 510 See BIC Exemption Release, supra note 504, at 21006–07 (DOL states that it ‘‘anticipates that the [DOL Fiduciary Rule] will cover many investment professionals who did not previously consider themselves to be fiduciaries under ERISA or the Code.’’). 511 As of December 2017, 3,841 broker-dealers filed Form BD. Retail sales by broker-dealers were obtained from Form BD. PO 00000 Frm 00061 Fmt 4701 Sfmt 4702 21475 worth and non-high net worth individual clients. The Commission believes that this number likely overestimates those broker-dealers and investment advisers that provide retirement account services. Therefore, these 2,850 broker-dealers and 7,600 investment advisers that provide retail services represent an upper bound of the number of broker-dealers and investment advisers that would likely be subject to compliance with disclosure obligations under DOL rules and exemptions and may have taken steps to comply with the contract, disclosure and other conditions under the DOL’s BIC Exemption.512 d. 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 shows the time series trend of growth in broker-dealers and investment advisers between 2005 and 2017. Over the last 13 years, the number of broker-dealers has declined from over 6,000 in 2005 to less than 4,000 in 2017, while the number of investment advisers has increased from approximately 9,000 in 2005 to over 12,000 in 2017. This change in the relative numbers of broker-dealers and investment advisers over time likely affects the competition for advice, and potentially alters the choices available to investors on how to receive or pay for such advice, the nature of the advice, and the attendant conflicts of interest. BILLING CODE 8011–01–P 512 The DOL’s Regulatory Impact Analysis estimated that the numbers of broker-dealers and investment advisers (including state-registered investment advisers) that could be affected by their rule are approximately 2,500 and 17,500, respectively. See Regulatory Impact Analysis for Final Rule and Exemptions, Definition Of The Term ‘‘Fiduciary’’ Conflicts Of Interest—Retirement Investment Advice (Apr. 2016), at 215–229, available at https://www.dol.gov/sites/default/files/ ebsa/laws-and-regulations/rules-and-regulations/ completed-rulemaking/1210-AB32-2/conflict-ofinterest-ria.pdf. E:\FR\FM\09MYP2.SGM 09MYP2 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules amozie on DSK3GDR082PROD with PROPOSALS1 Increases in the number of investment advisers and decreases in the number of broker-dealers could have occurred for a number of reasons, including anticipation of possible regulatory changes to the industry, other regulatory restrictions, technological innovation (i.e., robo-advisers and online trading platforms), product proliferation (e.g., index mutual funds and exchangetraded products), and industry consolidation driven by economic and market conditions, particularly among broker-dealers.513 Commission staff has observed the transition by brokerdealers from traditional brokerage services to also providing investment advisory services (often under an investment adviser registration, whether federal or state), and many firms have been more focused on offering fee-based accounts than accounts that charge 513 See, Hester Peirce, Dwindling numbers in the financial industry, Brookings Center on Markets and Regulation (May 15, 2017), available at https:// www.brookings.edu/research/dwindling-numbersin-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, page 5. 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, SROs, NFA, or the MSRB. VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 commissions. 514 Broker-dealers have indicated that the following factors have contributed to this migration: Provision of stability or increase in profitability,515 perceived lower 514 The Brookings Report, supra note 513, also discusses the shift from broker-dealer to investment advisory business models for retail investors, in part due to the DOL Fiduciary Rule (page 7). See also the RAND Study, supra note 5, which documents a shift from transaction-based to feebased accounts prior to recent regulatory changes. Declining transaction-based revenue due to declining commission rates and competition from discount brokerage firms has made fee-based products and services more attractive. 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. 515 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 9/30/2017 Form 10– Q available at https://www.sec.gov/Archives/edgar/ data/815917/000156459017023050/ck000081591710q_20170929.htm; Raymond James 9/30/2017 Form 10–K available at https://www.sec.gov/ Archives/edgar/data/720005/000072000517000089/ rjf-20170930x10k.htm; Stifle 12/31/2016 Form 10– K available at https://www.sec.gov/Archives/edgar/ data/720672/000156459017022758/sf-10q_ 20170930.htm; Wells Fargo 9/30/2017 10–Q available at https://www.sec.gov/Archives/edgar/ data/72971/000007297117000466/wfc- PO 00000 Frm 00062 Fmt 4701 Sfmt 4702 regulatory burden, and provisions of more services to retail customers. 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, since 2012, more than 12 million new non09302017x10q.htm; and Ameriprise 12/31/2016 Form 10–K available at https://www.sec.gov/ Archives/edgar/data/820027/;000082002 717000007/ameriprisefinancial12312016.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. Some firms have reported record profits as a result of moving clients into fee-based accounts, and cite that it provides ‘‘stability and high returns.’’ See ‘‘Morgan Stanley Wealth Management fees climb to all-time high,’’ Bloomberg, Jan. 18, 2018, available at https:// www.bloomberg.com/news/articles/2018-01-18/ morgan-stanley-wealth-management-fees-hitrecord-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 (Morgan Stanley Strategic Update, (Jan. 18, 2018), available at https://www.morganstanley.com/about-us-ir/ shareholder/4q2017-strategic-update.pdf). See also Beilfuss, Lisa & Brian Hershberg, WSJ Wealth Adviser Briefing: The Reinvention of Morgan and Merrill, Adviser Profile, The Wall Street Journal (Jan. 25, 2018), available at https://blogs.wsj.com/ moneybeat/2018/01/25/wsj-wealth-adviser-briefingthe-reinvention-of-morgan-and-merrill-adviserprofile/. E:\FR\FM\09MYP2.SGM 09MYP2 EP09MY18.002</GPH> 21476 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules high net worth retail clients have been added. With respect to assets under management, we observe a similar, albeit more pronounced pattern for nonhigh net worth retail clients as shown in Figure 3. For high net worth retail 21477 clients, there has been a pronounced increase in AUM since 2012, although AUM has leveled off since 2015. Figure 2: Time Series of the Number of Retail Clients of Investment Advisers (2010- 2017) 35,000,000 30,000,000 25,000,000 20,000,000 15,000,000 10,000,000 5,000,000 2010-09 2011-09 2012-09 2013-09 2014-09 2015-09 2016-09 2017-09 -Estimated Non-HNW Clients - Estimated HNW Clients Figure 3: Time Series of the Retail Clients of Investment Advisers Assets under Management (2010- 2017) 5,000,000,000,000 ~"~~"-~~;:::-"~"-~"-""m"~"--~L=--~-=~---~~-m4,000,000,000,000 ~~~-~""'-""''i 3,000,000,000,000 ,~~~~~~~~~-~~-"-""~-~-~"""-~m-"~--~~~~~ 2, 000,000,000,000 "fmm~m"""-"'"~~~~"~~"'""~'-"~~'"--""~~"'""""""m""~~~-,m-~"~~~"-"'""""m"m"~m"-~"~""m~~m"m"-' 1,000,000,000,000 +--~~~~-~~~~~~~~~-"-~""-~~~~~-,"~ 0 ~-~---r-~~~~~~"-~-~~--~~~, 2010-092011-092012-092013-092014-092015-092016-092017-09 BILLING CODE 8011–01–C - Estimated HNW Client RAUM e. Registered Representatives of BrokerDealers, Investment Advisers and Dually Registered Firms We estimate the number of associated natural persons of broker-dealers VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 PO 00000 Frm 00063 Fmt 4701 Sfmt 4702 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 a selfregulatory organization (‘‘registered E:\FR\FM\09MYP2.SGM 09MYP2 EP09MY18.003</GPH> amozie on DSK3GDR082PROD with PROPOSALS1 -Estimated Non-HNW Client RAUM - 21478 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules representatives’’ or ‘‘RR’’s). 516 Similarly, we approximate the number of supervised persons of registered investment advisers through the number of registered investment adviser representatives (or ‘‘registered IAR’’s), 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.517 We estimate the number of registered representatives and registered IARs (together ‘‘registered financial professionals’’) at broker-dealers, investment advisers, and dual registrants by considering only the employees of those firms that have Series 6 or Series 7 licenses or are registered with a state as a broker-dealer agent or investment adviser representative.518 We only consider employees at firms who have retailfacing business, as defined previously.519 We observe in Table 5, that approximately 61% 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, 72% of all registered financial professionals in that size category are employed by dually registered firms. Focusing on dually registered firms only, approximately 59.7% of total licensed representatives at these firms are dualhatted, approximately 39.9% are only registered representatives; and less than one percent are only registered investment adviser representatives. TABLE 5—TOTAL LICENSED REPRESENTATIVES AT BROKER-DEALERS, INVESTMENT ADVISERS, AND DUALLY REGISTERED FIRMS WITH RETAIL INVESTORS 520 Total number of representatives % of representatives in dually registered firms % of representatives in standalone BD >$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 ................................................................................................ 82,668 150,662 31,673 62,539 116,047 37,247 13,563 75 72 67 58 52 34 7 8 10 16 24 47 63 87 18 18 16 18 1 2 6 Total Licensed Representatives ....................................................... 494,399 61 27 12 Size of firm (total assets for standalone BDs and dually registered firms; AUM for standalone IAs) % representatives in standalone IA amozie on DSK3GDR082PROD with PROPOSALS1 In Table 6 below, we estimate the number of employees who are registered representatives, registered investment adviser representatives, or both (‘‘dualhatted representatives’’).521 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.522 In Table 6, approximately 24% of registered employees at registered broker-dealers or investment advisers are dual-hatted representatives. However, this proportion varies significantly across size categories. For example, for firms with total assets between $1 billion and $50 billion,523 approximately 36% of all registered employees are both registered representatives and investment adviser representatives. In contrast, for firms with total assets below $1 million, 15% of all employees are dual-hatted representatives. 516 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 the firm. Therefore, using 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. 517 See Advisers Act rule 203A–3. 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.’’ As discussed above, the definition of retail investor for purposes of this proposed rulemaking would include qualified clients who are natural persons and trusts that represent natural persons. Proposed General Instruction 9.(e) to Form CRS. In addition, state securities authorities may impose different criteria for requiring registration as an investment adviser representative. 518 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 self-regulatory organizations. 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 financial professional if he has an approved, pending, or temporary registration status for either Series 6 or 7 (RR) 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 to be licensed as an RR or IAR. 519 See supra notes 460 and 485. 520 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. 521 We calculate these numbers based on Form U4 filings. 522 See supra notes 460 and 485. 523 Firm size is defined as total assets from the balance sheet (source: FOCUS reports) for brokerdealers and dual registrants and is assets under management for investment advisers (source: Form ADV). VerDate Sep<11>2014 23:17 May 08, 2018 Jkt 244001 PO 00000 Frm 00064 Fmt 4701 Sfmt 4702 E:\FR\FM\09MYP2.SGM 09MYP2 21479 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules TABLE 6—NUMBER OF EMPLOYEES AT RETAIL FACING FIRMS WHO ARE REGISTERED REPRESENTATIVES, INVESTMENT ADVISER REPRESENTATIVES, OR BOTH 524 Size of firm (total assets for standalone BDs and dually registered firms; AUM for standalone IAs) Total number of employees Percentage of dual-hatted representatives Percentage of RRs 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 ................................................................................................ 216,655 292,663 50,531 112,119 189,318 61,310 19,619 18 36 15 23 19 19 15 17 11 40 24 41 39 46 1 3 6 8 1 1 3 Total Employees at Retail Facing Firms .......................................... 942,215 24 24 3 amozie on DSK3GDR082PROD with PROPOSALS1 Approximately 88% of investment adviser representatives are dual-hatted as 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 2010.525 In contrast, approximately 50% of registered representatives were dually registered as investment adviser representatives at the end of 2017.526 With respect to disclosure made about licensed individuals, broker-dealers and investment advisers must report certain criminal, regulatory, and civil actions and complaint information and information about certain financial matters in Forms U4 527 and U5 528 for their representatives. Self-regulatory organizations, regulators and jurisdictions report disclosure events on 524 See supra notes 520–521. Note that all percentages in the table have been rounded to the nearest whole percentage point. 525 Comment letter of FINRA to 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. 526 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 duallyregistered representatives by the sum of the duallyregistered 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. 527 Form U4 requires disclosure of registered representatives’ and investment adviser representatives’ criminal, regulatory, and civil actions similar to those reported on Form BD or Form ADV as well as certain customer-initiated complaints, arbitration, and civil litigation cases. See generally Form U4. 528 Form U5 requires information about representatives’ termination from their employers. VerDate Sep<11>2014 23:17 May 08, 2018 Jkt 244001 Form U6.529 FINRA’s BrokerCheck system discloses to the public certain information on registered representatives and investment adviser representatives such as principal place of business, business activities, owners, and criminal prosecutions, regulatory actions, and civil actions in connection with any investment-related activity. f. Current Use of Names and Titles Although many financial services firms are registered as broker-dealers, investment advisers, or are dually registered, both firms and financial professionals use a variety of terms to label both the firm and the professional. Approximately 103 broker-dealers that are not dually registered as investment advisers use the term ‘‘adviser,’’ ‘‘advisor,’’ or ‘‘advisory’’ as part of their current company name.530 Of these broker-dealers, 16 reported at least one type of non-securities business. Approximately 39 percent of the 103 broker-dealers described above used a proper name coupled with the term ‘‘advisor’’ alone,531 and an additional 31 percent used a proper name coupled with the term ‘‘capital advisor.’’ In addition to those terms, less than 10% of these broker-dealers use the terms ‘‘financial advisor,’’ ‘‘investment advisor,’’ or ‘‘wealth advisor’’ in their corporate name. The remainder of the broker-dealers (approximately 25 firms) use unique combinations of other words along with ‘‘adviser,’’ ‘‘advisor’’ or ‘‘advisory.’’ In addition to company names or professional titles, firms are likely to use labels or terms other than their formal company names to describe themselves in corporate descriptions, marketing material, or other communications with 529 See FINRA, Current Uniform Registration Forms for Electronic Filing in Web CRD, available at https://www.finra.org/industry/web-crd/currentuniform-registration-forms-electronic-filing-webcrd. 530 Source: Form BD. 531 E.g. ‘‘ABC Advisor.’’ PO 00000 Frm 00065 Fmt 4701 Sfmt 4702 the public. To gauge the extent that registered broker-dealers and investment advisers use terms other than their registration status as descriptors, Commission staff conducted an analysis to evaluate the different terms that broker-dealer, investment adviser, and duallyregistered firms use to describe themselves.532 Commission staff reviewed firm websites to collect the terms that were used on the website to describe the firm.533 Many firms provided multiple descriptions of their businesses.534 As shown below in Panel A of Table 7, over 50% of broker-dealers sampled use the term ‘‘broker,’’ ‘‘dealer,’’ ‘‘broker-dealer,’’ or ‘‘brokerage’’ to 532 From the full sample of broker-dealers with retail investors (2,857) and investment advisers with retail investors (7,600), the Commission staff used a random number generator to select 20 firms in each of the size categories listed in Table 7, from which to construct a sample of firms for which staff hand-collected data on firm descriptions from firm website homepages and ‘‘About’’ pages, as available. When a size category contained less than 20 firms we sampled all firms in that category. Relative to the overall proportion of firms, we oversampled firms from the larger size categories because they employ a majority of all licensed representatives and are therefore the firms the average retail investor is most likely to come in contact with. Overall, 83 randomly selected standalone broker-dealers, 100 randomly selected investment advisers, and 91 randomly selected dual registrants based on the previously identified size categories (either total assets for broker-dealers and dual registrants or assets under management for investment advisers) provided the sample reviewed in the staff study. Further, the 917 Financial Literacy Study (see supra note 20) showed that a substantial percentage of retail investors use information obtained from firm websites in making the selection of their financial professional. 533 See Table 7, Panel A for firm level identifiers for broker-dealers, Panel B for identifiers for investment advisers, and Panel C for dual registrants. Not all firms provided a description of their firm on their website, which we coded as ‘‘N/ A’’ for not available. 534 For purposes of our classification analysis, if ‘‘ABC & Co.’’ were to be a SEC-registered standalone broker-dealer and, on ABC’s webpage in describing its business and operations, ABC refers to itself as a brokerage firm and a wealth manager, we would classify, ABC & Co. as using both ‘‘brokerage’’ and ‘‘wealth manager’’ as descriptors in our analysis. E:\FR\FM\09MYP2.SGM 09MYP2 21480 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules describe their business, while less than 10% use ‘‘financial advisor,’’ ‘‘wealth advisor,’’ or ‘‘investment advisor.’’ Registered investment advisers (Panel B) are more likely to use the term ‘‘investment advisor,’’ ‘‘wealth advisor,’’ or ‘‘financial advisor’’ as a description of their business compared to broker- much more diverse in their use of firm descriptions; approximately 40% use the term ‘‘brokerage,’’ ‘‘broker-dealer,’’ ‘‘broker,’’ or ‘‘dealer,’’ while nearly 30% use a firm description that contains the term ‘‘adviser’’ or ‘‘advisor.’’ dealers (approximately 40%). Nearly 50% of the sampled standalone investment advisers use the term ‘‘investment manager’’ or ‘‘wealth manager’’ to describe their business model compared to less than 10% of broker-dealers that use these terms. Dually registered firms (Panel C) are TABLE 7—PANEL A: DESCRIPTION OF STANDALONE BROKER-DEALER FIRMS ON FIRM WEBSITES 535 Brokerdealer Wealth/ investment management Investment bank Advisory Other N/A >$50 billion ............................................... $1 billion to $50 billion ............................. $500 million to $1 billion .......................... $100 million to $500 million ..................... $10 million to $100 million ....................... 2 15 14 12 11 2 6 2 7 2 0 0 0 4 5 2 0 0 2 3 0 0 1 4 4 0 1 0 0 0 Total .................................................. 54 19 9 7 9 1 TABLE 7—PANEL B: DESCRIPTION OF STANDALONE INVESTMENT ADVISER FIRMS ON FIRM WEBSITE 536 Brokerdealer Wealth/ investment management Investment bank Advisory Other N/A >$50 billion ............................................... $1 billion to $50 billion ............................. $500 million to $1 billion .......................... $100 million to $500 million ..................... $10 million to $100 million ....................... 0 0 0 0 2 1 0 0 0 0 16 13 10 6 2 3 5 13 7 10 4 8 9 9 7 0 0 0 3 1 Total .................................................. 2 1 47 38 37 4 TABLE 7—PANEL C: DESCRIPTION OF DUALLY-REGISTERED FIRMS ON FIRM WEBSITE 537 Brokerdealer Wealth/ investment management Investment bank Advisory Other N/A 5 7 3 13 10 8 8 1 3 1 2 5 2 1 3 4 6 1 7 10 1 9 2 6 7 0 0 0 0 0 Total .................................................. amozie on DSK3GDR082PROD with PROPOSALS1 >$50 billion ............................................... $1 billion to $50 billion ............................. $500 million to $1 billion .......................... $100 million to $500 million ..................... $10 million to $100 million ....................... 38 21 13 28 25 0 Regarding the use of titles by individual financial professionals, a 2008 RAND Study,538 found that households responding to the survey 539 reported a wide variety of titles were used by financial professionals with whom they worked. The RAND Study Table 6.3 (replicated below in Table 8) provides an overview of the most commonly used titles by services provided. As shown in the table, financial professionals providing brokerage services use a large variety of titles to describe their business and the services that they offer, including ‘‘financial advisor,’’ ‘‘financial consultant,’’ ‘‘banker,’’ and ‘‘broker.’’ Around 31% of professionals providing only brokerage services used titles containing the terms ‘‘adviser’’ or ‘‘advisor.’’ Professionals providing advisory services or both brokerage and advisory services similarly also use a wide variety of titles, but the proportion 535 Broker-dealers are randomly drawn from Form BD data (as of Dec. 2017). The data on firm descriptions is hand collected from individual broker-dealer websites. 536 Investment advisers are randomly drawn from Form ADV data (as of Dec. 2017). The data on firm descriptions is hand collected from individual investment adviser websites. 537 Dual registrants are randomly drawn from Form BD data (as of Dec. 2017). The data on firm descriptions is hand collected from individual dually-registered firms’ websites. VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 PO 00000 Frm 00066 Fmt 4701 Sfmt 4702 of professionals who use titles containing the terms ‘‘adviser’’ or ‘‘advisor’’ are somewhat larger at 35%. Note that the RAND Study did not distinguish financial professionals’ use of tiles based on whether they were RRs or IARs, but rather by type of services provided. 538 RAND Study, supra note 5. survey administered to members of the American Life Panel; 654 (out of 1000) households completed the survey. 539 Internet E:\FR\FM\09MYP2.SGM 09MYP2 21481 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules TABLE 8—REPLICATION OF TABLE 6.3 OF THE RAND STUDY—PROFESSIONAL TITLES MOST COMMONLY REPORTED BY RESPONDENTS All individual professionals Title Advisor ............................................................................................................. Banker .............................................................................................................. Broker, stockbroker, or registered representative ........................................... CFP (Certified Financial Planner) .................................................................... Financial adviser or financial advisor .............................................................. Financial consultant ......................................................................................... Financial planner ............................................................................................. Investment adviser or investment advisor ....................................................... President or vice president .............................................................................. 2. Investor Account Statistics Investors seek financial advice and services to achieve a number of different goals, such as saving for retirement or children’s college education. As shown above in Figures 2 and 3, the number of retail investors and their assets under management associated with investment Provide advisory services only 11 21 38 21 78 25 44 22 20 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.540 In 2016, a total of 43.3 million U.S. households have either an IRA or a brokerage account, of which an estimated 20.2 million U.S. households have a brokerage account Provide brokerage services only 1 2 0 3 7 2 6 3 0 Provide both types of services 1 8 8 3 11 0 1 3 2 9 11 30 15 60 23 37 16 18 and 37.7 million households have an IRA (including 72% of households that also hold a brokerage account).541 Table 9 below provides an overview of account ownership segmented by account type (e.g., IRA, brokerage, or both) and investor income category based on the Survey of Consumer Finances (SCF).542 TABLE 9—OWNERSHIP BY ACCOUNT TYPE IN THE U.S. BY INCOME GROUP [As reported by the 2016 SCF] % Brokerage only Income category 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 amozie on DSK3GDR082PROD with PROPOSALS1 One question in the SCF 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.543 Panel A of Table 10 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) used advice services of broker-dealers for savings and investment decisions, while 49% (7.8 million households) took advice from a ‘‘financial planner.’’ Approximately 36% (7.2 million households) sought advice from other sources such as bankers, accountants, and lawyers. Almost 25% (5.0 million households) did not use advice from the above sources. Panel B of Table 10 below presents the breakdown of advice received for households who have an IRA. 15% (5.7 million households) relied on advice services of their broker-dealers, 48% (18.3 million households) obtained advice from financial planners. Approximately 41% (15.5 million households) sought advice from bankers, accountants, or lawyers, while the 25% (9.5 million households) used no advice or sought advice from other sources. 540 See ICI Research Perspective, The Role of IRAs in U.S. Households’ Saving for Retirement, 2016 (Jan. 2017), available at https://www.ici.org/pdf/ per23-01.pdf. 541 The data is obtained from the Federal Reserve System’s 2016 Survey of Consumer Finances (‘‘SCF’’), 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. Federal Reserve, Survey of Consumer Finances (2016), available at https:// www.federalreserve.gov/econres/scfindex.htm. The SCF 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. 542 Id. 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 this proposed rulemaking. 543 The SCF 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 included ‘‘Calling Around,’’ ‘‘Magazines,’’ ‘‘Self,’’ ‘‘Past Experience,’’ ‘‘Telemarketer,’’ and ‘‘Insurance Agent,’’ as well as other choices. Respondents could also choose ‘‘Do Not Save/Invest.’’ The SCF allows for multiple responses, so these categories are not mutually exclusive. However, we would note that the list of terms in the question did not specifically include ‘‘investment adviser.’’ VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 PO 00000 Frm 00067 Fmt 4701 Sfmt 4702 E:\FR\FM\09MYP2.SGM 09MYP2 21482 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules TABLE 10—PANEL A: SOURCES OF ADVICE FOR HOUSEHOLDS WHO HAVE A BROKERAGE ACCOUNT IN THE U.S. BY INCOME GROUP 544 % Taking advice from brokers Income category % Taking advice from financial planners % Taking advice from lawyers, bankers, or accountants % Taking no advice or from other sources Bottom 25% ..................................................................................................... 25%–50% ......................................................................................................... 50%–75% ......................................................................................................... 75%–90% ......................................................................................................... Top 10% .......................................................................................................... 20.55 22.98 20.75 22.56 25.29 53.89 38.03 52.00 48.94 50.53 35.64 43.92 31.42 32.25 38.47 24.30 32.36 23.61 28.10 21.06 Average .................................................................................................... 23.02 49.02 35.99 24.94 TABLE 10—PANEL B: SOURCES OF ADVICE FOR HOUSEHOLDS WHO HAVE AN IRA IN THE U.S. BY INCOME GROUP 545 % Taking advice from brokers Income category % Taking advice from financial planners % Taking advice from bankers, accountants, or lawyers % Taking no advice or from other sources Bottom 25% ..................................................................................................... 25%–50% ......................................................................................................... 50%–75% ......................................................................................................... 75%–90% ......................................................................................................... Top 10% .......................................................................................................... 12.14 9.79 14.93 14.68 21.40 38.30 43.82 45.20 52.14 55.40 43.69 40.67 41.23 41.65 40.03 31.85 32.74 25.23 24.26 18.56 Average .................................................................................................... 15.25 48.45 41.17 25.28 amozie on DSK3GDR082PROD with PROPOSALS1 3. Investor Perceptions About BrokerDealers and Investment Advisers Although many retail investors rely on broker-dealers and investment advisers to help them achieve financial goals, evidence indicates that many retail investors do not understand, or are confused by, among other items, the different standards of conduct applicable to broker-dealers and investment advisers, and are also confused and potentially misled by the titles used by firms and financial professionals. In the subsections below, we review in greater detail five aspects of investor perceptions with respect to: (1) How investors search for financial professionals and firms and; (2) the nature of the relationship with their financial professional (investment adviser or broker-dealer) and the meaning of company names and professional titles; (3) the structure and level of fees in the industry; (4) the existing conflicts of interest; (5) and the disciplinary history of the financial professional or firm. g. How Investors Select Financial Firms or Professionals A number of surveys show that retail investors predominantly find their current financial firm or financial professional from personal referrals by 544 Id. 545 Id. VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 family, friends, or colleagues.546 For instance, the RAND Study reported that 46% of survey respondents indicated that they located a financial professional from personal referral, although this percentage varied depending on the type of service provided (e.g., only 35% of survey participants used personal referrals for brokerage services). After personal referrals, RAND survey participants ranked professional referrals (31%), print advertisements (4%), direct mailings (3%), online advertisements (2%), and television advertisements (1%), as their source of locating individual professionals. The RAND Study separately inquired about locating a financial firm, which yielded substantially different results from the selection of the financial professional.547 Respondents reported selecting financial firm (of any type) based on: Referral from family or friends (29%), professional referral (18%), print advertisement (11%), online advertisements (8%), television advertisements (6%), direct mailings (2%), with a general ‘‘other’’ category (36%). The 917 Financial Literacy Study provides similar responses, although it allowed survey respondents to identify multiple sources from which they obtained information that facilitated the selection of the current financial firm or financial professional.548 In the 917 Financial Literacy Study,549 51% of survey participants received a referral from family, friends, or colleagues. Other sources of information or referrals came from: referral from another financial professional (23%), online search (14%), attendance at a financial professional-hosted investment seminar (13%), advertisement (e.g., television or newspaper) (11.5%), other (8%), while approximately 4% did not know or could not remember how they selected their financial firm or financial professional. Twenty-five percent of survey respondents indicated that the ‘‘name or reputation of the financial firm or financial professional’’ affected the selection decision. h. Nature of the Relationship Comment letters as well as several studies provide us with information about retail investor confusion about the distinctions among different types firms and financial professionals. Several 548 See 546 See RAND Study, supra at 5; 917 Financial Literacy Study, supra note 20. 547 The Commission notes that only one-third of the survey respondents that responded to ‘‘method to locate individual professionals’’ also provided information regarding locating the financial firm. PO 00000 Frm 00068 Fmt 4701 Sfmt 4702 917 Financial Literacy Study, supra note 20. 549 The data used in the 917 Financial Literacy Study comes from the Siegel & Gale Investor Research Report (Jul. 26, 2012), available at https:// www.sec.gov/news/studies/2012/917-financialliteracy-study-part3.pdf, at 249–250. E:\FR\FM\09MYP2.SGM 09MYP2 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules amozie on DSK3GDR082PROD with PROPOSALS1 commenters in response to Chairman Clayton’s recent Request for Comment highlighted investor confusion about whether financial services providers are subject to the fiduciary duty.550 Particularly, some commenters tied investor confusion about the standard of care applicable to financial service providers to the names or titles of such firms and financial professionals.551 Similarly, during the public comment process as part of the 913 Study, commenters indicated that retail investors did not understand or found confusing the distinctions between broker-dealers and investment advisers, for example, in terms of services provided and applicable standards of care.552 Investor advocate groups submitted comments that reiterated the view that many market participants also believe that financial professionals should act in investors’ best interests.553 913 Study commenters also expressed beliefs that certain titles used by firms and financial professionals are confusing to investors.554 Further findings of investor confusion about the roles and titles of financial professionals comes from studies conducted by Siegel & Gale 555 in 2004, 550 See, e.g., CFA 2017 Letter; PIABA 2017 Letter; IAA 2017 Letter; Pefin 2017 Letter. 551 See Chamber 2017 Letter, at 10; Committee for the Fiduciary Standard 2017 Letter, at 3; Pefin 2017 Letter, at 9. 552 See 913 Study, supra note 3, at section III.A. 553 Id. See also AFL–CIO 2017 Letter; AARP 2017 Letter. 554 See, e.g., Comment letters on 913 Study, available at https://www.sec.gov/comments/4-606/ 4-606.shtml. Comment letter of Bert Oshiro (Aug. 29, 2010) (‘‘Years ago, I was pretty sure who I was dealing with based on their titles. . . Today it’s a totally different story. All kinds of products such as securities, insurance, fee based products, bank accounts, loans, health insurance, auto/ homeowners insurance, etc. are sold by people calling themselves: Financial advisors; financial consultants; investment advisors; investment consultants; financial planners; asset managers; financial services advisors; [and] registered representatives. . . It has come to the point that I really don’t know who I’m dealing with.’’); Comment letter of Larry J. Massung (Aug. 29, 2010) (‘‘I believe there is considerable confusion within the general public with the fiduciary duty, responsibilities, and titles of brokers, dealers and investment advisors’’); and Comment letter of Cecylia Escarcega (Aug. 30, 2010) (‘‘Personally, I find the titles confusing because the broker, dealer or investment advisor typically does not tell me what their role is and the scope of their fiduciary duty to me as an investor’’). 555 The Commission retained Siegel and Gale in 2004 to conduct the focus group testing in order to determine how investors distinguish the roles, legal obligations, and compensation structures between broker-dealers and investment advisers. See Siegel & Gale Study, supra note 549. VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 RAND 556 in 2008 and CFA in 2010.557 The Siegel & Gale Study found that focus group participants did not understand that the roles and legal obligations of broker-dealers differed from investment advisers, and were further confused by different labels or titles used by advice providers (e.g., financial planner, financial advisor, financial consultant, broker-dealer, or investment adviser). More specifically, participants in the Siegel & Gale Study focus groups believed that brokers executed trades and were focused on ‘‘near-term’’ advice, while financial advisors and consultants provided many of the same services as brokers, but also provided a greater scope of long-term planning advice (e.g., portfolio allocation). ‘‘Investment adviser,’’ on the other hand, was a term unfamiliar to many participants, but financial professionals using this label were perceived to provide similar services to financial advisors and financial consultants. Financial planners were viewed to provide services related to insurance and estate planning in addition to investment advice, and encompassed long-term financial planning including college, retirement, and other long-term savings and investment goals. The Siegel & Gale Study focus group participants assumed that financial advisors/consultants, investment advisers, and financial planners provided planning services, while brokers, financial advisors/ consultants, and investment advisers provided trade execution services.558 Further, the focus group participants generally did not understand certain legal terms, such as ‘‘fiduciary.’’ Similarly, the RAND Study generally concluded that investors did not understand the differences between broker-dealers and investment advisers and that common job titles contributed to investor confusion.559 Further, 556 The RAND Study contained two components: (1) An analysis of business practices at brokerdealers and investment advisers based on regulatory filings and interviews with stakeholders (including members of the broker-dealer and investment adviser industries); and (2) a survey of 654 households or focus group testing on household investment behavior and preferences, experience with financial service providers, and understanding of the different types of providers. See RAND Study, supra note 5. 557 See CFA Survey, supra note 5. 558 The Commission notes that the results of the Siegel & Gale Study relied on a small sample of focus group testing conducted over a decade ago. While relevant to our understanding of investor perception about broker-dealers and investment advisers, the results of the study may not reliably reflect the current views of the general population of U.S. retail investors. 559 RAND study participants ‘‘commented that the interchangeable titles and ‘we do it all’ advertisements [by broker-dealers] made it difficult PO 00000 Frm 00069 Fmt 4701 Sfmt 4702 21483 participants responded similarly that investment advisers and brokers are required to act in the client’s best interest. Similar to the Siegel and Gale Study, focus group participants did not understand the term fiduciary, or how the fiduciary standard differed from suitability. In addition, the RAND Study noted that the confusion about titles, services, legal obligations, and compensation persisted even after a fact sheet on broker-dealers and investment advisers was provided to participants.560 Similar to the Siegel and Gale Study and the RAND Study, the CFA Survey concluded that investors do not understand differences between brokerdealers and investment advisers, or the standards of conduct that apply to advice or recommendations made by these firms. For example, approximately 34% of investors surveyed believed that ‘‘offering advice’’ was a primary service of broker-dealers.561 With respect to conduct-related questions, 91% of those surveyed believed that broker-dealers and investment advisers should follow the same investor protection rules if providing the same sort of advisory services, while 85% believed that the person providing advice should put the retail customer’s interest ahead of theirs and should disclose fees and commissions earned or any conflicts of interest that could affect the advice provided. More than two-thirds believed that a fiduciary duty is owed to customers by broker-dealers, suggesting a degree of investor confusion.562 to discern broker-dealers from investment advisers.’’ Although the RAND Study indicates that investors are confused the services provided and the titles used by financial professionals, more than 70% of participants also answered that they were ‘‘very satisfied with the service received from the firm,’’ that ‘‘they trust the firm acts in their best interest,’’ and that ‘‘the firm provides a valuable service.’’ These numbers increased to 80% when the length of time spent at a firm was at least 10 years. The Commission notes that the results of the RAND Study relied on testing conducted nearly 10 years ago; therefore, the results of the study may not reliably reflect the current views of the general population of U.S. retail investors 560 See RAND Study, supra note 5, at 111. The fact sheet provided to RAND Study participants included information on the definition of broker and investment adviser, including a description of common job titles, legal duties and typical compensation. Participants in the RAND Study focus groups indicated that they were confused over common job titles of broker-dealers and investment advisers, thought that because brokers are required to be licensed, investment advisers were not as qualified as brokers, deemed the term ‘‘suitable’’ too vague, and concluded that it would be difficult to prove whether or not an investment adviser was not acting in the client’s best interest. 561 See CFA Study, supra note 5. 562 In some circumstances, broker-dealers may owe a fiduciary duty to their customers. For example, there is a body of case law holding that E:\FR\FM\09MYP2.SGM Continued 09MYP2 21484 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules i. Fees bulleted format with examples, 20% preferred a bulleted format, and 12% preferred a table format.565 In 2015, FINRA conducted an ‘‘Investor Survey’’ which included questions about investors’ understanding of fees charged for investment services.566 Approximately 70% of survey participants reported that they thought investment firm (generically referred to as ‘‘adviser’’ in the study) compensation and account fees to be very clear, with less than 4% stating that they thought compensation The 917 Financial Literacy Study showed that, prior to engaging an investment adviser,563 approximately 76.4% of survey participants indicated that disclosure of the fees and compensation of investment advisers was an absolutely essential element to any disclosure.564 With respect to how investors prefer information about fees and compensation to advisers, 23% of respondents preferred a table format with examples, 21% preferred a to be unclear. Between 54.7% and 57.6% of respondents indicated that they considered account fees to be ‘‘reasonable,’’ while between 0% and 2.3% of respondents indicated that account fees were not reasonable. Of investors that have commission-based accounts, approximately 28% believed that commissions did not affect advice given. Those percentages decline to 15% or less when asked to consider whether selling incentives and third party compensation had not affected the advice provided by investment firms. TABLE 11—INVESTOR PERCEPTION OF COMPENSATION TO FINANCIAL PROFESSIONALS [As obtained from the 2015 FINRA Investor Survey] Unadvised (%) amozie on DSK3GDR082PROD with PROPOSALS1 Advisor Compensation Clear? Very ...................................................................................................................................... Somewhat ............................................................................................................................. Not ........................................................................................................................................ Account Fees Clear? Very ...................................................................................................................................... Somewhat ............................................................................................................................. Not ........................................................................................................................................ Account Fees Reasonable? Agree .................................................................................................................................... Somewhat Agree .................................................................................................................. Disagree ............................................................................................................................... Commissions Affect Advice? Great Deal ............................................................................................................................ Somewhat ............................................................................................................................. Not At All .............................................................................................................................. Selling Incentives Affect Advice? Great Deal ............................................................................................................................ Somewhat ............................................................................................................................. Not At All .............................................................................................................................. Third Party Compensation Affects Advice? Great Deal ............................................................................................................................ Somewhat ............................................................................................................................. Not At All .............................................................................................................................. 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, or the scope of obligations that attach by virtue of that duty. 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, VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 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) (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 PO 00000 Frm 00070 Fmt 4701 Sfmt 4702 Advised: asset fee (%) Advised: commissionbased fee (%) NA NA NA 70.9 27.6 1.5 68.5 28.0 3.5 68.0 29.0 2.9 70.3 29.7 0 74.7 23.5 1.8 55.6 42.1 2.3 54.7 45.3 0 57.6 40.2 2.2 58.3 32.8 8.9 21.8 57.8 20.4 29.7 42.5 27.7 66.1 28.4 5.5 41.9 43.7 14.4 44.3 40.6 15.1 68.6 26.3 5.1 32.8 56.4 10.8 41.4 45.3 13.4 in a relationship of trust and confidence with her clients). 563 The 917 Financial Literacy Study, supra note 20, uses the term financial intermediary when discussing the importance of certain disclosures of firms or financial professionals. 564 See 917 Financial Literacy Study, supra note 20, at 67. 565 23% of respondents also preferred the ‘‘status quo’’—‘‘the way it was presented’’ in the example. 566 See FINRA Report on Conflicts of Interest, (Oct. 2013), at 6, available at https://www.finra.org/ sites/default/files/Industry/p359971.pdf (‘‘Investor Survey’’). E:\FR\FM\09MYP2.SGM 09MYP2 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules Academic evidence also indicates that retail investors exhibit limited understanding of the fees and commissions of financial products. Several academic studies show that even when disclosures are provided to investors, investors experience difficulty in accounting for and understanding how fees affect their financial choices.567 amozie on DSK3GDR082PROD with PROPOSALS1 j. Conflicts of Interest Studies have found that investors consider conflicts of interest to be an important factor in the market for financial advice. For example, in the 917 Financial Literacy Study,568 approximately 52.1% of survey participants indicated that an essential component of any disclosure would be their financial intermediary’s conflicts of interest, while 30.7% considered information about conflicts of interest to be important, but not essential. Investors also were asked to rate their level of concern about potential conflicts of interest that their adviser might have. Approximately 36% of the investors expressed concerns that their adviser might recommend investments in products for which its affiliate receives a fee or other compensation, while 57% were concerned that their adviser would recommend investments in products for which it gets paid by other sources. In addition to conflicts directly related to compensation practices of financial professionals, some investors were concerned about conflicts related to the trading activity of these firms. For example, more than 26% of participants were concerned that an adviser might buy and sell from its account at the same time it is recommending securities to investors; and more than 55% of investors were 567 Experimental evidence from the U.S. mutual fund market is provided by, James J. Choi, David Laibson, & Brigitte C. Madrian, Why Does the Law of One Price Fail? An Experiment on Index Mutual Funds Review of Financial Studies 23(4): 1405– 1432 (Nov. 14, 2009) (‘‘Choi Laibson Article’’) (finding that experimental subjects fail to minimize fees among four different actual S&P 500 index funds and 80–90% of the subjects in the study presented with simplified fee disclosures still failed to select the lowest-priced options among products with similar characteristics). Field-based evidence from the payday loans market is provided by, Marianne Bertrand & Adair Morse, Information Disclosure, Cognitive Biases, and Payday Borrowing, The Journal of Finance 46(6): 1865–1893 (Nov. 14, 2011). For a comprehensive survey of the literature see George Loewenstein, Cass R. Sunstein, & Russell Golman, Disclosure: Psychology Changes Everything, Annual Review of Economics 6: 391– 419 (Aug. 2014) (‘‘Loewenstein Sunstein Article’’). 568 Section 917 of the Dodd-Frank Act further required the Commission to conduct a study to identify the level of financial literacy among retail investors as well as methods and efforts to increase the financial literacy of investors. See 917 Financial Literacy Study, supra note 20. VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 also concerned about their adviser’s engaging in principal trading. Approximately 70% of the participants in the 917 Financial Literacy Study indicated that they would read disclosures on conflicts of interest if made available, with 48% requesting additional information from their adviser, 41% increasing the monitoring of their adviser, and 33% proposing to limit their exposure of specific conflicts. The majority of investors (70%) also wanted to see specific examples of conflicts and how those related to the investment advice provided. Academic research also suggests that information about conflicts of interest could improve individual decisions.569 k. Disciplinary History Survey evidence indicates that knowledge of a firm’s and financial professional’s disciplinary history is among the most important items for retail investors deciding whether to receive financial services from a particular firm, according to one study.570 Despite this, most investors do not actively seek disciplinary information for their advisers and broker-dealers.571 A recent FINRA survey, however, found that only 15% of survey respondents checked their financial professional’s background, although the Commission notes that the study encompasses a wide group of advisers, such as debt counselors and tax professionals.572 Another FINRA survey found that only 7% of survey respondents use FINRA’s BrokerCheck and approximately 14% of survey respondents are aware of the Investment Adviser Public Disclosure (IAPD) website.573 569 See S. Sah & G. Loewenstein, Nothing to declare: Mandatory and voluntary disclosure leads advisors to avoid conflicts of interest, Psychological Science 25, 575–584 (2014). 570 See 917 Financial Literacy Study, supra note 20, at nn. 311 and 498 and accompanying text (Approximately 67.5% of the online survey respondents considered information about an adviser’s disciplinary history to be absolutely essential, and about 20.0% deemed it important, but not essential, and ‘‘When asked how important certain factors would be to them if they were to search for comparative information on investment advisers, the majority of online survey respondents identified the fees charged and the adviser’s disciplinary history as the most important factors.’’). 571 For example, the FINRA 2015 Investor Survey finds that only 24% of investors are aware of Investor.gov; only 16% are aware of BrokerCheck; only 14% are aware of the IAPD website, and only 7% have used BrokerCheck. Investor Survey, supra note 566. 572 2009 National Survey Initial Report, supra note 275. 573 See Investor Survey, supra note 566. PO 00000 Frm 00071 Fmt 4701 Sfmt 4702 21485 B. Form CRS Relationship Summary 1. Broad Economic Considerations We are proposing to require brokerdealers, investment advisers, and firms that are dually registered to deliver a relationship summary to retail investors.574 The economic tradeoffs involved in disclosures made by financial firms and financial professionals are complex and affected by a wide range of factors, which we consider in more detail below. In this section, we discuss the characteristics of disclosures that may effectively convey information that is useful to retail investors when they are searching for a financial firm and to facilitate matching between retail investors’ expectations and the choice of financial firm or financial professional. Disclosure requirements provide benefits to participants in financial markets because disclosing parties may lack private incentives to voluntarily disclose or standardize relevant information.575 Disclosure can benefit not only investors but also the disclosing parties,576 as well as provide indirect benefits to financial markets.577 574 See supra Section II. e.g., Confirmation Requirements and Point of Sale Disclosure Requirements for Transactions in Certain Mutual Funds and Other Securities, and Other Confirmation Requirement Amendments, and Amendments to the Registration Form for Mutual Funds, Exchange Act Release No. 8358 (Jan. 29, 2004) [69 FR 6437 (Feb. 10, 2004)] (‘‘The Commission believes that permitting investors to more readily obtain information about distribution-related costs that have the potential to reduce their investment returns and to give investors a better understanding of some of the distribution-related arrangements that create conflicts of interest for brokers, dealers, municipal securities dealers, and their associated natural persons. The disclosure of information about these costs and arrangements can help investors make better informed investment decisions.’’). See also P. Healy & K. Palepu, Information asymmetry, corporate disclosure, and the capital markets: A review of the empirical corporate disclosure literature, Journal of Accounting and Economics 31, 405–440 (2001). 576 See, Michael Jensen & William Meckling, Theory of the firm: Managerial behavior, agency costs, and ownership structure, Journal of Financial Economics 3, 305–360 (1976); Patel, S. and G. Dallas, Transparency and disclosure: Overview of methodology and study results, United States, Standard & Poor’s, New York (2002); A. Ferrell, Mandatory disclosure and stock returns: Evidence from the over-the-counter market, The Journal of Legal Studies 36, 213–253 (2007). Regarding the effect of corporate disclosures on improved corporate governance, see, e.g. B. Hermalin & M. Weisbach, Transparency and corporate governance, NBER Working paper No. W12875 (2007); R. Lambert, C. Leuz, & R. Verrecchia, Accounting information, disclosure, and the cost of capital, Journal of Accounting Research 45, 385–420 (2007). 577 See L. Holder-Webb, J. Cohen, L. Nath, & D. Wood, A survey of governance disclosures among U.S. firms, Journal of Business Ethics 83, 543–563 (2008); Z. Rezaee, Causes, consequences, and 575 See, E:\FR\FM\09MYP2.SGM Continued 09MYP2 21486 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules amozie on DSK3GDR082PROD with PROPOSALS1 Although the majority of the information proposed for Form CRS may be publicly available in a number of existing regulatory forms and platforms, including, for example, Form ADV (and IAPD) or BrokerCheck, or may be included in disclosures developed to meet disclosure requirements under DOL regulations or exemptions, such as the BIC Exemption, the Commission preliminary believes that all retail investors would benefit from short summary disclosure that focuses on certain aspects of a firm and its services to retail investors which could be supplemented by additional disclosure. Like other public-facing disclosures, the objective of Form CRS would be to provide relevant and reliable information to investors. The relationship summary would apply to a broad array of relationships, spanning different firms as well as both retirement and non-retirement accounts.578 By requiring both investment advisers and broker-dealers to deliver to existing and prospective retail investors and file a publicly available concise relationship summary that discusses, in one place, both types of services and their differences, the proposed rules for Form CRS would also help retail investors to compare certain different types of accounts and firms. Given that most of the information provided by Form CRS would already have been made available by investment advisers through other regulatory disclosures, and by some broker-dealers through contracts or other voluntary disclosures, the focus of this economic analysis is on the effects of the format and structure of the proposed Form CRS disclosures. Studies have found that the format and structure of disclosure may improve (or decrease) investor understanding of the disclosures being made.579 deterrence of financial statement fraud, Critical Perspectives on Accounting 16, 277–298 (2005). 578 For comparison, the disclosure conditions under applicable DOL regulations and exemptions apply only to financial firms and financial professionals servicing IRAs and ERISA-covered retirement plans and participants in such plans. 579 See, Justine S. Hastings & Lydia TejedaAshton, Financial Literacy, Information, and Demand Elasticity: Survey and Experimental Evidence from Mexico, NBER Working Paper 14538 (Dec. 2008) (finding that providing fee disclosures to Mexican investors in peso rather than percentage terms caused financially inexperienced investors to focus on fees); See, Richard G. Newell & Juha Siikamaki, Nudging Energy Efficiency Behavior, Resources for the Future Discussion Paper 13–17 (Jul. 10, 2013) (finds that providing dollar operating costs in simplified energy efficiency labeling significantly encouraged consumers to choose higher energy efficiency appliances, while another related study presents similar evidence from payday loans). VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 Before elaborating on the characteristics of an effective disclosure regime, we note that some studies undertaken outside the market for financial services find that sometimes certain disclosures may result in unintended consequences. In general, the structure of the disclosure may affect the choices that investors make. Every disclosed item not only presents a piece of new information to retail investors but also provides a frame within which all other items are evaluated.580 This framing effect could lead investors to draw different conclusions depending on how information is presented. For example, if the disciplinary history information is presented first, it could affect the way investors perceive all subsequent disclosures in the relationship summary and, possibly, discount more heavily the information provided by firms with disciplinary events than by firms with clean record. The effect of the disciplinary history information would be moderated if this information is provided at the end of the relationship summary. Existing research has also found that conflict of interest disclosures can increase the likelihood that the disclosing party would act on the conflict of interest.581 This bias can be caused by ‘‘moral licensing,’’ a belief that the disclosing party has already fulfilled its moral obligations in the relationship and therefore can act in any way, or it can be caused by ‘‘strategic biasing,’’ aimed at compensating the disclosing party for the anticipated loss of profit due to the disclosure.582 Experimental evidence also suggests that disclosure could turn some clients or customers into ‘‘reluctant 580 See Tversky, A., Kahneman, D., 1981. The framing of decisions and the psychology of choice. Science 211, 453–458 (‘‘Tversky Kahneman Article’’). 581 See, Daylian Cain, George Loewenstein & Don Moore, The Dirt on Coming Clean: Perverse Effects of Disclosing Conflicts of Interest, Journal of Legal Studies 34: 1–25 (Jan. 2005) (‘‘Cain 2005 Article’’); Daylian Cain, George Loewenstein & Don Moore, When Sunlight Fails to Disinfect: Understanding the Perverse Effects of Disclosing Conflicts of Interest, Journal of Consumer Research 37: 1–45 (Aug. 27, 2010); Bryan Church & Xi Kuang, Conflicts of Disclosure and (Costly) Sanctions: Experimental Evidence, Journal of Legal Studies 38 2: 505–532 (Jun. 2009); Christopher Tarver Robertson, Biased Advice, Emory Law Journal 60: 653–703 (Feb. 17, 2011). These papers study conflicts of interest in general, experimental settings, not specialized to the provision of financial advice. 582 Although disclosures in general may cause negative unintended consequences, existing rules and regulations for broker-dealers and investment advisers, as well as proposed Regulation Best Interest, are likely to moderate the effects of moral licensing or strategic bias for financial professionals. PO 00000 Frm 00072 Fmt 4701 Sfmt 4702 altruists.’’ 583 For example, if financial professionals disclose that they earn a referral fee if a customer enrolls in a program, the customer may implicitly feel that they are being asked to help their financial professional receive the fee. One study also found evidence that disclosure of a professional’s financial interests (particularly in face-to-face interactions) can induce a panhandler effect, whereby customers may face an implicit social pressure to meet the professional’s financial interests.584 The above literature indicates that conflicts of interest disclosures could undermine the intended benefits of the disclosures for investors if investors become reluctant altruists or feel an obligation to succumb to the panhandler effect. However, these studies also suggest certain factors that may mitigate the unintended consequences. For example, in the case of the ‘‘panhandler effect,’’ researchers have found that distancing the client or customer from the financial professional either in the decision or disclosure phase can dampen this effect.585 Academic research has identified a set of characteristics, including targeted and simple disclosures, salience, and standardization, that may increase the effectiveness of a disclosure regime. Adhering to these characteristics is expected to increase the benefits of a disclosure document to consumers. These characteristics, discussed below, frame our analysis of the economic impacts of the proposed rule.586 First, existing research demonstrates that individuals exhibit limited ability to absorb and process information.587 These cognitive limitations suggest that more targeted and simpler disclosures may be more effective in communicating information to investors than more complex disclosures. As discussed more thoroughly below, costs, such as increased investor confusion or reduced understanding of the key elements of the disclosure, are likely to 583 See J. Dana, D. Cain & R. Dawes, What you don’t know won’t hurt me: Costly (but quiet) exit in dictator games, Organizational Behavior and Human Decision Processes 100:193–201 (2006). 584 Daylian Cain, George Loewenstein & Don Moore, The burden of disclosure: Increased compliance with distrusted advice, Journal of Personality and Social Psychology, 104(2): 289–304 (2013) (‘‘Burden of Disclosure Article’’). 585 See id. 586 See Loewenstein Sunstein Article, supra note 567. The paper provides a comprehensive survey of the literature relevant to disclosure regulation. 587 See Nisbett RE & Ross L. Human Inference: Strategies and Shortcomings of Social Judgment (1980). Englewood Cliffs, NJ: Prentice Hall. David Hirshleifer & Siew Hong Teoh, Limited attention, information disclosure, and financial reporting, Journal of Accounting and Economics 36, 337–386 (Dec. 2003). E:\FR\FM\09MYP2.SGM 09MYP2 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules amozie on DSK3GDR082PROD with PROPOSALS1 increase as disclosure documents become longer, more convoluted, or more reliant on narratives.588 Moreover, empirical evidence suggests that simplification benefits consumers of disclosed information.589 These results appear to support requirements of simple disclosures, which provide benefits to consumers of that information. A second characteristic of an effective disclosure is salience, or the tendency to ‘stand out’ or contrast with other information on a page. Salience detection is a key feature of the 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.590 Within the context of disclosures, more salient information, such as information presented in bold text, would be more effective in attracting attention than less salient information, such as information presented in a footnote. There is also empirical evidence that visualization improves individual perception of information.591 For example, one experimental study shows that tabular reports lead to better decision making and graphical reports lead to faster decision making (when people are subject to time constraints).592 A third characteristic of effective disclosure is standardization. People are generally able to make more coherent and rational decisions when they have comparative information that allows 588 See, e.g., S.B. Bonsall IV & B.P. Miller, The Impact of Narrative Disclosure Readability on Bond Ratings and the Cost of Capital, The Review of Accounting Studies 2 (2017) and A. Lawrence, Individual Investors and Financial Disclosure, Journal of Accounting & Economics 56, 130–47 (2013). 589 See supra notes 35, 46—48 and accompanying text. See also S. Agarwal, S. Chomsisengphet, N. Mahoney & J. Stroebel, Regulating consumer financial products: evidence from credit cards, NBER Working Paper 19484 (Jun. 2014) (finding that a series of requirements in the Credit Card Accountability Responsibility and Disclosure Act (CARD Act), including several provisions designed to promote simplified disclosure, has produced substantial decreases in both over-limit fees and late fees, thus saving U.S. credit card users $12.6 billion annually). 590 Daniel Kahneman, Thinking, Fast and Slow, New York: Farrar, Strauss, Giroux (2013). Susan Fiske & Shelley E. Taylor, Social cognition: From Brains to Culture, SAGE Publications Ltd; 3rd ed. (2017). 591 J. Hattie, Visible learning. A synthesis of over 800 meta-analyses relating to achievement, Oxon: Routledge (2008) (‘‘Hattie’’). 592 I. Benbasat & A.S. Dexter, An Investigation of the Effectiveness of Color and Graphical Presentation under Varying Time Constraints, MIS Quarterly 10, 59–83 (Mar. 1986) (‘‘Benbasat & Dexter’’). VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 them to assess relevant trade-offs.593 Standardization could be particularly important for the disclosure of certain quantitative aspects of financial services, such as the level and structure of fees. Finally, personalization may further enhance the effectiveness of disclosure.594 This approach might involve, for example, adjusting the presentation to take account of the receiver’s interests, expectations, or format preferences or to tailor the information based on what the receiver already knows in order not to repeat existing knowledge. Personalization is usually achieved at the expense of standardization, however, and can be costly to create. Current reporting and disclosure requirements for broker-dealers and registered investment advisers including Form BD and Form ADV may provide detailed information to investors. However, because these existing reports and disclosures (which serve the purposes for which they were created) are made in multiple, sometimes lengthy forms, and made available at different websites or delivery methods, it can be difficult for investors to grasp the most important features of the financial services and products they receive. In addition, the information available to retail investors about broker-dealers on BrokerCheck does not include the same information that investment advisers provide in the Form ADV brochure and brochure supplement. The relatively low financial literacy of many investors also makes it less likely that they would be able to effectively compile this information on their own and use it in their decision making. Furthermore, most financial firms and professionals could lack the incentives and resources to disclose the main aspects of their business practices to their customers in 593 See, e.g., JR Kling, S. Mullainathan, E. Shafir, LC Vermeulen & MV Wrobel, Comparison friction: experimental evidence from Medicare drug plans, Quarterly Journal of Economics 127, 199–235 (2012) (finding that in a randomized field experiment, in which some senior citizens choosing between Medicare drug plans that were randomly selected to receive a letter with personalized, standardized, comparative cost information (‘‘the intervention group’’) while another group (‘‘the comparison group’’) received a general letter referring them to the Medicare website, plan switching was 28% in the intervention group, but only 17% in the comparison group, and the intervention caused an average decline in predicted consumer cost of about $100 a year among letter recipients); CK Hsee, GF Loewenstein, S. Blount & MH Bazerman, Preference reversals between joint and separate evaluations of options: a review and theoretical analysis, Psychological Bulletin 125, 576–590 (Oct. 2006). 594 See Loewenstein Sunstein Article, supra note 567. PO 00000 Frm 00073 Fmt 4701 Sfmt 4702 21487 the absence of the proposed requirements. In evaluating the broad economic issues related to disclosure, the Commission preliminarily believes that all retail investors would benefit from a short summary that focuses on certain aspects of the firm and its financial professionals and its services. By requiring both investment advisers and broker-dealers to provide a concise relationship summary that discusses both types of services and their differences, the relationship summary would help all retail investors to understand these aspects of a particular firm, to compare different types of accounts, and to compare one firm with other firms. The relationship summary would also highlight, in one place, the services, some categories of fees, specified conflicts of interest, and whether the firm or its financial professionals currently have reportable disciplinary events. 2. Economic Effects of the Relationship Summary This section analyzes the anticipated economic effects from the proposed relationship summary to the directly affected parties: retail investors, and broker-dealers and investment advisers that offer brokerage or advisory services to retail investors.595 a. Retail Investors As noted above, substantial evidence suggests that retail investors lack financial literacy and do not understand many basic financial concepts, such as the implications of investment costs for investment performance.596 This, in turn, supports the notion that a wellfunctioning market for financial services may provide benefits to investors by helping them obtain information and guidance from firms and financial professionals and thereby make better investment decisions. At the same time, however, evidence also suggests that investors do not fully comprehend the nature of the business relationships and responsibilities in the market which makes them vulnerable to confusion and being misled by firms and financial professionals; 597 it also implies that any improvement of retail investor understanding of their relationship with 595 Economic effects of the proposal on the market for financial services, including on indirectlyaffected parties such as banks or insurers that are not regulated by the SEC, are considered in the following section. 596 See 917 Financial Literacy Study, supra note 20. 597 See 913 Study, supra note 3, at section III.A.; Siegel & Gale Study, supra note 550; RAND Study, supra note 5. E:\FR\FM\09MYP2.SGM 09MYP2 21488 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules financial professionals could improve investor’s investment decisions. The content of the proposed relationship summary is intended to alert retail investors to information that would help them to choose a firm or a financial professional and prompt retail investors to ask informed questions. It is also intended to facilitate comparisons across firms that offer the same or substantially similar services. Specifically, the relationship summary would provide information on the relationships and services offered by investment advisers and broker-dealers, the standards of conduct applicable to those services, certain categories of fees and costs of the services offered, comparisons of brokerage and investment advisory services (for standalone broker-dealers and investment advisers),598 conflicts of interest, and some additional information, including the existence of currently reportable legal or disciplinary events. The Commission believes that the information in the relationship summary could help alleviate investor confusion and would promote effective communication between the firm and its retail investors and assist investors in making an informed choice when choosing an investment firm and professional and type of account to help to ensure they receive services that meet their preferences and expectations. Although the relationship summary applies only to broker-dealers and registered investment advisers, its impact could extend beyond the current and prospective clients of these institutions and impact a larger set of investors through various channels such as public filings and website posting. Both the content and the form of the relationship summary are designed to increase the likelihood that the disclosed information is consumed easily and effectively by retail investors. We discuss the potential benefits and costs of the relationship summary and its components in detail below. amozie on DSK3GDR082PROD with PROPOSALS1 i. Structure of the Relationship Summary The structure of the relationship summary is designed to facilitate retail 598 For purposes of the relationship summary, we propose to define a standalone investment adviser as a registered investment adviser that offers services to retail investors and (i) is not dually registered as a broker-dealer or (ii) is dually registered as a broker-dealer but does not offer services to retail investors as a broker-dealer. We propose to define a standalone broker-dealer as a registered broker-dealer that offers services to retail investors and (i) is not dually registered as an investment adviser or (ii) is dually registered as an investment adviser but does not offer services to retail investors as an investment adviser. Proposed General Instruction 9.(f) to Form CRS. VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 investors’ absorption of the provided information. The proposed design intentionally restricts the length of the relationship summary, whether in electronic or paper format, to four pages on 81⁄2 x 11 inch paper if converted to PDF format, with a specified font size and margin requirements. Existing research suggests that shorter disclosures help investors absorb and process information.599 Shorter disclosure would also facilitate a layered approach to disclosure. The Commission acknowledges that a limit on overall document length (or equivalent length for electronic disclosure) may entail limiting the information provided through the relationship summary. However, based on the studies described above, we preliminarily believe that limiting the length of the relationship summary appropriately trades off the benefits of additional detail against the costs of increased complexity associated with longer disclosures. Similarly, while the required standardization across the relationship summary limits the ability of firms to provide customized information to potential retail investors, we preliminarily believe these constraints are appropriate to facilitate comparability. In addition, firms would be required to use short sentences, active voice, and plain language throughout the relationship summary. Firms would not be permitted to use legal jargon, highly technical business terms, or multiple negatives. Existing research also shows that visualization helps individuals absorb information more efficiently.600 Consistent with this research, firms would be permitted to use graphical presentations, and dual registrants would be required in certain aspects, to use tables to simplify and highlight the information. For example, dual registrants will be required to provide a side-by-side tabular presentation of all relevant information provided in the relationship summary. Moreover, the disclosure would involve a certain degree of standardization across firms. In particular, firms would be required to use the same headings, prescribed wording, and present the information under the headings in the same order. 601 Additionally, firms would be prohibited from adding any items to those prescribed by the Commission and any information other than what the Instructions require or permit. As 599 See supra Section IV.B.1. commenters’ feedback in the Financial Literacy Study, supra note 20, at iv, xx, 21–22. 601 See supra note 593. 600 See PO 00000 Frm 00074 Fmt 4701 Sfmt 4702 discussed above, standardization facilitates comparisons of content across disclosures.602 We believe that allowing only the required and permitted information would promote standardization of the information presented to retail investors, and would allow retail investors to focus on information that we believe is particularly helpful in deciding among firms. At the same time, we acknowledge that standardization of disclosures not only limits personalization that may be valuable to retail investors but also could result in disclosures that are less precise. Further, all information in the relationship summary must be true and not misleading. In particular, the Instructions permit firms to omit or modify any prescribed statement that is inapplicable to their business or would be misleading to a reasonable retail investor. In addition, for certain items, firms will have some flexibility in how they include the required information. ii. Introduction The proposed Introduction of the relationship summary would highlight to retail investors the type of accounts and services the firm offers to retail investors, and the firm’s SEC registration status. In addition, the introduction would require prescribed wording stating there are different ways for investors to get help with their investments, and that they should carefully consider what type of account and services would be right for them and that there are suggested questions at the end of the disclosure. An introduction designed in this manner may benefit retail investors by clarifying that there are choices available in terms of accounts and services and that the some services, firms, or financial professionals may be a better fit than others for the investor. This in turn may trigger a closer read of the relationship summary and perhaps also additional information gathering by the investor that could lead to a more informed choice of financial professional and better fit between the investor’s need and the type of accounts and services they use. iii. Relationships and Services In the second section of the relationship summary, firms would discuss specific information about the nature, scope, and duration of its relationships and services, including the types of accounts and services the firm offers, how often it offers investment advice, and whether the firm monitors 602 See E:\FR\FM\09MYP2.SGM supra Section IV.B.1. 09MYP2 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules the account. As noted above, the relationships and services of firms can differ in nature, scope, and duration. The Commission believes that a better understanding of the relationships and services could lower search costs and the risk of mismatch for retail investors, by facilitating cross-firm comparisons, and make it easier for them to find a firm and a financial professional that most closely meet their expectations, depending on how important different types of fee structures, services, standards of conduct or other information points are to them. amozie on DSK3GDR082PROD with PROPOSALS1 iv. Obligations to the Retail Investor— Standard of Conduct The third section of the relationship summary briefly describes in plain language the firm’s legal standard of conduct. As noted above, studies show that many retail investors are confused about the standard of conduct that applies to firms and financial professionals,603 and the Commission believes that providing retail investors with a brief description of legal obligations of firms and professionals could help alleviate this confusion. Furthermore, to the extent this section makes the issue of standard of conduct more salient to the investors, it may encourage additional information gathering by the investors about the standard of conduct, which could further increase investors’ understanding. Investor understanding of the obligations of their firms and financial professionals with respect to each type of account could help investors align their expectations with the expected conduct of their firm or financial professional. For example, depending on their preferences, some investors might find an advisory account more appropriate. Other investors could prefer the services and standards of conduct associated with a brokerage account. Thus, to the extent the proposed disclosure of obligations in the relationship summary increase investors understanding in this area, it may improve the match between investors’ preferences and expectations and the type of accounts and services they select while preserving investor choice. v. Summary of Fees and Costs The Commission is also proposing that firms include an overview of specified types of fees and expenses that retail investors will pay in connection 603 See, e.g., Siegel & Gale Study, supra note 5 and RAND Study, supra note 5. See also CFA Survey, supra note 5. VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 with their brokerage and investment advisory accounts.604 This section would include a description of the principal type of fees that the firm will charge retail investors as compensation for the firm’s advisory or brokerage services, including whether the firm’s fees vary and are negotiable, and factors that would help a reasonable retail investor understand the fees that he or she is likely to pay. As such, the improved disclosure of the categories of fees, including wrap fees, could help improve retail investor’s decision to engage a firm and a financial professional. vi. Comparisons The Commission is also proposing to require standalone investment advisers and standalone broker-dealers to provide comparisons to the other type of firm. Standalone broker-dealers would include information about the following: (i) The primary types of fees that investment advisers charge; (ii) services generally provided by investment advisers, (iii) advisers’ standard of conduct; and (iv) certain incentives advisers have based on the investment adviser’s asset-based fee structure. For investment advisers, this section would include parallel categories of information regarding broker-dealers. The choice between a brokerage account and an advisory account in part may determine the types of fees and costs and standard of conduct associated with the account. Retail investors who are provided with more information would be more likely to match their choice of the type of account with their expectations; if retail investors do not understand the differences between of broker-dealers and investment advisers, they are less likely to be able to match their expectations for financial services providers with their choices. Thus, the Commission preliminary believes that having a clear explanation of differences in the fees, scope of services, standard of conduct, and incentives that are generally relevant to advisory and brokerage accounts may help retail investors who are considering one such type of relationship to compare how their preferences and expectations might be better met with the other type of relationship. vii. Conflicts of Interest The Commission is also proposing that firms summarize their conflicts of interest related to certain financial incentives. Specifically, firms would be 604 See PO 00000 supra Section II.B.4. Frm 00075 Fmt 4701 Sfmt 4702 21489 required to disclose conflicts relating to: (i) Financial incentives to offer to, or recommend that the retail investor invest in, certain investments because (a) such products are issued, sponsored, or managed by the firm or its affiliates, (b) third parties compensate the firm when it recommends or sells the investments, or (c) both; (ii) financial incentives to offer to, or to recommend that the retail investor invest in, certain investments because the manager or sponsor of those investments or another third party (such as an intermediary) shares revenue it earns on those products with the firm; and (iii) the firm buying investments from and selling investments to a retail investor from the firm’s account (i.e., principal trading). Including these disclosures prominently, in one place, at or before the start of a retail investor’s relationship with a firm or financial professional could facilitate retail investors’ understanding of the incentives that may be present throughout the course of the relationship. Such disclosure of financial incentives could assist investors in matching their expectations when choosing a firm or professional and type of account to help to ensure they receive services that meet their expectations. In addition, to the extent that the specified conflicts of interest disclosures could draw retail investors’ attention to conflicts, monitoring of firms and financial professionals by retail investors could be improved. The first category of conflicts noted above makes the promotion of own and third party products more salient for retail investors. The possibility that an investor may request an explanation of a transaction regarding a recommended investment or strategy, and associated costs thereof, could serve as an additional disciplinary device for firms and financial professionals and align better their interests with the interests of retail investors. Similarly, the disclosures in the relationship summary about revenue sharing arrangements may induce retail investors to more carefully pay attention to investments with such arrangements and request further information. Principal trading could also make retail investors vulnerable to transactions that transfer value from their accounts to the accounts of the firm, and so the disclosure of principal trading information could draw retail investors’ attention to possible conflicts that could emerge from principal transactions and generate increased scrutiny of such transactions by investors. While the Commission preliminarily believes that disclosures of conflicts of E:\FR\FM\09MYP2.SGM 09MYP2 21490 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules amozie on DSK3GDR082PROD with PROPOSALS1 interest in the relationship summary could match retail investor expectations with the choices of firms and financial professionals, some studies have found that disclosures of conflicts of interest, in some cases, could undermine the motivations of people to behave ethically or to take moral license in their actions.605 In the context of providing investment advice, the perception that an investor has been warned (via the disclosure) of a firm’s and financial professional’s potential bias may make them believe that they are less obligated to provide unbiased advice.606 Further, other studies have suggested that disclosures of conflicts of interest could also make firms and financial professionals appear more trustworthy and as a result reduce the incentives for retail investors to examine additional information more carefully.607 The Commission preliminarily believes, however, that the securities laws and existing rules and regulations thereunder, such as investment advisers’ fiduciary duty,608 brokerdealers’ requirements under proposed Regulation Best Interest 609 standard, as 605 See Genevieve Helleringer, Trust Me, I Have ` a Conflict of Interest! Testing the Efficacy of Disclosure in Retail Investment Advice, Oxford Legal Studies Research Paper No. 14/2016 (Mar. 2016), available at https://ssrn.com/abstract= 2755734; and Cain 2005 Article, supra note 581. As discussed above, existing and proposed rules and regulations for broker-dealers and investment advisers could mitigate the negative unintended consequences of disclosures of conflicts of interest. 606 See supra Section IV.B.1. 607 See Burden of Disclosure Article, supra note 584. Further, this ‘‘panhandler effect’’ suggests that in some cases disclosure of financial professionals’ conflicts of interests (particularly in face-to-face interactions) may create social pressure on retail investors to meet the financial professionals’ interests. 608 Under the Advisers Act, an adviser is a fiduciary whose duty is to serve the best interest of its clients, including an obligation not to subrogate clients’ interest to its own. SEC v. Capital Gains Research Bureau, Inc., 375 U.S. at 194 (the United States Supreme Court held that, under section 206 of the Investment Advisers Act of 1940, advisers have an affirmative obligation of utmost good faith and full and fair disclosure of all material facts to their clients, as well as a duty to avoid misleading them). Section 206 applies to all firms and persons meeting the Advisers Act’s definition of investment adviser, whether registered with the Commission, a state securities authority, or not at all. See also Transamerica Mortgage Advisors, Inc. v. Lewis, 444 U.S. 11, 17 (1979) (‘‘[T]he Act’s legislative history leaves no doubt that Congress intended to impose enforceable fiduciary obligations.’’). 609 See Regulation Best Interest Proposal, supra note 24. Proposed Regulation Best Interest would establish a standard of conduct for broker-dealers and associated persons of broker-dealers to act in the best interest of the retail customer at the time at recommendation is made without placing the financial or other interest of the broker-dealer or associated person of a broker-dealer ahead of the interest of the retail customer. The standard of conduct obligation shall be satisfied if the brokerdealer or associated person of the broker-dealer discloses at the time of the recommendation VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 well as under existing self-regulatory organizations’ rules and the Exchange Act,610 reduce the risk that brokerdealers and investment advisers might use the proposed relationship summary to exploit potential conflicts of interest between themselves and their retail investors because these regulations may raise the cost of misconduct.611 viii. Additional Information To facilitate the layered disclosure that the relationship summary provides, we are proposing to require that firms include a separate section (‘‘Additional Information’’) in the relationship summary outlining where retail investors can find more information about the firm’s legal and disciplinary events, services, fees, and conflicts. Retail investors may benefit from information on where to find disclosures of the disciplinary events of firms and financial professionals. For some retail investors, the disciplinary history of the firm or the financial professional may affect their choices related to obtaining investment advice. By providing information on whether the firm or financial professionals have disciplinary history and where to obtain more detailed information through layered disclosure may facilitate retail investors’ ability to match their expectations with their choice of financial service provider. The required disclosure would succinctly state whether or not the firm or its financial professionals have legal and material facts relating to the scope and terms of the relationship, which may be satisfied in part by the relationship summary, and all material conflicts associated with the recommendation. In addition, broker-dealers would be required to satisfy the Care and Conflicts of Interest Obligations, as discussed more fully in the Regulation Best Interest Proposal. 610 For example, a broker-dealer may recommend a security even when a conflict of interest is present, but that recommendation must be suitable. See FINRA Rule 2111. The antifraud provisions of the federal securities laws and the implied obligation of fair dealing prohibit a broker-dealer from, among other things, making unsuitable recommendations and require broker-dealers to investigate an issuer before recommending the issuer’s securities to a customer. See, e.g., Hanly v. SEC, 415 F.2d 589, 596 (2d Cir. 1969). See also Municipal Securities Disclosure, Exchange Act Release No. 26100 (Sept. 22, 1988), at n.75. The fair dealing obligation also requires a broker-dealer to reasonably believe that its securities recommendations are suitable for its customer in light of the customer’s financial needs, objectives and circumstances (customer-specific suitability). See Release 8662, supra note 118, at 18 (involving excessive trading and recommendations of speculative securities without a reasonable basis). 611 Consistent with this belief, one study also finds that regulations and legal sanctions on conflicted advice can mitigate the effects of moral licensing discussed above. See Bryan Church & Xi Kuang, Conflicts of Disclosure and (Costly) Sanctions: Experimental Evidence, Journal of Legal Studies 38 2: 505–532 (Jun. 2009). PO 00000 Frm 00076 Fmt 4701 Sfmt 4702 disciplinary events, based on whether or not they or their financial professionals currently disclose or are currently required to disclose certain legal or disciplinary events to the Commission, self-regulatory organizations, state securities regulators or other jurisdictions, as applicable. The Additional Information section would also highlight where retail investors can find more information about the disciplinary history of the firm and its financial professionals on ‘‘Investor.gov.’’ While the disclosure of the existence of disciplinary events does not provide new information to the market,612 this simple disclosure in the relationship summary, if applicable, could help retail investors more easily identify firms that have reported disciplinary events for themselves or their financial professionals and where to find more information about the events. By including this disclosure, in combination with the requirement to include a specific question for retail investors to ask about disciplinary history in the ‘‘Key Questions to Ask’’ section (discussed further below), the relationship summary would potentially make retail investors more likely to seek out disciplinary history information to use in their evaluation of firms and financial professionals and would make them better informed when they choose a firm and a financial professional. Finally, retail investors themselves have indicated that they consider disciplinary information important.613 Further, by drawing attention to disciplinary histories of financial professionals for retail investors, firms could become more selective in their employment decisions, which could benefit retail investors by having a potentially more trustworthy pool of financial professionals to select from when they choose providers of investment advice, and reduce potential harm to retail investors. As such, the overall quality of financial advice provided to retail investors could increase, to the extent that legal and regulatory compliance is correlated with advice quality.614 As a consequence, such disclosures of disciplinary history could promote retail investor confidence in the market. One potential cost of the increased salience of the existence of disciplinary events may be that retail investors could 612 See Parts 1 and 2 of Form ADV; Form BD; Form U4. 613 See 917 Financial Literacy Study, supra note 20. 614 See Mark Egan, Gregor Matvos & Amit Seru, The Market for Financial Adviser Misconduct, Journal of Political Economy (Dec. 14, 2017), available at https://ssrn.com/abstract=2739170. E:\FR\FM\09MYP2.SGM 09MYP2 amozie on DSK3GDR082PROD with PROPOSALS1 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules be deterred from hiring a firm or financial professional with a disciplinary record, even if they would be better off to do so, without further investigating the nature of the disciplinary event. Alternatively, an investor may also incorrectly assume that a firm that does not report legal/ disciplinary history is a ‘‘better’’ or a ‘‘more compliant’’ firm than a firm that does report such history; i.e., the lack of currently reportable disciplinary history could signify a stamp of approval for some investors. Therefore, disclosures of the existence of disciplinary events could have an unintended consequence of keeping some investors out of the market for financial advice or by selecting financial professionals that could lead to a mismatch with the expectations of the retail investor. This section would also include disclosure of how investors can contact the firm, the SEC, or FINRA (when applicable) if they have problems with their investments, investment accounts, or financial professionals. Highlighting this information may encourage more outreach by investors when they experience such problems, which may increase the likelihood of investors seeking resolution of their or the firm’s problems. Further, to the extent investors’ awareness of how to report problems is increased, it may have some incremental disciplining effect ex ante on financial professionals to the benefit of all retail investors in this market. For example, if retail investors, once aware of how to contact the Commission or FINRA are more likely to do so as a result of the information provided by the relationship summary, firms and financial professionals may improve standards and implement policies and procedures aimed at reducing conduct that would warrant potential outreach to regulators by retail investors. Finally, this section would state where to find more information about the firm and its financial professionals. Broker-dealers would be required to direct retail investors to additional information about their brokers and services on BrokerCheck, their firm websites (if they have a website; if not, they would state where retail investors can find up-to-date information), and the retail investor’s account agreement. Investment advisers likewise would be required to direct retail investors to additional information in the firm’s Form ADV Part 2 brochure and any brochure supplement provided by a financial professional to the retail investor. If an adviser has a public website and maintains a current version of its firm brochure on the website, the firm would be required to provide the VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 website address (if an adviser does not have a public website or does not maintain its current brochure on its public website, then the adviser would provide the IAPD website address). Making these links to websites available could be important given that low levels of financial literacy could make it less likely that investors would effectively compile information on their own to use in decision making. ix. Key Questions To Ask The proposed relationship summary is expected to benefit retail investors either directly, by providing information about the corresponding firm and financial professional, or indirectly, by encouraging investors to acquire additional information. The relationship summary would also include suggested key questions to encourage retail investors to have conversations with their financial professionals about how the firm’s services, fees, conflicts, and disciplinary events affect them. Under the ‘‘Key Questions To Ask’’ heading, firms would be required to include ten questions,615 as applicable to their particular business, to help retail investors to elicit more information concerning the items discussed in the relationship summary.616 Given that standardization of disclosures limits personalization that may be valuable to retail investors, the Commission preliminarily believes that the proposed questions would serve an important purpose in the relationship summary—namely, to prompt retail investors to ask their financial professionals for more personalized information. The proposed list of questions in the relationship summary may alter the actions not only of retail investors but also of firms and their financial professionals. In anticipation of having to answer these key questions, firms may find it in their self-interest to train their staff and develop materials that could help them address the question in greater detail. Such a voluntary response by firms would likely benefit investors to the extent the answers given to the questions may become more informative and more accurate. 615 We are proposing to allow firms to modify or omit portions of any of these questions that are not applicable to their business. We are also proposing to require a standalone broker-dealer and a standalone investment adviser, to modify the questions to reflect the type of account they offer to retail investors (e.g., advisory or brokerage account). In addition, we are proposing that firms could include any other frequently asked questions they receive following these questions. Firms would not, however, be permitted to exceed fourteen questions in total. See supra Section II.B.8. 616 See proposed Item 8 of Form CRS. PO 00000 Frm 00077 Fmt 4701 Sfmt 4702 21491 However, some firms may develop standardized answers in anticipation of the key questions that become less informative to the retail investor than a back and forth conversation. We believe the proposed set of questions cover a broad range of issues that are likely to be important to retail investors and provide benefits, such as a platform from which to begin a dialogue with their financial professional. However, potential costs may arise for some retail investors. One such potential cost of the proposed questions is that they may anchor the attention of retail investors to the list and reduce the likelihood that they would explore other potential questions that could be important to them based on their unique circumstances.617 In addition, framing the questions as ‘‘Key Questions’’ could lead some retail investors to believe that any other questions they may have due to their own particular circumstances may be of second order importance, even if they may not be.618 x. Other Benefits and Costs to Investors As indicated in the 917 Financial Literacy Study, retail investors consider the proposed disclosures in the relationship summary to be important pieces of information. With respect to content, disclosure items identified as absolutely essential for retail investors were: Adviser’s fees (76%), disciplinary history (67%), adviser’s conflicts of interest (53%), and adviser’s methodology in providing advice (51%). Approximately 54% of investors also believe that disclosures that provided comparative adviser information would be useful. In light of this evidence, the Commission preliminarily believes the disclosure would provide valuable information to retail investors and potentially encourage further information gathering by retail investors that assist them in making an informed choice of what type of account matches their preferences and expectations.619 617 Anchoring is a cognitive bias, whereby receivers of information strongly rely on the initial information received when making decisions, and do not sufficiently adjust to new information received. See, Anderson, Jorgen Vitting, Detecting Anchoring in Financial Markets, Journal of Behavior Finance 11, 129–133 (2010) available at https://www.tandfonline.com/doi/abs/10.1080/ 15427560.2010.483186. 618 See, e.g., Tversky Kahneman Article, supra note 580, on the importance of framing. 619 Although the 917 Financial Literacy Study indicated that nearly 90% of survey participants believed that certain disclosures would have been helpful to have in advance of their selection of their current adviser, under the current proposal, firms may and are highly encouraged, though not required, to deliver the relationship summary in E:\FR\FM\09MYP2.SGM Continued 09MYP2 21492 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules amozie on DSK3GDR082PROD with PROPOSALS1 By providing specified disclosures in an abbreviated and simplified format, the proposed relationship summary could also improve the effectiveness of the communication between investors and investment advisers or brokerdealers. A more effective communication may enable retail investors to more quickly reach an understanding of what type of firm and financial professional or type of account offered by the broker-dealer or the investment adviser best matches their preferences. As a result, search costs may be reduced as retail investors may need to contact fewer broker-dealers or investment advisers and financial professionals given that they have access to information about those firms or financial professionals.620 The inclusion of key questions as part of the relationship summary also could serve to reduce search costs as well as the potential for mismatched expectations borne by retail investors if such questions foster greater discussion about the services, costs and fees, and possible conflicts associated with broker-dealer and investment adviser business models. The Commission preliminarily believes that the proposed relationship summary could benefit not only the existing and prospective customers and clients of broker-dealers and investment advisers but also the public more broadly. First, recipients of the relationship summary, to the extent they discuss investing in general, may discuss the topics covered in the summary with family and friends and in the process increase the degree of public awareness about the issues discussed in the disclosure. Second, some prospective retail investors could access the relationship summary independently through the company website or the Commission’s website. The proposed relationship summary may also impose some additional costs on retail investors. As described more advance of the time a retail investor enters into an advisory contract with an investment adviser or engages the services of a broker-dealer. Firms would be required to file the relationship summary with the Commission and the disclosure would be made available on public websites of broker-dealers and investment advisers, which indicates that prospective investors could have access to a given firm’s relationship summary in advance of initial contact with the firm or its financial professionals. In general, however, the Commission preliminarily anticipates that most prospective retail investors would receive the relationship summary at the time that they meet with a financial professional to consider entering into an agreement or engaging services. 620 Insofar as retail customers may also search for other providers of financial advice, such as insurance companies or banks and trust companies, the reduction in search costs obtainable from the relationship summary would be lower. VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 fully in the section that follows, brokersdealers and investment advisers will bear compliance costs associated with the production and dissemination of the relationship summary. As a result of such increased costs, some firms or financial professionals may transfer retail investors from potentially lower cost transaction-based accounts to higher cost asset-based fee advisory accounts, if the firm or the financial professional is dually registered. In addition to these compliance burdens which may indirectly be borne by retail investors, the disclosures themselves may impose certain indirect costs on retail investors. For example, since the proposed disclosures in the relationship summary are general and contain prescribed language in many parts, they could steer retail investor attention away from some specific and potentially important characteristics of the business practices of the firm or the financial professional. This potential cost is likely to be mitigated to the extent the required Additional Information section employs layered disclosure and the Key Questions encourage more personalized information gathering on part of the retail investors. b. Broker-Dealers and Investment Advisers The proposed disclosure requirements would impose direct costs on brokerdealers and investment advisers, including costs associated with delivery, filing, preparation, and firmwide implementation of the relationship summary, as well as training and monitoring for compliance.621 With respect to initial delivery, the relationship summary would need to be provided to retail investors 622 in the case of an investment adviser, before or at the time the firm enters into an advisory agreement or, in the case of a broker-dealer, before or at the time the retail investor first engages the firm’s services. A dual registrant should deliver the relationship summary at the earlier of entering into an investment advisory agreement with the retail investor or the retail investor engaging the firm’s services. Firms would be permitted to deliver the relationship summary (including updates) electronically, consistent with prior Commission guidance.623 Firms would 621 See infra Section V.A. for estimates of some of these compliance costs for purposes of the Paperwork Reduction Act. 622 In addition to the firm’s delivery requirements, firms would also file their relationship summary with the Commission, to be publicly available. See supra Section II.C.1. 623 See supra Section II.C.2. PO 00000 Frm 00078 Fmt 4701 Sfmt 4702 also be required to post their relationship summaries on their websites in a way that is easy for retail investors to find, if they maintain a public website. Firms that do not maintain a website would be required to include in their relationship summaries a toll-free number for investors to call to obtain documents. In addition, firms would be required to provide a relationship summary to an existing client or customer who is a retail investor before or at the time a new account is opened or changes are made to the retail investor’s account(s) that would materially change the nature and scope of the firm’s relationship with the retail investor. Firms also would be required to implement a one-time delivery of the relationship summary to all existing retail investors within 30 days after the date the firm is first required to file its relationship summary with the Commission.624 Regardless of the method of delivery (e.g., paper or electronic delivery) firms would incur costs associated with delivering the relationship summary to retail investors. Such flexibility in the method of delivery, while being consistent with Commission guidance, could increase efficiency by allowing a firm to communicate with retail investors in the same medium by which it typically communicates other information. Further, firms could reduce costs by utilizing technologies to deliver information to retail investors at lower costs than they may face with paper delivery.625 While we recognize that some firms are likely to use electronic delivery methods, and that these methods may be lower cost than paper delivery, some firms may still produce paper versions of the relationship 624 Currently, investment advisers have approximately 29 million non-high net worth individual clients and 5 million high net worth individual clients, and the total number of individual clients of investment advisers has increased by 10 million since 2012. Therefore, investment advisers would need to deliver relationship summaries to approximately 35 million existing retail clients, and on average, would expect approximately 2.5 million new clients per year. Item 5.D of Form ADV. Although the Commission is unable to estimate the number of broker-dealer retail customers, we could assume that the number of relationship summaries for broker-dealer customers would be at least as many, if not more, than what would have to be delivered for investment advisers. 625 Firms would be required to create and maintain records of deliveries of the relationship summary. See supra Section II.E. See supra Section II.E (discussing recordkeeping requirements relating to the relationship summary). If choosing electronic delivery, firms would have compliance costs in providing notice to retail investors that the relationship summary would be available electronically. See supra Section II.C.2 (discussing elements of Commission guidance about electronic delivery of certain documents). E:\FR\FM\09MYP2.SGM 09MYP2 amozie on DSK3GDR082PROD with PROPOSALS1 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules summary, particularly if they have some retail investors that prefer delivery of disclosure in this method, or do not have access to the Internet, or if firms are delivering the relationship summary in the same format alongside other deliverables, such as Form ADV or account statements. Firms would also incur costs of posting the relationship summary on their websites and filing the summary with the Commission. Beyond costs associated with delivery of the relationship summary to retail investors, firms would be required to prepare the relationship summary. The Commission preliminarily believes, however, that these costs would be limited for several reasons. First, the relationship summary is concise (limited to four pages in length or the equivalent length for electronic disclosure), and would contain a mandated set and sequence of topic areas, with much of the language to be prescribed, thus limiting the time required to prepare the disclosure. Second, the relationship summary will be uniform across retail investors and would not be customized or personalized to potential investors. Finally, the relationship summary would contain some standardized elements across investment advisers and broker-dealers, allowing for potential economies of scale for entities that may have subsidiaries that would also be required to produce the disclosure. Further to the costs of preparing the relationship summary, we consider the implication of the disclosure requirements attributable to the DOL rules and exemptions, including the DOL’s BIC Exemption, and the potential effects of those disclosures relative to the relationship summary for brokerdealers and investment advisers. The conditions of the DOL rules and exemptions, including the BIC Exemption, discussed above in the baseline section, are limited to retirement accounts. Although some firms may have voluntarily adopted disclosure requirements of the BIC Exemption for non-retirement accounts, the proposed relationship summary would apply to a broader array of relationships, spanning both retirement and non-retirement accounts for brokerdealers and investment advisers. To the extent that the information provided by the relationship summary would be duplicative of information that would be required by the BIC Exemption (or other DOL rules and exemptions) and provided to the same group of account holders that would receive the DOL required disclosures, the overall benefits of the relationship summary could be reduced. Lastly, to the extent that some VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 financial firms already have set up procedures and systems to comply with the DOL disclosure requirements, these firms may incur lower incremental compliance burdens. The Commission preliminarily believes, however, that the scope of the disclosure requirements under DOL rules and exemptions and the systems that firms would have put in place to accommodate such disclosures are unlikely to have a significant overlap with the relationship summary. Therefore, the Commission anticipates that any potential cost savings for firms to comply with disclosure obligations under DOL rules and exemptions and the relationship summary are likely to be minimal. With respect to preparing and implementing the relationship summary, firms would also need to expend resources with respect to the required Key Questions in the relationship summary. Firms would bear costs of preparing responses the questions from the list and training their employees on how to respond. Financial professionals need to spend time to prepare their responses to the questions and to respond to these questions when asked. As a result, some firm employees or financial professionals could take away from the time they dedicate to investigate investment recommendations, which could inadvertently harm investors if financial professionals divert resources to answering key questions but reduce their time devoted to arriving at investment strategies. In this case, the quality of their recommendations could decline. In both cases, the possible additional costs to firms could be (partially) transferred to retail investors. In addition to the costs associated with preparation, delivery, filing, and posting on websites of the initial relationship summary, firms would also bear costs for updating the relationship summary within 30 days whenever any information becomes materially inaccurate.626 The firm would be required to communicate updated information to retail investors who are existing customers or clients of the firm within 30 days whenever any information in the relationship summary becomes materially inaccurate.627 Firms could communicate 626 Along this line, firms could also incur some costs of modifying prescribed disclosure per the parameters of Instruction 3. 627 The requirement to communicate updated information to retail investors, rather than deliver an updated relationship summary could reduce the effectiveness of the information to the extent that the communication does not allow retail investors to see the context in which information was changed. PO 00000 Frm 00079 Fmt 4701 Sfmt 4702 21493 this information by delivering the amended relationship summary or by communicating the information another way to the retail investor. For example, if an investment adviser communicated a material change to information contained in its relationship summary to a retail investor by delivering an amended Form ADV brochure or Form ADV summary of material changes containing the updated information, this generally would support a reasonable belief that the information had been communicated to the retail investor, and the investment adviser generally would not be required to deliver an updated relationship summary to that retail investor. This requirement provides firms the ability to disclose changes without requiring them to duplicate disclosures and incur additional costs. The updated relationship summary would also need to be posted prominently to the firm’s website if the firm has one and filed electronically with the Commission. In addition, firms could also incur some costs to keep records of how the updated relationship summary or the information in the updated relationship summary was delivered to retail investors. We anticipate that the compliance costs associated with producing updates of the relationship summary would be also relatively minor given that the relationship summary uses largely prescribed language and updates of the relationship summary, which are only required for material changes, are expected to be infrequent. As a result, the costs of such updates are expected to be small relative to the costs associated with the initial production of the disclosure. Further, annual costs associated with communications regarding updates to the relationship summary are anticipated to be lower than the costs of the initial delivery to existing retail investors to the extent the frequency of updates is low or the firm communicates the updates through other ways than formal delivery. The Commission anticipates that some of the costs associated with preparation, delivery, filing, website posting, and updates to the relationship summary for an average broker-dealer or average dual registrant could exceed the costs for the average investment adviser. As Table 1 and Table 3 indicate, broker-dealers maintain a larger number of accounts than investment advisers do; therefore, delivery costs for broker-dealers could exceed those of investment advisers, if the number of accounts is a good indicator of the number of retail E:\FR\FM\09MYP2.SGM 09MYP2 21494 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules amozie on DSK3GDR082PROD with PROPOSALS1 investor customers.628 Similarly, given that the average dual registrant has more customer accounts than the average investment adviser, and that the preparation of relationship summaries for dual registrants may require more effort than for standalone broker-dealers or investment advisers, the compliance costs could be larger for these firms. In addition, unlike investment advisers, which produce Part 2A of Form ADV, a broker-dealer currently is not required to prepare a narrative disclosure document for its retail investors, although under existing antifraud provisions of the Exchange Act, a broker-dealer may be liable if it does not disclose material information to its retail investors. Thus, brokerdealers could expend additional time and effort to aggregate the information required by the relationship summary relative to investment advisers. As a result, the Commission preliminarily believes that the investment advisers should be able to produce the relationship summary at a relatively lower cost than broker-dealers, given investment advisers’ experience with preparing and distributing Part 2A of Form ADV.629 The Commission preliminary believes that compliance costs would also be different across firms with relatively smaller or larger numbers of retail investors as customers or clients. For example, to the extent that developing the relationship summary entails a fixed cost, firms with a relatively smaller number of retail investors as customers or clients may be at a disadvantage relative to firms with a larger number of such customers or clients since the former would amortize these costs over a smaller retail investor base. Firms with a relatively larger number of existing retail investors would face higher costs of initial distribution of the relationship summary compared to firms with a relatively smaller retail investor base. Further, to the extent that certain costs associated with preparing different versions of the proposed relationship summary scale with the number of branches and associated financial professionals that a firm has, firms with a relatively larger number of branches and employees may bear 628 The Commission is unable to obtain from Form BD or FOCUS data information on brokerdealer numbers of customers, and instead, is only provided with the number of customer accounts. The number of customer accounts will exceed the number of customers as a customer could have multiple accounts at the same broker-dealer. 629 For example, investment advisers may already have specialized staff dealing with disclosure issues. VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 higher costs than firms with a smaller number. While the imposed four-page limit is expected to impose nominal compliance costs on market participants, it could also generate additional costs for some firms relative to others. For example, the four-page limit may be more costly for firms that have more complex business models because it will limit the information they can present within the relationship summary.630 For example, a firm with a disciplinary history that provides exceptionally good customer service could be at a disadvantage compared to other firms with no disciplinary history because the relationship disclosure may not summarize relevant information about the quality of customer service or the full scope of services offered by the firm. Based on the estimates provided in Section V.A for Paperwork Reduction Act purposes, the average cost burden for an investment adviser to prepare the proposed Form CRS for the first time is estimated to range between approximately $1,300 and $3,400, depending on the extent to which external help is used.631 The estimated aggregate combined internal and external costs to investment advisers industry-wide for initially preparing and filing the relationship summary would be approximately $22 million.632 Similarly, for broker-dealers, the average cost to a firm for preparing Form CRS for the first time is estimated to range between approximately $4,000 and $6,100, based on the estimate provided in Section V.D.633 The estimated 630 Complexity is not necessarily linked to size— for example, there are large, simple firms and small, complex firms. 631 The lower end estimate is based on the assessment that, without additional external help, it will take an average investment adviser 5 hours to prepare the relationship summary for the first time, see infra Section V.A.2.a. We assume that performance of this function will be equally allocated between a senior compliance examiner and a compliance manager at a cost of $229 and $298 per hour, (see infra note 743 for how we arrived at these costs). Thus, the cost for one investment adviser to produce the relationship summary for the first time is estimated at $1,317 (2.5 hours × $229 + 2.5 hours × $298 = $1,317) if no external help is needed. In addition, we estimate that if the investment adviser needs external help, the average cost to an investment adviser for the most expensive type of such help (i.e., compliance consulting services) would be $2,109, see infra note 732, which brings the total cost to $3,426. 632 See infra Sections V.A.2.a and V.A.2.b for estimates of aggregate internal and external costs, respectively, of the initial preparation and filing of the relationship summary. 633 The lower end estimate is based on the assessment that, without additional external help, it will take an average broker-dealer 15 hours to prepare the relationship summary for the first time, see infra Section V.D.2.a. We assume that PO 00000 Frm 00080 Fmt 4701 Sfmt 4702 aggregate combined internal and external costs to broker-dealers industry-wide of initially preparing and filing the relationship summary would be approximately $15 million.634 In terms of the initial cost of delivering the relationship summary to current retail investors, we estimate that the cost to existing and newly registered investment advisers would be approximately $43.4 million in aggregate, or approximately $5,350 per adviser.635 For broker-dealers, the estimated initial cost of delivering the relationship summary to current retail investors would be approximately $121.5 million in aggregate, or approximately $42,500 per brokerdealer.636 For both investment advisers and broker-dealers, the estimated annual costs of the requirement to deliver the relationship summary before or at the time a new account is opened, or changes are made to the retail investor’s account(s) that would materially change the nature and scope of the firm’s relationship with the retail investor, is approximately 10% of the respective estimated costs of the initial delivery to existing retail investors.637 Finally, the Commission believes that the proposed relationship summary would bring tangible benefits to many broker-dealers and investment advisers. Although the possibility of mismatched expectations for retail investors and their choice of financial firm or professional generally are most costly to the retail investors, such mismatch also imposes costs on broker-dealers and investment advisers. For instance, some investors who have mismatched their performance of this function will be equally allocated between a senior compliance examiner and compliance manager at a cost of $229 and $298 per hour, respectively (see infra note 743 for how we arrived at these costs). Thus, the cost for one broker-dealer to produce the relationship summary for the first time is estimated a $3,953 (7.5 hours × $229 + 7.5 hours × $298 = $3,953) if no external help is needed. In addition, we estimate that if the broker-dealer needs external help, the average cost to a broker-dealer for the most expensive type of such help (i.e., compliance consulting services) would be $2,109, see infra note 826, which brings the total cost to $6,062. 634 See infra Sections V.D.2.a and V.D.2.b for estimates of aggregate internal and external costs, respectively, of the initial preparation and filing of the relationship summary. 635 See infra Section V.C.2.b.i for the estimate of costs investment advisers would incur to deliver the relationship summary to their existing clients. Note that the analysis includes investment advisers that are dual registrants. 636 See infra Section V.D.2.d.i for the estimate of costs investment advisers would incur to deliver the relationship summary to their existing clients. Note that thee analysis includes broker-dealers that are dual registrants. 637 See infra Section V.C.2.b.ii for the estimate of these costs for investment advisers and infra Section V.D.2.d.ii for the analysis of these costs for broker-dealers. E:\FR\FM\09MYP2.SGM 09MYP2 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules amozie on DSK3GDR082PROD with PROPOSALS1 expectations of a financial services provider with the type of provider they have engaged may lodge complaints with the SEC or FINRA for perceived misconduct by their financial professional without understanding the nature of their relationship (e.g., an investor may file a complaint of discretionary trading in an investment advisory account because they did not understand the nature of the services for which they contracted). These complaints are costly to firms and financial professionals, and the Commission preliminarily believes that the relationship summary could alleviate search costs for investors and the likelihood of mismatch between investor expectations and their choice of firm or financial professional. With respect to particular elements of the relationship summary, firms with relatively no currently reportable legal and disciplinary disclosures could benefit directly from the reporting in the relationship summary because the reporting would make these characteristics more salient for retail investors by prompting investors to research disciplinary history of firms with currently reportable legal and disciplinary disclosures. To the extent that including disciplinary history information in the relationship summary increases the propensity of retail investors to consider this information when selecting firms and financial professionals, it could also ultimately increase the cost of misconduct for firms and financial professionals (for example, by making it more difficult to attract retail investors), which would make it more likely that firms take disciplinary information into account when making employment choices, thereby potentially raising the overall quality of their workforce. The relationship summary could further exhibit some positive long-term effects on the markets for broker-dealers and investment advisers and we elaborate on these long-term effects in greater detail in the next subsection. 3. Impact on Efficiency, Competition, and Capital Formation In addition to the specific benefits and costs discussed in the previous section, the Commission expects that the proposed disclosure could cause some broader long-term effects on the market for financial advice. Below, we elaborate on these possible effects, including a discussion of their impact on efficiency, competition, and capital formation. The primary long-term effect of the disclosure on the market is that it could enhance the competitiveness of the VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 broker-dealer and investment adviser markets. The increased transparency with respect to the nature of the relationship between broker-dealers or investment advisers and their retail investors may allow retail investors to better evaluate their firms and financial professionals as well as the options for financial services that are advertised by them, which may increase the overall level of retail investor understanding in the market. When retail investor understanding increases, the degree of competitiveness of the financial services industry may also increase because retail investors could better assess the types of services available in the market. Market competitiveness could be further enhanced by the fact that, by prompting investors to understand better and obtain more information on the services provided as well as the types of fees and costs associated with such services, the relationship summary may reduce search costs for retail investors associated with acquiring this information, thus allowing them to more readily identify less expensive services that match their preferences and expectations for financial services. The relationship summary also could cause additional competition around conflicts of interest, resulting in some firms changing their practices to decrease conflicts. Proposed Regulation Best Interest also requires broker-dealers to disclose all material facts relating to the scope and terms of the relationship, and all material conflicts of interest associated with the recommendation.638 The Commission preliminarily believes that the relationship summary, which draws investor awareness to potential conflicts of interest at the outset of the relationship with a firm or financial professional, would address similar concerns related to the material facts associated with the scope and terms of the relationship as required by proposed Regulation Best Interest. Relative to the disclosures required by proposed Regulation Best Interest, the relationship summary conflicts of interest disclosures apply not only to broker-dealers and dually-registered firms, but also to investment advisers. Increased competitiveness in the market for financial services could have ancillary effects as well, including reduced pricing power for firms and 638 Further, proposed Regulation Best Interest would establish policies and procedures to identify and at a minimum disclose or mitigate material conflicts of interest associated with such recommendations, as well as policies and procedures to identify, disclose and mitigate or eliminate material conflicts of interest arising from financial incentives associated with such recommendations. PO 00000 Frm 00081 Fmt 4701 Sfmt 4702 21495 incentives for firms to innovate products and services. Reduced pricing power, as a result of increased competitiveness, could benefit retail investors through lower fees, effectively redistributing value from holders of financial firm equity to their retail investors.639 We note, however, that this effect could be mitigated by the possibility that people may still be willing to pay higher prices for other reasons, including firm reputation. Competition also provides incentives for firms to develop and innovate. Additional competition among financial services firms could provide incentives for broker-dealers and investment advisers to seek alternative ways to generate profits. In the process, firms could develop new and better ways of providing services to retail investors, for example, by utilizing recent developments in information technologies to deliver information to retail investors at lower cost. In this way, innovation could thus improve the satisfaction of retail investors and the profitability of firms in the financial services provider market. Another potential positive effect of the relationship summary is that, by reporting whether a firm or financial professional has currently reportable legal or disciplinary events, the relationship summary could prompt retail investors to seek out disciplinary information on their current and prospective firms and financial professionals and take that information into account when considering whom to engage for financial services. In this respect, the proposed relationship summary may also enhance competition if, for example, firms and financial professionals with better disciplinary records outcompete those with worse records. We note, however, that reporting whether a firm or financial professional has currently reportable legal or disciplinary events may also bias firms toward hiring firms or financial professionals with fewer years of experience (i.e., fewer opportunities for customer complaints) and against hiring experienced financial professionals with some (minor) customer complaints. The expected economic impact of the above effect across small and large firms, however, is generally unclear. For investment advisers and broker-dealers, reportable disciplinary events are less common for smaller firms than for larger firms.640 639 See Jean Tirole, The Theory Of Industrial Organization, M.I.T. Press (1989). 640 For example, while only 10% of registered investment advisers with less than $1 million of E:\FR\FM\09MYP2.SGM Continued 09MYP2 21496 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules amozie on DSK3GDR082PROD with PROPOSALS1 However, in the market for financial services between investment advisers and broker-dealers, disclosing the existence of currently reportable legal and disciplinary events in the relationship summary may confer a small competitive advantage for investment advisers because brokerdealers are more likely to have to report that they have a disciplinary history due to broader broker-dealer disclosure obligations.641 They are also more likely to report if they have more disciplinary issues. Reporting from Form BD with respect to broker-dealer disclosures of disciplinary actions taken by any regulatory agency or SRO shows that 308 (84%) out of 366 dual-registered broker-dealers disclosed a disciplinary action. By contrast, 1,650 (47%) out of 3,475 standalone broker-dealers have a disclosed disciplinary action. For investment advisers, Form ADV requires disclosures of any disciplinary actions taken in the past ten years. 289 (79%) out of 366 dual-registered investment advisers disclosed a disciplinary action. A much lower fraction, 1,732 (14%) of 12,293, standalone investment advisers disclosed a disciplinary action.642 The fact that broker-dealers have relatively more reportable legal and disciplinary events than investment advisers may cause retail investors to engage investment advisers rather than brokerdealers, thus creating a competitive advantage for some investment advisers. Although the proposed relationship summary applies to SEC-registered broker-dealers and SEC-registered investment advisers, it could exhibit some spillover effects for other categories of firms not affected by the proposal such as investment advisers not registered with the SEC, bank trust departments, and others. In particular, AUM disclose at least one disciplinary action as of January 1, 2018, 66% of registered investment advisers with more than $50 billion of AUM disclosed at least one disciplinary action that year. Form ADV. Similarly, while 89% of broker-dealers with less than $1 million in total assets disclose at least one disciplinary action as of January 1, 2018, 100% of broker-dealers with more than $50 billion total assets disclosed at least one disciplinary action that year. Form BD. 641 See supra notes 251, 253—255 and accompanying text. 642 Source: Items 11C, 11D, and 11E of Form BD and Items 11.C., 11.D. and 11.E. of Form ADV. Form BD asks if the SEC, CFTC, other federal, state, or foreign regulatory agency, or a self-regulatory organization have ever found the applicant brokerdealer or control affiliate to have (1) made a false statement or omission, (2) been involved in a violation of its regulations or statues, (3) been a cause of an investment related business having its authorization to do business denied, suspended, revoked, or restricted, or (4) imposed a civil money penalty or cease and desist order against the applicant or control affiliate. Likewise, Form ADV asks similar questions of registered investment advisers and advisory affiliates. VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 the relationship summary could change the size of the broker-dealer and investment adviser markets—relative to each other, as well as relative to other markets. To the extent the relationship summary reduces retail investors’ confusion and makes it easier for them to choose a relationship in line with their preferences and expectations, the Commission expects that this could attract new retail investors to these markets, coming from firms in other markets. Firms’ current retail investors also may consider switching to a different type of firm if the relationship summary makes the different services provided and the fees and costs of investment advisory and brokerage services more prominent. The exact extent and direction of substitution between brokerage and advisory services is hard to predict and depends on the nature of the current mismatch between retail investor preferences and expectations and the type of services for which they have contracted. The proposed relationship summary may also benefit financial markets more broadly. Recent survey evidence suggests that 60% of all American households have sought advice from a financial professional.643 Despite their prevalence and importance, however, financial professionals are often perceived as dishonest and consistently rank among the least trustworthy professionals.644 This perception has been partly shaped by highly publicized scandals that have affected the industry over the past decade. Systematic mistrust may suppress household stock market participation below the optimal threshold predicted by academic investment theory, as documented in household survey based studies.645 The Commission preliminarily believes that the increased transparency of the existing business practices of financial 643 See supra note 541. Survey of Consumer Finances, 2016. The percentage aggregates all respondents indicating that they use at least one of the following sources in making saving and investment decisions—brokers, financial planners, accountants, lawyers, or bankers. 26% of the respondents indicate that they have used brokers or financial planners. 644 See Edelman Trust Barometer, 2015 Edleman Trust Barometer Executive Summary (2015), available at https://www.edelman.com/2015edelman-trust-barometer/; Anna Prior, Brokers are Trusted Less than Uber Drivers, Survey Finds, Wall Street Journal (Jul. 28, 2015), available at https:// www.wsj.com/articles/brokers-are-trusted-less-thanuber-drivers-survey-finds-1438081201; Luigi Zingales, Does Finance Benefit Society, Journal of Finance 70, 1327–1363 (Jan. 2015). 645 See, e.g., Luigi Guiso, Paola Sapienza & Luigi Zingales, Trusting in the Stock Market, The Journal of Finance, Vol. 63, No. 6, 2557–2600 (2012); and J. Campbell, Household Finance, The Journal of Finance, Vol. 61, No. 4, 1553–1604 (2006) (‘‘Campbell Article’’). PO 00000 Frm 00082 Fmt 4701 Sfmt 4702 professionals could raise the level of investor trust in the market. The enhanced trust could promote retail investor participation in capital markets which could increase the availability of funds for businesses. Depending on the magnitude of the effect, greater availability of funds could lower firms’ cost of capital, allowing firms to accumulate more capital over time. We note a possible negative effect on the trust of some retail investors due to the disclosure on the relationship summary that a firm or financial professional has currently reportable legal or disciplinary events. The decrease in the trust levels of some retail investors, however, could also benefit these investors by bringing their expectations and perceptions in line with their choice of a firm or financial professional.646 Another possible long-term effect of the relationship summary is that it could decrease the prevalence of thirdparty selling concessions in the market by requiring broker-dealers and dual registrants to include prescribed disclosure about indirect fees associated with investments that compensate the broker-dealer, including mutual fund loads. Currently, selling concessions constitute a significant part of the compensation of broker-dealers selling mutual fund products.647 For example, a mutual fund may provide a selling concession, in the form of a sales charge, some portion of which could be remitted to the broker-dealer that recommended the product. Table 2, Panel A also indicates that selling concessions constitute a larger fraction of total revenue (commissions, fees, and sales of IC shares) for smaller broker-dealers—for example, selling concessions as a fraction of revenues represent around 20% for broker-dealers with total assets less than $1 million and less than 4% for broker-dealers with total assets in excess of $50 billion. To compensate for the potential loss of concession-based revenue, brokerdealers could try to switch customers to advisory accounts. As noted above, however, if the proposed disclosure also increases the competitiveness in the broker-dealer and investment adviser markets the increased competitiveness would create some downward price pressure in the market. 646 See Jeremy Ko, Economics Note: Investor Confidence (Oct. 2017), available at https:// www.sec.gov/files/investor_confidence_ noteOct2017.pdf. 647 See supra Table 2, Section IV.A.1.a. E:\FR\FM\09MYP2.SGM 09MYP2 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules amozie on DSK3GDR082PROD with PROPOSALS1 4. Alternatives to the Proposed Relationship Summary This section highlights alternatives to the relationship summary concerning an amendment of existing Forms BD and ADV for broker-dealers and investment advisers, respectively; the form and format of the relationship summary; extensiveness of disclosure; delivery; and communicating information about the updated relationship summary. a. Amendment to Existing Disclosures As proposed, the relationship summary would be a new, standalone disclosure produced by broker-dealers and investment advisers, in addition to the other required information disclosed by broker-dealers and investment advisers. As an alternative, the Commission could consider incorporating the relationship summary information into existing disclosures. For example, Part 2A of Form ADV currently has 18 mandatory reporting elements, produced as a narrative discussion, as part of the disclosure ‘‘brochure’’ provided to prospective retail investors initially and to existing retail investors annually. Instead of requiring investment advisers to produce a completely new disclosure as a separate Form CRS, the Commission could instead make an amendment to Part 2A of Form ADV to require a brief summary at the beginning of the brochure in addition to the existing narrative elements, or to change certain of the disclosure requirements to reduce or eliminate redundancy. Similarly, broker-dealers could be required to deliver longer narrative disclosure to their retail investors with specified elements. Such disclosure could also be required as part of Form BD or a standalone requirement.648 For example, the instructions to Form BD contain a section on the explanation of terms which could be extended to include basic (registrant-specific) information on the business practices of the registrant. Although modifying existing disclosure and reporting in these ways could provide the same information to retail investors as the proposed relationship summary, the Commission believes that these approaches would be less suited for the objective of this disclosure, which is to provide a short, simple overview. The proposed relationship summary would provide disclosure in a standardized, simplified manner, that would allow retail investors not only to compare 648 We note, however, that Form BD is a registration/application form (rather than an existing brochure-type disclosure form). VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 information within a category (e.g., two investment advisers), but also across categories (e.g., investment advisers and broker-dealers). Further, the relationship summary would be designed to be easily comprehensible by retail investors, relying on short, easyto-read disclosure that would provide an overview of information about the firm and its financial professionals to retail investors when choosing a firm and account type. We believe that the proposed relationship summary would benefit retail investors by highlighting succinct information that is relevant to a decision to select a firm, financial professional, or account type and services, at the time such decisions are made, and relying on layered disclosure to provide additional detail. b. Form and Format of the Relationship Summary The Commission is proposing to require broker-dealers and investment advisers to create and deliver a short relationship summary to retail investors that would highlight specified information under prescribed headings in the same order to facilitate comparability. The relationship summary would be limited in length and would contain a mix of prescribed and firm-specific language. The proposal does not specify a single format for filing the disclosure. The Commission could require the relationship summary be filed with the Commission in a specified format, such as an text-searchable PDF file or in some other format, for example, an unstructured PDF or HTML, structured PDF, a web-fillable form, XML, XBRL or Inline XBRL. Further to this alternative, the Commission could require that the relationship summary information be filed in a structured format to facilitate validation, aggregation and comparison of disclosures, and the Commission could then make the data available on IARD and EDGAR. Structured format, such as XML, can enable the automatic generation of unstructured formats such as PDF, HTML, and others to meet the needs of those users who would prefer a paper-oriented layout. As an alternative to the largely prescribed language for the relationship summaries, the Commission could instead allow broker-dealers and investment advisers to construct bespoke disclosure, while providing guidance to firms on the elements of the relationship disclosure that are required to be included. Although this disclosure would allow firms to tailor the discussion of the nature of the business, fees and costs, conflicts of interest, and disciplinary history specifically to their PO 00000 Frm 00083 Fmt 4701 Sfmt 4702 21497 business model, this approach would likely be more costly to retail investors, as it would likely diminish the usefulness of a concise, simplified disclosure that is capable of being used by retail investors to understand firm types. Longer firm-specific disclosures could also increase the search costs for retail investors which could ultimately result in worse choices by lowering investor ability and incentives to screen a large number of firms. Higher search costs for investors could also lower the competitiveness of the market by allowing some firms with lower-quality services to maintain customers and sustain market share, even if better choices are available to retail investors. As discussed above in Section III.B, simplification of disclosures, in terms of size, presentation, and readability, allows for ease of processing of information, while standardization of the content would facilitate identification of information most useful to a retail investor. Finally, lengthier bespoke disclosure would be also costlier for firms to produce. As another alternative, the Commission could have required the relationship summaries to include only prescribed wording. However, the Commission believes that a mix of prescribed and firm-drafted language provides both information that is useful for retail investors in comparing different firms along with some flexibility for firms to determine how best to communicate the information about their particular practices to retail investors. c. Extensiveness of Disclosure As currently proposed, the relationship summary would include high-level information on (i) introduction; (ii) the relationships and services provided in the firm’s advisory accounts and brokerage accounts; (iii) the standard of conduct applicable to those services; (iv) the fees and costs that retail investors will pay, (v) comparison to other account types; (vi) specified conflicts of interest; (vii) where to find additional information, including whether the firm and its financial professionals currently have reportable legal or disciplinary events and who to contact about complaints; and (viii) key questions for retail investors to ask the firm’s financial professional. As an alternative, the Commission could require the inclusion of additional topics or additional disclosures on one or more topics proposed to be covered by the relationship summary. These disclosures could be required as part of the relationship summary or as separate appendices. E:\FR\FM\09MYP2.SGM 09MYP2 21498 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules amozie on DSK3GDR082PROD with PROPOSALS1 With respect to the additional topics to be disclosed, the Commission could request that firms disclose additional information on their performance, investment style, or other business practices. Retail investors, however, may become overwhelmed if presented with a number of very lengthy disclosures, which therefore could bury the information that is most useful to investors and reduce the effectiveness of those disclosures.649 With respect to the specific topics of additional information, evaluating the performance, investment style and business practices of a firm or financial could be subjective or speculative, and may be more suited for marketing materials rather than prescribed language in the relationship summary.650 For all these reasons, we believe that these additional disclosure topics are not appropriate for inclusion in the relationship summary. Regarding alternatives to the disclosure of fees and costs as proposed here, the relationship summary could require additional disclosures on one or more of these topics. For example, the relationship summary could include the firm’s fee schedule, either as part of the body of the relationship summary or as an attachment. Alternatively, we could require each relationship summary to include a personalized fee schedule,651 to be created for each retail investor, detailing the specific fees and costs associated with the retail investor’s account, presented both in dollars and as a percentage of the value of the retail investor’s account. These fee schedules could also include compensation received by the firm and its financial professionals related to the account, and the indirect fees that are payable by the retail investor to others (e.g., mutual fund and exchange-traded fund fees and expenses). However, ex ante identifying possible fee schedules for investors at the outset of a relationship as opposed to at the time of the transaction could impose costs to both investors and firms. For example, firms might need to outline a long list of possible transactions and the associated fee schedules, which in turn could be confusing to investors. We could also require more comprehensive disclosures regarding conflicts of interest and disciplinary history, including requiring firms to summarize more or all of their conflicts of interest.652 For example, firms could disclose potential conflicts of interest associated with execution services, such as those required to be reported in rule 606 disclosures.653 We could also require additional details about a firms’ and its financial professionals’ disciplinary history. Instead of requiring firms to disclose whether or not they have currently reportable legal or disciplinary history, as proposed, we could require firms to disclose the number of disciplinary events, expressed as a number or as a percentage of the size of the firm or the number of firm professionals. We could further differentiate the disclosures by requiring firms to disclose the existence and numbers of disciplinary histories within categories of disciplinary history. More detailed disclosures about fees, compensation, conflicts and disciplinary history could help retail investors understand better the differences between types of accounts, and could facilitate the decision about the most appropriate account for each retail investor. As noted above, current disclosures on these topics cover only subsets of firms and relationships and could take different forms. For example, firms wishing to make investment recommendations to IRAs and participants of ERISA-covered plans may be subject to certain disclosure obligations.654 This disclosure, however, does not apply to nonretirement accounts. Investment advisers also prepare a Form ADV Part 2A narrative brochure but such a retail disclosure document is not currently required for broker-dealers. As a result, the Commission preliminary believes that retail investors could benefit from the proposed relationship summary given its wide coverage, delivery method, and design. In particular, the disclosures about types of fees and costs included in the 649 See also supra note 50 and accompanying text (discussing comment letters to the 917 Financial Literacy Study regarding the length of disclosure documents). 650 In terms of performance, studies have shown that investors take into account information about historic fund performance in their investment choice; see, e.g., Choi Laibson Article, supra note 567. 651 One requirement of proposed Regulation Best Interest would be to provide to investors at the time of or prior to a recommendation the expected fees and costs, and possibly a fee schedule, associated with the individual transaction. 652 See supra Section II.B.6 for a discussion of conflicts, or specific details of conflicts, that would not be required to be disclosed in the proposed Form CRS. 653 See 17 CFR 242.606 (requiring that brokerdealers make publicly available a quarterly report on order routing information, including a discussion of the material aspects of their relationship with venues executing non-directed orders, including arrangements for payment for order flow and any profit-sharing arrangement). 654 See supra Section IV.A.1.c (discussing disclosure obligations under DOL rules and exemptions). VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 PO 00000 Frm 00084 Fmt 4701 Sfmt 4702 relationship summary could help retail investors understand better the types of fees that they will pay and how those types of fees and costs affect their accounts. As discussed in the baseline, the 917 Financial Literacy Study highlighted that transparency and disclosure about fees charged by financial intermediaries was one of the most essential elements that investors would consider in making their decision about which financial professional to choose.655 Similarly, the information provided about conflicts of interest in the relationship summary could help retail investors understand how such conflicts that might be pertinent to their account. The disclosure about whether the firm or financial professional has currently reportable legal or disciplinary events could encourage retail investors to research the extensiveness and nature of the disciplinary history of a firm, therefore allowing retail investors to further evaluate firms based on the types of disciplinary events. Although additional disclosures on account types, fees and compensation (including a fee/compensation schedule), conflicts of interest and disciplinary history could enhance retail investors’ understanding of the accounts that are available to them, there are a number of additional costs associated with these alternatives. As noted earlier in the release, extensive empirical evidence suggests that as documents get lengthier and more complex, readers either stop reading or read less carefully.656 Retail investors, therefore, may become overwhelmed if presented with lengthy disclosure, which could bury the information that is most important to investors and reduce the effectiveness of those disclosures.657 Further, the compliance and production costs of additional disclosure would increase significantly the overall compliance costs to brokerdealers and registered investment advisers. As another alternative, the Commission could require a shorter relationship summary, limited to one page (or equivalent limit for electronic format) that would highlight important topics for retail investors and/or including only key questions for retail investors to ask. This alternative relationship summary would be highly readable, with prescribed formatting, 655 See supra note 20. e.g., 917 Financial Literacy Study, supra 656 See, note 20. 657 See also supra note 50 and accompanying text (discussing comment letters to the 917 Financial Literacy Study regarding the length of disclosure documents). E:\FR\FM\09MYP2.SGM 09MYP2 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules and could highlight the differences between brokerage and advisory services and fees, and flag for retail investors the existence of firms’ and financial professionals’ conflicts of interest without discussing any specific conflicts. However, the one-page relationship summary would be the same or very similar across firms, and therefore likely would not facilitate detailed comparison across firms or provide enough information to highlight the differences for most retail investors. We alternatively could require firms to create separate relationship summaries for each account type they offer to retail investors, and require firms to provide a retail investor only the relationship summary for the service being offered.658 This would result in more detailed disclosures on specific account types, and would potentially provide retail investors with more relevant information about account types that they are interested in reviewing (and less extraneous information about account types that they are not interested in reviewing). However, providing such focused relationship summaries could decrease comparability across account types, as the relationship summary would not present, in one place, the differences in accounts and services offered.659 In addition, this would result in more costs to firms with multiple advisory and brokerage services, as they would be required to prepare several relationship summaries, although they may also have the resources to do this. The Commission preliminarily believes that, as a tool for layered disclosure, the relationship summary as proposed facilitates retail investors’ ability to obtain more detailed disclosures on account types by encouraging retail investors to ask questions and request more information. amozie on DSK3GDR082PROD with PROPOSALS1 d. Delivery As currently proposed, firms would be required to deliver the relationship summary before or at the time an investment adviser enters into an advisory agreement with a retail investor, or, for broker-dealers, before or at the time the retail investor first engages the firm’s services. Dual registrants would be required to deliver the relationship summary at the earlier 658 See Comment letter of Fidelity responding to FINRA’s Regulatory Notice 10–54 (Dec. 27, 2010), available at https://www.finra.org/sites/default/files/ NoticeComment/p122723.pdf. 659 We note that firms with multiple account types within brokerage or advisory would not have the flexibility to describe/distinguish the different account types (e.g., a brokerage firm that offers a range of accounts—from completely self-directed to mutual-fund only to full-service). VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 of entering into an investment advisory agreement with a retail investor or the retail investor engaging the firm’s services. As with other disclosure, a firm would be permitted to deliver the relationship summary (including updates) electronically, consistent with the Commission’s guidance regarding electronic delivery. In addition, firms would be required to implement a onetime delivery of the relationship summary to existing retail investors as a transition requirement. We are also proposing a requirement for firms to post their relationship summaries on their websites in a way that is easy for retail investors to find, if they maintain a public website. Firms that do not maintain a website would be required to include in their relationship summaries a toll-free number for investors to call to obtain documents. In addition, a firm would be required to provide a relationship summary to an existing client or customer who is a retail investor before or at the time a new account is opened or changes are made to the retail investor’s account(s) that would materially change the nature and scope of the firm’s relationship with the retail investor, as described in more detail in Section III.C.2 above. A firm would also be required to deliver the relationship summary to a retail investor within 30 days upon request. Furthermore, firms would be required to file current relationship summaries with the Commission, which would be made publicly available, and would be required to post a current version of their relationship summary on their website, if they maintain one. As an alternative regarding delivery, the Commission could require that the relationship summary would only be available through electronic delivery, such as an email attachment, an email with the full text of the relationship summary in the body of the text, or an email with a hyperlink to the firm’s website. Although alternatives relying exclusively on electronic delivery could reduce costs associated with the production of those disclosures, the proposed approach would give the potential benefits of providing information to retail investors in a timely fashion in order to help retail investors select a financial professional or firm, while recognizing the proliferation of the various means of communications, electronic or otherwise, available to firms and retail investors. Our approach also recognizes that some retail investors may not have Internet access or may prefer delivery in paper. The Commission could have also eliminated the requirement for firms to PO 00000 Frm 00085 Fmt 4701 Sfmt 4702 21499 post the relationship summary on their websites and file the disclosure with the Commission. However, we believe that the relatively minimal cost to firms for posting and filing is outweighed by the benefit of providing easily accessible information to retail investors to assist them in deciding among firms and financial professionals. Another possibility would have been also not to require a one-time delivery of the relationship summary to existing retail investors. The Commission believes that since the information in the relationship summary is potentially valuable to new investors it would be also potentially valuable for the existing customers of broker-dealers and investment advisers. While existing retail investors would face higher costs to change from an existing financial services provider to a new one than new potential investors would, most existing investors would be still able to reevaluate their relationships with their current firm and investment professionals. Furthermore, there is an inherent cost to retail investors when the services they receive do not meet their expectations. To the extent delivery of the relationship summary to existing retail investors fosters greater understanding and decreases the mismatch, this could mitigate any costs of changing financial service providers. Distributing the relationship summary to a larger group of initial investors further increases the group of individuals that could become familiar with the disclosure indirectly through interactions with family and friends. As another alternative, the Commission could have proposed only a delivery requirement for the relationship summary, like Form ADV Part 2B, instead of also requiring that firms file it with the Commission. As discussed also in Section III.A above, although not requiring the summaries to be filed with the Commission could reduce the costs to firms for preparing the document to be filed, the Commission believes that public access to relationship summaries benefits prospective retail investors by allowing them to compare firms when deciding whether to engage a particular firm or financial professional or open an advisory or brokerage account, particularly if the summaries can be located on a single point of access. Further, filing the relationship summary with the Commission provides public access regardless of whether a particular firm has a website with which to provide public access to the disclosure. E:\FR\FM\09MYP2.SGM 09MYP2 21500 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules amozie on DSK3GDR082PROD with PROPOSALS1 e. Communicating Updated Information As currently proposed, firms would need to update their relationship summary within 30 days whenever any information in the relationship summary becomes materially inaccurate. Our proposal would also require firms to communicate the information in the amended relationship summary to retail investors who are existing clients or customers of the firm within 30 days after the updates are required to be made and without charge. The communication can be made by delivering the relationship summary or by communicating the information in another way to the retail investor.660 Each firm would also be required to post the updated relationship summary prominently on its website (if it has one) and electronically file the current version of the summary with the Commission. Alternatively, the Commission could require that the relationship summary also be updated and delivered annually, which would be similar to the current requirements for investment advisers to provide an updated ‘‘brochure’’ derived from Part 2A of Form ADV to their existing retail investors both annually and upon any changes to the Item 9 of Part 2A (disciplinary information). The Commission preliminarily believes that the benefits of preparing and delivering an annual relationship summary, regardless of the format of that delivery, would not outweigh the costs to produce and distribute. As noted earlier, the Commission anticipates that the terms of the business relationship between most firms and their retail investors would be relatively stable over time, except when a new account is opened or a significant amount of assets is moved from one type of account to another that is different from the retail investor’s existing accounts, or other changes are made that result in a material change to the nature and scope of the firm’s relationship with the retail investor. As a result, every new delivery would bring relatively small amount of information to retail investors. We believe that mere public posting of the updated summary would not itself adequately inform retail investors about material changes to the relationship summary, and that firms providing communication of information about relationship summary updates to investors as described above is therefore necessary. Finally, instead of proposing that firms may choose to communicate information about updated relationship 660 See supra Section II.C.3. VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 summaries to existing retail investors instead of delivering an updated relationship summary, the Commission could have proposed that firms must deliver the updated relationship summary to each existing retail investor regardless of whether or not it communicated the information to retail investors in another way. While delivering the summary would provide retail investors with the full scope of changes being made to the summary in the context of existing information, the Commission preliminarily believes that allowing firms to communicate information about the updates as well as making the current version of the summary publicly available, via a firm’s website (if the firm has a website) and on the Commission’s website, provides flexibility for firms to utilize existing communication methods and reduces the costs of delivery on firms while providing adequate notice to retail investors about the updates to the relationship summary, as well as access to the updated summaries. 5. Request for Comments The Commission requests comment on all aspects of the economic analysis, including the analysis of: (i) Potential benefits and costs and other economic effects; (ii) long-term effects of the proposed relationship summary on efficiency, competition, and capital formation; and (iii) reasonable alternatives to the proposed regulations. We also request comments identifying sources of data and that could assist us in analyzing the economic consequences of the proposed regulations. In addition to our general request for comment on the economic analysis, we request specific comment on certain aspects of the proposal: • Do commenters agree with the overall assessment that the relationship summary would benefit retail investors and assist them in making a choice of what type of account matches their preferences? Do commenters believe there are alternatives to the structure and content of the relationship summary that we have not considered that could make it more beneficial to retail investors? Are there any unintended costs of the relationship summary for retail investors that we have not considered? • Do commenters believe that the proposed disclosures about relationships and services and fees are clear and effective enough? How would you recommend altering the presentation of these disclosures in order to increase their effectiveness? PO 00000 Frm 00086 Fmt 4701 Sfmt 4702 • Do commenters agree the proposed disclosure of the categories of conflicts of interest would be beneficial to retail investors? How would you recommend altering the presentation of the conflicts of interest information so that costs are minimized? • What additional costs and benefits do you envision with extending the disclosure of disciplinary history? • Are there alternative key questions we should consider recommending that retail investors ask their financial professional? Are there questions we should exclude, and, if so, why? Do commenters agree with the concern that there could be potential costs associated with the list of proposed questions, such as anchoring the attention of retail investors to the list and thereby reducing the likelihood that they would explore other potential questions that could be important to them? • What costs do commenters anticipate that firms and financial professionals will incur in implementing and complying with the proposed Form CRS, both initial and ongoing? Please provide estimates of the time and cost burdens for preparing, delivering and filing the proposed form. What costs do commenters expect firms and financial professionals will incur to prepare answers to the ‘‘Key Questions to Ask’’ in the proposed Form CRS? Please provide estimates of the time and cost burden for preparing to answer the questions. • How do commenters anticipate that the benefits and costs of the proposed rule will be shared between brokerdealers and their clients; or between investment advisers and their clients? • Do commenters anticipate that the benefits and costs of the proposed rule would be different across broker-dealers and investment advisers? What about dually-registered firms? • Are retail investors likely to access and download relationship summaries of broker-dealers through EDGAR and investment advisers through IAPD? • Are there other reasonable alternatives that the Commission should consider? If so, please provide additional alternatives and how their costs and benefits would compare to the proposal. C. Restrictions on the Use of Certain Names and Titles and Required Disclosures As discussed above, several studies suggest that retail investors may lack financial literacy and are confused about the differences between broker- E:\FR\FM\09MYP2.SGM 09MYP2 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules dealers and investment advisers.661 Part of this confusion may be related to the current use of professional names and titles as indicated by these studies and commenters.662 This proposal would seek to reduce investor confusion related to the use of certain terms in firm names and professional titles and prevent retail investors from potentially being misled that their firm or financial professional is an investment adviser, resulting in investor harm. In particular, our proposed rule seeks to restrict a broker or dealer, and any natural person who is an associated person of such broker or dealer, when communicating with a retail investor, from using as part of its name or title the words ‘‘adviser’’ or ‘‘advisor’’ unless such broker or dealer is registered as an investment adviser under the Advisers Act or with a state, or such natural person who is an associated person of a broker or dealer is a supervised person of an investment adviser registered under section 203 of the Advisers Act or with a state, and such person provides investment advice on behalf of such investment adviser.663 In addition to the restriction on the use of certain names and titles, we are proposing rules that require both brokerdealers and investment advisers to prominently disclose their registration status with the Commission and for their financial professionals to disclose their association with such firm in all print and electronic retail investor communications. Dual registrants would be required to disclose both registration statuses. This section provides an analysis of the economic effects of the proposed rules relative to the baseline, including a discussion of the benefits and costs to the affected parties and the impact on efficiency, competition and capital formation. We also discuss reasonable alternatives to the proposed rules. amozie on DSK3GDR082PROD with PROPOSALS1 1. Broad Economic Considerations The economic tradeoffs involved in the choice of names and titles by firms and financial professionals are complex and affected by a wide range of factors. 661 See Siegel & Gale Study, supra note 549 and RAND Study, supra note 5. Although these studies do not limit the types of financial professionals exclusively to broker-dealers or investment advisers, the majority of the survey questions focus on differences between advisory services versus brokerage services. 662 Id. See supra note 4. 663 See section 202(a)(25) of the Advisers Act [15 U.S.C. 80b–2(a)(25)] defining ‘‘supervised person’’ as any partner, officer, director (or other person occupying a similar status or performing similar functions), or employee of an investment adviser, or other person who provides investment advice on behalf of the investment adviser and is subject to the supervision and control of the investment adviser. VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 In this section, we discuss under what conditions firm names and financial professionals’ titles may convey information that is important to retail investors when they are searching for a provider of financial advice, as well as factors that are likely to matter for firms and financial professionals when choosing their names and titles. We also discuss some conditions where investor confusion over the information conveyed by the names and titles chosen by firms and financial professionals may lead to investor harm. We believe that investors fall into a spectrum of knowledge about the providers in the market for financial advice. On one end of the spectrum, there are investors who may understand and correctly distinguish the types of services and standard of conduct provided by different types of firms and financial professionals. If firms and financial professionals use names that accurately describe their regulatory type, these types of investors would understand and expect that ‘‘brokerdealers,’’ or close synonyms thereof, would provide the services of, and be subjected to the standard of conduct applicable to, a broker-dealer, while ‘‘investment advisers,’’ or similar names and titles, would provide the services of, and be subject to the standard of conduct applicable to, an investment adviser. On the other end of the spectrum there are less knowledgeable investors who do not understand that there are different types of services that can be provided by firms or financial professionals, or differing applicable standards of conduct. These investors may not be able to discern from the name or title what type of service will be provided by a firm or financial professional. As a result, these investors may bear costs associated with their confusion, such as increased time and effort (‘‘search costs’’) to identify the right type of financial professional,664 or harm associated with inadvertently selecting, or potentially being misled to select, a type of firm and financial professional that is not consistent with their preferences and expectations. The harm from a mismatched relationship could be, for example, a higher-thanexpected cost of services or reduced protection for the investor. In addition to confusion over firm names and professional titles, and what they may represent, some investors may 664 According to the 2009 National Survey Initial Report (see supra note 275), of the 816 survey respondents that used a financial professional in the last five years, 56% indicated that when looking for a financial professional, they met or talked with more than one professional before making their choice. PO 00000 Frm 00087 Fmt 4701 Sfmt 4702 21501 also have confusion over the type of brokerage, advisory and other services and standard of conduct that best match their preferences. Retail investors, therefore, can also be categorized based on whether they know the type of advice relationship (and associated payment model) that they would prefer, regardless of whether they understand the names and titles of firms and professionals. For instance, some investors may know that they prefer to receive and pay for advice on a per transaction basis, such as that provided typically by a broker-dealer, while others know they prefer an ongoing advisory relationship with an assetbased fee model, such as that typically provided by an investment adviser. On the other hand, some other investors may only understand that they are seeking financial advice but do not understand that there are different types of advice relationships, and different ways to pay for advice, and may not correctly identify the type of advice relationship that would be most consistent with their preferences. This dimension of investor confusion could also lead to investor harm such as increased search costs, an overall mismatch in the type of advice relationship, or paying more than expected for services received. In principle, firm names and professional titles used by financial intermediaries, to the extent that names and titles accurately reflect the financial services provided, may serve as a search tool for some investors when they initially select which financial professionals to approach. In particular, for investors that both understand and correctly interpret company or professional names and titles and also know the type of investment advice relationship that they prefer, names and titles of firms and financial professionals that are mainly associated with one type of financial services could be used as an initial sorting mechanism that may reduce search costs. For example, to the extent names and titles accurately reflect the type of firms and financial professionals, knowledgeable investors that prefer only brokerage services could lower their search costs by using names and titles to increase the likelihood they would contact brokerdealers rather than investment advisers in their search. Similarly, knowledgeable investors looking to hire an investment adviser would more easily be able to contact investment advisers and avoid contacting brokerdealers simply by observing the firm or professional names and titles. We also note that investors who understand the E:\FR\FM\09MYP2.SGM 09MYP2 amozie on DSK3GDR082PROD with PROPOSALS1 21502 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules differences between broker-dealers and investment advisers generally are unlikely to face a mismatch in the selection of a financial professional, and that the names and titles, in this case primarily serve to reduce search costs. Less knowledgeable investors may face confusion over either the information conveyed by firm or professional names and titles or the preferred scope of their advice relationship. To the extent that names or titles used by financial intermediaries accurately reflect services provided, any reduction in search costs or reduction of the risk of investors matching with the wrong type of firm and financial professional will depend on the nature of the investor confusion, as we discuss in more detail below. When selecting firm or professional names and titles, financial services providers may account for the level of investor understanding (or confusion). For example, they may be aware that some investors are informed by the use of particular names and titles, and the implications for the services provided and applicable standard of conduct, while other investors may face confusion over the use of particular names and titles or the type of advice relationship they seek. The incentives of financial intermediaries are two-fold: (1) They seek to build their client/customer base; and (2) they desire to reduce the costs associated with building that client/customer base, such as the time, effort, and marketing costs incurred in the initial client acquisition process. Therefore, financial intermediaries would rationally choose titles that effectively attract the attention of potential investors, while reducing the likelihood of ‘‘false starts’’ with investors that are not the right match (and understand what type of advice that they seek). For example, if investors that fully understand the differences between different types of financial intermediaries are a significant majority of the potential investor pool, then profit maximizing financial intermediaries would likely choose names and titles that clearly identify the nature of services provided and applicable standard of conduct. These knowledgeable investors will then be able to identify from that choice of name or title whether the firm or financial professional will meet their preferred type of investment advice relationship, and therefore, the unambiguous choice of title by the financial professional both reduces search costs incurred by these investors and reduces the effort expended by the financial professionals to build their customer base. VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 Continuing the same example, the remainder of the investor pool would then consist of less knowledgeable investors, which would represent a small portion of the aggregate investor pool. These investors, in particular those who are confused about the differences among firms and financial professionals and what type of investment advice relationship they should seek, may be unlikely to understand from names or titles alone how well the financial intermediary would match their preferences, and therefore, will bear search costs and the possibility of mismatch even when names and titles provide little ambiguity for informed investors. However, we expect that when the hypothetical investor pool predominantly consists of investors who fully understand the differences between different financial intermediaries, as we assumed for this example, overall costs borne by both investors (e.g., search costs) and financial intermediaries (e.g., customer acquisition costs) are minimized by the use of distinct names and titles clearly identifying financial intermediary type. As the hypothetical pool of less knowledgeable investors that face confusion over company names, titles, or services increases, the choice of names and professional titles by financial intermediaries become more complex to analyze and depends on a number of factors related to investors. These factors include, among others: (i) Whether and how much these investors infer information from titles about the type of advisory or other services provided; (ii) the source of investors’ confusion, such as (a) a lack of understanding about the type of service they would prefer, (b) an inability (in the absence of additional information) to understand the differences in the services offered and their associated payment models, or (c) a lack of knowledge about professional titles and information provided therein; (iii) how easily investors can learn, upon meeting with a financial professional, about whether the type of advice or other services provided by the financial professional meets their preferences; (iv) whether investors could be persuaded to choose a type of advisory service that is not consistent with the investor’s preferences after meeting with a financial professional; (v) investors willingness or ability to keep searching for a financial professional until they find one that best matches their preferences; and (vi) the distribution in the investor pool of investors with different levels of knowledge and understanding as described above. PO 00000 Frm 00088 Fmt 4701 Sfmt 4702 When less knowledgeable investors are confused not only about what services broker-dealers and investment advisers provide, but also are confused about the types of services that they would prefer, the factors noted above may lead firms and financial professionals of either type to rationally choose generic or common terms in names and titles. Consider the example where retail investors know they would benefit from financial advice in a general sense, but are confused about which type of investment advice relationship and associated payment model would be best for them.665 A portion of these investors are also persuadable, to some degree, to contract for whatever service is offered to them by any given financial professional they contact, regardless of whether that type of service matches the investors’ preferences. In this case, and in order to maximize the number of investors that a firm or financial professional may be able to contract with, both broker-dealers and investment advisers facing these less knowledgeable investors would have incentives to pick names and titles that are the most effective at getting these investors to approach them, to the extent that names or titles alone have any impact on the choices made by these investors.666 Once these investors make contact, a firm and financial professional hypothetically may be able to persuade the investor to hire them regardless of the type of financial advice relationship offered, to the extent that the investor cannot distinguish the characteristics of different types of advice relationships that best fit their preferences, does not know the most 665 The assumptions underlying this hypothetical example are meant to be illustrative of the incentives of firms and financial professionals to pick certain names and titles when their pool of potential customers is relatively uninformed. Should the relationship summary disclosure be provided to potential and existing customers, we believe that some of the confusion regarding the nature of services would be addressed/mitigated; however, some investors may still, even in the event that the relationship summary is provided be confused about what type of firm or financial professional or which particular service is best for their investing situation. 666 Although a number of studies discussed in the baseline provide survey evidence that investors are confused about titles, we are unaware of any direct evidence that titles alone affect the choice of firms or financial professionals that are contacted or eventually hired. However, in conjunction with the proposed relationship summary, we expect that investors would gain better understanding of the services provided by, and standards of conduct applicable to, broker-dealers and investment advisers, which could lead to more informed decision making about choosing the type of financial intermediary that best matches to the investors’ own expectations regarding services and standard of conduct. E:\FR\FM\09MYP2.SGM 09MYP2 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules amozie on DSK3GDR082PROD with PROPOSALS1 cost effective way to pay for that relationship, and cannot easily distinguish between the types of relationships that are offered by different firms and their financial professionals. In order to attract this type of investors, firms may favor titles that indicate their financial professionals’ ability to dispense guidance and advice. For example, they may select titles that include the word ‘‘adviser’’ or ‘‘advisor,’’ such as ‘‘financial advisor’’.667 In addition to potential search costs expended by less knowledgeable investors, these investors also bear a greater risk of mismatch between the type of advice relationship that best fits their preference and the actual advisory service for which they contract. However, in this example, the mismatch arises because of investor confusion over the type of relationship that best would meet their preference, and this confusion itself may lead the investor to, by chance, seek out a type of firm or financial professional that is inconsistent with the investor’s preference, rather than any confusion directly related to the firm’s or financial professional’s use of a common name or title. Conversely, generic names and titles may make it easier for less knowledgeable investors to identify a broader class of firms or financial professionals that can meet their perceived need for financial advice to some extent.668 In situations where the pool of less knowledgeable investors is likely to be large, one likely outcome is that many firms and financial professionals could end up using similar names or titles, which would potentially increase search costs for those more knowledgeable investors who otherwise may use names and titles as an initial sorting mechanism. Other particular kinds of investor confusion, which could impose costs on some investors, may provide benefits, such as increased customer flow, to only a certain type of firm or financial professional. For example, some investors may be fully aware of the type of advice relationship that they prefer, but are confused about which firm or 667 Alternatively, these firms may choose relatively generic names or titles that in other ways suggest an advisory service, such as ‘‘financial planner’’ or ‘‘financial consultant,’’ which are not subject to the present rulemaking proposal. 668 To the extent generic titles in use today such as ‘‘financial planner’’ and ‘‘financial consultant’’ make it more likely less knowledgeable investors can identify both investment advisers and brokerdealers that offer advice, there may be benefits to some of these investors if they in their contacts with financial professionals of both types learn about which relationship and payment models is most consistent with their preferences. VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 professional names and titles are associated with that type of advice relationship. In particular, consider a situation where investors know that they would like an advice relationship that is provided by investment advisers. In this case, some broker-dealers may have incentives to use titles such as ‘‘advisor’’ that suggest such an advice relationship to maximize their customer flow. As a result, some less knowledgeable investors may be misled to wrongly approach broker-dealers rather than investment advisers in their search for advice, and bear both potentially higher search costs and an increased likelihood of a mismatch between the type of advice that is received and the type of advice that is preferred. The risk of a mismatch and associated harm in this case would be especially large for any of these investors that primarily base their choice of firm and financial professional on names and titles, rather than any information they would receive from a firm or financial professional about the type of services or applicable standards of conduct. In addition to the factors related to investors discussed above, the selection of names and titles by financial intermediaries also depend on other factors specific to the intermediary. For example, competitive concerns may cause some financial intermediaries to simply choose terms in names and titles that are commonly used by other financial intermediaries of their type. Alternatively, firms may choose names and titles that distinguish them from their competitors. Some firms or financial professionals may choose ambiguous generic titles, such as ‘‘financial consultant,’’ in order to capture a larger fraction of the investor pool, thinking that investors may seek information if the title does not clearly identify the kinds or levels of services provided or the applicable standard of conduct. We acknowledge that these factors could also be important determinants of the choice of names and titles. 2. Economic Effects of the Proposed Restrictions on the Use of Certain Titles and Required Disclosures In this section we discuss the potential economic effects from the proposed rules to the directly affected parties: Investors, standalone brokerdealers, standalone investment advisers, dually registered firms, and financial professionals. Potential economic effects on indirectly-affected parties, in particular financial intermediaries not regulated by the Commission, are discussed in the next section. PO 00000 Frm 00089 Fmt 4701 Sfmt 4702 21503 a. Investors The objective of the proposed rules is to reduce retail investor confusion and limit the ability for retail investors to be misled that a firm or financial professional is an investment adviser as a result of the use of firm and financial professional names and titles that contain either ‘‘adviser’’ or ‘‘advisor’’. Specifically, our proposed rule seeks to enable retail investors to be able to discern more fully whether a particular firm or financial professional will offer advisory or other services provided by investment advisers versus those provided by broker-dealers. In this section, we discuss the potential benefits to investors as a result of the proposed rules, while considering the potential costs that could be borne by investors. In general, we expect the benefits and costs are unlikely to be evenly distributed among investors, but will rather depend on both the differences in investors’ preferences for broker-dealer or investment adviser services, and investors’ individual degree of understanding what services any given firm or financial professional is providing and the standard of conduct that is applicable. i. Benefits of Restrictions on the Use of Certain Names or Titles The proposed restriction on the use of the terms ‘‘adviser’’ and ‘‘advisor’’ in names and titles of broker-dealers who are not also dually registered as investment advisers and of financial professionals who are not supervised persons of investment advisers and who provide advice on behalf of such advisers, may reduce investor confusion about what type of firm or financial professional is likely to match with their preferences for a particular type of investment advice relationship. The proposed rule may also reduce corresponding search costs for some investors under certain conditions. Moreover, the proposed rule may reduce the likelihood that a mismatch between an investor’s preferences and the services offered by a firm or financial professional occur.669 Specifically, to the extent investors looking for an advice relationship of the type provided by investment advisers, and believe that 669 We note that a potential mismatch could occur because investors may contact the wrong type of firm or financial professional and may not fully understand the type of financial advice that best match their preferences (even if the proposed relationship summary is made available), may be persuaded to hire the wrong type of firm or financial professional, or may be misled that a firm or financial professional will provide the type of service that the investor prefers, but in fact, does not. E:\FR\FM\09MYP2.SGM 09MYP2 amozie on DSK3GDR082PROD with PROPOSALS1 21504 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules names or titles containing the terms ‘‘adviser’’ or ‘‘advisor’’ are associated with this type of advice relationship, the proposed rule would make it easier to identify firms and financial professionals that offer such advice relationships, thereby reducing investor confusion, search costs, and any mismatch in the advice relationship that may occur from the potential misleading nature of such names or titles, as well as any associated harm with such mismatch.670 As a result of the proposed restriction on the use of certain terms, we expect the greatest potential reduction in search costs for retail investors who know that they specifically want the services provided by investment advisers and also would use names and titles in their search. The proposed rule would potentially make it easier for such investors to distinguish firms and professionals providing investment adviser services from firms and professionals providing brokerage services. The proposed rules may also reduce search costs for investors that prefer brokerage services, if standalone registered broker-dealers and financial professionals who are not supervised persons of an investment adviser or who are supervised persons but do not provide investment advice on behalf of such investment adviser are using names or titles including ‘‘adviser’’ and ‘‘advisor,’’ would choose new names and titles due to the proposed rule that more distinctly indicate the types of services they provide, such as ‘‘broker’’ or ‘‘broker representative.’’ However, the reduction in search costs for retail investors as a result of the proposed rule would be limited to the extent the firms and financial professionals covered by the restriction on the use of the terms ‘‘adviser’’ or ‘‘advisor’’ are not currently using the proposed terms in their names and titles. Further, the potential impact of the proposed rule on search costs is likely to be mitigated to the extent the proposed rule is limited to firm names and job titles, and would not itself affect the use of terms, such as ‘‘advisory services’’ in other communications or using those terms in metadata to attract internet search engines.671 Moreover, beyond registered investment advisers, dual registrants, and their supervised persons, other types of financial services providers, such as insurance companies and banks, may also continue to use the 670 See supra discussion in Section IV.C.1. discussed above, these other communications by firms and financial professionals would continue to be subject to antifraud rules. See supra note 309. 671 As VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 terms ‘‘adviser’’ and ‘‘advisor’’ in their names and professional titles, and any confusion and search costs borne by investors related to the use of such names and titles by financial intermediaries not affected by this proposed rule would not be reduced. As noted above, the Commission recognizes that terms such as ‘‘financial advisor’’ or ‘‘financial consultant’’ may be used by banks, trust companies, insurance companies, and commodities professionals.672 As discussed above in Section IV.C.1, some investors may be confused by names and titles and believe that certain names and titles are likely to specifically signal the type of advice services provided by firms and financial professionals that use those names and titles and the associated standard of conduct.673 In particular, investors that prefer the type of investment advice relationship and the associated standard of conduct offered by investment advisers may believe that names or titles containing the terms ‘‘adviser’’ or ‘‘advisor’’ are only associated with that type of advisory relationship. If some of these investors are persuaded by financial professionals associated with broker-dealers (who are not themselves investment advisers or supervised persons of investment advisers who provide advice on behalf of such adviser) that they could have a similar type of advice relationship as they would with an investment adviser, a potential mismatch between investor preferences and the advice relationship received may occur, which in turn may lead to investor harm such as higher payments for the services by the investor than necessary.674 Thus, the proposed prohibition on the use of ‘‘adviser’’ or ‘‘advisor’’ by certain broker-dealers may reduce the risk of a mismatch between investors seeking advisory services of the type provided by investment advisers and the type of services for which they contract, as these investors under the proposed restriction would be potentially less likely to be misled or inadvertently 672 See supra note 400. Further, as identified by Commission staff, as of December 2017, approximately 546 broker-dealers reported at least one type of non-securities business, such as insurance, retirement planning, and real estate; see supra note 459. 673 As discussed in Section IV.A.3.b, survey evidence suggest that many investors in general do not have a clear understanding about the differences in the nature of the advisory services provided by, and standard of conduct applicable to, different types of financial professionals. 674 Broker-dealers may elect to provide some services similar to those of many investment advisers, such as ongoing monitoring, thereby potentially mitigating any mismatches between preferred services and the services provided. PO 00000 Frm 00090 Fmt 4701 Sfmt 4702 approach and hire a type of firm or financial professional that does not match with their preferences and expectations. Because mismatch in investor preferences and the type of advice relationship they receive can potentially be very costly for investors by resulting in inefficient advice relationships, reducing this cost could be a potential benefit of the proposed rule for some investors. In particular, if an investor seeks an advice relationship of the type offered by investment advisers, but mismatches to a brokerage relationship, then the frequency of advice received may not be the most appropriate, or the cost for the advice may be too high if it leads to frequent trading, and could result in suboptimal investment decisions or lower investment returns net of costs. The Commission preliminarily believes this reduction in mismatch risk would mainly apply to those investors seeking a relationship similar to that provided by investment advisers, as discussed above. However, for at least some investors requiring advice on a per-transaction basis, the confusion about the use of titles or the services provided by financial professionals could potentially lead them to inadvertently select investment advisers even if they truly want a broker-dealer. To the extent the proposed rule would also help these investors more clearly distinguish between broker-dealers and investment advisers, they may avoid inadvertently hiring an investment adviser and thereby avoid paying potentially higher fees for that type of advice relationship. At this time the Commission is unable to estimate how many investors have contracted for services that do not meet their preferences, or are paying more than they would have preferred for services, due to confusion about the names and titles of financial intermediaries. Further, to the extent that confusion exists among retail investors regarding the names and titles used by firms and their financial professionals, surveys of retail investors with brokerage accounts suggest that they tend to be satisfied with their firms and financial professionals, and also believe that services provided by these firms and financial professionals are valuable, which further complicates any estimate of the incidence or magnitude of harmful mismatch.675 As discussed above with respect to search costs, any reduction in mismatch risk associated with investor confusion over names and titles would be limited to the extent that standalone registered 675 See E:\FR\FM\09MYP2.SGM RAND Study, supra note 5, at 98. 09MYP2 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules amozie on DSK3GDR082PROD with PROPOSALS1 broker-dealers and their associated natural persons do not use the proposed prohibited terms in their names and titles. This would also be the case to the extent that registered representatives of dually-registered broker-dealers who are not themselves supervised persons of an investment adviser or who are supervised persons but do not provide investment advice on behalf of such investment adviser do not use those terms. The potential reduction in mismatch risk due to this proposed rule would also be limited to extent the rule is limited to firm name and individual job titles, and would not itself affect firms and financial professionals from using terms such as ‘‘advisory’’ in other content. Moreover, other types of financial intermediaries may use the terms ‘‘adviser’’ and ‘‘advisor’’ in their names and titles, such as banks, trust companies, insurance companies, and commodities professionals.676 Therefore, the potential gains associated with a reduction in mismatch risk due to the prohibition on certain names and titles may be limited because some confused investors seeking an advice relationship from investment advisers could continue to inadvertently hire these other types of financial intermediaries that also use ‘‘adviser’’ or advisor’’ in their names and titles. Another potential limitation of the proposed restriction on the use of certain titles is that a dual registrant could still call itself an ‘‘adviser’’ or ‘‘advisor,’’ but then only offer brokerage services to investors that may not be legally and financially sophisticated enough to understand the differences in types of relationships and standards of conduct available.677 Finally, for retail investors that rely on professional or personal recommendations in their search for financial professionals, the proposed prohibition on the use of certain titles is likely to have a limited effect on both search costs and the risk of mismatch in the advice relationship. ii. Costs of the Restriction on the Use of Certain Titles Although the Commission preliminarily believes that the proposed rule would decrease investor confusion, search costs, and mismatch for some segment of the investor pool that search for professionals based on names or titles, investor confusion and search costs could increase for those that 676 See supra note 400. discussed above, however, financial professionals who are not themselves investment advisers or supervised persons of investment advisers and who provide advice on behalf of such advisers would also not be able to use the terms ‘‘adviser’’ or ‘‘advisor’’ in their professional titles. 677 As VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 would have, in the absence of the rule, selected broker-dealers and associated natural persons that would have to change their company names or titles as a result of the proposed rule.678 For example, prospective customers familiar with a firm’s name or financial professional’s title may be especially confused by a change of either name or title to the extent that the term ‘‘adviser’’ or ‘‘advisor’’ is part of the firm’s name brand or the titles of the professionals. Any increase in confusion as a result of the rule along these lines would likely be larger if the changed names or titles of broker-dealer firms that currently contain the words ‘‘adviser’’ or ‘‘advisor’’ are widely recognized as brands by investors.679 Further, even if the broker-dealer name or title is unlikely to change, some investors may remove certain firms from their search list as professional names or titles change as a result of the rule. If, for example, a prospective investor is using the search term ‘‘financial advisor’’ to search for firms and financial professionals located in their city, some firms and financial professionals will be removed from any possible searches by these investors as a result of the proposed rule, even though these financial professionals might have been the best match to the preferences and expectations of the investor. However, these kind of potential costs to some current investors are likely to be limited to the extent that proposed rule is limited to firm name or title and individual job name or title and would not require firms and financial professionals to remove the restricted terms from other content, if they are not using such terms as a name or a title. The proposed rule may also increase investor confusion to the extent some firms and financial professionals invent new names or titles to substitute for the restricted ones. Studies already indicate that the wide variety of names and titles used by firms and financial 678 As discussed in the baseline, several studies indicate that many investors receive personal or professional referrals in the selection of their broker-dealer or investment advisor. However, even these investors may investigate these referrals prior to undertaking outreach, and therefore, may avoid certain financial professionals as a result of the name or title change. 679 As discussed in the baseline, approximately 87 broker-dealers that are not dually registered as investment advisers and do not report nonsecurities business use the words ‘‘adviser,’’ ‘‘advisor,’’ or ‘‘advisory’’ as part of their current company name. These firms would likely have to change their company name as a result of this proposed rule. However, any loss in brand value due to this change could be mitigated to the extent the prohibited terms are not an important part of the firm’s brand. PO 00000 Frm 00091 Fmt 4701 Sfmt 4702 21505 professionals causes general investor confusion about the market for investment advice. The magnitude of such costs is hard to predict, but would likely increase search costs for less knowledgeable retail investors that use names or titles to search for financial professionals or firms, and may also increase the likelihood of a mismatch for some of these investors between the type of advice relationship they prefer and the type of firm and financial professional they hire. Investors seeking advice from brokerdealers may also face potential harm if some broker-dealers change their business model as a result of the proposed rule. As discussed above, we believe that most broker-dealers that would be subject to the restrictions of the proposed rule have chosen names and titles to build their customer base. Given that the market for investment advice overall appears to be relatively competitive, with respect to the number of firms and financial professionals, firms and financial professionals likely have chosen names or titles that they view as effective in marketing their services to investors. Therefore, being forced to switch names or titles could reduce the potential customer flow for some broker-dealers (and registered representatives of dual registrants who are not supervised persons of an investment adviser or who are supervised persons but do not provide investment advice on behalf of such investment adviser) who currently are using name or titles which include the term ‘‘adviser’’ and ‘‘advisor’’ and who serve retail investors. In lieu of adopting a new name or title without ‘‘adviser’’ or ‘‘advisor,’’ these firms or financial professionals might respond by exiting the retail investor market, or may bypass the compliance and other costs associated with this proposed rule by also registering as investment advisers or becoming supervised persons of an investment adviser who provide investment advice on behalf of such investment adviser, which would change their incentives to market their brokerage services to investors.680 Either of these changes to business practices could reduce the availability of brokerdealer services for investors.681 To the 680 Some firms could potentially increase their profits by moving some customers from a brokerage account to an advisory account (e.g., customers who rarely trade). Such firms would have incentives to cut back on marketing of existing brokerage services to such customers and instead market the new advisory services. 681 For example, in the event of exit by a brokerdealer, investors who want broker-dealer services would be forced to undertake search costs to find another firm and financial professional to meet E:\FR\FM\09MYP2.SGM Continued 09MYP2 21506 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules amozie on DSK3GDR082PROD with PROPOSALS1 extent the costs of exiting the retail investor market or associated initial and ongoing costs of becoming a registered investment adviser (or a supervised person of an investment adviser who provides investment advice on behalf of such investment adviser) are greater than the costs associated with complying with the proposed rule, the likelihood of exit from the retail market or a change to the existing business model from a brokerage to advisory model would be low. In this case, the anticipated effect on investors from the loss of existing broker-dealer advice is expected to be limited. However, if it is costlier to change names or titles than to switch business model for brokerdealers, we expect some investors may experience a reduction in supply of broker-dealer advice services. Finally, because the Commission recognizes that a standalone broker-dealer can provide advice to retail investors without being regulated as an investment adviser provided that such advice is merely ‘‘solely incidental to’’ its brokerage business and the broker-dealer receives no ‘‘special compensation’’ for the advice, the proposed restriction would not prevent standalone broker-dealers from conveying the services that they provide in other content, without using the titles or names ‘‘adviser’’ or ‘‘advisor.’’ This may also limit the likelihood of exit from the retail market or a change to the existing business model from a brokerage to an advisory model. The proposed rule could, however, also increase the risk of mismatch for some investors by removing standalone registered broker-dealers and registered representatives of dual registrants who are not supervised persons of an investment adviser from the pool of financial intermediaries that use the terms ‘‘adviser’’ or ‘‘advisor’’ in names and titles, while not affecting the use of these terms by other types of financial intermediaries, including banks, trust companies, insurance companies, and commodities professionals. Investors who are seeking financial services from either investment advisers or brokerdealers could instead inadvertently hire other types of financial intermediaries that would continue use these terms ‘‘adviser’’ or ‘‘advisor,’’ thereby their perceived needs, but also bear an increased cost associated with mismatch if they choose the wrong type of firm and financial professional. In the event of a switch from a brokerage model to an advisory model, investors may be forced to bear the costs associated with an advisory account that could exceed costs associated with services provided by a broker-dealer, or face costs associated with search and mismatch if they choose to change financial intermediaries, as discussed above. VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 potentially exacerbating the degree of mismatch between the type of relationship that they seek and what they receive. Further, neither this rule nor the proposed relationship summary would address the potential mismatch because these entities and natural persons are outside of the scope of the Commission rules. The Commission is not able to estimate the scope of this continuing potential for mismatch because we do not have access to information on the extent to which retail investors include these other types of financial intermediaries (deliberately or inadvertently) in their search for financial advice, nor the extent to which they see the services provided by these other financial intermediaries as substitute for the services provided by investment advisers or broker-dealers. Another potential cost for investors is that affected broker-dealers may attempt to directly pass through any costs they would incur due to the proposed restriction on certain names and titles. A broker-dealer’s incentives for such pass-through behavior would be attenuated the more competitive the broker-dealer’s local market is in the sense that price sensitivity of demand is high. Finally, we note that many of the costs and benefits to investors that we discussed above depend on the extent that titles and names affect investors’ selection of their financial professional. The evidence discussed in Section IV.A.3.a suggests that between 40% and 50% of investors find their financial professionals through personal recommendations.682 For this set of investors, the proposed rule would likely have little impact on search costs or potential for mismatch between their preferences and expectations and the type of advisory service for which they contract. We also note that we are not able to provide quantitative estimates of potential changes in search costs. Search costs for investors as well as costs due to mismatch would depend on a large set of individual specific factors, such as exactly what procedures investors use to search for financial professionals, what restrictions they put on their search (for example, choice of market, how many firms or professionals they are willing to sample before making a decision), the method they use to evaluate different alternative financial professionals they have identified, etc. The costs will to a large part not be monetary in nature but rather in the form of time and effort spent. The monetized value of that time 682 RAND Study, supra note 5 and 917 Financial Literacy Study, supra note 20. PO 00000 Frm 00092 Fmt 4701 Sfmt 4702 and effort will also be individual specific. We do not have access to data that would provide us with this type of information, which we would need to estimate search costs. Similarly, we also are unable to provide estimates of changes in costs due to changes in the potential for mismatch as we do not currently have data on the percentage of the investor population that is mismatched, or the extent of harm that comes from mismatch.683 For example, we don’t have an analysis of how well someone would have done in their portfolio (especially after costs) if they had been correctly matched. iii. Benefits and Costs of the Required Disclosures About Regulatory Status of a Financial Services Provider We anticipate the proposed requirements for broker-dealers and investment advisers and their associated natural persons and supervised persons to prominently disclose their registration (or firm association for financial professionals) status in retail investor communications would reduce investor confusion as well as search costs associated with locating and hiring a firm, which could reduce the probability of mismatch for investors seeking advice. In particular, for investors who understand the meaning of the registration status and know they want to hire either a registered brokerdealer or a SEC-registered investment adviser, we expect the search for the correct type of firm will be made both clearer and less time consuming, as these investors will more readily observe the registration status. Search costs for investors for whom the registration status has little meaning, however, are not expected to experience a decrease in either confusion or search costs due to these disclosure requirements. Disclosure may also reduce the possibility of mismatch of hiring the wrong type of firm for investors who understand the meaning of the registration status and know what type of financial intermediary they want to hire, although we note that the likelihood for such mismatch is likely lower in the first place for such investors compared to less knowledgeable investors. For the pool of investors that are confused by both the type of advice relationship that they 683 To estimate the potential harm from mismatch we would need to analyze how well someone could have done in their portfolio (after costs) if they had been correctly matched. This requires a rich set of investor characteristics as well as information about the investment menus and fee structures of potential alternative firms and financial professionals investors could have hired. We do not currently have access to such detailed information. E:\FR\FM\09MYP2.SGM 09MYP2 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules prefer, including how they want to pay for it, as well as professionals’ titles, disclosure of registration status alone may not be sufficient to alleviate confusion in the type of advisory services provided by or the standard of conduct applicable to firms or financial professionals. Finally, for retail investors that rely on professional or personal recommendations in their search for financial professionals, the disclosure requirement is likely to have a limited effect on both search costs and the risk of mismatch in the advice relationship. As discussed above, we do not have access to information that would allow us to provide quantitative estimates of the potential costs and benefits to the investor from these proposed disclosure requirements. In general, we do not anticipate any costs to investors from the proposed rules to disclose registration status. However, it could be that firms may attempt to pass through any compliance costs to investors through higher fees, in particular those that operate in markets where the price sensitivity of demand may be lower. Given that compliance costs would be of a one-time nature, as discussed above, we believe the likelihood and magnitude of such passthrough would be low. amozie on DSK3GDR082PROD with PROPOSALS1 b. Standalone Registered Broker-Dealers The proposed rule would restrict broker-dealers who are not dually registered as investment advisers and their associated natural persons who are not themselves investment advisers or supervised persons of investment advisers that provide advice on behalf of such advisers from using the terms ‘‘adviser’’ or ‘‘advisor’’ when communicating with retail investors. As described previously in Section IV.A.1, approximately 87% of retail facing broker-dealer firms and 50% of registered representatives are not dually registered as investment advisers, and therefore potentially could be affected by the proposed restriction. The fraction of standalone broker-dealer firms that are currently using the terms ‘‘adviser’’ or ‘‘advisor’’ in their firm names or titles and do not report a non-securities business, is only approximately 3.5%.684 When it comes to names or 684 As discussed in supra Section IV.A.1.f, there are 87 (103¥16 = 87) retail facing standalone broker-dealers without non-securities business that are currently using one of these terms in their firm names, which represents approximately 3.5% of the 2,497 retail acing standalone broker-dealers (2,857¥360 = 2,497; see supra Table 1, Panel B). If we go beyond firm names and instead look at how firms’ publicly describe themselves on their websites, the evidence presented in Section IV.A.1.f suggests that of the sampled standalone brokerdealers, less than 10% describe themselves using VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 titles by registered representatives at standalone broker-dealers, the RAND Study evidence discussed in Section IV.A.1.f suggests that around 31% of professionals providing only brokerage services used titles containing the terms ‘‘adviser’’ or ‘‘advisor.’’ If the evidence presented in the baseline, is representative of the overall universe of standalone registered broker-dealers, the fraction of firms and associated natural persons that would be affected by the proposed prohibition may be relatively low.685 If the proposed restriction on certain names or titles would reduce potential investor confusion and prevent retail investors from potentially being misled, it could have some positive benefits for the subset of broker-dealers that would be impacted by this restriction but are not marketing advice services to attract business. In particular, these brokerdealers may be able to better attract customer flow and more efficiently target their marketing and advertising campaigns to reduce the likelihood of ‘‘false starts’’ associated with the potential mismatch with retail investors. Moreover, broker-dealers that are not dually registered may similarly benefit from the requirement to prominently display registration status as that may also help reduce investor confusion. Firms and financial professionals may the terms ‘‘adviser’’ or ‘‘advisor.’’ Although some of these website descriptions may still be allowed under the proposed rule, it suggests that the fraction of standalone broker-dealers that rely on these terms to describe themselves may be relatively low. 685 We estimate that approximately 226,132 (942,215 × 0.24 = 226,132; see supra Table 6) registered representatives of broker-dealers are not also registered as investment advisory representatives. Among these registered representatives, approximately 119,729 are employed by dually registered firms (494,399 × 0.61 × 0.397 = 119,729; see supra Section IV.A.1.e), which means 106,403 are employed by standalone broker-dealers. Further, if only 31% of brokerdealer registered representatives that are not dualhatted (see supra Table 8) use titles containing the terms ‘‘adviser’’ or ‘‘advisor,’’ then we estimate that the total number of non-dual hatted registered representatives that would be potentially subject to this proposed prohibition would be 70,101, which is approximately 15.5% of all registered representatives. Of these representatives, 32,985 (0.31 × 106,403 = 32,985) are employed by standalone broker-dealers and approximately 37,116 (0.31 × 119,729 = 37,116) are employed by dual registrants. Note, the number of non-dual hatted registered representatives at dual registrants that would be potentially affected by the rule is likely lower than the estimated 37,166 because some of these representatives may be supervised persons providing advisory service without being dual-hatted. We are not able to estimate how large the fraction of such registered representatives would be. On the other hand, we do not have information about how many dual-hatted registered representatives among dual registrants that they are not supervised persons providing advisory services despite being dual-hatted, and therefore would also be subject to the proposed restriction on the use of certain titles. PO 00000 Frm 00093 Fmt 4701 Sfmt 4702 21507 also realize a limited benefit from this disclosure such that they can more effectively signal their type in communications, even when the firm or professional names or titles are not perfectly aligned with the registration status.686 For the segment of broker-dealers that would be affected by a restriction of using the terms ‘‘adviser’’ or ‘‘advisor,’’ we anticipate potentially substantial, one-time costs associated with the proposed rule. Broker-dealer firms subject to the restrictions on the use of certain names or titles would be required to change current company names or titles (if the company name or title contains ‘‘adviser/advisor’’), and marketing materials, advertisements (e.g., print ads or television commercials), website and social media appearances that use the current company name or title, among other items, resulting in direct compliance costs. Similarly, all personal communications tools used by financial professionals, such as business cards, letterhead, social media profiles, and signature blocks would need to be amended to reflect new company and financial professionals’ names or titles. The proposed requirement to prominently disclose registration status in print or electronic retail investor communications is also expected to require changes to the same set of materials and communication tools, and therefore, also would have to be modified to incorporate the registration status in the manner the rule prescribes.687 To the extent that the costs discussed above have a fixed-cost component (i.e., a print ad would likely cost the same regardless of the size of the firm), the costs associated with producing new communication and advertising materials would be disproportionately higher for smaller broker-dealer firms. Other costs, however, may increase with the size of the broker-dealer, such as costs associated with revisions to each individual representative’s communication and advertising materials, and therefore would increase with a broker-dealer’s size. 686 Note that any such benefits from the proposed rules relies on an assumption that some brokerdealers are not currently optimizing to receive such benefits by voluntarily changing names and titles or prominently display their registration status. However, as noted above, we expect in an efficient market, firms have already chosen names and titles that they view as effective marketing tools. As a result, we expect this benefit will be limited to the extent firms are currently rationally optimizing their choice of names and titles. 687 See infra Section V.G for estimates of some of these compliance costs developed for the purpose of the Paperwork Reduction Act. E:\FR\FM\09MYP2.SGM 09MYP2 21508 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules amozie on DSK3GDR082PROD with PROPOSALS1 In addition to direct compliance costs associated with producing new materials, broker-dealers would likely bear costs associated with contacting current and prospective customers, whether by email, mass mailings, oneon-one meetings, or telephone conversations, to inform them of changes to names and titles. Such outreach on behalf of the broker-dealer or the individual representatives would inform existing and prospective investors of a name or title change, and whether or not any services have changed and may be necessary in order to minimize any confusion among current and prospective customers that could potentially lead to a loss of business during a ‘‘changeover’’ period.688 This kind of outreach, however, could be costly to financial professionals and firms if it diverted time and resources away from the core business of the broker-dealer.689 Further, the greater the name recognition of a current company or the larger the size of the company, the costlier such an outreach is likely to be as more current and prospective customers would need to be informed of the name change. Finally, to the extent that a broker-dealer’s company name is recognized as a brand in the market and therefore represents a valuable intangible asset to the firm, some of its ‘‘brand value’’ may be lost following a company name change.690 We note that the number of broker-dealer firms 688 In particular, without outreach, some brokerdealers could experience a temporary reduction in the flow of prospective customers that would have relied on the use of titles prohibited by the proposed rule. In the absence of the prohibitions, these investors would have ended up contracting with the broker-dealers, but due to confusion over new company names and titles that would be required to be used, these investors may avoid broker-dealers subject to the change in names and titles, and these broker-dealers could earn less revenue. Only after the potential customer base becomes familiar with the new names and titles associated with a given broker-dealer and its financial professionals, or the search costs associated with these new titles decline, could these firms potentially recover a portion of the prospective customer base that was originally lost during the name transition period as a result of the changeover confusion. The Commission does not have access to the type of detailed customer information of individual broker-dealers that would allow us to estimate the percentage of customers that might be confused as a result of the name change or what fraction of these customers might eventually be recovered by a broker-dealer. 689 Although such outreach is not required by the proposed rule, we anticipate that at least some percentage of affected broker-dealers or financial professionals would undertake such efforts in order to maintain good relationships with existing customers. 690 Academic evidence suggest corporate brands are valuable intangible assets to firms; see, e.g., M. E. Barth, M. B. Clement, G. Foster, & R. Kasznik, Brand values and capital market valuation, Review of Accounting Studies, 3(1), 41–68 (1998). VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 whose brand value may be negatively affected by the rule is relatively limited, as only around 3.5% of the brokerdealer firms that would be subject to the rule are using any of the prohibited terms in their company names.691 Likewise, broker-dealers facing no constraints on their choice of names and titles may choose the names and titles that they believe are the most effective at helping attract customers, and may best describe their business model, and reduce the effort associated with building a customer base, as described above.692 Therefore, a segment of broker-dealers that are currently using terms that would be restricted under the proposed rule could experience a reduction in the efficiency of their marketing efforts, which in turn might lead to fewer customers and a loss of revenue compared to the baseline. In particular, those broker-dealers that rely on advice services as an important part of their value proposition to retail investors and directly compete with investment advisers may lose competiveness, if names and titles become less descriptive of this aspect of their business in the eyes of retail investors. These marketing efficiency costs would be mitigated to the extent the broker-dealers would use new names and titles that are equally efficient at conveying they are providing advice, or to the extent that the proposed restriction would not affect the use of terms such as ‘‘advisory services’’ in other content, or using them in metadata to attract internet search engines.693 Although we recognize that a significant fraction of a broker-dealer’s customer base is attributed to referrals, as noted in the 917 Financial Literacy Study, approximately 25% of survey respondents rely on broker-dealer or financial professional names or titles in selecting their current advisor.694 Depending on how effective the terms ‘‘adviser’’ or ‘‘advisor’’ are at attracting customers, costs associated with the loss of certain titles or names could be substantial for some broker-dealers.695 691 See supra note 648. Specifically, 3% refers to the total number of broker-dealers that do not report non-securities business. 692 See discussion in Section IV.C.1. 693 Note that to the extent affected broker-dealers would choose other names and titles that convey a similar signal to investors as those containing the terms ‘‘adviser’’ or ‘‘advisor,’’ it would reduce the efficiency of the proposed prohibition. In Section IV.C.4.a we discuss an alternative that would prohibit a broker-dealer from otherwise ‘‘holding out’’ as an investment adviser, which would potentially also prevent the use of some similar names and titles. 694 See supra note 20. 695 For example, if investors know that they are seeking advice related to individual transactions PO 00000 Frm 00094 Fmt 4701 Sfmt 4702 One way that affected broker-dealers could potentially mitigate the costs associated with the potential loss of titles or names could be for these firms to dually register as investment advisers. However, dual registration imposes an additional layer of regulatory oversight and compliance and need for training and licensing of employees to work as investment adviser representatives, which would also be costly. A broker-dealer would likely pursue such a strategy only if it expected the costs of regulation as an investment adviser were lower than the expected costs of modifying names and titles. We do not have access to data that would allow us to estimate either the total costs for modifying names and titles for broker-dealers, or the total costs of becoming an investment adviser for these broker-dealers. c. Investment Advisers (Including Dual Registrants) The proposed restriction on the use of the terms ‘‘adviser’’ and ‘‘advisor’’ in names and titles does not apply to registered investment advisers, whether they are solely registered as investment advisers or whether they are dually registered. Consequently, there would be no compliance costs for registered investment advisers associated with the restriction on the use of certain terms in names or titles. Some benefits could accrue to investment advisers at the expense of impacted broker-dealers. However, supervised persons of investment advisers who are dually registered but do not provide investment advice on behalf of such investment adviser would be prohibited from using the terms, which could lead to costs for those financial professionals or their firms. Because the proposed restriction would force some standalone registered broker-dealers to change their names and titles in a way that may lead to less efficient marketing aimed at attracting potential investors, as discussed above, some customer flow that might have gone to these broker-dealers could be permanently diverted to investment advisers who will not be required to (e.g., the type of mutual fund or exchange-traded fund in which to invest), they may have a preference for terms such as ‘‘financial advisor’’ compared to terms such as ‘‘financial planner’’ or ‘‘investment strategist,’’ depending on their colloquial understanding of what an these terms might imply for the level of service and standard of conduct. If certain broker-dealers are restricted from using ‘‘financial advisor,’’ these firms may lose these potential customers. Moreover, these investors could potentially expend search costs as they sort through investment advisers that use the term ‘‘financial advisor’’ until the investor is able to match with the right type of financial professional. E:\FR\FM\09MYP2.SGM 09MYP2 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules amozie on DSK3GDR082PROD with PROPOSALS1 change their names.696 As a result, some investment advisers could experience an increase in revenues due to an increase in customer flow. The benefits may also be larger for investment advisers or dual registrants that are able to continue to use names or titles that include the term ‘‘adviser’’ or ‘‘advisor’’ as these terms could be the draw that currently attracts customer flow to certain firms and financial professionals, and that would be diverted due to a restriction on the use of these terms by standalone registered broker-dealers. In addition, assuming that small broker-dealers and investment advisers select geographic areas where competition from larger firms is low, then, as result of the proposed rule restricting the use of certain names or titles by broker-dealers, small investment advisers could especially benefit at the expense of small broker-dealers in these locations. In terms of additional potential benefits, investment advisers and dual registrants, like standalone brokerdealers, will be subject to the required disclosure of their registration status, as part of the proposed rules. As we discussed in the case of standalone registered broker-dealers above, the prominent display of registration status could help reduce investor confusion, and could be used by both firms and their financial professionals as a marketing tool. Moreover, firms may benefit from this disclosure such that they can more effectively signal their type, even if the firm or professional names or titles are not perfectly aligned with the registration status. These potential benefits may be larger for dual registrants, as the prominent display of both their registrations may help attract investors that are looking for both types of services or investors who are generally unsure about which type of services they want.697 696 To the extent that investor confusion about the market for financial services generally increases during the period when affected firms and financial professionals remove the term ‘‘adviser’’ or ‘‘advisor’’ from their names and titles, investment advisers that are not required to change their names or titles may see an increase in the diversion of customer flow from broker-dealers to investment advisers until investor confusion over the change in titles subsides. To the extent that some investors that are not currently making an efficient choice of a broker-dealer as indicated by investor confusion about titles and associated standards of conduct, and would choose an investment adviser after the proposed rules were adopted, this proposed rule change may assist them in making a more efficient choice to a service they would prefer. 697 However, as noted previously, all firms and financial professionals can already voluntarily choose to prominently display their registration status, therefore implying that the direct benefits to firms and financial professionals from the proposed VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 The proposed restriction on the use of certain names and titles would apply to financial professionals of dual registrant investment advisers who are not supervised persons of an investment adviser or who are supervised persons of an investment adviser but who do provide investment advice on behalf of such investment adviser, which could lead to costs for those financial professionals or their firms. Consistent with the discussion of standalone registered broker-dealer firms above, this segment of persons associated with dual registrants, and the dual registrants themselves, could bear a potentially substantial, one-time costs associated with the proposed rule to change marketing materials and other communications to remove the restricted terms and to explain the change to their customers. Further, some financial professionals using the restricted terms could experience a reduction in the efficiency of their marketing efforts. This could happen to the extent the terms were optimally chosen in the first place from a marketing perspective. This, in turn, might lead to fewer customers for the financial professional and his or her associated firm and a loss of revenue compared to the baseline. Furthermore, financial professionals that are not currently supervised persons of an investment adviser, or cannot immediately qualify to be hired in such a professional role may become less attractive to retain or hire by dual registrants, to the extent their services would be less valuable to dual registrants if they cannot use the terms ‘‘adviser’’ or ‘‘advisor’’ in their names or titles. These financial professionals could potentially mitigate the costs associated with the potential loss of names or titles by becoming a supervised person of an investment adviser and providing investment advice on behalf of such investment adviser. A financial professional would likely pursue such a strategy only if it expected the costs of becoming a supervised person of an investment adviser who provides investment advice on behalf of such investment adviser were lower than the expected costs of modifying their professional names or titles. We expect the proposed requirements to prominently disclose registration status to impose one-time direct compliance costs associated with changes to written and electronic retail investor communications on both investment advisers and dually rule requiring disclosure of registration status may be limited. PO 00000 Frm 00095 Fmt 4701 Sfmt 4702 21509 registered financial firms.698 Similar to standalone registered broker-dealers, we expect that to the extent the required changes have a fixed-cost component, smaller investment adviser firms would incur relatively higher costs associated with this disclosure. Larger investment advisers and dual registrants, however, would likely bear an increase in the variable costs associated with such disclosures, as the amount of revisions associated with individual representative’s and firm’s communications will rise.699 3. Impact on Efficiency, Competition, and Capital Formation In addition to the specific benefits and costs discussed in the previous section, the Commission expects that the proposed disclosure could cause some broader long-term effects on the market for financial advice. Below, we elaborate on these possible effects, specifically discussing the impact on efficiency, competition and capital formation. a. Efficiency As discussed above, the proposed rules have the potential to reduce investor confusion about the meaning of the names and titles used by firms and their financial professionals and to improve the matching between investor preferences and types of services they receive. To the extent retail investors use titles and names in their search for firms and financial professionals, the potential reduction in search costs would improve the overall efficiency of the market for financial advice by making the search process shorter in time and more cost effective. Moreover, to the extent the proposed rules would reduce the risk of any mismatch between investor preferences and the type of relationship their financial professional provides, it could lead to potentially improved efficiency in retail investors’ asset allocation as investors would be more likely to receive investment advice that is optimal for their individual situation. A reduced risk of mismatch in the relationship would also make it less likely that investors pay more than necessary for the services they receive, which could lead to higher investment returns net of cost. 698 See infra Section V.H. for estimates of some of these compliance costs developed for the purpose of the Paperwork Reduction Act. 699 Consistent with this argument, we estimate in the Paperwork Reduction Act analysis in infra Section V.H.2, that the initial one-time burden for complying with the disclosure requirements would be 72 hours per large investment adviser and 15 hours per small investment adviser. E:\FR\FM\09MYP2.SGM 09MYP2 amozie on DSK3GDR082PROD with PROPOSALS1 21510 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules Alternatively, as discussed previously, investor confusion may increase rather than decrease under certain circumstances, which would increase search costs for investors. In this case, we would instead expect a negative effect on efficiency. Moreover, there could also be negative effects on efficiency to the extent affected brokerdealers start using new names and titles that potentially convey the same information to investors as the restricted terms. Under such circumstances, the proposed rules would then only impose cost increases on broker-dealers without achieving any reduction of investor confusion. These costs may or may not be passed through to investors. In addition, some of the other potential costs outlined previously could have negative effects on efficiency. For example, this proposed rule could have a direct negative impact on efficiency in the registered broker-dealer segment of the market by making marketing less efficient for any affected broker-dealers (including any affected dual registrants with affected registered representatives). Further, any compliance costs or increased marketing costs may be passed through to investors in local markets where the competitive pressure is relatively low—for example, due to, a relatively low supply of financial professionals—and some investors may then face higher costs for broker-dealer services as a result. Finally, some affected firms and financial professionals may decide to exit the market if their costs of doing business go up substantially, which could decrease supply and increase costs of brokerage services for retail investors in some segments of the market. Any such increases in costs of broker-dealer services may also price some investors with limited ability to absorb a cost increase out of the brokerage market altogether, thereby limiting their access to advice and investment choices offered by broker-dealers and potentially hurting the efficiency of their investment allocation. Because of the complexity associated with the use of names or titles by firms and their financial professionals, and their potential importance for investors both with respect to investor confusion and as a selection mechanism for hiring financial professionals, coupled with the lack of data on how investors could react to a restriction of the use of certain names and titles among broker-dealers and their associated natural persons, we are unable to provide estimates for the potential effects on efficiency. However, we preliminarily believe that any potential effects on the overall VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 efficiency in the market for financial advice, or in segments of this market, are likely to be limited because of several factors that would mitigate the potential impact on investor confusion and/or the potential costs imposed on firms and financial professionals from the proposed restriction: (i) Only a fraction of standalone registered brokerdealers and their associated natural persons, as well as registered representatives working for dual registrants that are not dual-hatted are currently using the terms ‘‘adviser’’ and ‘‘advisor’’ in names and titles; 700 (ii) the extent to which the proposed restriction would not affect the use of terms such as ‘‘advisory services’’ in communications which do not convey a name or title; (iii) financial intermediaries and professionals not regulated by the Commission could still use the terms ‘‘adviser’’ or advisor’’ in their names and titles.701 The proposed requirements to disclose a firm’s regulatory status and a financial professional’s association may increase the efficiency in the search and matching process in the market for financial advice to the extent retail investors understand the meaning of the registration status and would use it in their search for financial professionals. Among firms, the potential efficiency benefits may be larger for dual registrants, as the prominent display of both types of registrations may help attract investors that are looking for both brokerage services and an investment advice relationship, or investors who are in general unsure about which type of services they want. b. Competition The proposed rules could affect competition in the market for financial advice through potential effects on both demand and supply in the market. In terms of potential effects on demand, to the extent search costs are reduced for investors, it may raise the price elasticity of demand and consequently we would expect the competition between firms in this market to increase.702 To the extent it is primarily 700 The use of names and titles by firms and financial professionals is discussed in Section IV.A.1.f. Only around 87 current standalone brokerdealers with retail investors use the terms ‘‘advisor’’ or ‘‘adviser’’ in their company names. Further, around 31% of professionals providing only brokerage services used titles containing the terms ‘‘adviser’’ or ‘‘advisor’’ according to the RAND Study. 701 See discussion of other such financial intermediaries and professionals in supra Section III.B.1. 702 All else equal, we would expect customers in a marketplace with differentiated products to prolong their search for the right product at the PO 00000 Frm 00096 Fmt 4701 Sfmt 4702 investors who prefer the services provided by investment advisers who would experience a reduction in search costs, we would expect in particular an increase in the average price elasticity of demand for investment adviser services and therefore greater competition in the investment adviser market segment. However, a reduction in search cost may also increase retail investor participation in the market for financial advice. Investors at the high end of the search cost distribution who previously may have refrained from seeking financial advice altogether may enter the market for financial advice if there is a reduction in search costs. Because these new entrants to the market for financial advice would likely have higher search costs than the existing investors in the market, average investor demand elasticity may go down, which in turn would reduce competition at the margin.703 To the extent it is mainly investors that prefer investment adviser services who would experience a reduction in search costs; we expect the new entrants to primarily belong to this group of investors. Therefore, the average demand elasticity may potentially decrease in particular for investment adviser services and reduce competition in the investment adviser market segment. Conversely, if investor confusion and associated search costs instead are increased by the proposed rules, which as we discussed previously may happen under certain circumstances, it would likely lower price elasticity of demand among current retail investor market participants and reduce competition in the market for financial advice. However, if search costs are increased to the extent that current investors at the high end of the search cost distribution are induced to exit the market for financial advice altogether, it could instead increase average demand elasticity and increase competition among the firms in this market, as the right price if search costs are reduced. The resulting increase in demand elasticity would increase downward pressure on prices in the market, see, e.g. S. Anderson & R. Renault, Pricing, Product Diversity, and Search Costs: A BertrandChamberlin-Diamond Model, The RAND Journal of Economics, 30, 719–735 (1999). 703 For a theoretical model on how lower search costs may increase the average price elasticity of demand in this manner, see, e.g., J. L. Moraga´ ´ Gonzalez, Z. Sandor, & M.R. Wildenbeest, Prices and heterogeneous search costs, The RAND Journal of Economics, 48, 125–146 (2017). A study of the U.S. mutual fund industry also provide empirical evidence consistent with this type of effect; see A. Hortacsu & C. Syverson, Product differentiation, ¸ search costs, and competition in the mutual fund industry: A case study of S&P 500 Index funds, The Quarterly Journal of Economics, Vol. 119, Issue 2, 403–456 (May 2004). E:\FR\FM\09MYP2.SGM 09MYP2 amozie on DSK3GDR082PROD with PROPOSALS1 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules remaining investors would be those at the lower end of the search cost distribution and consequently would have higher price sensitivity. To the extent it is mainly investors that prefer broker-dealer services who would experience an increase in search costs we expect the investors exiting the market to primarily be such investors. Therefore, the average demand elasticity may potentially increase in particular for broker-dealer adviser services and increase competition in the brokerdealer market segment. In terms of the effect on the supply of advice services, to the extent the proposed restriction on the use of certain names or titles would cause affected broker-dealers to register as investment advisers and start promoting that side of their business, or perhaps completely move to an investment adviser model, there would likely be a shift in the mix of supply of advice services, where the supply of brokerdealer (and associated registered representative) services could potentially decrease and the supply of investment adviser services could increase. Such a shift in the mix of the supply of advice services could potentially raise brokerage account prices, reduce choice for investors who prefer to pay for execution of trades on a transactional basis, and lower the costs of advisory accounts with investment advisers. However, to the extent some broker-dealers would exit the market for retail investors altogether, the overall supply of advice services could go down and we may see a decrease in competition not only in the market for broker-dealer services but also in the overall market for investment adviser services, assuming that retail investors view broker-dealer and investment adviser services as substitutes for one another, thereby increasing costs and limiting choices for retail investors. This potential negative effect on competition would be mitigated to the extent other firms (whether other broker-dealers or investment advisers) decide to compete for the customers of any broker-dealers exiting the market. Further, to the extent the proposed restriction would make standalone broker-dealers services more costly and marketing less effective, non-affected standalone broker-dealers (i.e., brokerdealers that do not use the restricted terms), dual-registrants, investment advisers, and financial intermediaries that are not registered as investment advisers (such as banks, trust companies, insurance companies, commodity trading advisers, and municipal advisors) may to a varying VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 degree gain business at these affected firms expense. That is, by only affecting a subset of firms, the proposed restriction on the use of certain names and titles may change competitive positions among different suppliers in the market for financial advice. In addition, the proposed requirement to disclose registration status may benefit the competitive positon of dual registrants, as the prominent display of both types of registrations may help attract investors that are looking for both brokerage services and an investment advice relationship, or investors who are in general unsure about which type of services they want. In addition, assuming that small broker-dealers and investment advisers select geographic areas where competition from larger firms is low, then any reduction of competition in the broker-dealer market due to a switch to an investment adviser business model would be particularly large in such geographic areas. Similarly, any reduction in competition due to exit of standalone registered broker-dealer altogether from the retail market would be particularly large in such geographic areas, where smaller investment advisers and dual registrants could especially see competitive benefits at the expense of small standalone registered broker-dealers. We are not able to assess the magnitude of the potential demand or supply related effects as we do not have access to information that would allow us to do so, such as the distribution of search costs across the population of retail investors, estimates of the effect of the proposed rules on search costs, the internal cost functions of broker-dealers, etc. However, we preliminarily believe that the impact of any effects on the overall competitive situation in the market for financial advice is likely to be limited because of the same three mitigating factors we discussed above regarding the potential impact on efficiency.704 21511 investors may lose access to the market for advice serviced by broker-dealers, which may cause them to exit the market for financial advice altogether and reduce their (direct or indirect) investments in productive assets, thereby reducing capital formation. Alternatively, any investors who lose access to broker-dealers services may switch to an investment adviser relationship, which could reduce their investment returns net of costs to the extent the broker-dealer payment model was more optimal for their investment preferences, thereby also potentially reducing capital formation. Overall, the Commission is unable to determine how these countervailing effects could impact capital formation, and what the likely magnitude of those impacts would be. However, we preliminarily believe that the proposed rules would have a limited impact on capital formation because of the same three mitigating factors we discussed above regarding the potential impact on efficiency.705 4. Alternatives to the Proposed Rules c. Capital Formation Some aspects of the proposed rules could lead to increased capital formation, if, for example, retail investors are better able to allocate capital due to a better match with financial professionals or more retail investors enter the market for financial advice and start investing in securities. However, as discussed above, if some broker-dealers exit the market or move to an advisory business model as a result of the proposed rules, some As discussed above, the proposed rule would restrict broker-dealers and their associated natural persons from using as part of a name or title the term ‘‘adviser’’ or ‘‘advisor,’’ unless such broker-dealer is dually registered as an investment adviser or the associated natural person is a supervised person of an investment adviser and provides advice on behalf of such investment adviser. Further, our proposed rules would also require both broker-dealers and investment advisers to disclose their registration status in print or electronic retail investor communications. Finally, the proposed rules would require associated natural persons of a broker-dealer and supervised persons of an investment adviser to disclose their association with a particular firm in print or electronic retail investor communications. Below, the Commission describes several alternatives to the proposed rules, including the continued ability of broker-dealers to rely on section 202(a)(11)(C) of the Advisers Act (the ‘‘Solely Incidental’’ exclusion), prohibitions on a broker-dealer ‘‘holding out’’ as an investment adviser, disclosure of the registration status only, or additional requirements for dual registrants. 704 See discussion of mitigating factors in supra Section IV.C.3.a. 705 See discussion of mitigating factors in supra Section IV.C.3.a. PO 00000 Frm 00097 Fmt 4701 Sfmt 4702 E:\FR\FM\09MYP2.SGM 09MYP2 21512 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules a. No ‘‘Solely Incidental’’ Exclusion As an alternative to the proposed rule restricting the use of the term ‘‘adviser’’ or ‘‘advisor’’ in names and titles, the Commission could propose a rule that stated that a broker-dealer cannot be considered to provide investment advice solely incidental to the conduct of its business as a broker-dealer under section 202(a)(11)(C) of the Advisers Act if the broker-dealer used the term ‘‘adviser’’ or ‘‘advisor’’ in names or titles, and therefore, would not be excluded from the definition of investment adviser. This alternative would rely on the assumption that a broker-dealer that uses these terms in its name to market or promote its services is doing so because its advice is significant or even instrumental to its brokerage business, and consequently, the broker-dealer’s provision of advice is therefore no longer solely incidental to its brokerage business. Similarly, it would also rely on the assumption that if a broker-dealer invests its capital into marketing, branding, and creating intellectual property in using the terms ‘‘adviser’’ or ‘‘advisor’’ in its name or title, the broker-dealer is indicating that advice is an important part of its brokerdealer’s business. This alternative, like the proposed rule, would not permit an associated natural person of a dually registered firm to use the terms ‘‘adviser’’ or ‘‘advisor’’ in their names or titles unless such person was a supervised person of a registered investment adviser who provides investment advice on behalf of such investment adviser. For standalone broker-dealers, and their associated natural persons as well as associated natural person of a dually registered firm that are not supervised persons of a registered investment adviser providing advice on behalf of such investment adviser, that are currently marketing their services to retail investors using the terms ‘‘adviser’’ and ‘‘advisor,’’ in their name or title, the economic effects of this alternative would be expected to be substantially the same as under the proposed restriction on the use of the terms in names and titles. amozie on DSK3GDR082PROD with PROPOSALS1 b. Prohibit Broker-Dealers From Holding Themselves Out as Investment Advisers Instead of prohibiting a broker-dealer from using certain names or titles, we could propose a rule to preclude a broker-dealer from relying on the solely incidental exclusion of section 202(a)(11)(C) if a broker-dealer ‘‘held itself out’’ as an investment adviser to retail investors. This approach could encompass a broker-dealer and its VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 associated natural persons representing or implying through any communication or other sales practice (including through the use of names or titles) that they are offering investment advice subject to a fiduciary relationship with an investment adviser. This approach would reduce the risk that by only proscribing ‘‘adviser’’ and ‘‘advisor,’’ or any other specific names and titles, new names and titles could arise with similar, confusing connotations. Moreover, this alternative could promote informed investor choices by focusing more comprehensively on broker-dealer marketing and titles that may confuse or mislead investors into believing that a brokerage relationship is an advice relationship of the type provided by investment advisers. Relative to either the baseline or the proposed rule, the ‘‘holding out’’ alternative could have a broader application because it could capture any communication or other sales practices that may lead to confusion by investors in believing that their firms or financial professionals provide more or different services than they provide. As a result, investor confusion and associated costs may be reduced more compared to the proposed rule. This alternative, however, could create uncertainty for broker-dealers as to which activities (and the extent of such activities) would be permissible and not considered ‘‘holding out’’ as an investment adviser and therefore triggering the need to register as such. As a result of a ‘‘holding out’’ alternative, broker-dealers may feel compelled to avoid fully describing even the types of advisory services they are allowed to provide in their communications and marketing efforts and may also limit or reduce allowable advice provided by broker-dealers to avoid any instances where the advice provided could be misconstrued that such person is ‘‘holding out’’ as an investment adviser. Given that brokerdealers under the current regulatory environment are permitted to provide incidental advice related to recommendations of securities or investment strategies, investor confusion may be increased and some investors may believe that as a result of the ‘‘holding out’’ alternative that this advice could no longer be offered, and could face a mismatch in their preferences and expectations if they sub-optimally choose to hire investment advisers and avoid broker-dealers. Therefore, implementing a rule along these lines could have significant competitive effects for broker-dealers, and could reduce the effectiveness in PO 00000 Frm 00098 Fmt 4701 Sfmt 4702 how investors choose their firms and financial professionals. As a result of increased investor confusion, both search costs and costs associated with choosing the wrong type of firm and financial professional could be increased under this alternative. Moreover, if some broker-dealers avoid providing advice as a result of this alternative, some retail investors may be shut out of the advice market entirely or may have to incur higher costs that may be associated with investment advisory services. From a compliance cost perspective, broker-dealers that could be subject to the ‘‘holding out’’ alternative would face costs in revising their communications and advertisements in order to eliminate any discussion about them implying they are offering investment advice subject to a fiduciary relationship with an investment adviser. To the extent such revisions have a significant fixed cost component or there are other economies of scale, such as decreasing variable costs for printed material as the number of copies increase, we would expect smaller broker-dealers to face relatively higher costs following the implementation of this alternative. There could also be increased costs under this alternative from training and monitoring of associated natural persons to ensure compliance with the rule, as the restrictions would be more principles-based than prescriptive compared to the proposed rule. c. Disclosure of Registration Status Only The proposed rules both prohibit certain names or titles and require disclosure of broker-dealer or investment adviser registration status in all written and electronic retail investor communications of broker-dealers and SEC-registered investment advisers, including those of individual representatives, such as business cards, social media profiles, and signature blocks on paper or electronic correspondence. As an alternative to the proposed rules, the Commission could not propose a restriction on the use of certain names or titles by standalone registered broker-dealers, and solely propose requiring disclosure of registration status in all written and electronic retail investor communications given by the firm or its representatives. Although both broker-dealers and SEC-registered investment advisers would have to bear the cost of including a disclosure of their registration status in all written and electronic retail investor communications under this alternative, they would have to bear this cost under the proposed rules, as well. E:\FR\FM\09MYP2.SGM 09MYP2 amozie on DSK3GDR082PROD with PROPOSALS1 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules This alternative, however, would allow broker-dealers to continue to use titles or names that include ‘‘Adviser/ Advisor’’ and therefore would likely result in a lower overall cost of rebranding their financial professionals or the firm itself in all other communications. While the costs of compliance with a disclosure of registration status only requirement would be lower than under the proposed rules, and would apply uniformly to all broker-dealers and investment advisers, this alternative could be less effective in reducing investor confusion over the titles or names used by financial professionals and firms, and the implications of the types of services provided by, or standard of conduct applicable to, these professionals to the extent the registration status is uninformative to retail investors because they do not understand the regulatory implications of a firm being registered as either a broker-dealer or an investment adviser. Another potential, related, alternative would be to limit the disclosure of registration status only to certain marketing communications. The overall compliance costs to broker-dealers, particularly small broker-dealers that are less likely to produce advertising campaigns in either print media, television/radio broadcasts, mass mailings, or on websites, would be lower than under the requirements of the proposed rules for disclosure of registration status in all communications. This alternative, however, would likely reduce the potential benefits to retail investors, as only ‘‘advertisements’’ would be required to produce the disclosure of registration status, and could increase both search costs and the possibility of mismatch associated with choosing the wrong type of financial firm or professional. To the extent small brokerdealers or investment advisers are less likely to use these types of marketing communications to reach potential customers relative to larger brokerdealers and investment advisers (e.g., because there are fixed costs in producing an advertisement, the reduction in benefits is more likely to affect retail investors that use such small broker-dealers or investment advisers). Therefore, the Commission preliminarily believes that the potential compliance cost savings for limiting communications that would require such disclosure do not justify the reduced level of investor protection under such alternative. Another ‘‘disclosure only’’ alternative to the proposed restriction on the use of the terms ‘‘adviser’’ and ‘‘advisor’’ in VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 names and titles would be to propose a rule that would provide that when any broker-dealer not registered under the Advisers Act chooses to distribute advertisements or other communications using the term ‘‘adviser’’ or ‘‘advisor’’ as part of a name or title, each use of the term would have to include an asterisked disclaimer clarifying its registration status. Under this alternative broker-dealers and their associated natural persons could continue to use these terms in their names and titles in retail investor communications, but investors would be potentially alerted by the asterisk to the actual registration status of the broker-dealer, which may reduce investors confusion about the type of services provided the associated standard of care to the extent they understand the meaning of the registration status. One limitation of this alternative, as well as the other alternatives discussed in this section, compared to the proposed rule is that some of the evidence on investor perceptions discussed previously in Section IV.A.3 suggest that many retail investors may not fully understand the meaning of the registration status. Moreover, the asterisked declaimer may not be salient enough to attract investors’ attention to the disclaimer. d. Additional Requirements for Dual Registrants We estimate that the number of dual registrants represents approximately 13% of all retail broker-dealer firms and that approximately 65% of registered representatives of retail broker-dealers work at these dual registrants.706 Although the proposed rule restricts supervised persons of dual registrants who do not provide investment advice on behalf of such investment adviser, a percentage of dually registered firms would not be affected by the proposed restriction of certain names and titles. To address this issue, we considered an alternative to the proposed rule which would prohibit the name or title containing the terms ‘‘adviser’’ or 706 As shown in supra Table 1, Panel B those broker-dealer firms that were registered in a dual capacity were 360 of approximately 2,857 firms (about 13%) as of December 31, 2017. Using data from Form ADV filings, these 360 dually-registered firms had approximately $4.3 trillion of AUM. As discussed in Section IV.A,1.e, almost all registered financial professionals at dual registrants are either dual-hatted or registered representatives. Because dual registrants employ approximately 61% of all licensed financial professionals (see supra Table 5) and approximately 94% of all financial professionals are either dual hatted or registered representatives (48/51 = 0.94; see supra Table 6), it means that approximately 65% (0.61/0.94 = 0.65) of all registered representatives, whether dual hatted or not, work at dual registrants. PO 00000 Frm 00099 Fmt 4701 Sfmt 4702 21513 ‘‘advisor’’ unless a ‘‘a substantial part of the business consists of rendering investment supervisory services.’’ 707 We also considered limiting dual registrants’ use of the term ‘‘adviser’’ or ‘‘advisor’’ to when they provide advice to a retail investor in the capacity as an investment adviser, and prohibiting dual registrants from using such terms when acting in the capacity of a brokerdealer to a particular customer. Under this alternative, some of the investor pool may face reduced confusion in their communications with their financial professional with regard to the use of specific names and titles, because these names and titles containing the term ‘‘adviser’’ or ‘‘advisor’’ would be limited only to the accounts or the instances in which the financial professional actually serves in the capacity as an investment adviser. However, these alternatives for dual registrants would create substantial compliance challenges for dual registrants. For example, dual registrants would have to ensure the appropriate name or title is being used when the financial professional is engaging in multiple capacities with investors. Moreover, requiring financial professionals that are dual registrants to tailor their names or titles based on what capacity they are acting in could increase confusion to investors, given that some dual registrants might act in broker-dealer and investment adviser capacities for a single investor. For example, a retail investor may have both a brokerage account and an advisory account, and may receive advice related to both brokerage recommendations as well as ongoing advice in the advisory account in a single communication. 5. Request for Comments The Commission requests comment on all aspects of the economic analysis, including the analysis of: (i) Potential benefits and costs and other economic effects; (ii) long-term effects of the proposed restriction on the use of certain titles and required disclosure of registration status on efficiency, competition, and capital formation; and (iii) reasonable alternatives to the proposed regulations. We also request comments identifying sources of data and that could assist us in analyzing the economic consequences of the proposed regulations. In addition to our general request for comment on the economic analysis, we request specific comment on certain aspects of the proposal: • Do commenters agree with our assessment that the main potential 707 See E:\FR\FM\09MYP2.SGM section 208(c) of the Advisers Act. 09MYP2 amozie on DSK3GDR082PROD with PROPOSALS1 21514 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules benefits to retail investors are reduced search costs and a lower risk of mismatch? Are there other benefits of the proposed rule that have not been identified in our discussion and that warrant consideration? Are the assumptions that form the basis of our analysis of the benefits appropriate? Can commenters provide data that supports or opposes these assumptions? • Do commenters agree with our characterization of the costs? Are the assumptions that form the basis of our analysis of the costs appropriate? Are there other costs to investors of the proposed rule that have not been identified in our discussion and that warrant consideration? Can commenters provide data that supports or opposes these assumptions? • We request additional information on how retail investors search for financial professionals. In particular, are there studies, evidence or data available on how investors use company names and titles of representatives in their search for a financial professional? • We request comments on our characterization of the benefits and costs to broker-dealers and investment advisers of the proposed rule. Do commenters agree with our characterization of the benefits and costs? Are there other benefits or costs of the proposed rule that have not been identified in our discussion and that warrant consideration? Are the assumptions that form the basis of our analysis of the benefits and costs appropriate? Can commenters provide data that supports or opposes these assumptions? • We specifically request comments on the costs to broker-dealers from having to change their company names as a result of the rule. How costly do commenters believe it would be for affected entities that would be required to their change current company names, including the costs of marketing materials and advertisements? Do broker-dealer company names have significant brand value? To what extent does the brand value lie in terms such as ‘‘adviser’’ or ‘‘advisor’’? • Do commenters believe standalone broker-dealers that would be affected by the proposed rule may decide to register as an investment advisers? Are there any specific types of standalone brokerdealers that would be more likely to respond in this way? Do you believe standalone broker-dealers registering as investment advisers would affect their supply of brokerage services? What are the compliance and indirect costs for broker-dealers who would seek to register as an investment adviser? Is there additional data to estimate such VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 costs, either initially or on an ongoing basis? • Are there any effects on efficiency, competition, and capital formation that are not identified or are misidentified in our economic analysis? Please be specific and provide data and analysis to support your views. • Do commenters believe that the alternatives the Commission considered are appropriate? Are there other reasonable alternatives that the Commission should consider? If so, please provide additional alternatives and how their costs and benefits would compare to the proposal. D. Combined Economic Effects of Form CRS Relationship Summary and Restrictions on the Use of Certain Titles and Required Disclosures About a Firm’s Regulatory Status Above, we have described the anticipated standalone economic effects of the proposed Form CRS relationship summary and the proposed restrictions on the use of certain titles and required disclosures about a firm’s regulatory status relative to the current baseline. In this section, we discuss how we anticipate these economic effects could change when considering both these proposed rules in combination. To the extent that investors may be confused and potentially misled about what type of investment advice relationship is best for their investing situation, being provided with the proposed Form CRS, along with the proposed restriction on names and titles, could incrementally reduce some of the investor confusion and mismatch risk. In particular, if a retail investor communicates with a financial professional associated with a dual registrant and the professional has a name or title containing either of the terms ‘‘adviser’’ or ‘‘advisor’’ but solely provides brokerage services, such investor would likely receive the dually registered firm’s relationship summary. Because Form CRS would include a description of both business models, without the restriction on names and titles and the requirement of disclosure of registration status, some retail investors might incorrectly match the services they would receive from this financial professional to the description in the relationship summary of investment advisory services. In this case, the proposed restriction on names or titles and the requirement to disclose regulatory status would increase the effectiveness of Form CRS by reducing the risk of any mismatch between investor preferences and type of services received due to this kind of misunderstanding, which in turn may PO 00000 Frm 00100 Fmt 4701 Sfmt 4702 lead to harm such as the investor paying too much for advice if it if it leads to frequent trading. To the extent investors who received a relationship summary shares it with family and friends, the potential importance of having the restriction on the use of certain names and titles would be increased, because it could also reduce the risk of this type of misunderstanding being spread to a greater set of retail investors. However, for those investors whose confusion about the differences between broker-dealers’ and investment advisers’ services and standards of conduct would be substantially reduced once receiving and reading a firm’s relationship summary we expect a reduced overall incremental benefit of the proposed restriction on the use of certain names and titles. Specifically, because such investors would learn about the differences between brokerdealer and investment adviser services through the relationship summary, they may be unlikely to hire the wrong type of firm or financial professional even without the proposed restriction on the use of certain names or titles. With respect to the initial search costs borne by investors, we do not believe that the relationship summary would alter the incremental effects the proposed restriction on certain names and titles may have on search costs, because the proposed Form CRS would generally be provided at a later stage in the search process (e.g., after initial contact with a financial professional is made) relative to the initial stage where names and titles of firms and financial professionals may be a useful search tool to investors. Similarly, we do not believe that the relationship summary would alter the incremental effects on search costs from the proposed requirement to disclose registration status in retail investor communications, because investors would likely encounter communications disclosing a firm’s registration status prior to being provided a firm’s relationship summary. We believe that the proposed Form CRS and the proposed required disclosures of registration status would complement each other because both are designed to reduce investor confusion. In particular, for less knowledgeable investors, the disclosure of registration status may raise awareness about the different forms of registration among financial intermediaries and their associated natural persons and prompt questions about the difference between registered broker-dealers and registered investment advisers. The relationship summary potentially could work in concert with the disclosure of E:\FR\FM\09MYP2.SGM 09MYP2 amozie on DSK3GDR082PROD with PROPOSALS1 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules registration status to facilitate investors’ learning about the different types of financial firms and professionals because it would highlight many of the key differences between investment advisers and broker-dealers in different communications and different times, consistent with the layered approach to disclosure that the relationship summary is designed to further. Likewise, if the disclosure of registration status makes such status more salient to less knowledgeable investors, such disclosure may induce a more careful reading of related parts in the relationship summary or provide incentives to discuss the information contained in disclosure with a financial professional. Thus, the combination of the disclosure of registration status and the relationship summary may further help facilitate the search process also for investors initially confused about the difference between broker-dealers and investment advisers, and help them ultimately better match to an appropriate financial professional. However, for more knowledgeable investors, there may be some overlap in function that could reduce the potential benefits to either the relationship summary or the disclosure of regulatory status without offsetting anticipated costs. As discussed previously, the disclosure of registration status may help to reduce search costs for investors who already understand the meaning of the registration status. These relatively knowledgeable investors may therefore already be familiar with some of the information in relationship summary by having encountered the disclosure of the registration status beforehand. In this case, the relationship summary may provide fewer additional benefits for these investors in either reducing search costs or the likelihood of mismatch, but would impose costs on both brokerdealers and investment advisers that must produce both the relationship summary and the disclosures of registration status. Finally, we note that any complementarities between the proposed restrictions on the use of certain names and titles, required disclosures about a firm’s regulatory status, and the proposed relationship summary would be constrained by the fact (1) the relationship summary does not need to be provided by stateregistered standalone investment advisers and (2) these state-registered investment advisers (and their supervised persons) would not be required to provide registration status disclosures in retail investor communications pursuant to this proposed rule. VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 V. Paperwork Reduction Act Analysis Certain provisions of our proposal contain ‘‘collection of information’’ requirements within the meaning of the Paperwork Reduction Act of 1995 (‘‘PRA’’).708 The Commission is submitting these collections of information to the Office of Management and Budget (‘‘OMB’’) for review in accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11. The titles for the existing collections of information that we are proposing to amend are (i) ‘‘Form ADV’’ (OMB control number 3235–0049), (ii) ‘‘Rule 204–2 under the Investment Advisers Act of 1940’’ (OMB control number 3235–0278), (iii) ‘‘Rule 17a–3; Records to be Made by Certain Exchange Members, Brokers and Dealers’’ (OMB control number 3235–0033) and (iv) ‘‘Rule 17a–4; Records to be Preserved by Certain Exchange Members, Brokers and Dealers’’ (OMB control number 3235– 0279). The new collections of information relate to (i) ‘‘Rule 204–5 under the Investment Advisers Act of 1940,’’ (ii) ‘‘Form CRS and rule 17a–14 under the Exchange Act,’’ (iii) ‘‘Rule 15l–3 under the Securities Exchange Act,’’ and (iv) ‘‘Rule 211h–1 under the Investment Advisers Act of 1940.’’ 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 control number. The Commission is also including a short-form tear sheet for investors to provide feedback on the relationship summary.709 A. Form ADV Form ADV (OMB Control No. 3235– 0049) is currently a two-part investment adviser registration form. Part 1 of Form ADV contains information used primarily by Commission staff, and Part 2 is the client brochure. We are not proposing amendments to Part 1 or 2. We use the information to determine eligibility for registration with us and to manage our regulatory and examination programs. Clients use certain of the information to determine whether to hire or retain an investment adviser. The collection of information is necessary to provide advisory clients, prospective clients and the Commission with information about the investment adviser and its business, conflicts of interest and personnel. Rule 203–1 under the Advisers Act requires every 708 44 U.S.C. 3501 et seq. Appendix F. The Commission determines that using this short-form tear sheet to obtain information from investors is in the public interest and will protect investors. See Securities Act section 19(e). 709 See PO 00000 Frm 00101 Fmt 4701 Sfmt 4702 21515 person applying for investment adviser registration with the Commission to file Form ADV. Rule 204–4 under the Advisers Act requires certain investment advisers exempt from registration with the Commission (‘‘exempt reporting advisers’’) to file reports with the Commission by completing a limited number of items on Form ADV. Rule 204–1 under the Advisers Act requires each registered and exempt reporting adviser to file amendments to Form ADV at least annually, and requires advisers to submit electronic filings through IARD. The paperwork burdens associated with rules 203–1, 204–1, and 204–4 are included in the approved annual burden associated with Form ADV and thus do not entail separate collections of information. These collections of information are found at 17 CFR 275.203–1, 275.204–1, 275.204–4 and 279.1 (Form ADV itself) and are mandatory. Responses are not kept confidential. We are proposing to amend Form ADV to add a new Part 3, requiring certain registered investment advisers to prepare and file a relationship summary for retail investors. As with Form ADV Parts 1 and 2, we will use the information to determine eligibility for registration with us and to manage our regulatory and examination programs. Similarly, clients can use the information required in Part 3 to determine whether to hire or retain an investment adviser, as well as what types of accounts and services are appropriate for their needs. The collection of information is necessary to provide advisory clients, prospective clients and the Commission with information about the investment adviser and its business, conflicts of interest and personnel. The proposal requiring investment advisers to deliver the relationship summary is contained in a new collection of information under proposed new rule 204–5 under the Advisers Act, which estimates are discussed in Section V.B below. We are not proposing amendments to Part 1 or 2 of Form ADV.710 1. Respondents: Investment Advisers and Exempt Reporting Advisers The respondents to current Form ADV are investment advisers registered with the Commission or applying for registration with the Commission and 710 We are proposing conforming technical amendments to the General Instructions of Form ADV to add references to the Part 3, but these amendments would not affect the burden of Part 1 or Part 2. See proposed amendments to Form ADV: General Instructions. E:\FR\FM\09MYP2.SGM 09MYP2 21516 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules amozie on DSK3GDR082PROD with PROPOSALS1 exempt reporting advisers.711 As of December 31, 2017, 12,721 investment advisers were registered with the Commission, and 3,848 exempt reporting advisers report information to the Commission. As discussed in Section II above, we propose to adopt amendments to Form ADV that would add a new Part 3, requiring certain registered investment advisers to prepare and file a relationship summary for retail investors. Only those registered investment advisers offering services to retail investors would be required to prepare and file a relationship summary. Based on IARD system data, the Commission estimates that 7,625 investment advisers provide advice to individual high net worth and individual non-high net worth clients.712 This would leave 5,096 registered investment advisers that do not provide advice to retail investors 713 and 3,848 exempt reporting advisers that would not be subject to Form ADV Part 3 requirements, but are included in the PRA analysis for purposes of updating the overall Form ADV information collection.714 We also note that these figures include the burdens for 366 registered broker-dealers that are dually registered as investment advisers as of December 31, 2017.715 711 An exempt reporting adviser is an investment adviser that relies on the exemption from investment adviser registration provided in either section 203(l) of the Advisers Act because it is an adviser solely to one or more venture capital funds or 203(m) of the Advisers Act because it is an adviser solely to private funds and has assets under management in the United States of less than $150 million. An exempt reporting adviser is not a registered investment adviser and therefore would not be subject to the relationship summary requirements. 712 Based on responses to Item 5.D. of Form ADV. These advisers indicated that they advise either high net worth individuals or individuals (other than high net worth individuals), which includes trusts, estates, and 401(k) plans and IRAs of individuals and their family members, but does not include businesses organized as sole proprietorships. The proposed definition of retail investor would include a trust or other similar entity that represents natural persons, even if another person is a trustee or managing agent of the trust. We are not able to determine, based on responses to Form ADV, exactly how many advisers provide investment advice to these types of trusts or other entities; however, we believe that these advisers most likely also advise individuals and are therefore included in our estimate. 713 12,721 registered investment advisers—7,625 = 5,096 registered investment advisers not providing advice to retail investors. 714 Based on IARD system data. 715 See supra note 457. VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 2. Changes in Burden Estimates and New Burden Estimates Based on the prior revision of Form ADV,716 the currently approved total aggregate annual hour burden estimate for all advisers of completing, amending and filing Form ADV (Part 1 and Part 2) with the Commission is 363,082 hours, or a blended average of 23.77 hours per adviser,717 with a monetized total of $92,404,369, or $6,051 per adviser.718 The currently approved annual cost burden is $13,683,500. This burden estimate is based on: (i) The total annual collection of information burden for SEC-registered advisers to file and complete Form ADV (Part 1 and Part 2); and (ii) the total annual collection of information burden for exempt reporting advisers to file and complete the required items of Part 1A of Form ADV. Broken down by adviser type, the current approved total annual hour burden is 29.22 hours per SECregistered adviser, and 3.60 hours per exempt reporting adviser.719 The proposed amendments would increase the current burden estimate due in part to the proposed amendments to Form ADV to add Form ADV Part 3: Form CRS (the relationship summary) and the increased number of investment advisers and exempt reporting advisers since the last burden estimate. We are not proposing any changes to Part 1 or Part 2 of Form ADV. The proposed amendments to Form ADV to add Part 3 would increase the information collection burden for registered investment advisers with retail investors. As discussed above in Section II, we propose to adopt amendments to Form ADV, under Part 3, that would require certain registered investment advisers to prepare and file a relationship summary for retail investors. Only those registered investment advisers providing services to retail investors would be required to prepare and file a relationship summary. We propose to require that those investment advisers file their relationship summaries with the Commission electronically through IARD in the same manner as they currently file Form ADV Parts 1 and 2. Investment advisers also would need to amend and file an updated relationship 716 See Form ADV and Investment Advisers Act Rules, Final Rule, Investment Advisers Act Release No. 4509 (Aug. 25, 2016) [81 FR 60418 (Sep. 1, 2016)] (‘‘2016 Form ADV Paperwork Reduction Analysis’’). 717 363,082 hours/(12,024 registered advisers + 3,248 exempt reporting advisers) = 23.77 hours. 718 $92,404,369 hours/(12,024 registered advisers + 3,248 exempt reporting advisers) = $6,051. 719 See 2016 Form ADV Paperwork Reduction Analysis, supra note 716, at 81 FR 60454. PO 00000 Frm 00102 Fmt 4701 Sfmt 4702 summary within 30 days whenever any information becomes materially inaccurate. As noted in Section V.A.1 above, not all investment advisers would be required to prepare and file the relationship summary. For those investment advisers, the per adviser annual hour burden for meeting their Form ADV requirements would remain the same, in particular, 29.22 hours per registered investment adviser without relationship summary obligations. Similarly, because exempt reporting advisers also would not have relationship summary obligations, the annual hour burden for exempt reporting advisers to meet their Form ADV obligations would remain the same, at 3.60 hours per exempt reporting adviser. However, although we are not proposing changes to Form ADV Part 1 and Part 2, and the per adviser information collection burden would not increase for those without the obligation to prepare and file the relationship summary, the information collection burden attributable to Parts 1 and 2 of Form ADV would increase due to an increase in the number of registered investment advisers and exempt reporting advisers since the last information collection burden estimate. In this section, we discuss the increase in burden for Form ADV overall attributable to the proposed amendments, i.e., new Form ADV Part 3: Form CRS, and the increase due to the updated number of respondents that would not be subject to the proposed amendments. a. Initial Preparation and Filing of Relationship Summary For investment advisers that provide advice to retail investors, we estimate that the initial first year burden for preparing and filing the relationship summary would be five hours per registered adviser. As discussed above, much of the language of the proposed relationship summary is prescribed. Furthermore, much of the information proposed to be required in the relationship summary overlaps with that required by Form ADV Part 2 and therefore should be readily available to registered investment advisers because of their existing disclosure obligations. Investment advisers also already file the Form ADV Part 2 brochure on IARD, and we have considered this factor in determining our estimate of the additional burden to file Form ADV Part 3: Form CRS. In addition, the narrative descriptions required in the relationship summary should be narrowly tailored and brief, and the relationship summary must be limited to four pages (or E:\FR\FM\09MYP2.SGM 09MYP2 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules amozie on DSK3GDR082PROD with PROPOSALS1 equivalent limit if in electronic format). Thus, while we recognize that different firms may require different amounts of time to prepare the relationship summary, we believe that this is an appropriate average number for estimating an aggregate amount for the industry for purposes of the PRA analysis. Moreover, a considerable amount of language within each topic area also would be prescribed, thereby limiting the amount of time required to prepare the relationship summary. Based on these factors, we believe that the estimate of five hours to prepare and file the relationship summary is appropriate. We therefore estimate that the total burden of preparing and filing the relationship summary would be 38,125 hours.720 As with the Commission’s prior Paperwork Reduction Act estimates for Form ADV, we believe that most of the paperwork burden would be incurred in advisers’ initial preparation and submission of Part 3: Form CRS, and that over time this burden would decrease substantially because the paperwork burden would be limited to updating information.721 As under the currently approved collection, the estimated initial burden associated with preparing the relationship summary would be amortized over the estimated period that advisers would use the relationship summary, i.e., over a three-year period.722 The annual hour burden of preparing and filing the relationship summary would therefore be 12,708.723 In addition, based on IARD system data, the Commission assumes that 1,000 new investment advisers will file Form ADV with us annually. Of these, we estimate that 477 would be required to prepare and file the relationship summary.724 Therefore, the aggregate initial burden for newly registered advisers to prepare the relationship summary would be 2,385 725 and, amortized over three years, 795 on an annual basis.726 In sum, the annual hour burden for existing and newly registered investment advisers to prepare and file 720 5.0 hours × 7,625 investment advisers = 38,125 total aggregate initial hours. 721 We discuss the burden for advisers making annual updating amendments to Form ADV in Section V.A.3 below. 722 See 2016 Form ADV Paperwork Reduction Analysis, supra note 716. 723 5.0 hours × 7,625 investment advisers/3 = 12,708 total annual aggregate hours. 724 The number of new investment advisers is calculated by looking at the number of new advisers in 2016 and 2017 and then determining the number each year that serviced retail investors. (455 for 2016 + 499 for 2017)/2 = 477. 725 477 new RIAs required to prepare relationship summary × 5.0 hours = 2,385 hours for new RIAs to prepare relationship summary. 726 477 × 5.0 hours/3 = 795. VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 a relationship summary would be 13,503 hours,727 or 1.67 hours per adviser.728 b. Estimated External Costs for Investment Advisers Preparing the Relationship Summary The currently approved total annual collection of information burden estimate for Form ADV anticipates that there will be external costs, including (i) a one-time initial cost for outside legal and compliance consulting fees in connection with the initial preparation of Part 2 of Form ADV, and (ii) the cost for investment advisers to private funds to report the fair value of their private fund assets.729 We do not anticipate that the amendments we are proposing today will affect the per adviser cost burden for those existing requirements but anticipate that some advisers may incur a one-time initial incremental cost for outside legal and consulting fees in connection with the initial preparation of the relationship summary. We do not anticipate external costs to investment advisers in the form of website set-up, maintenance, or licensing fees because they would not be required to establish a website for the sole purpose of posting their relationship summary if they do not already have a website. We also do not expect other ongoing external costs for the relationship summary. Although advisers would be required to amend the relationship summary within 30 days whenever any information becomes materially inaccurate, given the standardized nature and prescribed language of the relationship summary, we expect that amendments would be factual and require relatively minimal wording changes. We believe that the investment adviser would be more knowledgeable about these facts than outside legal or compliance consultants and would be able to make these revisions in-house. Therefore, we do not expect that investment advisers will need to incur ongoing external costs for the preparation and review of relationship summary amendments. Although advisers that would be subject to the relationship summary 727 (38,125 + 2,385)/3 years = 13,503 annual hour burden for existing and new advisers to prepare and file relationship summary. 728 13, 503 hours/(7,625 existing advisers + 477 new advisers) = 1.67 hours per year. 729 See 2016 Form ADV Paperwork Reduction Analysis, supra note 716, at 81 FR 60452. We do not anticipate that the amendments we are proposing to add Form ADV Part 3 will affect those per adviser cost burden estimates for outside legal and compliance consulting fees. The estimated external costs of outside legal and consulting services for the relationship summary are in addition to the estimated hour burden discussed above. PO 00000 Frm 00103 Fmt 4701 Sfmt 4702 21517 requirement may vary widely in terms of the size, complexity and nature of their advisory business, we believe that the amount of disclosure required would not vary substantially among advisers. Accordingly, we believe that the amount of time, and thus cost, required for outside legal and compliance review is unlikely to vary substantially among those advisers who elect to obtain outside assistance.730 Most of the information proposed to be required in the relationship summary is readily available to investment advisers from Form ADV Part 2, and the narrative descriptions are narrowly tailored and brief or prescribed. As a result, we anticipate that a quarter of advisers will seek the help of outside legal services and half will seek the help of compliance consulting services in connection with the initial preparation of the relationship summary. We estimate that the initial per existing adviser cost for legal services related to the preparation of the relationship summary would be $1,416.731 We estimate that the initial per existing adviser cost for compliance consulting services related to the preparation of the relationship summary would be $2,109.732 Thus, the incremental external cost burden for existing investment advisers is estimated to be $10,739,813, or $3,579,938 annually when amortized over a three-year 730 We estimate that an external service provider would spend 3 hours helping an adviser prepare an initial relationship summary. In estimating the external cost for the initial preparation of Form ADV Part 2, we estimated that small, medium, and large advisers would require 8, 11, and 26 hours of outside assistance, respectively, to prepare Form ADV Part 2. In comparison, as discussed above, the relationship summary is limited to four pages in length (or equivalent limit if in electronic format) and is standardized across investment advisers in terms of the mandated selection and sequence of topic areas. While we recognize that different firms may require different amounts of external assistance in preparing the relationship summary, we believe that this is an appropriate average number for estimating an aggregate amount for the industry purposes of the PRA analysis. See Brochure Adopting Release, supra note 157, at 75 FR at 49257. 731 External legal fees are in addition to the projected hour per adviser burden discussed above. $472 per hour for legal services × 3 hours per adviser = $1,416. The hourly cost estimate of $472 is based on an inflation-adjusted figure and our consultation with advisers and law firms who regularly assist them in compliance matters. 732 External compliance consulting fees are in addition to the projected hour per adviser burden discussed above. Data from the SIFMA Management and Professional Earnings Report, modified to account for an 1,800-hour work year and multiplied by 5.35 to account for bonuses, firm size, employee benefits, and overhead, and adjusted for inflation (‘‘SIFMA Management and Professional Earnings Report’’), suggest that outside management consulting services cost approximately $703 per hour. $703 per hour for outside consulting services × 3 hours per adviser = $2,109. E:\FR\FM\09MYP2.SGM 09MYP2 21518 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules period.733 In addition, we assume that 1,000 new advisers will register with us annually, 477 of which would be required to prepare a relationship summary. For these 477 new advisers, we estimate that they will require $671,855 in external costs to prepare the relationship summary.734 In summary, the annual external legal and compliance consulting cost for existing and new advisers relating to relationship summary obligations is estimated to total $4,251,792, or $525 per adviser.735 amozie on DSK3GDR082PROD with PROPOSALS1 c. Amendments to the Relationship Summary and Filing of Amendments The current approved information collection burden for Form ADV also includes the hour burden associated with annual and other amendments to Form ADV, among other requirements. We anticipate that the proposed relationship summary would increase the annual burden associated with Form ADV by 0.5 hours 736 due to amendments to the relationship summary,737 for those advisers required to prepare and file a relationship summary. We do not expect amendments to be frequent, but based on the historical frequency of amendments made on Form ADV Parts 1 and 2, estimate that on average, each adviser preparing a relationship summary will likely amend the disclosure an average of 1.80 times per year.738 The collection of information burden of 0.5 hours for amendments to the relationship summary would include filing it. Based on the number 733 25% × 7,625 existing advisers × $1,416 for legal services = $2,699,250 for legal services. 50% × 7,625 existing advisers × $2,109 for compliance consulting services = $8,040,563. $2,699,250 + $8,040,563 = $10,739,813 in external legal and compliance consulting costs for existing advisers. $10,739,813/3 = $3,579,938 annually. 734 25% × 477 new advisers × $1,416 for legal services = $168,858. 50% × 477 new advisers × $2,109 for compliance consulting services = $502,997. $168,858 + $502,997 = $671,855 annually in external legal and compliance consulting costs for newly registered advisers. 735 $3,579,938 in external legal and compliance consulting costs for existing advisers + $671,855 for new advisers = $4,251,792 annually for existing and new advisers. $4,251,792/($7,625 existing advisers + 477 new advisers) = $525 per adviser. 736 We have previously estimated that investment advisers would incur 0.5 hours to prepare an interim (other-than-annual) amendment to Form ADV. See 2016 Form ADV Paperwork Reduction Analysis, supra note 716, at 81 FR at 60452. We believe that an amendment to the relationship summary would take a similar amount of time, if not less. 737 Similarly, we estimated that 0.5 hours would be required for interim updating amendments to Form ADV Part 2. See Brochure Adopting Release, supra note 157, at 75 FR at 49257. 738 This estimate is based on IARD system data regarding the number of filings of Form ADV amendments. VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 of other-than-annual amendments filed by investment advisers with retail investors last year, we estimate that advisers will file an estimated total of 1.80 739 relationship summary amendments per year for an estimated total paperwork burden of 6,878 hours per year.740 d. Incremental Increase to Form ADV Hourly and External Cost Burdens Attributable to Proposed Amendments For existing and newly-registered advisers with relationship summary obligations, the additional burden attributable to amendments to Form ADV to add Part 3: Form CRS, (including the initial preparation and filing of the relationship summary and amendments thereto) totals 20,381 hours,741 or 2.52 hours per adviser,742 and a monetized cost of $5,248,193, or $648 per adviser.743 The incremental external legal and compliance cost is estimated to be $4,251,792.744 3. Total Revised Burden Estimates for Form ADV a. Revised Hourly and Monetized Value of Hourly Burdens As discussed above, the currently approved total aggregate annual hour burden for all registered advisers completing, amending, and filing Form ADV (Part 1 and Part 2) with the Commission is 363,082 hours, or a blended average per adviser burden of 23.77 hours, with a monetized cost of $92,404,369, or $6,051 per adviser. This includes the total annual hour burden for registered advisers of 351,386 hours, or 29.22 hours per registered adviser, 739 Based on IARD data, 7,625 investment advisers with retail clients filed 13,756 other-thanannual amendments to Form ADV. 13,756 otherthan-annual amendments/7,625 investment advisers = 1.80 amendments per investment adviser. 740 7,625 investment advisers amending relationship summaries × 1.80 amendments per year × 0.5 hours = 6,878 hours. 741 13,503 hours for initial preparation and filing of the relationship summary + 6,878 hours for amendments to the relationship summary = 20,381 total aggregate annual hour burden attributable to the Form ADV amendments to add Part 3: Form CRS. 742 20,381 hours/(7,625 existing advisers + 477 newly registered advisers) = 2.52 hours per adviser. 743 20,381 total aggregate annual hour burden for preparing and filing a relationship summary. We expect 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 suggest that costs for these positions are $229 and $298 per hour, respectively. 20,381 hours × 0.5 × $229 = $2,211,375. 20,381 hours × 0.5 × $298 = $3,036,819. $2,211,375 + $3,036,819 = $5,248,193. $5,248,193/(7,625 existing registered advisers + 477 newly registered advisers) = $648 per adviser. 744 See supra note 735. PO 00000 Frm 00104 Fmt 4701 Sfmt 4702 and 11,696 hours for exempt reporting advisers, or 3.60 hours per exempt reporting adviser. For purposes of updating the total information collection based on the proposed amendments to Form ADV, we consider three categories of respondents, as noted above: (i) Existing and newly-registered advisers preparing and filing a relationship summary, (ii) registered advisers with no obligation to prepare and file a relationship summary, and (iii) exempt reporting advisers. For existing and newly-registered advisers preparing and filing a relationship summary, including amendments to the disclosure, the total annual collection of information burden for preparing all of Form ADV, updated to reflect the proposed amendments to Form ADV, equals 31.74 hours per adviser, with 2.52 hours attributable to the proposed amendments.745 On an aggregate basis, this totals 257,122 hours for existing and newly registered advisers, with a monetized value of $66,208,857.746 As noted above, we estimate 5,096, or approximately 40% of existing registered advisers, would not have retail investors; therefore, they would not be obligated to prepare and file relationship summaries, so their annual per adviser hour burden would remain unchanged.747 To that end, using the currently approved total annual hour estimate of 29.22 hours per registered investment adviser to prepare and amend Form ADV, we estimate that the updated annual hourly burden for all existing and newly-registered investment advisers not required to prepare a relationship summary would be 164,187,748 with a monetized value 745 29.22 hours + 2.52 hours for increase in burden attributable to initial preparation and filing of, and amendments to, relationship summary = 31.74 hours total. 746 31.74 hours × 7,625 existing RIAs required to prepare a relationship summary + 477 newly registered RIAs required to prepare a relationship summary = 257,122 total aggregate annual hour burden for preparing, filing and amending a relationship summary. We expect 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 suggest that costs for these positions are $229 and $298 per hour, respectively. 257,122 hours × 0.5 × $229 = $27,897,712. 257,122 hours × 0.5 $298 = $38,311,144. $27,897,712 + $38,311,144 = $66,208,857. 747 12,721 registered investment advisers—7,625 registered investment advisers with retail investors = 5,096 registered investment advisers without retail investors. 748 29.22 hours × (5,096 existing and 523 newlyregistered investment advisers without retail investors) = approximately 164,187 total annual hour burden for RIAs not preparing a relationship summary. E:\FR\FM\09MYP2.SGM 09MYP2 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules amozie on DSK3GDR082PROD with PROPOSALS1 of $43,263,322.749 The revised total annual collection of information burden for exempt reporting advisers, using the currently approved estimate of 3.60 hours per exempt reporting adviser, would be 15,653 hours,750 for a monetized cost of $4,124,513, or $949 per exempt reporting adviser.751 In summary, factoring in the proposed amendments to Form ADV to add Part 3, the revised aggregate burden for Form ADV for all registered advisers and exempt reporting advisers would be 436,962,752 for a monetized cost of $115,139,422.753 This results in a blended average per adviser burden for Form ADV of 26.37 hours 754 and $6,949 per adviser.755 This is an increase of 73,880 hours, 756 or $22,735,053 757 in the monetized value of the hour burden, from the currently approved annual aggregate burden estimates, increases which are attributable primarily to the proposed burden estimates on the larger registered investment adviser and exempt reporting adviser population since the most recent approval, 749 We expect that performance of this function for registered advisers will most likely be equally allocated between a senior compliance examiner and a compliance manager. Data from the 2018 SIFMA Management and Professional Earnings Report suggest that costs for these positions are $229 and $298 per hour, respectively. 164,187 hours × 0.5 × $229 = $18,799,432. 164,187 hours × 0.5 × $298 = $24,463,890. $18,799,432 + $24,463,890 = $43,263,322. 750 3.60 hours × 3,848 exempt reporting advisers currently + 500 new exempt reporting advisers = 15,653 hours. 751 As with preparation of the Form ADV for registered advisers, we expect that performance of this function for exempt reporting advisers will most likely be equally allocated between a senior compliance examiner and a compliance manager. Data from the 2018 SIFMA Management and Professional Earnings Report suggest that costs for these positions are $229 and $298 per hour, respectively. 15,653 hours × 0.5 × $229 = $1,792,246. 15,653 hours × 0.5 × $298 = $2,322,267. $1,792,246 + $2,322,267 = $4,124,513. $4,124,513/ (3,848 exempt reporting advisers currently + 500 new exempt reporting advisers) = $949 per exempt reporting adviser. 752 257,122 annual hour burden for RIAs preparing relationship summary + 164,187 annual hour burden for RIAs not preparing relationship summary + 15,653 annual hour burden for exempt reporting advisers = 436,962 total updated Form ADV annual hour burden. 753 $66,208,857 for RIAs preparing relationship summary + $43,263,890 for RIAs not preparing relationship summary + $4,124,513 for exempt reporting advisers = $115,139,422 total updated Form ADV annual monetized hourly burden. 754 436,962/(12,721 registered investment advisers + 3,843 exempt reporting advisers) = 26.37 hours per adviser. 755 $115,139,422/12,721 registered investment advisers + 3,843 exempt reporting advisers) = $6,949 per adviser. 756 436,962 hours estimated—363,082 hours currently approved = 73,880 hour increase in aggregate annual hourly burden. 757 $115,139,422 monetized hourly burden¥$92,404,369 = $22,735,053 increase in aggregate annual monetized hourly burden. VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 adjustments for inflation, and the amendments to Form ADV. b. Revised Estimated External Costs for Form ADV The currently approved total annual collection of information burden estimate for Form ADV anticipates that there will be external costs, including (i) a one-time initial cost for outside legal and compliance consulting fees in connection with the initial preparation of Part 2 of Form ADV, and (ii) the cost for investment advisers to private funds to report the fair value of their private fund assets.758 The currently approved annual cost burden for Form ADV is $13,683,500, $3,600,000 of which is attributable to external costs incurred by new advisers to prepare Form ADV Part 2, and $10,083,500 of which is attributable to obtaining the fair value of certain private fund assets.759 We do not expect any change in the annual external costs relating to new advisers preparing Form ADV Part 2. Due to the slightly higher number of registered advisers with private funds, however, the cost of obtaining the fair value of private fund assets may be higher. We estimate that 6% of registered advisers have at least one private fund client that may not be audited. Based on IARD system data as of December 31, 2017, 4,670 registered advisers advise private funds. We therefore estimate that approximately 281 registered advisers may incur costs of $37,625 each on an annual basis, for an aggregate annual total cost of $10,572,625.760 In summary, taking into account (i) a one-time initial cost for outside legal and compliance consulting fees in connection with the initial preparation of Part 2 of Form ADV, (ii) the cost for investment advisers to private funds to report the fair value of their private fund assets, and (iii) the incremental external legal or compliance costs for the preparation of the proposed relationship summary, we estimate the annual aggregate external cost burden of the Form ADV information collection would be $18,424,417, or $1,448 per 758 See 2016 Form ADV Paperwork Reduction Analysis, supra note 716, at 81 FR 60452. We do not anticipate that the amendments we are proposing to add to Form ADV Part 3 will affect those per adviser cost burden estimates for outside legal and compliance consulting fees. The estimated external costs of outside legal and compliance consulting services for the relationship summary are in addition to the estimated hour burden discussed above. 759 See 2016 Form ADV Paperwork Reduction Analysis, supra note 716, at 81 FR at 60452–53. The $10,083,500 is based on 4,469 registered advisers reporting private fund activity as of May 16, 2016. 760 6% × 4,760 = 281 advisers needing to obtain the fair value of certain private fund assets. 281 advisers × $37,625 = $10,572,625. PO 00000 Frm 00105 Fmt 4701 Sfmt 4702 21519 registered adviser.761 This represents a $4,740,917 increase from the current external costs estimate for the information collection.762 B. Rule 204–2 Under the Advisers Act Under section 204 of the Advisers Act, investment advisers registered or required to register with the Commission under section 203 of the Advisers Act must make and keep for prescribed periods such records (as defined in section 3(a)(37) of the Exchange Act), furnish copies thereof, and make and disseminate such reports as the Commission, by rule, may prescribe as necessary or appropriate in the public interest or for the protection of investors. Rule 204–2 sets forth the requirements for maintaining and preserving specified books and records. We are proposing amendments to rule 204–2 that would require registered advisers to retain copies of each relationship summary. Investment advisers would also be required to maintain each amendment to the relationship summary as well as to make and preserve a record of dates that each relationship summary and each amendment was delivered to any client or to any prospective client who subsequently becomes a client, as well as to any retail investor before such retail investor opens an account. These records would be required to be maintained in the same manner, and for the same period of time, as other books and records required to be maintained under rule 204–2(a), to allow regulators to access the relationship summary during an examination. Specifically, investment advisers would be required to maintain and preserve a record of the relationship summary in an easily accessible place for not less than five years from the end of the fiscal year during which the last entry was made on such record, the first two years in an appropriate office of the investment adviser. This collection of information is found at 17 CFR 275.204–2 and is mandatory. The Commission staff uses the collection of information in its examination and oversight program. Requiring maintenance of these disclosures as part of the firm’s books and records would facilitate the Commission’s ability to inspect for and enforce compliance with firms’ obligations with respect to Form CRS. 761 $3,600,000 for preparation of Form ADV Part 2 + $10,572,625 for registered investment advisers to fair value their private fund assets + $4,251,792 to prepare relationship summary = $18,424,417 in total external costs for Form ADV. $18,424,417/ 12,721 total registered advisers as of December 31, 2017 = $1,448 per registered adviser. 762 $18,424,417 ¥ $13,683,500 = $4,740,917. E:\FR\FM\09MYP2.SGM 09MYP2 21520 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules The information generally is kept confidential.763 The likely respondents to this collection of information are all of the approximately 12,721 advisers currently registered with the Commission. We estimate that based on updated IARD data as of December 31, 2017, 7,625 existing advisers will be subject to the amended provisions of rule 204–2 to preserve the relationship summary as a result of the proposed amendments. amozie on DSK3GDR082PROD with PROPOSALS1 1. Changes in Burden Estimates and New Burden Estimates The approved annual aggregate burden for rule 204–2 is currently 2,199,791 hours, with a total annual aggregate monetized cost burden of approximately $130,316,112, based on an estimate of 12,024 registered advisers, or 183 hours per registered adviser.764 We estimate that the proposed amendments would result in an increase in the collection of information burden estimate by 0.2 hours 765 for each of the estimated 7,625 registered advisers with relationship summary obligations,766 resulting in a total of 183.2 hours per adviser. This would yield an annual estimated aggregate burden of 1,396,900 hours under amended rule 204–2 for all registered advisers with relationship summary obligations,767 for a monetized cost of $85,476,311.768 In addition, the 763 See section 210(b) of the Advisers Act (15 U.S.C. 80b–10(b)). 764 See 2016 Form ADV Paperwork Reduction Analysis, supra note 716, at 81 FR at 60454–55. 765 In the Paperwork Reduction Act analysis for amendments to Form ADV adopted in 2016, we estimated that 1.5 hours would be required for each adviser to make and keep records relating to (i) the calculation of performance the adviser distributes to any person and (ii) all written communications received or sent relating to the adviser’s performance. Because the burden of preparing of the relationship summary is already included in the collection of information estimates for Form ADV, and because the relationship is a short, standardized document, we assume that recordkeeping burden for the relationship summary would be considerably less than 1.5 hours and estimate that 0.2 hours would be appropriate. 766 See supra note 674. 767 7,625 registered investment advisers required to prepare relationship summary × 183.2 hours = 1,396,900 hours. 768 As with our estimates relating to the previous amendments to rule 204–2 (see 2016 Form ADV Paperwork Reduction Analysis, supra note 716, at 81 FR at 60454–55, we expect that performance of this function will most likely be allocated between compliance clerks and general clerks, with compliance clerks performing 17% of the function and general clerks performing 83% of the function. Data from the SIFMA Office Salaries in the Securities Industry Report, modified to account for an 1,800-hour work year and multiplied by 2.93 to account for bonuses, firm size, employee benefits, and overhead (‘‘SIFMA Office Salaries Report), suggest that costs for these positions are $67 and $60, respectively. (17% × 1,396,9001 hours × $67) + (83% × 1,396,900 hours × $60) = $85,476,311. VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 5,096 advisers 769 not subject to the proposed amendments would continue to be subject to an unchanged burden of 183 hours under rule 204–2, or a total aggregate annual hour burden of 932,568,770 for a monetized cost of $57,063,836.771 In summary, taking into account the estimated annual burden of registered advisers that would be required to maintain records of the relationship summary, as well as the estimated annual burden of registered advisers that do not have relationship summary obligations and whose information collection burden is unchanged, the revised annual aggregate burden for all respondents to rule 204– 2, under the proposed amendments, would be estimated to be 2,329,468 total hours,772 for a monetized cost of $142,540,147.773 most recent approval and adjustments for inflation, as well as the proposed rule 204–2 amendments relating to the relationship summary as discussed in this proposing release. C. Rule 204–5 Under the Advisers Act Proposed new rule 204–5 would require an investment adviser to deliver the relationship summary to each retail investor before or at the time the adviser enters into an investment advisory agreement (even if the adviser’s agreement with the retail investor is oral) as well as to existing clients one time within a specified time period after the effective date of the proposed amendments. The adviser also would deliver the relationship summary to existing clients before or at the time (i) a new account is opened that is different from the retail investor’s existing 2. Revised Annual Burden Estimates account(s); or (ii) changes are made to As noted above, the approved annual the retail investor’s existing account(s) aggregate burden for rule 204–2 is that would materially change the nature currently 2,199,791, hours based on an and scope of the adviser’s relationship estimate of 12,024 registered advisers, or with the retail investor, as further 183 hours per registered adviser.774 The discussed in Section II.C.2 above. In revised annual aggregate hourly burden addition, advisers would be required to for rule 204–2 would be 2,329,468 775 post a current version of their hours, represented by a monetized cost relationship summary prominently on of $142,540,147,776 based on an estimate their public website (if they have one). Investment advisers would be required of 7,625 registered advisers with the to communicate any changes in an relationship summary obligation and updated relationship summary to retail 5,096 registered advisers without, as noted above. This represents an increase investors who are existing clients or of 129,677 777 annual aggregate hours in customers of the firm within 30 days the hour burden and an annual increase after the updates are required to be of $12,224,035 from the currently made and without charge. The approved total aggregate monetized cost communication can be made by for rule 204–2.778 These increases are delivering the relationship summary or attributable to a larger registered by communicating the information in investment adviser population since the another way to the retail investor. Proposed new rule 204–5 contains a 769 See supra note 681. collection of information requirement. 770 5,096 registered investment advisers not The collection of information is required to prepare the relationship summary × 183 necessary to provide advisory clients, hours = 932,568. prospective clients and the Commission 771 As with our estimates relating to the previous with information about the investment amendments to rule 204–2 (see 2016 Form ADV Paperwork Reduction Analysis, supra note 716, at adviser and its business, conflicts of 81 FR at 60454–55, we expect that performance of interest and personnel. Clients would this function will most likely be allocated between use the information contained in the compliance clerks and general clerks, with relationship summary to determine compliance clerks performing 17% of the function and general clerks performing 83% of the function. whether to hire or retain an investment Data from the SIFMA Office Salaries Report suggest adviser and what type of accounts and that costs for these positions are $67 and $60, services are appropriate for their needs. respectively. (17% × 932,568 hours × $67) + (83% The Commission would use the × 932,568 hours × $60) = $57,063,836. 772 7,625 registered investment advisers required information to determine eligibility for to prepare relationship summary × 183.2 hours = registration with us and to manage our 1,396,900 hours. 5,096 registered investment regulatory and examination programs. advisers not required to prepare the relationship This collection of information would be summary × 183 hours = 932,568 hours. 1,396,900 hours + 932,568 hours = 2,329,468 hours. found at 17 CFR 275.204–5 and would 773 $85,476,311 + $57,063,836 = $142,540,147. be mandatory. Responses would not be 774 2,199,791 hours/12,024 registered advisers = kept confidential. 183 hours per adviser. 775 See supra note 772. supra note 773. 777 2,329,467 hours ¥ 2,199,791 hours = 129,677 hours. 778 $142,540,073 ¥ $130,316,112 = $12,224,035. 776 See PO 00000 Frm 00106 Fmt 4701 Sfmt 4702 1. Respondents: Investment Advisers The likely respondents to this information collection would be the approximately 7,625 investment E:\FR\FM\09MYP2.SGM 09MYP2 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules advisers registered with the Commission that would be required to deliver a relationship summary per proposed new rule 204–5. We also note that these figures include the 366 registered broker-dealers that are dually registered as investment advisers.779 2. Initial and Annual Burdens a. Posting of the Relationship Summary to Website Under proposed new rule 204–5, advisers would be required to post a current version of their relationship summary prominently on their public website (if they have one). We estimate that each adviser would incur 0.5 hours to prepare the relationship summary, such as to ensure proper electronic formatting, and to post the disclosure to the adviser’s website, if the adviser has one.780 Based on IARD system data, 91.1% of investment advisers with individual clients report at least one public website. Therefore, we estimate that 91.1% of the 7,625 existing and 477 newly-registered investment advisers with relationship summary obligations would incur a total of 3,690 aggregate burden hours to post relationship summaries to their websites,781 with a monetized cost of $221,428.782 As with the initial preparation of the relationship summary, we amortize the estimated initial burden associated with posting the relationship summary over a three-year period.783 Therefore, the total 779 See supra note 457 and accompanying text. estimate is based upon staff experience. See e.g., Enhanced Mutual Fund Disclosure Adopting Release, supra note 47 (‘‘we estimate, as we did in the proposing release, that rule 498 will impose a 1⁄2 hour burden per portfolio annually associated with the compilation of the additional information required on a cover page or at the beginning of the Summary Prospectus. Rule 498 also imposes annual hour burdens associated with the posting of a fund’s Summary Prospectus, statutory prospectus, SAI, and most recent report to shareholders on an Internet website. We estimate that the average hour burden for one portfolio to comply with the Internet website posting requirements will be approximately one hour annually.’’) Because rule 204–5 pertains to one document, the relationship summary, which is much shorter than the several documents to which rule 498 applies, we estimate that each adviser on average would incur approximately 0.5 hours for the preparation of the relationship summary for posting, and for the posting itself. 781 0.5 hours to prepare and post the relationship summary × 91.1% × (7,625 existing advisers + 477 newly-registered advisers with relationship summary obligations) × 0.5 hours = 3,690 hours. 782 Based on data from the SIFMA Office Salaries Report, we expect that requirement for investment advisers to post their relationship summaries to their websites will most likely be performed by a general clerk at an estimated cost of $60 per hour. 0.5 hours per adviser × $60 = $30 in monetized costs per adviser. $30 per adviser × (7,625 existing advisers + 477 newly registered advisers = $221,428 total aggregate monetized cost. 783 See 2016 Form ADV Paperwork Reduction Analysis, supra note 716. amozie on DSK3GDR082PROD with PROPOSALS1 780 This VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 annual aggregate hourly burden related to the initial posting of the relationship summary is estimated to be 1,230 hours, with a monetized cost of $73,809.784 We do not anticipate external costs to rule 204–5 because investment advisers without a public website would not be required to establish or maintain one. External costs for the preparation of the relationship summary are already included for the collection of information estimates for Form ADV, in Section V.A, above. b. Delivery to Existing Clients i. One-Time Initial Delivery to Existing Clients The burden for this proposed rule is based on each adviser with retail investors having, on average, an estimated 4,461 clients who are retail investors.785 Although advisers may either deliver the relationship summary separately, in a ‘‘bulk delivery’’ to clients, or as part of the delivery of information that advisers already provide, such as the annual Form ADV update, account statements or other periodic reports, we base our estimates here on a ‘‘bulk delivery’’ to existing clients. This is similar to the approach we took in estimating the delivery costs for amendments to rule 204–3 under the Advisers Act, which requires investment advisers to deliver their Form ADV Part 2 brochures and brochure supplements to their clients.786 As with the estimates for rule 204–3, we estimate that advisers would require approximately 0.02 hours to deliver the relationship summary to each client.787 Based on IARD data as of December 31, 2017, we estimate that advisers with the obligation to deliver the relationship summary under proposed rule 204–5 have, on average, 4,461 clients who are retail investors, per adviser. Thus, we estimate the total burden hours for 7,625 advisers for initial delivery of the relationship to existing clients to be 89.22 hours per adviser, or 722,860 total aggregate hours, for the first year after the rule is in effect,788 with a monetized cost of 784 43,688 hours/3 years = 1,230 hours annually. $221,428/3 years = $73,809 in annualized monetized costs. 785 Based on IARD system data as of December 31, 2017. 786 See Brochure Adopting Release, supra note 157, at 75 FR at 49259. 787 This is the same estimate we made in the Form ADV Part 2 proposal and for which we received no comment. Brochure Adopting Release, supra note 157, at 75 FR at 49259 We note that the burden for preparing relationship summaries is already incorporated into the burden estimate for Form ADV discussed above. 788 (0.02 hours per client × 4,461 retail clients per adviser) = 89.22 hours per adviser. 89.22 hours per PO 00000 Frm 00107 Fmt 4701 Sfmt 4702 21521 $5,353 789 per adviser or $43,339,507 in aggregate.790 Amortized over three years, the total annual hourly burden is estimated to be 29.74 hours per adviser, or 240,953 annual hours in aggregate,791 with annual monetized costs of $1,784 per adviser, or $14,457,209 in aggregate.792 We do not expect that investment advisers will incur external costs for the initial delivery of the relationship summary to existing clients because we assume that advisers will make such deliveries along with another required delivery, such as an interim or annual update to the Form ADV Part 2. ii. Delivery for New Account Types or Material Changes in the Nature or Scope of the Advisory Relationship As noted above, investment advisers also would be required to deliver the relationship summary to existing clients before or at the time (i) a new account is opened that is different from the retail investor’s existing account(s); or (ii) changes are made to the retail investor’s existing account(s) that would materially change the nature and scope of the adviser’s relationship with the retail investor, as further discussed in Section II.C.2. With respect to delivery of the relationship summary in the event new account types are opened or material changes occur in the nature or scope of the advisory relationship, we expect that such delivery would take place among 10% of an adviser’s retail investors annually. We would therefore estimate a total annual hourly burden of 9 hours per adviser and 72,286 hours in total annual aggregate hours,793 with a monetized cost of $535 per adviser 794 adviser × (7,625 existing advisers + 477 newly registered advisers) = 722,860 total aggregate hours. 789 Based on data from the SIFMA Office Salaries Report, we expect that initial delivery requirement to existing clients of rule 204–5 will most likely be performed by a general clerk at an estimated cost of $60 per hour. 89.22 hours per adviser × $60 = $5,353 in monetized costs per adviser. We estimate that advisers will not incur any incremental postage costs because we assume that they will make such deliveries with another mailing the adviser was already delivering to clients, such as interim or annual updates to the Form ADV, or will deliver the relationship summary electronically. 790 $5,353 in monetized costs per adviser × (7,625 existing advisers + 477 newly registered advisers) = $43,339,507 in total aggregate costs. 791 89.22 initial hours per adviser/3 = 29.74 total annual hours per adviser. 722,860 initial aggregate hours/3 = 240,953 total annual aggregate hours. 792 $5,353 in monetized costs per adviser/3 = $1,784 annualized monetized cost per adviser. $43,339,507 initial aggregate monetized cost/3 = $14,14,457,209 in total annual aggregate monetized cost. 793 10% of 4,461 retail clients per adviser × .02 hours to deliver the relationship summary = 9 hours per adviser. 9 hours × (7,625 existing advisers + 477 new advisers) = 72,286 total aggregate hours. 794 Based on data from the SIFMA Office Salaries Report, we expect that delivery requirements of rule E:\FR\FM\09MYP2.SGM Continued 09MYP2 21522 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules and $4,337,163 in aggregate.795 We do not expect advisers to incur external costs related to deliveries of the relationship summary due to new account type openings, or material changes to the nature or scope of the relationship, because we assume that advisers will deliver the relationship summary along with new account agreements and other information normally required in such circumstances. amozie on DSK3GDR082PROD with PROPOSALS1 iii. Posting of Amended Relationship Summaries to Websites and Communicating Changes to Amended Relationship Summaries, Including by Delivery Investment advisers would be required to amend their relationship summaries within 30 days when any of the information becomes materially inaccurate. We do not expect amendments to be frequent, but based on the historical frequency of amendments made on Form ADV Parts 1 and 2, estimate that on average, each adviser preparing a relationship summary will likely amend the disclosure and average of 1.81 times per year.796 As above, we estimate that preparation of the relationship summary for posting to the web and the posting itself will require 0.5 hours. Therefore, once again using the same percentage of investment advisers reporting public websites, 91.1% of 7,625 advisers would incur a total annual burden of 0.91 hours per adviser, or 6,286 hours in aggregate,797 to post the amended relationship summaries to their website. This translates into an annual monetized cost of $54.30 per adviser, or $377,188 in the aggregate for existing registered advisers with relationship summary obligations.798 Investment 204–5 will most likely be performed by a general clerk at an estimated cost of $60 per hour. 9 hours per adviser × $60 = $535 per adviser. We estimate that advisers will not incur any incremental postage costs in the delivery of the relationship summary to existing clients for changes in accounts, because we assume that advisers will make such deliveries with another mailing the adviser was already delivering to clients, such as new account agreements and other documentation normally required in such circumstances. 795 $535 in monetized costs per adviser × (7,625 existing advisers + 477 newly registered advisers) = $4,337,163 in total aggregate costs. 796 This estimate is based on IARD system data regarding the number of filings of Form ADV amendments. See also supra note 702 and accompanying text. 797 0.5 hours to post the amendment × 1.81 amendments annually = 0.91 hours per adviser annually to post amendments to the website. 0.91 × 7,625 existing advisers amending the relationship summary × 91.1% of advisers with public websites = 6,286 aggregate annual hours to post amendments of the relationship summary. 798 Based on data from the SIFMA Office Salaries Report, we expect that the posting requirements of VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 advisers also will be required to communicate any changes in an amended relationship summary to existing clients who are retail investors. The communication can be made by delivering the relationship summary or by communicating the information in another way. For this requirement, we estimate that 50% of advisers will choose to deliver the relationship summary to communicate the updated information, and that the delivery will be made along with other disclosures already required to be delivered, such as an interim or annual Form ADV update. We therefore estimate a burden of 615,674 799 hours, or 161.5 hours per adviser,800 at a monetized cost of $36,940,426 in aggregate,801 or $9,689 per adviser,802 for the 50% of advisers that choose to deliver amended relationship summaries in order to communicate updated information. Similar to the other delivery requirements discussed above for proposed rule 204–5, we do not expect investment advisers to incur external costs in delivering amended relationship summaries because we assume that they will make this delivery with other disclosures required to be delivered, such as an interim or annual update to Form ADV. c. Delivery to New Clients or Prospective New Clients Data from the IARD system indicate that of the 12,721 advisers registered rule 204–5 will most likely be performed by a general clerk at an estimated cost of $60 per hour. 0.91 hours per adviser × $60 = $54.30 per adviser. $54.30 per adviser × 91.1% × 7,625 existing advisers = $377,188 in annual monetized costs. 799 7,625 advisers amending the relationship summary × 4,461 retail clients per adviser × 50% delivering the amended relationship summary to communicate updated information × 0.02 hours per delivery × 1.81 amendments annually = 615,674 hours to deliver amended relationship summaries. 800 4,461 retail clients per adviser × 0.02 hours per delivery × 1.81 amendments annually = 161.5 hours per adviser. 801 Based on data from the SIFMA Office Salaries Report, we expect that delivery requirements of rule 204–5 will most likely be performed by a general clerk at an estimated cost of $60 per hour. 615,674 hours × $60 = $36,940,426. We estimate that advisers will not incur any incremental postage costs to deliver the relationship summary for communicating updated information by delivering the relationship summary, because we assume that advisers will make the delivery along with other documents already required to be delivered, such as an interim or annual update to Form ADV, or will deliver the relationship summary electronically. 802 Based on data from the SIFMA Office Salaries Report, modified to account for an 1,800-hour workyear and multiplied by 2.93 to account for bonuses, firm size, employee benefits and overhead, we expect that delivery requirements of rule 204–5 will most likely be performed by a general clerk at an estimated cost of $60 per hour. 161.5 hours per adviser × $60 per hour = $9,689 per adviser. PO 00000 Frm 00108 Fmt 4701 Sfmt 4702 with the Commission, 7,625 have retail investors, and on average, each has 4,461 clients who are retail investors.803 Based on IARD system data from 2015 to 2017, we estimate that the client base for investment advisers will grow by approximately 4.5% annually.804 Based on our experience with Form ADV Part 2, we estimate the annual hour burden for initial delivery of a relationship summary would be the same by paper or electronic format, at 0.02 hours for each relationship summary,805 or 4 annual hours per adviser.806 Therefore, we estimate that the aggregate annual hour burden for initial delivery of the relationship summary to new clients would be 30,614 hours,807 at a monetized cost of $1,836,817, or $241 per adviser.808 We do not expect that advisers will incur external costs to deliver the relationship summary to new or prospective clients because we assume that advisers will make the delivery along with other documentation normally provided in such circumstances, such as Form ADV Part 2, or will deliver the relationship summary electronically. d. Total New Initial and Annual Burdens Altogether, we estimate the total collection of information burden for proposed new rule 204–5 to be 967,044 annual aggregate hours per year,809 or 803 This average is based on advisers’ responses to Item 5 of Part 1A of Form ADV as of December 31, 2017. 804 The number of retail clients reported by RIAs changed by 6.7% between December 2015 and 2016, and by 2.3% between December 2016 and 2017. (6.7% + 2.3%)/2 = 4.5% average annual rate of change over the past two years. 805 This is the same as the estimate for the burden to deliver the brochure required by Form ADV Part 2. See Brochure Adopting Release, supra note 157. 806 4,461 clients per adviser with retail clients × 4.5% = 201 new clients per adviser. 201 new clients per adviser × .02 hours per delivery = 4.0 hours per adviser for delivery of a relationship summary to new or prospective new clients. 807 4.0 hours per adviser for delivery obligation to new or prospective clients × 7,625 advisers = 30,614 hours. 808 Based on data from the SIFMA Office Salaries Report, modified to account for an 1,800-hour workyear and multiplied by 2.93 to account for bonuses, firm size, employee benefits and overhead, we expect that delivery requirements of rule 204–5 will most likely be performed by a general clerk at an estimated cost of $60 per hour. 7,625 hours × $60 = $1,836,817. We estimate that advisers will not incur any incremental postage costs to deliver the relationship summary to new or prospective clients because we assume that advisers will make the delivery along with other documentation normally provided in such circumstances, such as Form ADV Part 2. $1,835,371/7,625 investment advisers = $241 per adviser. 809 1,230 annual hours for posting initial relationship summaries to adviser websites + 240,953 annual hours for initial delivery to existing clients + 72,286 hours for delivery to existing clients based on material changes to accounts or E:\FR\FM\09MYP2.SGM 09MYP2 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules 126.8 hours per respondent,810 for a total annual aggregate monetized cost of $58,022,611,811 or $7,610 812 per adviser. We request comment on the estimated hourly and cost burdens for the new collection of information under proposed rule 204–5. amozie on DSK3GDR082PROD with PROPOSALS1 D. Form CRS and Rule 17a–14 Under the Exchange Act New proposed rule 17a–14 under the Exchange Act [17 CFR 240.17a–14] and Form CRS [17 CFR 249.640] would require a broker-dealer that offer services to retail investors to prepare, file with the Commission, post to the broker-dealer’s website (if it has one), and deliver to retail investors a relationship summary, as discussed in greater detail in Section II above. Broker-dealers would file the relationship summary with EDGAR and deliver the relationship summary to both existing customers and new or prospective new customers who are retail investors. New proposed rule 17a– 14 under the Exchange Act [17 CFR 240.17a–14] and Form CRS [17 CFR 249.640] contain a collection of information requirement. We will use the information to manage our regulatory and examination programs. Clients can use the information required in Form CRS to determine whether to hire or retain a broker-dealer, as well as what types of accounts and services are appropriate for their needs. The collection of information is necessary to provide broker-dealer customers, prospective customers, and the Commission with information about the broker-dealer and its business, conflicts of interest and personnel. This collection of information would be found at 17 CFR 249.640 and would be mandatory. Responses would not be kept confidential. scope of relationship + 6,286 annual hours to post amended relationship summary to website + 615,674 hours for delivery to existing clients to communicate updated information in amended relationship summaries + 30,614 hours for delivery to new or prospective clients = 967,044 annual total hours for investment advisers to post and deliver the relationship summary under proposed rule 204– 5. 810 967,044 hours (initial and other deliveries)/ 7,625 advisers = 126.8 hours per adviser. 811 $73,809 for posting initial relationship summaries to adviser websites + $14,457,209 for initial delivery to existing clients + $4,337,162 for delivery to existing clients based on material changes to accounts or scope of relationship + $377,188 to post amended relationship summary to website + $36,940,426 for delivery to existing clients to communicate updated information in amended relationship summaries + $1,836,817 for delivery to new or prospective clients = $58,022,611 in total annual aggregate monetized cost for investment advisers to post and deliver the relationship summary under proposed rule 204–5. 812 $58,022,611/7,625 advisers = $7,610 per adviser. VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 1. Respondents: Broker-Dealers The respondents to this information collection would be the broker-dealers registered with the Commission that would be required to deliver a relationship summary in accordance with proposed new rule 17a–14 under the Exchange Act [17 CFR 240.17a–14]. As of December 31, 2017, there were 2,857 broker-dealers registered with the Commission that reported sales to retail customer investors,813 and therefore likely would be required to prepare and deliver the relationship summary.814 We also note that these include 366 brokerdealers that are dually registered as investment advisers.815 To a great extent, the burden for dual registrants to prepare and deliver the relationship summary and post it to a website is already accounted for in the estimated burdens for investment advisers under the proposed amendments to Form ADV and proposed new rule 204–5, discussed in Sections V.A and V.C above. However, dually registered broker-dealers will incur burdens related to their business as an investment adviser that standalone broker-dealers will not incur, such as the requirement to file the relationship summary with IAPD (in addition to EDGAR as a broker-dealer), and to deliver to both investment advisory clients and brokerage customers, to the extent those groups of retail investors do not overlap. Therefore, although treating dually registered broker-dealers in this way may be over-inclusive, we base our burden estimates for proposed rule 17a– 14 and Form CRS on 2,857 brokerdealers with relationship summary obligations, including those dually registered as broker-dealers. 816 2. Initial and Annual Burdens a. Initial Preparation, Filing, and Posting of Relationship Summary Unlike investment advisers, brokerdealers currently are not required to disclose in one place all of the 813 See supra note 461 and accompanying text. Retail sales activity is identified from Form BR (see supra note 280, 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. 814 For purposes of Form CRS, a ‘‘retail investor’’ would be defined as: a prospective or existing client or customer who is a natural person (an individual) and would include a trust or other similar entity that represents natural persons, even if another person is a trustee or managing agent of the trust. 815 See supra note 457 and accompanying text. 816 See supra note 457 and accompanying text. PO 00000 Frm 00109 Fmt 4701 Sfmt 4702 21523 information required by the relationship summary or to file a narrative disclosure document with the Commission. We estimate, therefore, that the initial first year burden for preparing and filing the relationship summary would be 15.0 hours per registered broker-dealer. The narrative descriptions required in the relationship summary should be narrowly tailored and brief, and the relationship summary must be limited to four pages (or equivalent limit if in electronic format). The relationship summary would be standardized across broker-dealers given the mandated set and sequence of topic areas, and moreover, a considerable amount of language within each topic area also would be prescribed, thereby limiting the amount of time required to prepare the disclosure. Therefore, we believe that the time needed to prepare the relationship summary should not vary significantly based on the size of the broker-dealer. However, unlike investment advisers, which already prepare Form ADV Part 2 brochures and have information readily available to prepare the relationship summary, broker-dealers would be required for the first time to prepare disclosure that contains all the information proposed to be required by the relationship summary. In addition, investment advisers already file their brochures on IARD, while broker-dealers may incur new burdens to file their relationship summaries on EDGAR. Therefore, we believe that each broker-dealer respondent would incur 15 hours on a one-time basis, instead of five hours for investment advisers, for the initial preparation and filing of the relationship summary. However, we believe that the amount of time needed to post the relationship summary on the broker-dealer’s website, if it has one, would not vary significantly from the time needed by investment advisers because the time required to prepare and post disclosure that is standardized in length and content should not vary significantly across firms. As with investment advisers, we estimate that each broker-dealer would incur 0.5 hours to prepare the relationship summary for posting to its website, if it has one, such as to ensure proper electronic formatting, and to perform the actual posting.817 Given these assumptions, we estimate the total one-time initial hourly burden for broker-dealers to prepare the relationship summary and file it with the Commission would be 42,855 817 See E:\FR\FM\09MYP2.SGM supra note 780. 09MYP2 21524 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules hours,818 for a monetized value of $11,292,293.819 We estimate that the initial burden of posting the relationship summary to their websites, if they have one, would be 1,428 hours,820 for a monetized value of $85,710.821 To arrive at an annual burden for preparing, filing, and posting the relationship summary, as for advisers, the initial burden would be amortized over a three-year period. Therefore, the total annual aggregate hour burden for registered brokerdealers to prepare, file, and post a relationship summary to their website, if they have one, would be 14,761 hours, or 5.17 hours per broker-dealer,822 for an annual monetized cost of $3,792,668, or $1,328 per broker-dealer.823 amozie on DSK3GDR082PROD with PROPOSALS1 b. Estimated External Costs for Initial Preparation of Relationship Summary Under proposed new rule 17a–14, broker-dealers would be required to prepare and file a relationship summary, as well as post it to their website if they have one. We do not anticipate external costs in the form of website set-up, maintenance, or licensing fees because broker-dealers would not be required to establish a website for the sole purpose of posting their relationship summary if they do not already have a website. We do anticipate that some broker-dealers may incur a one-time initial cost for outside legal and consulting fees in connection with the initial preparation of the relationship summary. Although broker818 15.0 hours × 2,857 broker-dealers with retail accounts = 42,855 total hours. 819 42,855 total aggregate initial hour burden for preparing and filing a relationship summary. We expect 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 suggest that costs for these positions are $229 and $298 per hour, respectively. (21,427.5 hours × $229 + (21,427.5 hours × $298 = $11,292,293). 820 0.5 hours × 2,857 broker-dealers = 1,248 hours to prepare and post relationship summary to the website. 821 Based on data from the SIFMA Office Salaries Report, modified to account for an 1,800-hour workyear and multiplied by 2.93 to account for bonuses, firm size, employee benefits and overhead, we expect that performance of this function will most likely be performed by a general clerk at an estimated cost of $60 per hour. 1,429 hours × $60 = $85,710 total aggregate monetized cost. 822 42,855 hours/3 years = 14,761 total aggregate annual hour burden to prepare and file relationship summary. 14,761 hours/2,857 broker-dealers with retail accounts = 5.17 hours annually per brokerdealer. 823 ($11,292,293 total initial aggregate monetized cost for preparation and filing + $85,710 for posting to the website)/3 = $3,792,668 total annual monetized cost for preparation, filing and posting the relationship summary. $3,792,668/2,857 brokerdealers subject to relationship summary obligations = $1,328 per broker-dealer. VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 dealers subject to the relationship summary requirement may vary widely in terms of the size, complexity and nature of their businesses, the amount of disclosure required would not vary substantially among broker-dealers. Accordingly, the amount of time, and thus cost, required for outside legal and compliance review is unlikely to vary substantially among those brokerdealers who elect to obtain outside assistance.824 The relationship summary is short, standardized, and contains largely prescribed language. Because the information required in the relationship summary pertains largely to the brokerdealer’s own business practices, the information is likely more readily available to the broker-dealer than to an external legal or compliance consultant. As a result, we anticipate that only a quarter of broker-dealers will seek the help of outside legal services and half will seek the help of compliance consulting services in connection with the initial preparation of the relationship summary. We estimate that the initial per broker-dealer cost for legal services related to the preparation of the relationship summary would be $1,416.825 We estimate that the initial per broker-dealer cost for compliance consulting services related to the preparation of the relationship summary would be $2,109.826 Accordingly, we estimate that 715 broker-dealers will use outside legal services, for a total initial aggregate cost burden of $1,011,378,827 and 1,429 broker-dealers will use outside compliance consulting services, for a total initial aggregate cost burden of $3,012,707,828 resulting in a total initial aggregate cost burden among all respondents of $4,024,085, or $1,409 per broker-dealer, for outside legal and compliance consulting fees related to preparation of the relationship 824 We estimate that an external service provider would spend 3 hours helping a broker-dealer prepare an initial relationship summary. 825 External legal fees are in addition to the projected hour per broker-dealer burden discussed above. $472 per hour for legal services × 3 hours per broker-dealer = $1,416. The hourly cost estimate of $472 is adjusted for inflation and based on our consultation with broker-dealers and law firms who regularly assist them in compliance matters. 826 External compliance consulting fees are in addition to the projected hour per broker-dealer burden discussed above. Data from the SIFMA Management and Professional Earnings Report suggest that outside management consulting services cost approximately $703 per hour. $703 per hour for outside consulting services × 3 hours per adviser = $2,109. 827 25% × 2,857 SEC registered broker-dealers = 715 broker-dealers. $1,416 for legal services × 715 broker-dealers = $1,011,378. 828 50% × 2,857 SEC registered broker-dealers = 1,429 broker-dealers. $2,109 for compliance consulting services × 1,429 broker-dealers = $3,012,707. PO 00000 Frm 00110 Fmt 4701 Sfmt 4702 summary.829 Annually, this represents $1,341,362, or $470 per broker-dealer, when amortized over a three-year period.830 We do not expect ongoing external legal or compliance consulting costs for the relationship summary. Although broker-dealers would be required to amend the relationship summary within 30 days whenever any information becomes materially inaccurate, given the standardized nature and prescribed language of the relationship summary, we expect that amendments would be factual and require relatively minimal wording changes. We believe that broker-dealers would be more knowledgeable about these facts than outside legal or compliance consultants and would be able to make these revisions in-house. Therefore, we do not expect that broker-dealers will need to incur ongoing external costs for the preparation and review of relationship summary amendments. c. Amendments to the Relationship Summary and Filing and Posting of Amendments As with our estimates above for investment advisers, we do not expect broker-dealers to amend their relationship summaries frequently. Based on staff experience, we believe that many broker-dealers, as a matter of best practices, would update their relationship summary at a minimum once a year, after conducting an annual supervisory review, for example.831 We also estimate that on average, each broker-dealer preparing a relationship summary may amend the disclosure once more during the year, due to emerging issues. Therefore, we assume that broker-dealers would update their relationship summary, on average, twice a year, and as with investment advisers, we estimate that broker-dealers would require 0.5 hours to amend and file the updated relationship summary, and 0.5 hours to post it to their website. Thus, we estimate that broker-dealers would incur a total annual aggregate hourly 829 $1,011,378 + $3,012,707 = $4,024,085. $4,024,085/2,857 broker-dealers = $1,409 per broker-dealer. 830 $4,024,085 initial aggregate hours/3 years = $1,341,362 annually. $1,409 initial hours per broker-dealer/3 years = $469.50. 831 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). E:\FR\FM\09MYP2.SGM 09MYP2 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules burden of 5,714 hours per year, to prepare and file, and post to their websites an estimated total of 5,714 amendments per year.832 d. Delivery of the Relationship Summary Proposed rule 17a–14 under the Exchange Act would require a brokerdealer to deliver the relationship summary, with respect to a retail investor that is a new or prospective customer, before or at the time the retail investor first engages the broker-dealer’s services. Broker-dealers also would make a one-time, initial delivery of the relationship summary to all existing customers within a specified time period after the effective date of the proposal. Also with respect to existing customers, broker-dealers would deliver the relationship summary before or at the time (i) a new account is opened that is different from the retail investor’s existing account(s); or (ii) changes are made to the retail investor’s account(s) existing account(s) that would materially change the nature and scope of the broker-dealer’s relationship with the retail investor, as further discussed in II.C.2 above. amozie on DSK3GDR082PROD with PROPOSALS1 i. One-Time Initial Delivery to Existing Customers We estimate the burden for brokerdealers to make a one-time initial delivery of the relationship summary to existing customers based on an estimate of the number of accounts held by these broker-dealers. Based on FOCUS data, we estimate that the 2,857 brokerdealers that report retail activity have approximately 128 million customer accounts, and that approximately 79%, or 101.248 million, of those accounts belong to retail customers.833 We estimate that, under the proposed rule, broker-dealers would send their relationship summary along with other required disclosures, such as periodic 832 2,857 broker-dealers amending relationship summaries × 2 amendments per year = 5,714 amendments per year. 5,714 amendments × (0.5 hours to amend and file + 0.5 hours to post to website) = 5,714 hours. 833 See supra notes 428–437 and accompanying text. 2,857 broker-dealers (including dual registrants) report 128 million customer accounts. We are aware that, based on data from IARD, investment advisers reporting retail activity have approximately 79.1% retail clients and 21.9% nonretail clients. While acknowledging the differences between the investment adviser and broker-dealer models, we apply the 79.1% in estimating the proportion of broker-dealer accounts that belong to retail customers. Therefore, 79.1% × 128 million accounts = 101.248 million accounts. This number likely overstates 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. VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 account statements, in order to comply with initial delivery requirement for the relationship summary. As with investment advisers, we estimate that a broker-dealer will require no more than 0.02 hours to send the relationship summary to each customer, or an aggregate initial burden of 2,024,960 hours, or approximately 709 hours per broker-dealer for the first year after the rule is in effect.834 We would therefore expect the aggregate monetized cost for broker-dealers to make a one-time initial delivery of relationship summaries to existing customers to be $121,497,600.835 Amortized over three years, the total annual hourly burden is estimated to be 674,987 hours, or approximately 236.3 hours per brokerdealer,836 with annual monetized costs of $40,499,200 and $14,175, respectively.837 We do not expect that broker-dealers will incur external costs for the initial delivery of the relationship summary to existing clients because we assume that they will make such deliveries along with another required delivery, such as periodic account statements. ii. Delivery for New Account Types or Material Changes in the Nature or Scope of the Brokerage Relationship Broker-dealers would be required to deliver the relationship summary to existing customers before or at the time (i) a new account is opened that is different from the retail investor’s existing account(s); or (ii) changes are made to the retail investor’s existing account(s) that would materially change the nature and scope of the adviser’s relationship with the retail investor, as further discussed in Section II.C.2. With respect to delivery of the relationship summary in the event of material changes in the nature or scope of the 834 (0.02 hours per customer account × 101.248 million customer accounts) = 2,024,960 hours. We note that the burden for preparing updated relationship summaries is already incorporated into the burden estimate for Form CRS discussed above. 2,024,960 hours/2,857 broker-dealers = approximately 709 hours per broker-dealer. 835 Based on data from SIFMA’s Office Salaries Report, we expect that initial delivery requirement to existing clients of rule 17a–14 will most likely be performed by a general clerk at an estimated cost of $60 per hour. 2,024,960 hours × $60 = $121,497,600. 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 clients, such as periodic account statements. 836 2,024,960 initial aggregate hours/3 = 674,987 total annual aggregate hours. 709 initial hours per broker-dealer/3 = 236.3 total annual hours per broker-dealer. 837 $121,497,600 initial aggregate monetized cost/ 3 = $40,499,200 annual aggregate monetized cost. $40,499,200/2,857 broker-dealers = $14,175 annual monetized cost per broker-dealer. PO 00000 Frm 00111 Fmt 4701 Sfmt 4702 21525 brokerage relationship, as with investment advisers, we estimate that this would take place among 10% of a broker-dealer’s retail investors annually. We would therefore estimate brokerdealers to incur a total annual aggregate burden of 202,496 hours, or 71 hours per broker-dealer,838 at an annual aggregate monetized cost of $12,149,760, or approximately $4,253 per broker-dealer.839 We do not expect broker-dealers to incur external costs related to deliveries of the relationship summary due to new account type openings, or material changes to the nature or scope of the relationship, because we assume that broker-dealers will deliver the relationship summary along with new account agreements and other documentation normally required in such circumstances, or with periodic account statements. iii. Communicating Changes to Amended Relationship Summaries, Including by Delivery As discussed above, broker-dealers must communicate any changes in an updated relationship summary to retail investors who are existing customers of the firm within 30 days after the updates are required to be made and without charge. The communication can be made by delivering the relationship summary or by communicating the information in another way to the retail investor. Consistent with our discussion on broker-dealers’ amendments to the relationship summary we are assuming that the 2,857 broker-dealers with relationship summaries will amend them twice each year. We also assume that 50% will choose to deliver the relationship summary to communicate the update information. As with investment advisers, we estimate that broker-dealers would require 0.02 hours to make a delivery to each customer. Therefore, the estimated burden for those broker-dealers choosing to deliver an amended relationship summary to meet this communication requirement 838 10% of 101.248 million customers × .02 hours = 202,496 hours. 202,496 hours/2,857 brokerdealers = 71 hours per broker-dealer. 839 Based on data from the SIFMA Office Salaries Report, modified to account for an 1,800-hour workyear and multiplied by 2.93 to account for bonuses, firm size, employee benefits and overhead, we expect that delivery requirements of rule 17a–14 will most likely be performed by a general clerk at an estimated cost of $60 per hour. 202,496 hours × $60 = $12,149,760. $12,149,760/2,857 brokerdealers = $4,253 per broker-dealer. We estimate that broker-dealers will not incur any incremental postage costs in these deliveries of the relationship summary to existing customers, because we assume that broker-dealers will make such deliveries with another mailing the broker-dealer was already delivering to clients, such as periodic account statements, or new account agreements and other similar documentation. E:\FR\FM\09MYP2.SGM 09MYP2 21526 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules would be approximately 2,024,960 hours, or 709 hours per broker-dealer,840 translating into a monetized cost of $121,497,600 in aggregate, or $42,526 per broker-dealer.841 Similar to the other delivery requirements relating to proposed rule 17a–14, we do not expect broker-dealers to incur external costs in delivering amended relationship summaries because we assume that they will make this delivery with other documents required to be delivered, such as periodic account statements. e. Delivery to New Clients or Prospective New Customers amozie on DSK3GDR082PROD with PROPOSALS1 To estimate the delivery burden for broker-dealers’ new or prospective new customers, as discussed above, we estimate that the 2,857 standalone broker-dealers with retail activity have approximately 101.248 million retail customer accounts.842 Based on FOCUS data over the past five years, we estimate that broker-dealers grow their customer base and enter into new agreements with, on average, 8% more new retail investors each year.843 We estimate the hour burden for initial delivery of a relationship summary would be the same by paper or electronic format, at 0.02 hours for each relationship summary, as we have estimated above. Therefore, the aggregate annual hour burden for initial delivery of the relationship summary by broker-dealers to new or prospective new customers would be 161,917 hours, or 56.7 hours per broker-dealer.844 at a monetized cost of $9,715,001 at an 840 2 amendments per year × 101.248 million customer accounts × 50% delivering the amended relationship summary to communicate updated information × 0.02 hours per delivery = 2,024,960 hours to deliver amended relationship summaries. 2,024,960 hours/2,857 broker-dealers = 709 hours per broker-dealer. 841 Based on data from the SIFMA Office Salaries Report, modified to account for an 1,800-hour work year and multiplied by 2.93 to account for bonuses, firm size, employee benefits and overhead, we expect that delivery requirements of rule 17a–14 will most likely be performed by a general clerk at an estimated cost of $60 per hour. 2,024,960 hours × $60 = $121,497,600. $121,467,600/2,857 brokerdealers = $42,526 per broker-dealer. We estimate that broker-dealers will not incur any incremental postage costs to deliver these relationship summaries, because we assume that advisers will make the delivery along with other documentation they normally would provide, such as account opening documents. 842 See supra notes 429–439 and accompanying text. 843 This represents the average annual rate of growth from 2012–2016 in the number of accounts for all broker-dealers reporting retail activity. 844 101.248 million customer accounts × 8% increase = 8,095,834 new customers. 8,095,834 new customers × 0.02 hours per delivery = 161,917 total annual aggregate hours. 161,917/2,857 brokerdealers = 56.7 hours per broker-dealer for delivery to new customers. VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 aggregate level, or $3,400 per brokerdealer.845 dealer, when amortized over a three year period. f. Total New Initial and Annual Burdens As discussed above, we estimate the total annual collection of information burden for proposed new rule 17a–14 in connection with obligations relating to the relationship summary, including (i) initial preparation, filing, and posting to a website; (ii) amendments to the relationship summary for material updates and related filing and website posting burdens; (iii) one-time initial delivery to existing customers; (iv) delivery to existing customers who are opening new accounts or materially changing the nature or scope of their relationship with the broker-dealer; (v) delivery of amended relationship summaries; and (vi) delivery to new and prospective customers. Given these proposed requirements, we estimate the total annual aggregate hourly burden to be approximately 3,084,835 hours per year, or 1,080 hours on a per brokerdealer basis.846 This translates into an aggregate annual monetized cost of $188,578,462, or $66,066 on a brokerdealer basis per year.847 In addition, we estimate that broker-dealers would incur external legal and compliance costs in the initial preparation of the relationship summary of approximately $4,024,085 in aggregate, or $1,409 per broker-dealer, translating into $1,341,362 annually, or $470 per broker- E. Recordkeeping Obligations Under Rule 17a–3 of the Exchange Act 848 845 Based on data from the SIFMA Office Salaries Report, modified to account for an 1,800-hour workyear and multiplied by 2.93 to account for bonuses, firm size, employee benefits and overhead, we expect that these functions will most likely be performed by a general clerk at an estimated cost of $60 per hour. 161,917 hours × $60 = $9,715,001. $9,715,001/2,857 broker-dealers = $3,400 per broker-dealer for delivery to new customers. We estimate that broker-dealers will not incur any incremental postage costs to deliver the relationship summary to new or prospective clients because we assume that broker-dealers will make the delivery along with other documentation, such as periodic account statements. 846 14,761 hours per year for initial preparation, filing, and posting of relationship summary + 5,714 hours per year for amendments, filing, and posting of amendments + 674,987 hours for one-time initial delivery to existing customers + 202,496 hours for delivery to existing customers making material changes to their accounts + 2,024,960 hours for delivery of amendments + 161,917 hours for delivery to new customers = 3,084,835 total annual aggregate hours. 3,084,835 hours/2,857 brokerdealers = 1,080 hours per broker-dealer. 847 $3,792,668 per year for initial preparation, filing, and posting of relationship summary + $924,240 per year for amendments, filing, and posting of amendments + $40,499,200 for one-time initial delivery to existing customers (amortized over three years) + $12,149,760 for delivery to existing customers making material changes to their accounts + $121,497,600 for delivery of amendments + $9,715,001 for delivery to new customers = $188,578,468 in total annual aggregate monetized cost. $188,578,468/2,857 broker-dealers = $66,066 per broker-dealer. PO 00000 Frm 00112 Fmt 4701 Sfmt 4702 The proposed requirement to make a record indicating the date that a relationship summary was provided to each customer and to each prospective customer who subsequently becomes a customer would contain a collection of information that would be found at 17 CFR 240.17a–3(a)(24) and would be mandatory. The Commission staff would use this collection of information in its examination and oversight program, and the information generally is kept confidential.849 The likely respondents to this collection of information requirement are the approximately 2,857 broker-dealers currently registered with the Commission that offer services to retail investors, as defined above.850 Exchange Act section 17(a)(1) requires registered broker-dealers to make and keep for prescribed periods such records as the Commission deems ‘‘necessary or appropriate in the public interest, for the protection of investors or otherwise in furtherance of the purposes of’’ the Exchange Act.’’ 851 Exchange Act rules 17a–3 and 17a–4 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. The amendments to rule 17a–3 that we are proposing today would require SEC-registered broker-dealers to make a record indicating the date that a relationship summary was provided to each customer and to each prospective customer who subsequently becomes a customer. Commission staff has estimated that the proposed amendments to rule 17a–3(a)(24) would result in an incremental burden increase of 0.1 hours annually for each of the estimated SEC-registered broker-dealers that would be required to prepare and preserve the initial relationship summary and any amendments.852 The incremental hour burden for broker-dealers to maintain the relationship summary would therefore 848 In a concurrent release, we are proposing additional burden adjustments to rules 17a–3 and 17a–4 of the Exchange Act. See Regulation Best Interest Proposal, supra note 24. 849 See section 24(b) of the Exchange Act (15 U.S.C. 78x–24(b)). 850 See supra note 29 and accompanying text. 851 See section 17(a) of the Exchange Act. 852 We apply the same 0.2 hour estimate as with investment advisers, but divided equally between creating a record of the relationship summary and its deliveries and the maintenance of those records. E:\FR\FM\09MYP2.SGM 09MYP2 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules be 286 hours,853 for a monetized cost of 17,481 in aggregate, or $6.00 per brokerdealer.854 F. Record Retention Obligations Under Rule 17a–4 of the Exchange Act amozie on DSK3GDR082PROD with PROPOSALS1 Exchange Act section 17(a)(1) requires registered broker-dealers to make and keep for prescribed periods such records as the Commission deems ‘‘necessary or appropriate in the public interest, for the protection of investors or otherwise in furtherance of the purposes of’’ the Exchange Act.’’ 855 Exchange Act rule 17a–4 specifies minimum requirements with respect to how long records created under Exchange Act rule 17a–3 and other documents must be kept. We are proposing amendments to rule 17a–4 that would require broker-dealers to retain copies of each relationship summary, including amendments, and to preserve the record of dates that each relationship summary and each amendment thereto was delivered to any existing customer or to any new or prospective customer, pursuant to the proposed new requirements under amended rule 17a–3, discussed above. These records would be required to be maintained in an easily accessible place for at least six years after such record or relationship summary is created. This collection of information would be found at 17 CFR 240.17a–4 and would be mandatory. The Commission staff would use the collection of information in its examination and oversight program. Requiring maintenance of these disclosures as part of the brokerdealer’s books and records would facilitate the Commission’s ability to inspect for and enforce compliance with firms’ obligations with respect to Form CRS. The information generally is kept confidential.856 The likely respondents to this collection of information requirement are the approximately 2,857 brokerdealers that report retail activity, as described above. 853 2,857 broker-dealers × 0.1 hours annually = 286 annual hours for recordkeeping. 854 As with our estimates relating to the proposed amendments to rule 204–2 under the Advisers Act (see, e.g., supra note 771 and accompanying text), we expect that performance of this function will most likely be allocated between compliance clerks and general clerks, with compliance clerks performing 17% of the function and general clerks performing 83% of the function. Data from the SIFMA Office Salaries Report suggest that costs for these position are $67 and $60, respectively. (17% × 286 hours × $67) + (83% × 286 hours × $60) = $17,481. $17,481/2,857 broker-dealers = $6.00 per broker-dealer. 855 See section 17(a) of the Exchange Act. 856 See section 24(b) of the Exchange Act (15 U.S.C. 78x–24(b)). VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 1. Changes in Burden Estimates and New Burden Estimates The approved annual aggregate burden for rule 17a–4 is currently 1,042,416 hours, with a total annual aggregate monetized cost burden of approximately $67.8 million, based on an estimate of 4,104 broker-dealers and 150 broker-dealers maintaining an internal broker-dealer system.857 The currently approved external cost estimate to respondents is $20,520,000.858 We estimate that the proposed amendments would result in an increase in the collection of information burden estimate by 0.10 hours 859 for each of the estimated 2,857 currently registered broker-dealers that report retail sales activity and would have relationship summary obligations.860 This would yield an annual estimated aggregate burden of 754,964 hours for all broker-dealers with relationship summary obligations to comply with rule 17a–4,861 for a monetized cost of approximately $48.6 million.862 In addition, the 984 brokerdealers 863 not subject to the proposed amendments would continue to be subject to an unchanged burden of 254 hours per broker-dealer, or 249,936 hours for these broker-dealers.864 In addition, those maintaining an internal broker-dealer system would continue to be subject to an unchanged burden of 450 hours annually, under rule 17a–4. In summary, taking into account the estimated annual burden of brokerdealers that would be required to maintain records of the relationship 857 (4,104 broker-dealers × 254 hours per brokerdealer) + (150 broker-dealers maintaining internal broker-dealer systems × 3 hours) = (1,042,416 hours + 450 hours ) = 1,042,866 hours each year. The monetized cost was based on these functions being performed by a compliance clerk earning an average of $65 per hour, resulting in a total internal cost of compliance of (1,042,416 × $65) + (450 × $65) = $67,786. See 17a–4 Supporting Statement, available at https://www.reginfo.gov/public/do/PRAView Document?ref_nbr=201607-3235-007. 858 4,104 broker-dealers × $5,000 annual recordkeeping cost per broker-dealer = $20,520,000. See id. 859 We apply the same 0.2 hour estimate as with investment advisers, but divided equally between creating a record of the relationship summary and its deliveries and the maintenance of those records. 860 See supra note 616. 861 2,857 broker-dealers required to prepare relationship summary × (254 hours + 0.1 hour) = 725,964 hours. 862 Consistent with our prior paperwork reduction analyses for rule 17a–4, we expect that performance of this function will most likely be performed by compliance clerks. Data from the SIFMA Office Salaries Report suggest that costs for these positions are $67 per hour. 725,964 hours × $67 = $48,639,568. 863 See supra note 618. 864 984 broker-dealers × 254 hours = 249,936 hours for broker-dealers not preparing a relationship summary. PO 00000 Frm 00113 Fmt 4701 Sfmt 4702 21527 summary, as well the estimated annual burden of broker-dealers that do not have relationship summary obligations and whose information collection burden is unchanged, the revised annual aggregate burden for all brokerdealer respondents to the recordkeeping requirements under rule 17a–4 is estimated to be 976,350 total annual aggregate hours,865 for a monetized cost of approximately $65.4 million.866 2. Revised Annual Burden Estimates As noted above, the approved annual aggregate burden for rule 17a–4 is currently 1,042,416 hours, with a total annual aggregate monetized cost burden of approximately $67.8 million, based on an estimate of 4,104 broker-dealers and 150 broker-dealers maintaining an internal broker-dealer system. The revised annual aggregate hourly burden for rule 17a–4 would be 976,350 867 hours, represented by a monetized cost of approximately $65.4 million,868 based on an estimate of 2,857 brokerdealers with the relationship summary obligation and 984 broker-dealers without, as noted above. This represents a decrease of 66,516 869 annual aggregate hours in the hour burden and an annual decrease of approximately $2.37 million from the currently approved total aggregate monetized cost for rule 17a– 4.870 These changes are attributable to the proposed amendments to rule 17a– 4 relating to the relationship summary as discussed in this proposing release and the decline in the number of registered broker-dealer respondents. The revised external cost to respondents is estimated at approximately $19.2 million, or a reduction of $1.3 million from the currently approved external cost burden of $20,520,000.871 G. Rule 151–3 Under the Exchange Act Proposed new rule 151–3 would require broker-dealers and their associated natural persons to prominently disclose that it is, or in the case of a natural person that such person is associated with a broker865 725,964 + 249,936 + 450 = 976,350 total aggregate hours. 866 Consistent with our prior paperwork reduction analyses for rule 17a–4, we expect that performance of this function will most likely be performed by compliance clerks. Data from the SIFMA Office Salaries Report suggest that costs for these positions are $67 per hour. 976,650 hours × $67 = $65,415,430. 867 See supra note 865. 868 See supra note 739. 869 1,042,866 hours ¥ 976,350 hours = 66,516 hours. 870 $67,786,290 ¥ $65,415,430 = $2,370,860. 871 3,841 registered broker-dealers as of December 31, 2017 × $5,000 per broker-dealer in record maintenance costs = $19,205,000. $20,520,000¥$19,205,000 = $1,315,000. E:\FR\FM\09MYP2.SGM 09MYP2 21528 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules dealer that is, registered with the Commission as a broker-dealer in print or electronic retail investor communications. For print communications, we propose to require that such registration status be displayed in a type size at least as large as and of a font style different from, but at least as prominent as, that used in the majority of the communication. In addition, such disclosure must be presented in the body of the communication and not in a footnote. For electronic communications, or in any publication by radio or television, we propose to require that such disclosure be presented in a manner reasonably calculated to draw retail investor attention to it. Rule 151–3 contains a collection of information requirement. This collection of information would be found at [17 CFR 240.15l–3] and would be mandatory. The likely respondents to this information collection would be all broker-dealers and their associated natural persons that distribute print or electronic retail investor communications. The Commission believes that the collection of information is necessary to provide retail investors and the Commission with information to better determine whether a communication is from a broker-dealer or investment adviser, and, for retail investors specifically, to allow them to better identify which type of firm is more appropriate for their specific investment needs. Additionally, by requiring an affirmative identification, retail investors would also be better informed whether a financial professional is an associated person of a broker-dealer rather than a supervised person of an investment adviser, allowing them to make a more informed choice as to which type of professional is appropriate for their financial goals. amozie on DSK3GDR082PROD with PROPOSALS1 1. Respondents: Broker-Dealers and Associated Natural Persons Currently, there are 3,841 registered broker-dealers and 435,071 associated natural persons licensed with FINRA.872 Of these registered broker-dealers, we estimate that approximately 74% or 872 The number of broker-dealers is as of Dec. 31, 2017. Such associated natural persons are registered as registered representatives with FINRA through Form U4 as of Dec. 31, 2017. We took the total 494,399 registered representatives across standalone broker-dealers, dually registered firms, and standalone investment advisers and isolated those registered representatives that act on behalf of standalone broker-dealers and dually registered firms (i.e. 88%). See supra Section IV.A.1.e, Economic Analysis: Registered Representatives of Broker-Dealers, Investment Advisers and Dually Registered Firms. VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 2,857 distribute print or electronic retail investor communications 873 while 435,071 associated natural persons distribute print or electronic retail investor communications at standalone broker-dealers or dually registered firms.874 Of these broker-dealers that distribute print or electronic retail investor communications, 1,388 are large broker-dealers and 1,469 are small broker-dealers.875 Accordingly, the Commission estimates that 2,857 brokerdealers and 435,071 associated natural persons would be required to comply with proposed rule 15l–3. For the purposes of this analysis of the paperwork burden associated with the proposed rules, the Commission preliminarily estimates that there would be approximately 2,857 broker-dealer respondents and 435,071 associated natural person respondents. 876 873 See Section IV.A, supra note 460 and accompanying text. As noted above, as of December 2017, 3,841 broker-dealers filed Form BD. Retail sales by broker-dealers were obtained from Form BR. 874 See supra Section IV.A.1.e, at Table 5. For the purposes of the Paperwork Reduction Act analysis applicable to proposed rules 15l–3 and 211h–1, we are defining a ‘‘dually registered firm’’ in the same manner as ‘‘dual registrant’’ is defined in the baseline of the Economic Analysis. See supra Section IV, note 453. We assume for the purposes of this rule that all 435,071 registered representatives engage retail investors. This estimate is based on the following calculation: (494,399 total licensed registered representatives) × (12% (the percentage of pure investment adviser representatives)) = 59,328 representatives at standalone investment advisers. Then, to isolate the number of representatives at standalone broker-dealers and dually registered firms, subtract 59,328 from 494,399 = 435,071 retail-facing, licensed registered representatives at standalone broker-dealers or dually registered firms. 875 For the purposes of this proposed rule, we define large broker-dealers as those with total assets greater than 1 million and small broker-dealers as those with less than 1 million in total assets. See Table 1, Panel B supra Section IV.A.1.a. We note that this distinction differs from the distinction used for proposed rule 211h-1 below because historically we have used the number of employees rather than total assets to distinguish small and large investment advisers. See cf. Rules Implementing Amendments to the Investment Advisers Act of 1940, Investment Advisers Act Release No. 3221 (Jun. 22, 2011), at n.727 (‘‘Release 3221’’). Additionally, we believe that because broker-dealer services encompass a small set of large broker-dealers and thousands of smaller broker-dealers competing for niche or regional segments of the market, the number of employees would not provide the best estimate for how firms would be impacted by our proposed rule based on the number of communications produced. Instead, we believe that total assets properly account for the varying sizes of these smaller broker-dealers and are a better indicator as to how many communications would be impacted in proportion to a firm’s size. More specifically, we assume that the greater the total assets, the larger the firm and associated number of customer accounts which in turn would lead to a greater number of communications with retail investors. 876 We note that we are not analyzing new brokerdealers or associated natural persons because there PO 00000 Frm 00114 Fmt 4701 Sfmt 4702 2. Initial and Annual Burdens We estimate that the initial one time burden for complying with the disclosure requirements would be 72 hours per large broker-dealer 877 and 15 hours per small broker-dealer.878 We note that we are staging the compliance date to ensure that firms can phase out certain older communications from circulation through the regular business lifecycle rather than having to retroactively change them.879 As a result of this staged compliance, our burden estimates do not reflect the burdens that would have been imposed had these firms had to replace all outstanding communications. Aside from certain anticipated outside legal costs, as discussed below, we preliminary estimate that to comply with our proposed rule with respect to print communications,880 broker-dealers would need to review their communications, identify which would need to be amended, make the changes, and verify that all firm communications comply with the rule’s requirements including its technical specifications such as the type size, font, and prominence. Therefore, for existing print communications for large brokerdealers, we preliminarily estimate that the total burden for broker-dealers would be 8 hours for compliance and business operations personnel to review, identify, and make changes across all print communications.881 For has been a downward trend in broker-dealer registration and the number of associated natural persons has not shown signs of a noticeable increase over the past few years. From 2016 through 2018 the number of broker-dealers registered with the Commission decreased by 160. (4064 ¥ 3904) = 160. See also FINRA Statistics, available at https://www.finra.org/newsroom/statistics#reps. 877 (8 hours for print communications per large broker-dealer + 64 hours for electronic communications per large broker-dealer). 878 (5 hours for print communications per small broker-dealer + 10 hours for electronic communications per small broker-dealer). 879 Similarly, we are not requiring firms to send new communications to replace all older print communications as this would be overly burdensome and costly for firms. 880 Such communications could include business cards, letterheads, newspaper advertisements, and article reprints from an unaffiliated magazine or newspaper. 881 This estimate is based upon staff experience and industry sources more generally. See e.g., SelfRegulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of a Proposed Rule Change to Amend FINRA Rule 2210, Exchange Act Release No. 34–75377 (Jul. 7, 2015), at Economic Impact Assessment (‘‘FINRA 2015–22 Notice’’) (stating with reference to adding BrokerCheck links to mid-size and smaller firm communications, which we believe is analogous to the manual changes made to print communications, that ‘‘mid-size and small members typically have less complex websites, which they manage and maintain with nontechnical staff. These members would use personnel in non-technical roles to E:\FR\FM\09MYP2.SGM 09MYP2 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules amozie on DSK3GDR082PROD with PROPOSALS1 smaller broker-dealers, we preliminarily estimate that the total burden for brokerdealers would be 5 hours for compliance and business operations personnel to review, identify, and make changes across all print communications.882 We note that there is a difference between large brokerdealers and smaller broker-dealers. We assume that large broker-dealers will have to review, identify and change more print communications and in turn have their compliance staff verify more print communications as being compliant with our proposed rule as compared to small broker-dealers which will have fewer print communications. With respect to electronic communications,883 we preliminarily anticipate that it would take large broker-dealers approximately 64 hours 884 to review, identify and make the required updates coupled with verifying that such communications (present and future) would be compliant with the proposed rule. Our estimates take into account that larger firms likely have full-featured websites that generate other webpages based on complex system code and logic.885 In order to make changes to comply with our proposed rule, we assume that business operations and information technology accomplish the required updates to their websites . . . [I]t would take mid-size or small members approximately eight hours of non-technical staffs’ time to make the required updates . . .’’). To compute the 8 hours internal initial burden we assume 2 hours by compliance personnel and 6 hours by business operations personnel of the broker-dealer. 882 This estimate is based upon staff experience and industry sources more generally. See e.g., FINRA 2015–22 Notice, supra note 881. To compute the 5 hours internal initial burden we assume 1 hour by compliance personnel and 4 hours by business operations personnel of the broker-dealer. 883 We believe such communications could include websites, smart phone apps, social media, emails, and blogs. 884 This estimate is based upon staff experience and industry sources more generally. See e.g., FINRA 2015–22 Notice, supra note 881. (‘‘These estimates are based on FINRA’s assumption that large members typically have full-featured websites that dynamically generate webpages based on data and logic. The technology personnel at these members would be required to update the underlying information in order to automate the implementation of references and hyperlinks to BrokerCheck across all applicable webpages. FINRA estimates that on average it would take large members approximately 60 hours of technology staffs’ time to make the required updates . . .’’). To compute the 64 hours internal initial burden we assume 4 hours by compliance personnel and 60 hours by business operations and information technology personnel of the broker-dealer. 885 This is based upon staff experience and industry sources more generally. See e.g., FINRA 2015–22 Notice, supra note (discussing the burdens associated with the inclusion of a BrokerCheck reference and hyperlink across all firm communications for certain firms). VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 personnel would likely be required to update the underlying code and logic to automate the implementation of the required language to populate across all associated electronic media. Additionally, we assume that these teams would need to test to ensure that such changes were implemented correctly. With respect to smaller brokerdealers, we preliminarily anticipate that it would take approximately 10 hours 886 to review, identify and make the required updates coupled with verifying that such communications (present and future) would be compliant with the proposed rule. Our estimate for smaller broker-dealers assumes that smaller broker-dealers have fewer electronic communications that would be subject to our proposed rule as compared to larger firms, resulting in a lower burden preliminary estimate. We preliminarily estimate that the total initial burden for broker-dealers is 121,971 hours.887 We preliminarily estimate a cost of approximately $33,179,514 for broker-dealers.888 This 886 This estimate is based upon staff experience and industry sources more generally. See e.g., FINRA 2015–22 Notice, supra note 881 (stating with reference to adding BrokerCheck links to firm communications that ‘‘mid-size and small members typically have less complex websites, which they manage and maintain with nontechnical staff. These members would use personnel in nontechnical roles to accomplish the required updates to their websites . . . [I]t would take mid-size or small members approximately eight hours of nontechnical staffs’ time to make the required updates . . .’’). To compute the 10 hours internal initial burden, we assume 2 hours by compliance personnel and 8 hours by business operations and information technology personnel of the broker-dealer. 887 (8 hours for print communications per large broker-dealer + 64 hours for electronic communications per large broker-dealers) = 72 hours per large broker-dealer. (72 hours × 1,388 large broker-dealers) = 99,936 total initial burden for large broker-dealers. (5 hours for print communications per small broker-dealer + 10 hours for electronic communications per small broker-dealer) = 15 hours per small broker-dealer. (15 hours × 1,469 small broker-dealers) = 22,035 total initial burden for small broker-dealers. (99,936 total initial burden large broker-dealers + 22,035 total initial burden small broker-dealers) = 121,971 total broker-dealer initial burden. 888 Based on the SIFMA Management and Professional Earnings Report, Commission staff preliminarily estimates that the average hourly rate for compliance services is $298, for business operation services is $268, and for information technology services is $270. The average technology and business rate is ($268 business rate + $270 technology rate)/2 = $269 average rate. This figure was calculated as follows: (6 compliance hours × $298 compliance rate) + (66 technology/business hours × $269 averaged technology/business rate) × 1,388 large brokerdealers = $27,124,296 total initial costs for large broker-dealers. (3 compliance hours × $298 compliance rate) + (12 technology/business hours × $269 averaged PO 00000 Frm 00115 Fmt 4701 Sfmt 4702 21529 would be an annual average burden of 43 hours per broker-dealer 889 (as monetized, is an average annual burden per broker-dealer of $11,613).890 We further preliminarily anticipate that associated natural persons would have an initial one-time burden of 0.5 hours for each associated natural person respondent to review, identify, and make changes to their individual communications, both print and electronic.891 Based on staff experience, technology/business rate) × 1,469 small brokerdealers = $6,055,218 total initial costs for small broker-dealers. $27,124,296 total initial cost for large brokerdealers + $6,055,218 total initial cost for small broker-dealers = $33,179,514 total initial costs for all broker-dealers. 889 (8 hours for print communications per large broker-dealer + 64 hours for electronic communications per large broker-dealers) = 72 hours per large broker-dealer. (72 hours × 1,388 large broker-dealers) = 99,936 total initial burden for large broker-dealers. (5 hours for print communications per small broker-dealer + 10 hours for electronic communications per small broker-dealer) = 15 hours per small broker-dealer. (15 hours × 1,469 small broker-dealers) = 22,035 total initial burden for small broker-dealers. 99,936 total initial burden large broker-dealers + 22,035 total initial burden small broker-dealers = 121,971 total broker-dealer initial burden/2,857 total broker-dealers = 43 total initial burden per broker-dealer. 890 Based on the SIFMA Management and Professional Earnings Report, Commission staff preliminarily estimates that the average hourly rate for compliance services is $298, for business operation services is $268, and for information technology services is $270. The average technology and business rate is ($268 business rate + $270 technology rate)/2 = $269 average rate. This figure was calculated as follows: (6 compliance hours × $298 compliance rate) + (66 technology/business hours × $269 averaged technology/business rate) × 1,388 large brokerdealers = $27,124,296 total initial costs for large broker-dealers. (3 compliance hours × $298 compliance rate) + (12 technology/business hours × $269 averaged technology/business rate) × 1,469 small brokerdealers = $6,055,218 total initial costs for small broker-dealers. $27,124,296 total initial cost for large brokerdealers + $6,055,218 total initial cost for small broker-dealers = $33,179,514 total initial costs for all broker-dealers/2,857 total number of brokerdealers = $11,613 total initial cost per broker-dealer. 891 This estimate is based upon staff experience. See e.g., Custody of Funds or Securities of Clients by Investment Advisers, Investment Advisers Act Release No. 2968 (Dec. 30, 2009) (‘‘Release 2968’’) (‘‘We further estimate that the adviser will spend 10 minutes per client drafting and sending the notice.’’); Enhanced Mutual Fund Disclosure Adopting Release, supra note 47 (‘‘we estimate, as we did in the proposing release, that rule 498 will impose a 1⁄2 hour burden per portfolio annually associated with the compilation of the additional information required on a cover page or at the beginning of the Summary Prospectus. Rule 498 also imposes annual hour burdens associated with the posting of a fund’s Summary Prospectus, statutory prospectus, SAI, and most recent report to shareholders on an Internet website. We estimate that the average hour burden for one portfolio to comply with the Internet website posting E:\FR\FM\09MYP2.SGM Continued 09MYP2 21530 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules amozie on DSK3GDR082PROD with PROPOSALS1 we anticipate that many firms will make many communication changes for their associated natural persons, including their business cards and letterheads, leaving only certain responsibilities to the individual such as changes to their individual social media profile(s) and email signatures. Therefore, we preliminarily estimate that the total initial one-time burden for associated natural persons is 217,536 hours.892 We preliminarily estimate a monetized cost of approximately $31,107,576.50 for associated natural persons.893 This would be an annual average burden of 0.5 hours per associated natural person 894 (as monetized, is an average annual burden per associated natural person of $71.50).895 requirements will be approximately one hour annually.’’). 892 (0.5 hours × 435,071 associated natural persons) = 217,536 total initial burden for associated natural persons. 893 Based on the SIFMA Management and Professional Earnings Report, Commission staff preliminarily estimates that the average hourly rate for compliance services is $298, for business operation services is $268, and for information technology services is $270. This figure was calculated as follows: 0.5 hours/ 3 firm staff categories (i.e., compliance, business operations, and information technology) = 0.17 hours per staff category ($298 compliance/hour × 0.17) = $51 per 0.17 of an hour. ($268 business operations rate/hour × 0.17) = $46 per 0.17 of an hour. ($270 information technology rate/hour × 0.17) = $46 per 0.17 of an hour. $51 + $46 + $46 = $143 total cost per associated natural person. (0.5 × $143 total cost per associated natural person × 435,071 associated natural persons) = $31,107,576.50 total initial cost for associated natural persons. 894 (0.5 hours × 435,071 associated natural persons) = 217,536 total initial burden for associated natural persons. (217,536 total initial burden/435,071 total associated natural persons) = 0.5 total initial burden per associated natural person. 895 Based on the SIFMA Management and Professional Earnings Report, Commission staff preliminarily estimates that the average hourly rate for compliance services is $298, for business operation services is $268, and for information technology services is $270. This figure was calculated as follows: 0.5 hours/ 3 firm staff categories (i.e., compliance, business operations, and information technology) = 0.17 hours per staff category ($298 compliance/hour × 0.17) = $51 per 0.17 of an hour. ($268 business operations rate/hour × 0.17) = $46 per 0.17 of an hour. ($270 information technology rate/hour × 0.17) = $46 per 0.17 of an hour. $51 + $46 + $46 = $143 total cost per associated natural person. (0.5 × $143 total cost per associated natural person × 435,071 associated natural persons) = $31,107,576.50 total initial cost for associated natural persons. ($31,107,576.50 total initial cost for associated natural persons/435,071 total number of associated natural persons) = $71.50 total initial cost per associated natural person. VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 Aside from the internal initial burden, we anticipate that there will be certain associated outside costs as well. We believe that broker-dealers and their associated natural persons may engage outside counsel to assist them in understanding our proposed rule should it be adopted.896 We assume that the amount of outsourced legal assistance would vary among various sizes of broker-dealers and their number of associated natural persons. As a result, we preliminarily estimate that large broker-dealers together with their associated natural persons may initially outsource approximately 8 hours of legal time in order to understand the implications of our proposed rule, including which communications are subject to the proposed rule and how best to comply with the technical specifications.897 For small brokerdealers, we anticipate that such firms will outsource 4 hours of legal time.898 Our preliminary estimates take into account that large firms have more communications affected by our proposed rule and more associated natural persons to supervise than smaller firms. We estimate initial outside legal costs associated with the proposed rule of $8,014,560 for brokerdealers 899 or $2,805 per brokerdealer.900 896 We are assuming that associated natural persons would not independently seek outside counsel and would instead rely on the advice received from outside counsel to the firm. Therefore, we are not including a separate estimate for associated natural persons. 897 This estimate is based upon staff experience. See e.g. Disclosure of Order Handling Information Proposed Rule, Securities Exchange Act Release No. 34–78309 (July 13, 2016) (‘‘Release 34–78309’’) (estimating 4 hours for legal burden ‘‘to assign each order routing strategy for institutional orders into passive, neutral, and aggressive categories and establish and document its specific methodologies for assigning order routing strategies as required by Rule 606(b)(3)(v)’’); Regulation of NMS Stock Alternative Trading Systems Proposed Rule, Securities Exchange Act Release No. 34–76474 (Nov. 18, 2015) (‘‘Release 34–76474’’) (estimating 7 legal hours ‘‘to put in writing its safeguards and procedures to protect subscribers’ confidential trading information and the oversight procedures to ensure such safeguards and procedures are followed . . .’’). 898 This estimate is based upon staff experience. See supra note 897. 899 Based on the SIFMA Management and Professional Earnings Report, Commission staff preliminarily estimates that the average hourly rate for legal services is $472/hour. ($472 × 8 legal hours = $3,776 × 1,388 large broker-dealers = $5,241,088) + ($472 × 4 legal hours = $1,888 × 1,469 small broker-dealers = $2,773,472). ($5,241,088 large broker-dealers + $2,773,472 small broker-dealers) = $8,014,560 total cost. 900 Based on the SIFMA Management and Professional Earnings Report, Commission staff preliminarily estimates that the average hourly rate for legal services is $472/hour. ($472 × 8 legal hours = $3,776 × 1,388 large broker-dealers = $5,241,088) + ($472 × 4 legal hours = $1,888 × 1,469 small broker-dealers = $2,773,472). PO 00000 Frm 00116 Fmt 4701 Sfmt 4702 Additionally, we anticipate that firms will also have one-time outside cost associated with the cost of printing new communications including new business cards, envelopes, pitch books, and letterheads. As part of these costs, we anticipate that both large and small broker-dealers will have to work with printers to set the disclosure on, for example, business cards. We estimate initial costs to amend certain communications associated with the proposed rule of $617,848,307 for broker-dealers 901 (or $216,258 per broker-dealer).902 We assume that because small broker-dealers have fewer associated natural persons there will be less communications that will require printing. For the ongoing burden of new communications for broker-dealers, we preliminarily estimate that the burden for legal, compliance, business operations, and technology services for adding a registration status statement would be 0.5 hours annual hours per broker-dealer.903 We anticipate that broker-dealers will need to add the registration disclosure to each new communication which they create, however we anticipate the burdens associated with this task to be minimal and therefore we do not believe there is a material difference between large and small broker-dealers.904 We $5,241,088 large broker-dealers + $2,773,472 small broker-dealers = $8,014,560 total cost/2,857 broker-dealers = $2,805 total cost per broker-dealer. 901 Our estimates are based on staff experience and industry sources. In particular, staff factored in its cost estimate the costs associated with printing envelopes, pitch books, letterheads, and business cards. For large broker-dealers, the staff assumes a printing cost of $445,121. For small broker-dealers, the staff assumes a printing cost of $20,359. ($445,121 × 1,388 large broker-dealers = $617,827,948) + ($20,359 × 1,469 small brokerdealers = $29,907,371) = $617,848,307 total brokerdealer outside costs. 902 ($445,121 × 1,388 large broker-dealers = $617,827,948) + ($20,359 × 1,469 small brokerdealers = $29,907,371) = $617,848,307 total brokerdealer outside costs/2,857 broker-dealers = $216,258 total cost per broker-dealer. 903 This estimate is based upon staff experience. See e.g., Release 2968, supra note 891; Enhanced Mutual Fund Disclosure Adopting Release, supra note 47. In this estimate we are not calculating the print and technological associated burdens of updating communications which we analyzed earlier as we are assuming those burdens to be a one-time initial burden for a firm seeking compliance with the proposed rule. 904 Our assumption of no material difference between large and small rests on the fact that all major systems changes would already have been implemented as part of the initial one-time burden. Therefore, any new electronic communications would have the disclosure statement required by our proposed rule built in at the outset which should take minimal time rather than having to retroactively insert it into the systems logic which is a more onerous task. We note that such communications will need to be reviewed by E:\FR\FM\09MYP2.SGM 09MYP2 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules amozie on DSK3GDR082PROD with PROPOSALS1 preliminarily estimate that the total ongoing annual aggregate burden for broker-dealers is 1,429 hours.905 We preliminarily estimate a total ongoing monetized cost of approximately $204,275.50 for broker-dealers.906 This would be an annual average burden of 0.5 hours per broker-dealer 907 (as monetized, is an average annual burden per broker-dealer of $71.50).908 For the ongoing burden of new communications for associated natural persons of a broker-dealer, we preliminarily estimate that the burden for compliance, business operations, and technology services for adding a registration status statement would be 0.5 hours.909 Therefore, we compliance staff for compliance with applicable securities laws and associated self-regulatory agency rules, including FINRA Rule 2210. We anticipate that compliance with proposed rule 151– 3’s requirements will be reviewed as part of this larger compliance check. 905 (0.5 hours × 2,857 broker-dealers) = 1,429 total ongoing burden for broker-dealers. 906 Based on the SIFMA Management and Professional Earnings Report, Commission staff preliminarily estimates that the average hourly rate for compliance services is $298, for business operation services is $268, and for information technology services is $270. This figure was calculated as follows: 0.5 hours/ 3 firm staff categories (i.e., compliance, business operations, and information technology) = 0.17 hours per staff category ($298 compliance/hour × 0.17) = $51 per 0.17 of an hour. ($268 business operations rate/hour × 0.17) = $46 per 0.17 of an hour. ($270 information technology rate/hour × 0.17) = $46 per 0.17 of an hour. $51 + $46 + $46 = $143 total cost per brokerdealer. (0.5 hours × $143 total cost per broker-dealer × 2,857 broker-dealers) = $204,275.50 total ongoing cost for broker-dealers. 907 (0.5 hours × 2,857 broker-dealers) = 1,429 total ongoing burden for broker-dealers. (1,429 total ongoing burden for broker-dealers/ 2,857 total broker-dealers) = 0.5 total initial burden per broker-dealer. 908 Based on the SIFMA Management and Professional Earnings Report, Commission staff preliminarily estimates that the average hourly rate for compliance services is $298, for business operation services is $268, and for information technology services is $270. This figure was calculated as follows: 0.5 hours/ 3 firm staff categories (i.e., compliance, business operations, and information technology) = 0.17 hours per staff category ($298 compliance/hour × 0.17) = $51 per 0.17 of an hour. ($268 business operations rate/hour × 0.17) = $46 per 0.17 of an hour. ($270 information technology rate/hour × 0.17) = $46 per 0.17 of an hour. $51 + $46 + $46 = $143 total cost per brokerdealer. (0.5 hours × $143 total cost per broker-dealer × 2,857 broker-dealers) = $204,275.50 total ongoing cost for broker-dealers/2,857 total number of brokerdealers = $71.50 total ongoing cost per brokerdealer. 909 This estimate is based upon staff experience. See e.g., Release 2968, supra note 891; Enhanced VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 preliminarily estimate that the total ongoing annual aggregate burden for associated natural persons is 217,536 hours.910 We preliminarily estimate a total ongoing monetized cost of approximately $31,107,576.50 for associated natural persons.911 This would be an ongoing annual average burden of 0.5 hours per associated natural person 912 (as monetized, is an average ongoing annual burden per associated natural person of $71.50).913 H. Rule 211h–1 Under the Advisers Act Proposed rule 211h–1 would require investment advisers registered under Mutual Fund Disclosure Adopting Release, supra note 47. In this estimate we are not calculating the print and technological associated burdens of updating communications which we analyzed earlier as we are assuming those burdens to be a one-time initial burden for an associated natural person of a brokerdealer seeking compliance with the proposed rule. 910 (0.5 hours × 435,071 associated natural persons) = 217,536 total ongoing burden for associated natural persons. 911 Based on the SIFMA Management and Professional Earnings Report, Commission staff preliminarily estimates that the average hourly rate for compliance services is $298, for business operation services is $268, and for information technology services is $270. This figure was calculated as follows: 0.5 hours/ 3 firm staff categories (i.e., compliance, business operations, and information technology) = 0.17 hours per staff category ($298 compliance/hour × 0.17) = $51 per 0.17 of an hour. ($268 business operations rate/hour × 0.17) = $46 per 0.17 of an hour. ($270 information technology rate/hour × 0.17) = $46 per 0.17 of an hour. $51 + $46 + $46 = $143 total cost per associated natural person. (0.5 hours × $143 total cost per associated natural person × 435,071 associated natural person) = $31,107,576.50 total ongoing cost for associated natural persons. 912 (0.5 hours × 435,071 associated natural persons) = 217,536 total ongoing annual burden for associated natural persons. (217,536 total ongoing burden/435,071 total associated natural persons) = 0.5 total ongoing annual burden per associated natural person. 913 Based on the SIFMA Management and Professional Earnings Report, Commission staff preliminarily estimates that the average hourly rate for compliance services is $298, for business operation services is $268, and for information technology services is $270. This figure was calculated as follows: 0.5 hours/ 3 firm staff categories (i.e., compliance, business operations, and information technology) = 0.17 hours per staff category ($298 compliance/hour × 0.17) = $51 per 0.17 of an hour. ($268 business operations rate/hour × 0.17) = $46 per 0.17 of an hour. ($270 information technology rate/hour × 0.17) = $46 per 0.17 of an hour. $51 + $46 + $46 = $143 total cost per associated natural person. (0.5 hours × $143 total cost per associated natural person × 435,071 associated natural person) = $31,107,576.50 total ongoing cost for associated natural persons/435,071 total number of associated natural persons) = $71.50 total ongoing annual cost per associated natural person. PO 00000 Frm 00117 Fmt 4701 Sfmt 4702 21531 section 203 and their supervised persons to prominently disclose that it is, or in the case of supervised persons that such persons are supervised by an investment adviser that is, registered with the Commission as an investment adviser in print or electronic retail investor communications. For print communications, we propose to require that such registration status be displayed in a type size at least as large as and of a font style different from, but at least as prominent as, that used in the majority of the communication. In addition, such disclosure must be presented in the body of the communication and not in a footnote. For electronic communications, or in any publication by radio or television, we propose to require that such disclosure be presented in a manner reasonably calculated to draw retail investor attention to it. This collection of information would be found at [17 CFR 240.15l–3] and would be mandatory. The likely respondents to this information collection would be all investment advisers and their supervised persons that distribute print or electronic retail investor communications. The Commission believes that the collection of information is necessary to provide retail investors and the Commission with information to better determine whether a communication is from a broker-dealer or investment adviser, and, for retail investors specifically, to allow them to better identify which type of firm is more appropriate for their specific investment needs. Additionally, by requiring an affirmative identification, retail investors would also be better informed whether a financial professional is a supervised person of an investment adviser rather than an associated person of a broker-dealer. For similar reasons, we believe that because retail investors interact with a firm primarily through financial professionals, it is important that financial professionals disclose the firm type with which they are associated. 1. Respondents: Investment Advisers and Supervised Persons Currently, there are 12,721 registered investment advisers and approximately 942,215 supervised persons.914 Of these, 7,625 investment advisers distribute print or electronic retail investor 914 The investment adviser and supervised person numbers are as of December 31, 2017. See supra Section IV.A.1.b, at Table 3, Panel A. We note that our estimate of supervised persons is based on those supervised persons identified in the baseline in the Economic Analysis. See Section IV.A.1.e, at Table 6. E:\FR\FM\09MYP2.SGM 09MYP2 21532 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules communications while 245,408 supervised persons distribute print or electronic retail investor communications at standalone investment advisers or dually registered firms.915 Additionally, of these investment advisers 2,738 are large advisers and 4,887 are small advisers.916 Accordingly, the Commission estimates that 7,625 investment advisers and 245,408 supervised persons would be required to comply with proposed rule 211h-1. There are also 477 new SEC registered investment advisers per year on average and 3,000 new supervised persons per year.917 amozie on DSK3GDR082PROD with PROPOSALS1 2. Initial and Annual Burdens We estimate that the initial one-time burden for complying with the disclosure requirements would be 72 hours per large investment adviser 918 and 15 hours per small investment adviser.919 We note that we are staging the compliance date to ensure that firms can phase out certain older communications from circulation through the regular business lifecycle rather than having to retroactively 915 We estimate the number of supervised persons who distribute print or electronic retail investor communications using several data points. First, we analyzed those supervised persons who only hold a series 65 at a dual registrant or an investment adviser firm, totaling 27,879. Next we analyzed those supervised persons at dual registrants or investment advisers holding a combination of either a series 6 and 65 or a series 7 and 65, totaling 15,381 and 172,304 respectively. Finally, we analyzed those supervised persons at dual registrants or investment advisers holding a series 6, 7, and 65, totaling 29,944. (27,879 + 15,281 + 172,304 + 29,944) = 245,408 total supervised persons who engage retail investors through print or electronic communications. We note that our estimate does not reflect supervised persons who hold various designations (e.g. Chartered Financial Analyst) in lieu of the licenses we used to identify supervised persons of investment advisers who distribute print or electronic retail investor communications. Finally, our estimate does not employ rounding as compared to Table 6 in the Economic Analysis Baseline. See Table 6: Number of Employees at Retail Facing Firms who are Registered Representatives, Investment Adviser Representatives, or Both, Section I.V.A.1.e. These numbers are as of December 31, 2017. 916 For purposes of this estimate, we categorize small advisers as advisers with 10 or fewer employees and large advisers as those with 10 or more employees. See cf. Release 3221, supra note 875, at n.727. 917 The number of new investment advisers is calculated by looking at the number of new advisers in 2016 and 2017 and then isolating the number each year that services retail investors. (455 for 2016 + 499 for 2017)/2) = 477. The number of new supervised persons is calculated by looking at the difference in the number of supervised persons in 2017 as compared to 2016 at firms which service retail investors. 918 (8 hours for print communications per brokerdealer + 64 hours for electronic communications per broker-dealer). 919 (5 hours for print communications per brokerdealer + 10 hours for electronic communications per broker-dealer). VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 change them.920 As a result of this staged compliance, our burden estimates do not reflect the burdens that would have been imposed had these firms had to replace all outstanding communications. Aside from certain anticipated outside legal costs, as discussed below, we preliminary estimate that to comply with our proposed rule with respect to print communications,921 investment advisers would need to review their communications, identify which would need to be amended, make the changes, and verify that all firm communications comply with the rule’s requirements including its technical specifications such as the type size, font, and prominence. Our preliminary estimates differ for large and small investment advisers. We drew these distinctions because we assume that the larger an adviser is the more communications it would need to review, identify and change and in turn have its compliance staff verify that such communications are compliant with our proposed rule. For existing print communications for large investment advisers we preliminarily estimate that the total burden for investment advisers would be 8 hours for compliance and business operations personnel to review, identify, and make changes across all print communications.922 For small investment advisers, we preliminarily estimate that the total burden for investment advisers would be 5 hours for compliance and business operations personnel to review, identify, and make changes across all print communications.923 With respect to electronic communications 924 we preliminarily anticipate that it would take large investment advisers approximately 64 920 Similarly, we are not requiring firms to send new communications to replace all older print communications as this would be overly burdensome and costly for firms. 921 Such communications could include business cards, letterheads, newspaper advertisements, and article reprints from an unaffiliated magazines or newspaper. 922 This estimate is based upon staff experience and industry sources more generally. See e.g., FINRA 2015–22 Notice, supra note 881. To compute the 8 hours internal initial burden we assume 2 hours by compliance personnel and 6 hours by business operations personnel of the broker-dealer. 923 This estimate is based upon staff experience and industry materials more generally. See e.g., FINRA 2015–22 Notice, supra note 881. To compute the 5 hours internal initial burden we assume 1 hour by compliance personnel and 4 hours by business operations personnel of the investment adviser. 924 We believe such communications could include websites, smart phone apps, social media, emails, and blogs. PO 00000 Frm 00118 Fmt 4701 Sfmt 4702 hours 925 to review, identify and make the required updates coupled with verifying that such communications (present and future) would be compliant with the proposed rule. Our estimates take into account that larger firms likely have full-featured websites that generate other webpages based on complex system code and logic.926 In order to make changes to comply with our proposed rule, we assume that business operations and information technology personnel would likely be required to update the underlying code and logic to automate the implementation of the required language to populate across all associated electronic media. Additionally, we assume that these teams would need to test to ensure that such changes were implemented correctly. With respect to small investment advisers, we preliminarily anticipate that it would take approximately 10 hours 927 to review, identify and make the required updates coupled with verifying that such communications (present and future) would be compliant with the proposed rule. Our estimate for small investment advisers assumes that small investment advisers have fewer electronic communications that would be subject to our proposed rule as compared to larger firms, resulting in a lower burden preliminary estimate. We preliminarily estimate that the total initial burden for investment advisers is 270,441 hours.928 We 925 This estimate is based upon staff experience and industry materials more generally. See e.g., FINRA 2015–22 Notice, supra note 881. To compute the 64 hours internal initial burden we assume 4 hours by compliance personnel and 60 hours by business operations and information technology personnel of the investment adviser. 926 This is based upon staff experience and industry materials more generally. See e.g., FINRA 2015–22 Notice, supra note 881 (discussing the burdens associated with the inclusion of a BrokerCheck reference and hyperlink across all firm communications for certain firms). 927 This estimate is based upon staff experience and industry materials more generally. See e.g., FINRA 2015–22 Notice, supra note 881. To compute the 10 hours internal initial burden, we assume 2 hours by compliance personnel and 8 hours by business operations and information technology personnel of the investment adviser. 928 (8 hours for print communications per large investment adviser + 64 hours for electronic communications per large investment adviser) = 72 hours per large investment adviser. (72 hours × 2,738 large investment advisers) = 197,136 total initial burden for large investment advisers. (5 hours for print communications per small investment adviser + 10 hours for electronic communications per small investment adviser) = 15 hours per small investment adviser. (15 hours × 4887 small investment advisers) = 73,305 total initial burden for small investment advisers. (197,136 total burden large investment advisers + 73,305 total burden small investment advisers) = 270,441 hours. E:\FR\FM\09MYP2.SGM 09MYP2 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules amozie on DSK3GDR082PROD with PROPOSALS1 preliminarily estimate a cost of approximately $73,650,210 for investment advisers.929 This would be an annual average burden of 35 hours per investment adviser 930 (as monetized, an annual average cost of $9,659 per investment adviser).931 We further preliminarily anticipate that supervised persons would have an initial burden of 0.5 hours for each supervised person respondent to review, identify, and make changes to their individual communications, both print 929 Based on the SIFMA Management and Professional Earnings Report, Commission staff preliminarily estimates that the average hourly rate for compliance services in the securities industry is $298, for business services is $268, and for technology services is $270. The average technology and business rate is ($270 technology rate + $268 business rate)/2 = $269 average rate. This figure was calculated as follows: (6 compliance hours × $298 compliance rate) + (66 technology/business hours × $269 averaged technology/business rate) × 2,738 large investment advisers = $53,505,996 total initial costs for large investment advisers. (3 compliance hours × $298 compliance rate) + (12 technology/business hours × $269 averaged technology/business rate) × 4,887 small investment advisers = $20,144,214 total initial costs for small investment advisers. ($53,505,996 total initial costs for large investment advisers + $20,144,214 total initial costs for small investment advisers) = $73,650,210 total initial costs for investment advisers. 930 (8 hours for print communications per large investment adviser + 64 hours for electronic communications per large investment adviser) = 72 hours per large investment adviser. (72 hours × 2,738 large investment advisers) = 197,136 total initial burden for large investment advisers. (5 hours for print communications per small investment advisers + 10 hours for electronic communications per small investment adviser) = 15 hours per small investment adviser. (15 hours × 4887 small investment advisers) = 73,305 total initial burden for small investment advisers. 197,136 total burden large investment advisers + 73,305 total burden small investment advisers = 270,441 hours/7,625 total investment advisers = 35 hours average initial burden per investment adviser. 931 Based on the SIFMA Management and Professional Earnings Report, Commission staff preliminarily estimates that the average hourly rate for compliance services is $298, for business operation services is $268, and for information technology services is $270. The average technology and business rate is ($268 business rate + $270 technology rate)/2 = $269 average rate. This figure was calculated as follows: (6 compliance hours × $298 compliance rate) + (66 technology/business hours × $269 averaged technology/business rate) × 2,738 large investment advisers = $53,505,996 total initial costs for large investment advisers. (3 compliance hours × $298 compliance rate) + (12 technology/business hours × $269 averaged technology/business rate) × 4,887 small investment advisers = $20,144,214 total initial costs for small investment advisers. $53,505,996 total initial cost large investment advisers + $20,144,214 total initial costs small investment advisers = $73,650,210 total initial cost investment advisers/7,625 total number of investment advisers = $9,659 average initial cost per investment adviser. VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 and electronic.932 Based on staff experience, we anticipate that many firms will make many communication changes for their supervised persons, including their business cards and letterheads, leaving only certain responsibilities to the individual such as changes to their individual social media profile(s) and email signatures. Therefore, we preliminarily estimate that the total initial one-time burden for supervised persons is 122,704 hours.933 We preliminarily estimate a monetized cost of approximately $17,546,672 for supervised persons.934 This would be an annual average burden of 0.5 hours per supervised person 935 (as monetized, is an annual average cost of $71.50 per supervised person).936 Aside from the internal initial burden, we anticipate that there would be certain associated outside costs as well. 932 This estimate is based upon staff experience. See e.g., Release 2968, supra note 891; Enhanced Mutual Fund Disclosure Adopting Release, supra note 47. 933 (0.5 hours × 245,408 supervised persons) = 122,704 total initial burden for supervised persons. 934 Based on the SIFMA Management and Professional Earnings Report, Commission staff preliminarily estimates that the average hourly rate for compliance services is $298, for business operation services is $268, and for information technology services is $270. This figure was calculated as follows: 0.5 hours/ 3 firm staff categories (i.e., compliance, business operations, and information technology) = 0.17 hours per staff category ($298 compliance/hour × 0.17) = $51 per 0.17 of an hour. ($268 business operations rate/hour × 0.17) = $46 per 0.17 of an hour. ($270 information technology rate/hour × 0.17) = $46 per 0.17 of an hour. $51 + $46 + $46 = $143 total cost per supervised person. (0.5 hours × $143 total cost per supervised person × 245,408 supervised persons) = $17,546,672 total initial cost for supervised persons. 935 (0.5 hours × 245,408 supervised persons) = 122,704 total initial burden for supervised persons. (122,704 total initial burden for supervised persons/245,408 total supervised persons) = 0.5 hours average initial burden per investment adviser. 936 Based on the SIFMA Management and Professional Earnings Report, Commission staff preliminarily estimates that the average hourly rate for compliance services is $298, for business operation services is $268, and for information technology services is $270. This figure was calculated as follows: 0.5 hours/ 3 firm staff categories (i.e., compliance, business operations, and information technology) = 0.17 hours per staff category ($298 compliance/hour × 0.17) = $51 per 0.17 of an hour. ($268 business operations rate/hour × 0.17) = $46 per 0.17 of an hour. ($270 information technology rate/hour × 0.17) = $46 per 0.17 of an hour. $51 + $46 + $46 = $143 total cost per supervised person. (0.5 hours × $143 total cost per supervised person × 245,408 supervised persons) = $17,546,672 total initial cost for supervised persons/245,408 total number of supervised persons) = $71.50 average initial cost per supervised person. PO 00000 Frm 00119 Fmt 4701 Sfmt 4702 21533 We believe that investment advisers and their supervised persons may engage outside counsel to assist them in understanding our proposed rule should it be adopted.937 We assume that the amount of outsourced legal assistance would vary among various sizes of investment advisers and their number of supervised persons. As a result, we preliminarily estimate that large investment advisers together with their supervised persons may initially outsource approximately 8 hours of legal time in order to understand the implications of our proposed rule and how best to comply with the technical specifications.938 For small investment advisers, we anticipate that such firms will outsource 4 hours of legal time.939 The hour differences in our preliminary estimates take into account that larger firms have more communications affected by our proposed rule and more supervised persons to supervise than small firms. We estimate initial outside legal costs associated with the proposed rule of $19,565,344 for investment advisers 940 (or $2,566 on average per investment adviser.) 941 Additionally, we anticipate that firms will also have one-time outside costs associated with the cost of printing new communications including new business cards, envelopes, pitch books, and letterheads. As part of these costs, we anticipate that both large and small investment advisers will have to work with printers to set the disclosure on, for example, business cards. We 937 We are assuming that supervised persons would not independently seek outside counsel and would instead rely on the advice received from outside counsel to the firm. Therefore, we are not including a separate estimate for supervised persons. 938 This estimate is based upon staff experience. See e.g., Release 34–78309, supra note 897; Release 34–76474, supra note 897. 939 This estimate is based upon staff experience. See supra note 938. 940 Based on the SIFMA Management and Professional Earnings Report, Commission staff preliminarily estimates that the average hourly rate for legal services is $472/hour. ($472 × 8 legal hours) = $3,776 × 2,738 large investment advisers = $10,338,688. ($472 × 4 legal hours) = $1,888 × 4,887 small investment advisers = $9,226,656. ($10,338,688 total large investment advisers costs + $9,226,656 total small investment advisers costs) = $19,565,344. 941 Based on the SIFMA Management and Professional Earnings Report, Commission staff preliminarily estimates that the average hourly rate for legal services is $472/hour. ($472 × 8 legal hours) = $3,776 × 2,738 large investment advisers = $10,338,688. ($472 × 4 legal hours) = $1,888 × 4,887 small investment advisers = $9,226,656. $10,338,688 total large investment advisers costs + $9,226,656 total small investment advisers costs = $19,565,344/7625 total investment advisers = $2,566 total cost per investment adviser. E:\FR\FM\09MYP2.SGM 09MYP2 21534 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules amozie on DSK3GDR082PROD with PROPOSALS1 estimate initial costs to amend certain communications associated with the proposed rule of $346,787,187 for investment advisers 942 (or $45,480 per investment adviser.) 943 We assume that because small investment advisers have fewer supervised persons there will be less communications that will require printing. For the ongoing burden of new communications for investment advisers, we preliminarily estimate that the burden for compliance, business operations, and technology services for adding a registration status statement would be 0.5 hours annual hours per investment adviser.944 We anticipate that investment advisers will need to add the registration disclosure to each new communication which they create, however we anticipate the burdens associated with this task to be minimal and therefore we do not believe there is a material difference between large and small investment advisers.945 We preliminarily estimate that the total ongoing annual aggregate burden for investment advisers is 3,812.50 hours.946 We preliminarily estimate a 942 Our estimates are based on staff experience and industry materials. In particular, staff factored in its cost estimate the costs associated with printing envelopes, pitch books, letter heads, and business cards. For large investment advisers, we assume printing costs of $65,973. For small investment advisers, we assume printing costs of $33,999. ($65,973 × 2,738 large investment advisers = $180,634,074) + ($33,999 × 4,887 small investment advisers = $166,153,113) = $346,787,187 total investment adviser outside costs. 943 ($65,973 × 2,738 large investment advisers = $180,634,074) + ($33,999 × 4,887 small investment advisers = $166,153,113) = $346,787,187 total investment adviser outside costs/7,625 investment advisers = $45,480 total cost per investment adviser. 944 This estimate is based upon staff experience. See e.g., Release 2968, supra note 891; Enhanced Mutual Fund Disclosure Adopting Release, supra note 47. In this estimate we are not calculating the print and technological associated burdens of updating communications which we analyzed earlier as we are assuming those burdens to be a one-time initial burden for a firm seeking compliance with the proposed rule. 945 Our assumption of no material difference between large and small investment advisers rests on the fact that all major systems changes would already have been implemented as part of the initial burden. Therefore, any new electronic communications would have the disclosure statement required by our proposed rule built in at the outset which should take minimal time rather than having to retroactively insert it into the systems logic which is a more onerous task. We note that such communications would likely be reviewed by compliance staff for compliance with applicable securities laws including rule 206(4)–1 of the Advisers Act. We anticipate that compliance with proposed rule 211h–1’s requirements would be reviewed as part of this larger compliance check. 946 (0.5 hours × 7,625 investment advisers) = 3,812.50 total ongoing burden for investment advisers. VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 total ongoing monetized cost of approximately $545,187.50 for investment advisers.947 This would be an annual average burden of 0.5 hours per investment advisers 948 (as monetized, is an annual average cost of $71.50 per investment adviser).949 For the ongoing burden of new communications for supervised persons of an investment adviser, we preliminarily estimate that the burden for compliance, business operations, and technology services for adding a registration status statement would be 0.5 hours.950 Therefore, we preliminarily estimate that the total ongoing annual aggregate burden for 947 Based on the SIFMA Management and Professional Earnings Report, Commission staff preliminarily estimates that the average hourly rate for compliance services is $298, for business operation services is $268, and for information technology services is $270. This figure was calculated as follows: 0.5 hours/ 3 firm staff categories (i.e., compliance, business operations, and information technology) = 0.17 hours per staff category ($298 compliance/hour × 0.17) = $51 per 0.17 of an hour. ($268 business operations rate/hour × 0.17) = $46 per 0.17 of an hour. ($270 information technology rate/hour × 0.17) = $46 per 0.17 of an hour. $51 + $46 + $46 = $143 total cost per investment adviser. (0.5 hours × $143 total cost per investment adviser × 7,625 investment advisers) = $545,187.50 total ongoing cost for investment advisers. 948 (0.5 hours × 7,625 investment advisers) = 3,812.50 total ongoing burden for investment advisers. (3,812.5/7,625 total investment advisers) = 0.5 hours average initial burden per investment adviser. 949 Based on the SIFMA Management and Professional Earnings Report, Commission staff preliminarily estimates that the average hourly rate for compliance services is $298, for business operation services is $268, and for information technology services is $270. This figure was calculated as follows: 0.5 hours/ 3 firm staff categories (i.e., compliance, business operations, and information technology) = 0.17 hours per staff category ($298 compliance/hour × 0.17) = $51 per 0.17 of an hour. ($268 business operations rate/hour × 0.17) = $46 per 0.17 of an hour. ($270 information technology rate/hour × 0.17) = $46 per 0.17 of an hour. $51 + $46 + $46 = $143 total cost per investment adviser. (0.5 hours × $143 total cost per investment adviser × 7,625 investment advisers) = $545,187.50 total ongoing cost for investment advisers/7,625 total number of investment advisers = $71.50 average annual ongoing cost per investment adviser. 950 This estimate is based upon staff experience. See e.g., Release 2968, supra note 891; Enhanced Mutual Fund Disclosure Adopting Release, supra note 47. In this estimate we are not calculating the print and technological associated burdens of updating communications which we analyzed earlier as we are assuming those burdens to be a one-time initial burden for a supervised person of an investment adviser seeking compliance with the proposed rule. PO 00000 Frm 00120 Fmt 4701 Sfmt 4702 supervised persons is 122,704 hours.951 We preliminarily estimate a total ongoing monetized cost of approximately $17,546,672 for supervised persons.952 This would be an annual average burden of 0.5 hours per supervised person 953 (as monetized, is an annual average cost of $71.50 per supervised person).954 Additionally, we believe that any new investment advisers and their supervised persons would likely only incur the same ongoing annual burden estimate rather than the initial burden because they would incorporate the proposed registration status in all communications at their inception and not have to conduct a review and identification of outstanding communications nor make changes to their already existing communications. We do anticipate that such persons would also incur similar outside legal 951 (0.5 hours × 245,408 supervised persons) = 122,704 total ongoing burden for supervised persons. 952 Based on the SIFMA Management and Professional Earnings Report, Commission staff preliminarily estimates that the average hourly rate for compliance services is $298, for business operation services is $268, and for information technology services is $270. This figure was calculated as follows: 0.5 hours/ 3 firm staff categories (i.e., compliance, business operations, and information technology) = 0.17 hours per staff category ($298 compliance/hour × 0.17) = $51 per 0.17 of an hour. ($268 business operations rate/hour × 0.17) = $46 per 0.17 of an hour. ($270 information technology rate/hour × 0.17) = $46 per 0.17 of an hour. $51 + $46 + $46 = $143 total cost per supervised person. (0.5 hours × $143 total cost per supervised person × 245,408 supervised persons) = $17,546,672 total ongoing cost for supervised persons. 953 (0.5 hours × 245,408 supervised persons) = 122,704 total ongoing annual burden for supervised persons. (122,704 total initial burden for supervised persons/245,408 total supervised persons) = 0.5 hours average ongoing annual burden per supervised person. 954 Based on the SIFMA Management and Professional Earnings Report, Commission staff preliminarily estimates that the average hourly rate for compliance services is $298, for business operation services is $268, and for information technology services is $270. This figure was calculated as follows: 0.5 hours/ 3 firm staff categories (i.e., compliance, business operations, and information technology) = 0.17 hours per staff category ($298 compliance/hour × 0.17) = $51 per 0.17 of an hour. ($268 business operations rate/hour × 0.17) = $46 per 0.17 of an hour. ($270 information technology rate/hour × 0.17) = $46 per 0.17 of an hour. $51 + $46 + $46 = $143 total cost per supervised person. (0.5 hours × $143 total cost per supervised person × 245,408 supervised persons) = $17,546,672 total ongoing cost for supervised persons/245,408 total number of supervised persons = $71.50 average ongoing annual cost per supervised person. E:\FR\FM\09MYP2.SGM 09MYP2 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules amozie on DSK3GDR082PROD with PROPOSALS1 costs, depending on their size, as discussed above. We do not believe that such new investment advisers would incur outside printing costs as a result of our proposed rule because these new firms would have their print communications produced with the appropriate disclosure initially as part of other materials they seek to have printed. Therefore, we preliminarily estimate that the total burden for new investment advisers is 238.50 hours.955 Additionally, we preliminarily estimate a cost of approximately $34,105.50 for new investment advisers.956 This would be an initial average burden of 0.5 hours per new investment adviser 957 (as monetized, is an initial average cost of $71.50 per new investment adviser).958 Additionally, we anticipate 1,500 hours 959 for new supervised persons of 955 (0.5 hours × 477 new investment advisers) = 238.50 total burden for new investment advisers. 956 Based on the SIFMA Management and Professional Earnings Report, Commission staff preliminarily estimates that the average hourly rate for compliance services is $298, for business operation services is $268, and for information technology services is $270. This figure was calculated as follows: 0.5 hours/ 3 firm staff categories (i.e., compliance, business operations, and information technology) = 0.17 hours per staff category ($298 compliance/hour × 0.17) = $51 per 0.17 of an hour. ($268 business operations rate/hour × 0.17) = $46 per 0.17 of an hour. ($270 information technology rate/hour × 0.17) = $46 per 0.17 of an hour. $51 + $46 + $46 = $143 total cost per investment adviser. (0.5 hours × $143 total cost per investment adviser × 477 new investment advisers) = $34,105.50 total initial cost for new investment advisers. 957 (0.5 hours × 477 new investment advisers) = 238.50 total initial burden for new investment advisers. (238.50 total initial burden for new investment advisers/477 total new investment advisers) = 0.5 hours average initial burden per investment adviser. 958 Based on the SIFMA Management and Professional Earnings Report, Commission staff preliminarily estimates that the average hourly rate for compliance services is $298, for business operation services is $268, and for information technology services is $270. This figure was calculated as follows: 0.5 hours/ 3 firm staff categories (i.e., compliance, business operations, and information technology) = 0.17 hours per staff category ($298 compliance/hour × 0.17) = $51 per 0.17 of an hour. ($268 business operations rate/hour × 0.17) = $46 per 0.17 of an hour. ($270 information technology rate/hour × 0.17) = $46 per 0.17 of an hour. $51 + $46 + $46 = $143 total cost per investment adviser. (0.5 hours × $143 total cost per investment adviser × 477 new investment advisers) = $34,105.50 total cost for new investment advisers/ 477 total number of new investment advisers = $71.50 average initial cost per new investment adviser. 959 (0.5 hours × 3,000 new supervised persons) = 1,500 total burden for new supervised persons. VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 an investment adviser and costs of approximately $214,500 for new supervised persons 960 of an investment adviser resulting from these requirements. This would be an initial average burden of 0.5 hours per new supervised person 961 (as monetized, is an initial average cost of $71.50 per supervised person).962 I. Request for Comment We request comment on our estimates for the new estimated burden hours and change in current burden hours, and their associated costs described above. Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits comments in order to: (i) Evaluate whether the proposed collections of information are necessary for the proper performance of the functions of the Commission, including whether the information will have practical utility; (ii) evaluate the accuracy of the Commission’s estimate of the burden of the proposed 960 Based on the SIFMA Management and Professional Earnings Report, Commission staff preliminarily estimates that the average hourly rate for compliance services is $298, for business operation services is $268, and for information technology services is $270. This figure was calculated as follows: 0.5 hours/ 3 firm staff categories (i.e., compliance, business operations, and information technology) = 0.17 hours per staff category ($298 compliance/hour × 0.17) = $51 per 0.17 of an hour. ($268 business operations rate/hour × 0.17) = $46 per 0.17 of an hour. ($270 information technology rate/hour × 0.17) = $46 per 0.17 of an hour. $51 + $46 + $46 = $143 total cost per supervised person. (0.5 hours × $143 total cost per supervised person × 3,000 new supervised persons) = $214,500 total cost for new supervised persons. 961 (0.5 hours × 3,000 new supervised persons) = 1,500 total initial burden for new supervised persons. (1,500 total initial burden for new supervised persons/3000 total new supervised persons) = 0.5 hours average initial burden per new supervised person. 962 Based on the SIFMA Management and Professional Earnings Report, Commission staff preliminarily estimates that the average hourly rate for compliance services is $298, for business operation services is $268, and for information technology services is $270. This figure was calculated as follows: 0.5 hours/ 3 firm staff categories (i.e., compliance, business operations, and information technology) = 0.17 hours per staff category ($298 compliance/hour × 0.17) = $51 per 0.17 of an hour. ($268 business operations rate/hour × 0.17) = $46 per 0.17 of an hour. ($270 information technology rate/hour × 0.17) = $46 per 0.17 of an hour. $51 + $46 + $46 = $143 total cost per supervised person. (0.5 hours × $143 total cost per supervised person × 3,000 new supervised persons) = $214,500 total cost for new supervised persons/3,000 total number of new supervised persons = $71.50 average initial cost per new supervised person. PO 00000 Frm 00121 Fmt 4701 Sfmt 4702 21535 collections of information; (iii) determine whether there are ways to enhance the quality, utility, and clarity of the information to be collected; and (iv) determine whether there are ways to minimize the burden of the collections of information on those who are to respond, including through the use of automated collection techniques or other forms of information technology. The agency has submitted the proposed collections of information to OMB for approval. Persons wishing to submit comments on the collection of information requirements of the proposed amendments should direct them to the Office of Management and Budget, Attention Desk Officer for the Securities and Exchange Commission, Office of Information and Regulatory Affairs, Washington, DC 20503, and should send a copy to Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549, with reference to File No. S7–08–18. As OMB is required to make a decision concerning the collections of information between 30 and 60 days after publication of the proposal, a comment to OMB is best assured of having its full effect if OMB receives it within 30 days of publication. Requests for materials submitted to OMB by the Commission with regard to these collections of information should be in writing, refer to File No. S7–08–18, and be submitted to the Securities and Exchange Commission, Office of FOIA Services, 100 F Street NE, Washington, DC 20549. VI. Initial Regulatory Flexibility Analysis The Commission has prepared the following Initial Regulatory Flexibility Analysis (‘‘IRFA’’) in accordance with section 3(a) of the Regulatory Flexibility Act (‘‘RFA’’).963 It relates to: (i) Proposed new rule 204–5 under the Advisers Act and proposed amendment to, Form ADV (17 CFR 279.1), to add a new Part 3: Form CRS; (ii) proposed amendments to rule 203–1 under the Advisers Act; (iii) proposed amendments to rule 204–1 under the Advisers Act; (iv) proposed amendments to rule 204–2 under the Advisers Act; (v) proposed new rule 17a–14 under the Exchange Act and new Form CRS (17 CFR 249.640); (vi) proposed amendments to rules 17a–3 and 17a–4 under the Exchange Act; (vii) proposed new rules 15l–2 and 15l–3 under the Exchange Act; and (viii) proposed new rule 211h–1 under the Advisers Act. 963 5 E:\FR\FM\09MYP2.SGM U.S.C. 603(a). 09MYP2 21536 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules amozie on DSK3GDR082PROD with PROPOSALS1 A. Reason for and Objectives of the Proposed Action Individual investors rely on the services of broker-dealers and investment advisers when making and implementing investment decisions. Such ‘‘retail investors’’ can receive investment advice from a broker-dealer, an investment adviser, or both, or decide to make their own investment decisions. Broker-dealers, investment advisers and dually registered firms all provide important services for individuals who invest in the markets. Studies show that retail investors are confused about the differences among them.964 These differences include the scope and nature of the services they provide, the fees and costs associated with those services, conflicts of interest, and the applicable legal standards and duties owed to investors. Studies also indicate that retail investors are confused about whether their firm and financial professional are broker-dealers or investment advisers, or both.965 Based on these studies, it appears that certain names or titles used by brokerdealers, including ‘‘financial advisor,’’ contribute to this confusion and could mislead retail investors into believing that they are engaging with an investment adviser—and are receiving services commonly provided by an investment adviser and subject to an adviser’s fiduciary duty, which applies to the retail investors’ entire relationship—when they are not.966 We recognize the benefits of retail investors having access to diverse business models and of preserving investor choice among brokerage services, advisory services, or both. However, we believe that retail investors need clear information in order to understand the differences and key characteristics of each type of service. Providing this clarity is intended to assist investors in making an informed choice when choosing an investment firm and professional and type of account to help to ensure they receive services that meet their needs and expectations. We also believe it is important to mitigate the risk that certain names or titles could result in retail investors being misled, including believing that the financial professional is a fiduciary, leading to uninformed decisions regarding which firm or financial professional to engage, which 964 See Siegel & Gale Study, supra note 5; Rand Study, supra note 5; and CFA Survey, supra note 5. 965 See Siegel & Gale Study, supra note 5; Rand Study, supra note 5; and 913 Study, supra note 3. 966 See supra note 375. VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 may in turn result in investors being harmed. The Commission considered ways to address investor confusion and preserve investor choice, including reviewing studies, comment letters, and committee recommendations.967 We believe it is important to ensure that retail investors receive the information they need to clearly understand the services, standard of conduct, fees, conflicts, and disciplinary history of firms and financial professionals they are considering. We also believe it is important for retail investors to better understand the distinction between investment advisers and broker-dealers and to have access to the information necessary to make an informed decision about which firm type and financial professional they are engaging or seeking to engage and avoid potential harm. 1. Proposed Form CRS Relationship Summary We are proposing new rules and rule amendments to require broker-dealers and investment advisers to deliver a Form CRS (or relationship summary) to retail investors that would include general information about each of these topics, including where to find additional information. We preliminarily believe that providing this information before or at the time a retail investor enters into an investment advisory agreement or first engages a brokerage firm’s services, as well as at certain points during the relationship (e.g., switching or adding account types), as further discussed above, is appropriate and in the public interest and will improve investor protection, and will deter potentially misleading sales practices by helping retail investors to make a more informed choice among the types of firms and services available to them.968 As discussed above in Section II.A, the relationship summary would be short, with a mix of tabular and narrative information, and contain sections covering: (i) Introduction; (ii) the principal relationships and services the firm offers to retail investors; (iii) the standard of conduct applicable to those services; (iv) the fees and costs that retail investors will pay; (v) 967 See supra notes 6–22 and accompanying text, referring to the Siegel & Gale Study, the RAND Study, the 913 Study, commenters responding to the 2013 Request for Data, the 917 Financial Literacy Study, comment letters of commenters providing input for these studies, the recommendation of the Commission’s Investor Advisory Committee, and comment letters of commenters responding to Chairman Clayton’s Request for Comment. 968 See supra note 36 and accompanying text. PO 00000 Frm 00122 Fmt 4701 Sfmt 4702 comparisons of brokerage and investment advisory services (for standalone broker-dealers and investment advisers); (vi) conflicts of interest; (vii) where to find additional information, including whether the firm or its financial professionals currently have reportable legal or disciplinary events and who to contact about complaints; and (viii) key questions for retail investors to ask the firm’s financial professional. The proposed rules and rule amendments would require advisers and broker-dealers to deliver their relationship summaries to retail investors, to file them electronically with the Commission, and to post them electronically on their public websites (if they have a public website). If they do not have a public website, they would be required to include in their relationship summary a toll-free number that retail investors may call to request documents. We are also proposing to require firms to update their relationship summaries within 30 days whenever any information in the relationship summary becomes materially inaccurate. Firms would be required to file the updated version electronically with the Commission, and post them on their firms’ websites (if they have a public website). Firms would be required to communicate any changes in an updated relationship summary to retail investors who are existing clients or customers of the firm within 30 days after the updates are required to be made and without charge. The communication could be made by delivering the relationship summary or by communicating the information in another way to the retail investor. The proposal would require a firm to maintain a copy of the relationship summary and each amendment or revision as part of its books and records and make them available to Commission staff upon request, as discussed in Section II.E above. All of these requirements are discussed in detail above in Sections I through IV. The burdens of these requirements on small advisers and broker-dealers are discussed below as well as above in our Economic Analysis and Paperwork Reduction Act Analysis, which discuss the burdens on all advisers and brokerdealers.969 As discussed in Section II above, the relationship summary would be in addition to, and not in lieu of, current disclosure and reporting requirements for broker-dealers and investment 969 See, E:\FR\FM\09MYP2.SGM e.g., Sections IV.B.2.b and V. 09MYP2 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules advisers.970 The relationship summary would alert retail investors to important information for them to consider when choosing a firm and a financial professional and prompt retail investors to ask informed questions. In addition, the content of the relationship summary would facilitate comparisons across firms. As discussed in Section II above, while the information required by the relationship summary is generally already provided in greater detail for investment advisers by Form ADV Part 2, the relationship summary would provide in one place information about the services, fees, conflicts, and disciplinary history for brokerdealers.971 amozie on DSK3GDR082PROD with PROPOSALS1 2. Proposed Rules Relating to Restrictions on the Use of Certain Terms and Required Disclosure of Regulatory Status and a Financial Professional’s Firm Association We are also proposing a rule under the Exchange Act that would restrict broker-dealers and their associated natural persons, when communicating with a retail investor, from using as part of a name or title the term ‘‘adviser’’ or ‘‘advisor’’ unless any such (1) broker or dealer is an investment adviser registered under section 203 of the Advisers Act or with a state, or (2) natural person who is an associated person of a broker or dealer is a supervised person of an investment adviser registered under section 203 of the Advisers Act or with a state, and such person provides investment advice on behalf of such investment adviser. We are also proposing rules under the Exchange Act and Advisers Act that would require broker-dealers and investment advisers and their associated natural persons and supervised persons, respectively, to prominently disclose the firm’s registration status with the Commission and the financial professional’s association with such firm in print and electronic retail investor communications. As discussed above in Section III, the proposed restriction is designed to address the risk that retail investors could be misled by the term ‘‘adviser’’ or ‘‘advisor’’ and, as a result, make an uninformed decision regarding which firm or financial professional they are engaging or seeking to engage, resulting in 970 See, e.g., supra note 33 and accompanying text. 971 See supra text accompanying note 316. In addition, under Regulation Best Interest, brokerdealers would be required to disclose, in writing, the material facts relating to the scope and terms of the relationship with the retail customer and all material conflicts of interest that are associated with the recommendation. See supra note 296. VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 21537 investors being harmed. Additionally, as discussed above in Section III, we believe that requiring firms and their associated natural persons or supervised persons, respectively, to disclose whether a firm is a broker-dealer or investment adviser and requiring a financial professional to disclose his or her association with such firm would assist retail investors in determining which type of firm is more appropriate for their specific investment needs. Similarly, our proposed rules to require a firm to disclose whether it is a brokerdealer or an investment adviser in print or electronic communications to retail investors would help to facilitate investor understanding, even if investors currently may not understand the differences between investment advisers and broker-dealers. For similar reasons, we preliminarily believe that because retail investors interact with a firm primarily through financial professionals, it is important that financial professionals disclose the firm type with which they are associated. proposing the following new rules under the authority set forth in sections 15(l), 23(a), and 36 of the Securities Exchange Act of 1934 (78o(l), 78w(a), and 78mm), sections 211(h), 206A, 211(a) of the Investment Advisers Act of 1940, 15 U.S.C. 80b–1 et seq., (80b– 11(h), 80b–6a, 80b–11(a), sections 913(f) and 913(g)(2) of Title IX of the DoddFrank Wall Street Reform and Consumer Protection Act of 2010; (i) proposed new rule 15l–2 under the Exchange Act; (ii) proposed new rule 15l–3 under the Exchange Act; and (iii) proposed new rule 211h–1 under the Advisers Act. B. Legal Basis The Commission is proposing the following new rule and rule amendments under the authority set forth in section 19(a) of the Securities Act of 1933 [15 U.S.C. 77s(a)], sections 23(a) and 28(e)(2) of the Securities Exchange Act of 1934 [15 U.S.C. 78w(a) and 78bb(e)(2)], section 319(a) of the Trust Indenture Act of 1939 [15 U.S.C. 7sss(a)], section 38(a) of the Investment Company Act of 1940 [15 U.S.C. 80a– 37(a)], and sections 203(c)(1), 204, 206A, 206(4), 211(a) and 211(h), and of the Investment Advisers Act of 1940 [15 U.S.C. 80b–3(c)(1), 80b–4, 80b–6a, 80b– 6(4), 80b–11(a) and 80b–11(h)], and section 913(f) of Title IX of the DoddFrank Wall Street Reform and Consumer Protection Act of 2010 (the ‘‘Dodd-Frank Act’’): (i) Proposed new rule 204–5 under the Advisers Act ; (ii) amendments to rule 279.1, Form ADV, to create Form CRS for investment advisers; (iii) amendments to rule 203– 1 under the Advisers Act; (iv) amendments to rule 204–1 under the Advisers Act; and (v) amendments to rule 204–2 under the Advisers Act. The Commission is proposing the following rule amendments under the authority set forth in section 913(f) of Title IX of the Dodd-Frank Act, sections 3, 10, 15, 23 and 36 of the Exchange Act [15 U.S.C. 78c, 78j, 78o, 78q, 78w and 78mm]: (i) Proposed new rule 17a–14 under the Exchange Act; (ii) proposed Form CRS (17 CFR 249.640) under the Exchange Act; and (iii) amendments to rule 17a–3 and 17a–4 under the Exchange Act. The Commission is also 1. Investment Advisers Under Commission rules, for the purposes of the Advisers Act and the RFA, an investment adviser generally is a small entity if it: (1) Has assets under management having a total value of less than $25 million; (2) did not have total assets of $5 million or more on the last day of the most recent fiscal year; and (3) does not control, is not controlled by, and is not under common control with another investment adviser that has assets under management of $25 million or more, or any person (other than a natural person) that had total assets of $5 million or more on the last day of its most recent fiscal year.972 As discussed in Section V, above, the Commission estimates that based on IARD data as of December 31, 2017, approximately 7,625 investment advisers would be subject to the proposed new rule 204–5 under the Advisers Act, Form CRS (required by a new Part 3 of Form ADV), the proposed amendments to rules 203–1, 204–1, and rule 204–2 under the Advisers Act, and the proposed new rule 211h–1 under the Advisers Act.973 Our proposed new PO 00000 Frm 00123 Fmt 4701 Sfmt 4702 C. Small Entities Subject to the Rule and Rule Amendments In developing these proposals, we have considered their potential impact on small entities that would be subject to the proposed amendments. The proposed amendments would affect many, but not all, broker-dealers and investment advisers registered with the Commission, including some small entities. 972 Advisers Act rule 0–7(a). supra Section V, at note 712 and accompanying text. Based on responses to Item 5.D. of Form ADV. These advisers indicated that they advise either high net worth individuals or individuals (other than high net worth individuals), which includes trusts, estates, and 401(k) plans and IRAs of individuals and their family members, but does not include businesses organized as sole proprietorships. The proposed definition of retail investor would include a trust or other entity similar entity that represents of natural persons, 973 See E:\FR\FM\09MYP2.SGM Continued 09MYP2 21538 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules rules and amendments would not affect most investment advisers that are small entities (‘‘small advisers’’) because they are generally registered with one or more state securities authorities and not with the Commission. Under section 203A of the Advisers Act, most small advisers are prohibited from registering with the Commission and are regulated by state regulators. Based on IARD data, we estimate that as of December 31, 2017, approximately 618 SEC-registered advisers are small entities under the RFA.974 Of these, 179 provide advice to individual high net worth and individual non-high net worth clients, and would therefore be subject to the proposed Form CRS requirements and the related new and amended rules under the Advisers Act, and proposed new rule 211h–1 under the Advisers Act requiring disclosure of Commission registration status and a financial professional’s association in certain communications with retail investors.975 amozie on DSK3GDR082PROD with PROPOSALS1 2. Broker-Dealers For purposes of a Commission rulemaking in connection with the RFA, a broker-dealer will be deemed a small entity if it: (1) 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,976 or, if not required to file such statements, had total capital (net worth plus subordinated liabilities) even if another person is a trustee or managing agent of the trust. We are not able to determine, based on responses to Form ADV, exactly how many advisers provide investment advice to these types of trusts or other entities; however, we believe that these advisers most likely also advise individuals and are therefore included in our estimate. 974 Based on SEC-registered investment adviser responses to Items 5.F. and 12 of Form ADV. 975 Based on SEC-registered investment adviser responses to, Items 5.D.(a), 5.D.(b), 5.F. and 12 of Form ADV, which indicate that the adviser has clients that are high net worth individuals and/or individuals (other than high net worth individuals) and that the adviser is a small entity. Of these, 3 firms are dually registered as a broker-dealer and an investment adviser and may offer services to retail investors as both a broker-dealer and investment adviser (e.g., ‘‘dual registrants’’ for purposes of the relationship summary). See supra note 25. Dual registrants would file Form CRS on both IARD and EDGAR describing their retail advisory and retail brokerage businesses. In this RFA, dual registrants are counted in both the total number of small entity investment advisers and broker-dealers that would be subject to Form CRS and the proposed related rules and rule amendments. We believe that counting these firms twice is appropriate because of their additional burdens of complying with the rules with respect to both their advisory and brokerage businesses and filing Form CRS with IARD and EDGAR. 976 See 17 CFR 240.0–10(c). VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 of less than $500,000 on the last day of the preceding fiscal year (or in the time that it has been in business, if shorter); and (2) is not affiliated with any person (other than a natural person) that is not a small business or small organization. As discussed in Sections IV and V, above, the Commission estimates that as of December 31, 2017, approximately 2,857 retail broker-dealers would be subject to the proposed Form CRS requirements and new rule 17a–14 under the Exchange Act, and proposed amendments to rule 17a–3 and 17a–4 under the Exchange Act, and proposed new rules 15l–2 and 15l–3 under the Exchange Act.977 Further, based on FOCUS Report data, the Commission estimates that as of December 31, 2017, approximately 1,040 broker-dealers may be deemed small entities under the RFA.978 Of these, approximately 802 have retail business, and would be subject to the proposed Form CRS requirements and related proposed new and amended rules, the proposed rule requiring disclosure of Commission registration status in certain communications with retail investors, and the proposed rule regarding the prohibition of certain terms in names or titles in certain communications with retail investors.979 D. Projected Reporting, Recordkeeping and Other Compliance Requirements 1. Initial Preparation of Form CRS Relationship Summary Proposed Form CRS and the proposed rules and rule amendments would impose certain reporting and compliance requirements on certain advisers and broker-dealers, including those that are small entities, requiring them to create and update relationship summaries containing specified information regarding their advisory 977 See supra note 461 and accompanying text. Retail sales activity is identified from Form BD, 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. 978 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 2017. 979 Id. PO 00000 Frm 00124 Fmt 4701 Sfmt 4702 and brokerage businesses, as applicable. The proposed rules and rule amendments, including new recordkeeping requirements, are summarized in this RFA (Section VI.A., above). All of these proposed requirements are also discussed in detail, above, in Sections II.A–E., and these requirements and the burdens on advisers and broker-dealers, including those that are small entities, are discussed above in Sections IV and V (the Economic Analysis and Paperwork Reduction Act Analysis) and below. The proposed amendments to Form ADV that would require each registered investment adviser that offers advisory services to retail investors to prepare, file and deliver Form CRS would impose additional costs on many registered advisers, including some small advisers. Our Economic Analysis, discussed in Section IV, above, discusses these costs and burdens for investment advisers, which include small advisers.980 In addition, as discussed in our Paperwork Reduction Analysis, above, we anticipate that some advisers may incur a one-time initial cost for outside legal and consulting fees in connection with the initial preparation of the relationship summary.981 Generally, all advisers, including small advisers that advise retail investors are currently required to prepare and distribute Part 2 of Form ADV (the firm brochure). Because advisers already provide disclosures about their services, fees, conflicts and disciplinary history in their firm brochures,982 they would be able to use some of this information to respond to the disclosure requirements of the relationship summary. They would, however, have to draft completely new disclosure to comply with the proposed new format of Form CRS. As discussed above, approximately 179 small advisers currently registered with us would be subject to the proposed new Form ADV 980 See supra notes 621–637 and accompanying text (discussing the direct costs of Form CRS and related requirements on broker-dealers and investment advisers, including costs associated with delivery, preparation, and firm-wide implementation of the relationship summary, as well as training and monitoring for compliance). 981 See supra notes 729–730 and accompanying text (stating, however, that we do not anticipate external costs to investment advisers in the form of website set-up, maintenance, or licensing fees because they would not be required to establish a website for the sole purpose of posting their relationship summary if they do not already have a website, and we also do not expect other ongoing external costs for the relationship summary). 982 Much of the disclosure in Part 2A addresses an investment adviser’s conflicts of interest with its clients, and is disclosure that the adviser, as a fiduciary, must make to clients in some manner regardless of the form requirements. See supra note 314. E:\FR\FM\09MYP2.SGM 09MYP2 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules Part 3.983 As discussed above in our Paperwork Reduction Act Analysis, we expect these 179 small advisers to spend, on average, an additional total of 23,152 annual hours, or approximately 129.34 hours per adviser,984 which translates into an approximate monetized cost of $1,478,055, or $8,257 per adviser, attributable to the initial preparation, filing, posting, and delivery related to Form CRS.985 We expect the incremental external legal and compliance cost for small entity investment advisers to be estimated at $525 per adviser, or $93,936 in aggregate for small advisers.986 Similarly, requiring each brokerdealer that offers brokerage services to retail investors to prepare, file and deliver Form CRS would impose additional costs on many broker-dealers, including some small broker-dealers. Our Economic Analysis, discussed in Section IV, above, discusses these costs and burdens for broker-dealers, which include small broker-dealers.987 In addition, as discussed in our Paperwork Reduction Analysis, above, we anticipate that some broker-dealers may incur a one-time initial cost for outside legal and consulting fees in connection with the initial preparation of the relationship summary.988 As discussed above,989 unlike investment advisers, broker-dealers are not currently required to deliver to their retail investors written disclosures covering their services, fees, conflicts, and disciplinary history in one place such as the investment advisory firm brochure.990 983 See supra note 975 and accompanying text. supra Sections V.A.2, V.B, and V.C. 2.52 hours for preparing and filing of the relationship summary + 126.8 hours for posting to the website and delivery = 129.3 hours per adviser. 985 See supra Sections V.A.2, V.B, and V.C. 129.3 hours × 179 small advisers = $23,152 in total annual aggregate hours for small advisers. $8,257 × 179 small advisers = $1,478,055 in total annual aggregate monetized cost for small advisers. 986 See supra Section V.A.2.b. 987 See supra notes 621–637 and accompanying text (discussing the direct costs of Form CRS and related requirements on broker-dealers and investment advisers, including costs associated with delivery, preparation, and firm-wide implementation of the relationship summary, as well as training and monitoring for compliance). 988 See supra Section V.D.1. (stating, however, that we do not expect ongoing external legal or compliance consulting costs for the relationship summary). 989 See supra Section IV, at note 629 and accompanying text. 990 Broker-dealers are required under certain circumstances, such as when effecting certain types of transactions, to disclose certain conflicts of interest to their customers in writing, in some cases at or before the time of the completion of the transaction. See 913 Study, supra note 3, at nn.256– 259 and accompanying text. See supra note 311 and accompanying text. Under Regulation Best Interest, broker-dealers would also be required to disclose amozie on DSK3GDR082PROD with PROPOSALS1 984 See VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 Under existing provisions of the Exchange Act and self-regulatory organization rules, however, a brokerdealer is required to disclose certain information to its customers.991 To the extent that some of the new Form CRS disclosure burdens would apply to small broker-dealers, these brokerdealers are therefore already obligated to make certain of these disclosures to retail investors, although the disclosure is not currently required to be included in one comprehensive document such as Form ADV. As discussed above,992 approximately 802 broker-dealers that are small entities would be subject to the proposed Form CRS requirements and proposed new and amended rules. As discussed above, we expect these 802 small broker-dealers to spend, on average, 1,080 hours per brokerdealer,993 for a monetized value of $66,006 per broker-dealer,994 or 865,956 aggregate annual hours to respond to the proposed new Form CRS requirements,995 for an annual monetized burden of approximately $52,936,812. We expect the aggregate annual external third-party cost to small broker-dealers associated with this process would be $376,940.996 The costs associated with preparing the new relationship summaries will be limited for investment advisers and broker-dealers, including small entities, for several reasons. First, the disclosure document is concise (no more than four pages in length or equivalent limit if in electronic format), and much of the information is already provided by the broker-dealers and investment advisers as part of current disclosure practices. Second, the disclosure will be uniform across retail investors and would not be customized or personalized to potential investors. Third, the disclosure would involve a certain degree of standardization across firms. In particular, firms would be required to use the same headings, prescribed wording, and present the information under the headings in the same order. Additionally, firms would be prohibited the material facts relating to the scope and terms of the relationship. Regulation Best Interest Proposal, supra note 24. 991 See supra Section II, at notes 309–312 and accompanying text. See also Regulation Best Interest Proposal, supra note 24. 992 See supra note 979. 993 See supra note 846. 994 See supra note 847. 995 See supra note 823 and accompanying text. 802 small broker-dealers × 1,080 hours per brokerdealer = 865,956 annual aggregate hours. 802 small broker-dealers × $66,006 in monetized cost per broker-dealer = 52,936,812 annual aggregate hours. 996 See supra note 829 and accompanying text. 802 small broker-dealers × $470 in external legal and compliance costs on average per broker-dealer = $376,940. PO 00000 Frm 00125 Fmt 4701 Sfmt 4702 21539 from adding any items to those prescribed by the Commission and any information other than what the Instructions require or permit. These standardized elements allow for potential economies of scale for entities that may have subsidiaries that would also be required to produce the disclosure. The compliance costs could, however, be different across firms with relatively smaller or larger numbers of retail investors as customers or clients.997 Filing, Delivery, and Updating Requirements Related to Form CRS. As discussed above, a firm would be required to give a relationship summary to each retail investor, if the firm is an investment adviser, before or at the time the firm enters into an investment advisory agreement with the retail investor, or if the firm is a broker-dealer, before or at the time the retail investor first engages the services of the brokerdealer.998 A firm would be required to deliver the relationship summary even if the firm’s agreement with the retail investor is oral. A dual registrant would deliver the relationship summary at the earlier of entering into an investment advisory agreement with the retail investor or the retail investor engaging the firm’s services. In order to ensure that existing retail investors receive the disclosures in the relationship summary, the Commission proposes that firms would deliver the relationship summary to retail investors who are existing clients and customers on an initial one-time basis within 30 days after the date the firm is first required to file its relationship summary with the Commission.999 In addition, firms would be required to deliver the relationship summary to a retail investor who is an existing client or customer before or at the time a new account is opened or changes are made to the retail investor’s account(s) that would materially change the nature and scope of the firm’s relationship with the retail investor. This would include, for example, before or at the time the firm recommends that the retail investor transfers from an investment advisory account to a brokerage account or from a brokerage account to an investment advisory account, or moves assets from one type of account to another in a 997 See supra note 628 and accompanying text (discussing the Commission’s preliminary belief that compliance costs could be different across firms with relatively smaller or larger numbers of retail investors as customers or clients). 998 See supra Section II.C for a discussion of the delivery requirements. 999 See supra Section II.D for a discussion of the delivery requirements during the proposed transition period following the effectiveness of the proposed new rule. E:\FR\FM\09MYP2.SGM 09MYP2 amozie on DSK3GDR082PROD with PROPOSALS1 21540 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules transaction not in the normal, customary or already agreed course of dealing. As discussed above, firms would be required to update the relationship summary within 30 days whenever any information in the relationship summary becomes materially inaccurate.1000 Firms also would be required to post the latest version on its website (if it has one), and electronically file the relationship summary with the Commission. Firms would be required to communicate any changes in the updated relationship summary to retail investors who are existing clients or customers of the firm within 30 days after the updates are required to be made and without charge. The firm could communicate the information by delivering the amended relationship summary or by communicating the information in another way to the retail investor. We believe that this flexibility would minimize the burden of the communication requirement for all firms, including small advisers and broker-dealers. Firms also would also be required to deliver the relationship summary to a retail investor upon the retail investor’s request. In addition, firms would be permitted to deliver the relationship summary, as well as updates, electronically consistent with the Commission’s prior guidance regarding electronic delivery. We believe that this would further minimize the burden of delivery for all firms, including small advisers and broker-dealers. To the extent that small advisers and broker-dealers are more likely to have fewer retail investors than larger advisers and broker-dealers, the proposed delivery requirements should impose lower variable costs on small advisers and broker-dealers than on larger firms. The additional hours per adviser and broker-dealer, the monetized cost per adviser and brokerdealer, and the incremental external legal and compliance cost for small entity investment advisers and brokerdealers, attributable to the initial preparation, filing, posting, delivery, and recordkeeping related to Form CRS, are estimated above and in the Paperwork Reduction Analysis.1001 Recordkeeping Requirements Related to Form CRS. The proposed amendments would impose new recordkeeping requirements on many investment advisers and broker-dealers, including some small advisers and broker-dealers. We are proposing amendments to Advisers Act rule 204– 1000 See supra Section II.C.3 for a discussion of updating requirements. 1001 See supra Sections V.A.–F. VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 2 and Exchange Act rules 17a–3 and 17a–4, which set forth requirements for maintaining, making and preserving specified books and records, to require SEC-registered investment advisers and broker-dealers to retain copies of each relationship summary. Firms would also be required to maintain each amendment and revision to the relationship summary and a record of dates that each relationship summary and each amendment was delivered. These proposed changes are designed to update the books and records rules in light of proposed Form CRS, and they mirror the current recordkeeping requirements for the Form ADV brochure and brochure supplement. The records for investment advisers would be required to be maintained in the same manner, and for the same period of time, as other books and records required to be maintained under rule 204–2(a) under the Advisers Act, and the records for broker-dealers would be required to maintained for six years after the record was created in accordance with rule 17a–4(e)(10) under the Exchange Act.1002 As discussed in the Paperwork Reduction Act Analysis in Section IV above, the proposed amendments to rule 204–2 under the Advisers Act would increase the annual burden by approximately 0.2 hours per adviser, or 35.80 hours in aggregate for small advisers.1003 We therefore expect the annual monetized aggregate cost to small advisers associated with our proposed amendments would be $2,148.1004 Also as discussed in the Paperwork Reduction Act Analysis in Section IV above, the proposed amendments to rules 17a–3 and 17a–4 under the Exchange Act would increase the burden by approximately 0.2 annual hours per broker-dealer, or 160.4 annual hours in the aggregate.1005 We expect the aggregate cost to small brokerdealers associated with our proposed amendments would be $9,624.1006 1002 See supra note 371 (referencing Advisers Act rule 204–2(e)(1) and Exchange Act rule 17a– 4(e)(10), and stating that pursuant to Advisers Act rule 204–2(e)(1), investment advisers will be required to maintain the relationship summary for a period of five years, while Exchange Act rule 17a– 4(e)(5) will require broker-dealers to maintain the relationship summary for a period of six years). 1003 See supra note 765. 0.2 hours × 179 small entity retail investment advisers = 35.8. 1004 See supra note 768. 1005 0.2 hours × 802 small broker-dealers = 160.4 hours. 1006 See supra note 854 and accompanying text. $12 per broker-dealer × 802 small broker-dealers = $9,624. PO 00000 Frm 00126 Fmt 4701 Sfmt 4702 2. Rule 15l–2 Relating to Restrictions on the Use of Certain Terms in Names and Titles As discussed above in Section III, we are proposing to restrict broker-dealers and associated natural persons of broker-dealers, when communicating with a retail investor, from using as part of a name or title the term ‘‘adviser’’ or ‘‘advisor’’ unless any such (1) broker or dealer is an investment adviser registered under section 203 of the Advisers Act or with a state, or (2) natural person who is an associated person of a broker or dealer is a supervised person of an investment adviser registered under section 203 of the Advisers Act or with a state, and such person provides investment advice on behalf of such investment adviser. This would include such names or titles as, for example, financial advisor (or adviser), wealth advisor (or adviser), and trusted advisor (or adviser), and advisory (e.g., ‘‘Sample Firm Advisory’’) when communicating with any retail investor. The proposed rule would permit firms that are registered both as investment advisers and broker-dealers to use the term ‘‘adviser’’ or ‘‘advisor’’ in their name or title. The proposed rule would, however, only permit an associated natural person of a dually registered firm 1007 to use these terms where such person is also a supervised person of an investment adviser registered with the Commission or with a state and provides investment advice on behalf of such investment adviser. This would limit the ability of natural persons associated with a broker-dealer that do not typically provide investment advisory services to retail investors from continuing to use the term ‘‘adviser’’ or ‘‘advisor’’ by virtue of the fact that they are affiliated with a dually registered firm. Proposed rule 15l–2 would impose certain compliance requirements on broker-dealers, including small brokerdealers, but would not impose reporting or recordkeeping requirements on broker-dealers. The compliance burdens on broker-dealers, including small broker-dealers, are described above in our Economic Analysis in Section IV. They would need to change their names or titles where their names or titles include ‘‘adviser’’ or ‘‘advisor’’ in violation of the proposed rule. As 1007 For purposes of rules 15l–2, 15l–3 and 211h– 1, we are defining a ‘‘dually registered firm’’ in the same manner as a ‘‘dual registrant’’ is defined in the baseline of the Economic Analysis. See supra Section IV, note 453. See also supra note 411. We use the more narrowly defined ‘‘dual registrant’’ for purposes of the relationship summary discussion only. E:\FR\FM\09MYP2.SGM 09MYP2 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules discussed in Section IV above, the Commission estimates that as of December 31, 2017, approximately 2,857 broker-dealers would be subject to the proposed rule 151–2 under the Exchange Act.1008 As discussed in Section IV, above, approximately 103 broker-dealers that are not dually registered as investment advisers use the term ‘‘adviser,’’ ‘‘advisor,’’ or ‘‘advisory’’ as part of their current company name. To the extent these broker-dealers, some of which may be small entities, advise retail investors and would be subject to proposed rule 151–2, they would be subject to potentially substantial, one-time costs associated with the proposed rule. Broker-dealer firms subject to the restriction on the use of certain names or titles would be required to change current company names (if the company name contains ‘‘adviser/advisor’’), marketing materials, advertisements (e.g., print ads or television commercials), website and social media appearance, among other items, resulting in direct compliance costs. In addition, as discussed in Section IV, as a result of the proposed rule 151– 2, broker-dealers would need to assess whether their associated natural persons use as part of a name or title the term ‘‘adviser’’ or ‘‘advisor.’’ As discussed in Section IV, financial professionals providing brokerage services use a large variety of names or titles to describe their business and the services that they offer, including ‘‘financial advisor,’’ ‘‘financial consultant,’’ ‘‘banker,’’ and ‘‘broker.’’ 1009 To the extent their associated natural persons use the terms adviser’’ or ‘‘advisor’’ when communicating with a retail investor, firms would need to assess whether to require their associated natural persons to change their names or title to comply with the proposed rule and modify their retail investor communications. We request comment on how many associated natural persons of brokerdealers, including small entity brokerdealers, are currently using the terms ‘‘adviser’’ or ‘‘advisor’’ in their names or titles, and how many of these associated 1008 See supra Section IV.A.1.a. discussed in Section IV, approximately 39 percent of the 103 broker-dealers described above used a proper name coupled with the term ‘‘advisor’’ alone, and an additional 31 percent used a proper name coupled with the term ‘‘capital advisor.’’ Additionally, as discussed in the RAND Study, professionals providing advisory services or both brokerage and advisory services similarly also use a wide variety of titles, but the proportion of professionals who use titles containing the terms ‘‘adviser’’ or ‘‘advisor’’ are somewhat larger at 35%. See supra Section IV, Table 8: Replication of Table 6.3 of the RAND Study—Professional Titles Most Commonly Reported by Respondents, and accompanying text. amozie on DSK3GDR082PROD with PROPOSALS1 1009 As VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 natural persons are supervised persons of an investment adviser registered with the Commission or with a state and who provide investment advice on behalf of such investment adviser. The proposed restriction on the use of the term ‘‘adviser’’ and ‘‘advisor’’ in a name or title does not apply to registered investment advisers, whether they are solely registered as investment advisers or whether they are dually registered as broker-dealers. Consequently, there would be no compliance costs for registered investment advisers associated with the restriction on certain terms in names or titles. However, as discussed in Sections III and IV, supervised persons of dually registered investment advisers who do not provide investment advice on behalf of such investment adviser would be restricted from using these terms when communicating with a retail investor, which could lead to costs for those financial professionals or their firms. 3. Rules 15l–3 and 211h–1 Relating to Disclosure of Commission Registration Status and Financial Professional Association As discussed above, we are proposing rule 15l–3 under Exchange Act and rule 211h–1 under the Advisers Act that would require broker-dealers and investment advisers and their associated natural persons and supervised persons, respectively, to disclose the firm’s registration status with the Commission and such financial professional’s relationship with the firm in print or electronic retail investor communications. These rules would impose certain compliance requirements on many broker-dealers and investment advisers but would not impose separate reporting or recordkeeping requirements on investment advisers and broker-dealers. The compliance burdens on brokerdealers and investment advisers, including small broker-dealers and investment advisers, are described above in our Economic Analysis in Section IV and the Paperwork Reduction Act discussion in Section V. These include the requirement for investment advisers and broker-dealers that would be subject to the proposed rule to prominently disclose their registration status in print or electronic retail investor communications. In addition, associated natural persons would need to prominently disclose that they are associated persons of a brokerdealer registered with the Commission, and supervised persons would need to prominently disclose that they are supervised persons of an investment adviser registered with the Commission. PO 00000 Frm 00127 Fmt 4701 Sfmt 4702 21541 As discussed in Sections IV and V above, the Commission estimates that as of December 31, 2017, approximately 2,857 broker-dealers would be subject to the proposed rule 15l–3 under the Exchange Act. As discussed above, of these, approximately 802 are small entities. These broker-dealers would be subject to the rule’s requirements described in the previous paragraph. As discussed above, the Commission estimates that as of December 31, 2017, approximately 7,625 investment advisers would be subject to the proposed rule 211h–1 under the Advisers Act. Based on IARD data, we estimate that as of December 31, 2017, approximately 618 advisers are small entities under the RFA. Of these, approximately 179 advise retail investors, and would therefore be subject to the proposed rule 211h–1 under the Advisers Act. Compliance with these proposed rules would require changes to retail investor communications, which would have to be modified to incorporate the registration status in the manner the rule prescribes. As discussed above in Sections IV and V, to comply with our proposed rule with respect to print communications, broker-dealers and investment advisers would need to review their print and electronic retail investor communications, identify which would need to be amended, make the changes, and verify that all firm retail investor communications comply with the rule’s requirements including its technical specifications such as the type size, font, and prominence. As discussed above in Section V, we preliminarily anticipate that the costs associated with complying with the proposed rule with respect to print communications would be larger for large broker-dealers than for small broker-dealers, because we assume large broker-dealers will have to review, identify and change more print communications and in turn have their compliance staff verify more print communications as being compliant with our proposed rule as compared to small broker-dealers which will have fewer print communications. With respect to electronic communications, broker-dealers would need to review, identify and make the required updates coupled with verifying that such retail investor communications (present and future) would be compliant with the proposed rule.1010 We preliminarily 1010 As stated in Section III.D above, we are not requiring firms to send new communications to replace all older print communications as this would be overly burdensome and costly for firms. Instead, we are staging the compliance date to E:\FR\FM\09MYP2.SGM Continued 09MYP2 21542 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules amozie on DSK3GDR082PROD with PROPOSALS1 estimate that the costs associated with complying with the proposed rule regarding electronic communications would similarly be lower for small broker-dealers than for large brokerdealers, because we assume that small broker-dealers have fewer electronic communications that are subject to our proposed rule as compared to large firms. For investment advisers, as discussed above in Section V, we preliminarily estimate that large firms would require larger costs than small firms to comply with the proposed rule (e.g., large firms have a greater amount of retail investor communications subject to our proposed rule that would need to be reviewed, changed, and verified). The Commission also preliminarily estimates that the costs associated with complying with the proposed rules’ disclosure requirements for brokerdealers, investment advisers, and their associated natural persons and supervised persons, respectively, would also be smaller for small firms than for large firms. With respect to brokerdealers, we estimate that the costs would increase with the size of the broker-dealer, such as costs associated with revisions to each individual representative’s communication and advertising materials.1011 Specifically, large broker-dealers would have to review, identify and change more print and electronic communications and in turn have their compliance staff verify more communications as being compliant with our proposed rules as compared to small broker-dealers which would have fewer communications. Similarly, with respect to investment advisers, we estimate that small investment advisers would have fewer print and electronic communications that would be subject to our proposed rule as compared to large firms, resulting in a lower burden preliminary estimate. In addition, the Commission estimates that small entity advisers have fewer employees performing investment advisory functions than large advisers.1012 Therefore, we anticipate that small entity retail investment advisers would require fewer resources ensure that firms can phase out certain older communications from circulation through the regular business lifecycle rather than having to retroactively change them. 1011 See Section IV. 1012 Based on adviser responses to Item 5.B.(1) of Form ADV, we estimate that as of September 30, 2017, the median small entity retail investment adviser employed 1 person performing investment advisory functions, and the median non-small entity retail investment advisers employed 5 persons performing investment advisory functions. VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 to oversee their employees’ compliance with the proposed rule. E. Duplicative, Overlapping, or Conflicting Federal Rules As noted above, broker-dealers and investment advisers have other disclosure obligations under the federal securities laws and other federal laws.1013 For example, the information required by the relationship summary is generally already provided in greater detail for investment advisers by Form ADV Part 2. The current disclosure requirements and obligations result in varying degrees and kinds of information to investors, but we believe that all retail investors would benefit from a short summary that focuses on certain key aspects of the firm and its services. By requiring both investment advisers and broker-dealers to deliver a relationship summary that discusses both types of services and their differences, the relationship summary would help all retail investors, whether they are considering an investment adviser or a broker-dealer. A relationship summary would help retail investors to understand their relationship with a particular firm, to compare different types of accounts, and to compare that firm with other firms. The relationship summary would provide in one place, for the first time, summary information about the services, fees, conflicts, and disciplinary history for broker-dealers. Under our proposed rules, firms would be required to file their relationship summary with the Commission, and the relationship summary will be available on the Commission’s public disclosure website. Dual registrants would be required to file Form CRS on both IARD and EDGAR. We are proposing IARD and EDGAR because they are familiar filing systems for investment advisers and broker-dealers.1014 By having firms file the relationship summaries with the Commission, the Commission can more easily monitor the filings for compliance with Form CRS. We believe that requiring dual registrants to file on both EDGAR and IARD is appropriate and in the public interest and will improve investor protection. This is because retail investors seeking brokerage services (but not investment advisory services) would be likely to search EDGAR, and retail investors seeking investment advisory services (but not brokerage services) would be likely to search IARD. 1013 See 1014 See PO 00000 supra notes 308–316. supra Section II.C.1. Frm 00128 Fmt 4701 Sfmt 4702 F. Significant Alternatives The RFA directs the Commission to consider significant alternatives that would accomplish our stated objectives, while minimizing any significant adverse impact on small entities. We considered the following alternatives for small entities in relation to the proposed Form CRS required by Part 3 of Form ADV, the proposed amendments to Form ADV (17 CFR 279.1) and rules 203–1, 204–1, and 204–2 under the Advisers Act, the proposed new rule 204–5 under the Advisers Act, the proposed amendments to rules 17a–3 and 17a–4 under the Exchange Act, the proposed new rule 17a–14 and new Form CRS (17 CFR 249.640) under the Exchange Act, the proposed new rules 15l–2 and 15l–3 under the Exchange Act, and the proposed new rule 211h– 1 under the Advisers Act: (i) The establishment of differing compliance or reporting requirements that take into account the resources available to small entities; (ii) the clarification, consolidation, or simplification of compliance and reporting requirements under the proposed Form CRS, and proposed new rules and rule amendments for such small entities; (iii) the use of performance rather than design standards; and (iv) an exemption from coverage of the proposed Form CRS, and proposed rules and rule amendments, or any part thereof, for such small entities. 1. Form CRS Relationship Summary Regarding the first alternative, the Commission believes that establishing different compliance or reporting requirements for small advisers and broker-dealers would be inappropriate under these circumstances. Because the protections of the Advisers Act and Exchange Act are intended to apply equally to retail investor clients and customers of both large and small firms, it would be inconsistent with the purposes of the Advisers Act and the Exchange Act to specify differences for small entities under the proposed rules and rule amendments. As discussed above, we believe that the proposed new Form CRS, and the proposed rules and rule amendments would result in multiple benefits to all retail investors, including alerting retail investors to certain information to consider when choosing a firm and a financial professional and prompting retail investors to ask informed questions. In addition, the content of the relationship summary would facilitate comparisons across firms. We believe that these benefits should apply to retail investors of smaller firms as well as retail E:\FR\FM\09MYP2.SGM 09MYP2 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules investors of larger firms.1015 To establish different disclosure requirements for small entities would diminish this investor protection for clients of small advisers. It would also be inappropriate to establish different recordkeeping requirements for small entities, because requiring maintenance of Form CRS and related records as part of the firm’s books and records would facilitate the Commission’s ability to inspect for and enforce compliance with firms’ obligations with respect to Form CRS, which is important for retail investors clients of both large and small firms. In addition, as discussed above in Section II, we are proposing to require that investment advisers and dual registrants file their relationship summaries with the Commission electronically through IARD in the same manner as they currently file Form ADV Parts 1 and 2. We are proposing to require that broker-dealers file their relationship summaries with the Commission electronically on EDGAR. As discussed above, there are several reasons we propose having the relationship summaries filed with the Commission, including that the public would benefit by being able to use a central location to find any firm’s relationship summary, and that easy access to various relationship summaries through one source may facilitate simpler comparison across firms.1016 In addition, as also discussed below, some firms may not maintain a website, and therefore their relationship summaries would not otherwise be accessible to the public.1017 We do not believe that proposing different filing requirements for large and small firms would be appropriate given our belief that the benefits of electronic filing are important for retail investors clients and customers of both large and small firms. Furthermore, almost all advisers, including small advisers, have Internet access and use the Internet for various purposes.1018 Finally, the proposal to require investment advisers and broker-dealers post their relationship summary on their amozie on DSK3GDR082PROD with PROPOSALS1 1015 See supra Section I (discussing the benefits of retail investors having access to diverse business models and of preserving investor choice among brokerage services, advisory services, or both). 1016 See supra note 320 and accompanying text. 1017 Id. 1018 See 2000 Brochure Proposing Release, supra note 271, at n.304 and accompanying text. However, an adviser that is a small business may be eligible for a continuing hardship exemption for Form ADV filings, which would include proposed Form CRS, if it can demonstrate that filing electronically would impose an undue hardship. See Instruction 17 of General Instructions to Form ADV. VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 public websites, if they have a public website, in a way that is easy for retail investors to find, already incorporates the flexibility to permit different compliance and reporting requirements for small entities, if applicable. To the extent that broker-dealers and investment advisers that are small entities are less likely to have public websites and do not have them, they would not be required under our proposal to post the relationship summary on their websites.1019 In other ways, as well, the proposal incorporates flexibility for smaller broker-dealers and investment advisers to comply with the proposed requirements. For instance, we are proposing to require firms to communicate the information in an amended relationship summary to retail investors who are existing clients or customers of the firm within 30 days after the updates are required to be made and without charge.1020 This requirement provides firms the ability to disclose changes without requiring them to duplicate disclosures and incur additional costs. Regarding the second alternative, we believe the current proposal is clear and that further clarification, consolidation, or simplification of the compliance requirements is not necessary. The proposed Instructions are designed to present requirements for advisers’ and broker-dealers’ relationship summaries clearly and simply to all such firms, including small entities. In addition, to aid firms in understanding the type of disclosures we propose to require, we have created mock-ups of a relationship summary for an investment advisory firm, a brokerage firm, and a dual registrant, and have included them as appendices to this release. These mockups examples are designed to illustrate the application of the proposed requirements. We also believe that the delivery and filing requirements are clear. As further discussed above, our proposal would require: Delivery of the relationship summary to each retail investor before or at the time of beginning a relationship with a firm,1021 1019 See supra note 320 (we are proposing that firms without a website include a toll-free telephone number in their relationship summaries that retail investors can call to obtain up-to-date information). 1020 Advisers Act proposed rule 204–5(b)(4) and Exchange Act proposed rule 17a–14(c)(2)(iv4); proposed General Instruction 6.(b) to Form CRS. See supra Section II.C.3. Firms could communicate this information by delivering the amended relationship summary or by communicating the information another way to the retail investor. Id. 1021 See supra Section II.C.2. We are proposing different triggers for initial delivery of the relationship summary by investment advisers (before or at the time the firm enters into an investment advisory agreement with the retail PO 00000 Frm 00129 Fmt 4701 Sfmt 4702 21543 updating the relationship summary within 30 days whenever any information in the relationship summary becomes materially inaccurate,1022 and delivery of the relationship summary to an existing retail investor client or customer at certain points during the relationship.1023 Firms would also be required to file their relationship summaries with the Commission and post them on their firm websites, if they have a public website. Regarding the third alternative, the Commission believes that proposed Form CRS and the related new rules and amendments appropriately use a combination of performance and design standards. We are proposing to standardize the relationship summaries among firms by specifying the headings, sequence, and content of the topics; prescribing language for firms to use as applicable; and limiting the length of the relationship summary. We believe that the standardization will provide comparative information in a userfriendly format that helps retail investors with informed decision making. For example, we are prescribing the use of graphical formats in specified circumstances, based on studies that indicate the effectiveness of graphical presentation for retail investors.1024 Also, as discussed above, we are requiring firms to use prescribed wording in many items, and we are proposing that firms may not include disclosure in the relationship summary other than disclosure that is required or permitted by the Instructions.1025 We believe that allowing only the proposed mandatory or permissible information would promote consistency of investor) and by broker-dealers (before or at the time the retail investor first engages the firm’s services). These proposed requirements are intended to make the relationship summary readily accessible to retail investors at the time when they are choosing investment services and are generally consistent with the approach many commenters recommended. Id. 1022 See supra Section II.C.3. 1023 See supra Section II.C.2. For example, our proposal would require firms to communicate the information in an amended relationship summary to retail investors who are existing clients or customers of the firm within 30 days after the updates are required to be made and without charge. 1024 For example we are proposing to require dual registrants to present all of the information required by Items 2 through 4 and Item 6 in a tabular format, comparing advisory services and brokerage services side-by-side, with prescribed headings. See proposed General Instruction 1.(e) to Form CRS. Similarly, standalone broker-dealers and investment advisers would be required to provide general information about fee types in tabular format, in a separate comparison section. See proposed Item 5 of Form CRS. 1025 See supra notes 54–55 and accompanying text. E:\FR\FM\09MYP2.SGM 09MYP2 21544 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules amozie on DSK3GDR082PROD with PROPOSALS1 information presented to investors, and allow investors to focus on information that we believe is particularly helpful in deciding among firms.1026 Within the framework of standardization, we are proposing that for certain disclosure Items in Form CRS, firms would have some flexibility in how they include the required information.1027 In addition, we have proposed permitting, but not requiring, the use of graphical formats where doing so does not unduly constrain effective description of a range of information. With respect to the prescribed wording, we are proposing that if a prescribed statement is inapplicable to a firm’s business or would be misleading to a reasonable retail investor, the firm would be permitted to omit or modify that statement.1028 We believe that this approach of using both performance and design standards balances the need to provide firms flexibility in making the presentation of information consistent with their particular business model while ensuring that all investors receive certain information regardless of the firm in a manner that promotes comparability. In the sections above, we request comment on whether the proposed mix of design and performance standards would work for investment advisers and broker-dealers, including small entities, and what the impact of such standards would be on firms.1029 Regarding the fourth alternative, we believe that, similar to the first alternative, it would be inconsistent with the purposes of the Advisers Act and the Exchange Act to exempt small advisers and broker-dealers from the proposed rule and form amendments, or any part thereof. Because the protections of the Advisers Act and Exchange Act are intended to apply equally to retail investors that are clients and customers of both large and small advisers and broker-dealers, it would be inconsistent with the purposes of the Advisers Act and 1026 It would also encourage impartial information by preventing firms from adding information commonly used in marketing materials, such as performance. 1027 See supra note 56. 1028 See proposed General Instruction 3 to Form CRS. Firms may omit or modify prescribed wording or other statements required to be part of the relationship summary if such statements are inapplicable to a firm’s business or would be misleading to a reasonable retail investor. 1029 See requests for comment in Sections II.A and II.B with respect to the proposed prescribed wording in places throughout the relationship summary, and the proposed prescribed headings, order and format. VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 Exchange Act to specify differences for small entities under the proposed amendments. As discussed above, the information in the relationship summary would alert retail investors to important information for them to consider when choosing a firm and a financial professional, and would prompt retail investors to ask informed questions. In addition, the content of the relationship summary would facilitate comparisons across firms that offer the same or substantially similar services. We preliminarily believe that providing this information before or at the time a retail investor enters into an investment advisory agreement or first engages a brokerage firm’s services, as well as at certain points during the relationship (e.g., switching account types) is appropriate and in the public interest and will improve investor protection, and will deter potentially misleading sales practices by helping retail investors to make a more informed choice among the types of firms and services available to them. Since we view investor confusion about brokerage and advisory services as an issue for many retail investors who are clients and customers of advisers and brokerdealers, it would be inconsistent with the purpose of the relationship summary to specify different requirements for small entities.1030 2. Rule 15l–2 Relating to Restrictions on the Use of Certain Terms in Names and Titles Regarding the first alternative, the Commission preliminarily believes that establishing different compliance or reporting requirements for small brokerdealers would be inappropriate under these circumstances. We believe it is important to address the risk that retail investors are confused and potentially misled based on the names or titles of their firms and financial professionals and as a result, make uninformed decisions regarding which firm or financial professional they are engaging or seeking to engage. Because the protections of the Exchange Act are intended to apply equally to retail investor clients of both large and small firms, the Commission preliminarily believes it would be inconsistent with the purposes of the Exchange Act to specify differences for small entities under the proposed rule. Regarding the second alternative, we believe that the current proposal is clear and that further clarification, consolidation, or simplification is not 1030 See supra note 3, citing studies that show retail investor confusion about the differences among broker-dealers and investment advisers. PO 00000 Frm 00130 Fmt 4701 Sfmt 4702 necessary. As discussed in Section III above, the restriction is limited to use of the terms ‘‘adviser’’ and ‘‘advisor.’’ As discussed above in Section III, we considered whether we should restrict broker-dealers from using additional terms, such as, for example, ‘‘financial consultant.’’ We believe, however, that the term ‘‘adviser’’ or ‘‘advisor’’ is more closely related to the statutory term ‘‘investment adviser,’’ which makes it more likely than these other terms that retail investors would associate such terms with an investment adviser and its advisory activities than with a broker-dealer and its brokerage activities. We preliminarily believe that the use of the terms ‘‘adviser’’ and ‘‘advisor’’ by broker-dealers and their associated natural persons has particularly contributed to investor confusion about the typical services, fee structures, conflicts of broker-dealers and investment advisers, and legal standards of conduct to which brokerdealers and investment advisers are subject. Therefore, we believe that the current proposal is clear in its limited scope of restricted terms. Regarding the third alternative, we believe that using performance rather than our proposed design standards would be less effective in addressing the issue of investor confusion based on the names or titles of their firms and financial professionals. As discussed in Section III, the proposed rule would restrict broker-dealers’ or its associated natural persons’ use of the term ‘‘adviser’’ or ‘‘advisor’’ as part of a name or title when communicating with a retail investor. We believe that the use of the terms ‘‘adviser’’ and ‘‘advisor’’ has particularly contributed to investor confusion about the typical services, fee structures, conflicts of interest, and legal standards of conduct to which brokerdealers and investment advisers are subject and as a result has potentially misled retail investors as to the type of firm or financial professional they are engaging or seeking to engage. Accordingly, we believe that restricting these terms appropriately addresses these issues based on a broker-dealer’s or its associated natural persons’ use of the term ‘‘adviser’’ or ‘‘advisor’’ as part of a name or title. As discussed above in Section III, we preliminarily believe that without restricting a broker-dealer or its associated natural person(s) from using ‘‘adviser’’ or ‘‘advisor’’ in a name or title, a retail investor may be misled into believing and expecting that their ‘‘financial advisor,’’ who may, for example, solely provide brokerage services at a broker-dealer, is an E:\FR\FM\09MYP2.SGM 09MYP2 amozie on DSK3GDR082PROD with PROPOSALS1 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules investment adviser (i.e., a fiduciary) on the basis of his name or title. Additionally, we considered two performance-based standards, as discussed above in Section III.C.1031 However, we believe that either performance standard would be less effective than our proposed design standard in addressing investor confusion stemming from their association with the statutory term investment adviser. In the first alternative approach, we considered proposing a rule which would have stated that a broker-dealer that uses the term ‘‘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 brokerage business and therefore would not be excluded from the definition of investment adviser under section 202(a)(11)(C) of the Advisers Act. For the second alternative approach, we considered precluding a broker-dealer from relying on the solely incidental exclusion of section 202(a)(11)(C) if it ‘‘held itself out’’ as an investment adviser to retail investors such as by representing or implying through any communication or other sales practice (including through the use of names or titles) that they are offering investment advice subject to a fiduciary relationship with an investment adviser. Under this second approach, there would be a prohibition on certain broker-dealer and its associated natural person communications that suggest, or could reasonably be understood as suggesting, that such broker-dealer or its associated natural persons are performing investment advisory services in a manner that would subject them to the Advisers Act rather than as solely incidental to their business as a brokerdealer. For the reasons we set out in Section III above, we believe that our proposed restriction on the use of ‘‘adviser’’ and ‘‘advisor’’ in combination with the requirement to deliver a relationship summary is a simpler, more administrable approach to address the confusion about the difference between investment advisers and broker-dealers, and to prevent investors from being potentially misled. As a result, we believe that our proposed approach is more tailored toward creating greater clarity than our alternative approaches. Regarding the fourth alternative, we preliminarily believe that, similar to the first alternative, it would be inconsistent with the purposes of the Exchange Act to exempt small broker-dealers from the proposed rule, or any part thereof. 1031 See supra Section III.C. VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 3. Rule 15l–3 Relating to Disclosure of Commission Registration Status and Financial Professional Association Regarding the first alternative, the Commission believes that establishing different compliance or reporting requirements for small advisers and broker-dealers would be inappropriate under these circumstances. We believe it is important to assist retail investors in determining which type of firm is more appropriate for their specific investment needs and promote better informed decisions regarding which firm or financial professional they are engaging or seeking to engage. Because the protections of the Advisers Act and Exchange Act are intended to apply equally to retail investor clients of both large and small firms, we preliminarily believe it would be inconsistent with the purposes of the Exchange Act and the Advisers Act to specify differences for small entities under the proposed rule. Regarding the second alternative, we believe that the current proposal is clear and that further clarification, consolidation, or simplification of the compliance requirements is not necessary. As discussed in Section III.D, we are proposing rules under the Exchange Act and Advisers Act that would require broker-dealers and investment advisers and their associated natural persons and supervised persons, respectively, to prominently disclose the firm’s registration status with the Commission and the associated natural persons and supervised person’s relationship with the firm in print and electronic retail investor communications. As discussed above in Section III, our proposal would subject broker-dealers and investment advisers to the same requirements, adding to the clarity and consolidation of the compliance requirements. Finally, we note that our proposed rules contain specific presentation and prominence requirements, as discussed above in Section III, for both print and electronic communications. Regarding the third alternative, we believe that using performance rather than design standards would be less effective in assisting retail investors in determining which type of firm is more appropriate for their specific investment needs. Specifically, we are concerned that in the absence of the specific prominence and formatting requirements, firms and financial professionals may disclose their registration status in a footnote or at the bottom of a website and in small print as they do today with other regulatory mandated disclosures (e.g., member of PO 00000 Frm 00131 Fmt 4701 Sfmt 4702 21545 Securities Investor Protection Corporation). In such cases, retail investors would be unable to readily discern whether a firm is a broker-dealer or investment adviser and thus avoid making an uniformed choice of which firm or financial professional to engage or seek to engage, undermining a key purpose of our proposed rules. Therefore, we believe that our proposed design standards would facilitate the presentation of required information to retail investors. Specifically, as we noted above, disclosures as important as a firm’s registration status or a financial professional’s association with such firm should not be disclosed inconspicuously or placed in fine print. Accordingly, we are proposing to require a firm and its financial professionals to disclose their registration statuses in print communications in a type size at least as large as and of a font style different from, but at least as prominent as, that used in the majority of the communication. In addition, we are proposing to require the disclosure to be presented in the body of the communication and not in a footnote. Finally, we are also proposing that if a communication is delivered through an electronic communication or in any publication by radio or television, the disclosure must be presented in a manner reasonably calculated to draw retail investors’ attention to it. We believe that through these design standards retail investors would have the information necessary to facilitate an informed choice of financial firm and its professionals. Regarding the fourth alternative, we preliminarily believe that, similar to the first alternative, it would be inconsistent with the purposes of the Advisers Act and the Exchange Act to exempt small advisers and broker-dealers from the proposed rule, or any part thereof. G. Solicitation of Comments We encourage written comments on the matters discussed in this IRFA. We solicit comment on the number of small entities subject to the proposed Form CRS, and the proposed rules and rule amendments as well as the potential impacts discussed in this analysis; and whether the proposal could have an effect on small entities that has not been considered. We request that commenters describe the nature of any impact on small entities and provide empirical data to support the extent of such impact. E:\FR\FM\09MYP2.SGM 09MYP2 21546 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules amozie on DSK3GDR082PROD with PROPOSALS1 VII. Consideration of the Impact on the Economy For purposes of the Small Business Regulatory Enforcement Fairness Act of 1996, or ‘‘SBREFA,’’ 1032 we must advise OMB whether a proposed regulation constitutes a ‘‘major’’ rule. Under SBREFA, a rule is considered ‘‘major’’ where, if adopted, it results in or is likely to result in (1) an annual effect on the economy of $100 million or more; (2) a major increase in costs or prices for consumers or individual industries; or (3) significant adverse effects on competition, investment or innovation. We request comment on the potential effect of the proposed amendments on the U.S. economy on an annual basis; any potential increase in costs or prices for consumers or individual industries; and any potential effect on competition, investment or innovation. Commenters are requested to provide empirical data and other factual support for their views to the extent possible. VIII. Statutory Authority The Commission is proposing amendments to rule 203–1 under the Advisers Act pursuant to authority set forth in sections 203(c)(1), 204, and 211(a) of the Investment Advisers Act of 1940 [15 U.S.C. 80b–3(c)(1), 80b–4, and 80b–11(a)]. The Commission is proposing amendments to rule 204–1 under the Advisers Act pursuant to authority set forth in sections 203(c)(1) and 204 of the Investment Advisers Act of 1940 [15 U.S.C. 80b–3(c)(1) and 80b–4]. The Commission is proposing new rule 204–5 under the Advisers Act pursuant to authority set forth in sections 204, 206A, 206(4), 211(a), and 211(h) of the Investment Advisers Act of 1940 [15 U.S.C. 80b–4, 80b–6a, 80b– 6(4), 80b–11(a), 80b–11(h)], and section 913(f) of Title IX of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the ‘‘Dodd-Frank Act’’). The Commission is proposing amendments to rule 279.1, Form ADV, under section 19(a) of the Securities Act of 1933 [15 U.S.C. 77s(a)], sections 23(a) and 28(e)(2) of the Securities Exchange Act of 1934 [15 U.S.C. 78w(a) and 78bb(e)(2)], section 319(a) of the Trust Indenture Act of 1939 [15 U.S.C. 7sss(a)], section 38(a) of the Investment Company Act of 1940 [15 U.S.C. 80a– 37(a)], and sections 203(c)(1), 204, 206A, 211(a) and 211(h), and of the Investment Advisers Act of 1940 [15 U.S.C. 80b–3(c)(1), 80b–4, 80b–6a, 80b– 1032 Public Law 104–121, Title II, 110 Stat. 857 (1996) (codified in various sections of 5 U.S.C., 15 U.S.C. and as a note to 5 U.S.C. 601). VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 11(a) and 80b–11(h)], and section 913(f) of Title IX of the Dodd-Frank Act. The Commission is proposing to amend rule 204–2 under the Advisers Act pursuant to authority set forth in sections 204 and 211 of the Advisers Act [15 U.S.C. 80b–4 and 80b–11]. The Commission is proposing new rule 17a–14 under the Exchange Act, Form CRS, and amendments to rules 17a–3 and 17a–4 under the Exchange Act pursuant to the authority set forth in the Exchange Act and particularly sections 3, 10, 15, 17, 23 and 36 thereof 15 U.S.C. 78c, 78j, 78o, 78q, 78w and 78mm, and section 913(f) of Title IX of the Dodd-Frank Act. The Commission is proposing new rules 15l–2 and 15l–3 under the authority set forth in sections 10, 15, 23, and 36 of the Securities Exchange Act of 1934 [15 U.S.C. 78j, 78o, 78w, and 78mm] and new rule 211h–1 under the authority set forth in sections 211(h), 206A, 211(a) of the Investment Advisers Act of 1940 [15 U.S.C. 80b–11(h), 80b– 6a, 80b–11(a)]. IX. Text of Rule and Form List of Subjects 17 CFR Parts 240 and 249 Brokers, Reporting and recordkeeping requirements, Sales practice and disclosure requirements, Securities. 17 CFR Parts 275 and 279 Investment advisers, Reporting and recordkeeping requirements, Securities. Text of Proposed Rules For the reasons set out in the preamble, title 17, chapter II of the Code of Federal Regulations is proposed to be amended as follows: PART 240—GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 1934 1. The general authority citation for part 240 continues to read as follows and sectional authorities for 240.15l–2, 240.15l–3, and 240.17a–14 are added to read as follows: ■ 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. 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. * PO 00000 * * Frm 00132 * Fmt 4701 * Sfmt 4702 Section 240.15l–2 is also issued under Public Law 111–203, sec. 913, 124 Stat. 1376 (2010). Section 240.15l–3 is also issued under Public Law 111–203, sec. 913, 124 Stat. 1376 (2010). Section 240.17a–14 is also issued under Public Law 111–203, sec. 913, 124 Stat. 1376 (2010). * * * * * 2. Section 240.15l–2 is added to read as follows: ■ § 240.15l–2 ‘‘Advisor’’. Use of the Term ‘‘Adviser’’ or (a) A broker or dealer, or a natural person who is an associated person of a broker or dealer shall be restricted, when communicating with a retail investor, from using as part of a name or title the term ‘‘adviser’’ or ‘‘advisor’’ unless any such: (1) Broker or dealer is an investment adviser registered under Section 203 of the Investment Advisers Act of 1940 or with a State, or (2) Natural person who is an associated person of a broker or dealer is a supervised person of an investment adviser registered under Section 203 of the Investment Advisers Act of 1940 or with a State, and such person provides investment advice on behalf of such investment adviser. (b) The term retail investor has the meaning set forth in § 240.17a–14. ■ 3. Section 240.15l–3 is added to read as follows: § 240.15l-3 Status. Disclosure of Registration (a) A broker or dealer shall prominently disclose that it is registered with the Commission as a broker-dealer in print or electronic retail investor communications. (b) A natural person who is an associated person of a broker or dealer shall prominently disclose that he or she is an associated person of a brokerdealer registered with the Commission in print or electronic retail investor communications. (c) Such disclosures in paragraphs (a) and (b) shall be provided in the following manner: (1) For print communications, such status must be displayed in a type size at least as large as and of a font style different from, but at least as prominent as, that used in the majority of the communication. In addition, such disclosure must be presented in the body of the communication and not in a footnote. (2) For electronic communications, or in any publication by radio or television, such disclosure must be presented in a manner reasonably calculated to draw retail investor attention to it. E:\FR\FM\09MYP2.SGM 09MYP2 21547 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules (d) The term retail investor has the meaning set forth in § 240.17a–14. ■ 4. Section 240.17a–3 is amended by adding paragraph (a)(24) to read as follows: § 240.17a–3 Records to be made by certain exchange members, brokers and dealers. (a) * * * (24) A record of the date that each Form CRS was provided to each retail investor, including any Form CRS provided before such retail investor opens an account. * * * * * ■ 5. Section 240.17a–4 is amended by adding paragraph (e)(10) to read as follows: § 240.17a–4 Records to be preserved by certain exchange members, brokers and dealers. * * * * * (e) * * * (10) All records required pursuant to § 240.17a–3(a)(24), as well as a copy of each Form CRS, until at least six years after such record or Form CRS is created. * * * * * ■ 6. Section 240.17a–14 is added to read as follows: amozie on DSK3GDR082PROD with PROPOSALS1 § 240.17a–14 Form CRS, for preparation, filing and delivery of Form CRS. (a) Scope of Section. This section shall apply to every broker or dealer registered with the Commission pursuant to section 15 of the Act that offers services to a retail investor. (b) Form CRS. You must: (1) Prepare Form CRS 17 CFR 249.640, by following the instructions in the form. (2) File your current Form CRS electronically with the Commission through the Commission’s EDGAR system, and thereafter, file an amended Form CRS in accordance with the instructions in the form. (3) Amend your Form CRS as required by the instructions in the form. (c) Delivery of Form CRS. You must: (1) Deliver to each retail investor your current Form CRS before or at the time the retail investor first engages your services. (2) Deliver to each retail investor who is an existing customer your current Form CRS before or at the time (i) a new account is opened that is different from the retail investor’s existing account(s); or (ii) changes are made to the retail investor’s existing account(s) that would materially change the nature and scope of the relationship with the retail investor, including before or at the time you recommend that the retail investor transfers from an advisory account to a VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 brokerage account, transfers from a brokerage account to an advisory account, or moves assets from one type of account to another in a transaction not in the normal, customary or already agreed course of dealing. Whether a change would require delivery of the Form CRS would depend on the specific facts and circumstances. (3) Post the current Form CRS prominently on your website, if you have one, in a location and format that is easily accessible for retail investors. (4) Communicate any changes made to Form CRS to each retail investor who is an existing customer within 30 days after the amendments are required to be made and without charge. The communication can be made by delivering the current Form CRS or by communicating the information in another way to the retail investor. (5) Deliver a current Form CRS to each retail investor within 30 days upon request. (d) Other disclosure obligations. Delivering a Form CRS in compliance with this section does not relieve you of any other disclosure obligations arising under the federal securities laws and regulations or other laws or regulations (including the rules of a self-regulatory organization). (e) Definitions. For purposes of this section: (1) Current Form CRS means the most recent version of the Form CRS. (2) Retail investor means a customer or prospective customer who is a natural person (an individual). This term includes a trust or other similar entity that represents natural persons, even if another person is a trustee or managing agent of the trust. (f) Transition rule. (1) You must begin to comply with this section by [INSERT DATE SIX MONTHS AFTER EFFECTIVE DATE OF RULES/FORM], including by filing your Form CRS in accordance with paragraph (b)(2) of this section by that date. (2) Within 30 days after the date by which you are first required by paragraph (f)(1) of this section to electronically file your Form CRS with the Commission, you must deliver to each of your existing customers who is a retail investor your current Form CRS. (3) After [INSERT DATE SIX MONTHS AFTER EFFECTIVE DATE OF RULES/FORM], if you are a newly registered broker or dealer that is subject to this section, you must begin to comply with this section by the date on which your registration with the Commission becomes effective pursuant to Section 15(b) of the Act, including by filing your Form CRS in accordance PO 00000 Frm 00133 Fmt 4701 Sfmt 4702 with paragraph (b)(2) of this section by that date. Editorial Note: For Federal Register citations affecting Form CRS, see the List of CFR Sections Affected, which appears in the Finding Aids section of the printed volume and at www.fdsys.gov. PART 249—FORMS, SECURITIES EXCHANGE ACT OF 1934 7. The authority citation for part 249 is amended by adding sectional authorities to read as follows: ■ Authority: 15 U.S.C. 78a et seq. and 7201 et seq.; 12 U.S.C. 5461 et seq.; 18 U.S.C. 1350; Sec. 953(b), Pub. L. 111–203, 124 Stat. 1904; Sec. 102(a)(3), Pub. L. 112–106, 126 Stat. 309 (2012); Sec. 107, Pub. L. 112–106, 126 Stat. 313, (2012), and Sec. 72001, Pub. L. 114–94, 129 Stat. 1312 (2015), unless otherwise noted. * * * * * Section 249.640 is also issued under Public Law 111–203, sec. 913, 124 Stat. 1376 (2010). * * * * * 8. Section 249.640 is added to read as follows: ■ § 249.640 Form CRS, Relationship Summary for Broker-Dealers Providing Services to Retail Investors, pursuant to § 240.17a–14 of this chapter. This form shall be prepared and filed by broker-dealers registered with the Securities and Exchange Commission pursuant to Section 15 of the Act that offer services to a retail investor pursuant to § 240.17a–14 of this chapter. PART 275—RULES AND REGULATIONS, INVESTMENT ADVISERS ACT OF 1940 9. The general authority citation for part 275 continues to read as follows and sectional authorities for 275.204–5 and 275.211h–1 are added to read as follows: ■ Authority: 15 U.S.C. 80b–2(a)(11)(G), 80b– 2(a)(11)(H), 80b–2(a)(17), 80b–3, 80b–4, 80b– 4a, 80b–6(4), 80b–6a, and 80b–11, unless otherwise noted. * * * * * Section 275.204–5 is also issued under sec. 913, Public Law 111–203, sec. 124 Stat. 1827–28 (2010). Section 275.211h–1 is also issued under sec. 913, Public Law 111–203, sec. 124 Stat. 1827–28 (2010). * * * * * 10. Amend § 275.203–1 by revising paragraph(a) to read as follows: ■ § 275.203–1 Application for investment adviser registration. (a) Form ADV. (1) To apply for registration with the Commission as an investment adviser, you must complete Form ADV (17 CFR 279.1) by following the instructions in the form and you E:\FR\FM\09MYP2.SGM 09MYP2 21548 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules must file Part 1A of Form ADV, the firm brochure(s) required by Part 2A of Form ADV and Form CRS required by Part 3 of Form ADV electronically with the Investment Adviser Registration Depository (IARD) unless you have received a hardship exemption under § 275.203–3. You are not required to file with the Commission the brochure supplements required by Part 2B of Form ADV. (2) After [INSERT DATE SIX MONTHS AFTER EFFECTIVE DATE OF RULES/FORM] the Commission will not accept any initial application for registration as an investment adviser that does not include a Form CRS that satisfies the requirements of Part 3 of Form ADV. Note to paragraph (a)(1): Information on how to file with the IARD is available on the Commission’s Web site at https:// www.sec.gov/iard. If you are not required to deliver a brochure or Form CRS to any clients, you are not required to prepare or file a brochure or Form CRS, as applicable, with the Commission. If you are not required to deliver a brochure supplement to any clients for any particular supervised person, you are not required to prepare a brochure supplement for that supervised person. * * * * * 11. Amend § 275.204–1 by revising paragraphs (a) and (b) to read as follows: ■ amozie on DSK3GDR082PROD with PROPOSALS1 § 275.204–1 Amendments to Form ADV. (a) When amendment is required. You must amend your Form ADV (17 CFR 279.1): (1) Parts 1 and 2: (i) At least annually, within 90 days of the end of your fiscal year; and (ii) More frequently, if required by the instructions to Form ADV. (2) Part 3 at the frequency required by the instructions to Form ADV. (b) Electronic filing of amendments. (1) Subject to paragraph (b)(3) of this rule, you must file all amendments to Part 1A, Part 2A and Part 3 of Form ADV electronically with the IARD, unless you have received a continuing hardship exemption under § 275.203–3. You are not required to file with the Commission amendments to brochure supplements required by Part 2B of Form ADV. (2) If you have received a continuing hardship exemption under § 275.203–3, you must, when you are required to amend your Form ADV, file a completed Part 1A, Part 2A and Part 3 of Form ADV on paper with the SEC by mailing it to FINRA. (3) Transition to filing Form CRS. You must amend your Form ADV by electronically filing with the IARD Form CRS that satisfies the requirements of Part 3 of Form ADV (as amended VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 effective [INSERT EFFECTIVE DATE OF RULES/FORM]) as part of the next annual updating amendment you are required to file after [INSERT DATE SIX MONTHS AFTER EFFECTIVE DATE OF RULES/FORM]. Note to paragraphs (a) and (b): Information on how to file with the IARD is available on our Web site at https://www.sec.gov/iard. For the annual updating amendment: Summaries of material changes that are not included in the adviser’s brochure must be filed with the Commission as an exhibit to Part 2A in the same electronic file; and if you are not required to prepare a brochure, a summary of material changes, an annual updating amendment to your brochure, or Form CRS you are not required to file them with the Commission. See the instructions for Part 2A and Part 3 of Form ADV. * * * * * 12. Section 275.204–2 is amended by revising paragraph (a)(14)(i) as follows: ■ § 275.204–2 Books and records to be maintained by investment advisers. (a) * * * (14) (i) A copy of each brochure, brochure supplement and Form CRS, and each amendment or revision to the brochure, brochure supplement and Form CRS, that satisfies the requirements of Part 2 or Part 3 of Form ADV, as applicable [17 CFR 279.1]; any summary of material changes that satisfies the requirements of Part 2 of Form ADV but is not contained in the brochure; and a record of the dates that each brochure, brochure supplement and Form CRS, each amendment or revision thereto, and each summary of material changes not contained in a brochure was given to any client or to any prospective client who subsequently becomes a client. * * * * * ■ 13. Section 275.204–5 is added to read as follows: § 275.204–5 Delivery of Form CRS. (a) General requirements. If you are registered under the Act as an investment adviser, you must deliver Form CRS, required by Part 3 of Form ADV [17 CFR 279.1], to each retail investor. (b) Delivery requirements. You (or a supervised person acting on your behalf) must: (1) Deliver to each retail investor your current Form CRS before or at the time you enter into an investment advisory contract with that retail investor. (2) Deliver to each retail investor who is an existing client your current Form CRS before or at the time (i) a new account is opened that is different from the retail investor’s existing account(s); or (ii) changes are made to the retail PO 00000 Frm 00134 Fmt 4701 Sfmt 4702 investor’s existing account(s) that would materially change the nature and scope of the relationship with the retail investor, including before or at the time you recommend that the retail investor transfers from an advisory account to a brokerage account, transfers from a brokerage account to an advisory account, or moves assets from one type of account to another in a transaction not in the normal, customary or already agreed course of dealing. Whether a change would require delivery of the Form CRS would depend on the specific facts and circumstances. (3) Post the current Form CRS prominently on your website, if you have one, in a location and format that is easily accessible for retail investors. (4) Communicate any changes made to Form CRS to each retail investor who is an existing client within 30 days after the amendments are required to be made and without charge. The communication can be made by delivering the amended Form CRS or by communicating the information in another way to the retail investor. (5) Deliver a current Form CRS to each retail investor within 30 days upon request. (c) Other disclosure obligations. Delivering Form CRS in compliance with this section does not relieve you of any other disclosure obligations you have to your retail investors under any federal or state laws or regulations. (d) Definitions. For purposes of this section: (1) Current Form CRS means the most recent version of the Form CRS. (2) Retail investor means a client or prospective client who is a natural person (an individual). This term includes a trust or other similar entity that represents natural persons, even if another person is a trustee or managing agent of the trust. (3) Supervised person means any of your officers, partners or directors (or other persons occupying a similar status or performing similar functions) or employees, or any other person who provides investment advice on your behalf. (e) Transition rule. (1) Within 30 days after the date by which you are first required by § 275.204–1(b)(3) to electronically file your Form CRS with the Commission, you must deliver to each of your existing clients who is a retail investor your current Form CRS as required by Part 3 of Form ADV. (2) As of the date by which you are first required to electronically file your Form CRS with the Commission, you must begin using your Form CRS as required by Part 3 of Form ADV to E:\FR\FM\09MYP2.SGM 09MYP2 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules Dated: April 18, 2018. comply with the requirements of paragraph (b) of this section. ■ 14. Section 275.211h–1 is added to read as follows: § 275.211h–1 Status. Brent J. Fields, Secretary. Note: The text of Form ADV does not and the amendments will not appear in the Code of Federal Regulations. Disclosure of Registration (a) An investment adviser registered under section 203 of the Act shall prominently disclose that it is registered with the Commission as an investment adviser in print or electronic retail investor communications. (b) A supervised person of an investment adviser registered under section 203 of the Act shall prominently disclose that he or she is a supervised person of an investment adviser registered with the Commission in print or electronic retail investor communications. (c) Such disclosures in paragraphs (a) and (b) of this section shall be provided in the following manner: (1) For print communications, such status must be displayed in a type size at least as large as and of a font style different from, but at least as prominent as, that used in the majority of the communication. In addition, such disclosure must be presented in the body of the communication and not in a footnote. (2) For electronic communications, or in any publication by radio or television, such disclosure must be presented in a manner reasonably calculated to draw retail investor attention to it. (d) The term retail investor has the meaning set forth in Rule 204–5 (§ 275.204–5 of this chapter). PART 279—FORMS PRESCRIBED UNDER THE INVESTMENT ADVISERS ACT OF 1940 15. The authority citation for part 279 is revised to read as follows: ■ Authority: The Investment Advisers Act of 1940, 15 U.S.C. 80b–1, et seq., Pub. L. 111– 203, 124 Stat. 1376. 16. Form ADV [referenced in § 279.1] is amended by: ■ a. In the instructions to the form, revising the section entitled ‘‘Form ADV: General Instructions.’’ The revised version of Form ADV: General Instructions is attached as Appendix A; ■ b. In the instructions to the form, adding the section entitled ‘‘Form ADV, Part 3: Instructions to Form CRS.’’ The new version of Form ADV, Part 3: Instructions to Form CRS is attached as Appendix B. amozie on DSK3GDR082PROD with PROPOSALS1 ■ By the Commission. VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 Appendices APPENDIX A FORM ADV (Paper Version) • UNIFORM APPLICATION FOR INVESTMENT ADVISER REGISTRATION AND • REPORT FORM BY EXEMPT REPORTING ADVISERS Form ADV: General Instructions Read these instructions carefully before filing Form ADV. Failure to follow these instructions, properly complete the form, or pay all required fees may result in your application or report being delayed or rejected. In these instructions and in Form ADV, ‘‘you’’ means the investment adviser (i.e., the advisory firm). If you are a ‘‘separately identifiable department or division’’ (SID) of a bank, ‘‘you’’ means the SID, rather than your bank, unless the instructions or the form provide otherwise. If you are a private fund adviser filing an umbrella registration, ‘‘you’’ means the filing adviser and each relying adviser, unless the instructions or the form provide otherwise. The information in Items 1, 2, 3 and 10 (including corresponding schedules) should be provided for the filing adviser only. Terms that appear in italics are defined in the Glossary of Terms to Form ADV. 1. Where can I get more information on Form ADV, electronic filing, and the IARD? The SEC provides information about its rules and the Advisers Act on its website: <https://www.sec.gov/iard>. NASAA provides information about state investment adviser laws and state rules, and how to contact a state securities authority, on its website: <https://www.nasaa.org>. FINRA provides information about the IARD and electronic filing on the IARD website: <https://www.iard.com>. 2. What is Form ADV used for? Investment advisers use Form ADV to: • Register with the Securities and Exchange Commission • Register with one or more state securities authorities • Amend those registrations; • Report to the SEC as an exempt reporting adviser • Report to one or more state securities authorities as an exempt reporting adviser • Amend those reports; and • Submit a final report as an exempt reporting adviser 3. How is Form ADV organized? Form ADV contains five parts: • Part 1A asks a number of questions about you, your business practices, the persons PO 00000 Frm 00135 Fmt 4701 Sfmt 4702 • • • • 21549 who own and control you, and the persons who provide investment advice on your behalf. Æ All advisers registering with the SEC or any of the state securities authorities must complete Part 1A. Æ Exempt reporting advisers (that are not also registering with any state securities authority) must complete only the following Items of Part 1A: 1, 2, 3, 6, 7, 10, and 11, as well as corresponding schedules. Exempt reporting advisers that are registering with any state securities authority must complete all of Form ADV. Part 1A also contains several supplemental schedules. The items of Part 1A let you know which schedules you must complete. Æ Schedule A asks for information about your direct owners and executive officers. Æ Schedule B asks for information about your indirect owners. Æ Schedule C is used by paper filers to update the information required by Schedules A and B (see Instruction 18). Æ Schedule D asks for additional information for certain items in Part 1A. Æ Schedule R asks for additional information about relying advisers. Æ Disclosure Reporting Pages (or DRPs) are schedules that ask for details about disciplinary events involving you or your advisory affiliates. Part 1B asks additional questions required by state securities authorities. Part 1B contains three additional DRPs. If you are applying for SEC registration or are registered only with the SEC, you do not have to complete Part 1B. (If you are filing electronically and you do not have to complete Part 1B, you will not see Part 1B). Part 2A requires advisers to create narrative brochures containing information about the advisory firm. The requirements in Part 2A apply to all investment advisers registered with or applying for registration with the SEC, but do not apply to exempt reporting advisers. Every application for registration must include a narrative brochure prepared in accordance with the requirements of Part 2A of Form ADV. See Advisers Act Rule 203-1. Part 2B requires advisers to create brochure supplements containing information about certain supervised persons. The requirements in Part 2B apply to all investment advisers registered with or applying for registration with the SEC, but do not apply to exempt reporting advisers. Part 3 requires advisers to create a relationship summary (Form CRS) containing information for retail investors. The requirements in Part 3 apply to all investment advisers registered or applying for registration with the SEC, but do not apply to exempt reporting advisers. Every adviser that has retail investors to whom it must deliver a relationship summary must include in the application for registration a relationship summary prepared in E:\FR\FM\09MYP2.SGM 09MYP2 21550 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules amozie on DSK3GDR082PROD with PROPOSALS1 accordance with the requirements of Part 3 of Form ADV. See Advisers Act Rule 203-1. 4. When am I required to update my Form ADV? • SEC- and State-Registered Advisers: Æ Annual updating amendments: You must amend your Form ADV each year by filing an annual updating amendment within 90 days after the end of your fiscal year. When you submit your annual updating amendment, you must update your responses to all items, including corresponding sections of Schedules A, B, C, and D and all sections of Schedule R for each relying adviser. You must submit your summary of material changes required by Item 2 of Part 2A either in the brochure (cover page or the page immediately thereafter) or as an exhibit to your brochure. Æ Other-than-annual amendments: In addition to your annual updating amendment, if you are registered with the SEC or a state securities authority, you must amend Part 1 and Part 2 of your Form ADV, including corresponding sections of Schedules A, B, C, D, and R, by filing additional amendments (other-than-annual amendments) promptly, if: D you are adding or removing a relying adviser as part of your umbrella registration; D information you provided in response to Items 1 (except 1.O. and Section 1.F. of Schedule D), 3, 9 (except 9.A.(2), 9.B.(2), 9.E., and 9.F.), or 11 of Part 1A or Items 1, 2.A. through 2.F., or 2.I. of Part 1B or Sections 1 or 3 of Schedule R becomes inaccurate in any way; D information you provided in response to Items 4, 8, or 10 of Part 1A, or Item 2.G. of Part 1B, or Section 10 of Schedule R becomes materially inaccurate; or D information you provided in your brochure becomes materially inaccurate (see note below for exceptions). Notes: Part 1: If you are submitting an other-than-annual amendment, you are not required to update your responses to Items 2, 5, 6, 7, 9.A.(2), 9.B.(2), 9.E., 9.F., or 12 of Part 1A, Items 2.H. or 2.J. of Part 1B, Section 1.F. of Schedule D or Section 2 of Schedule R even if your responses to those items have become inaccurate. Part 2: You must amend your brochure supplements (see Form ADV, Part 2B) promptly if any information in them becomes materially inaccurate. If you are submitting an other-than-annual amendment to your brochure, you are not required to update your summary of material changes as required by Item 2. You are not required to update your brochure between annual amendments solely because the amount of client assets you manage has changed or because your fee schedule has changed. However, if you are updating your brochure for a separate reason in between annual amendments, and the amount of client assets you manage listed in response to Item 4.E. or your fee schedule listed in response to Item 5.A. has become materially inaccurate, you should update that item(s) as part of the interim amendment. VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 • If you are an SEC-registered adviser, you are required to file your brochure amendments electronically through IARD. You are not required to file amendments to your brochure supplements with the SEC, but you must maintain a copy of them in your files. • If you are a state-registered adviser, you are required to file your brochure amendments and brochure supplement amendments with the appropriate state securities authorities through IARD. Æ Part 3 amendments: You must amend your relationship summary and file your relationship summary amendments in accordance with the Form ADV, Part 3 (Form CRS), General Instructions, 6. • Exempt reporting advisers: Æ Annual Updating Amendments: You must amend your Form ADV each year by filing an annual updating amendment within 90 days after the end of your fiscal year. When you submit your annual updating amendment, you must update your responses to all required items, including corresponding sections of Schedules A, B, C, and D. Æ Other-than-Annual Amendments: In addition to your annual updating amendment, you must amend your Form ADV, including corresponding sections of Schedules A, B, C, and D, by filing additional amendments (other-thanannual amendments) promptly if: D information you provided in response to Items 1 (except Item 1.O. and Section 1.F. of Schedule D), 3, or 11 becomes inaccurate in any way; or D information you provided in response to Item 10 becomes materially inaccurate. Failure to update your Form ADV, as required by this instruction, is a violation of SEC rules or similar state rules and could lead to your registration being revoked. 5. What is SEC umbrella registration and how can I satisfy the requirements of filing an umbrella registration? An umbrella registration is a single registration by a filing adviser and one or more relying advisers who advise only private funds and certain separately managed account clients that are qualified clients and collectively conduct a single advisory business. Absent other facts suggesting that the filing adviser and relying adviser(s) conduct different businesses, umbrella registration is available under the following circumstances: i. The filing adviser and each relying adviser advise only private funds and clients in separately managed accounts that are qualified clients and are otherwise eligible to invest in the private funds advised by the filing adviser or a relying adviser and whose accounts pursue investment objectives and strategies that are substantially similar or otherwise related to those private funds. ii. The filing adviser has its principal office and place of business in the United States and, therefore, all of the substantive provisions of the Advisers Act and the rules thereunder apply to the filing adviser’s and each relying adviser’s dealings with each of its clients, regardless of whether any client of PO 00000 Frm 00136 Fmt 4701 Sfmt 4702 the filing adviser or relying adviser providing the advice is a United States person. iii. Each relying adviser, its employees and the persons acting on its behalf are subject to the filing adviser’s supervision and control and, therefore, each relying adviser, its employees and the persons acting on its behalf are ‘‘persons associated with’’ the filing adviser (as defined in section 202(a)(17) of the Advisers Act). iv. The advisory activities of each relying adviser are subject to the Advisers Act and the rules thereunder, and each relying adviser is subject to examination by the SEC. v. The filing adviser and each relying adviser operate under a single code of ethics adopted in accordance with SEC rule 204A1 and a single set of written policies and procedures adopted and implemented in accordance with SEC rule 206(4)-7 and administered by a single chief compliance officer in accordance with that rule. To satisfy the requirements of Form ADV while using umbrella registration the filing adviser must sign, file, and update as required, a single Form ADV (Parts 1 and 2) that relates to, and includes all information concerning, the filing adviser and each relying adviser (e.g., disciplinary information and ownership information), and must include this same information in any other reports or filings it must make under the Advisers Act or the rules thereunder (e.g., Form PF). The filing adviser and each relying adviser must not be prohibited from registering with the SEC by section 203A of the Advisers Act (i.e., the filing adviser and each relying adviser must individually qualify for SEC registration). Unless otherwise specified, references to ‘‘you’’ in Form ADV refer to both the filing adviser and each relying adviser. The information in Items 1, 2, 3 and 10 (including corresponding schedules) should be provided for the filing adviser only. A separate Schedule R should be completed for each relying adviser. References to ‘‘you’’ in Schedule R refer to the relying adviser only. A filing adviser applying for registration with the SEC should complete a Schedule R for each relying adviser. If you are a filing adviser registered with the SEC and would like to add or delete relying advisers from an umbrella registration, you should file an other-than-annual amendment and add or delete Schedule Rs as needed. Note: Umbrella registration is not available to exempt reporting advisers. 6. Where do I sign my Form ADV application or amendment? You must sign the appropriate Execution Page. There are three Execution Pages at the end of the form. Your initial application, your initial report (in the case of an exempt reporting adviser), and all amendments to Form ADV must include at least one Execution Page. • If you are applying for or are amending your SEC registration, or if you are reporting as an exempt reporting adviser or amending your report, you must sign and submit either a: Æ Domestic Investment Adviser Execution Page, if you (the advisory firm) are a resident of the United States; or E:\FR\FM\09MYP2.SGM 09MYP2 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules Æ Non-Resident Investment Adviser Execution Page, if you (the advisory firm) are not a resident of the United States. • If you are applying for or are amending your registration with a state securities authority, you must sign and submit the State-Registered Investment Adviser Execution Page. 7. Who must sign my Form ADV or amendment? The individual who signs the form depends upon your form of organization: • For a sole proprietorship, the sole proprietor. • For a partnership, a general partner. • For a corporation, an authorized principal officer. • For a ‘‘separately identifiable department or division’’ (SID) of a bank, a principal officer of your bank who is directly engaged in the management, direction, or supervision of your investment advisory activities. • For all others, an authorized individual who participates in managing or directing your affairs. The signature does not have to be notarized, and in the case of an electronic filing, should be a typed name. amozie on DSK3GDR082PROD with PROPOSALS1 8. How do I file my Form ADV? Complete Form ADV electronically using the Investment Adviser Registration Depository (IARD) if: • You are filing with the SEC (and submitting notice filings to any of the state securities authorities), or • You are filing with a state securities authority that requires or permits advisers to submit Form ADV through the IARD. Note: SEC rules require advisers that are registered or applying for registration with the SEC, or that are reporting to the SEC as an exempt reporting adviser, to file electronically through the IARD system. See SEC rules 203–1 and 204–4. To file electronically, go to the IARD website (www.iard.com), which contains detailed instructions for advisers to follow when filing through the IARD. Complete Form ADV (Paper Version) on paper if: • You are filing with the SEC or a state securities authority that requires electronic filing, but you have been granted a continuing hardship exemption. Hardship exemptions are described in Instruction 17. • You are filing with a state securities authority that permits (but does not require) electronic filing and you do not file electronically. 9. How do I get started filing electronically? First, obtain a copy of the IARD Entitlement Package from the following website: https://www.iard.com/ GetStarted.asp. Second, request access to the IARD system for your firm by completing and submitting the IARD Entitlement Package. The IARD Entitlement Package explains how the form may be submitted. Mail the forms to: FINRA Entitlement Group, 9509 Key West Avenue, Rockville, MD 20850. VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 When FINRA receives your Entitlement Package, they will assign a CRD number (identification number for your firm) and a user I.D. code and password (identification number and system password for the individual(s) who will submit Form ADV filings for your firm). Your firm may request an I.D. code and password for more than one individual. FINRA also will create a financial account for you from which the IARD will deduct filing fees and any state fees you are required to pay. If you already have a CRD account with FINRA, it will also serve as your IARD account; a separate account will not be established. Once you receive your CRD number, user I.D. code and password, and you have funded your account, you are ready to file electronically. Questions regarding the Entitlement Process should be addressed to FINRA at 240.386.4848. 10. If I am applying for registration with the SEC, or amending my SEC registration, how do I make notice filings with the state securities authorities? If you are applying for registration with the SEC or are amending your SEC registration, one or more state securities authorities may require you to provide them with copies of your SEC filings. We call these filings ‘‘notice filings.’’ Your notice filings will be sent electronically to the states that you check on Item 2.C. of Part 1A. The state securities authorities to which you send notice filings may charge fees, which will be deducted from the account you establish with FINRA. To determine which state securities authorities require SEC-registered advisers to submit notice filings and to pay fees, consult the relevant state investment adviser law or state securities authority. See General Instruction 1. If you are granted a continuing hardship exemption to file Form ADV on paper, FINRA will enter your filing into the IARD and your notice filings will be sent electronically to the state securities authorities that you check on Item 2.C. of Part 1A. 11. I am registered with a state. When must I switch to SEC registration? If at the time of your annual updating amendment you meet at least one of the requirements for SEC registration in Item 2.A.(1) to (12) of Part 1A, you must apply for registration with the SEC within 90 days after you file the annual updating amendment. Once you register with the SEC, you are subject to SEC regulation, regardless of whether you remain registered with one or more states. See SEC rule 203A-1(b)(2). Each of your investment adviser representatives, however, may be subject to registration in those states in which the representative has a place of business. See Advisers Act section 203A(b)(1); SEC rule 203A-3(a). For additional information, consult the investment adviser laws or the state securities authority for the particular state in which you are ‘‘doing business.’’ See General Instruction 1. PO 00000 Frm 00137 Fmt 4701 Sfmt 4702 21551 12. I am registered with the SEC. When must I switch to registration with a state securities authority? If you check box 13 in Item 2.A. of Part 1A to report on your annual updating amendment that you are no longer eligible to register with the SEC, you must withdraw from SEC registration within 180 days after the end of your fiscal year by filing Form ADV-W. See SEC rule 203A-1(b)(2). You should consult state law or the state securities authority for the states in which you are ‘‘doing business’’ to determine if you are required to register in these states. See General Instruction 1. Until you file your Form ADV-W with the SEC, you will remain subject to SEC regulation, and you also will be subject to regulation in any states where you register. See SEC rule 203A-1(b)(2). 13. I am an exempt reporting adviser. When must I submit my first report on Form ADV? • All exempt reporting advisers: You must submit your initial Form ADV filing within 60 days of relying on the exemption from registration under either section 203(l) of the Advisers Act as an adviser solely to one or more venture capital funds or section 203(m) of the Advisers Act because you act solely as an adviser to private funds and have assets under management in the United States of less than $150 million. • Additional instruction for advisers switching from being registered to being exempt reporting advisers: If you are currently registered as an investment adviser (or have an application for registration pending) with the SEC or with a state securities authority, you must file a Form ADV-W to withdraw from registration in the jurisdictions where you are switching. You must submit the Form ADV-W before submitting your first report as an exempt reporting adviser. 14. I am an exempt reporting adviser. Is it possible that I might be required to also register with or submit a report to a state securities authority? Yes, you may be required to register with or submit a report to one or more state securities authorities. If you are required to register with one or more state securities authorities, you must complete all of Form ADV. See General Instruction 3. If you are required to submit a report to one or more state securities authorities, check the box(es) in Item 2.C. of Part 1A next to the state(s) you would like to receive the report. Each of your investment adviser representatives may also be subject to registration requirements. For additional information about the requirements that may apply to you, consult the investment adviser laws or the state securities authority for the particular state in which you are ‘‘doing business.’’ See General Instruction 1. 15. What do I do if I no longer meet the definition of ‘‘exempt reporting adviser’’? • Advisers Switching to SEC Registration: Æ You may no longer be an exempt reporting adviser and may be required to E:\FR\FM\09MYP2.SGM 09MYP2 21552 D D amozie on DSK3GDR082PROD with PROPOSALS1 Æ Æ Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules register with the SEC if you wish to continue doing business as an investment adviser. For example, you may be relying on section 203(l) and wish to accept a client that is not a venture capital fund as defined in SEC rule 203(l)-1, or you may have been relying on SEC rule 203(m)-1 and reported in Section 2.B. of Schedule D to your annual updating amendment that you have private fund assets of $150 million or more. If you are relying on section 203(l), unless you qualify for another exemption, you would violate the Advisers Act’s registration requirement if you accept a client that is not a venture capital fund as defined in SEC rule 203(l)–1 before the SEC approves your application for registration. You must submit your final report as an exempt reporting adviser and apply for SEC registration in the same filing. If you were relying on SEC rule 203(m)– 1 and you reported in Section 2.B. of Schedule D to your annual updating amendment that you have private fund assets of $150 million or more, you must register with the SEC unless you qualify for another exemption. If you have complied with all SEC reporting requirements applicable to an exempt reporting adviser as such, you have up to 90 days after filing your annual updating amendment to apply for SEC registration, and you may continue doing business as a private fund adviser during this time. You must submit your final report as an exempt reporting adviser and apply for SEC registration in the same filing. Unless you qualify for another exemption, you would violate the Advisers Act’s registration requirement if you accept a client that is not a private fund during this transition period before the SEC approves your application for registration, and you must comply with all SEC reporting requirements applicable to an exempt reporting adviser as such during this 90day transition period. If you have not complied with all SEC reporting requirements applicable to an exempt reporting adviser as such, this 90-day transition period is not available to you. Therefore, if the transition period is not available to you, and you do not qualify for another exemption, your application for registration must be approved by the SEC before you meet or exceed SEC rule 203(m)–1’s $150 million asset threshold. You will be deemed in compliance with the Form ADV filing and reporting requirements until the SEC approves or denies your application. If your application is approved, you will be able to continue business as a registered adviser. If you register with the SEC, you may be subject to state notice filing requirements. To determine these requirements, consult the investment adviser laws or the state securities authority for the particular state in which you are ‘‘doing business.’’ See General Instruction 1. VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 Note: If you are relying on SEC rule 203(m)–1 and you accept a client that is not a private fund, you will lose the exemption provided by SEC rule 203(m)–1 immediately. To avoid this result, you should apply for SEC registration in advance so that the SEC has approved your registration before you accept a client that is not a private fund. The 90-day transition period described above also applies to investment advisers with their principal offices and places of business outside of the United States with respect to their clients who are United States persons (e.g., the adviser would not be eligible for the 90-day transition period if it accepted a client that is a United States person and is not a private fund). • Advisers Not Switching to SEC Registration: Æ You may no longer be an exempt reporting adviser but may not be required to register with the SEC or may be prohibited from doing so. For example, you may cease to do business as an investment adviser, become eligible for an exemption that does not require reporting, or be ineligible for SEC registration. In this case, you must submit a final report as an exempt reporting adviser to update only Item 1 of Part 1A of Form ADV. Æ You may be subject to state registration requirements. To determine these requirements, consult the investment adviser laws or the state securities authority for the particular state in which you are ‘‘doing business.’’ See General Instruction 1. 16. Are there filing fees? Yes. These fees go to support and maintain the IARD. The IARD filing fees are in addition to any registration or other fee that may be required by state law. You must pay an IARD filing fee for your initial application, your initial report, and each annual updating amendment. There is no filing fee for an other-than-annual amendment, a final report as an exempt reporting adviser, or Form ADV-W. The IARD filing fee schedule is published at https://www.sec.gov/iard; https:// www.nasaa.org and https://www.iard.com. If you are submitting a paper filing under a continuing hardship exemption (see Instruction 17), you are required to pay an additional fee. The amount of the additional fee depends on whether you are filing Form ADV or Form ADV–W. (There is no additional fee for filings made on Form ADV–W.) The hardship filing fee schedule is available by contacting FINRA at 240.386.4848. 17. What if I am not able to file electronically? If you are required to file electronically but cannot do so, you may be eligible for one of two types of hardship exemptions from the electronic filing requirements. • A temporary hardship exemption is available if you file electronically, but you encounter unexpected difficulties that prevent you from making a timely filing with the IARD, such as a computer malfunction or electrical outage. This exemption does not permit you to file on PO 00000 Frm 00138 Fmt 4701 Sfmt 4702 paper; instead it extends the deadline for an electronic filing for seven business days. See SEC rules 203–3(a) and 204– 4(e). • A continuing hardship exemption may be granted if you are a small business and you can demonstrate that filing electronically would impose an undue hardship. You are a small business, and may be eligible for a continuing hardship exemption, if you are required to answer Item 12 of Part 1A (because you have assets under management of less than $25 million) and you are able to respond ‘‘no’’ to each question in Item 12. See SEC rule 0–7. If you have been granted a continuing hardship exemption, you must complete and submit the paper version of Form ADV to FINRA. FINRA will enter your responses into the IARD. As discussed in General Instruction 16, FINRA will charge you a fee to reimburse it for the expense of data entry. 18. I am eligible to file on paper. How do I make a paper filing? When filing on paper, you must: • Type all of your responses. • Include your name (the same name you provide in response to Item 1.A. of Part 1A) and the date on every page. • If you are amending your Form ADV: Æ complete page 1 and circle the number of any item for which you are changing your response. Æ include your SEC 801-number (if you have one), or your 802-number (if you have one), and your CRD number (if you have one) on every page. Æ complete the amended item in full and circle the number of the item for which you are changing your response. Æ to amend Schedule A or Schedule B, complete and submit Schedule C. Where you submit your paper filing depends on why you are eligible to file on paper: • If you are filing on paper because you have been granted a continuing hardship exemption, submit one manually signed Form ADV and one copy to: IARD Document Processing, FINRA, P.O. Box 9495, Gaithersburg, MD 20898-9495. If you complete Form ADV on paper and submit it to FINRA but you do not have a continuing hardship exemption, the submission will be returned to you. • If you are filing on paper because a state in which you are registered or in which you are applying for registration allows you to submit paper instead of electronic filings, submit one manually signed Form ADV and one copy to the appropriate state securities authorities. 19. Who is required to file Form ADV–NR? Every non-resident general partner and managing agent of all SEC-registered advisers and exempt reporting advisers, whether or not the adviser is resident in the United States, must file Form ADV–NR in connection with the adviser’s initial application or report. A general partner or managing agent of an SEC-registered adviser or exempt reporting adviser who becomes a E:\FR\FM\09MYP2.SGM 09MYP2 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules non-resident after the adviser’s initial application or report has been submitted must file Form ADV–NR within 30 days. Form ADV–NR must be filed on paper (it cannot be filed electronically). Submit Form ADV–NR to the SEC at the following address: Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549; Attn: OCIE Registrations Branch. Failure to file Form ADV–NR promptly may delay SEC consideration of your initial application. Federal Information Law and Requirements Sections 203 and 204 of the Advisers Act [15 U.S.C. §§ 80b–3 and 80b–4] authorize the SEC to collect the information required by Form ADV. The SEC collects the information for regulatory purposes, such as deciding whether to grant registration. Filing Form ADV is mandatory for advisers who are required to register with the SEC and for exempt reporting advisers. The SEC maintains the information submitted on this form and makes it publicly available. The SEC may return forms that do not include required information. Intentional misstatements or omissions constitute federal criminal violations under 18 U.S.C. § 1001 and 15 U.S.C. § 80b–17. amozie on DSK3GDR082PROD with PROPOSALS1 SEC’s Collection of Information 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 control number. The Advisers Act authorizes the SEC to collect the information on Form ADV from investment advisers. See 15 U.S.C. §§ 80b– 3 and 80b–4. Filing the form is mandatory. The form enables the SEC to register investment advisers and to obtain information from and about exempt reporting advisers. Every applicant for registration with the SEC as an adviser, and every exempt reporting adviser, must file the form. See 17 C.F.R. §§ 275.203–1 and 204–4. By accepting a form, however, the SEC does not make a finding that it has been completed or submitted correctly. The form is filed annually by every adviser, no later than 90 days after the end of its fiscal year, to amend its registration or its report. It is also filed promptly during the year to reflect material changes. See 17 C.F.R. § 275.204–1. The SEC maintains the information on the form and makes it publicly available through the IARD. Anyone may send the SEC comments on the accuracy of the burden estimate on page 1 of the form, as well as suggestions for reducing the burden. The Office of Management and Budget has reviewed this collection of information under 44 U.S.C. § 3507. The information contained in the form is part of a system of records subject to the Privacy Act of 1974, as amended. The SEC has published in the Federal Register the Privacy Act System of Records Notice for these records. VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 [Form ADV, Part 3:]1 Instructions to Form CRS General Instructions Under rule 17a–14 under the Securities Exchange Act of 1934 and rule 204–5 under the Investment Advisers Act of 1940, brokerdealers registered under section 15 of the Exchange Act and investment advisers registered under section 203 of the Advisers Act are required to deliver to retail investors a relationship summary disclosing information about the firm. Read all the General Instructions as well as the particular item requirements before preparing or updating the relationship summary. 1. Narrative and Graphical Format. a. The relationship summary must include the required items enumerated below. The items require you to provide specific information and, in some cases, prescribe the particular wording that you must use. b. You must respond to each item and must provide responses in the same order as the items appear in these instructions. Unless otherwise noted, you must also present the required information within each item in the order listed. c. Whether in electronic or paper format, the relationship summary must not exceed four 8c″ x 11″ pages if converted to PDF format, using at least an 11 point font size and a minimum 0.75’’ margins on all sides. d. You may not include disclosure in the relationship summary other than disclosure that is required or permitted by these Instructions and the applicable item. e. If you are a dual registrant, present the information in Items 2 through 4 and Item 6 in a tabular format, comparing advisory services and brokerage services side-by-side. In the column discussing brokerage services, include the heading ‘‘Broker-Dealer Services’’ and the subheading ‘‘Brokerage Accounts.’’ In the column discussing investment advisory services, include the heading ‘‘Investment Adviser Services’’ and the sub-heading ‘‘Advisory Accounts.’’ Dual registrants should not complete Item 5, which must be completed by standalone investment advisers and standalone broker-dealers. f. You may use charts, graphs, tables, and other graphics or text features to explain the required information, so long as the information: (i) is responsive to and meets the requirements in these instructions (including space limitations); (ii) is not inaccurate or misleading; and (iii) does not, because of the nature, quantity, or manner of presentation, obscure or impede understanding of the information that must be included. When using interactive graphics or tools, you may include instructions on their use and interpretation. g. In a relationship summary that is posted on your website or otherwise provided 1 The bracketed text will be included for Form ADV, Part 3 (17 CFR 279.1) only. PO 00000 Frm 00139 Fmt 4701 Sfmt 4702 21553 electronically, you must use hyperlinks for any document that is cross-referenced in the relationship summary if the document is available online. See General Instruction 8.a. You may add embedded hyperlinks within the relationship summary in order to supplement required disclosures, for example, links to fee schedules, conflicts disclosures, the firm’s narrative brochure required by Part 2A of Form ADV, or other regulatory disclosures. 2. Plain Language. The items of the relationship summary are designed to promote effective communication between you and retail investors. Write your relationship summary in plain language, taking into consideration retail investors’ level of financial experience. The relationship summary should be concise and direct. In drafting the relationship summary: (i) use short sentences; (ii) use definite, concrete, everyday words; (iii) use active voice; (iv) avoid legal jargon or highly technical business terms unless you clearly explain them or you believe that reasonable retail investors will understand them; and (v) avoid multiple negatives. You must write the relationship summary as if you are speaking to the retail investor, using ‘‘you,’’ ‘‘us,’’ ‘‘our firm,’’ etc. Note: The SEC’s Office of Investor Education and Advocacy has published A Plain English Handbook. You may find the handbook helpful in writing your relationship summary. For a copy of this handbook, visit the SEC’s website at www.sec.gov/news/extra/handbook.htm or call 1-800-732-0330. 3. Full and Truthful Disclosure. All information in your relationship summary must be true and may not omit any material facts necessary to make the disclosures required by these Instructions and the applicable item not misleading. If a statement is inapplicable to your business or would be misleading to a reasonable retail investor, you may omit or modify that statement. Broker-dealers and investment advisers have disclosure and reporting obligations under state and federal law, including, but not limited to, obligations under the Exchange Act, the Advisers Act, and the respective rules thereunder. Broker-dealers are also subject to disclosure obligations under the rules of self-regulatory organizations. Delivery of this document will not necessarily satisfy the additional disclosure requirements that you have under the federal securities laws and regulations or other laws. 4. Preserving Records. You must maintain a copy of each version of the relationship summary and make it available to the SEC staff upon request. See SEC Advisers Act rule 204–2(a)(14)(i); SEC Exchange Act rule 17a– 4. 5. Initial Filing and Delivery; Transition Provisions. a. Initial filing. If you are a registered investment adviser and are required to give a relationship summary to a retail investor, you must complete Form ADV, Part 3 (Form CRS) and file it electronically in a textsearchable format with the Investment Adviser Registration Depository (IARD). If E:\FR\FM\09MYP2.SGM 09MYP2 amozie on DSK3GDR082PROD with PROPOSALS1 21554 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules you are a registered broker-dealer and are required to give a relationship summary to a retail investor, you must complete Form CRS and file it electronically in a text-searchable format with the Electronic Data Gathering, Analysis and Retrieval System (‘‘EDGAR’’). If you do not have any retail investors to whom you must deliver a relationship summary, you are not required to prepare one. Note to instruction 5(a): If you are a dual registrant and are required to give a relationship summary to one or more retail investor clients or customers of both your advisory and brokerage businesses, you must prepare only one relationship summary and file it on IARD and EDGAR. Information for investment advisers on how to file with IARD is available on the Commission’s website at www.sec.gov/iard. Information for broker-dealers on how to file with the Commission on EDGAR is available on the Commission’s website at https:// www.sec.gov/edgar. b. Initial delivery. You must give a relationship summary to each retail investor, if you are an investment adviser, before or at the time you enter into an investment advisory agreement with the retail investor, or if you are a broker-dealer, before or at the time the retail investor first engages your services. See SEC Advisers Act rule 204-5(b)(1) and SEC Exchange Act rule 17a-14(c)(1). You must deliver the relationship summary even if your agreement with the retail investor is oral. A dual registrant should deliver the relationship summary at the earlier of entering into an investment advisory agreement with the retail investor or the retail investor engaging the firm’s services. c. Transition provisions for initial filing and delivery after the effective date of the new Form CRS requirements. (i) If you are a broker-dealer, you must file your initial relationship summary with the Commission as required by instruction 5.a, by [INSERT DATE SIX MONTHS AFTER EFFECTIVE DATE OF RULES/FORM]. If you are an investment adviser or a dual registrant, you must amend your Form ADV by electronically filing with IARD your initial relationship summary as part of the next annual updating amendment you are required to file after [INSERT DATE SIX MONTHS AFTER EFFECTIVE DATE OF RULES/ FORM]. (ii) As of the date by which you are first required to electronically file your relationship summary with the Commission, you must begin to deliver your relationship summary to new and prospective clients and customers who are retail investors as required by Instruction 5.b. (iii) Within 30 days after the date by which you are first required to electronically file your relationship summary with the Commission, you must deliver your relationship summary to each of your existing clients and customers who are retail investors. 6. Updating Relationship Summary. a. You must update your relationship summary within 30 days whenever any VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 information in the relationship summary becomes materially inaccurate. b. You must communicate any changes in the updated relationship summary to retail investors who are existing clients or customers of the firm within 30 days after the updates are required to be made and without charge. You can make the communication by delivering the amended relationship summary or by communicating the information in another way to the retail investor. c. You must file each amended relationship summary electronically with the Commission, on IARD if you are an investment adviser or dual registrant, and on EDGAR if you are a broker-dealer. 7. Additional Delivery Requirements to Existing Clients and Customers. a. You must deliver the relationship summary to a retail investor who is an existing client or customer before or at the time: (i) a new account is opened that is different from the retail investor’s existing account(s); or (ii) changes are made to the retail investor’s existing account(s) that would materially change the nature and scope of your relationship with the retail investor. For example, you must deliver a relationship summary before or at the time you recommend that the retail investor transfers from an investment advisory account to a brokerage account, transfers from a brokerage account to an investment advisory account, or moves assets from one type of account to another in a transaction not in the normal, customary or already agreed course of dealing. Whether a change would require delivery of the relationship summary would depend on the specific facts and circumstances. b. You also must deliver the relationship summary to a retail investor within 30 days upon the retail investor’s request. 8. Electronic Posting and Manner of Delivery. a. You must post the current version of the relationship summary prominently on your public website, if you have one, in a location and format that is easily accessible for retail investors. If you do not have a public website, include in your relationship summary a toll-free number that retail investors may call to request documents. b. You may deliver the relationship summary electronically, including updates, consistent with SEC guidance regarding electronic delivery of documents, in particular Use of Electronic Media by Broker-Dealers, Transfer Agents, and Investment Advisers for Delivery of Information, which you can find at www.sec.gov/rules/concept/33-7288.txt. c. If the relationship summary is delivered on paper and not as a standalone document, you should ensure that it is the first among any documents that are delivered at that time. 9. Definitions. For purposes of this Form CRS, the following terms have the meanings ascribed to them below: PO 00000 Frm 00140 Fmt 4701 Sfmt 4702 a. Affiliate: Any persons directly or indirectly controlling or controlled by you or under common control with you. b. Dual registrant: A firm that is dually registered as a broker-dealer and an investment adviser and offers services to retail investors as both a broker-dealer and an investment adviser. c. Portfolio Manager: An investment adviser that manages investments in a wrap fee program. d. Relationship summary: A written disclosure statement that you must provide to retail investors. See Advisers Act rule 204-5; Exchange Act rule 17a14; Form CRS. e. Retail investor: A prospective or existing client or customer who is a natural person (an individual). This term includes a trust or other similar entity that represents natural persons, even if another person is a trustee or managing agent of the trust. f. Standalone investment adviser and standalone broker-dealer: A standalone investment adviser is a registered investment adviser that offers services to retail investors and (i) is not dually registered as a broker-dealer or (ii) is dually registered as a broker-dealer but does not offer services to retail investors as a broker-dealer. A standalone brokerdealer is a registered broker-dealer that offers services to retail investors and (i) is not dually registered as an investment adviser or (ii) is dually registered as an investment adviser but does not offer services to retail investors as an investment adviser. g. Wrap fee program: An advisory program under which a specified fee or fees not based directly upon transactions in a retail investor’s account is charged for investment advisory services (which may include portfolio management or advice concerning the selection of other investment advisers) and the execution of retail investor transactions. [Form ADV, Part 3:] Form CRS Item 1: Introduction A. State your name, whether you are registered with the Securities and Exchange Commission as a brokerdealer, investment adviser, or both, and the date of the relationship summary. This information should be disclosed prominently on the first page, and can be included in the header or footer. B. Standalone Broker-Dealers: If you are a standalone broker-dealer, include the title ‘‘Is a Brokerage Account Right for You?’’ Include the following introductory paragraphs (emphasis required): ‘‘There are different ways you can get help with your investments. You should carefully consider which types of accounts and services are right for you. We are a broker-dealer and provide brokerage accounts and services rather than advisory accounts and services. This document gives you a summary of the types of services we provide and how you pay. Please ask us for more information. There are some suggested questions on page [ ].’’ E:\FR\FM\09MYP2.SGM 09MYP2 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules amozie on DSK3GDR082PROD with PROPOSALS1 C. Standalone Investment Advisers: If you are a standalone investment adviser, include the title ‘‘Is an Investment Advisory Account Right for You?’’ Include the following introductory paragraphs (emphasis required): ‘‘There are different ways you can get help with your investments. You should carefully consider which types of accounts and services are right for you. We are an investment adviser and provide advisory accounts and services rather than brokerage accounts and services. This document gives you a summary of the types of services we provide and how you pay. Please ask us for more information. There are some suggested questions on page [ ].’’ D. Dual Registrants: If you are a dual registrant, include the title ‘‘Which Type of Account is Right for You – Brokerage, Investment Advisory or Both?’’ Include the following introductory paragraphs (emphasis required): ‘‘There are different ways you can get help with your investments. You should carefully consider which types of accounts and services are right for you. Depending on your needs and investment objectives, we can provide you with services in a brokerage account, investment advisory account, or both at the same time. This document gives you a summary of the types of services we provide and how you pay. Please ask us for more information. There are some suggested questions on page [ ].’’ Item 2: Relationships and Services A. Include the heading ‘‘[Types of] Relationships and Services.’’ If you are a standalone broker-dealer or standalone investment adviser, omit the bracketed language. If you are a dual registrant, include the bracketed language in the heading, and include the following after the heading: ‘‘Our accounts and services fall into two categories.’’ B. Brokerage Account Services: If you are a broker-dealer that offers brokerage accounts to retail investors, summarize the principal brokerage services that you provide to retail investors. You must address the following, unless not applicable: 1. Include the following (emphasis required): ‘‘If you open a brokerage account, you will pay us a transactionbased fee, generally referred to as a commission, every time you buy or sell an investment.’’ 2. If you offer accounts in which you offer recommendations to retail investors, state that the retail investor may select investments or you may recommend investments for the retail investor’s account, but the retail investor will make the ultimate investment decision regarding the investment strategy and the purchase or sale of investments. If you only offer accounts in which you do not offer recommendations to retail investors (e.g., execution-only brokerage services), state that the retail investor will select the investments and the retail investor will make the ultimate investment VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 decision regarding the investment strategy and the purchase or sale of investments. 3. State if you offer to retail investors additional services, including, for example: (a) assistance with developing or executing the retail investor’s investment strategy (e.g., you discuss the retail investor’s investment goals or you design with the retail investor a strategy to achieve the retail investor’s investment goals), or (b) monitoring the performance of the retail investor’s account. Indicate whether these services can be offered as additional services or are part of the standard brokerage account services, and whether a retail investor will pay more for these services. If you offer monitoring (as reflected in (b) above), as part of the standard brokerage account services, indicate how frequently you monitor the performance. Briefly describe any regular communications you have with retail investors, including the frequency and method of the communications. 4. If you significantly limit the types of investments available to retail investors in any accounts, include the following: ‘‘We offer a limited selection of investments. Other firms could offer a wider range of choices, some of which might have lower costs.’’ You significantly limit the types of investments if, for example, you only offer one type of asset (e.g., mutual funds, exchange-traded funds, or variable annuities), you only offer mutual funds or other investments sponsored or managed by you or an affiliate (i.e., proprietary products), or you only offer a small number of investments. If such limits only apply to certain accounts that you offer, identify those accounts. C. Investment Advisory Account Services: If you are an investment adviser that offers investment advisory accounts to retail investors, summarize the principal investment advisory services that you provide to retail investors. You must address the following, unless not applicable: 1. State the type of fee you receive as compensation if the retail investor opens an investment advisory account. For example, state if you charge an on-going asset-based fee based on the value of cash and investments in the advisory account, a fixed fee, or some other fee arrangement. Emphasize the type of fee in bold and italicized font. If you are a standalone adviser, also state how frequently you assess the fee. 2. State that you offer advice on a regular basis, or, if you do not offer advice on a regular basis, state how frequently you offer advice. State the services you offer to retail investors including, for example, (a) assistance with developing the retail investor’s investment strategy (e.g., you discuss the retail investor’s investment goals or you design with the retail investor a strategy to achieve the retail investor’s investment goals); or (b) how frequently you monitor the retail PO 00000 Frm 00141 Fmt 4701 Sfmt 4702 21555 investor’s accounts. Briefly describe any regular communications you have with retail investors, including the frequency and method of the communications. 3. State if you offer advisory accounts for which you exercise discretion (i.e., discretionary accounts), accounts where you do not exercise discretion (i.e., nondiscretionary accounts), or both. Emphasize the type of account (discretionary and non-discretionary) in bold and italicized font. If you offer a discretionary account, state that it allows you to buy and sell investments in the retail investor’s account, without asking the retail investor in advance. If you offer a non-discretionary account, state that you give advice and the retail investor decides what investments to buy and sell. 4. If you significantly limit the types of investments available to retail investors in any accounts, include the following: ‘‘Our investment advice will cover a limited selection of investments. Other firms could provide advice on a wider range of choices, some of which might have lower costs.’’ You significantly limit the types of investments if, for example, you only offer one type of asset (e.g., mutual funds, exchange-traded funds, or variable annuities), you only offer mutual funds or other investments sponsored or managed by you or an affiliate (i.e., proprietary products), or you only offer a small number of investments. If such limits only apply to certain accounts that you offer, identify those accounts. D. Affiliate Services: If you are a standalone investment adviser or standalone brokerdealer and have affiliates that offer to retail investors brokerage or advisory services, respectively, you may state that you provide retail investors with certain brokerage or advisory services of your affiliates, as applicable. Item 3: Standard of Conduct A. Include the heading ‘‘Our Obligations to You’’ and the following language after the heading: ‘‘We must abide by certain laws and regulations in our interactions with you.’’ B. Broker-Dealers: If you are a broker-dealer that offers brokerage accounts to retail investors, include the following: 1. ‘‘[We must act in your best interest and not place our interests ahead of yours when we recommend an investment or an investment strategy involving securities.] When we provide any service to you, we must treat you fairly and comply with a number of specific obligations. Unless we agree otherwise, we are not required to monitor your portfolio or investments on an ongoing basis.’’ Include the bracketed language only if you offer recommendations subject to Exchange Act Rule 15l-1 (‘‘Regulation Best Interest’’). 2. ‘‘Our interests can conflict with your interests. [When we provide recommendations, we must eliminate these conflicts or tell you about them and in some cases reduce them].’’ E:\FR\FM\09MYP2.SGM 09MYP2 21556 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules amozie on DSK3GDR082PROD with PROPOSALS1 Include the bracketed language only if you offer recommendations subject to Regulation Best Interest. C. Investment Advisers: If you are an investment adviser that offers investment advisory accounts to retail investors, include the following: 1. ‘‘We are held to a fiduciary standard that covers our entire investment advisory relationship with you. [For example, we are required to monitor your portfolio, investment strategy and investments on an ongoing basis.]’’ If you do not provide ongoing advice (for example, if you only provide a one-time financial plan), omit the bracketed sentence. 2. ‘‘Our interests can conflict with your interests. We must eliminate these conflicts or tell you about them in a way you can understand, so that you can decide whether or not to agree to them.’’ Item 4: Summary of Fees and Costs A. Include the heading ‘‘Fees and Costs’’ and the following language after the heading: ‘‘Fees and costs affect the value of your account over time. Please ask your financial professional to give you personalized information on the fees and costs that you will pay.’’ B. Brokerage Account Fees and Costs: If you are a broker-dealer that offers brokerage accounts to retail investors, summarize the principal fees and costs that retail investors will incur. 1. If you are a dual registrant include the following (emphasis required): ‘‘Transaction-based fees. You will pay us a fee every time you buy or sell an investment. This fee, commonly referred to as a commission, is based on the specific transaction and not the value of your account.’’ If you are a standalone broker-dealer include the following: ‘‘The fee you pay is based on the specific transaction and not the value of your account.’’ 2. Include the following (emphasis required): (a) ‘‘With stocks or exchange-traded funds, this fee is usually a separate commission. With other investments, such as bonds, this fee might be part of the price you pay for the investment (called a ‘‘markup’’ or ‘‘mark down’’). With mutual funds, this fee (typically called a ‘‘load’’) reduces the value of your investment.’’ (b) State that some investments impose additional fees that will reduce the value of retail investors’ investments over time and provide examples of such investments that you offer to retail investors (e.g., mutual funds and variable annuities). Also state that a retail investor could be required to pay fees when certain investments are sold (e.g., surrender charges for selling variable annuities). 3. State whether your fees vary and are negotiable, and describe the key factors that you believe would help a reasonable retail investor understand the fee that he or she is likely to pay for your services (e.g., how much the retail investor buys or sells, what type of investment the retail investor buys or sells, and what VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 kind of account the retail investor has with you). 4. State, if applicable, that a retail investor will also pay other fees in addition to the firm’s principal fees. List other fees the retail investor will pay, including, but not limited to, custodian fees, account maintenance fees and account inactivity fees. 5. Include the following: ‘‘The more transactions in your account, the more fees we charge you. We therefore have an incentive to encourage you to engage in transactions.’’ 6. If you are a dual registrant include the following: ‘‘From a cost perspective, you may prefer a transaction-based fee if you do not trade often or if you plan to buy and hold investments for longer periods of time.’’ C. Investment Advisory Account Fees and Costs: If you are an investment adviser that offers investment advisory accounts to retail investors, summarize the principal fees and costs that retail investors will incur. Your determination of the principal fees for investment advisory services should align with the type of fee(s) that you report in response to Form ADV Part 1A, Item 5.E. Include information about each type of fee you report that is responsive to this Item 4.C. 1. If you are a dual registrant include the following if you charge an asset-based fee (emphasis required): ‘‘Asset-based fees. You will pay an on-going fee [at the end of each quarter] based on the value of the cash and investments in your advisory account.’’ Replace the brackets with how frequently you assess the fee. If you charge another type of fee instead of an asset-based fee for your advisory services, briefly describe that fee and how frequently it is assessed. 2. Include the following: ‘‘The amount paid to our firm and your financial professional generally does not vary based on the type of investments we select on your behalf. [The asset-based fee reduces the value of your account and will be deducted from your account.]’’ Include the bracketed language if you charge an ongoing assetbased fee for your advisory accounts. If you charge another type of fee, succinctly describe how it is assessed and the impact it has on the value of the retail investor’s account. 3. If you provide advice to retail investors about investing in a wrap fee program (and do not also offer retail investors another type of advisory account), include the following (emphasis required): ‘‘We offer advisory accounts called wrap fee programs. In a wrap fee program, the asset-based fee will include most transaction costs and fees to a broker-dealer or bank that will hold your assets (called ‘‘custody’’), and as a result wrap fees are typically higher than non-wrap advisory fees.’’ If you offer retail investors a wrap fee program as well as another type of advisory account, include the following (emphasis required): ‘‘For some advisory accounts, called wrap fee programs, the asset- PO 00000 Frm 00142 Fmt 4701 Sfmt 4702 based fee will include most transaction costs and custody services, and as a result wrap fees are typically higher than non-wrap advisory fees.’’ 4. State that some investments impose additional fees that will reduce the value of retail investors’ investments over time and provide examples of such investments that you offer to retail investors (e.g., mutual funds and variable annuities). Also state that a retail investor could be required to pay fees when certain investments are sold (e.g., surrender charges for selling variable annuities). 5. State whether your fees vary and are negotiable, and describe the key factors that you believe would help a reasonable retail investor understand the fee that he or she is likely to pay for your services (e.g., the services your receive and the amount of assets in your account). 6. State, if applicable, that a retail investor will pay transaction-based fees when you buy and sell an investment for the retail investor (e.g., commissions paid to broker-dealers for buying or selling investments) in addition to the firm’s principal fee it charges retail investors for the firm’s advisory accounts. Also state, if applicable, that a retail investor will pay fees to a broker-dealer or bank that will hold the retail investor’s assets and that this is called custody. List other fees the retail investor will pay, including, but not limited to, account maintenance services. 7. If you provide advice to retail investors about investing in a wrap fee program, include the following: ‘‘Although transaction fees are usually included in the wrap program fee, sometimes you will pay an additional transaction fee (for investments bought and sold outside the wrap fee program).’’ 8. If you charge an ongoing asset-based fee, include the following: ‘‘The more assets you have in the advisory account, including cash, the more you will pay us. We therefore have an incentive to increase the assets in your account in order to increase our fees. You pay our fee [insert frequency of fee (e.g., quarterly)] even if you do not buy or sell.’’ Replace the brackets with the frequency of your fee. 9. If you provide advice to retail investors about investing in a wrap fee program, also include the following: ‘‘Paying for a wrap fee program could cost more than separately paying for advice and for transactions if there are infrequent trades in your account.’’ 10. If you are a dual registrant that charges an ongoing asset-based fee, include the following: ‘‘An asset-based fee may cost more than a transaction-based fee, but you may prefer an asset-based fee if you want continuing advice or want someone to make investment decisions for you.’’ If you provide advice to retail investors about investing in a wrap fee program, also include the following: ‘‘You may prefer a wrap fee program if you prefer the certainty of a [insert frequency of the wrap fee (e.g., quarterly)] fee regardless E:\FR\FM\09MYP2.SGM 09MYP2 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules amozie on DSK3GDR082PROD with PROPOSALS1 of the number of transactions you have.’’ Replace the brackets with the frequency of the wrap fee. Item 5: Comparisons to be provided by standalone investment advisers and standalone broker-dealers A. If you are a standalone investment adviser, include the heading ‘‘Compare with Typical Brokerage Accounts,’’ and include the following under the heading (emphasis required): ‘‘You could also open a brokerage account with a brokerdealer, where you will pay a transaction-based fee, generally referred to as a commission, when the broker-dealer buys or sells an investment for you.’’ Include ‘‘Features of a typical brokerage account include:’’ and then include the following statements, each set off by a bullet point (except as specified below), in the following order: 1. ‘‘With a broker-dealer, you may select investments or the broker-dealer may recommend investments for your account, but the ultimate decision for your investment strategy and the purchase and sale of investments will be yours.’’ 2. ‘‘A broker-dealer must act in your best interest and not place its interests ahead of yours when the broker-dealer recommends an investment or an investment strategy involving securities. When a broker-dealer provides any service to you, the broker-dealer must treat you fairly and comply with a number of specific obligations. Unless you and the broker-dealer agree otherwise, the broker-dealer is not required to monitor your portfolio or investments on an ongoing basis.’’ 3. ‘‘If you were to pay a transaction-based fee in a brokerage account, the more trades in your account, the more fees the broker-dealer charges you. So it has an incentive to encourage you to trade often.’’ 4. Include ‘‘You can receive advice in either type of account, but you may prefer paying:’’ and then present the following information in this sub-item in a tabular format, comparing a transaction-based fee and an asset-based fee side-by-side. In one column, include the following (emphasis required): ‘‘a transaction-based fee from a cost perspective, if you do not trade often or if you plan to buy and hold investments for longer periods of time.’’ In the other column, include the following (emphasis required): ‘‘an asset-based fee if you want continuing advice or want someone to make investment decisions for you, even though it may cost more than a transaction-based fee.’’ B. If you are a standalone broker-dealer, include the heading ‘‘Compare with Typical Advisory Accounts,’’ and include the following under the heading (emphasis required): ‘‘You could also open an advisory account with an investment adviser, where you will pay an ongoing asset-based fee that is based on the value of the cash and investments in your advisory account.’’ VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 Include ‘‘Features of a typical advisory account include:’’ and then include the following statements, each set off by a bullet point (except as specified below), in the following order (emphasis required): 1. ‘‘Advisers provide advice on a regular basis. They discuss your investment goals, design with you a strategy to achieve your investment goals, and regularly monitor your account.’’ 2. ‘‘You can choose an account that allows the adviser to buy and sell investments in your account without asking you in advance (a ‘‘discretionary account’’) or the adviser may give you advice and you decide what investments to buy and sell (a ‘‘non-discretionary account’’).’’ 3. ‘‘Advisers are held to a fiduciary standard that covers the entire investment advisory relationship. For example, advisers are required to monitor your portfolio, investment strategy and investments on an ongoing basis.’’ 4. ‘‘If you were to pay an asset-based fee in an advisory account, you would pay the fee periodically, even if you do not buy or sell. You may also choose to work with an investment adviser who provides investment advice for an hourly fee, or provides a financial plan for a one-time fee.’’ 5. ‘‘For an adviser that charges an assetbased fee, the more assets you have in an advisory account, including cash, the more you will pay the adviser. So the adviser has an incentive to increase the assets in your account in order to increase its fees.’’ 6. Include ‘‘You can receive advice in either type of account, but you may prefer paying:’’ and then present the following information in this sub-item in a tabular format, comparing a transaction-based fee and an asset-based fee side-by-side. In one column, include the following (emphasis required): ‘‘an asset-based fee if you want continuing advice or want someone to make investment decisions for you, even though it may cost more than a transaction-based fee.’’ In the other column, include the following (emphasis required): ‘‘a transaction-based fee from a cost perspective if you do not trade often or if you plan to buy and hold investments for longer periods of time.’’ Item 6. Conflicts of Interest A. Include the heading, ‘‘Conflicts of Interest.’’ Standalone broker-dealers must include the following after the heading: ‘‘We benefit from our recommendations to you.’’ Standalone investment advisers must include the following after the heading: ‘‘We benefit from the advisory services we provide to you.’’ Dual registrants must include the following after the heading: ‘‘We benefit from the services we provide to you.’’ B. Briefly describe the following conflicts of interest, as they are applicable to you. If all or a portion of a conflict is inapplicable to your business, omit that conflict or portion thereof. If you are a PO 00000 Frm 00143 Fmt 4701 Sfmt 4702 21557 dual registrant and a conflict only applies to your brokerage accounts or to your investment advisory accounts, only include that conflict in the applicable column. 1. State that you have a financial incentive to offer or recommend the retail investor to invest in certain investments because (a) they are issued, sponsored or managed by you or your affiliates, (b) third parties compensate you when you recommend or sell the investments, or (c) both. Provide examples of such investments. State that your financial professionals receive additional compensation if the retail investor buys these investments. 2. State that you have an incentive to offer or recommend the retail investor to invest in certain investments because the manager or sponsor of those investments or another third party (such as an intermediary) shares with you revenue it earns on those investments. Provide examples of such investments. 3. State that you can buy investments from a retail investor, and sell investments to a retail investor, from your own accounts (called ‘‘acting as principal’’). State that you can earn a profit on these trades, and that you have an incentive to encourage the retail investor to trade with you. If this activity is part of your investment advisory business, state that the retail investor’s specific approval on each such transaction is required. Item 7. Additional Information. A. Include the heading, ‘‘Additional Information’’ and include the following after the heading: ‘‘We encourage you to seek out additional information.’’ B. Include the following: ‘‘We have legal and disciplinary events’’ if you or one of your financial professionals currently disclose, or are required to disclose, the following information: 1. Disciplinary information in your Form ADV (Item 11 of Part 1A or Item 9 of Part 2A). 2. Legal or disciplinary events in your Form BD (Items 11 A-K) (except to the extent such information is not released to BrokerCheck, pursuant to FINRA Rule 8312). 3. Disclosures for any of your financial professionals in Items 14 A-M on Form U4 (Uniform Application for Securities Industry Registration or Transfer), or in Items 7(a) and 7(c)-(f) of Form U5 (Uniform Termination Notice for Securities Industry Registration) or on Form U6 (Uniform Disciplinary Action Reporting Form) (except to the extent such information is not released to BrokerCheck, pursuant to FINRA Rule 8312). C. Regardless of your response to Item 7.B, you must state the following: ‘‘Visit Investor.gov for a free and simple search tool to research our firm and our financial professionals.’’ D. Include the following: ‘‘To report a problem to the SEC, visit Investor.gov or call the SEC’s toll-free investor assistance line at (800) 732-0330. [To E:\FR\FM\09MYP2.SGM 09MYP2 21558 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules report a problem to FINRA, [ ].] If you have a problem with your investments, investment account or a financial professional, contact us in writing at [insert your primary business address].’’ If you are a broker-dealer or dual registrant, include the bracketed language. It is your responsibility to review the current telephone numbers for the SEC and FINRA no less often than annually and update as necessary. E. State where the retail investor can find additional information about your brokerage and investment advisory services. 1. If you are a broker-dealer, state that for additional information about your brokers and services, visit BrokerCheck, your website, and the retail investor’s account agreement. Include a link to the portion of your website that provides upto-date information for retail investors and the following link to BrokerCheck: Brokercheck.Finra.org. If you do not have a public firm website, then you must include a toll-free telephone number where retail investors can request up-to-date information. 2. If you are an investment adviser, state that for additional information on your investment advisory services, see your Form ADV brochure on IAPD on Investor.gov and any brochure supplement a financial professional provides. If you maintain your current Form ADV brochure on your public website, then you must state the website address. If you do not have a public firm website or if you do not maintain your current Form ADV brochure on your public website, then you must include the following link: adviserinfo.sec.gov. If you do not have a public firm website, then you also must include a toll-free telephone number where retail investors can request up-to-date information. Item 8. Key Questions to Ask. amozie on DSK3GDR082PROD with PROPOSALS1 Under the heading ‘‘Key Questions to Ask,’’ include the key questions below and VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 the following: ‘‘Ask our financial professionals these key questions about our investment services and accounts.’’ Use formatting to make the questions more noticeable and prominent (for example, by using larger font, a text box around the heading or questions, different font, or lines to offset the questions from the other sections). You may modify or omit portions of any questions that you determine are inapplicable to your business. If you are a standalone broker-dealer or standalone investment adviser, you should modify the questions below to reflect the type of account you offer to retail investors (e.g., advisory or brokerage account). Advisers that provide automated advice or broker-dealers that provide services only online without a particular individual with whom a retail investor can discuss these questions must include a section or page on their website that answers each of the below questions and should provide a hyperlink in the relationship summary to that section or page. If you provide automated advice but make a financial professional available to discuss the existing account with a retail investor, you may wish to consider making the financial professional available to discuss these questions with the retail investor. 1. Given my financial situation, why should I choose an advisory account? Why should I choose a brokerage account? 2. Do the math for me. How much would I pay per year for an advisory account? How much for a typical brokerage account? What would make those fees more or less? What services will I receive for those fees? 3. What additional costs should I expect in connection with my account? 4. Tell me how you and your firm make money in connection with my account. Do you or your firm receive any payments from anyone besides me in connection with my investments? 5. What are the most common conflicts of interest in your advisory and brokerage accounts? Explain how you will address PO 00000 Frm 00144 Fmt 4701 Sfmt 4702 those conflicts when providing services to my account. 6. How will you choose investments to recommend for my account? 7. How often will you monitor my account’s performance and offer investment advice? 8. Do you or your firm have a disciplinary history? For what type of conduct? 9. What is your relevant experience, including your licenses, education and other qualifications? Please explain what the abbreviations in your licenses are and what they mean. 10. Who is the primary contact person for my account, and is he or she a representative of an investment adviser or a brokerdealer? What can you tell me about his or her legal obligations to me? If I have concerns about how this person is treating me, who can I talk to? In addition to the abovementioned questions, you may also include any other frequently asked questions you receive following these questions. You may not, however, exceed fourteen questions in total. Appendix C Hypothetical Relationship Summary for a Dually Registered Investment Adviser and Broker-Dealer Prepared By SEC Staff—For Illustrative Purposes Only Which Type of Account is Right for You— Brokerage, Investment Advisory or Both? There are different ways you can get help with your investments. You should carefully consider which types of accounts and services are right for you. Depending on your needs and investment objectives, we can provide you with services in a brokerage account, investment advisory account, or both at the same time. This document gives you a summary of the types of services we provide and how you pay. Please ask us for more information. There are some suggested questions on page 4. BILLING CODE 8011–01–P E:\FR\FM\09MYP2.SGM 09MYP2 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules • If you open a brokerage account, you will pay us a transaction-based fee, generally referred to as a commission, every time you buy or sell an investment. 21559 • If you open an advisory account, you will pay an on-going asset-based fee for our services. • We will offer you advice on a regular basis. We will discuss your investment goals design with you a strategy to achieve your investment goals, and regularly monitor your account. We will contact you (by phone oremail) at least quarterly to discuss your portfolio. • You may select investments or we may recommend investments for your account, but the ultimate investment decision for your investment strategy and the purchase or sale of investments will be yours. • We can offer you additional services to assist you in developing and executing your investment strategy and monitoring the performance of your account but you might pay more. We will deliver account statements to you each quarter in paper or electronically. • You can choose an account that allows us to buy and sell investments in your account without asking you in advance (a "discretionary account") or we may give you advice and you decide what investments to buy and sell (a "non-discretionary account"). • We offer a limited selection of investments. Other firms could offer a wider range of choices, some of which might have lower costs. • Our investment advice will cover a limited selection of investments. Other firms could provide advice on a wider range of choices, some of which might have lower costs. Our Obligations to You. We must abide by certain laws and regulations in our interactions with you. • Our interests can conflict with your interests. When we provide recommendations, we must eliminate these conflicts or tell you about them and in some cases reduce them. • We are held to a fiduciary standard that covers our entire investment advisory relationship with you. For example, we are required to monitor your portfolio, investment strategy and investments on an ongoing basis. • Our interests can conflict with your interests. We must eliminate these conflicts or tell you about them in a way you can understand, so that you can decide whether or not to agree to them. Fees and Costs. Fees and costs affect the value of your account over time. Please ask your financial -SAMPLE FIRM, broker-dealer and investment adviser registered with the Securities and Exchange Commission, Aprill, 2018- VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 PO 00000 Frm 00145 Fmt 4701 Sfmt 4725 E:\FR\FM\09MYP2.SGM 09MYP2 EP09MY18.004</GPH> amozie on DSK3GDR082PROD with PROPOSALS1 • We must act in your best interest and not place our interests ahead of yours when we recommend an investment or an investment strategy involving securities. When we provide any service to you, we must treat you fairly and comply with a number of specific obligations. Unless we agree otherwise, we are not required to monitor your portfolio or investments on an ongoing basis. 21560 • Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules Transaction-based fees. You will pay us a fee • every time you buy or sell an investment. This fee, commonly referred to as a commission, is based on the specific transaction and not the value of your account. at the end of each quarter based on the value of the cash and investments in your advisory account. The amount paid to our firm and your financial professional generally does not vary based on the type of investments we select on your behalf. The asset-based fee reduces the value of your account and will be deducted from your account. For some advisory accounts, called wrap fee programs, the asset-based fee will include most transaction costs and custody services, and as a result wrap fees are typically higher than non-wrap advisory fees. With stocks or exchange-traded funds, this fee is usually a separate commission. With other investments, such as bonds, this fee might be part of the price you pay for the investment (called a "mark-up" or "mark down"). With mutual funds, this fee (typically called a "load") reduces the value of your investment. • • Some investments (such as mutual funds and variable annuities) impose additional fees that will reduce the value of your investment over time. Also, with certain investments such as variable annuities, you may have to pay fees such as "surrender charges" to sell the investment. Our fees vary and are negotiable. The amount you pay will depend, for example, on how much you buy or sell, what type of investment you buy or sell, and what kind of account you have with us. • • • Some investments (such as mutual funds and variable annuities) impose additional fees that will reduce the value of your investment over time. Also, with certain investments such as variable annuities, you may have to pay fees such as "surrender charges" to sell the investment. • Our fees vary and are negotiable. The amount you pay will depend, for example, on the services you receive and the amount of assets in your account. • For accounts not part of the wrap fee program, you will pay a transaction fee when we buy and sell an investment for you. You will also pay fees to a broker-dealer or bank that will hold your assets (called "custody"). The more transactions in your account, the more fees we charge you. We therefore have an incentive to encourage you to engage in transactions. From a cost perspective, you may prefer a transaction-based fee if you do not trade often or if you plan to buy and hold Although transaction fees are usually included in the wrap program fee, sometimes you will pay an additional transaction fee (for investments bought and sold outside the wrap fee program). • The more assets you have in the advisory -SAMPLE FIRM, broker-dealer and investment adviser registered with the Securities and Exchange Commission, Aprill, 2018- VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 PO 00000 Frm 00146 Fmt 4701 Sfmt 4725 E:\FR\FM\09MYP2.SGM 09MYP2 EP09MY18.005</GPH> amozie on DSK3GDR082PROD with PROPOSALS1 • We charge you additional fees, such as custodian fees, account maintenance fees, and account inactivity fees. Asset-based fees. You will pay an on-going fee Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules investments for longer periods of time. 21561 account, including cash, the more you will pay us. We therefore have an incentive to increase the assets in your account in order to increase our fees. You pay our fee quarterly even if you do not buy or sell. • Paying for a wrap fee program could cost more than separately paying for advice and for transactions if there are infrequent trades in your account. • An asset-based fee may cost more than a transaction-based fee, but you may prefer an asset-based fee if you want continuing advice or want someone to make investment decisions for you. You may prefer a wrap fee program if you prefer the certainty of a quarterly fee regardless of the number of transactions you have. Conflicts of Interest. We benefit fmm the services we provide to you. • We can make extra money by selling you certain investments, such as [_], either because they are managed by someone • related to our firm or because they are offered by companies that pay our firm to offer their investments. Your financial professional also receives more money if you buy these investments. • • We have an incentive to offer or recommend certain investments, such as[_], because the manager or sponsor of those investments shares with us revenue it earns on those investments. We can buy investments from you, and sell investments to you, from our own accounts (called "acting as principal''). We can earn a profit on these trades, so we have an incentive to encourage you to trade with us. We can make extra money by advising you to invest in certain investments, such as [_], because they are managed by someone related to our firm. Your financial professional also receives more money if you buy these investments. • We have an incentive to advise you to invest in certain investments, such as[_], because the manager or sponsor of those investments shares with us revenue it earns on those investments. • We can buy investments from you, and sell investments to you, from our own accounts (called "acting as principal"), but only with your specific approval on each transaction. We can earn a profit on these trades, so we have an incentive to encourage you to trade with us. • We have legal and disciplinary events. Visit lnvestor.gov for a free and simple search tool to -SAMPLE FIRM, broker-dealer and investment adviser registered with the Securities and Exchange Commission, Aprill, 2018- VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 PO 00000 Frm 00147 Fmt 4701 Sfmt 4725 E:\FR\FM\09MYP2.SGM 09MYP2 EP09MY18.006</GPH> amozie on DSK3GDR082PROD with PROPOSALS1 Additional Information. We encourage you to seek out additional information. 21562 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules ' ,•: ~"r~kefi.·iile0~t~~:~f.J~f~', ,: " \, .·, " ~~~k~r~•~,A~~....,~~,,· . research our firm and our financial professionals. • For additional information about our brokers and services, visit lnvestor.gov or BrokerCheck (BrokerCheck.Finra.org), our website (SampleFirm.com), and your account agreement. For additional information on advisory services, see our Form ADV brochure on IAPD, on lnvestor.gov, or on our website (SAMPLEFirm.com/FormADV) and any brochure supplement your financial professional provides. • To report a problem to the SEC, visit lnvestor.gov or call the SEC's toll-free investor assistance line at (800) 732-0330. To report a problem to FINRA, [ ]. If you have a problem with your investments, account or financial professional, contact us in writing at [ ]. Key Que$'tions to Ask. Ask our financial professionals these key questions about our investment services and accounts. 1. Given my financial situation, why should I choose an advisory account? Why should I choose a 2. 3. 4. 5. 6. 7. 8. 9. 10. brokerage account? Do the math for me. How much would I expect to pay per year for an advisory account? How much for a typical brokerage account? What would make those fees more or less? What services will I receive for those fees? What additional costs should I expect in connection with my account? Tell me how you and your firm make money in connection with my account. Do you or your firm receive any payments from anyone besides me in connection with my investments? What are the most common conflicts of interest in your advisory and brokerage accounts? Explain how you will address those conflicts when providing services to my account. How will you choose investments to recommend for my account? How often will you monitor my account's performance and offer investment advice? Do you or your firm have a disciplinary history? For what type of conduct? What is your relevant experience, including your licenses, education, and other qualifications? Please explain what the abbreviations in your licenses are and what they mean. Who is the primary contact person for my account, and is he or she a representative of an investment adviser or a broker-dealer? What can you tell me about his or her legal obligations to me? If I have concerns about how this person is treating me, who can I talk to? VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 PO 00000 Frm 00148 Fmt 4701 Sfmt 4725 E:\FR\FM\09MYP2.SGM 09MYP2 EP09MY18.007</GPH> amozie on DSK3GDR082PROD with PROPOSALS1 -SAMPLE FIRM, broker-dealer and investment adviser registered with the Securities and Exchange Commission, Aprill, 2018- Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules Appendix D Hypothetical Relationship Summary for a Registered Broker-Dealer Prepared By SEC Staff—For Illustrative Purposes Only Is A Brokerage Account Right For You? There are different ways you can get help with your investments. You should carefully consider which types of accounts and services are right for you. We are a broker-dealer and provide brokerage accounts and services rather than advisory accounts and services. This document gives you a summary of the types of services we provide and how you pay. Please ask us for more information. There are some suggested questions on page 4. ,. : REHationships cmd Services. .. ·· •.. ·· 21563 .·· • If you open a brokerage account, you will pay us a transaction-based fee, generally referred to as a commission, every time you buy or sell an investment. • You may select investments or we may recommend investments for your account, but the ultimate investment decision as to your investment strategy and the purchase or sale of investments will be yours. • We can offer you additional services to assist you in developing and executing your investment strategy and monitoring the performance of your account but you might pay more. We will deliver account statements to you each quarter in paper or electronically. • We offer a limited selection of investments. Other firms could offer a wider range of choices, some of which might have lower costs. Our.Qbligati()nsto You. We must abi<:f~. by certainla.!Nshnd regulations in·..out interactions with . . . . . . . ·.•. . . · .· you. •· ... .. ·.· . .. .· • We must act in your best interest and not place our interests ahead of yours when we recommend an investment or an investment strategy involving securities. When we provide any service to you, we must treat you fairly and comply with a number of specific obligations. Unless we agree otherwise, we are not required to monitor your portfolio or investments on an ongoing basis. • . Our interests can conflict with your interests. When we provide recommendations, we - SAMPLE FIRM, a broker-dealer registered with the Securities and Exchange Commission, April 1, 2018 - VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 PO 00000 Frm 00149 Fmt 4701 Sfmt 4725 E:\FR\FM\09MYP2.SGM 09MYP2 EP09MY18.008</GPH> amozie on DSK3GDR082PROD with PROPOSALS1 must eliminate these conflicts or tell you about them and in some cases reduce them. 21564 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules Pe~sand.Costs.teesilf!.dcostsa]fe~tth~. value.ol}lauratcour~to~ertirne:··pJeaseasl<vour financia.jprofessio.ruJI to give you.perso:nalizerl injqrrn.atian em the fifes and. cost~ that yqu will P<i/Y. • The fee you pay is based on the specific transaction and not the value of your account. • With stocks or exchange-traded funds, this fee is usually a separate commission. With other investments, such as bonds, this fee might be part of the price you pay for the investment (called a "mark-up" or "mark down"). With mutual funds, this fee (typically called a "load") reduces the value of your investment. • Some investments (such as mutual funds and variable annuities) impose additional fees that will reduce the value of your investment over time. Also, with certain investments such as variable annuities, you may have to pay fees such as "surrender charges" to sell the investment. • Our fees vary and are negotiable. The amount you pay will depend, for example, on how much you buy or sell, what type of investment you buy or sell, and what kind of account you have with us. • We charge you additional fees, such as custodian fees, account maintenance fees, and account inactivity fees. • The more transactions in your account, the more fees we charge you. We therefore have an incentive to encourage you to engage in transactions. You could also open an advisory account with an investment adviser, where you will pay an ongoing asset-based fee that is based on the value of the cash and investments in your advisory account. Features of a typical advisory account include: Advisers provide advice on a regular basis. They discuss your investment goals, design with you a strategy to achieve your investment goals, and regularly monitor your account. • You can choose an account that allows the adviser to buy and sell investments in your account without asking you in advance (a "discretionary account'') or the adviser may give you advice and you decide what investments to buy and sell (a "non-discretionary account''). - SAMPLE FIRM, an investment adviser registered with the Securities and Exchange Commission, April 1, 2018 - VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 PO 00000 Frm 00150 Fmt 4701 Sfmt 4725 E:\FR\FM\09MYP2.SGM 09MYP2 EP09MY18.009</GPH> amozie on DSK3GDR082PROD with PROPOSALS1 • Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules Advisers are held to a fiduciary standard that covers the entire investment advisory relationship. For example, advisers are required to monitor your portfolio, investment strategy and investments on an ongoing basis. • If you were to pay an asset-based fee in an advisory account, you would pay the fee periodically even if you do not buy or sell. You may also choose to work with an investment adviser who provides investment advice for an hourly fee, or provides a financial plan for a one-time fee. • For an adviser that charges an asset-based fee, the more assets you have in an advisory account, including cash, the more you will pay the adviser. So the adviser has an incentive to increase the assets in your account in order to increase its fees. • You can receive advice in either type of account, but you may prefer paying: • We can make extra money by selling you certain investments, such as[_], either because they are managed by someone related to our firm or because they are offered by companies that pay our firm to sell their investments. Your financial professional also receives more money if you buy these investments. • We have an incentive to offer or recommend certain investments, such as[_], because the manager or sponsor of those investments shares with us revenue it earns on those investments. • We can buy investments from you, and sell investments to you, from our own accounts (called "acting as principal"). We can earn a profit on these trades, so we have an incentive to encourage you to trade with us. • We have legal and disciplinary events. Visit lnvestor.gov for a free and simple search tool to research our firm and our financial professionals. - SAMPLE FIRM, an investment adviser registered with the Securities and Exchange Commission, April 1, 2018 - VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 PO 00000 Frm 00151 Fmt 4701 Sfmt 4725 E:\FR\FM\09MYP2.SGM 09MYP2 EP09MY18.010</GPH> amozie on DSK3GDR082PROD with PROPOSALS1 • 21565 21566 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules • For additional information about our brokers and services, visit lnvestor.gov, BrokerCheck (BrokerCheck.Finra.org), our web site (SampleFirm.com), and your account agreement. • To report a problem to the SEC, visit lnvestor.gov or call the SEC's toll-free investor assistance line at (800) 732-0330. To report a problem to FINRA, [ ]. If you have a problem with your investments, account or financial professional, contact us in writing at [ ]. l(eyQuestions to As~. Ask our}inancialpr:pfessiqnaJs the$~. ke}i que~tit:ms abourour investment s.ervices ahd .aicounts. . ·. .. · . .· . .• .. . . .· .. . .. .· 1. Given my financial situation, why should I choose a brokerage account? 2. Do the math for me. How much would I pay per year for a typical brokerage account? What would make those fees more or less? What services will I receive for those fees? 3. What additional costs should I expect in connection with my account? 4. Tell me how you and your firm make money in connection with my account. Do you or your firm receive any payments from anyone besides me in connection with my investments? 5. What are the most common conflicts of interest in your brokerage accounts? Explain how you will address those conflicts when providing services to my account. 6. How will you choose investments to recommend for my account? 7. How often will you monitor my account's performance and offer investment advice? 8. Do you or your firm have a disciplinary history? For what type of conduct? 9. What is your relevant experience, including your licenses, education, and other qualifications? Please explain what the abbreviations in your licenses are and what they mean. 10. Who is the primary contact person for my account? What can you tell me about his or her legal obligations to me? If I have concerns about how this person is treating me, who can I talk to? - SAMPLE FIRM, an investment adviser registered with the Securities and Exchange Commission, April 1, 2018 - Hypothetical Relationship Summary for a Registered Investment Adviser Prepared By SEC Staff—For Illustrative Purposes Only Is An Investment Advisory Account Right For You? There are different ways you can get help with your investments. You should carefully VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 consider which types of accounts and services are right for you. We are an investment adviser and provide advisory accounts and services rather than brokerage accounts and services. This document gives you a summary of the types of services we provide and how you pay. Please ask us for more information. There are some suggested questions on page 3. PO 00000 Frm 00152 Fmt 4701 Sfmt 4702 E:\FR\FM\09MYP2.SGM 09MYP2 EP09MY18.011</GPH> amozie on DSK3GDR082PROD with PROPOSALS1 Appendix E Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules 21567 REHationships cmd Services. • If you open an advisory account, you will pay an on-going asset-based fee at the end of each quarter for our services, based on the value of the cash and investments in your advisory account. • We will offer you advice on a regular basis. We will discuss your investment goals, design with you a strategy to achieve your investment goals, and regularly monitor your account. We will contact you (by phone or e-mail) at least quarterly to discuss your portfolio. • You can choose an account that allows us to buy and sell investments in your account without asking you in advance (a "discretionary account'') or we may give you advice and you decide what investments to buy and sell (a "non-discretionary account''). • Our investment advice will cover a limited selection of investments. Other firms could provide advice on a wider range of choices, some of which might have lower costs. w~ • • /'l'llist abJde by certain Jaws end. n:gulat~ofts in ourinteract!ons with. We are held to a fiduciary standard that covers our entire investment advisory relationship with you. For example, we are required to monitor your portfolio, investment strategy, and investments on an ongoing basis. Our interests can conflict with your interests. We must eliminate these conflicts or tell you about them in a way you can understand, so that you can decide whether or not to agree to them. - SAMPLE FIRM, an investment adviser registered with the Securities and Exchange VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 PO 00000 Frm 00153 Fmt 4701 Sfmt 4725 E:\FR\FM\09MYP2.SGM 09MYP2 EP09MY18.012</GPH> amozie on DSK3GDR082PROD with PROPOSALS1 Commission, April 1, 2018 - 21568 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules fees and Costs. te~s ctqdcdstsa!fe.ct the. value (J}Yx?ufac~ouQtaver time: Ple}1:;e a~kyour • finan:cio.l proje~fi'Onalto gi11e yo:Cipersonalizeci inlormattorpn the!e!!s and cqsts t/J(ltgou wit/· pay. • The amount paid to our firm and your financial professional generally does not vary based on the type of investments we select on your behalf. The asset-based fee reduces the value of your account and will be deducted from your account. • Some investments (such as mutual funds and variable annuities) impose additional fees that will reduce the value of your investment over time. Also, with certain investments such as variable annuities, you may have to pay fees such as "surrender charges" to sell the investment. • Our fees vary and are negotiable. The amount you pay will depend, for example, on the services you receive and the amount of assets in your account. • You will pay a transaction fee when we buy and sell an investment for you. You will also pay fees to a broker-dealer or bank that will hold your assets (called "custody''). • The more assets you have in the advisory account, including cash, the more you will pay us. We therefore have an incentive to increase the assets in your account in order to increase our fees. You pay our fee quarterly even if you do not buy or sell. You could also open a brokerage account with a broker-dealer, where you will pay a transaction-based fee, generally referred to as a commission, when the broker-dealer buys or sells an investment for you. Features of a typical brokerage account include: With a broker-dealer, you may select investments or the broker-dealer may recommend investments for your account, but the ultimate decision for your investment strategy and the purchase and sale of investments will be yours. • A broker-dealer must act in your best interest and not place its interests ahead of yours when the broker-dealer recommends an investment or an investment strategy involving securities. When a broker-dealer provides any service to you, the broker-dealer must treat you fairly and comply with a number of specific obligations. Unless you and the broker-dealer agree otherwise, the broker-dealer is not required to monitor your portfolio or investments on an ongoing basis. • If you were to pay a transaction-based fee in a brokerage account, the more trades in your account, the more fees the broker-dealer charges you. So it has an incentive to encourage you to trade often. -SAMPLE FIRM, an investment adviser registered with the Securities and Exchange Commission, April 1, 2018 - VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 PO 00000 Frm 00154 Fmt 4701 Sfmt 4725 E:\FR\FM\09MYP2.SGM 09MYP2 EP09MY18.013</GPH> amozie on DSK3GDR082PROD with PROPOSALS1 • 21569 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules • You can receive advice in either type of account, but you may prefer paying: • We can make extra money by advising you to invest in certain investments, such as[_], because they are managed by someone related to our firm. Your financial professional also receives more money if you buy these investments. • We have an incentive to advise you to invest in certain investments, such as[_], because the manager or sponsor of those investments shares with us revenue it earns on those investments. • We can buy investments from you, and sell investments to you, from our own accounts (called "acting as principal"), but only with your specific approval on each transaction. We can earn a profit on these trades, so we have an incentive to encourage you to trade with us. • We have legal and disciplinary events. Visit lnvestor.gov for a free and simple search tool to research our firm and our financial professionals. • For additional information on our advisory services, see our Form ADV brochure on IAPD on lnvestor.gov or on our website (SampleFirm.com/FormADV) and any brochure supplement your financial professional provides. • To report a problem to the SEC, visit lnvestor.gov or call the SEC's toll-free investor assistance line at (800) 732-0330. If you have a problem with your investments, account or financial professional, contact us in writing at [ ]. Key. Qu~stio(l~tp As~.. Ask oilrfinancrt;Jl pr<>fessJoaalsth~sekev q!Je:Stie:ns ab9ut burlnvestment sen/1c~sdritf accou.n.ts~. . . . . .. . . . .. 1. Given my financial situation, why should I choose an advisory account? 2. Do the math for me. How much would I pay per year for an advisory account? What - SAMPLE FIRM, an investment adviser registered with the Securities and Exchange Commission, April 1, 2018 - VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 PO 00000 Frm 00155 Fmt 4701 Sfmt 4725 E:\FR\FM\09MYP2.SGM 09MYP2 EP09MY18.014</GPH> amozie on DSK3GDR082PROD with PROPOSALS1 would make those fees more or less? What services will I receive for those fees? Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules Your Relationship with Your Financial Professional: Feedback on the Relationship Summary amozie on DSK3GDR082PROD with PROPOSALS1 We would like to know what you think about a proposed Relationship Summary that describes your relationship with your investment adviser or your broker-dealer (your firm) and your financial professionals. This document summarizes: • the services the firm offers and the types of fees and costs associated with those services; • the firm’s obligations to you; • certain conflicts of interest; • how to find additional information about the firm and its financial professionals and research disciplinary history for the firm or its financial professionals; VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 • how to report a problem with your investments, investment account or a financial professional; and • some questions to ask your financial professional to get more information. It is important to us at the SEC to understand what you, the investor, think so that we can make it easier for you to choose the type of investment services relationship that is right for you. We prepared sample Relationship Summaries to illustrate what they may look like. ➢ Sample Relationship Summary for a broker-dealer ➢ Sample Relationship Summary for an investment adviser ➢ Sample Relationship Summary for firms that are both an investment adviser and broker-dealer PO 00000 Frm 00156 Fmt 4701 Sfmt 4725 Please take a few minutes to review one or more of the samples and answer any or all of these questions. Please provide your comments by August 7, 2018 – and thank you for your feedback! If you are interested in background information on the proposed Relationship Summary, or want to provide feedback on additional questions, click here (https:// www.sec.gov/rules/proposed/2018/3483063.pdf). Questions 1. Overall, do you find the Relationship Summary useful? If not, how would you change it? 2. How useful is each section of the Relationship Summary? Please consider explaining your responses in the comments. E:\FR\FM\09MYP2.SGM 09MYP2 EP09MY18.015</GPH> EP09MY18.016</GPH> 21570 Federal Register / Vol. 83, No. 90 / Wednesday, May 9, 2018 / Proposed Rules 21571 3. Please answer the following questions. Please consider explaining your responses in the comments. amozie on DSK3GDR082PROD with PROPOSALS1 4. Are there topics in the Relationship Summary that are too technical or that could be improved? If so, what topics and how can they be improved? 5. Is there additional information that we should require in the Relationship Summary, such as more specific information about the firm or additional information about fees? Is that because you do not receive the information now, or because you would also like to see it presented in this summary document, or both? Is there any information that should be made more prominent? 6. Is the Relationship Summary an appropriate length? If not, should it be longer or shorter? 7. Do you find the ‘Key Questions to Ask’ useful? Would the questions improve the quality of your discussion with your financial professional? If not, why not? 8. Do you have any additional suggestions to improve the Relationship Summary? Is there anything else you would like to tell us? How to Provide Feedback You can send us feedback in the following ways (include the file number S7-08-18 in your response): Mail ................ Secretary, Securities and Exchange Commission 100 F Street, NE Washington, DC, 20549-1090 Email .............. SEC Website We will post your feedback on our website. Your submission will be posted without change; we do not redact or edit personal identifying information from submissions. You should only make submissions that you wish to make available publicly. Thank you! [FR Doc. 2018–08583 Filed 5–8–18; 8:45 am] BILLING CODE 8011–01–P 1 Not applicable for firms that are both an investment adviser and broker-dealer. VerDate Sep<11>2014 19:30 May 08, 2018 Jkt 244001 PO 00000 Frm 00157 Fmt 4701 Sfmt 9990 rule-comments@sec.gov https://www.sec.gov/rules/ proposed.shtml E:\FR\FM\09MYP2.SGM 09MYP2 EP09MY18.017</GPH> BILLING CODE 8011–01–C

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 83, Number 90 (Wednesday, May 9, 2018)]
[Proposed Rules]
[Pages 21416-21571]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-08583]



[[Page 21415]]

Vol. 83

Wednesday,

No. 90

May 9, 2018

Part III





Securities and Exchange Commission





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17 CFR Parts 240, 249, 275, et al.





Form CRS Relationship Summary; Amendments to Form ADV; Required 
Disclosures in Retail Communications and Restrictions on the Use of 
Certain Names or Titles; Proposed Rule

Federal Register / Vol. 83 , No. 90 / Wednesday, May 9, 2018 / 
Proposed Rules

[[Page 21416]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 240, 249, 275 and 279

[Release No. 34-83063; IA-4888; File No. S7-08-18]
RIN 3235-AL27


Form CRS Relationship Summary; Amendments to Form ADV; Required 
Disclosures in Retail Communications and Restrictions on the Use of 
Certain Names or Titles

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is 
proposing new and amended 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 to inform them about the 
relationships and services the firm offers, the standard of conduct and 
the fees and costs associated with those services, specified conflicts 
of interest, and whether the firm and its financial professionals 
currently have reportable legal or disciplinary events. Retail 
investors would receive a relationship summary at the beginning of a 
relationship with a firm, and would receive updated information 
following a material change. The relationship summary would be subject 
to Commission filing and recordkeeping requirements. The Commission 
also is proposing two rules to reduce investor confusion in the 
marketplace for firm services, a new rule under the Exchange Act that 
would restrict broker-dealers and associated natural persons of broker-
dealers, when communicating with a retail investor, from using the term 
``adviser'' or ``advisor'' in specified circumstances; and new rules 
under the Exchange Act and Advisers Act that would require broker-
dealers and investment advisers, and their associated natural persons 
and supervised persons, respectively, to disclose, in retail investor 
communications, the firm's registration status with the Commission and 
an associated natural person's and/or supervised person's relationship 
with the firm.

DATES: Comments should be received on or before August 7, 2018.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/proposed.shtml); or
     Send an email to [email protected]. Please include 
File Number S7-08-18 on the subject line.

Paper Comments

     Send paper comments to Brent J. Fields, Secretary, 
Securities and Exchange Commission, 100 F Street NE, Washington, DC 
20549.

All submissions should refer to File Number S7-08-18. This file number 
should be included on the subject line if email is used. To help the 
Commission process and review your comments more efficiently, please 
use only one method. The Commission will post all comments on the 
Commission's internet website (https://www.sec.gov/rules/proposed.shtml). Comments also are available for website viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE, 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. All comments received will be posted without 
change. Persons submitting comments are cautioned that we do not redact 
or edit personal identifying information from comment submissions. You 
should submit only information that you wish to make available 
publicly. Investors seeking to comment on the relationship summary may 
want to submit our short-form tear sheet for providing feedback on the 
relationship summary, available at Appendix F.
    Studies, memoranda or other substantive items may be added by the 
Commission or staff to the comment file during this rulemaking. A 
notification of the inclusion in the comment file of any such materials 
will be made available on the Commission's website. To ensure direct 
electronic receipt of such notifications, sign up through the ``Stay 
Connected'' option at www.sec.gov to receive notifications by email.

FOR FURTHER INFORMATION CONTACT: Emily Rowland, Jennifer Songer, Gena 
Lai, Roberta Ufford, Jennifer Porter (Branch Chief), and Sara Cortes 
(Assistant Director), Investment Adviser Regulation Office at (202) 
551-6787 or [email protected], and Benjamin Kalish, Elizabeth Miller, 
Parisa Haghshenas (Branch Chief), and Holly Hunter-Ceci (Assistant 
Director), Chief Counsel's Office at (202) 551-6825 or [email protected], 
Division of Investment Management, Securities and Exchange Commission, 
100 F Street NE, Washington, DC 20549.

SUPPLEMENTARY INFORMATION: The Commission is proposing new rule 204-5 
under the Investment Advisers Act of 1940 [15 U.S.C. 80b],\1\ and is 
proposing to amend Form ADV to add a new Part 3: Form CRS [17 CFR 
279.1] under the Advisers Act. The Commission is also proposing to 
amend rules 203-1 [17 CFR 275.203-1], 204-1 [17 CFR 275.204-1], and 
204-2 [17 CFR 275.204-2] under the Advisers Act. The Commission is 
proposing new rule 17a-14 under the Securities Exchange Act of 1934 [17 
CFR 240.17a-14],\2\ and new Form CRS [17 CFR 249.640] under the 
Exchange Act. The Commission is also proposing to amend rules 17a-3 [17 
CFR 240.17a-3] and 17a-4 [17 CFR 240.17a-4] under the Exchange Act. The 
Commission is further proposing new rule 15l-2 under the Exchange Act 
[17 CFR 240.15l-2], new rule 15l-3 under the Exchange Act [17 CFR 
240.15l-3], and new rule 211h-1 under the Advisers Act [17 CFR 
275.211h-1].
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    \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 
refer to rules under the Exchange Act, or any paragraph of these 
rules, we are referring to Title 17, Part 240 of the Code of Federal 
Regulations [17 CFR 240], in which these rules are published.

I. Background
II. Form CRS Relationship Summary
    A. Presentation and Format
    B. Items
    1. Introduction
    2. Relationships and Services
    3. Obligations to the Retail Investor--Standard of Conduct
    4. Summary of Fees and Costs
    5. Comparisons
    6. Conflicts of Interest
    7. Additional Information
    8. Key Questions
    C. Delivery, Updating, and Filing Requirements
    1. Filing Requirements
    2. Delivery Requirements
    3. Updating Requirements
    D. Transition Provisions
    E. Recordkeeping Amendments
III. Restrictions on the Use of Certain Names and Titles and 
Required Disclosures
    A. Investor Confusion
    B. Restrictions on Certain Uses of ``Adviser'' and ``Advisor''
    1. Firms Solely Registered as Broker-Dealers and Associated 
Natural Persons
    2. Dually Registered Firms and Dual Hatted Financial 
Professionals

[[Page 21417]]

    C. Alternative Approaches
    D. Disclosures About a Firm's Regulatory Status and a Financial 
Professional's Association
IV. Economic Analysis
    A. Baseline
    1. Providers of Financial Services
    2. Investor Account Statistics
    3. Investor Perceptions About Broker-Dealers and Investment 
Advisers
    B. Form CRS Relationship Summary
    1. Broad Economic Considerations
    2. Economic Effects of the Relationship Summary
    3. Impact on Efficiency, Competition, and Capital Formation
    4. Alternatives to the Proposed Relationship Summary
    5. Request for Comments
    C. Restrictions on the Use of Certain Names and Titles and 
Required Disclosures
    1. Broad Economic Considerations
    2. Economic Effects of the Proposed Restrictions on the Use of 
Certain Titles and Required Disclosures
    3. Impact on Efficiency, Competition, and Capital Formation
    4. Alternatives to the Proposed Rules
    5. Request for Comments
    D. Combined Economic Effects of Form CRS Relationship Summary 
and Restrictions on the Use of Certain Titles and Required 
Disclosures About a Firm's Regulatory Status
V. Paperwork Reduction Act Analysis
    A. Form ADV
    1. Respondents: Investment Advisers and Exempt Reporting 
Advisers
    2. Changes in Burden Estimates and New Burden Estimates
    3. Total Revised Burden Estimates for Form ADV
    B. Rule 204-2 Under the Advisers Act
    1. Changes in Burden Estimates and New Burden Estimates
    2. Revised Annual Burden Estimates
    C. Rule 204-5 Under the Advisers Act
    1. Respondents: Investment Advisers
    2. Initial and Annual Burdens
    D. Form CRS and Rule 17a-14 Under the Exchange Act
    1. Respondents: Broker-Dealers
    2. Initial and Annual Burdens
    E. Recordkeeping Obligations Under Rule 17a-3 of the Exchange 
Act
    F. Record Retention Obligations Under Rule 17a-4 of the Exchange 
Act
    1. Changes in Burden Estimates and New Burden Estimates
    2. Revised Annual Burden Estimates
    G. Rule 151-3 Under the Exchange Act
    1. Respondents: Broker-Dealers and Associated Natural Persons
    2. Initial and Annual Burdens
    H. Rule 211h-1 Under the Advisers Act
    1. Respondents: Investment Advisers and Supervised Persons
    2. Initial and Annual Burdens
    I. Request for Comment
VI. Initial Regulatory Flexibility Analysis
    A. Reason for and Objectives of the Proposed Action
    1. Proposed Form CRS Relationship Summary
    2. Proposed Rules Relating to Restrictions on the Use of Certain 
Terms and Required Disclosure of Regulatory Status and a Financial 
Professional's Firm Association
    B. Legal Basis
    C. Small Entities Subject to the Rule and Rule Amendments
    1. Investment Advisers
    2. Broker-Dealers
    D. Projected Reporting, Recordkeeping and Other Compliance 
Requirements
    1. Initial Preparation of Form CRS Relationship Summary
    2. Rule 15l-2 Relating to Restrictions on the Use of Certain 
Terms in Names and Titles
    3. Rules 15l-3 and 211h-1 Relating to Disclosure of Commission 
Registration Status and Financial Professional Association
    E. Duplicative, Overlapping, or Conflicting Federal Rules
    F. Significant Alternatives
    1. Form CRS Relationship Summary
    2. Rule 15l-2 Relating to Restrictions on the Use of Certain 
Terms in Names and Titles
    3. Rule 15l-3 Relating to Disclosure of Commission Registration 
Status and Financial Professional Association
    G. Solicitation of Comments
VII. Consideration of the Impact on the Economy
VIII. Statutory Authority
IX. Text of Rule and Form
Appendices
Appendix A: Form ADV: General Instructions
Appendix B: [Form ADV, Part 3:] Instructions to Form CRS
Appendix C: Dual Registrant Mock-Up
Appendix D: Broker-Dealer Mock-Up
Appendix E: Investment Adviser Mock-Up
Appendix F: Feedback on the Relationship Summary

I. Background

    Individual investors rely on the services of broker-dealers and 
investment advisers when making and implementing investment decisions. 
Such ``retail investors'' can receive investment advice from a broker-
dealer, an investment adviser, or both, or decide to make their own 
investment decisions.\3\ A number of firms are dually registered with 
the Commission as broker-dealers and investment advisers, and offer 
both types of services.\4\ Broker-dealers, investment advisers and 
dually registered firms all provide important services for individuals 
who invest in the markets. Studies show that retail investors are 
confused about the differences among them.\5\ These differences include 
the scope and nature of the services they provide, the fees and costs 
associated with those services, conflicts of interest, and the 
applicable legal standards and duties to investors.
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    \3\ 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), at 10-11, available at www.sec.gov/news/studies/2011/913studyfinal.pdf (``913 Study''). As discussed below, 
we have considered the findings, conclusions and recommendations of 
the 913 Study in developing this proposal.
    Retail investors also can choose to receive advisory services 
from other sources, such as banks, that are not required to be 
registered with the Commission.
    \4\ Investment advisers also may be registered with one or more 
states if, among other things, they have less than a certain amount 
of assets under management. See section 203A of the Advisers Act. 
References in this release to investment advisers generally refer 
only to SEC-registered investment advisers.
    \5\ See, e.g., 913 Study, supra note 3. See also Letter from 
Barbara Roper, Director of Investor Protection, Consumer Federation 
of America, et al., (Sept. 15, 2010) (``CFA Survey'') (submitting 
the results of a national opinion survey regarding U.S. investors 
and the fiduciary standard conducted by ORC/Infogroup for the 
Consumer Federation of America, AARP, the North American Securities 
Administrators Association, the Certified Financial Planner Board of 
Standards, Inc., the Investment Adviser Association, the Financial 
Planning Association and the National Association of Personal 
Financial Advisors); Siegel & Gale, LLC/Gelb Consulting Group, Inc., 
Results of Investor Focus Group Interviews About Proposed Brokerage 
Account Disclosures (Mar. 5, 2005), available at https://www.sec.gov/rules/proposed/s72599/focusgrp031005.pdf (``Siegel & Gale Study''); 
Angela A. Hung, et al., RAND Institute for Civil Justice, Investor 
and Industry Perspectives on Investment Advisers and Broker-Dealers 
(2008), available at https://www.sec.gov/news/press/2008/2008-1_randiabdreport.pdf (``RAND Study'').
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    We recognize the benefits of retail investors having access to 
diverse business models and of preserving investor choice among 
brokerage services, advisory services, or both. We also believe that 
retail investors need clear and sufficient information in order to 
understand the differences and key characteristics of each type of 
service. Providing this clarity is intended to assist investors in 
making an informed choice when choosing an investment firm and 
professional, and type of account to help to ensure they receive 
services that meet their needs and expectations.
    The Commission, as the primary regulator of both broker-dealers and 
investment advisers, has considered ways to address this confusion and 
preserve investor choice for some time, including through the RAND 
study of investor perspectives commissioned in 2006, the 913 Study 
conducted in 2010-2011, and a solicitation of data and other relevant 
information in 2013.\6\ A number of approaches with a range of formats 
have been considered to address this issue, such as a statement by 
broker-dealers that an account is a brokerage account and not an 
advisory

[[Page 21418]]

account, and encouraging investors to ask questions.\7\ Through these 
initiatives, we have heard and considered the views of a wide range of 
commenters--financial firms, investors, consumer advocates, academics, 
and others. Improving retail investors' understanding of their 
different options for investment-related services through better 
disclosure is one key area on which commenters have focused. Commenters 
have suggested a range of presentations. Some commenters recommended a 
short disclosure document that explains the firm's services, fees, 
certain conflicts of interest, and the scope and nature of its services 
to the retail investor.\8\ Others recommended a longer, more 
comprehensive narrative document such as the Form ADV Part 2 brochure 
that investment advisers are required to deliver to their clients.\9\
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    \6\ See RAND Study, supra note 5; 913 Study, supra note 3; 
Duties of Brokers, Dealers, and Investment Advisers, Exchange Act 
Release No. 69013 (Mar. 1, 2013) [78 FR 14848 (Mar. 7, 2013)] 
(``2013 Request for Data'').
    \7\ See, e.g., Certain Broker-Dealers Deemed Not to Be 
Investment Advisers, Exchange Act Release No. 51523 (Apr. 12, 2005) 
[70 FR 20424, 20435 (Apr. 19, 2005)], at n.124 and accompanying text 
(``2005 Broker Dealer Release'').
    \8\ See, e.g., Comment letters of Sammons Retirement Solutions 
(Jun. 4, 2013) and Insured Retirement Institute (Jul. 3, 2013) 
(recommending a short summary disclosure document together with a 
longer disclosure document similar to Form ADV, to be offered by 
both broker-dealers and investment advisers); Comment letter of AARP 
(Jul. 25, 2013); Comment letter of American Council of Life Insurers 
(Jul. 5, 2013) (incorporating by reference its comment letter, dated 
Aug. 30, 2010); Comment letter of Financial Services Institute (Jul. 
5, 2013).
    \9\ See, e.g., Comment letter of Committee of Annuity Insurers 
(Jul. 5, 2013); Comment letter of Edward D. Jones and Co., L.P. 
(Jul. 12, 2013); Comment letter of North American Securities 
Administrators Association, Inc. (Jul. 5, 2013); Comment letter of 
PFS Investments, Inc. (Jul. 5, 2013).
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    Similarly, the staff in the 913 Study and the Commission's Investor 
Advisory Committee, as part of its recommendation that the Commission 
adopt a fiduciary duty for broker-dealers, recommended uniform, simple, 
and clear summary disclosures to retail customers about the terms of 
their relationships with broker-dealers and investment advisers, 
including any material conflicts of interests.\10\ Disclosure has also 
been a feature of other regulatory efforts that address investment 
advice, including those of the U.S. Department of Labor (``DOL'') 
applicable to services provided by broker-dealers and investment 
advisers,\11\ and rules applicable to broker-dealers issued by the 
Financial Industry Regulatory Authority (``FINRA'').\12\
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    \10\ See 913 Study, supra note 3, at 114-117. The 913 Study 
contemplated that the general relationship guide would be akin to 
Part 2A of Form ADV, which is generally referred to as an investment 
adviser's ``brochure'' and is the form investment advisers use to 
register with the Commission and states, which is provided to 
advisory clients. The 913 Study identified a number of potential 
disclosures that the Commission should consider including in such 
relationship guide. See also Recommendation of the Investor Advisory 
Committee: Broker-Dealer Fiduciary Duty, available at https://www.sec.gov/spotlight/investor-advisory-committee-2012/fiduciary-duty-recommendation-2013.pdf (``Broker-Dealer Fiduciary Duty 
Recommendations''). The recommendation of the Investor Advisory 
Committee suggested that the disclosure be provided at the start of 
the engagement and periodically thereafter, and that it cover basic 
information about the nature of the services offered, fees and 
compensation, conflicts of interest, and disciplinary record.
    \11\ For example, DOL regulations relating to ``reasonable plan 
service arrangements'' require firms providing advisory and other 
services to workplace retirement plans covered by the Employee 
Retirement Income Security Act of 1974 (``ERISA'') and the 
prohibited transaction provisions under section 4975 of the Internal 
Revenue Code (``Code'') to disclose in writing (among other things) 
a description of services and applicable fees. See 29 CFR 2550.408b-
2. See also 29 CFR 2550.408g-1 (regulation requires fiduciary 
advisers to plans and individual retirement accounts (``IRAs'') 
seeking to rely on the statutory exemption for participant 
investment advice to provide certain disclosures, among other 
conditions). See also infra Section IV.A.1.c, which further 
describes disclosure obligations under DOL regulations and 
exemptions, including the DOL's ``Best Interest Contract Exemption'' 
(the ``BIC Exemption'').
    \12\ Disclosure of Services, Conflicts and Duties, FINRA Notice 
10-54 (Oct. 2010), available at https://www.finra.org/sites/default/files/NoticeDocument/p122361.pdf (``FINRA Notice 10-54'').
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    In 2017, Commission Chairman Clayton continued the discourse on 
these issues by outlining a series of questions and welcoming the 
public to submit their views on standards of conduct and related 
disclosures for investment advisers and broker-dealers. More than 250 
commenters responded.\13\ Many commenters recommended enhanced 
disclosures in addition to regulations that would raise the standard of 
conduct for broker-dealers providing advice.\14\ Some recommended that 
both broker-dealers and investment advisers should provide a uniform 
disclosure document to retail investors,\15\ while others suggested new 
disclosure requirements only for broker-dealers.\16\ Commenters also 
noted that investor confusion based on financial professionals' titles 
persists, and made a range of suggestions.\17\ Specifically, some 
commenters believed that particular titles cause investors to either 
form misimpressions about whether the services received are those of an 
investment adviser and subject to a fiduciary duty, or these investors 
are misled by financial professionals to form such beliefs.\18\
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    \13\ Public Comments from Retail Investors and Other Interested 
Parties on Standards of Conduct for Investment Advisers and Broker-
Dealers, Chairman Jay Clayton (Jun. 1, 2017), available at https://www.sec.gov/news/public-statement/statement-chairman-clayton-2017-05-31 (``Chairman Clayton's Request for Comment'').
    \14\ See, e.g., Comment letter of T. Rowe Price (Oct. 12, 2017) 
(``T. Rowe 2017 Letter''); Comment letter of Vanguard (Sept. 29, 
2017) (``Vanguard 2017 Letter''); Comment letter of Teachers 
Insurance and Annuity Association of America (Sept. 26, 2017) 
(``TIAA 2017 Letter''); Comment letter of the Investment Adviser 
Association (Aug. 31, 2017) (``IAA 2017 Letter''); Comment letter of 
Stifel, Nicolaus & Co. (Jul. 25, 2017) (``Stifel 2017 Letter''); 
Comment letter of Bernardi Securities, Inc. (Sept. 11, 2017) 
(``Bernardi Securities 2017 Letter''); Comment letter of UBS 
Financial Services Inc. (Jul. 21, 2017) (``UBS 2017 Letter''); 
Comment letter of SIFMA (Jul 21, 2017) (``SIFMA 2017 Letter''); 
Comment letter of the Equity Dealers of America (Sept. 11, 2017) 
(``Equity Dealers of America 2017 Letter''); Comment letter of AARP 
(Sept. 6, 2017) (``AARP 2017 Letter''); Comment letter of Financial 
Services Institute (Oct. 30, 2017); Comment letter of Financial 
Services Roundtable (Oct. 17, 2017) (``FSR 2017 Letter''); Comment 
letter of Consumer Federation of America (Sept. 14, 2017) (``CFA 
2017 Letter'').
    \15\ See, e.g., Stifel 2017 Letter; Equity Dealers of America 
2017 Letter; Comment letter of Michael Kiley (Jul. 6, 2017) (``Kiley 
2017 Letter''); Comment letter of the American Council of Life 
Insurers (Oct. 3, 2017) (``ACLI 2017 Letter''); Comment letter of 
Allianz Life Insurance Company of North America (Oct. 13, 2017) 
(``Allianz 2017 Letter''); AARP 2017 Letter; Comment letter of 
Robert Shaw (Jun. 5, 2017) (``Shaw 2017 Letter''); Comment letter of 
Alan Syzdek (Jul. 2 2017); Comment letter of Americans for Financial 
Reform (Sept. 22, 2017) (``AFR 2017 Letter'').
    \16\ See, e.g., SIFMA 2017 Letter; Comment letter of the 
Investment Company Institute (Feb. 5, 2018); IAA 2017 Letter; 
Comment letter of Fidelity Investments (Aug. 11, 2017) (``Fidelity 
2017 Letter''); Vanguard 2017 Letter; T. Rowe 2017 Letter; FSR 2017 
Letter; UBS 2017 Letter; TIAA 2017 Letter; Comment letter of Wells 
Fargo & Company (Sept. 20, 2017) (``Wells Fargo 2017 Letter''); 
Bernardi Securities 2017 Letter; Comment letter of State Farm Mutual 
Automobile Insurance Company (Aug. 21, 2017) (``State Farm 2017 
Letter''); Comment letter of PFS Investments Inc. (Dec. 10, 2017); 
Comment letter of Davis & Harman LLP (Jan. 18, 2018); Comment letter 
of LPL Financial LLC (Feb. 22, 2018).
    \17\ See, e.g., CFA 2017 Letter; Comment letter of the Public 
Investors Arbitration Bar Association (Aug. 11, 2017) (``PIABA 2017 
Letter''); IAA 2017 Letter; Comment letter of Pefin (Sept. 13, 2017) 
(``Pefin 2017 Letter''); Comment letter of Jackson National Life 
Insurance Company (Nov. 1, 2017) (``Jackson 2017 Letter''); Comment 
letter of CFA Institute (Jan. 10, 2018); Comment letter of First 
Ascent Asset Management (Jan. 10, 2018) (``First Ascent 2018 
Letter'').
    \18\ See e.g., CFA 2017 Letter; IAA 2017 Letter; Comment letter 
of the National Employment Law Project (Oct. 20, 2017) (``National 
Employment Law Project 2017 Letter'').
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    Many commenters recommended a short disclosure document addressing 
the nature and scope of services, fees and material conflicts of 
interest.\19\ These suggestions are consistent with our staff's 
financial literacy study,\20\

[[Page 21419]]

which found that retail investors favor a summary document and find 
these categories of disclosures, plus a financial intermediary's 
disciplinary history, to be important in choosing financial 
intermediaries.\21\ Regarding investor confusion based on titles, 
commenters also recommended, for example, prohibiting the use of 
certain terms in titles, and prohibiting a firm not registered as an 
investment adviser from holding itself out in a manner that implies it 
is an investment adviser.\22\
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    \19\ See, e.g., SIFMA 2017 Letter; UBS 2017 Letter; Stifel 2017 
Letter; AARP 2017 Letter; Bernardi Securities 2017 Letter; Fidelity 
2017 Letter; Allianz 2017 Letter.
    \20\ See, e.g., Staff of the Securities and Exchange Commission, 
Study Regarding Financial Literacy Among Investors as required by 
Section 917 of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (Aug. 2012), at iv, v, xiv, 37, 73, 121-23 and 131-
32, available at https://www.sec.gov/news/studies/2012/917-financial-literacy-study-part1.pdf (``917 Financial Literacy 
Study'').
    \21\ See, e.g., 917 Financial Literacy Study, supra note 20, at 
iv, x-xiii, xxi, 37, 66-67, 73, 119.
    \22\ See, e.g. Comment letter of Mark D. Moss (Jun. 2, 2017); 
Comment letter of Gimme Credit (Aug. 8, 2017); PIABA 2017 Letter; 
AFL-CIO 2017 Letter; IAA 2017 Letter; Pefin 2017 Letter; Jackson 
2017 Letter; AFR 2017 Letter; National Employment Law Project 2017 
Letter; First Ascent 2018 Letter.
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    We agree that it is important to ensure that retail investors 
receive the information they need to understand the services, fees, 
conflicts, and disciplinary history of firms and financial 
professionals they are considering. Likewise, we believe that we should 
reduce the risk that retail investors could be confused or misled about 
the financial services they will receive as a result of the titles that 
firms and financial professionals use, and mitigate potential harm to 
investors as a result of that confusion. We also believe the 
information should be reasonably concise. Accordingly, we are proposing 
new rules to require broker-dealers and investment advisers to deliver 
to retail investors a customer or client relationship summary (``Form 
CRS'') that would explain general information about each of these 
topics.\23\ Second, we are proposing rules that would (i) restrict the 
use of the terms ``adviser'' and ``advisor'' by broker-dealers and 
their associated financial professionals, and (ii) require broker-
dealers and investment advisers to disclose in retail investor 
communications the firm's registration status while also requiring 
their associated financial professionals to disclose their association 
with such firm.
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    \23\ For investment advisers, Form CRS would be required by Form 
ADV Part 3. For broker-dealers, Form CRS would be required by 
proposed new rule 17a-14 under the Exchange Act. When we refer to 
Form CRS in this release, we are referring to Form CRS for both 
broker-dealers and investment advisers.
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    Together, these requirements would complement a separate release 
that the Commission is proposing concurrently to enhance existing 
broker-dealer conduct obligations (``Regulation Best Interest'').\24\ 
Regulation Best Interest would establish a standard of conduct for 
broker-dealers and associated natural persons of broker-dealers to act 
in the best interest of a retail customer when making a recommendation 
of a securities transaction or investment strategy involving 
securities. While Regulation Best Interest would enhance the standard 
of conduct owed by broker-dealers to retail customers, it would not 
make that standard of conduct identical to that of investment advisers, 
given important differences between investment advisers and broker-
dealers. The requirements we are proposing in this release would help 
an investor better understand these differences, and distinguish among 
different firms in the marketplace, which in turn should assist the 
investor in making an informed choice for the services that best suit 
her particular needs and circumstances.
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    \24\ Regulation Best Interest, Exchange Act Release No. 34-83062 
(Apr. 18, 2018) (``Regulation Best Interest Proposal'').
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II. Form CRS Relationship Summary

    We are proposing to require registered investment advisers and 
registered broker-dealers to deliver a relationship summary to retail 
investors. In the case of an investment adviser, initial delivery would 
occur before or at the time the firm enters into an investment advisory 
agreement with the retail investor; in the case of a broker-dealer, 
initial delivery would occur before or at the time the retail investor 
first engages the firm's services. Dual registrants would deliver the 
relationship summary at the earlier of entering into an investment 
advisory agreement with the retail investor or the retail investor 
engaging the firm's services.\25\
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    \25\ For purposes of the relationship summary, we propose to 
define dual registrant as a firm that is dually registered as a 
broker-dealer and an investment adviser and offers services to 
retail investors as both a broker-dealer and investment adviser. 
Proposed General Instruction 9.(b) to Form CRS. Accordingly, a firm 
that is registered with the Commission as a broker-dealer and with 
one or more states as an investment adviser would be a dual 
registrant.
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    The relationship summary would be as short as practicable (limited 
to four pages or equivalent limit if in electronic format), with a mix 
of tabular and narrative information, and contain sections covering: 
(i) Introduction; (ii) the relationships and services the firm offers 
to retail investors; (iii) the standard of conduct applicable to those 
services; (iv) the fees and costs that retail investors will pay; (v) 
comparisons of brokerage and investment advisory services (for 
standalone broker-dealers and investment advisers); (vi) conflicts of 
interest; (vii) where to find additional information, including whether 
the firm and its financial professionals currently have reportable 
legal or disciplinary events and who to contact about complaints; and 
(viii) key questions for retail investors to ask the firm's financial 
professional. Form CRS would be required by Form ADV Part 3 and rule 
204-5 of the Advisers Act for investment advisers, and by Form CRS and 
rule 17a-14 of the Exchange Act for broker-dealers.\26\
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    \26\ We propose to amend Form ADV, which investment advisers 
must file to register with the Commission and with state securities 
regulators, to include a new Part 3: Form CRS that describes the 
requirements for the relationship summary, and we propose conforming 
technical amendments to the General Instructions of Form ADV. See 
proposed amendments to Advisers Act rule 203-1; proposed amendments 
to General Instructions to Form ADV. We also propose a rule 17a-14 
to require a Form CRS for broker-dealers registered with the 
Commission. See Exchange Act proposed rule 17a-14. Advisers use Form 
ADV to apply for registration with us (Part 1A) or with state 
securities authorities (Part 1B), and must keep it current by filing 
periodic amendments as long as they are registered. See Advisers Act 
rules 203-1 and 204-1. Form ADV has two parts. Part 1(A and B) of 
Form ADV provides regulators with information to process 
registrations and to manage their regulatory and examination 
programs. Part 2 is a uniform form used by investment advisers 
registered with both the Commission and the state securities 
authorities. See Instruction 2 of General Instructions to Form ADV. 
This release discusses the Commission's proposal of Form ADV Part 3: 
Form CRS and related rules applicable to advisers registered with 
the Commission. To the extent that state securities authorities 
could consider making similar changes that affect advisers 
registered with the states, we can forward comments to the North 
American Securities Administrators Association (``NASAA'') for 
consideration by the state securities authorities.
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    We are proposing to define ``relationship summary'' as a written 
disclosure statement that firms must provide to retail investors.\27\ A 
``retail investor'' would be defined as a prospective or existing 
client or customer who is a natural person (an individual).\28\ All 
natural persons would be included in the definition, regardless of the 
individual's net worth (thus including, e.g., accredited investors, 
qualified clients or qualified purchasers).\29\ The definition would

[[Page 21420]]

include a trust or other similar entity that represents natural 
persons, even if another person is a trustee or managing agent of the 
trust.\30\ We believe that this definition is appropriate because 
section 913 of the Dodd-Frank Act defines ``retail customer'' to 
include natural persons and legal representatives of natural persons 
without distinction based on net worth, and because financial literacy 
studies report deficiencies in financial literacy among the general 
population.\31\ While studies also report variability in financial 
literacy among certain sub-sections of the general population,\32\ we 
believe that all individual investors would benefit from clear and 
succinct disclosure regarding key aspects of their advisory and 
brokerage relationships.
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    \27\ Proposed General Instruction 9.(d) to Form CRS.
    \28\ Proposed General Instruction 9.(e) to Form CRS.
    \29\ Advisers Act proposed rule 204-5(d)(2) and Exchange Act 
proposed rule 17a-14(e)(2); proposed General Instruction 9.(e) to 
Form CRS. We recognize that the definition of ``retail investor'' 
would differ from that of ``retail customer,'' as used in Regulation 
Best Interest. ``Retail customer'' for broker-dealers under 
Regulation Best Interest would be defined 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.'' Regulation Best Interest Proposal, supra note 24, 
section II.C.4. We believe it is beneficial to require firms to 
provide a relationship summary to all natural persons to facilitate 
their understanding of account choices, regardless of whether they 
will receive investment advice primarily for personal, family, or 
household purposes. The relationship summary is intended for an 
earlier stage in the relationship between an investor and a 
financial professional, potentially before discussing the investment 
purposes of the investor. In contrast, Regulation Best Interest 
focuses on recommendations to ``retail customers'' who have chosen 
to engage the services of a broker-dealer after receiving the 
relationship summary.
    \30\ Advisers Act proposed rule 204-5(d)(2) and Exchange Act 
proposed rule 17a-14(e)(2); proposed General Instruction 9.(e) to 
Form CRS.
    \31\ See Federal Research Division, Library of Congress, 
Financial Literacy Among Retail Investors in the United States (Dec. 
30, 2011), available at https://www.sec.gov/news/studies/2012/917-financial-literacy-study-part2.pdf (``Library of Congress Report''). 
The Library of Congress Report is incorporated by reference into the 
917 Financial Literacy Study, supra note 20, at Appendix 1.
    \32\ See, e.g., 917 Financial Literacy Study, supra note 20, at 
viii (``In addition, surveys demonstrate that certain subgroups, 
including women, African-Americans, Hispanics, the oldest segment of 
the elderly population, and those who are poorly educated, have an 
even greater lack of investment knowledge than the average general 
population.''); Library of Congress Report, supra note 31, at 1.
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    As discussed further below, the relationship summary would be in 
addition to, and not in lieu of, current disclosure and reporting 
requirements for broker-dealers and investment advisers.\33\ The 
relationship summary would alert retail investors to important 
information for them to consider when choosing a firm and a financial 
professional, and would prompt retail investors to ask informed 
questions. In addition, the content of the relationship summary would 
facilitate comparisons across firms that offer the same or 
substantially similar services. We are promoting these goals through 
specifying much of the content and presentation of Form CRS in the 
form's instructions (``Instructions''); while firms will be required to 
include firm-specific information in Form CRS, they will have limited 
discretion in the scope and presentation of that information. We are 
proposing that firms electronically file the relationship summary and 
any updates with the Commission, and therefore such filings would be 
subject to section 207 of the Advisers Act \34\ and section 18 of the 
Exchange Act.\35\ Investment advisers would file on the Investment 
Adviser Registration Depository (``IARD''), broker-dealers would file 
on the Commission's Electronic Data Gathering, Analysis and Retrieval 
System (``EDGAR''), and dual registrants would file on both IARD and 
EDGAR.
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    \33\ See infra Section II.C.
    \34\ 15 U.S.C. 80b-7.
    \35\ 15 U.S.C. 78r.
---------------------------------------------------------------------------

    To aid firms in understanding the type of disclosures we propose to 
require, we have created mock-ups of a relationship summary for an 
investment advisory firm, a brokerage firm, and a dual registrant, and 
have included them as Appendices C-E to this release. The mock 
relationship summaries are for illustrative purposes only, reflect the 
business models of hypothetical firms, and are not intended to imply 
that they reflect a ``typical'' firm. They do not provide a safe harbor 
and, depending on the circumstances of a particular firm, a 
relationship summary that merely copies the mock-ups may not provide 
sufficient or accurate information about the firm, including for 
purposes of meeting the firm's obligations under the antifraud 
provisions of the federal securities laws. Investors seeking to comment 
on the relationship summary may want to submit our short-form tear 
sheet for providing feedback on the relationship summary, available at 
Appendix F. Below we request comments on all requirements of the 
relationship summary, including format, content, method of filing, 
method of delivery, updating, and other aspects as discussed below.
    We preliminarily believe that providing this information before or 
at the time a retail investor enters into an investment advisory 
agreement or first engages a brokerage firm's services, as well as at 
certain points during the relationship (e.g., switching or adding 
account types), as further discussed below, is appropriate and in the 
public interest and will improve investor protection, and will deter 
potentially misleading sales practices by helping retail investors to 
make a more informed choice among the types of firms and services 
available to them.\36\
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    \36\ See Exchange Act section 15(l)(2) and Advisers Act section 
211(h)(2) (providing that the Commission shall examine and, where 
appropriate, promulgate rules prohibiting or restricting certain 
sales practices, among other things, for brokers, dealers, and 
investment advisers that the Commission deems contrary to the public 
interest and the protection of investors).
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A. Presentation and Format

    We are proposing requirements designed to make the relationship 
summary short and easy to read. We believe that the required disclosure 
provides an overview of information that would help retail investors 
when choosing a firm, financial professional, and account type. The 
proposed formatting requirements would help retail investors, many of 
whom may not be sophisticated in legal or financial matters, to 
understand the information in the relationship summary and be in a 
better position to ask informed questions. The proposal is also 
informed by our experience with the mutual fund summary prospectus, 
which has illustrated the benefits of highlighting certain information 
in summary form, coupled with layered disclosure and disclosure 
designed to facilitate comparisons across investments.\37\ We encourage 
firms to use innovative technology to create a relationship summary 
that is user-friendly, concise, easy-to-read, and more interactive than 
paper, and request comment below on ways to do so. The relationship 
summary would be provided to retail investors in addition to, and not 
in lieu of, any other required disclosures.\38\
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    \37\ In a previous study, Commission staff found that most of 
the retail investors agreed that it was important to read a summary 
prospectus prior to investing in a mutual fund, and a majority of 
the retail investors surveyed on the mutual fund summary prospectus 
panel agreed that the actual summary prospectus they reviewed 
highlighted important information, was well-organized, written using 
words that they understood, clear and concise, and user friendly, 
and agreed that summary prospectuses contain the `right amount' of 
information. 917 Financial Literacy Study, supra note 20, at xvii 
and xix.
    \38\ See Proposed General Instruction 3 to Form CRS. Broker-
dealers and investment advisers have disclosure and reporting 
obligations under state and federal law, and broker-dealers are also 
subject to disclosure obligations under the rules of self-regulatory 
organizations. Delivery of the relationship summary would not 
necessarily satisfy a firm's other disclosure obligations.
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    As noted in the General Instructions, the requirements of the 
relationship summary are designed to promote effective communication 
between the firm and its retail investors.\39\ First, as several 
commenters have recommended, we propose requiring that firms use 
``plain language'' principles for the organization, wording, and design 
of the entire relationship summary, taking into consideration retail 
investors' level of financial sophistication.\40\ Specifically,

[[Page 21421]]

firms would be required to be concise and direct and to use short 
sentences, active voice, and definite, concrete, everyday words.\41\ 
Firms would not be permitted to use legal jargon, highly technical 
business terms or multiple negatives.\42\ Firms should write the 
relationship summary as if addressing the retail investor, using 
``you,'' ``us,'' or ``our firm.'' \43\
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    \39\ Proposed General Instruction 2 to Form CRS.
    \40\ Proposed General Instruction 2 to Form CRS. See, e.g., 
PIABA 2017 Letter; State Farm 2017 Letter; Fidelity 2017 Letter; 
Comment letter of BlackRock (Aug. 7, 2017); Comment letter of the 
Investor Advisory Committee (Aug. 24, 2017); CFA 2017 Letter; AFR 
2017 Letter; ACLI 2017 Letter; FSR 2017 Letter.
    \41\ Proposed General Instruction 2 to Form CRS.
    \42\ Proposed General Instruction 2 to Form CRS.
    \43\ Proposed General Instruction 2 to Form CRS.
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    Second, we are proposing to require that, whether in electronic or 
paper format, the relationship summary should be no more than four 8\1/
2\ x 11 inch pages if converted to Portable Document Format (``PDF''), 
using at least an 11 point font size, and margins of at least 0.75 
inches on all sides.\44\ For example, if delivered directly in the text 
of an email or in a mobile viewing format on the firm's website, the 
content of the relationship summary should not exceed this four-page 
PDF-equivalent length. This approach is consistent with our experience 
and commenters' suggestion that brief disclosure is more effective than 
a long-form narrative to focus retail investors on relevant 
information, and with suggestions from commenters who advocated for a 
clear, concise disclosure.\45\ If delivered in paper, the paper size, 
font, and margin requirements would also encourage a clear presentation 
for retail investors, for example, by presenting important disclosures 
in a readable font-size and eliminating fine print.\46\ Recognizing, 
however, that many firms deliver disclosures in electronic format and 
employ a variety of technologies to interact with prospective and 
existing retail investors, the Commission is requesting comment on 
formatting and other features of the relationship summary in electronic 
form.
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    \44\ Proposed General Instruction 1.(c) to Form CRS.
    \45\ See, e.g., Shaw 2017 Letter; SIFMA 2017 Letter; AFL-CIO 
2017 Letter; AARP 2017 Letter; CFA 2017 Letter; AFR 2017 Letter; 
TIAA 2017 Letter; Vanguard 2017 Letter; ACLI 2017 Letter; FSR 2017 
Letter; Allianz 2017 Letter.
    \46\ See, e.g., 917 Financial Literacy Study, supra note 20, at 
xiii and 32.
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    In the past, the Commission has declined to impose page limits on 
disclosures required by the Investment Company Act of 1940 
(``Investment Company Act''), including the summary prospectus, 
expressing concern that page limits could constrain appropriate 
disclosure and lead funds to omit material information about fund 
offerings.\47\ The proposed relationship summary is intended to serve 
different purposes than the summary prospectus, including to provide a 
general overview of firms that could prompt a more detailed, 
individualized, and open conversation between the retail investor and 
his or her financial professional. The Commission preliminarily 
believes that the utility and effectiveness of the relationship summary 
lie in its brevity and conciseness; accordingly, we believe a page 
limit (or equivalent limit if in electronic format) is appropriate.
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    \47\ See Enhanced Disclosure and New Prospectus Delivery Option 
for Registered Open-End Management Investment Companies, Investment 
Company Act Release No. 28584 (Jan. 13, 2009) [74 FR 4546 (Jan. 26, 
2009)], at 24 (``Enhanced Mutual Fund Disclosure Adopting 
Release'').
---------------------------------------------------------------------------

    Brief disclosure would also facilitate a layered approach to 
disclosure in which firms would include certain information in the 
relationship summary, along with references and links to other 
disclosure where interested investors can find additional 
information.\48\ The proposed relationship summary also would encourage 
retail investors to seek additional information in other ways, 
including through suggested questions for retail investors to ask their 
financial professional, as discussed further below.\49\ These 
requirements are intended to create a concise summary that points out 
relevant areas for retail investors to focus on as they consider 
financial services, and the cross references and suggested questions 
facilitate investors' ability to choose to seek additional information. 
In addition, providing retail investors with a relationship summary 
containing specified information about the firm in a standardized 
format should aid retail investors' ability to compare firms at a 
higher level. The suggested questions and cross references to more 
information would enable them to more easily find and compare these 
details about the firms.
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    \48\ Firms would be required to include cross-references to 
where investors could find additional information, such as in the 
Form ADV Part 2 brochure and brochure supplement for investment 
advisers or on the firm's website or in the account opening 
agreement for broker-dealers. For electronic versions of the 
relationship summary, we would require firms to use hyperlinks to 
the cross-referenced document if it is available online. See 
proposed Items 7.E.1. and 7.E.2. of Form CRS; proposed General 
Instruction 1.(g) to Form CRS.
    \49\ See proposed Item 8 of Form CRS.
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    We considered requiring more detailed disclosure for broker-dealers 
similar to many items in the Form ADV brochure that advisers currently 
must deliver to clients. This longer disclosure would provide, for 
example, more information about fee amounts for specific accounts and 
products and more detailed descriptions of a wider range of conflicts 
of interest. We believe, however, that brief disclosure that focuses on 
the proposed topics would be more effective in capturing the attention 
of retail investors, encouraging them to explore certain key areas 
further, including by asking questions, and allowing them to make a 
quick comparison among a number of options.\50\ We also encourage the 
use of methods, such as embedded hyperlinks, to direct retail investors 
to additional disclosures.
---------------------------------------------------------------------------

    \50\ See, e.g., 917 Financial Literacy Study, supra note 20, at 
23-24 (citing CFA 2012 Letter, at 4-5).
---------------------------------------------------------------------------

    Alternatively, we considered shorter disclosure, such as a one-page 
document (or equivalent length if in electronic format) that would 
provide either a much abbreviated general description of a firm's 
services, fees, and conflicts, or a list of suggested questions for 
retail investors to discuss with their financial professional. We are 
concerned, however, that these approaches might not provide retail 
investors with enough information to compare firms and types of 
accounts. In addition, we are concerned that providing only a list of 
questions, without sufficient background information for investors to 
know why the question is important to ask, could make it less likely 
that investors would ask the questions or have an informed 
conversation. Only providing questions also would not ensure a 
standardized minimum of information that retail investors would receive 
across firms and therefore would not facilitate comparing firms or 
account types.
    The relationship summary would require eight separate items 
covering: (i) Introduction; (ii) relationships and services the firm 
provides to retail investors; (iii) standard of conduct applicable to 
those services; (iv) the fees and costs that retail investors will pay; 
(v) comparisons of brokerage and investment advisory services (for 
standalone broker-dealers and investment advisers); \51\ (vi) conflicts 
of

[[Page 21422]]

interest; (vii) where to find additional information, including whether 
the firm and its financial professionals currently have reportable 
legal or disciplinary events and who to contact about complaints; and 
(viii) key questions for retail investors to ask the firm's financial 
professional.\52\ In order to promote comparison across firms, we would 
require firms to present this information under prescribed headings in 
the same order.\53\ Firms also would be prohibited from including any 
information other than what the Instructions and the applicable item 
require or permit.\54\ We believe that allowing only the required and 
specified permitted information would promote consistency of 
information presented to investors, allow retail investors to focus on 
information that we believe would be particularly helpful in deciding 
among firms, and help retail investors to decide what further 
information is needed. It would also encourage impartial information by 
preventing firms from adding information commonly used in marketing 
materials, such as performance.\55\
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    \51\ For purposes of the relationship summary, we propose to 
define a standalone investment adviser as a registered investment 
adviser that offers services to retail investors and (i) is not 
dually registered as a broker-dealer or (ii) is dually registered as 
a broker-dealer but does not offer services to retail investors as a 
broker-dealer. We propose to define a standalone broker-dealer as a 
registered broker-dealer that offers services to retail investors 
and (i) is not dually registered as an investment adviser or (ii) is 
dually registered as an investment adviser but does not offer 
services to retail investors as an investment adviser. Proposed 
General Instruction 9.(f) to Form CRS. We are including certain dual 
registrants in these proposed definitions because we understand that 
dual registrants do not always offer both brokerage and advisory 
accounts to retail investors. For example, some dual registrants 
offer advisory accounts to retail investors, but offer brokerage 
broker-dealer services only to institutions (e.g., for their 
underwriting services).
    \52\ See proposed Items 1-8 of Form CRS.
    \53\ Proposed General Instruction 1.(b) and (e) to Form CRS. See 
also e.g., proposed Items 2.A., 3.A., 4.A., 5.A. and 5.B., 6.A., 
7.A., and 8 of Form CRS.
    \54\ Proposed General Instruction 1.(d) to Form CRS.
    \55\ Although performance disclosure is a subject on which the 
Commission focuses, including to promote accuracy, consistency, and 
comparability, such disclosure is not the subject of this 
initiative.
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    For certain items, firms will have some flexibility in how they 
include the required information.\56\ For others, we are requiring 
firms to use prescribed wording, as discussed in the following 
sections. Firms may not include disclosure in the relationship summary 
other than disclosure that is required or permitted by the 
Instructions. We believe that this approach balances the need to 
provide firms flexibility in making the presentation of information 
consistent with their particular business model while ensuring that all 
investors receive certain information regardless of the firm. The 
information in the relationship summary must accurately reflect the 
characteristics of the particular firm and the services that it offers. 
Accordingly, all information in the relationship summary must be true 
and may not omit any material facts necessary to make the required 
disclosures not misleading.\57\ If a statement is inapplicable to a 
firm's business or would be misleading to a reasonable retail investor, 
the firm may omit or modify that statement.\58\
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    \56\ See, e.g., proposed General Instruction 1.(f) to Form CRS 
(``You may use charts, graphs, tables, and other graphics or text 
features to explain the required information, so long as the 
information (i) is responsive to and meets the requirements in these 
instructions (including space limitations); (ii) is not inaccurate 
or misleading; and (iii) does not, because of the nature, quantity, 
or manner of presentation, obscure or impede understanding of the 
information that must be included. When using interactive graphics 
or tools, you may include instructions on their use and 
interpretation.''); proposed Items 2.B., 2.C., and 6.B. of Form CRS.
    \57\ Firms should keep in mind the applicability of the 
antifraud provisions of the federal securities laws, including 
section 206 of the Advisers Act, section 17(a) of the Securities 
Act, and section 10(b) of the Exchange Act and rule 10b-5 
thereunder, in preparing the relationship summary.
    \58\ See proposed General Instruction 3 to Form CRS. Firms may 
omit or modify prescribed wording or other statements required to be 
part of the relationship summary if such statements are inapplicable 
to a firm's business or would be misleading to a reasonable retail 
investor.
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    Based on studies that indicate the effectiveness of graphical 
presentation for retail investors,\59\ we are prescribing the use of 
graphical formats in specified circumstances. For example, dual 
registrants would be required to present all of the information 
required by Items 2 through 4 and Item 6 in a tabular format,\60\ 
comparing advisory services and brokerage services side-by-side, with 
prescribed headings.\61\ Similarly, standalone broker-dealers and 
investment advisers would be required to provide general information 
about fee types in tabular format, in a separate comparison 
section.\62\ All firms would be permitted to use charts, graphs, 
tables, and other graphics or text features to explain the information, 
so long as the information is responsive to and meets the requirements 
in the Instructions (including the space limitations).\63\ The use of a 
graphical presentation would be prohibited if it is inaccurate or 
misleading or, because of its nature, quantity, or manner of 
presentation, obscures or impedes understanding of the information that 
is required to be included. Firms that choose to use interactive 
graphics or tools may include Instructions on their use and 
interpretation.\64\ We believe that standardizing the relationship 
summaries among firms by specifying the headings, sequence, and content 
of the topics; prescribing language for firms to use as applicable; and 
limiting the length of the relationship summary will provide 
comparative information in a user-friendly manner that helps retail 
investors with informed decision-making.\65\
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    \59\ See 917 Financial Literacy Study, supra note 20, at iv, xx, 
21-22; see also Benbasat & Dexter, infra note 592.
    \60\ Empirical evidence suggests that visualization improves 
individual perception of information (see Hattie, infra note 591) 
and that tabular reports may lead to better decision making (see 
Benbasat & Dexter, infra note 592).
    \61\ Dual registrants must present the information in Items 2 
through 4 and Item 6 in a tabular format, comparing advisory 
services and brokerage services side-by-side. In the column 
discussing brokerage services, firms must include the heading 
``Broker-Dealer Services'' and the sub-heading ``Brokerage 
Accounts.'' In the column discussing investment advisory services, 
firms must include the heading ``Investment Adviser Services'' and 
the sub-heading ``Advisory Accounts.'' See proposed General 
Instruction 1.(e) to Form CRS.
    \62\ Standalone broker-dealers and investment advisers would be 
required to include the sub-heading ``You can receive advice in 
either type of account, but you may prefer paying:'' and present 
prescribed information comparing a transaction-based fee and an 
asset-based fee in side-by-side columns, in a tabular format. See 
proposed Items 5.A.4. and 5.B.6. of Form CRS.
    \63\ Proposed General Instruction 1.(f) to Form CRS.
    \64\ Id.
    \65\ Empirical evidence suggests that users are better able to 
make coherent, rational decisions when they have comparative, 
standardized disclosure that allows them to assess relevant trade-
offs. See infra note 593 and accompanying text.
---------------------------------------------------------------------------

    We request comment on the following for the relationship summary.
     Should firms only be required to deliver the relationship 
summary to retail investors? Or should they be required to deliver one 
to other types of investors, too, such as individuals representing sole 
proprietorships or other small businesses, or institutional investors 
that are not natural persons, including workplace retirement plans and 
funds? Would such investors have the need for the information in the 
relationship summary to facilitate a choice among different firms, 
financial professionals, and account types? Or would these investors 
rely directly on the more detailed disclosures in the Form ADV Part 2 
brochure or pursuant to Regulation Best Interest?
     Should retail investors be defined for purposes of Form 
CRS to include all natural persons, as proposed? Should we instead 
exclude certain categories of natural persons based on their net worth 
or income level, such as accredited investors,\66\ qualified 
clients,\67\ or

[[Page 21423]]

qualified purchasers? \68\ If we did exclude certain categories of 
natural persons based on their net worth, what threshold should we use 
for measuring net worth? Should we exclude certain categories of 
natural persons for other reasons?
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    \66\ Accredited investors include natural persons who (i) have a 
net worth over $1 million, either individually or together with a 
spouse (excluding the value of the primary residence); (ii) had an 
individual income greater than $200,000 (or $300,000 together with a 
spouse) in each of the two most recent years, and has a reasonable 
expectation of reaching the same income level in the current year; 
or (iii) for purposes of a securities offering of a particular 
issuer, are directors, executive officers, or general partners of 
that issuer. Accredited investors also include non-natural persons, 
such as, banks, broker-dealers, insurance companies, investment 
companies registered under the Investment Company Act of 1940, and 
certain partnerships, corporations, nonprofit entities, retirement 
plans, and trusts. 17 CFR 230.501.
    \67\ A qualified client is a client that meets one or more of 
the following criteria: (i) Is a natural person or company that has 
at least $1 million in assets under management with the adviser 
immediately after entering into an investment advisory contract with 
the adviser; (ii) the adviser reasonably believes the natural person 
has a net worth (together with assets held jointly with a spouse) of 
more than $2.1 million immediately prior to entering into an 
advisory contract (excluding the value of the primary residence); 
(iii) the adviser reasonably believes the natural person or company 
is a ``qualified purchaser'' as defined in section 2(a)(51)(A) of 
the Investment Company Act at the time an advisory contract is 
entered into; (iv) is an executive officer, director, trustee, 
general partner, or person serving in a similar capacity, of the 
adviser; or (v) is an employee of the adviser who participates in 
the investment activities of the adviser, and has performed 
investment activities for at least twelve months. The dollar 
thresholds under the definition of qualified client are subject to 
inflation adjustments every five years. 17 CFR 275.205-3(d)(1); 
Order Approving Adjustment for Inflation of the Dollar Amount Tests 
in Rule 205-3 under the Investment Advisers Act of 1940, Investment 
Advisers Act Release No. 4421 (Jun. 14, 2016) [81 FR 39985 (Jun. 20, 
2016)].
    \68\ The term ``qualified purchaser'' has been defined for 
purposes of the Investment Company Act and for the Securities Act. 
Under the Investment Company Act, the term ``qualified purchaser'' 
includes any natural persons who or certain family-owned companies 
that own not less than $5 million in investments; certain trusts; 
and any person, acting for its own account or the accounts of other 
qualified purchasers, who in the aggregate owns and invests on a 
discretionary basis, not less than $25 million in investments. 15 
U.S.C. 80a-2(a)(51)(A).
     For purposes of section 18(b)(3) of the Securities Act, the 
term ``qualified purchaser'' means any person to whom securities are 
offered or sold pursuant to a Tier 2 offering as defined in 
Regulation A. 17 CFR 230.256. Tier 2 offerings generally may be sold 
only to (i) accredited investors; (ii) natural persons for whom the 
aggregate purchase price to be paid by the purchaser for the 
securities is no more than 10% of the purchaser's annual income or 
net worth; or (iii) non-natural persons for which the aggregate 
purchase price to be paid by the purchaser for the securities is no 
more than 10% of its revenue or net assets for the most recently 
completed fiscal year. 17 CFR 230.251.
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     Should we conform the definition of retail investor to the 
definition of retail customer as proposed in Regulation Best Interest, 
which would include non-natural persons who use the recommendation 
primarily for personal, family, or household purposes? Should the 
definition of retail investor include trusts or similar entities that 
represent natural persons, as proposed? Are there other persons or 
entities that should be covered? Should we expand the definition to 
cover plan participants in workplace retirement plans who receive 
services from a broker-dealer or investment adviser for their 
individual accounts within a plan?
     Should we include any additional definitions of terms or 
phrases in the relationship summary? Should we omit any definitions we 
have proposed for the relationship summary? Should any of the proposed 
definitions be changed? If so, why?
     Will the length and presentation proposed for the 
relationship summary be effective for retail investors? Are there other 
approaches we should consider? What are the benefits and drawbacks of 
shorter or longer disclosure for retail investors relative to the 
proposed approach?
     We are proposing that the relationship summary discuss all 
of the firm's advisory and brokerage services in one relationship 
summary. Should we instead permit firms to prepare a separate 
relationship summary for different business lines or different programs 
or types of accounts and/or services that a broker-dealer or investment 
adviser offers? If we adopt such an approach, how could we modify the 
requirements to allow for comparison among account options within and 
across firms? For example, should we require that each such separate 
summary refer to the other summaries and include hyperlinks or other 
electronic features if presented on a firm's website? Should we require 
the use of hyperlinks that direct the investor directly to specific 
disclosure (i.e., a ``deep link'') or a more general landing page? How 
would delivery obligations be formulated to ensure that retail 
investors receive sufficient but still user-friendly information?
     In the alternative, should we permit or require firms to 
prepare one relationship summary for the entire affiliated group or 
firm complex, i.e., to summarize the services offered to retail 
investors of all affiliated companies together in a single relationship 
summary? What factors should dictate whether affiliates should be 
permitted or required to prepare a single relationship summary? For 
example, should we base any permissive instruction or requirement on 
whether the affiliates typically market services of multiple investment 
advisers and broker-dealer entities together? What about investment 
advisers and broker-dealers that are not affiliates but have 
partnership agreements, are part of one wrap fee program,\69\ or other 
arrangements? Should they be required or permitted to cross-reference 
to other firms?
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    \69\ A wrap fee program would be defined as an advisory program 
under which a specified fee or fees not based directly upon 
transactions in a retail investor's account is charged for 
investment advisory services and the execution of retail investor 
transactions. Proposed General Instruction 9.(g) to Form CRS. See 
infra note 173.
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     Should we permit the relationship summary, or any part of 
it, to substitute for other disclosure obligations that broker-dealers 
or investment advisers have, if the disclosure obligations overlap? If 
so, for what disclosures could the relationship summary substitute? If 
not, why not?
     Does the proposal sufficiently encourage electronic design 
and delivery? Are there other ways we can modify the requirements to 
make clear that paper-based delivery is not the only permissible or 
desired delivery format?
     With respect to firms that use paper delivery to meet 
investor preferences, are the proposed presentation and content 
requirements appropriate for a relationship summary provided in paper 
or in PDF (e.g., 11 point font, and have margins of at least 0.75 
inches on all sides)? Would they be helpful in encouraging relationship 
summaries that address retail investors' preferences for concise and 
user-friendly information? If not, what requirements would improve the 
document's utility and accessibility for retail investors? In 
particular, are there any areas where requiring the use of a specific 
check-the-box approach, bullet points, tables, charts, graphs or other 
graphics or text features would be helpful in presenting any of the 
information or making it more engaging to retail investors? Should we 
include different requirements for font size, margins and paper size? 
Should we restrict certain types or sizes of font, color choices or the 
use of footnotes?
     Are there special technical specifications we should 
consider for other forms of electronic or online delivery on phones, 
tablets and other devices, and for information conveyed via videos, 
interactive graphics, or tools and calculators? Are the Instructions to 
the relationship summary sufficiently flexible to permit delivery on 
phones, tablets and other devices and to accommodate information 
conveyed via videos, interactive graphics, or tools and calculators? 
Should we require that firms make the relationship summary available by 
specific forms of electronic delivery or certain electronic devices? 
How can the Commission encourage investment advisers and broker-dealers 
to make fuller use of innovative technology to enable more interactive, 
user-friendly relationship summary disclosure, while still creating a 
short, easy-to-read relationship summary that includes the proposed 
content? Are there potential tools that the Commission should encourage 
or require firms to use in order to make

[[Page 21424]]

their disclosures more interactive and understandable? For instance, 
should we permit or require a firm to use pop-ups or hovers to provide 
retail investors with additional information required or permitted by 
the relationship summary, without retail investors having to scroll to 
find the information in another section of the relationship summary? 
Would this tool be useful for firms to use, for example, in the 
Introduction section of the relationship summary, so that a retail 
investor could access upfront additional information about the terms 
used (advisory and brokerage accounts) that is presented in other 
sections of the relationship summary? Instead of requiring and 
permitting hyperlinks in certain circumstances (e.g., to link to an 
adviser's Form ADV or a fee schedule), are there other technological 
tools that would better help an investor find information that is 
cross-referenced in the relationship summary? Should we permit or 
require other technologies (such as QR codes \70\) in addition to or in 
lieu of hyperlinks to connect to such information?
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    \70\ A QR code is a two-dimensional barcode capable of encoding 
information such as a website address, text information, or contact 
information. These codes are becoming increasingly popular in print 
materials and can be read using the camera on a smartphone.
---------------------------------------------------------------------------

     Would retail investors be more likely to read a firm's 
relationship summary if we required or permitted firms to use certain 
design elements--such as larger font sizes or greater use of white 
space, colors, or visuals? Could this be accomplished while still 
providing retail investors with the information we are proposing to 
require in a short and easy-to-read relationship summary?
     We are proposing that the firm use plain language 
principles and the Instructions refer to the SEC's Plain English 
Handbook. Should we modify any of these principles? Should the 
Instructions refer to any other principles to promote understandable 
wording?
     Do firms commonly market to non-English speakers or 
provide information--including marketing materials--in languages other 
than English? To what extent would firms expect to deliver a 
relationship summary in a language other than English? Should we 
propose requirements to prepare relationship summaries in languages 
other than English? For example, should we require that firms prepare, 
file, and deliver a relationship summary in any language in which they 
disseminate marketing materials? Are there concerns with translating 
the relationship summary without also having to translate the firm's 
other disclosures? If so, what are those concerns?
     Should we limit the relationship summary to four pages (or 
equivalent limit if in electronic format), as proposed? Is this enough 
space for firms to provide meaningful information? Should we instead 
eliminate page limits (and their equivalent for electronic format) or 
increase the amount of permitted pages or their equivalent? Are there 
particular items that may require longer responses than others? If so, 
how should the Commission take these into account in considering page 
limits? For example, if commenters believe the use of graphics will be 
more effective to communicate fees, should we permit a greater number 
of pages to account for the use of graphics? Conversely, will retail 
investors read four pages? Should the page limit be shorter, such as 
one to three pages? If so, what information in the proposed 
requirements should we omit? Should we have different page limits for 
dual registrants than for firms that offer only brokerage or only 
advisory services? If we do require shorter disclosure, what 
information should firms be required to provide regardless of the 
length?
     Are there too few or too many items that would be required 
in the relationship summary? Are there other items that we should also 
require or proposed items that we should delete? Do commenters agree 
that we should only permit the items required by the relationship 
summary? Is there other information that we should permit, but not 
require, firms to include? If so, what items are those?
     Do commenters agree that all items should be presented in 
the same order under the same heading to promote comparability across 
firms? Why or why not? If the items are not listed in the same order, 
could retail investors still easily compare firm relationship 
summaries? Does the prescribed order work, or should we consider a 
different order? Is there information that we should always require to 
appear on the first page or at the beginning of an electronic 
relationship summary? Are there any specifications we should include to 
enhance comparability for electronic delivery of the relationship 
summary in various forms?
     Should we, as proposed, prescribe headings for each item 
or allow firms to choose their own headings? Should we require or 
permit a different style of headings, such as a question and answer 
format or other wording to encourage retail investors to continue 
reading?
     Should we permit firms to include additional disclosure 
with the relationship summary, such as a comprehensive fee table, or 
other disclosures? Would the inclusion of additional disclosures affect 
whether retail investors would view the relationship summary? What are 
the benefits and drawbacks of such an approach?
     Should we generally permit firms to use charts, graphs, 
tables, and/or other graphics or text features to explain the 
information required by the relationship summary (so long as any such 
feature meets requirements as specified in the Instructions), as 
proposed? Should we permit firms to choose the graphical presentation 
that they will use? Are there specific graphical presentations that we 
should require? Should we permit other mediums of presentation, such as 
the use of video presentations?
     Do any elements of the proposed presentation requirements 
impose unnecessary costs or compliance challenges? Please provide 
specific data. Are there any changes to the proposal that could lower 
those costs? Please provide examples.
     Are the mock relationship summaries useful and 
illustrative of the proposed form requirements? Do they appropriately 
show the level of detail that firms might provide?
    With respect to each item for which we prescribe wording in the 
relationship summary, we request the following comment on each of those 
required disclosures:
     Does the narrative style work for the prescribed wording 
or are there other presentation formats that we should require? Should 
the Commission instead require more prescribed wording? Conversely, is 
there prescribed wording we have proposed that we should modify or 
replace with a more general instruction that allows firms to use their 
own description?

B. Items

1. Introduction
    We are proposing that the beginning of the relationship summary 
contain a title highlighting the types of investment services and 
accounts the firm offers to retail investors, specifically ``Which Type 
of Account is Right for You--Brokerage, Investment Advisory or Both?'' 
for dual registrants and ``Is a[n] [Brokerage/Investment Advisory] 
Account Right for You?'' for standalone brokerage firms or investment 
advisory firms, respectively.\71\ A firm also would be required to 
include its name, whether it is registered with the Commission as a 
broker-dealer, investment adviser, or

[[Page 21425]]

both, and date of the relationship summary prominently on the first 
page or beginning of the electronic disclosure (this information could 
be included in the header or footer).\72\
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    \71\ Proposed Items 1.B., 1.C. and 1.D. of Form CRS.
    \72\ Proposed Item 1.A. of Form CRS. The disclosure of 
Commission registration would make the relationship summary 
consistent with proposed rules 15l-3 of the Exchange Act and 211h-1 
of the Advisers Act, which would require that a broker-dealer and a 
registered investment adviser prominently disclose that it is 
registered with the Commission as a broker-dealer or investment 
adviser, respectively, in print or electronic retail investor 
communications.
---------------------------------------------------------------------------

    An introductory paragraph would briefly explain the types of 
accounts (brokerage accounts and/or investment advisory accounts) and 
services the firm offers. Using prescribed wording, all firms would be 
required to state: ``There are different ways you can get help with 
your investments. You should carefully consider which types of accounts 
and services are right for you.'' In a new paragraph and using 
prescribed wording and bold font, a standalone broker-dealer would be 
required to state: ``We are a broker-dealer and provide brokerage 
accounts and services rather than advisory accounts and services.'' 
\73\ Likewise, a standalone investment adviser would be required to 
state in bold font: ``We are an investment adviser and provide advisory 
accounts and services rather than brokerage accounts and services.'' 
\74\ Dual registrants would include a similar statement in bold font 
that discusses both types of services, specifically: ``Depending on 
your needs and investment objectives, we can provide you with services 
in a brokerage account, investment advisory account, or both at the 
same time.'' \75\ Finally, all firms would be required to include: 
``This document gives you a summary of the types of services we provide 
and how you pay. Please ask us for more information. There are some 
suggested questions on page [ ].'' \76\
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    \73\ Proposed Item 1.B. of Form CRS.
    \74\ Proposed Item 1.C. of Form CRS.
    \75\ Proposed Item 1.D. of Form CRS.
    \76\ Proposed Items 1.B.--1.D. of Form CRS.
---------------------------------------------------------------------------

    The proposed introductory paragraph sets up a key theme of the 
relationship summary--helping retail investors to understand and make 
choices among account types and services. For example, some retail 
investors want to receive periodic recommendations while others prefer 
ongoing advice and monitoring. Some retail investors wish to pursue 
their own investment ideas and direct their own transactions, while 
others seek to delegate investment discretion to the firm. Emphasizing 
that there are different types of accounts and services from which a 
retail investor may choose would help the retail investor make an 
informed choice about whether the firm provides services that are the 
right fit for his or her needs and help the retail investor to choose 
the right firm or account type. Although the disclosures are 
intentionally simplified and generalized, we believe they would help 
retail investors to obtain more detailed information.
    We request comment generally on the proposed requirement for firms 
to include specific information in the introduction.
     In addition to the title, firm name and SEC registration 
status, and date, is there other information that we should require at 
the beginning of the relationship summary? Should we instead require a 
cover page? Are the titles we proposed in the Instructions appropriate? 
What alternatives should we consider? Should we allow firms to select 
their own title for the relationship summary?
     Should we require firms to include the prescribed wording, 
as proposed, or should we allow more flexibility in the words they use? 
Should we modify the prescribed wording? Does the proposed wording 
capture the range of business models among investment advisers and 
broker-dealers? Would the prescribed wording require a firm to provide 
any inaccurate information given that firm's circumstances? Instead of 
the proposed prescriptive wording, should the Commission permit or 
require a more open-ended narrative?
     Is there additional information we should require in the 
introduction?
     Should we require that standalone brokerage and investment 
advisory firms include a statement that the retail investor may instead 
prefer investment advisory or brokerage services, respectively? Why or 
why not?
2. Relationships and Services
    After the introduction, the proposed relationship summary would 
provide information about the relationships between the firm and retail 
investors and the investment advisory account services and/or brokerage 
account services the firm provides to retail investors.\77\ The section 
would begin with the heading ``Relationships and Services'' for a 
standalone broker-dealer or investment adviser.\78\ A dual registrant 
would use the heading ``Types of Relationships and Services,'' followed 
by this statement: ``Our accounts and services fall into two 
categories.'' \79\ Each firm would discuss specific information about 
the nature, scope, and duration of its relationships and services, 
including the types of accounts and services the firm offers, how often 
it offers investment advice, and whether the firm monitors the account.
---------------------------------------------------------------------------

    \77\ Proposed Item 2 of Form CRS.
    \78\ Proposed Item 2.A. of Form CRS.
    \79\ Id.
---------------------------------------------------------------------------

    This item requires firms to provide specific information with a mix 
of prescribed wording and short narrative statements. As discussed 
above, if a prescribed statement is not applicable to the firm's 
business or would be misleading to a reasonable retail investor, the 
firm would be permitted to omit or modify that statement.\80\ We have 
designed these requirements to provide retail investors with 
consistent, concise, and meaningful information about the services they 
would receive from a firm and help them to ask relevant questions, 
compare firms' services against each other, and make more informed 
choices about the services they choose.
---------------------------------------------------------------------------

    \80\ See supra note 58 and accompanying text.
---------------------------------------------------------------------------

    We considered an approach whereby firms would be required to 
complete a prescribed checklist of common characteristics of brokerage 
and advisory accounts, indicating which characteristics applied to 
their accounts and services. This approach could improve comparability 
among firms. We are concerned, however, that this approach would not be 
sufficiently flexible to accommodate the variety of business models and 
services that broker-dealers and advisers provide, and that a mix of 
prescribed wording and narrative format would help investors better 
understand the firm's services. We believe that our proposed approach 
provides enough information to help retail investors understand and 
choose between investment advisory accounts and brokerage accounts 
without overwhelming them with too much information.
    Brokerage Account Services. We propose requiring broker-dealers to 
summarize the principal brokerage services that they provide to retail 
investors.\81\ First, broker-dealers would include the following 
wording to explain the transaction-based nature of their fees (emphasis 
required): ``If you open a brokerage account, you will pay us a 
transaction-based fee, generally referred to as a commission, every 
time you buy or sell an investment.'' \82\ Even though a separate 
section of the relationship summary would discuss a firm's fees, we 
believe it is important for broker-dealers to explain transaction-based 
fees at the beginning of the

[[Page 21426]]

disclosure because these types of fees are typically a critical 
distinction between brokerage and investment advisory accounts.\83\
---------------------------------------------------------------------------

    \81\ Proposed Item 2.B. of Form CRS.
    \82\ Proposed Item 2.B.1. of Form CRS.
    \83\ See infra note 126 (discussing our use of the term 
``transaction-based fees'' in the relationship summary).
---------------------------------------------------------------------------

    Next, broker-dealers that offer accounts in which they offer 
recommendations to retail investors would state that the retail 
investor may select investments or the broker-dealer may recommend 
investments for the retail investor's account, but that the retail 
investor will make the ultimate investment decision regarding the 
investment strategy and the purchase or sale of investments.\84\ 
Broker-dealers that offer accounts in which they do not offer 
recommendations to retail investors (e.g., execution-only brokerage 
services) would state that the retail investor will select the 
investments and make the ultimate investment decision regarding the 
investment strategy and the purchase or sale of investments.\85\ 
Starting with a clear description of the services provided in a 
brokerage account by a broker-dealer--including the retail investor's 
choice of receiving recommendations or self-directing his or her 
investments, and the fact that the retail investor will make the 
ultimate investment decision--would help address confusion about the 
services that broker-dealers offer to retail investors.\86\ This 
language also highlights differences from the services that investment 
advisers would describe, discussed below.
---------------------------------------------------------------------------

    \84\ Proposed Item 2.B.2. of Form CRS.
    \85\ Id.
    \86\ We believe that retail investors have the ultimate 
investment decision for their investment strategy and the purchase 
or sale of investments, even if the broker-dealer has temporary or 
limited discretion over retail investors' accounts. See Regulation 
Best Interest Proposal, supra note 24, at section II.F.
---------------------------------------------------------------------------

    Next, we propose requiring broker-dealers to state if they offer 
additional services to retail investors, including, for example: (a) 
Assistance with developing or executing the retail investor's 
investment strategy (e.g., the broker-dealer discusses the retail 
investor's investment goals or designs with the retail investor a 
strategy to achieve the retail investor's investment goals); or (b) 
monitoring the performance of the retail investor's account.\87\ They 
would also state that a retail investor might pay more for these 
additional services, if applicable.\88\ Broker-dealers that offer 
performance monitoring as part of the standard brokerage account 
services would indicate how frequently they monitor the 
performance.\89\ While broker-dealers do not undertake to provide 
investment strategy and performance monitoring services when they give 
recommendations, we recognize that many broker-dealers offer these 
services to retail investors as part of their account agreement. We 
believe that retail investors would benefit from disclosure that such 
services exist, and that broker-dealers might charge higher fees for 
these services. Broker-dealers would also be required to briefly 
describe any regular communications they have with retail investors, 
such as providing account statements, giving an overview of 
transactions during a period, or evaluating the account's 
performance.\90\ Firms would include the frequency (e.g., at least 
quarterly) and the method (e.g., by email, phone or in person) of the 
communications.\91\
---------------------------------------------------------------------------

    \87\ Proposed Item 2.B.3. of Form CRS.
    \88\ Id.
    \89\ Id. Broker-dealers that monitor the performance of the 
retail investor's account, as market and customer conditions demand 
(rather than on a specific time schedule), could state so.
    \90\ Id.
    \91\ Id. We are proposing the same requirement for investment 
advisers, described below. See infra note 102 and accompanying text.
---------------------------------------------------------------------------

    Finally, broker-dealers would be required to include the following 
if they significantly limit the types of investments available to 
retail investors in any accounts: ``We offer a limited selection of 
investments. Other firms could offer a wider range of choices, some of 
which might have lower costs.'' \92\ A broker-dealer would 
significantly limit the types of investments if, for example, the firm 
only offers one type of asset (e.g., mutual funds, exchange-traded 
funds, or variable annuities), the firm only offers mutual funds or 
other investments sponsored or managed by the firm or its affiliate 
(i.e., proprietary products), or the firm only offers a small choice of 
investments.\93\ In addition, if the limitations only apply to some of 
the accounts the firm offers, such as, for example, limiting the types 
of investments for retail investors within different asset tiers, then 
the firm would have to identify those accounts.\94\
---------------------------------------------------------------------------

    \92\ Proposed Item 2.B.4. of Form CRS.
    \93\ Id.
    \94\ Id.
---------------------------------------------------------------------------

    Limitations on investments offered could have a significant effect 
on investor choice and performance of the account over time. In 
particular, firms that offer proprietary products exclusively preclude 
investor access to competing products that could offer lower fees or 
result in better performance over time. As a result, retail investors 
should understand these limitations before they enter into a 
relationship with a firm.
    Advisory Account Services. We propose requiring investment advisers 
that offer investment advisory accounts to retail investors to 
summarize the principal investment advisory services provided to retail 
investors.\95\ First, investment advisers would be required to state 
the type(s) of fee they receive as compensation if a retail investor 
opens an investment advisory account.\96\ For example, an investment 
adviser would state if it charges an on-going asset-based fee based on 
the value of the cash and investments in the advisory account, a fixed 
fee, or some other fee arrangement. A standalone adviser would also 
state how frequently it assesses the fee.\97\ Similar to the 
requirement for broker-dealers,\98\ we are proposing to require a 
statement about how investment advisers charge fees up-front because of 
the importance that investors understand how they will pay for services 
and to highlight this critical distinction between brokerage and 
advisory accounts. We are proposing to require that firms describe 
additional fees associated with these services in the discussion of 
fees and costs. Because the fees charged by each investment adviser may 
differ, we are not prescribing specific wording and instead are 
allowing firms flexibility in choosing the exact wording to use for 
this disclosure. Advisers would, however, emphasize the type of fee in 
bold and italicized font.\99\
---------------------------------------------------------------------------

    \95\ Proposed Item 2.C. of Form CRS.
    \96\ Proposed Item 2.C.1. of Form CRS. The relationship summary 
would refer to ``account advisory services'' and ``opening an 
account'' to simplify the explanations for retail investors. When an 
investment adviser provides investment advisory services, the client 
may have a custodial account with another firm, such as a broker-
dealer or bank. A dual registrant may maintain custody for an 
advisory client's assets as broker-dealer. We are not proposing to 
require that firms include these nuances in the discussion of 
relationships and services.
    \97\ Id.
    \98\ See supra note 82 and accompanying text.
    \99\ Proposed Item 2.C.1 of Form CRS.
---------------------------------------------------------------------------

    Next, investment advisers would state that they offer advice on a 
regular basis, or, if they do not offer advice on a regular basis, they 
would state how frequently they offer advice.\100\ They would also 
state the services they offer to retail investors including, for 
example, (a) assistance with developing the retail investor's 
investment strategy (e.g., the investment adviser discusses the retail 
investor's investment goals or designs with the retail investor a 
strategy to achieve the retail investor's investment goals), or (b) how 
frequently

[[Page 21427]]

they monitor the retail investor's accounts.\101\ Similar to broker-
dealers, advisers would include the frequency (e.g., at least 
quarterly) and the method (e.g., by email, phone or in person) of the 
communications.\102\ We believe that the regularity of advice and other 
services that investment advisers commonly provide, including, as 
applicable--discussions with the retail investor, designing a strategy 
to achieve investment goals, monitoring, and reporting on performance--
are key aspects of services that advisers commonly provide.\103\ As 
discussed above with respect to broker-dealers, these services can 
distinguish advisory accounts from brokerage accounts and therefore the 
disclosure will help retail investors determine which type of account 
best suits their needs.
---------------------------------------------------------------------------

    \100\ Proposed Item 2.C.2. of Form CRS.
    \101\ Id.
    \102\ Id.
    \103\ An agreement for advisory services typically defines the 
scope and specific types of services provided.
---------------------------------------------------------------------------

    Additionally, investment advisers would state if they offer 
advisory accounts for which they exercise investment discretion (i.e., 
discretionary accounts), accounts for which they do not exercise 
investment discretion (i.e., non-discretionary accounts), or both.\104\ 
For purposes of this Item in the relationship summary, investment 
advisers generally should use the same definition of ``discretionary 
authority'' as in Form ADV, which is the authority to decide which 
securities to purchase and sell for the client, or the authority to 
decide which investment advisers to retain on behalf of the 
client.\105\ If an investment adviser offers a discretionary account, 
the relationship summary would state that a discretionary advisory 
account allows the firm to buy and sell investments in the retail 
investor's account, without asking the retail investor in advance. For 
a non-discretionary advisory account, the relationship summary would 
state that the firm gives advice and the retail investor decides what 
investments to buy and sell.\106\
---------------------------------------------------------------------------

    \104\ Proposed Item 2.C.3. of Form CRS. Investment advisers 
would be required to emphasize the type of account (discretionary 
and non-discretionary) in bold and italicized font.
    \105\ Term 12 of Glossary of Terms to Form ADV.
    \106\ Proposed Item 2.C.3. of Form CRS.
---------------------------------------------------------------------------

    We believe it is important for retail investors considering an 
advisory account to understand the difference between discretionary 
services and non-discretionary services, as that distinction would 
affect the degree of control the retail investor would provide to the 
adviser. Discretionary advice is also a common feature of many 
investment advisory accounts,\107\ so explaining discretion would 
benefit a retail investor in choosing between brokerage and investment 
advisory services, as well as between different types of advisory 
accounts.
---------------------------------------------------------------------------

    \107\ In 1992, only approximately three percent of SEC-
registered advisers had discretionary authority over client assets; 
as of March 31, 2018, according to data collected on Form ADV, 91 
percent of SEC-registered advisers have that authority.
---------------------------------------------------------------------------

    Finally, as we are proposing for broker-dealers, investment 
advisers that significantly limit the types of investments available to 
retail investors in any accounts would include the same statement that 
broker-dealers would be required to include, and if such limits only 
apply to certain accounts, the investment adviser would identify those 
accounts, for the same reasons discussed above.\108\
---------------------------------------------------------------------------

    \108\ Proposed Item 2.C.4. of Form CRS. The required statement 
would be ``Our investment advice will cover a limited selection of 
investments. Other firms could provide advice on a wider range of 
choices, some of which might have lower costs.'' Also consistent 
with the requirements for broker-dealers, such limitations could 
include, for example, only offering a selection of mutual funds, 
equities, or proprietary products.
---------------------------------------------------------------------------

    Affiliate Services. We recognize that many investment advisers and 
broker-dealers that are not dual registrants nonetheless have 
affiliates that are broker-dealers or investment advisers, 
respectively. Often, these standalone firms offer their affiliates' 
services to retail investors. For example, an affiliated sub-adviser 
also may manage a portion of a retail investor's portfolio or an 
investment adviser may effect trades for client accounts through an 
affiliated broker-dealer. We would allow these firms to state that they 
offer retail investors their affiliates' brokerage or advisory 
services, as applicable.\109\ We believe that the inclusion of this 
disclosure could make clear the choice investors have within affiliated 
firms and give financial professionals an opportunity to discuss these 
services.
---------------------------------------------------------------------------

    \109\ Proposed Item 2.D. of Form CRS. This disclosure only 
applies in the context of an affiliate of the firm. This is not 
intended to describe disclosure of a financial professional's 
outside business activities, such as an outside investment advisory 
business of a broker-dealer registered representative.
---------------------------------------------------------------------------

    We request comment generally on the proposed requirement for firms 
to include specific information about the relationships and services 
offered in their advisory and brokerage accounts.
     Would the proposed summary of relationships and services 
help retail investors to make informed choices about whether investment 
advisory or brokerage services better suit their needs? If not, how 
should we revise it?
     Would the proposed requirements result in disclosure that 
is clear, concise, and meaningful to retail investors? Would this 
information help retail investors to better understand the general 
differences in the services that investment advisers and broker-dealers 
provide? Are there other differences in the services provided by 
investment advisers and broker-dealers that we should require firms to 
discuss in this section? If so, should we permit or require information 
about those differences in the summary of services? Are there any 
common misconceptions about services provided by broker-dealers, 
investment advisers, or dual registrants that the relationship summary 
should specifically seek to clarify or correct?
     Would more or less information about a firm's services be 
helpful for retail investors? Are there any elements of the proposed 
requirements that firms should or should not include? If so, why? 
Should any of the required disclosures be included in a different 
section of the relationship summary? Is the proposed order of the 
information appropriate, or should it be modified? If so, how should it 
be modified? Should we allow firms the flexibility to present this 
information in a different order if doing so makes their relationships 
and services more understandable to retail investors?
     Is the proposed heading and the introductory wording for 
firms clear and useful to retail investors? Are there alternative 
headings we should consider?
     Does the mix of prescribing wording for some information 
and requiring brief narratives for other information strike the right 
balance between having similar, neutral wording to promote comparisons 
and permitting firms to conform the language to reflect the services 
they offer? Should the Commission instead require more prescribed 
wording in this Item? Conversely, is there prescribed wording we have 
proposed that we should modify or replace with a more general 
instruction that allows firms to use their own description?
     Does the prescribed wording we are proposing capture the 
range of business models of investment advisers and broker-dealers? 
Would the prescribed wording require any firm to state something 
inaccurate in the relationship summary? Should we instead provide more 
flexibility to change the prescribed wording?
     Should we require broker-dealers to include prescribed 
wording about transaction-based fees and investment advisers to state 
the type of fee for an advisory account at the beginning of this

[[Page 21428]]

section, or should fees only be discussed in the fee section?
     How should broker-dealers describe execution-only 
accounts, sometimes referred to as ``discount'' brokerage, and accounts 
in which they provide recommendations concerning securities, sometimes 
referred to as ``full-service'' brokerage? Should we, as proposed, 
require that broker-dealers offering recommendations to retail 
investors state that the retail investor may select investments or the 
broker-dealer may recommend investments, but the retail investor will 
make the ultimate investment decision? Should we also, as proposed, 
require that broker-dealers only offering discount brokerage accounts 
to retail investors state that the retail investor will select the 
investments and make the ultimate investment decision? Should we 
require prescribed language about these accounts, or should we permit a 
brief narrative as proposed? Should firms be permitted or required to 
use the terms ``full-service'' accounts and ``discount'' brokerage 
accounts, or other terms, so long as they are likely to be understood? 
Do investors understand the meanings of these terms?
     Should investment advisers that provide investment 
advisory services be required to discuss both discretionary and non-
discretionary account services, regardless of whether they offer both 
discretionary and non-discretionary accounts? Should they instead be 
permitted to describe only the service they offer? Do firms offer 
accounts that involve limited discretionary services that would not be 
covered in the proposed discussions of discretionary and non-
discretionary accounts? If so, how should the requirements be changed 
to reflect these accounts? Should we also require investment advisers 
to state that they offer advice on a regular basis, or, if not on a 
regular basis, state how frequently they offer advice? Should we 
require the disclosure of any additional information about the advice 
an investment adviser provides?
     We are proposing to require firms to disclose if they 
offer certain additional services, such as assistance with developing 
or executing the retail investor's investment strategy, and performance 
monitoring, and to briefly describe any regular communications they 
have with retail investors. Are there services in addition to those in 
the Instructions that broker-dealers and investment advisers also 
should disclose? Should we require disclosure of the same types of 
additional services for both broker-dealers and investment advisers?
     We understand that, to some extent, all firms limit the 
investments offered to retail investors. Would other disclosures 
regarding a firm's product offering limitations be helpful to 
investors, in addition to the proposed disclosures for firms that 
significantly limit the types of investments that are available? Why or 
why not? Should we, for example, require firms that only offer 
proprietary investments to also state that the only investments 
available to a retail investor are investments that the firm or its 
affiliates issue, sponsor, or manage? How feasible would this 
disclosure be for a firm that has several account types? Should we 
consider other alternatives?
     Is it clear what we mean by ``significantly limit'' with 
regard to the requirement to disclose limitations on investment 
choices? Should we provide additional examples or more prescriptive 
instructions regarding when firms must disclose such limitations? Are 
there other ways a firm may significantly limit the types of 
investments that should be captured by this instruction?
     Should we permit firms to prepare different relationship 
summaries for different types of services and lines of business, 
particularly where the firm offers a broad array of accounts and 
services? Would separate relationship summaries still promote 
comparability across firms and the ability to understand the 
differences between advisory and brokerage services?
     Would the proposed summary of services allow retail 
investors to easily compare the services provided by different firms? 
If not, what changes to the requirements should we make to increase 
comparability?
     Would other disclosures about a firm's services be more 
helpful for retail investors? Should we permit or require firms to 
describe services they offer to retail investors, in addition to 
brokerage and advisory services, such as insurance services? Would such 
disclosure about other services give retail investors a more complete 
overview of a firm's offerings, or would it detract from the other 
disclosures, for example, by overwhelming the more important 
information about a firm's brokerage and advisory services?
     Should we require firms to include more details about the 
specific services provided for each type of advisory account or 
brokerage account that they offer? Should the relationship summary help 
investors to choose among a variety of account options that the firm 
offers, rather than providing more summary information about the 
advisory and brokerage services that are offered?
     Some dual registrants have implemented a default 
relationship for retail investors, where, for example, the firm will 
act as a broker-dealer with respect to the account unless specifically 
stated otherwise. Should we require these firms to disclose that they 
are acting as a broker-dealer (or investment adviser, as applicable) 
with respect to the account unless the firm specifically states 
otherwise?
     Should we, as proposed, allow firms with affiliated 
broker-dealers or investment advisers to state that they offer retail 
investors additional brokerage or advisory services, as applicable, 
through their affiliates? Should we require such statements, if 
applicable? Should we permit or require firms to expand on the 
different types of services available to their retail investors through 
the firm's affiliates? Should affiliates be required or permitted to 
use a single relationship summary that describes the services of all 
affiliates? If not, why not? What are the advantages and disadvantages 
to the retail investor?
     Should we also permit or require disclosure regarding a 
firm's relationships with other third parties, such as where the 
registered representatives of a broker-dealer are also investment 
adviser representatives of an unaffiliated investment adviser or where 
an investment adviser uses a single unaffiliated broker-dealer to 
provide execution and custody and generally does not consider execution 
through other firms?
     Should we require investment advisers and broker-dealers 
to disclose whether they have a minimum account size and state that 
minimum (or range of minimums) if the account minimum varies by 
account? If applicable, should we require disclosure that the selection 
of investments or services is limited by account size? Would this help 
investors understand whether they are eligible for certain accounts or 
certain services and understand the ways in which their investment 
choices may be limited? Are there any drawbacks to requiring such 
disclosure?
     So-called robo-advisers and online broker-dealers 
represent a fast-growing trend within the brokerage and investment 
advisory industries. They employ a wide range of business models. For 
example, differences among robo-advisers and online broker-dealers 
include: The degree of reliance on computer algorithms (as opposed to 
individualized human judgment) to generate financial advice; the level 
of human interaction between the client or customer and firm personnel; 
and the use of the internet to communicate with

[[Page 21429]]

clients and customers. Are the Instructions pertaining to relationships 
and services sufficient and appropriate to capture the business models 
of robo-advisers and online broker-dealers? For example, would it be 
appropriate to require or permit descriptions regarding the degree of 
human involvement in the oversight and management of individual client 
accounts, how computer algorithms are used in generating investment 
advice, and the availability of financial professionals to answer 
retail investors' questions? Do the requirements with respect to the 
content and delivery of the relationship summary, as further discussed 
below, allow retail investors to make informed decisions about entering 
into a relationship with a robo-adviser, other type of investment 
adviser, or broker-dealer?
3. Obligations to the Retail Investor--Standard of Conduct
    Following the relationships and services section, the relationship 
summary would include a brief section, using prescribed wording, to 
describe the firm's legal standard of conduct to the retail 
investor.\110\ The section would begin with the heading ``Our 
Obligations to You'' and the following language: ``We must abide by 
certain laws and regulations in our interactions with you.'' Firms 
would then use prescribed wording describing the standard of conduct 
applicable to investment advisers and/or broker-dealers.\111\ As with 
certain other sections of the relationship summary, dual registrants 
would provide this information in tabular format to facilitate 
comparison.
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    \110\ Proposed Item 3.A. of Form CRS.
    \111\ Proposed General Instruction 1.(e) to Form CRS.
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    We understand that the standard of conduct that applies to firms 
and financial professionals has been a source of investor 
confusion.\112\ For example, the 913 Study noted that retail investors 
were not clear about the specific legal duties of broker-dealers and 
investment advisers.\113\ We believe that providing a brief overview of 
the standards of conduct to which broker-dealers and investment 
advisers must adhere, including the differences between the standards 
of care of broker-dealers and investment advisers, could help alleviate 
this confusion. We further believe that providing this overview, in 
combination with the key question about the financial professional's 
legal obligations discussed below, would encourage a conversation 
between the retail investor and the financial professional about 
applicable legal obligations.\114\ We also believe that prescribing 
language is appropriate to promote consistency in communicating these 
standards to retail investors.\115\
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    \112\ See, e.g., Siegel & Gale Study, supra note 5; and RAND 
Study, supra note 5. See also CFA Survey, supra note 5.
    \113\ See 913 Study, supra note 3, at v. See also Rand Study, 
supra note 5.
    \114\ See infra at Section II.B.8. Similarly, certain DOL 
regulations already obligate firms and financial professionals to 
acknowledge fiduciary status when they provide certain advisory type 
services to workplace retirement plans subject to ERISA and to IRAs. 
See, e.g., 29 CFR 2550.408g-1(b)(7)(i)(G) (regulation under 
statutory exemption for participant advice requires fiduciary 
advisers to plans and IRAs seeking exemptive relief to provide 
advice and receive compensation to acknowledge fiduciary status); 29 
CFR 2550.408b-2(c)(1)(iv)(B) (regulation under statutory exemption 
for reasonable service arrangements requires certain ERISA-covered 
plan service providers to state, if applicable, that the service 
provider will provide or reasonably expects to provide services as a 
``fiduciary'' as defined by ERISA). Similarly, the DOL's BIC 
Exemption, see infra note 504, would require an investment advice 
fiduciary that seeks to rely on that exemption to receive 
compensation in connection with investment recommendations to state 
in writing that it is acting as a fiduciary under ERISA or the Code.
    \115\ As noted above, if a prescribed statement is inapplicable 
to a firm's business or would be misleading to a reasonable retail 
investor, the firm may omit or modify that statement, as further 
discussed below. Proposed General Instruction 3 to Form CRS. See 
supra note 58.
---------------------------------------------------------------------------

    Broker-Dealers. We are proposing a required description of the 
standard of conduct for broker-dealers based on the proposed standards 
in Regulation Best Interest, as well as existing obligations of broker-
dealers when they provide services to customers. First, a broker-dealer 
that provides recommendations subject to Regulation Best Interest \116\ 
would include the following wording: ``We must act in your best 
interest and not place our interests ahead of yours when we recommend 
an investment or an investment strategy involving securities.'' \117\ 
Execution-only broker-dealers and other broker-dealers that do not 
provide such recommendations would not be required to include this 
sentence. We believe retail investors receiving recommendations that 
are subject to Regulation Best Interest would benefit from 
understanding the new obligation.
---------------------------------------------------------------------------

    \116\ Regulation Best Interest Proposal, supra note 24.
    \117\ Proposed Item 3.B.1. of Form CRS. This wording assumes 
Commission adoption of Regulation Best Interest. As noted above (see 
supra note 29 and accompanying text), the proposed definition of 
``retail customer,'' to whom Regulation Best Interest would apply, 
differs from the proposed definition of ``retail investor'' under 
Form CRS. The relationship summary is intended for a broader range 
of investors than the intended focus of Regulation Best Interest. 
Accordingly, the proposed Regulation Best Interest standard may not 
apply to the recommendations of all retail investors receiving the 
relationship summary from broker-dealers. The Instructions for 
proposed Item 3.B.1 recognizes this possibility and seeks to ensure 
that broker-dealers provide accurate disclosure to their retail 
investors, even if the broker-dealer is not providing a 
recommendation subject to Regulation Best Interest.
---------------------------------------------------------------------------

    Second, all broker-dealers providing services to retail investors 
would state, ``When we provide any service to you, we must treat you 
fairly and comply with a number of specific obligations.'' This would 
inform retail investors that broker-dealers have a duty of fair dealing 
under the federal securities laws and self-regulatory organization 
rules, as well as other obligations and standards to which they must 
adhere.\118\
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    \118\ See Report of the Special Study of Securities Markets of 
the Securities and Exchange Commission, H.R. Doc. No. 88-95, at 238 
(1st Sess. 1963); In the Matters of Richard N. Cea, et al., Exchange 
Act Release No. 8662 (Aug. 6, 1969), at 18 (``Release 8662'') 
(involving excessive trading and recommendations of speculative 
securities without a reasonable basis); In the Matter of Mac Robbins 
& Co. Inc., Exchange Act Release No. 6846 (Jul. 11, 1962). See also 
FINRA Rule 2111.01 (Suitability) (``Implicit in all member and 
associated person 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. The 
suitability rule is fundamental to fair dealing and is intended to 
promote ethical sales practices and high standards of professional 
conduct''); see also FINRA Rule 2010 (Standards of Commercial Honor 
and Principles of Trade) (requiring a member, in the conduct of its 
business, to observe high standards of commercial honor and just and 
equitable principles of trade).
---------------------------------------------------------------------------

    Finally, broker-dealers would be required to state, ``Unless we 
agree otherwise, we are not required to monitor your portfolio or 
investments on an ongoing basis.'' This sentence reflects that neither 
Regulation Best Interest nor existing broker-dealer standards oblige 
the broker-dealer to monitor the performance of retail investor's 
accounts,\119\ while making clear that broker-dealers could agree to 
provide monitoring as an additional service. We are proposing this 
wording because we believe that the episodic, rather than ongoing, 
nature of broker-dealers' standard of conduct in Regulation Best 
Interest is a distinction from investment advisers' obligations to 
clients that retail investors should be

[[Page 21430]]

aware of from the outset of a relationship.
---------------------------------------------------------------------------

    \119\ References to ``monitoring'' relate to monitoring the 
performance of a portfolio or investments, and are not intended to 
alter or diminish broker-dealers' current supervisory obligations 
under the Exchange Act and detailed self-regulatory organization 
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 self-regulatory rules. See 
section 15(b)(4)(E) of the Exchange Act; FINRA Rule 3110.
---------------------------------------------------------------------------

    After the description of the standard of conduct, broker-dealers 
would be required to state: ``Our interests can conflict with your 
interests.'' If the broker-dealer provides to retail investors 
recommendations that are subject to Regulation Best Interest, it would 
also include the language, ``When we provide recommendations, we must 
eliminate these conflicts or tell you about them and in some cases 
reduce them.'' \120\ These statements reflect proposed requirements in 
Regulation Best Interest that broker-dealer would need to establish, 
maintain, and enforce reasonably designed policies and procedures 
relating to material conflicts of interest, including those arising 
from financial incentives, associated with recommendations to retail 
customers. While we are not using the exact words of the proposed 
standard, we believe that this information, in combination with the 
conflicts section below, can make the retail investor aware that 
conflicts exist and that the broker-dealer has obligations regarding 
disclosure, mitigation, or elimination of conflicts when the broker-
dealer is subject to Regulation Best Interest. We believe this could 
help prompt a conversation between retail investors and their financial 
professionals about both the conflicts the firm and financial 
professional have and what steps the firm takes to reduce the 
conflicts.\121\
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    \120\ Proposed Item 3.B.2. of Form CRS. This wording assumes 
Commission adoption of the Regulation Best Interest.
    \121\ See discussion of the proposed conflicts of interest 
disclosure in the relationship summary, infra Section II.B.6.
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    Investment Advisers. We propose to require that investment advisers 
state the standard of conduct that applies to them as an investment 
adviser by including the following wording: ``We are held to a 
fiduciary standard that covers our entire investment advisory 
relationship with you.'' In addition, unless the investment adviser 
does not provide ongoing advice (for example, provides only a one-time 
financial plan), the investment adviser would also state, ``For 
example, we are required to monitor your portfolio, investment strategy 
and investments on an ongoing basis.'' \122\ While we are not proposing 
to include a specific definition of fiduciary, we believe that the 
proposed wording that the relationship covers the ``entire investment 
advisory relationship'' and wording regarding the ongoing duty to 
monitor would provide retail investors with information about aspects 
of the fiduciary duty that can help the retail investor understand the 
standard.\123\ Additionally, as with the proposed standard of conduct 
disclosure for broker-dealers, we believe that the ongoing, as opposed 
to episodic, nature of investment advisers' standard of conduct is a 
distinction from broker-dealers' typical obligations when providing 
recommendations that retail investors should be aware of from the 
outset of a relationship.
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    \122\ Proposed Item 3.C.1. of Form CRS.
    \123\ We are concurrently publishing for comment a proposed 
interpretation of the standard of conduct for investment advisers 
under the Advisers Act. See Proposed Commission Interpretation 
Regarding Standard of Conduct for Investment Advisers; Request for 
Comment on Enhancing Investment Adviser Regulation, Investment 
Advisers Act Release No. IA-4889 (Apr. 18, 2018) (``Fiduciary Duty 
Interpretive Release'').
---------------------------------------------------------------------------

    After the description of the standard of conduct, investment 
advisers would then be required to state, ``Our interests can conflict 
with your interests. We must eliminate these conflicts or tell you 
about them in a way you can understand, so that you can decide whether 
or not to agree to them.'' As with broker-dealers, we believe that this 
information, in combination with the conflicts section below, can make 
retail investors aware that conflicts exist and that investment 
advisers, as part of their fiduciary duty, have obligations regarding 
conflicts.\124\ We believe this could help prompt a conversation 
between retail investors and their financial professionals about both 
the conflicts the firm and financial professional have and what steps 
the firm takes to reduce the conflicts.
---------------------------------------------------------------------------

    \124\ See, e.g., General Instruction 3 to Form ADV, Part 2.
---------------------------------------------------------------------------

    We request comment generally on the proposed standard of conduct 
descriptions, and in particular on the following issues:
     Should we require, as proposed, that all firms include a 
brief prescribed statement about the legal standards of conduct that 
apply to them under the federal securities laws, including the new 
standard proposed in Regulation Best Interest and an investment 
adviser's fiduciary duty? Is such disclosure likely to be meaningful to 
retail investors? Does the prescribed wording capture what retail 
investors should or want to understand about broker-dealers' and 
investment advisers' standards of conduct? Would the prescribed wording 
require any firm to provide any inaccurate information? Are there 
modifications to the proposed wording or alternative wording that would 
make the legal standards more clear in a succinct way? Should we 
require or permit additional information, and if so, what? 
Alternatively, would a briefer statement be appropriate? Are there any 
common misconceptions about broker-dealers' and investment advisers' 
standard of conduct that the relationship summary should specifically 
seek to clarify or correct?
     Should we require or permit broker-dealers to include 
additional detail about the best interest standard proposed in 
Regulation Best Interest or their duty of fair dealing? Would this or 
other disclosure provide retail investors with useful information? 
Should we provide flexibility in how broker-dealers describe the best 
interest standard or duty of fair dealing?
     We are proposing to require that broker-dealers state that 
they must comply with a number of specific obligations when providing 
any service to customers. Should we permit or require more detailed 
disclosure about these obligations? For example, should we permit or 
require broker-dealers to disclose their obligations to make sure that 
the prices a customer receives when a trade is executed are fair and 
reasonable, and to make sure that the commissions and fees the customer 
pays are not excessive?
     Should we require disclosure that further describes the 
investment adviser fiduciary standard, including any additional details 
described in the proposed interpretation? If so, what wording should we 
require? Should we provide flexibility in describing the fiduciary 
standard?
     For dual registrants, would the side-by-side descriptions 
of the standards of conduct for broker-dealers and investment advisers 
assist retail investors in understanding the differences between these 
standards? Are there modifications we can make to the wording or the 
presentation to facilitate this comparison?
     Should we permit or require firms to disclose additional 
information about the legal differences between broker-dealers and 
investment advisers, such as explaining that broker-dealers are subject 
to regulation by self-regulatory organizations in addition to the SEC? 
Should we permit or require firms to disclose the differences in 
licensing requirements for financial professionals of broker-dealers 
and investment advisers, such as the frequency of licensing or 
qualifications examinations? Would such disclosure about financial 
professionals fit within this section of the relationship summary that 
focuses on the firm? What information would be most relevant to retail 
investors?

[[Page 21431]]

     We understand that state laws and other regulations,\125\ 
also may require broker-dealers and advisers to affirmatively 
acknowledge fiduciary status. Should we provide firms flexibility to 
include language in a relationship summary consistent with or to 
satisfy these other regulatory requirements? Would such flexibility 
enhance or potentially reduce the effectiveness of the relationship 
summary?
---------------------------------------------------------------------------

    \125\ See. e.g., supra note 114.
---------------------------------------------------------------------------

4. Summary of Fees and Costs
    We are proposing to require broker-dealers and investment advisers 
to include an overview of specified types of fees and expenses that 
retail investors will pay in connection with their brokerage and 
investment advisory accounts. This section would include a description 
of the principal type of fees that the firm will charge retail 
investors as compensation for the firm's advisory or brokerage 
services, including whether the firm's fees vary and are negotiable, 
and the key factors that would help a reasonable retail investor 
understand the fees that he or she is likely to pay.\126\ Investment 
advisers that provide advice to retail investors about investing in 
``wrap fee programs'' would include an overview of the fees associated 
with those wrap fee programs.\127\ Both broker-dealers and investment 
advisers would state that some investments impose fees that will reduce 
the value of a retail investor's investment over time, and would 
provide examples relevant to the firm's business.\128\ In addition, 
each firm would include the incentives it and its financial 
professionals have to put their own interests ahead of their retail 
investors' interests based on the account fee structure,\129\ and would 
state that depending on an investor's investment strategy, retail 
investors may prefer paying a different type of fee in certain 
specified circumstances.\130\ Having a clear, simple explanation of the 
fees a retail investor would pay firms for advisory accounts versus 
brokerage accounts, and the incentives that such fees create, would 
help the retail investor to understand the types of fees that they will 
pay and make a more informed choice about which account is right for 
them. As with other sections of the relationship summary, dual 
registrants would provide this information in tabular format to 
facilitate comparison.\131\
---------------------------------------------------------------------------

    \126\ Proposed Item 4 of Form CRS. A broker-dealer would 
describe transaction-based fees as its principal type of fee, using 
prescribed wording. See proposed Item 4.B.1 of Form CRS. We use the 
term ``transaction-based fees'' in the relationship summary for 
plain language purposes to refer generally to broker-dealer 
compensation such as commissions, mark-ups, mark-downs, sales loads 
or similar fees, including 12b-1 fees, tied to specific 
transactions. An investment adviser would summarize the principal 
fees and costs that align with the type of fee(s) the adviser 
reports in response to Item 5.E. of Form ADV Part 1A that are 
applicable to retail investors. See proposed Item 4.C. of Form CRS. 
Investment advisers and associated persons that receive compensation 
in connection with the purchase or sale of securities should 
carefully consider the applicability of the broker-dealer 
registration requirements of the Exchange Act.
    \127\ Proposed Items 4.C.3., 4.C.7., 4.C.9. and 4.C.10. of Form 
CRS.
    \128\ Proposed Items 4.B.2.b. and 4.C.4. of Form CRS.
    \129\ Proposed Items 4.B.5. and 4.C.8. of Form CRS.
    \130\ Proposed Items 4.B.6. and 4.C.10. of Form CRS. Dual 
registrants would make these disclosures under the heading ``Fees 
and Costs,'' whereas standalone investment advisers and broker-
dealers would make certain of these disclosures under the heading 
``Fees and Costs,'' and certain of these disclosures under the 
heading, as applicable ``Compare with Brokerage Accounts'' or 
``Compare with Advisory Accounts,'' as described below. Proposed 
Items 5.A.4. and 5.B.6. of Form CRS.
    \131\ Proposed General Instruction 1.(e) to Form CRS.
---------------------------------------------------------------------------

    Fees and costs are important to retail investors,\132\ but many 
retail investors are uncertain about the fees they will pay.\133\ Many 
commenters have stressed the importance of clear fee disclosure to 
retail investors, including disclosure about differences between 
advisory and brokerage fees.\134\ Accordingly, the proposed 
relationship summary is intended to provide investors greater clarity 
concerning certain categories of fees they should expect to pay, how 
the types of fees affect the incentives of the firm and their financial 
professionals, and certain other fees and expenses that will reduce the 
value of the retail investor's investment. The proposed relationship 
summary would focus on certain general types of fees, rather than 
describe all fees or provide a comprehensive schedule of fees. 
Specifically, the proposal would highlight certain differences in how 
broker-dealers and investment advisers charge for their services.
---------------------------------------------------------------------------

    \132\ See 917 Financial Literacy Study, supra note 20, at iv 
(``With respect to financial intermediaries, investors consider 
information about fees, disciplinary history, investment strategy, 
conflicts of interest to be absolutely essential.'').
    \133\ See Rand Study, supra note 5, at xix (``In fact, focus-
group participants with investments acknowledged uncertainty about 
the fees they pay for their investments, and survey responses also 
indicate confusion about the fees.''). In addition, we have brought 
enforcement actions against advisers providing inaccurate disclosure 
of all of the fees and costs that retail investors pay. See, e.g., 
In the Matter of Robert W. Baird & Co. Inc., Investment Advisers Act 
Release No. 4526 (Sept. 8, 2016) (settled action) (``In re Robert W. 
Baird''); In the Matter of Raymond James & Associates, Inc., 
Investment Advisers Act Release No. 4525 (Sept. 8, 2016) (settled 
action) (``In re Raymond James''); In the Matter of Barclays Capital 
Inc., Investment Advisers Act Release No. 3929 (Sep. 23, 2014) 
(settled action) (``Release 3929'').
    \134\ See, e.g., Kiley 2017 Letter (recommending that investors 
receive disclosures about the differences in advisory and brokerage 
fees, and brokers' specific fee and commission structure); Stifel 
2017 Letter (recommending that firms explain the differences between 
brokerage and advisory accounts with the goal of improving 
understanding of a firm's different service models, compensation 
arrangements, and conflicts of interests); Equity Dealers of America 
2017 Letter (recommending disclosure of aspects of advisory and 
brokerage accounts, including the type of fees charged, to 
facilitate investors' selection of an account type); Wells Fargo 
2017 Letter; ACLI 2017 Letter; FSR 2017 Letter; SIFMA 2017 Letter; 
UBS 2017 Letter; Comment letter of the Investment Company Institute 
(Aug. 7, 2017) (``ICI 2017 Letter''); State Farm 2017 Letter; IAA 
2017 Letter; Bernardi Securities 2017 Letter; Fidelity 2017 Letter; 
Vanguard 2017 Letter.
---------------------------------------------------------------------------

    We are not proposing a requirement that firms personalize the fee 
disclosure for their retail customers, or provide a comprehensive fee 
schedule, as some commenters had proposed.\135\ A personalized fee 
disclosure could be expensive and complex for firms to provide in a 
standardized presentation across all of their accounts and in a way 
that captures all fees, including embedded fees in various investments 
(which will vary for each investor depending on their portfolio). Many 
firms likely would seek to implement systems to automate the disclosure 
for each of their existing and prospective retail investors, and if 
such systems were expensive, some firms could choose to reduce the 
products and services that they offer as a result of the additional 
costs. Our proposal would encourage retail investors to ask financial 
professionals about their fees and request personalized information 
about the specific fees and expenses associated with their current or 
prospective accounts. As further discussed in Section II.B.8 below, one 
of the proposed questions for a retail investor to ask a financial 
professional is to ``do the math for me,'' and specifically encourages 
retail investors to ask about the amount that they would pay per year 
for the account, what would make the fees more or less, and the 
services included in those fees.\136\ Additionally, the beginning of 
the Fees and Costs section of the relationship summary would state: 
``Please ask your financial professional to give you personalized 
information on fees and

[[Page 21432]]

costs that you will pay.'' \137\ We believe that financial 
professionals are well positioned to provide individualized fee 
information to their retail investors upon request. During the account 
opening process, for example, generally the relevant financial 
professional would have access to personalized information about the 
retail investor's account and can put together personalized fee 
information estimates during the process.
---------------------------------------------------------------------------

    \135\ See, e.g., Comment letter of Mark J. Flannery, BankAmerica 
Professor of Finance, University of Florida (Jul. 27, 2017) 
(``Flannery 2017 Letter''); Pefin 2017 Letter (recommending that 
clients should receive information on a quarterly basis on fees 
charged to their account, the calculation used to determine fees, 
and a breakdown of the charges by category).
    \136\ See infra Section II.B.8.; infra notes 299-303 and 
accompanying text; proposed Item 8 of Form CRS.
    \137\ Proposed Item 4.A. of Form CRS.
---------------------------------------------------------------------------

    Likewise, we believe that requiring a comprehensive fee schedule in 
the relationship summary also could be more complex than a retail 
investor would find useful for an overview disclosure such as this. 
However, we believe our proposed layered disclosure would achieve 
similar results in a less costly and complex manner. The relationship 
summary would provide required information about fees, and a later 
section titled ``Additional Information'' would provide references and 
links to other disclosures where interested investors can find more 
detailed information.\138\ As discussed below, investment advisers 
would be required to direct retail investors to additional information 
in the firm's Form ADV Part 2 brochure and any brochure supplement 
provided by a financial professional to the retail investor.\139\ An 
adviser's Form ADV Part 2 contains more detailed information about the 
firm's fees. Broker-dealers would likewise be required to direct retail 
investors to additional information at BrokerCheck, the firm's website, 
and the retail investor's account agreement.\140\ Up-to-date fee 
disclosures may appear on broker-dealers' websites or in the retail 
investors' account agreements, if applicable, where we understand 
broker-dealers typically provide information about fees, including, in 
some cases, comprehensive fee schedules.\141\
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    \138\ Proposed Item 7 of Form CRS.
    \139\ Proposed Item 7.E.2. of Form CRS. Investment advisers that 
do not have a public firm website or do not maintain their current 
Form ADV brochure on its public website would be required to include 
a link to adviserinfo.sec.gov. Advisers that do not have a public 
firm website would also be required to include a toll-free telephone 
number where retail investors can request up-to-date information.
    \140\ Proposed Item 7.E.1. of Form CRS. Broker-dealers that do 
not have a public firm website would be required to include a toll-
free telephone number where retail investors can request up-to-date 
information.
    \141\ Under Regulation Best Interest, broker-dealers would also 
be required to disclose the material facts relating to the scope and 
terms of the relationship, which would include disclosure of fees 
and charges that apply to a customer's transactions, holdings and 
accounts. Regulation Best Interest Proposal, supra note 24, at 
section II.D.1.a.
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    We are also not proposing to require firms to include examples of 
how fees could affect a retail investor's investment returns. We 
recognize that the Commission has required firms to disclose examples 
showing the effects of fees and other costs in certain contexts. For 
example, we have required mutual funds to provide in their summary 
prospectuses an example that is intended to help investors compare the 
cost of investing in the mutual fund with the cost of investing in 
other mutual funds.\142\ While we continue to believe that examples of 
the effect of fees on returns could be helpful to retail investors, 
they could also fail to capture the effect of a firm's fees on a 
particular retail investor's account. Transactional fees, in 
particular, can vary widely based on a number of circumstances, and it 
could be potentially misleading to present a typical example showing 
how sample transaction fees apply to a sample account over time. We 
believe requiring firms to provide an example for each type of account 
that would show the effect of fees on a sample account could overwhelm 
investors due to the number and variability of assumptions that would 
need to incorporated, explained, and understood in order for the 
example to be meaningful, and would not necessarily promote 
comparability. If the assumptions were standardized, such examples 
might not be useful, or might even be potentially misleading, to the 
retail investor, whose circumstances may be different from the 
assumptions used.
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    \142\ See Item 3 of Mutual Fund Summary Prospectus; Enhanced 
Mutual Fund Disclosure Adopting Release, supra note 47, at section 
III.A.3.b (``The fee table and example are designed to help 
investors understand the costs of investing in a fund and compare 
those costs with the costs of other funds.'').
---------------------------------------------------------------------------

    Some commenters suggested requiring that a firm disclose the types 
of compensation firms and their financial professionals receive, 
including from third parties, in connection with providing investment 
recommendations.\143\ A few commenters suggested requiring disclosure 
of how much the firm and its financial professionals receive in fees, 
including commissions and fees from third parties.\144\ We agree with 
commenters that it is important to make investors aware of such fees 
and compensation because they create conflicts of interest for firms 
and financial professionals making investment recommendations for 
retail investors. We are proposing to require that firms disclose 
commissions and certain third-party fees related to mutual funds in 
this section, and certain compensation-related conflicts (e.g., 
conflicts related to revenue sharing) in the conflicts section of the 
relationship summary, as discussed in Section II.B.6 below.
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    \143\ See, e.g., SIFMA 2017 Letter; UBS 2017 Letter; ICI 2017 
Letter; State Farm 2017 Letter; Bernardi Securities 2017 Letter; 
Fidelity 2017 Letter.
    \144\ See, e.g., Flannery 2017 Letter; Pefin 2017 Letter.
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    Heading. To emphasize the importance of fees, all firms would be 
required to include the following statement at the beginning of this 
section under the heading ``Fees and Costs'': ``Fees and costs affect 
the value of your account over time. Please ask your financial 
professional to give you personalized information on the fees and costs 
that you will pay.'' \145\ We are proposing this precise wording 
because we believe it is applicable to retail investors regardless of 
any differences among the accounts and their fees. Understanding that 
fees and costs affect investment value over time would help retail 
investors to understand why they should review and understand this 
information. This introductory language also would highlight that 
retail investors could get more personalized information from the 
firm's financial professionals.
---------------------------------------------------------------------------

    \145\ Proposed Item 4.A. of Form CRS.
---------------------------------------------------------------------------

    Brokerage Account Fees and Costs. Broker-dealers would be required 
to summarize the principal fees and costs that retail investors will 
incur.\146\ First, we are proposing prescribed language that describes 
the transactional nature of many brokerage fees.\147\ We are proposing 
different wording for dual registrants than for standalone broker-
dealers to facilitate the side-by-side comparison with the description 
of the advisory fee in the dual registrant's relationship summary. 
Specifically, dual registrants that offer retail investors both 
investment advisory accounts and brokerage accounts would include the 
following wording to assist with the side-by-side comparison with 
investment advisers: ``Transaction-based fees. You will pay us a fee 
every time you buy or sell an investment. This fee, commonly referred 
to as a commission, is based on the specific transaction and not the 
value of your account.'' \148\ A standalone broker-dealer

[[Page 21433]]

would include the following: ``The fee you pay is based on the specific 
transaction and not the value of your account.'' \149\
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    \146\ Proposed Item 4.B. of Form CRS.
    \147\ As discussed above, we use the term ``transaction-based 
fees'' to refer to broker-dealer compensation such as commissions, 
mark-ups, mark-downs, sales loads or similar fees, including 12b-1 
fees, tied to specific transactions. See supra note 126.
    \148\ Proposed Item 4.B.1. of Form CRS. As discussed further 
below, dual registrants would include a parallel statement regarding 
their investment advisory account fees. Proposed Item 4.C.1. of Form 
CRS.
    \149\ Proposed Item 4.B.1. of Form CRS. As discussed above, 
standalone broker-dealers would be required to include wording that 
a transaction-based fee is generally referred to as a commission in 
the Relationships and Services section of the relationship summary. 
See proposed Item 2.B.1. of Form CRS.
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    In addition, both standalone and dual registrant broker-dealers 
would include the following (emphasis required): ``With stocks or 
exchange-traded funds, this fee is usually a separate commission. With 
other investments, such as bonds, this fee might be part of the price 
you pay for the investment (called a ``mark-up'' or ``mark down''). 
With mutual funds, this fee (typically called a ``load'') reduces the 
value of your investment.'' \150\ Because of the importance of these 
transaction-based fees to brokerage services, as well as the variety of 
forms that such fees can take, we believe it will benefit investors to 
have specific examples to illustrate transaction-based fees with 
standardized, concise wording. We are proposing to require the example 
of mutual fund loads because they are common indirect fees associated 
with investments that compensate the broker-dealer.
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    \150\ Proposed Item 4.B.2.a. of Form CRS.
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    We are not proposing to require broker-dealers to provide the range 
of their transaction-based fees. We understand that these fees vary 
widely based on the specific circumstances of a transaction. For 
example, a broker-dealer that transacts in only one type of security--
such as equities--can have a wide range of transaction fees for such 
securities, depending on factors such as the size of the transaction, 
the type of investment purchased, the type of account and services 
provided, and how retail investors place their orders (for example, 
online, telephone or with the assistance of a financial professional). 
A broker-dealer that transacts in multiple types of securities--for 
example, equities and real estate investment trusts (REITs)--could have 
an even wider range of transaction fees. Given this variability, and 
our intent that the relationship summary be short and that it be 
provided in addition to, and not in lieu of, other disclosure, we 
believe that requiring firms to provide a range of transaction-based 
fees in the relationship summary could be confusing or provide limited 
benefit to retail investors.
    Following the examples of transaction-based fees, broker-dealers 
would be required to state that some investments impose additional fees 
that will reduce the value of retail investors' investments over time, 
and provide examples of such investments that they offer to retail 
investors.\151\ Mutual funds, variable annuities and exchange-traded 
funds are common examples, as well as any other investment that incurs 
fund management, 12b-1, custodial or transfer agent fees, or any other 
fees and expenses that reduce the value of the investment over 
time.\152\ Broker-dealers also would be required to state that a retail 
investor could be required to pay fees when certain investments are 
sold, for example, surrender charges for selling variable 
annuities.\153\ We believe that it is important to highlight for 
investors the costs associated with particular investments in addition 
to describing the transaction-based fee for brokerage services. Retail 
investors may not appreciate that they will bear costs for some 
investments in addition to the transaction-based brokerage fee they pay 
to their financial professional or firm.\154\ In addition, the 
investment fees and expenses we are proposing to require that firms 
disclose are ones that we believe are among the most common and can 
have a substantial impact on an investor's return from a particular 
investment.
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    \151\ Proposed Item 4.B.2.b. of Form CRS. Investment advisers 
would also be required to make this disclosure. See proposed Item 
4.C.4. of Form CRS.
    \152\ We acknowledge that some fees, such as 12b-1 fees, could 
be a broker-dealer's principal fee for their brokerage services and 
are also fees that reduce the return on an investment. In such a 
case, the broker-dealer would describe transaction-based fees as its 
principal fees and costs pursuant to proposed Item 4.B.1, and would 
also describe these fees as additional fees that will reduce the 
return on an investor's investments pursuant to proposed Item 
4.B.2.b. of Form CRS.
    \153\ Proposed Item 4.B.2.b. of Form CRS. Investment advisers 
would also be required to make this disclosure. See proposed Item 
4.C.4. of Form CRS.
    \154\ See, e.g., Enhanced Disclosure and New Prospectus Delivery 
Option For Registered Open-End Management Investment Companies, 
Investment Company Act Release No. 28064 (Nov. 21, 2007) [72 FR 
67790 (Nov. 30, 2007)], at n.49 and accompanying text (``In recent 
years, we have taken significant steps to address concerns that 
investors do not understand that they pay ongoing costs every year 
when they invest in mutual funds, including requiring disclosure of 
ongoing costs in shareholder reports.'').
---------------------------------------------------------------------------

    Requiring the disclosure of these investment fees and expenses, 
sometimes described as ``indirect fees,'' follows commenters' 
recommendations that investment advisers and broker-dealers disclose 
certain indirect costs to retail investors.\155\ We are not proposing a 
requirement that firms disclose the amount or range of mutual fund fees 
or other third-party fees that retail investors may pay related to 
their underlying investments, as a few commenters recommended.\156\ 
These expenses vary so greatly that attempts to quantify them or 
describe their range likely would not be useful to retail investors or 
would provide limited benefit to retail investors given that the 
relationship summary is designed to be short disclosure provided in 
addition to, and not in lieu of, other disclosures.\157\ Instead, we 
intend that our proposed summary disclosure would effectively highlight 
these costs in a simple, understandable way.
---------------------------------------------------------------------------

    \155\ See, e.g., State Farm 2017 Letter; Bernardi Securities 
2017 Letter; Pefin 2017 Letter; Flannery 2017 Letter; Comment letter 
of Dan Keppel (Jun. 5, 2017); Comment letter of Edward H. Weyler 
(Jun. 8, 2017).
    \156\ See Flannery 2017 Letter; Pefin 2017 Letter.
    \157\ See Amendments to Form ADV, Investment Advisers Act 
Release No. 3060 (Jul. 28, 2010) [75 FR 49233 (Aug. 12, 2010)] 
(``Brochure Adopting Release''); Amendments to Form ADV, Investment 
Advisers Act Release No. 2711 (Mar. 3, 2008) [73 FR 13958 (Mar. 14, 
2008)] (``2008 Brochure Proposing Release'').
---------------------------------------------------------------------------

    Additionally, broker-dealers would be required to state whether or 
not the fees they charge retail investors for their brokerage accounts 
vary and are negotiable, including a description of the key factors 
that they believe would help a reasonable retail investor understand 
the fee that he or she is likely to pay for the firm's services.\158\ 
Such factors could include, for example, how much the retail investor 
buys or sells, what type of investment the retail investor buys or 
sells, and what kind of account the retail investor has with the 
broker-dealer. We believe investors would benefit from knowing at 
account opening whether they have the ability to negotiate the fees 
they pay.
---------------------------------------------------------------------------

    \158\ Proposed Item 4.B.3. of Form CRS.
---------------------------------------------------------------------------

    Broker-dealers would next be required to state, if applicable, that 
a retail investor will also pay other fees in addition to the firm's 
transaction-based fee, and to list those fees, including account 
maintenance fees, account inactivity fees, and custodian fees.\159\ We 
believe that it is important to highlight for investors the fees 
associated with an account that they will pay in addition to the 
principal type of fee that the firm charges retail investors for their 
brokerage account because these fees are common and they can have an 
impact on a retail investor's return.
---------------------------------------------------------------------------

    \159\ Proposed Item 4.B.4. of Form CRS.
---------------------------------------------------------------------------

    Broker-dealers would then be required to disclose certain specified 
incentives they have to put their own interests ahead of retail 
investors' interests based on charging transaction-based fees for 
brokerage accounts.\160\

[[Page 21434]]

They would be required to include the following: ``The more 
transactions in your account, the more fees we charge you. We therefore 
have an incentive to encourage you to engage in transactions.'' \161\ 
We believe this information would help retail investors understand how 
the fee structures for brokerage accounts could affect their 
investments and the incentives that firms and financial professionals 
have to place their interests ahead of retail investors' interests by 
encouraging retail investors to engage in transactions to increase 
their fees.\162\ We are proposing to prescribe wording because we 
believe these particular incentives and considerations generally apply 
to most brokers that offer retail investors brokerage accounts, and 
using uniform wording would promote consistency. We believe that retail 
investors would benefit from understanding these incentives when they 
are considering broker-dealers. Additionally, we believe this 
disclosure would reinforce a key theme of the relationship summary, 
which is choice across account types and services.
---------------------------------------------------------------------------

    \160\ Proposed Item 4.B.5. of Form CRS.
    \161\ Id.
    \162\ Pursuant to the federal securities laws, broker-dealers 
can violate the federal antifraud provisions by engaging in 
excessive trading that amounts to churning, switching, or unsuitable 
recommendations. Churning occurs when a broker-dealer, exercising 
control over the volume and frequency of trading in a customer 
account, abuses the customer's confidence for personal gain by 
initiating transactions that are excessive in view of the character 
of the account and the customer's investment objectives. Excessive 
trading is an excessive level of trading unjustified in light of the 
customer's investment objectives. See Mihara v. Dean Witter & Co., 
Inc., 619 F.2d 814, 821 (9th Cir. 1980); Carras v. Burns, 516 F.2d 
251, 258 (4th Cir. 1975). See also Regulation Best Interest 
Proposal, supra note 24, at section II.D.2.c.
---------------------------------------------------------------------------

    Finally, dual registrants would be required to include the 
following with respect to brokerage services: ``From a cost 
perspective, you may prefer a transaction-based fee if you do not trade 
often or if you plan to buy and hold investments for longer periods of 
time.'' \163\ We believe that these factors--cost, trading frequency, 
and the desire to ``buy and hold''--are important for retail investors 
to consider when determining whether to use brokerage services or 
advisory services.\164\ We are proposing to prescribe the wording 
because we believe these factors reflect common circumstances in which 
a brokerage account could be more cost-effective for a retail investor 
than an advisory account, and using uniform wording would promote 
consistency. We believe this disclosure, in conjunction with the 
corresponding disclosure regarding advisory accounts that would appear 
next to it, would help retail investors to compare the two services and 
make an informed choice about the account type that is the right fit 
for them based on their goals and preferences.
---------------------------------------------------------------------------

    \163\ Proposed Item 4.B.6. of Form CRS.
    \164\ See e.g., Comment letter of The Capital Group Companies, 
Inc. (Mar. 12, 2018) (discussing considerations for buy and hold 
investors choosing among commission-based and fee-based 
arrangements). Standalone broker-dealers and standalone investment 
advisers would also be required to include similar wording under the 
headings ``Compare with Typical Advisory Accounts'' and ``Compare 
with Typical Brokerage Accounts,'' as applicable. See proposed Items 
5.B.5 and 5.A.4 of Form CRS. Dual-registrants, standalone broker-
dealers, and standalone investment advisers would also be required 
to include a statement that retail investors may prefer an asset-
based fee in certain circumstances, and that an asset-based fee may 
cost more than a transaction-based fee. See proposed Items 4.C.10, 
5.B.5 and 5.A.4 of Form CRS.
---------------------------------------------------------------------------

    Investment Advisory Account Fees and Costs. Investment advisers 
that offer advisory accounts to retail investors would be required to 
summarize the principal fees and costs that retail investors will 
incur.\165\ Dual registrants that charge ongoing asset-based fees for 
their advisory services would state the following: ``Asset-based fees. 
You will pay an on-going fee [at the end of each quarter] based on the 
value of the cash and investments in your advisory account.'' \166\ 
replacing, as needed, the bracketed wording with how often they assess 
the fee. If the dual registrant charges another type of fee for 
advisory services, it would briefly describe that fee and how often it 
is assessed.\167\ Standalone investment advisers would state the 
following: ``The amount paid to our firm and your financial 
professional generally does not vary based on the type of investments 
we select on your behalf.'' \168\ Standalone investment advisers that 
charge an ongoing asset-based fee would also state ``The asset-based 
fee reduces the value of your account and will be deducted from your 
account.'' \169\ Standalone investment advisers that charge another 
type of fee would succinctly describe how the fee is assessed and the 
impact it has on the value of the retail investor's account.\170\
---------------------------------------------------------------------------

    \165\ Proposed Item 4.C. of Form CRS. An investment adviser 
would summarize the principal fees and costs that align with the 
type of fee(s) the adviser reports in response to Item 5.E. of Form 
ADV Part 1A that are applicable to retail investors.
    \166\ Proposed Item 4.C.1. of Form CRS.
    \167\ Id. Some investment advisers report on Form ADV Item 5.E 
that they receive ``commissions.'' These ``commissions'' may include 
deferred sales loads, including fees for marketing and service, as 
well as commissions as understood in the broker-dealer context. As a 
form of deferred sales load, all payments of ongoing sales charges 
to intermediaries would constitute transaction-based compensation. 
Intermediaries receiving those payments should consider whether they 
need to register as broker-dealers under section 15 of the Exchange 
Act.
    \168\ Proposed Item 4.C.2. of Form CRS. We recognize that, in 
some cases, the amount paid to the advisory firm and the financial 
professional can vary based on the type of investment selected 
(e.g., advisory firms and financial professionals may recommend 
certain mutual funds that pay the adviser or the financial 
professional 12b-1 fees out of fund assets).
    \169\ Id.
    \170\ Proposed Item 4.C.2. of Form CRS. Investment advisers that 
offer retail investors advisory accounts sometimes charge fees that 
are not ongoing, asset based fees. A financial planner, for example, 
sometimes charges a one-time fixed fee to prepare a plan.
---------------------------------------------------------------------------

    These requirements are consistent with the current fee disclosure 
requirements for the Form ADV brochure and how investment advisers 
typically describe asset-based fees, and we believe that retail 
investors would find this type of disclosure helpful.\171\ We are not 
proposing to require that investment advisers provide the range of 
fees, as ranges an investment adviser charges can vary based on a 
number of factors individual to the retail investor and the services 
they choose. Additionally, although we do not believe that ranges for 
investment advisers' asset based fees vary as much as broker-dealers' 
transaction-based fees, we recognize that requiring firms to provide a 
fee range for advisory accounts and not brokerage accounts could cause 
confusion among retail investors and be of limited benefit when 
comparing advisory and brokerage services. However, we recognize that 
providing such a range could promote comparability between different 
advisers, and we request comment below on whether we should require 
disclosure of the adviser's range of principal fees charged.
---------------------------------------------------------------------------

    \171\ As discussed above, when completing Form CRS, investment 
advisers should generally consider achieving consistency with the 
type(s) of fee(s) that the investment adviser reports on Item 5.E. 
of Form ADV Part 1A. See supra note 126.
---------------------------------------------------------------------------

    An investment adviser that provides advice to retail investors 
about investing in a wrap fee program would be required to include 
specified language about the program fees.\172\ A ``wrap fee program'' 
would be defined as an advisory program that charges a specified fee 
not based directly upon transactions in the account for investment 
advisory services and the execution of transactions.\173\ The advisory 
services may include portfolio management or advice concerning 
selection of other advisers.\174\ An

[[Page 21435]]

investment adviser that provides advice to retail investors about 
investing in a wrap fee program and does not also offer another type of 
advisory account would be required to include the following (emphasis 
required): ``We offer advisory account programs called wrap fee 
programs. In a wrap fee program, the asset-based fee will include most 
transaction costs and fees to a broker-dealer or bank that will hold 
your assets (known as ``custody''), and as a result wrap fees are 
typically higher than non-wrap advisory fees.'' \175\ An investment 
adviser that provides advice about investing in a wrap fee program and 
offers another type of advisory account would be required to include 
similar prescribed wording, modified as applicable to reflect that the 
adviser also offers other types of advisory accounts.\176\
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    \172\ Proposed Items 4.C.3., 4.C.6., 4.C.9. and 4.C.10. of Form 
CRS. We also refer to these types of investment advisers as 
``client-facing firms.''
    \173\ Proposed General Instruction 9.(g) to Form CRS. This 
proposed definition is identical to the definition already used in 
Form ADV.
    \174\ Proposed General Instruction 9.(g) to Form CRS.
    \175\ Proposed Item 4.C.3. of Form CRS. The asset-based fee in a 
wrap program does not always include all transaction costs. For 
example, in some cases retail investors pay mark-ups, mark-downs, or 
spreads, and mutual fund fees and expenses in addition to the wrap 
fee program's asset-based fee. In addition, as discussed below, an 
investment adviser may select a broker-dealer outside of the wrap 
fee program to execute certain trades in a retail investor's 
account--a practice sometimes referred to as ``trading away''--that 
results in the retail investor's account incurring separate 
brokerage fees. See infra note 187 and accompanying text.
    \176\ Such investment advisers would be required to include the 
following (emphasis required): ``For some advisory accounts, known 
as wrap fee programs, the asset-based fee will include most 
transaction costs and custody services, and as a result wrap fees 
are typically higher than non-wrap advisory fees.'' Proposed Item 
4.C.3. of Form CRS.
---------------------------------------------------------------------------

    Many retail investors participate in wrap fee programs.\177\ We 
believe that retail investors would benefit from receiving information 
about certain characteristics of wrap fee programs, particularly with 
respect to their fees. Requiring investment advisers to describe the 
asset-based fee, what it includes, and that it is typically higher than 
non-wrap advisory fees would help a retail investor to distinguish wrap 
fee programs from other types of advisory accounts that charge or incur 
separate transaction fees.
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    \177\ Based on IARD data as of December 31, 2017, of the 12,667 
SEC-registered investment advisers, 1,035 (8.17%) sponsor a wrap fee 
program, and 1,597 (12.61%) act as a portfolio manager for one or 
more wrap fee programs.
---------------------------------------------------------------------------

    Next, investment advisers would be required to state that some 
investments impose additional fees that will reduce the value of a 
retail investor's investment over time, and provide examples of such 
investments that the firm offers to retail investors.\178\ Investment 
advisers also would state that a retail investor could be required to 
pay fees when certain investments are sold, for example, surrender 
charges for selling variable annuities.\179\ These proposed 
requirements are identical to the disclosure that broker-dealers would 
provide.\180\
---------------------------------------------------------------------------

    \178\ Proposed Item 4.C.4 of Form CRS. See supra notes 151-155 
and accompanying text for a discussion of this requirement 
applicable to both investment advisers and broker-dealers.
    \179\ Proposed Item 4.C.4. of Form CRS.
    \180\ See proposed Item 4.B.2.b. of Form CRS.
---------------------------------------------------------------------------

    In addition, investment advisers would be required to state whether 
or not the fees they charge retail investors for their advisory 
accounts vary and are negotiable.\181\ They would be required to 
describe the key factors that they believe would help a reasonable 
retail investor understand the fee that he or she is likely to pay for 
the firm's services.\182\ Such factors could include, for example, the 
services the retail investor receives and the amount of assets in the 
account. As discussed above with regard to broker-dealers, we believe 
investors would benefit from knowing at account opening whether they 
have the ability to negotiate the fees they pay.
---------------------------------------------------------------------------

    \181\ Proposed Item 4.C.5. of Form CRS.
    \182\ Id.
---------------------------------------------------------------------------

    Investment advisers would next be required to state, if applicable, 
that a retail investor will pay transaction-based fees when the firm 
buys and sells an investment for the retail investor (e.g., commissions 
paid to broker-dealers for buying or selling investments) in addition 
to the firm's principal fee it charges retail investors for the firm's 
advisory accounts.\183\ Investment advisers would also be required to 
state, if applicable, that a retail investor will pay fees to a broker-
dealer or bank that will hold the retail investor's assets and that 
this is called ``custody,'' and would be required to list other fees 
the retail investor will pay.\184\ Examples could include fees for 
account maintenance services. These other fees we are proposing to 
require firms to disclose are ones that we believe are among the most 
common or can have an impact on a retail investor's return.\185\ As 
discussed above, we believe that investors would benefit from being 
aware of the fees associated with an account that they will pay in 
addition to the principal fee that the firm charges retail investors 
for their brokerage or advisory account.
---------------------------------------------------------------------------

    \183\ Proposed Item 4.C.6. of Form CRS.
    \184\ Id.
    \185\ See, e.g., Advisers Act rule 204-3; Item 5 of Form ADV 
Part 2A (requiring each adviser to describe the types of other 
costs, such as brokerage, custody fees and fund expenses that 
clients may pay in connection with the advisory services provided to 
them by the adviser).
---------------------------------------------------------------------------

    An investment adviser that provides advice to retail investors 
about investing in a wrap fee program also would be required to state: 
``Although transaction fees are usually included in the wrap program 
fee, sometimes you will pay an additional transaction fee (for 
investments bought and sold outside the wrap fee program).'' \186\ The 
Commission is aware that wrap fee program portfolio managers employ, to 
varying degrees, ``trading away'' practices, in which they use a broker 
other than the sponsoring broker to execute trades for which a 
commission or other transaction-based fee is charged, in addition to 
the wrap fee, to the retail investor.\187\ The Commission has 
identified instances in which firms participating in wrap fee programs 
had poor disclosure about the overall cost of selecting a wrap fee 
program, including the effect of their trade away practices.\188\ We 
believe that investors would benefit from the relationship summary 
highlighting that, even in a wrap fee program, they sometimes will pay 
an additional transaction fee.
---------------------------------------------------------------------------

    \186\ Proposed Item 4.C.7. of Form CRS.
    \187\ A wrap fee program portfolio manager may trade away 
because, for example, it believes that doing so will allow it to 
seek best execution of clients' transactions, as investment advisers 
have an obligation to seek best execution of clients' securities 
transactions where they have the responsibility to select broker-
dealers to execute client trades (typically in the case of 
discretionary accounts). See Advisers Act rule 206(3)-2(c) 
(referring to adviser's duty of best execution of client 
transactions). See also Commission Guidance Regarding Client 
Commission Practices Under Section 28(e) of the Securities Exchange 
Act of 1934, Exchange Act Release No. 54165 (Jul. 18, 2006) (stating 
that investment advisers have ``best execution obligations'') 
(``Release 54165''). See also Brochure Adopting Release at 9.
    \188\ The Commission has brought enforcement actions in these 
circumstances. See, e.g., In re Robert W. Baird, supra note 133; In 
re Raymond James, supra note 133; In the Matter of Riverfront 
Investment Group, LLC, Investment Advisers Act Release No. 4453 
(Jul. 14, 2016) (settled action); In the Matter of Stifel, Nicolaus 
& Company, Inc., Investment Advisers Act Release No. 4665 (Mar. 13, 
2017) (settled action).
---------------------------------------------------------------------------

    As with broker-dealers, investment advisers that charge an ongoing 
asset-based fee for advisory services would next be required to address 
the incentives they have to put their own interests ahead of their 
retail investors' interests based on the type of fee charged for 
investment advisory services.\189\ These advisers would be required to 
include the following statement: ``The more assets you have in the 
advisory account, including cash, the more you will pay us. We 
therefore have an incentive to increase the assets in your account in 
order to increase our fees. You pay our fee [insert frequency of fee 
(e.g., quarterly)] even if you do not

[[Page 21436]]

buy or sell,'' replacing the brackets with the frequency of their 
fee.\190\ Investment advisers that provide advice to retail investors 
about participating in a wrap fee program would, in addition, be 
required to include the following: ``Paying for a wrap fee program 
could cost more than separately paying for advice and for transactions 
if there are infrequent trades in your account.'' \191\ We are 
proposing to require prescribed wording to promote consistency and 
because we believe these particular incentives and considerations 
generally apply to all advisers that charge retail investors ongoing 
asset-based fees or provide advice about participating in a wrap fee 
program. While we are not proposing any prescribed language for other 
fee types, such as fixed fees, we request comment, below, on whether 
advisers that charge other types of fees for their advisory services 
have incentives to act in their own interest based on the type of fee 
charged, and whether we should require disclosure of such incentives.
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    \189\ Proposed Item 4.C.8. of Form CRS.
    \190\ Proposed Item 4.C.8. of Form CRS.
    \191\ Proposed Item 4.C.9. of Form CRS.
---------------------------------------------------------------------------

    These disclosures would help retail investors understand how the 
fee structures for advisory accounts could affect their investments and 
the incentives that firms and financial professionals have to place 
their interests ahead of retail investors' interests. The disclosures 
for investment advisers that provide advice about investing in a wrap 
fee program also would help retail investors to understand that in 
certain circumstances a wrap fee would cost them more than separately 
paying for advice and for transactions in a different type of advisory 
account. Similarly, wrap fee sponsors that complete the Form ADV Wrap 
Fee Program Brochure are required to explain that the wrap fee program 
may cost the client more or less than purchasing such services 
separately and describe the factors that bear upon the relative cost of 
the program, such as the cost of the services if provided separately 
and the trading activity in the client's account.\192\ As with some of 
the proposed requirements described above, we are proposing to 
prescribe wording because we believe these particular considerations 
generally apply to any investment in a wrap fee program and would 
promote consistency. Also, as discussed above, we believe this 
disclosure would reinforce a key theme of the relationship summary, 
which is choice across account types and services.
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    \192\ See Item 4.B. of Form ADV Part 2A; Appendix 1 of Form ADV: 
Wrap Fee Program Brochure.
---------------------------------------------------------------------------

    Finally, dual registrants that charge ongoing asset-based fees for 
advisory accounts would be required to include the following with 
respect to their investment advisory services: ``An asset-based fee may 
cost more than a transaction-based fee, but you may prefer an asset-
based fee if you want continuing advice or want someone to make 
investment decisions for you.'' \193\ Dual registrants that provide 
advice to retail investors about investing in wrap fee programs would 
also be required to include the following with respect to wrap fee 
program accounts: ``You may prefer a wrap fee program if you prefer the 
certainty of a [insert frequency of the wrap fee (e.g., quarterly)] fee 
regardless of the number of transactions you have.'' \194\ We believe 
that these features--ongoing advice, discretion, standards of conduct, 
and, for wrap fee programs, certainty in pricing--distinguish advisory 
accounts and wrap fee programs from brokerage accounts. We also believe 
it is important to highlight how costs relate to the services 
included.\195\ We are proposing to prescribe wording because we believe 
these particular considerations generally apply to all advisory 
accounts and wrap fee programs, and using uniform wording would promote 
consistency. We believe these disclosures, in conjunction with the 
corresponding disclosure regarding broker-dealer accounts that would 
appear next to it for dual registrants, would help retail investors to 
compare the two types of services and combinations of those services 
and make an informed choice about the account type that is the right 
fit for them based on their goals and preferences.
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    \193\ Proposed Item 4.C.10. of Form CRS. Standalone investment 
advisers and standalone broker-dealers would also be required to 
include similar wording under the headings ``Compare with Typical 
Brokerage Based Accounts,'' and ``Compare with Typical Advisory 
Accounts,'' as applicable. Proposed Items 5.A.4 and 5.B.5. of Form 
CRS.
    \194\ Proposed Item 4.C.10. of Form CRS.
    \195\ We also propose to require dual registrants to include the 
following with respect to broker-dealer services: ``From a cost 
perspective, you may prefer a transaction-based fee if you do not 
trade often or if you plan to buy and hold investments for longer 
periods of time.'' See proposed Items 4.B.6. See also Items 5.A.4. 
and 5.B.5 of Form CRS (including similar disclosures to be made by 
standalone investment advisers and broker-dealers).
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    We request comment generally on the proposed fees and costs 
disclosures, and in particular on the following issues:
     Is the proposed disclosure discussing fees and expenses 
useful to investors?
     Do the proposed requirements encourage disclosure that is 
simple, clear and useful to retail investors? Would the proposed 
disclosure help investors to understand and compare the fees and costs 
associated with a firm's advisory services and brokerage services? Are 
there any revisions to the descriptions of fees that would make the 
proposed disclosure more useful to investors? Is it clear that retail 
investors would incur different costs for different types of accounts 
and advice services? Are there common assumptions or misconceptions 
regarding account fees and services that firms should be required to 
discuss, clarify, or address?
     Is the proposed order of the information appropriate, or 
should it be modified? If so, how should it be modified?
     Do the proposed requirements strike the right balance 
between requiring specific wording and allowing firms to draft their 
own responses? Why or why not? Should the Commission permit or require 
a more open-ended narrative or require more prescribed wording? Do the 
proposed Instructions cover the range of business models and fee 
structures that investment advisers and broker-dealers offer fully and 
accurately? Are there other fees that should be required to be 
disclosed for broker-dealers or investment advisers?
     Is the proposed format useful for retail investors to 
understand and compare fees and costs as between broker-dealers and 
investment advisers? Should we require further use of bullet points, 
tables, charts, graphs or other illustrative format? Should we require, 
as proposed, that dual registrants present the fee and cost information 
in a tabular format, comparing advisory services and brokerage services 
side-by-side, or permit other formats such as in a bulleted format?
     How would the required disclosures contribute to 
readability and length of the proposed relationship summary? Should 
each of these disclosures be required? Should any of these disclosures 
not be required but instead permitted? Should any of these disclosures 
be required to appear in the relationship summary, but outside the 
proposed summary of fees and costs?
     Should any additional disclosures about fees and costs be 
included for investment advisers? In particular, should we require any 
disclosures from an investment adviser's Form ADV Part 2A narrative 
brochure, such as more details about an investment adviser's fees? Some 
other disclosures about fees that are included in Form ADV Part 2A, but 
that we have not included in the proposed relationship summary, include 
an adviser's fee schedule; whether the adviser bills clients or

[[Page 21437]]

deducts fees directly from clients' accounts; and an explanation of how 
an adviser calculates and refunds prepaid fees when a client contract 
terminates (for an adviser charging fees in advance). Should we require 
some or all of such disclosures, or other disclosures about fees?
     Should we require or permit advisers to disclose whether 
they charge performance-based fees, which is a type of compensation 
investment advisers may charge to ``qualified clients,'' that is based 
on a share of capital gains on, or capital appreciation of, such 
clients' assets? \196\ Advisers are required to disclose their receipt 
of performance-based fees on Form ADV, and they provide an incentive 
for the adviser to take additional investment risks with the account.
---------------------------------------------------------------------------

    \196\ See Advisers Act rule 205-3.
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     Should we permit or require each firm to provide the range 
of its fees? If so, should broker-dealers be required to include a 
range for each type of transaction-based fee it charges or the 
aggregate range for all of the firm's transaction-based fees? Should 
investment advisers be required to include a range for each type of 
principal fee they charge retail investors for advisory services, or 
the aggregate range for all of its principal advisory fees? Do broker-
dealers and investment advisers currently compute or have the ability 
to compute such aggregated fee information? What factors determine the 
type or amount of fee that firms charge (e.g., for broker-dealers, such 
factors could include the: means of placing an order, such as online, 
by telephone or in person; type of account, such as full-service or 
discount brokerage, and; type of product)? Do commenters have 
suggestions for how best to convey one or more ranges in a space-
limited disclosure in light of the different fee structures? Are there 
other ways to give retail investors a better sense of the amount of 
fees they will pay without providing account-specific disclosures?
     Should we require firms to state whether their fees are 
``negotiable,'' as we have proposed? At firms that offer negotiable 
fees, are retail investors generally able to negotiate their fees, and 
if not, would they find this disclosure helpful or could it be 
confusing? Will firms be able to succinctly describe the key factors 
they believe would help a reasonable retail investor understand the fee 
that he or she is likely to pay for a firm's services (e.g., the size 
of the transaction, the type of investment purchased, and the type of 
account and services he or she receives)?
     Will any of the required disclosures be misleading or make 
it more difficult for investors to select the right type of account for 
them?
     Should we make the proposed relationship summary more 
personalized to individual retail investors, such as by requiring or 
permitting estimates for each retail investor, reflecting the fees and 
charges incurred for the retail investor's brokerage or advisory 
account? Is personalization feasible for this type of relationship 
summary disclosure? If so, what information should be included in the 
personalized fees and cost disclosure, and how should such information 
be presented? How would firms calculate those estimates? How often 
should we require firms to update the personalized fees and 
compensation disclosure, and how should the personalized fee disclosure 
updates be delivered or made available to retail investors? What would 
be the costs to firms to prepare and update personalized fee and 
compensation disclosures?
     Should we require firms to provide investors with 
personalized fee information in a different disclosure, such as an 
account statement? What would be the cost and benefits, including the 
costs of books and records requirements, of personalizing information 
to investors relative to the proposal? Do firms currently provide 
retail investors with personalized fee disclosure estimates at or 
before account opening? Do they provide personalized fee disclosures in 
periodic account statements? For firms that provide personalized fee 
disclosures, do they include all fees paid by the retail investor as 
well as compensation received by the firm and financial professionals, 
even if such compensation is not paid directly or indirectly by the 
retail investor, such as commissions, mark-ups, mark-downs, other fees 
embedded in the investment or fees from third parties? What other types 
of fee information do firms include? Do they automate such disclosures? 
How expensive and complex a process is creating and delivering such 
personalized fee disclosures?
     Should we require firms to state where retail investors 
can find personalized information about account fees and costs, such as 
on account statements and trade confirmations? What other source of 
such information might be available for prospective customers and 
clients? Should we require firms to include hyperlinks to fee and cost 
calculators on investor.gov?
     Should we require firms to provide an example showing how 
sample fees and charges apply to a hypothetical advisory account and a 
hypothetical brokerage account, as applicable? Should we require a more 
general example that shows the impact of hypothetical fees on an 
account? If so, what assumptions should we require firms to make in 
preparing such an example? For example, should we specify assumptions 
such as the kinds of assets that are most typical for a broker-dealer's 
customers, stated commission schedules, and aggregate third-party 
compensation? If the assumptions were standardized, would such examples 
be useful to the retail investor, whose circumstances may be different 
from the assumptions used or would they help give an investor a better 
idea about what kind of fees are being charged? Would such examples 
provide retail investors with a clear understanding of the application 
of ongoing asset-based, transaction-based and product-level fees to an 
account? Should we require one example for an advisory account and one 
example for a brokerage account? How should the information be 
presented (e.g., mandated graphical presentation)? Should we require 
firms to present more than one hypothetical example showing a range of 
fees instead (e.g., based on representative holdings or 
recommendations)? Should specific assumptions be included in 
calculating the hypothetical example? What disclosures would need to 
accompany the example? Should the example(s) track the effect of the 
fees over time, and if so, over what time period (e.g., over one, five 
and 10 years)? Or should firms describe the impact of different amounts 
or types of fees over a longer period of time, such as 20 years?
     Should firms be permitted or required to include in the 
relationship summary a detailed fee table or schedule? Should we permit 
or require firms to create a fee schedule as separate disclosure, and 
then include it as an attachment (or cross reference it with a website 
address and hyperlink) to the relationship summary? What should be 
included in such a fee table or schedule? Should it include 
compensation received by the firm and financial professionals, even if 
such compensation is not paid directly or indirectly by the retail 
investor, such as commissions or fees from third parties?
     Regarding fees related to funds and other investments that 
reduce the value of the investment over time, would the required 
disclosures by investment advisers and broker-dealers be clear and 
understandable to retail investors?

[[Page 21438]]

Should we, as proposed, permit firms to select their own example that 
they offer to retail investors? Are there other considerations related 
to fees for funds and other investments that we should require firms to 
highlight for retail investors? Would our proposed requirement that 
firms disclose the existence of such fees, along with examples of 
investments that impose such fees, adequately inform retail investors 
of these costs? Should we require an example showing how investment 
fees and expenses and other account fees and expenses may affect a 
retail investor's investment over time? Should we require a reference 
to such an example if available elsewhere (e.g., in mutual fund, ETF or 
variable annuity prospectuses)?
     Should firms describe the types of compensation they and 
their financial professionals receive from sources other than the 
retail investor in the description of their conflicts of interest, as 
we have proposed (for example, with respect to revenue sharing 
arrangements, such as payments for ``shelf space,'' i.e., product 
distribution by broker-dealers)? Or, should we require firms to state 
in the fees and costs section of the relationship summary that they and 
their financial professionals receive such compensation? If so, what 
types of additional compensation should we require firms to disclose in 
the summary of fees and costs? Should we require firms to disclose how 
the amount of fees received from retail investors relates to the amount 
of fees received from others in connection with recommendations or 
other services to those investors? Would such disclosure be confusing 
to retail investors? Should we require firms only to disclose which 
source of fees is greater or to provide a reasonable estimate of the 
relative magnitude of the categories of such fees (e.g., that on 
average for retail customers that the amount the firm receives from 
third parties is twice as much as the firm charges investors)?
     Should we require firms to state, as proposed, that a 
retail investor will also pay other fees in addition to the firm's 
principal fee for brokerage or advisory services, and to list such 
fees? Should we also require firms to state ranges for such fees?
     We are proposing disclosures that are intended to help 
retail investors understand how the principal types of fees firms 
charge for advisory and brokerage accounts affect the incentives of the 
firm and their financial professionals. Are these disclosures clear? Do 
they capture all incentives that broker-dealers or investment advisers 
may have from their fee structures? Are there other considerations 
related to fees and compensation that we should require firms to 
highlight for retail investors that are not captured here or elsewhere 
in the relationship summary? Should we require firms to include the 
prescribed wording, as proposed, or should we allow more flexibility in 
the words they use? Should we modify the prescribed wording? For 
example, should we expressly permit or require broker-dealers to modify 
the prescribed wording regarding their incentive to encourage retail 
investors to engage in transactions, to the extent they also receive 
compensation that might lower such incentive, such as asset-based 
compensation (e.g., rule 12b-1 fees, sub-transfer agent or other 
similar service fees)?
     For our prescribed wording for investment advisers 
regarding the adviser's incentive to increase the assets in a retail 
investor's advisory account, would different wording better reflect 
this incentive? Does the proposed wording capture the conflict of 
interest, or does the wording suggest that advisers will increase 
retail investors' assets by generating higher investment returns? 
Because many advisers do not charge ongoing asset-based fees as their 
principal fees for retail investor advisory accounts, and instead 
charge fixed fees, hourly fees, commissions or other types of fees, 
should we require these firms to state the incentives they have as a 
result of receiving such other types of fees? If so, what are the 
incentives that such firms have that are important for retail investors 
to understand and would be relevant to the relationship summary?
     These proposed disclosures about a firm's incentives can 
also be considered to involve conflicts, as they address the incentives 
that investment advisers and broker-dealers have as a result of 
receiving certain types of fees. Should we require this disclosure in 
the conflicts of interest disclosure instead of the summary of fees and 
costs? Should we require firms to include in the summary of fees and 
costs any other fee-related conflicts that we propose to include in the 
conflicts of interest disclosure, as discussed in Section II.B.6 below? 
Should we require firms to include other fee-related conflicts in these 
sections that are not included elsewhere in the relationship summary?
     Would our proposed disclosure for advisers and broker-
dealers, that retail investors may, in certain circumstances, prefer 
one type of fee over another, be useful to retail investors? Are these 
proposed disclosures clear? Do they adequately capture the typical 
circumstances in which retail investors would prefer one fee type over 
another? Are there other considerations related to fees and 
compensation that we should require or permit firms to highlight for 
retail investors that are not captured here or elsewhere in the 
relationship summary? Should we require firms to include the prescribed 
wording, as proposed, or should we allow more flexibility in the words 
they use? Should we modify the prescribed wording? Does the proposed 
prescribed wording capture the range of business models among 
investment advisers and broker-dealers? Would the prescribed wording 
require a firm to provide any inaccurate information given that 
particular firm's circumstances?
     Should we require firms to make disclosures about wrap fee 
programs, as proposed? Would the proposed disclosures help investors to 
understand the fees and costs associated with a wrap fee program as 
compared to unbundled advisory accounts and brokerage accounts? Would 
the proposed disclosures help retail investors to make informed choices 
about whether a wrap fee program suits their needs, as compared with 
unbundled investment advisory or brokerage services? If not, how could 
we revise it? Are there any revisions to the descriptions of wrap fee 
programs that would make the proposed disclosures more useful to 
investors?
     Are there other differences between wrap fee programs, 
unbundled advisory accounts, and brokerage accounts that we should 
require firms to include, such as other differences in fees and 
services? Would more or less information about wrap fee programs be 
helpful for retail investors? For instance, should we require firms to 
disclose information about the firms that participate in the wrap fee 
programs they recommend (e.g., the wrap fee program sponsors or 
managers), and any particular conflicts relevant to investors in wrap 
fee programs? Should we require more or less disclosure, or different 
disclosure, about the amount and frequency of additional transaction 
fees retail investors incur in wrap fee programs? Are there any 
elements of the proposed requirements that we should exclude? If so, 
why? Should any of the required disclosures be included in a different 
section of or an appendix to the relationship summary?
     Have we appropriately tailored the information required 
for advisers that provide advice about investing in both a wrap fee and 
a non-wrap fee program, and advisers that only provide advice about 
investing in a wrap fee program?

[[Page 21439]]

Should we require firms that provide advice about investing in both a 
wrap fee and a non-wrap fee program to prepare a separate relationship 
summary for the wrap fee program? Should we instead require firms to 
prepare an appendix with information about the wrap fee program, in 
addition to the relationship summary, as we do for the Form ADV 
brochure? If so, what types of information should we require firms to 
include about wrap fee programs in a separate relationship summary or 
appendix, and why should we require such disclosure?
     Should we require broker-dealers that sponsor wrap fee 
programs to include any additional disclosures about wrap fee programs, 
other than the disclosures that would be made by dual registrants?
     We understand that client-facing firms--or advisers that 
provide advice to retail investors about investing in wrap fee 
programs--are not necessarily the same firms that sponsor wrap fee 
programs (we define a wrap fee program sponsor in Form ADV General 
Instructions as a firm that sponsors, organizes, or administers the 
program or selects, or provides advice to clients regarding the 
selection of, other investment advisers in the program). Should we 
require each client-facing firm to include the proposed wrap fee 
disclosures in its relationship summary, even if the firm is not the 
wrap fee program sponsor, as proposed? Please describe how this 
information is currently provided to wrap fee program clients.
     Should we require only sponsors of wrap fee programs (and 
not all client-facing firms) to include the proposed wrap fee 
disclosures in the relationship summary, similar to the Form ADV wrap 
fee brochure delivery requirement, which requires only investment 
advisers that sponsor wrap fee programs to deliver to their wrap fee 
clients the Form ADV wrap fee brochure? If so, should we permit only 
one sponsor of a wrap fee program that has multiple sponsors to include 
the proposed wrap fee disclosures in the relationship summary, similar 
to the delivery requirements for the Form ADV wrap fee brochure?
     In addition to wrap fee programs, are there other types of 
retail investor programs and services for which it would be useful to 
require investment advisers and broker-dealers to disclose additional 
information about the nature and scope of services, fees and conflicts 
of interest? If so, which programs and services, and why should we 
require such disclosure?
     Are there any common misconceptions about broker-dealers' 
and investment advisers' compensation that the relationship summary 
should specifically seek to clarify or correct (e.g., that the firm or 
financial professional will only be compensated if the retail investor 
makes money on the investment)?
5. Comparisons
    We are proposing to require standalone investment advisers and 
standalone broker-dealers to prepare this section under the following 
headings: ``Compare with Typical Brokerage Accounts'' (for standalone 
investment advisers) or ``Compare with Typical Advisory Accounts'' (for 
standalone broker-dealers).\197\ Specifically, standalone broker-
dealers would include the following information about a generalized 
retail investment adviser: (i) The principal type of fee for investment 
advisory services; (ii) services investment advisers generally provide, 
(iii) advisers' standard of conduct; and (iv) certain incentives 
advisers have based on the investment adviser's asset-based fee 
structure.\198\ For investment advisers, this section would include 
parallel categories of information regarding broker-dealers.\199\
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    \197\ Proposed Items 5.A. and 5.B. of Form CRS. As discussed 
above, for purposes of the relationship summary, we propose to 
define a standalone investment adviser as a registered investment 
adviser that offers services to retail investors and (i) is not 
dually registered as a broker-dealer or (ii) is dually registered as 
a broker-dealer but does not offer services to retail investors as a 
broker-dealer. We propose to define a standalone broker-dealer as a 
registered broker-dealer that offers services to retail investors 
and (i) is not dually registered as an investment adviser or (ii) is 
dually registered as an investment adviser but does not offer 
services to retail investors as an investment adviser. Proposed 
General Instruction 9.(f) to Form CRS. See supra note 51. A dually 
registered firm that offers retail investors only advisory or 
brokerage services (but not both) may in the future decide to offer 
retail investors both services. We would expect a firm to update its 
relationship summary within 30 days whenever any information in the 
relationship summary becomes materially inaccurate. See proposed 
General Instruction 6.(a). to Form CRS and infra note 350 and 
accompanying text. In addition, the firm would communicate the 
information in its amended relationship summary to retail investors 
who are existing clients or customers of the firm within 30 days 
after the updates are required to be made and without charge. See 
proposed General Instruction 6.(b) to Form CRS and infra note 354 
and accompanying text.
    \198\ Proposed Item 5.B. of Form CRS.
    \199\ Proposed Item 5.A. of Form CRS.
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    We are proposing to require these disclosures to help retail 
investors choose among different account types and services. Having a 
clear explanation of differences in the fees, scope of services, 
standard of conduct, and incentives that are generally relevant to 
advisory and brokerage accounts would help retail investors that are 
considering one such type of relationship to compare whether their 
needs might be better met with the other type of relationship. In 
addition, we are proposing to prescribe wording in this section because 
it is intended to provide a general comparison of what we believe is a 
typical brokerage or investment adviser account that is offered to 
retail investors. Moreover, we believe prescribing language will 
promote uniformity and allow retail investors to receive the same 
information to use in comparing choices from different standalone 
firms.
    Standalone investment advisers would be required to include the 
following prescribed language (emphasis required): ``You could also 
open a brokerage account with a broker-dealer, where you will pay a 
transaction-based fee, generally referred to as a commission, when the 
broker-dealer buys or sells an investment for you.'' \200\ They would 
be required to include prescribed statements in bullet point format 
(except as otherwise specified) under the lead-in ``Features of a 
typical brokerage account include:'' \201\ First, there would be a 
general description of brokerage accounts: ``With a broker-dealer, you 
may select investments or the broker-dealer may recommend investments 
for your account, but the ultimate decision as to your investment 
strategy and the purchase and sale of investments will be yours.'' 
\202\ This statement would highlight for the retail investor two 
aspects of a typical broker-dealer's services that differ from that of 
an investment adviser--specifically, that an investor may select 
investments without advice or he or she may receive recommendations 
from the broker-dealer, and that the investor will make the ultimate 
investment decision.
---------------------------------------------------------------------------

    \200\ Id.
    \201\ Id.
    \202\ Proposed Item 5.A.1. of Form CRS.
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    Standalone investment advisers would then include the following 
information about the standard of conduct applicable to broker-dealers: 
``A broker-dealer must act in your best interest and not place its 
interests ahead of yours when the broker-dealer recommends an 
investment or an investment strategy involving securities. When a 
broker-dealer provides any service to you, the broker-dealer must treat 
you fairly and comply with a number of specific obligations. Unless you 
and the broker-dealer agree otherwise, the broker-dealer is not

[[Page 21440]]

required to monitor your portfolio or investments on an ongoing 
basis.'' \203\ As discussed above in Section II.B.3, above, the 
applicable standard of conduct for financial professionals has been a 
source of confusion among retail investors. This statement would 
provide information to retail investors about the obligations of 
broker-dealers, including some differences from investment advisers' 
obligations so that they can consider this factor when determining 
whether brokerage services might better suit their needs.
---------------------------------------------------------------------------

    \203\ Proposed Item 5.A.2. of Form CRS.
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    Standalone investment advisers would then include the following 
statement discussing incentives created by a typical broker-dealer's 
fee: ``If you were to pay a transaction-based fee in a brokerage 
account, the more trades in your account, the more fees the broker-
dealer charges you. So it has an incentive to encourage you to trade 
often.'' \204\ This disclosure is substantially similar to the 
disclosure we propose a broker-dealer would be required to include in 
the ``Fees and Costs'' section of its relationship summary.\205\ As 
discussed above, we believe this information would help retail 
investors understand how the fee structures for brokerage accounts 
could affect their investments, which they could compare with the 
incentives advisers have based on their fee structure.\206\
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    \204\ Proposed Item 5.A.3. of Form CRS.
    \205\ See supra Section II.B.4.
    \206\ Id.
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    Finally, a tabular chart would compare certain specified 
characteristics of a transaction-based fee and an ongoing asset-based 
fee side-by-side, set off by the wording ``You can receive advice in 
either type of account, but you may prefer paying:'' \207\ One column 
would include the following (emphasis required): ``a transaction-based 
fee from a cost perspective, if you do not trade often or if you plan 
to buy and hold investments for longer periods of time.'' \208\ The 
other column would include the following (emphasis required): ``an 
asset-based fee if you want continuing advice or want someone to make 
investment decisions for you, even though it may cost more than a 
transaction-based fee.'' \209\ This disclosure is substantially similar 
to the disclosure we propose that each dual registrant would include in 
the ``Fees and Costs'' section of its relationship summary.\210\ For 
the reasons discussed above, we are proposing this requirement to 
encourage choice across account types and services.\211\ We are also 
proposing that advisers include this information in the specified side-
by-side manner in order to promote comparisons between the relevant 
considerations for both types of relationships.
---------------------------------------------------------------------------

    \207\ Proposed Item 5.A.4. of Form CRS.
    \208\ Id.
    \209\ Id.
    \210\ See supra Section II.B.4.
    \211\ Id.
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    Standalone broker-dealers would be required to include the 
following prescribed language (emphasis required), which would 
highlight for the retail investor the different fee structure of many 
investment advisers: ``You could also open an advisory account with an 
investment adviser, where you will pay an ongoing asset-based fee that 
is based on the value of the cash and investments in your advisory 
account.'' \212\ Standalone broker-dealers would list prescribed 
statements describing certain differences from investment advisers in 
bullet point format (except as otherwise specified) under the lead-in 
``Features of a typical advisory account include:''.\213\ First, there 
would be a general description of investment advisory accounts as 
follows: ``Advisers provide advice on a regular basis. They discuss 
your investment goals, design with you a strategy to achieve your 
investment goals, and regularly monitor your account.'' \214\ The next 
bullet would highlight that investment advisers offer discretionary 
accounts and non-discretionary accounts by including the following 
(emphasis included): ``You can choose an account that allows the 
adviser to buy and sell investments in your account without asking you 
in advance (a ``discretionary account'') or the adviser may give you 
advice and you decide what investments to buy and sell (a ``non-
discretionary account'').'' \215\ Together, these statements would 
highlight for the retail investor two aspects of a typical investment 
adviser's services that differ from the typical services of a broker-
dealer--specifically, ongoing advice and monitoring and discretionary 
accounts.
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    \212\ Proposed Item 5.B. of Form CRS. We recognize that some 
investment advisers charge other types of fees for their advisory 
services, including fixed fees for one-time services such as 
financial planning. However, because asset-based fees are a common 
type of fee for advisory services, we think it would be useful for 
firms to describe asset-based fees in this section of the 
relationship summary for comparison with broker-dealers' 
transaction-based fees.
    \213\ Proposed Item 5.B. of Form CRS.
    \214\ Proposed Item 5.B.1. of Form CRS.
    \215\ Proposed Item 5.B.2. of Form CRS.
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    Standalone broker-dealers would then include the following 
disclosure about an investment adviser's standard of conduct: 
``Advisers are held to a fiduciary standard that covers the entire 
relationship. For example, advisers are required to monitor your 
portfolio, investment strategy and investments on an ongoing basis.'' 
\216\ As discussed above, the applicable standard of conduct for 
financial professionals has been a source of confusion among retail 
investors. This statement would provide information to retail investors 
about the obligations of investment advisers so that they can consider 
this factor when determining whether investment advisory services might 
better suit their needs.
---------------------------------------------------------------------------

    \216\ Proposed Item 5.B.3. of Form CRS.
---------------------------------------------------------------------------

    Standalone broker-dealers would then include the following 
disclosure about a typical investment advisory asset-based fee, as 
follows: ``If you were to pay an asset-based fee in an advisory 
account, you would pay the fee periodically, even if you do not buy or 
sell.'' \217\ They would also be required to include the following 
prescribed disclosure about hourly fees and one-time flat fees, which 
are common among investment advisers that offer financial planning 
services and other advisory services to retail investors: ``You may 
also choose to work with an investment adviser who provides investment 
advice for an hourly fee, or provides a financial plan for a one-time 
fee.'' \218\
---------------------------------------------------------------------------

    \217\ Proposed Item 5.B.4. of Form CRS.
    \218\ Id.
---------------------------------------------------------------------------

    The next statement would note certain incentives created by an 
investment adviser's ongoing asset-based fee. Broker-dealers would 
include the following: ``For an adviser that charges an asset-based 
fee, the more assets you have in an advisory account, including cash, 
the more you will pay the adviser. So the adviser has an incentive to 
increase the assets in your account in order to increase its fees.'' 
\219\ This statement is substantially similar to the disclosure an 
investment adviser would be required to include in the ``Fees and 
Costs'' section of its relationship summary.\220\ For the reasons 
discussed above, we believe this information would help retail 
investors understand how the principal fee structures for typical 
advisory accounts could affect their investments and the incentives 
financial professionals may have based on charging ongoing asset-based 
fees for investment advisory services. This proposed disclosure would 
encourage retail investors to compare these incentives with certain 
incentives broker-dealers have based on their fee structure, which 
broker-dealers

[[Page 21441]]

would describe under ``Fees and Costs.'' \221\
---------------------------------------------------------------------------

    \219\ Proposed Item 5.B.5. of Form CRS.
    \220\ See supra Section II.B.4.
    \221\ Id.
---------------------------------------------------------------------------

    Finally, standalone broker-dealers would be required to include the 
same tabular chart that standalone investment advisers would 
include.\222\ As discussed above, requiring this information side-by-
side would promote comparisons of typical advisory and brokerage 
relationships.
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    \222\ Proposed Item 5.B.6. of Form CRS.
---------------------------------------------------------------------------

    We request comment generally on the proposed comparison disclosures 
to be provided by standalone investment advisers and broker-dealers, 
and in particular on the following issues:
     Is it useful to require firms to include disclosures about 
services and fees they do not offer, so that investors know other 
choices are available and are better able to compare different types of 
firms?
     Is it clear from the headings that the information 
provided in this section describes a typical investment adviser and 
broker-dealer, and does not describe the circumstances of all 
investment advisers and broker-dealers? Why or why not? Should we 
modify the headings or provide additional information at the beginning 
of this section?
     Do the proposed requirements encourage disclosure that is 
simple, clear, and useful to retail investors? Would the proposed 
disclosure help investors to understand and compare the fees, services 
and standard of conduct associated with a firm's advisory services and 
brokerage services? Are there any revisions to the descriptions of 
fees, services, standard of conduct, and incentives that would make the 
proposed disclosure more useful to investors?
     Is the proposed order of the information appropriate, or 
should it be modified? If so, how should it be modified?
     Is the proposed disclosure about how often a typical 
advisory firm monitors retail investors' accounts useful to retail 
investors, given that different firms may view ``ongoing monitoring'' 
differently?
     Is the proposed format useful for retail investors to 
understand and compare fees, services, standard of conduct and 
incentives among broker-dealers and investment advisers? Should we 
permit or require further use of tables, charts, graphs or other 
graphics or text features?
     Should we require firms to include the prescribed wording, 
as proposed, or should we allow more flexibility in the words they use? 
Does the proposed prescribed wording capture the range of typical 
business models and fee structures that investment advisers and broker-
dealers offer? Would the prescribed wording require a firm to provide 
any inaccurate information given that particular firm's circumstances? 
If so, how should it be modified? Instead of the proposed prescriptive 
wording, should the Commission permit or require a more open-ended 
narrative?
     How would the required explanations and various 
disclosures contribute to readability and length of the proposed 
relationship summary? Should each of these explanations be required, 
permitted, or prohibited? Should any of these explanations be required 
to appear in the relationship summary, but outside the comparisons 
section?
     Are there other considerations related to investment 
advisers and broker-dealers that we should require or permit firms to 
highlight for retail investors? For example, should we require advisers 
to state that broker-dealers sometimes offer both full-service and 
discount brokerage accounts, and the differences between them, 
including fees? Are there any disclosures that we should omit?
     Is the proposed prescriptive wording describing the 
standard of conduct required for investment advisers and broker-dealers 
clear and useful to retail investors? Would the proposed disclosure 
help investors to understand the standard of conduct associated with a 
firm's advisory services and brokerage services? Should such disclosure 
be modified? If so, how should it be modified?
     Should we amend the proposed wording that describes the 
standard of conduct for broker-dealers to incorporate or refer to any 
fiduciary obligations that certain broker-dealers have under state law 
or other laws or regulations?
     Our proposal would require a standalone investment adviser 
to include prescribed disclosure about a broker-dealer's incentives 
based on a typical broker-dealer's principal fee structure, and vice 
versa. Should these disclosures be substantially similar to the 
disclosures we propose certain dual registrants to include, as 
proposed? \223\ Or should we modify these disclosures for firms that do 
not offer retail investors both brokerage and advisory services? If so, 
how should these disclosures be modified?
---------------------------------------------------------------------------

    \223\ See supra Section II.B.4.
---------------------------------------------------------------------------

     Our proposal would require a standalone investment adviser 
and a standalone broker-dealer to include prescribed disclosure that a 
retail investor may prefer one type of fee over another in certain 
circumstances. Should these disclosures be substantially similar to the 
disclosures we propose certain dual registrants to include, as 
proposed? Or should we modify these disclosures for firms that do not 
offer retail investors both brokerage and advisory services? If so, how 
should these disclosures be modified?
6. Conflicts of Interest
    We are proposing to require that investment advisers and broker-
dealers summarize their conflicts of interest related to certain 
financial incentives. Specifically, firms would be required to disclose 
conflicts relating to: (i) Financial incentives to offer to, or 
recommend that the retail investor invest in, certain investments 
because (a) they are issued, sponsored or managed by the firm or its 
affiliates, (b) third parties compensate the firm when it recommends or 
sells the investments, or (c) both; (ii) financial incentives to offer 
to, or recommend that the retail investor invest in, certain 
investments because the manager or sponsor of those investments or 
another third party (such as an intermediary) shares revenue it earns 
on those products with the firm; and (iii) the firm buying investments 
from and selling investments to a retail investor for the firm's own 
account (i.e., principal trading).\224\
---------------------------------------------------------------------------

    \224\ Proposed Item 6 of Form CRS. Studies have shown, for 
example, that for broker-dealers, the most frequently identified 
disclosures concerned issues of compensation--e.g., how clients 
compensate the firm, how other firms compensate it, and how 
employees are compensated. See, e.g., Rand Study, supra note 5, at 
xviii. We sometimes refer interchangeably to payments, compensation 
and benefits that firms and financial professionals receive. These 
terms are all meant to capture the various ways through which firms 
and financial professionals have financial incentives to favor a 
product, service, account type, investor, or provider over another.
---------------------------------------------------------------------------

    Investment advisers, broker-dealers, and their financial 
professionals have incentives to put their interests ahead of the 
interests of their retail investor clients and customers. The federal 
securities laws do not preclude broker-dealers or investment advisers 
from having conflicts of interest that might adversely affect the 
objectivity of the advice they provide; however, firms and financial 
professionals have obligations regarding their conflicts. Investment 
advisers are required to eliminate, or, at a minimum, fully and fairly 
disclose conflicts of interest clearly enough for a client to make an 
informed decision to consent to such conflicts and practices,

[[Page 21442]]

or reject them.\225\ For broker-dealers, the federal securities laws 
and rules and self-regulatory organization rules address broker-dealer 
conflicts in one (or more) of the following ways: Express 
prohibitions,\226\ mitigation,\227\ or disclosure.\228\ Under 
Regulation Best Interest, broker-dealers would be required to 
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 recommendation,\229\ as well as to 
disclose, in writing, all material conflicts of interest that are 
associated with the recommendation.\230\
---------------------------------------------------------------------------

    \225\ See SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 
180, 194 (1963) (An adviser must deal fairly with clients and 
prospective clients, seek to avoid conflicts with its clients and, 
at a minimum, make full disclosure of any material conflict or 
potential conflict.); see also Instruction 3 of General Instructions 
to Part 2 of Form ADV. See Fiduciary Duty Interpretive Release, 
supra note 123.
    \226\ For example, FINRA rules establish restrictions on the use 
of non-cash compensation in connection with the sale and 
distribution of mutual funds, variable annuities, direct 
participation program securities, public offerings of debt and 
equity securities, and real estate investment trust programs. These 
rules generally limit the manner in which members can pay for or 
accept non-cash compensation and detail the types of non-cash 
compensation that are permissible. See FINRA Rules 2310, 2320, 2341, 
and 5110.
    \227\ See, e.g., FINRA Rule 3110(c)(3) (firm must have 
procedures to prevent the effectiveness of an internal inspection 
from being compromised due to conflicts of interest); FINRA Rule 
3110(b)(6)(C) (supervisory personnel generally cannot supervise 
their own activities); FINRA Rule 3110(b)(6)(D) (firm must have 
procedures reasonably designed to prevent the required supervisory 
system from being compromised due to conflicts of interest).
    \228\ For example, when engaging in transactions directly with 
customers on a principal basis, a broker-dealer violates Exchange 
Act rule 10b-5 when it knowingly or recklessly sells a security to a 
customer at a price not reasonably related to the prevailing market 
price and charges excessive mark-ups, without disclosing the fact to 
the customer. See, e.g., Grandon v. Merrill Lynch & Co., 147 F.3d 
184, 189-90 (2d. Cir. 1998). See also Exchange Act rule 10b-10 
(requiring a broker-dealer effecting transactions in securities to 
provide written notice to the customer of certain information 
specific to the transaction at or before completion of the 
transaction, including the capacity in which the broker-dealer is 
acting (i.e., agent or principal) and any third party remuneration 
it has received or will receive.
    \229\ Broker-dealers would also be required to establish, 
maintain, and enforce written policies and procedures reasonably 
designed to identify and at a minimum disclose, or eliminate, all 
material conflicts of interest that are associated with such 
recommendation. See Regulation Best Interest Proposal, supra note 
24, section II.D.3.
    \230\ See Regulation Best Interest Proposal, supra note 24, 
section II.D.1.
---------------------------------------------------------------------------

    Conflicts of interest with retail investors often arise when firms 
and/or their financial professionals recommend or sell proprietary 
products or products offered by third parties, recommend products that 
have revenue sharing arrangements, and engage in principal 
trading.\231\ For example, a firm could have a financial incentive to 
recommend proprietary products because the firm (or its affiliate) 
would receive additional revenue or an affiliate could pay a firm for 
recommending affiliate products. A broker-dealer making a platform 
available for self-directed transactions may select investments 
available for purchase on the platform based on financial incentives 
the broker-dealer receives. Similarly, a financial professional could 
be paid for recommending affiliated products or could get a bonus or 
greater promotion potential for recommending certain investments.\232\ 
These conflicts create an incentive for firms and their financial 
professionals to make available for sale or base investment 
recommendations on the compensation or profit that firms will receive, 
rather than on the client's best interests.\233\ The Commission's 
enforcement actions underscore how these types of compensation 
arrangements and activities may produce conflicts of interest that can 
lead firms and their financial professionals to act in their own 
interests, rather than the interests of their retail investors.\234\
---------------------------------------------------------------------------

    \231\ See, e.g., Rand Study, supra note 5, at 13 (``Examples of 
such conflicts include various practices in which an adviser may 
have pecuniary interest (through, e.g., fees or profits generated in 
another commercial relationship, finder's fees, outside commissions 
or bonuses) in recommending a transaction to a client.'') and 15 
(noting that the formation of the Committee on Compensation 
Practices was, in part, motivated by concerns that commission-based 
compensation may encourage registered representatives to churn 
accounts or make unsuitable recommendations).
    \232\ Jason Zweig & Anne Tergesen, Advisers at Leading Discount 
Brokers Win Bonuses to Push Higher-Priced Products, Wall Street 
Journal (Jan. 10, 2018), available at https://www.wsj.com/articles/advisers-at-leading-discount-brokers-win-bonuses-to-push-higher-priced-products-1515604130.
    \233\ See, e.g., Brochure Adopting Release, supra note 157, at 
n.62 and accompanying text and n.132; Report of the Committee on 
Compensation Practices (Apr. 10, 1995), at 3, available at https://www.sec.gov/news/studies/bkrcomp.txt (``The prevailing commission-
based compensation system inevitably leads to conflicts of interest 
among the parties involved.''). See also FINRA Report on Conflicts 
of Interest (Oct. 2013), available at https://www.finra.org/sites/default/files/Industry/p359971.pdf (discussing conflicts of interest 
in the broker-dealer industry and highlighting effective conflicts 
management practices); SEC v. Capital Gains Research Bureau Inc., 
375 U.S. at 191, 196-97 (``The Investment Advisers Act of 1940 thus 
reflects a congressional recognition of the delicate fiduciary 
nature of an investment advisory relationship. . . . An investor 
seeking the advice of a registered investment adviser must, if the 
legislative purpose is to be served, be permitted to evaluate such 
overlapping motivations, through appropriate disclosure, in deciding 
whether the adviser is serving two masters or only one, especially 
if one happens to be economic self-interest.''); In the Matter of 
Feeley & Willcox Asset Management Corp., Investment Advisers Act 
Release No. 2143 (Jul. 10, 2003) (Commission opinion) (``It is the 
client, not the adviser, who is entitled to make the determination 
whether to waive the adviser's conflict. Of course, if the adviser 
does not disclose the conflict, the client has no opportunity to 
evaluate, much less waive, the conflict.'').
    \234\ See infra notes 243, 255, 256, 260 and 267, citing 
examples of where we have brought enforcement actions regarding 
conflicts of interest arising from one or more of the following 
categories of compensation practices and activities: the 
compensation of the firm's financial professionals; payments from 
others; incentives for selling the firm's own products, and 
principal trading.
---------------------------------------------------------------------------

    We are not proposing to require or permit the relationship summary 
disclosure to include specific information about all of the conflicts 
of interests that are or could be present in a firm's relationship with 
retail investors. For example, conflicts that can be applicable to 
investment advisers include using certain affiliated service 
providers,\235\ charging performance-based fees to some accounts but 
not others,\236\ personal trading by an adviser's personnel,\237\ 
receipt of soft dollar products and services provided by brokers in 
connection with client transactions,\238\ and voting client 
securities.\239\ Likewise, a broker-dealer

[[Page 21443]]

may have several conflicts of interest with its retail investors that 
we are not proposing to include in the relationship summary. These 
include, for example, a broker-dealer's incentive to favor its 
institutional customers over its retail customers when making available 
proprietary research or certain investment opportunities, such as 
widely anticipated initial public offerings, acting as a market maker 
for a recommended security, using certain service providers, or voting 
client securities.\240\ In addition, broker-dealers are subject to 
Exchange Act rules that require them to disclose in writing to the 
customer if they have any control, affiliation, or interest in a 
security they are offering or the issuer of such security.\241\
---------------------------------------------------------------------------

    \235\ Item 10.C. of Form ADV Part 2A. Item 10 requires an 
investment adviser to describe in its brochure material 
relationships or arrangements the adviser (or any of its management 
persons) has with related financial industry participants, any 
material conflicts of interest that these relationships or 
arrangements create, and how the adviser addresses the conflicts. 
The disclosure that Item 10 requires highlights for clients their 
adviser's other financial industry activities and affiliations that 
can create conflicts of interest and may impair the objectivity of 
the adviser's investment advice. See Brochure Adopting Release, 
supra note 157, at 29.
    \236\ Item 6 of Form ADV Part 2A. An adviser faces a variety of 
conflicts of interest that it is required to address in its Form ADV 
brochure, including that the adviser can potentially receive greater 
fees from its accounts having a performance-based compensation 
structure than from those accounts it charges a fee unrelated to 
performance (e.g., an asset-based fee). See Brochure Adopting 
Release, supra note 157, at n.64 and accompanying text; 2008 
Brochure Proposing Release, supra note 157, at n.51 and accompanying 
text.
    \237\ Items 11.C. and 11.D. of Form ADV Part 2A. For example, 
because of the information they have, advisers and broker-dealers 
and their personnel are in a position to abuse clients' positions 
by, for example, placing their own trades before or after client 
trades are executed in order to benefit from any price movements due 
to the clients' trades. An investment adviser is required to address 
this conflict in its Form ADV brochure. See Brochure Adopting 
Release, supra note 157, at n.83 and accompanying text.
    \238\ Item 12 of Form ADV Part 2A. Use of client commissions to 
pay for research and brokerage services presents money managers with 
significant conflicts of interest, and may give incentives for 
managers to disregard their best execution obligations when 
directing orders to obtain client commission services as well as to 
trade client securities inappropriately in order to earn credits for 
client commission services. See Brochure Adopting Release, supra 
note 157, at n.128 (citing Release 54165, supra note 187).
    \239\ Item 17 of Form ADV Part 2A. Each adviser must describe 
how the adviser addresses conflicts of interest when it votes 
securities pursuant to its proxy voting authority, as applicable. 
See Brochure Adopting Release, supra note 157, at n.172 and 
accompanying text.
    \240\ See 913 Study, supra note 3, at nn.251 and 254 and 
accompanying text (discussing that courts have found that broker-
dealers should have disclosed these conflicts).
    \241\ See Exchange Act rules 15c1-1, 15c1-5, and 15c1-6. 
Similarly, rule 15c1-6 requires written disclosure of the broker-
dealer's interest in a security it is offering at or before the 
completion of the transaction. Self-regulatory organizations require 
similar disclosures. See, e.g., FINRA Rules 2262 and 2269; and MSRB 
Rule G-22.
---------------------------------------------------------------------------

    It is important for firms to disclose information about each of 
these conflicts to retail investors; however, we believe that requiring 
an exhaustive discussion of all conflicts in the relationship summary 
would make the relationship summary too long for its intended purpose--
that is, focusing on key aspects of a firm and its services, as well as 
helping retail investors to make an informed choice between receiving 
the services of a broker-dealer or an investment adviser or among 
different broker-dealers or investment advisers. Since investment 
advisers already report conflicts of interest in Form ADV Part 2, a 
more exhaustive discussion of conflicts by investment advisers would be 
duplicative of certain disclosures provided in Form ADV Part 2, which 
is provided to clients of investment advisers, including retail 
investors.\242\ While we are not proposing to require such detailed 
disclosures for broker-dealers in the relationship summary, Regulation 
Best Interest would require broker-dealers to disclose, in writing, all 
material conflicts of interest that are associated with a 
recommendation to a retail customer.\243\
---------------------------------------------------------------------------

    \242\ For investment advisers, the Form ADV Part 2 brochure and 
the brochure supplement address many of the conflicts an adviser may 
have. Items in Part 2 of Form ADV may not address all conflicts an 
adviser may have, and may not identify all material disclosure that 
an adviser may be required to provide clients. As a result, 
delivering a brochure prepared under Form ADV's requirements may not 
fully satisfy an adviser's disclosure obligations under the Advisers 
Act. See Brochure Adopting Release, supra note 157, at n.7. Broker-
dealers also must make a variety of disclosures, but the extent, 
form and timing of the disclosures are different. See 913 Study, 
supra note 3, at 55--58. In accordance with the Instructions to Form 
CRS, if a relationship summary is posted on a firm's website or 
otherwise provided electronically, the firm must use hyperlinks for 
any document that is cross-referenced in the relationship summary if 
the document is available online. See proposed General Instruction 
1.(g) to Form CRS.
    \243\ See supra notes 229- 230 and accompanying text. 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-interest. See, 
e.g., De Kwiatkowski v. Bear, Stearns & Co., 306 F.3d 1293, 1302 (2d 
Cir. 2002); Chasins v. Smith, Barney & Co., 438 F.2d 1167, 1172 (2d 
Cir. 1970); In the Matter of Richmark Capital Corp., Exchange Act 
Release No. 48758 (Nov. 7, 2003) (Commission opinion) (``Release 
48758'') (``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).
---------------------------------------------------------------------------

    We are proposing to require specific information about conflicts of 
interest related to financial incentives for recommending or selling 
proprietary products or products offered by third parties, and from 
revenue sharing arrangements. Such incentives could include, for 
example, the firm earning more money or the financial professional 
receiving compensation or other benefits, including an increase in 
compensation such as a bonus, when a retail investor invests in the 
product. Disclosure of these conflicts would highlight for retail 
investors that firms and financial professionals have financial 
incentives to place their own interests first when making investment 
recommendations. Including these disclosures prominently, in one place, 
at or before the start of a retail investor's relationship with a firm 
or financial professional would facilitate retail investors' 
understanding of the incentives that may be present throughout the 
course of the relationship. Retail investors also have indicated they 
find information about the sources and amount of compensation from 
third parties useful and relevant to making informed financial 
decisions before engaging a firm.\244\ In addition, a number of 
commenters responding to Chairman Clayton's Request for Comment 
suggested disclosure that would focus on incentives associated with the 
products and services offered and how associated persons are 
compensated.\245\
---------------------------------------------------------------------------

    \244\ See 917 Financial Literacy Study, supra note 20, at xxi. 
(``The most useful and relevant information that the online survey 
respondents indicated that they favored to make informed financial 
decisions before engaging a financial intermediary includes 
information about . . . [s]ources and amount of compensation that a 
financial intermediary may receive from third parties in connection 
with and [sic] investment transaction . . .'').
    \245\ See, e.g., SIFMA 2017 Letter; UBS 2017 Letter; ICI 2017 
Letter; State Farm 2017 Letter; IAA 2017 Letter; Bernardi Securities 
2017 Letter; Fidelity 2017 Letter.
---------------------------------------------------------------------------

    We are also proposing to require disclosures about conflicts 
relating to principal transactions. Commenters recognized the 
importance of principal trading, with appropriate safeguards, including 
disclosure.\246\ As we explain further below, we believe that investors 
should be aware of and understand this conflict at or before the start 
of the relationship.
---------------------------------------------------------------------------

    \246\ See, e.g., SIFMA 2017 Letter (recommending that a best 
interest standard of conduct for broker-dealers would not prohibit 
principal trading, provided that such transactions be accompanied by 
written disclosure and corresponding client consent); Wells Fargo 
2017 Letter. See also ICI 2017 Letter (recommending that a broker-
dealer would be able to engage in principal trading, subject to 
appropriate limitations, disclosure, and customer consent); Bernardi 
Securities 2017 Letter (recommending that any revised standard of 
conduct for broker-dealers permit principal transactions, and 
suggesting that firms could implement disclosures and policies and 
procedures to protect investors from the related potential 
conflicts).
---------------------------------------------------------------------------

    Specifically, we are proposing that firms use the heading 
``Conflicts of Interest'' under which a broker-dealer, investment 
adviser or dual registrant would describe three categories of 
conflicts, as applicable to the firm.\247\ To emphasize the importance 
of conflicts, broker-dealers would be required to state the following 
language after the heading: ``We benefit from our recommendations to 
you.'' \248\ Similarly, investment advisers would be required to state: 
``We benefit from the advisory services we provide you.'' \249\ Dual 
registrants would be required to state: ``We benefit from the services 
we provide you.'' \250\ If all or a portion of a conflict is not 
applicable to the firm's business, the firm should omit that conflict 
or portion thereof.\251\ If a conflict only applies to a dual 
registrant's brokerage accounts or investment advisory accounts, the 
firm would include that conflict in the applicable column.\252\
---------------------------------------------------------------------------

    \247\ Proposed Items 6.A. and 6.B. of Form CRS.
    \248\ Proposed Item 6.A. of Form CRS..
    \249\ Id.
    \250\ Id.
    \251\ Proposed Item 6.B. of Form CRS.
    \252\ Id.
---------------------------------------------------------------------------

    First, we propose that a firm be required to state, as applicable, 
that it has a financial incentive to offer or

[[Page 21444]]

recommend to the retail investor certain investments because: (a) They 
are issued, sponsored or managed by the firm or the firm's affiliates, 
(b) third parties compensate the firm when it recommends or sells the 
investments, or (c) both.\253\ The firm also would provide examples of 
such types of investments, and state if its financial professionals 
receive additional compensation if the retail investor buys these 
investments.\254\
---------------------------------------------------------------------------

    \253\ Proposed Item 6.B.1. of Form CRS. We are not prescribing 
the specific language that firms must use to discuss each of these 
conflicts, which would give firms some flexibility to structure 
their disclosure, particularly if they offer proprietary products 
and receive compensation from third parties.
    \254\ Proposed Items 6.B.1. of Form CRS.
---------------------------------------------------------------------------

    This conflict disclosure would highlight that a variety of 
financial incentives affects the incentives of the firm or its 
financial professional to offer or recommend certain investments to the 
retail investor.\255\ These financial incentives can range from cash 
and non-cash compensation that a firm or financial professional 
receives for selling those investments as well as less direct financial 
incentives. In particular, investors might not be aware that the firm 
or its affiliate offers proprietary products that provide a financial 
incentive to the firm to recommend those products, that a third party 
provides incentives for a firm to recommend investments, or that the 
firm's financial professional will receive additional compensation if 
the retail investor buys certain investments. We believe that requiring 
this disclosure is consistent with indications that retail investors 
find information about sources and amount of compensation that firms 
receive from third parties useful to make informed financial 
decisions.\256\ Additionally, we believe that it is important for firms 
to separately and explicitly disclose if the financial professionals 
benefit from these payments because these individuals are making the 
recommendations to the retail investors and their compensation is an 
incentive that could affect their advice.
---------------------------------------------------------------------------

    \255\ The Commission has brought enforcement actions against 
firms that the Commission alleged to have failed to disclose fees, 
such as referral fees, that financial professionals receive as a 
result of recommending certain investments to retail investors. See, 
e.g., In the Matter of Financial Design Associates, Inc. and Albert 
Coles Jr., Investment Advisers Act Release No. 2654 (Sept. 25, 2007) 
(settled action) (respondents failed to disclose to investment 
advisory clients payments received from a company in which clients 
were advised to invest); In the Matter of Energy Equities, Inc. and 
David G. Snow, Investment Advisers Act Release No. 1811 (Aug. 2, 
1999) (settled action) (respondents received finder's fees or other 
compensation from issuers, the securities of which were recommended 
to clients or prospective clients); Vernazza v. SEC, 327 F.3d 851 
(9th Cir. 2003).
    \256\ See 917 Financial Literacy Study, supra note 20, at xxi. 
The Commission's enforcement actions also have underscored how these 
types of compensation and benefits from third parties for 
recommending certain investments may produce conflicts of interest 
that lead firms and their financial professionals to favor those 
investments over others. See, e.g., In the Matter of the Robare 
Group, LTD., Investment Advisers Act Release No. 3907 (Sep. 2, 2014) 
(Commission opinion) (investment adviser failed to disclose 
compensation it received through agreements with a registered 
broker-dealer and conflicts arising from that compensation).
---------------------------------------------------------------------------

    We are also proposing to require examples of the types of 
investments associated with each of these conflicts (e.g., mutual funds 
and variable annuities) because we believe it would be helpful for 
investors to be aware of the types of products for which firms and 
financial professionals have these incentives.\257\ We considered 
whether to require a complete list of investments; however, we believe 
that a long list of the names of each of the affected products would 
not necessarily benefit investors or be helpful to them in their review 
of the firm's conflicts and could detract from the other information in 
the relationship summary.
---------------------------------------------------------------------------

    \257\ See proposed Items 6.B.1. of Form CRS.
---------------------------------------------------------------------------

    Next, we propose that firms disclose revenue sharing arrangements 
by stating that the firm has an incentive to offer or recommend the 
retail investor to invest in certain investments because the manager or 
sponsor of those investments or another third party (such as an 
intermediary) shares with the firm revenue it earns on those 
investments.\258\ The firm also would provide examples of such types of 
investments.\259\ This disclosure would highlight another type of 
compensation firms receive that affects their incentives to offer or 
recommend certain investments to the retail investor, and like the 
disclosures regarding proprietary products and third party payments, 
would provide retail investors with information about sources of 
compensation the firm receives from third parties.\260\ This 
requirement is intended to capture arrangements pursuant to which a 
firm receives payments or other benefits from third parties for 
recommending certain investments, including, for example, conflicts 
related to payment for distribution support or ongoing services from 
distributors or advisers of mutual funds, annuity products or other 
products. We are proposing that firms would be required to describe 
these and other conflicts of interest even if the compensation the firm 
receives is not shared with the firm's financial professionals, as the 
compensation can create incentives for the firm to promote certain 
investments over others. These types of distribution-related 
arrangements may give broker-dealers heightened incentives to market 
the shares of particular mutual funds, or particular classes of fund 
shares. Those incentives may be reflected in a broker-dealer's use of 
``preferred lists'' that explicitly favor the distribution of certain 
funds, or they may be reflected in other ways, including incentives or 
instructions that the broker-dealer provides to its managers or its 
salespersons.\261\
---------------------------------------------------------------------------

    \258\ Proposed Item 6.B.2. of Form CRS.
    \259\ Id.
    \260\ The Commission has pursued enforcement actions against 
firms that the Commission alleged to have failed to disclose revenue 
sharing arrangements. See, e.g., In re Edward D. Jones & Co, 
Securities Act Release No. 8520 (Dec. 22, 2004) (broker-dealer 
violated antifraud provisions of Securities Act and Exchange Act by 
failing to disclose conflicts of interest arising from receipt of 
revenue sharing, directed brokerage payments and other payments from 
``preferred'' fund families that were exclusively promoted by 
broker-dealer); In re Morgan Stanley DW Inc., Securities Act Release 
No. 8339 (Nov. 17, 2003) (``Release 8339'') (broker-dealer violated 
antifraud provisions of Securities Act by failing to disclose 
special promotion of funds from fund families that paid revenue 
sharing and portfolio brokerage); In the Matter of KMS Financial 
Services, Inc., Investment Advisers Act Release No. 4730 (Jul. 19, 
2017) (dually-registered investment adviser and broker-dealer that 
failed, in its capacity as an investment adviser, to disclose to its 
advisory clients compensation it received from a third party broker-
dealer for certain investments it selected for its advisory 
clients); In the Matter of Voya Financial Advisors, Inc., Investment 
Advisers Act Release No. 4661 (Mar. 8, 2017) (registered investment 
adviser failed to disclose to its clients compensation it received 
through an arrangement with a third party broker-dealer and 
conflicts arising from that compensation).
    \261\ See, e.g., Release 8339, supra note 260.
---------------------------------------------------------------------------

    Finally, we propose that firms address principal trading by stating 
that the firm can buy investments from a retail investor, and sell 
investments to a retail investor, from its account (called ``acting as 
principal'').\262\ Firms must state that they can earn a profit on 
those trades, and disclose that the firm has an incentive to encourage 
the retail investor to trade with it.\263\ If this activity is part of 
the firm's investment advisory business, it must state that the retail 
investor's specific approval is required on each transaction.\264\
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    \262\ Proposed Item 6.B.3. of Form CRS.
    \263\ Id.
    \264\ Section 206(3) of the Advisers Act. Proposed Item 6.B.3. 
of Form CRS.
---------------------------------------------------------------------------

    While access to securities that are traded on a principal basis, 
such as certain types of municipal bonds, is important to many 
investors, principal trades by broker-dealers and investment advisers 
raise potential conflicts of

[[Page 21445]]

interest.\265\ Principal trading raises concerns because of the risks 
of price manipulation or the placing of unwanted securities into client 
accounts (i.e., ``dumping'').\266\ Under the Advisers Act, an adviser 
may not 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.\267\ Broker-dealers also 
are subject to a number of requirements when they engage in principal 
transactions with customers, including disclosure of such capacity on 
the trade confirmation.\268\ There is no specific requirement for 
broker-dealers, however, to provide written disclosure prior to the 
trade or obtain consent for each principal transaction.\269\ Our 
proposal to require firms to disclose, if applicable, that they engage 
in principal transactions, and to summarize the conflict of interest 
raised by principal transactions, would not replace the disclosure and 
consent requirements under the Advisers Act or any other requirement, 
such as under the Exchange Act. Rather, our disclosure requirement 
would supplement such disclosures by alerting retail investors to this 
practice and the related conflicts of interest at the start of the 
relationship.
---------------------------------------------------------------------------

    \265\ See 913 Study, supra note 3, at 120.
    \266\ See id., at 118.
    \267\ Section 206(3) of the Advisers Act. See also Opinion of 
Director of Trading and Exchange Division interpreting the reference 
to ``the transaction'' to require separate disclosure and consent 
for each transaction. Investment Advisers Act Release No. 40 (Feb. 
5, 1945) (``[T]he requirements of written disclosure and of consent 
contained in this clause must be satisfied before the completion of 
each separate transaction. A blanket disclosure and consent in a 
general agreement between investment adviser and client would not 
suffice.''); 913 Study, supra note 3, at n.534 and accompanying 
text. An investment adviser must provide written disclosure to a 
client and obtain the client's consent at or prior to the completion 
of each transaction. 913 Study, supra note 3, at n.535 and 
accompanying text. See also, e.g., Release 3929, supra note 133; In 
the Matter of JSK Associates, et al., Investment Advisers Act 
Release No. 3175 (Mar. 14, 2011) (settled action).
    \268\ As an example of one such requirement, broker-dealers must 
disclose their capacity in the transactions (typically on the 
confirmation statement). See Exchange Act rule 10b-10.
    \269\ See 913 Study, supra note 3, at n.540 and accompanying 
text.
---------------------------------------------------------------------------

    We request comment generally on the conflicts of interest 
disclosures proposed to be included in the relationship summary, and in 
particular on the following issues:
     Do the proposed conflicts of interest disclosures 
encourage firms to provide information that is simple, clear, and 
useful to retail investors? Would the proposed disclosures help retail 
investors to compare the conflicts of interest associated with advisory 
services and brokerage services and the conflicts among firms? Does the 
relationship summary help retail investors understand that compensation 
to firms and financial professionals creates incentives that could 
impact the advice or recommendations that they provide? If not, should 
it do so and if so, what modifications should be made to the summary to 
address this concern?
     Should we require brief statements about particular 
conflicts of interest, as proposed, or should we require a more open-
ended narrative or more prescribed wording? Would an open-ended 
narrative permit firms to tailor the disclosure and describe all of the 
conflicts they believe retail investors should know? Or would firms 
seek to provide so much information about their conflicts that the 
proposed page limit (or equivalent limit in electronic format) would 
not provide enough space for all of the disclosures? How would the 
required explanations of various items contribute to the readability 
and length of the relationship summary?
     Our intent in using layered disclosure for conflicts 
(i.e., short summaries of certain types of conflicts of interest with 
information later in the relationship summary on where retail investors 
can find more information) is to highlight these conflicts and 
encourage retail investors to ask questions and seek more information 
about the firm's and its financial professionals' conflicts of 
interest. Do our proposed requirements achieve this goal? In light of 
our objective of keeping the relationship summary short, should we 
instead prescribe general language concerning the importance of 
understanding conflicts, while simply requiring cross-references to the 
relevant sections of Form ADV Part 2 brochure or brochure supplement 
(for investment advisers) and relevant disclosures typically included 
in account opening documents or websites (for broker-dealers)? Should 
we provide wording to encourage retail investors to ask questions about 
conflicts, including advising customers to go through all of the firm's 
and financial professional's conflicts with the financial professional? 
Are there other modifications or alternatives we should consider?
     Should we instead require firms to make the conflicts of 
interest disclosure more detailed, even if it results in a lengthier 
relationship summary?
     Are the proposed conflicts of interest disclosures too 
limited? Are there other types of conflicts we should include, such as 
additional disclosure currently required in the Form ADV Part 2 
brochure or brochure supplement (for investment advisers), or 
disclosure typically included in account opening documents or websites 
(for broker-dealers)? Should we, for example, require firms to describe 
all of their conflicts and how they address them, such as specific 
information about incentives to favor certain clients over others, 
agency cross-trades, relationships with certain clients, personal 
trading by personnel, soft dollar practices, directed brokerage, proxy 
voting practices, or acting as a market maker for a recommended 
security? Or should we require firms to list all of their conflicts and 
provide cross references to where additional information about each 
conflict can be found (i.e., cross referencing the relevant sections of 
Form ADV Part 2 and analogous broker-dealer disclosures)? Would this 
detract from the brevity of the disclosure? Is there another way to 
provide additional information about conflicts to retail investors in a 
way that would be meaningful to them and would facilitate their ability 
to obtain additional information?
     Are there certain types of investments that should be 
disclosed by firms as ones that the firm ``issues, sponsors, or 
manages?'' For example, should we require firms to disclose that any 
investment with a firm's name in the title is generally an investment 
that the firm issues, sponsors, or manages? If a firm uses a name other 
than its own name to market proprietary investments, should we require 
firms disclose such other names?
     Should we require firms to disclose whether they provide 
ancillary services to retail investors themselves or through their 
affiliates so that retail investors better understand that the firm has 
incentives to select its affiliates over third parties?
     With respect to the required disclosure regarding 
financial incentives a firm has to offer or recommend investment in 
certain investments because they are offered by the firm's affiliates, 
or third parties compensate the firm for selling their investments, or 
both, would firms understand what types of financial incentives would 
be covered by this item--and what would not be covered? Should the 
Commission provide additional guidance or instructions to clarify?
     Should we require firms to disclose that they use third-
party service providers that offer the firms or their financial 
professionals additional compensation? For example, some investment 
advisers select broker-

[[Page 21446]]

dealers to execute their clients' transactions that provide the adviser 
or financial professionals with compensation or other benefits, 
including in the form of client referrals. Should we highlight that 
compensation can be in the form of advisory client referrals?
     Firms would be required to provide examples of investments 
that firms have a financial incentive to offer. Are these requirements 
clear? Should we provide additional guidance? Should firms also be 
required to identify specific account types for which financial 
professionals receive incentives? Or should firms list all of their 
services or products that create the stated conflicts (or cross-
reference to such disclosure elsewhere)? Should additional information 
be provided in this section of the relationship summary or should it be 
provided in an attachment?
     Should firms explicitly state that other firms offer 
similar products that could be less expensive for the retail investor? 
Should we require firms to disclose if the firm engages in principal 
trading, as proposed, including that the firm can earn a profit on 
these trades and may have an incentive to encourage the retail investor 
to trade with the firm? Should we require investment advisers to state 
the retail investor's specific approval on each principal transaction 
is required? Are there additional disclosures that we should require 
for broker-dealers?
     Should we require firms to disclose any additional 
conflicts of interest related to the compensation of financial 
professionals? For example, should firms be required to include any 
specific conflicts related to financial professionals' outside business 
activities? Should we require firms to include additional disclosure on 
compensation that a financial professional receives from third parties, 
such as compensation that an investment adviser representative receives 
in his or her capacity as a registered representative of an unrelated 
broker-dealer?
     Should we allow firms to choose the order they present the 
conflicts? For example, should firms be permitted to base the order on 
the conflicts they believe are most relevant in their business, or is a 
standardized order preferable to increase the comparability of the 
disclosures among different firms? If a firm does not engage in any 
practices that would be required to be disclosed, should we permit or 
require a firm to state that it does not have that conflict, or should 
we require firms to say nothing, as proposed? Would it be confusing to 
investors if, as proposed, the order was prescribed but some firms omit 
certain conflicts because they do not have the particular conflict? 
Would such presentation lessen the ability to compare conflicts across 
firms?
     Is the proposed format useful for retail investors in 
understanding and comparing conflicts of interest among firms? Would 
the use of tables, charts, graphs or other graphics or text features be 
helpful in explaining all or any particular conflict? If so, how could 
firms structure that disclosure?
     Should any of the conflicts be required to appear in the 
relationship summary, but outside of the conflicts of interest section?
7. Additional Information
    We are proposing to require that firms include information on where 
retail investors can find more information about the firm's 
disciplinary events, services, fees, and conflicts, which facilitates 
the layered disclosure that the relationship summary provides.\270\ 
This section would be titled ``Additional Information'' and firms would 
include the following after the title: ``We encourage you to seek out 
additional information.'' First, firms would be required to state 
whether or not they or their financial professionals currently disclose 
or are currently required to disclose certain legal or disciplinary 
events to the Commission, self-regulatory organizations, state 
securities regulators or other jurisdictions, as applicable. We are 
including information about a firm's and its financial professionals' 
disciplinary information because this information may assist retail 
investors in evaluating the integrity of a firm and its financial 
professionals.\271\ For example, a prior disciplinary event could 
reflect upon the firm's integrity, affect the degree of trust and 
confidence a client would place in the firm, or impose limitations on 
the firm's activities.\272\ Knowledge of a firm's and financial 
professional's disciplinary history is among the most important items 
for retail investors when deciding whether to receive financial 
services from a particular firm, according to one study.\273\ 
Approximately 67.5% of the online survey respondents considered 
information about an adviser's disciplinary history to be absolutely 
essential, and about 20.0% deemed it important, but not essential.\274\ 
But despite its importance, many investors do not review this 
information prior to engaging a firm.\275\ A study also found that many 
retail investors would check the Investment Adviser Public Disclosure 
site (``IAPD'') for comparative information on investment advisers, 
including disciplinary history, if they were made aware of its 
existence.\276\ We believe that requiring firms to state the existence 
of

[[Page 21447]]

disciplinary events, provide specific questions for retail investors to 
ask, and provide information on where retail investors can find more 
information, would cause more retail investors to seek out this 
information and would make them better informed when they choose a firm 
and a financial professional.\277\
---------------------------------------------------------------------------

    \270\ See supra notes 37, 48-50 and 139-141 and accompanying 
text (regarding the use of layered disclosure and alternative 
approaches to presentation).
    \271\ See Brochure Adopting Release, supra note 157, at n.81 and 
accompanying text. See also Electronic Filing by Investment 
Advisers; Proposed Amendments to Form ADV, Investment Advisers Act 
Release No. 1862 (Apr. 5, 2000) [65 FR 20524 (Apr. 17, 2000)], at 
nn.148-149 and accompanying text (``2000 Brochure Proposing 
Release'') (``When assessing whether an adviser will fulfill its 
obligations to clients, an investor would likely give great weight 
to whether the adviser has met its fiduciary and other legal 
obligations in the past.''); Self-Regulatory Organizations; 
Financial Industry Regulatory Authority, Inc.; Order Approving a 
Proposed Rule Change to Amend FINRA Rule 8312 (FINRA BrokerCheck 
Disclosure) to Expand the Categories of Civil Judicial Disclosures 
Permanently Included in BrokerCheck, Release No. 34-71196 (Dec. 27, 
2013) [79 FR 417 (Jan. 3, 2014)] (``By making certain of this 
information publicly available, BrokerCheck, among other things, 
helps investors make informed choices about the individuals and 
firms with which they conduct business.'').
    \272\ See Brochure Adopting Release, supra note 157, at n.85.
    \273\ See 917 Financial Literacy Study, supra note 20, at nn.308 
and 498 and accompanying text (``When asked how important certain 
factors would be to them if they were to search for comparative 
information on investment advisers, the majority of online survey 
respondents identified the fees charged and the adviser's 
disciplinary history as the most important factors.'').
    \274\ Id.
    \275\ 917 Financial Literacy Study, supra note 20, at n.770 
(citing Applied Research Consulting LLC for FINRA Investor Education 
Foundation, Financial Capability in the United States: Initial 
Report of Research Findings from the 2009 National Survey (Dec. 1, 
2009), available at https://www.usfinancialcapability.org/downloads/NFCS_2009_Natl_Full_Report.pdf (``2009 National Survey Initial 
Report''), which revealed that only 15% of respondents claimed that 
they had checked a financial professional's background or 
credentials with a state or federal regulator, although the 
Commission notes that the study encompasses a wide group of 
advisors, such as debt counselors and tax professionals.). In 
addition, the FINRA 2015 Investor Survey found that only 24% of 
investors were aware of Investor.gov; only 16% were aware of 
BrokerCheck; only 14% were aware of the IAPD website, and only 7% 
had used BrokerCheck. FINRA, Investors in the United States 2016 
(Dec. 2016), available at https://www.usfinancialcapability.org/downloads/NFCS_2015_Inv_Survey_Full_Report.pdf).
    \276\ See 917 Financial Literacy Study, supra note 20, at 
nn.317-319 and accompanying text ([A]bout 76.5% of the online survey 
respondents reported that, in selecting their current adviser, they 
did not use an SEC-sponsored website to find information about the 
adviser. 73% of respondents stated that they would check IAPD if 
they were made aware of its existence. Of that subset--those who 
reported not using an SEC-sponsored website--approximately 85.2% 
indicated that they did not know that such a website was available 
for that purpose. Of that majority (i.e., a further subset)--those 
who were unaware of such a website--approximately 73.5% reported 
that they would review information about their adviser on an SEC-
sponsored website if they knew it were available).
    \277\ In addition, this would address an issue that was 
highlighted by the Commission's Investor Advisory Committee, which, 
among other things, encouraged the Commission to develop an enhanced 
approach to the disclosure of disciplinary events. Broker-Dealer 
Fiduciary Duty Recommendations, supra note 10 (recommending a 
summary disclosure document that includes, among other disclosures, 
basic information about a firm's disciplinary record).
---------------------------------------------------------------------------

    Specifically, in the relationship summary, firms would state ``We 
have legal and disciplinary events'' if they are required to disclose 
(i) disciplinary information per Item 11 of Part 1A or Item 9 of Part 
2A of Form ADV,\278\ or (ii) legal or disciplinary events per Items 
11A-K of Form BD (``Uniform Application for Broker-Dealer 
Registration'') \279\ except to the extent such information is not 
released through BrokerCheck pursuant to FINRA Rule 8312 or in 
IAPD.\280\ Regarding their financial professionals, firms would 
determine whether they need to include the statement based on legal and 
disciplinary information on Form U4,\281\ Form U5 \282\ and Form 
U6.\283\ In particular, firms would be required to state, ``We have 
legal and disciplinary events'' if they have financial professionals 
for whom disciplinary events are reported per Items 14 A-M on Form U4, 
Items 7(a) and 7(c)-(f) on Form U5,\284\ and Form U6 except to the 
extent such information is not released through BrokerCheck pursuant to 
FINRA Rule 8312 or in IAPD.\285\
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    \278\ Proposed Item 7.B. of Form CRS. Generally, investment 
advisers are required to disclose on Form ADV Part 2A any legal or 
disciplinary event, including pending or resolved criminal, civil 
and regulatory actions, if it occurred in the previous 10 years, 
that is material to a client's (or prospective client's) evaluation 
of the integrity of the adviser or its management personnel, and 
include events of the firm and its personnel. See Brochure Adopting 
Release, supra note 157, at 22-27. Items 9.A., 9.B., and 9.C. 
provide a list of disciplinary events that are presumptively 
material if they occurred in the previous 10 years. However, Item 9 
requires that disciplinary events more than 10 years old be 
disclosed if the event is so serious that it remains material to a 
client's or prospective client's evaluation of the adviser and the 
integrity of its management.
    \279\ Item 11 of Form BD requires disclosure on the relevant 
Disclosure Reporting Page (``DRP'') with respect to: (A) felony 
convictions, guilty pleas, ``no contest'' pleas or charges in the 
past ten years; (B) investment-related misdemeanor convictions, 
guilty pleas, ``no contest'' pleas or charges in the past ten years; 
(C) certain SEC or the Commodity Futures Trading Commission (CFTC) 
findings, orders or other regulatory actions (D) other federal 
regulatory agency, state regulatory agency, or foreign financial 
regulatory authority findings, orders or other regulatory actions; 
(E) self-regulatory organization or commodity exchange findings or 
disciplinary actions; (F) revocation or suspension of certain 
authorizations; (G) current regulatory proceedings that could result 
in ``yes'' answers to items (C), (D) and (E) above; (H) domestic or 
foreign court investment-related injunctions, findings, settlements 
or related civil proceedings; (I) bankruptcy petitions or SIPC 
trustee appointment; (J) denial, pay out or revocation of a bond; 
and (K) unsatisfied judgments or liens. Some of these disclosures 
are only required if the relevant action occurred within the past 
ten years, while others must be disclosed if they occurred at any 
time.
    \280\ FINRA Rule 8312 governs the information FINRA releases to 
the public via BrokerCheck. FINRA established BrokerCheck in 1988 
(then known as the Public Disclosure Program) to provide the public 
with information on the professional background, business practices, 
and conduct of FINRA member firms and their associated natural 
persons. The information that FINRA releases to the public through 
BrokerCheck is derived from the CRD system, the securities industry 
online registration and licensing database. Firms, their associated 
natural persons and regulators report information to the CRD system 
via the uniform registration forms (Form U4 (Uniform Application for 
Securities Industry Registration or Transfer), Form U5 (Uniform 
Termination Notice for Securities Industry Registration), Form U6 
(Uniform Disciplinary Action Reporting Form), Form BD (Uniform 
Application for Broker-Dealer Registration), Form BDW (Uniform 
Request for Broker-Dealer Withdrawal), and Form BR (``Uniform Branch 
Office Registration Form'')). Under FINRA Rule 8312, FINRA limits 
the information that is released to BrokerCheck in certain respects. 
For example, pursuant to FINRA Rule 8312(d)(2), FINRA shall not 
release ``information reported on Registration Forms relating to 
regulatory investigations or proceedings if the reported regulatory 
investigation or proceeding was vacated or withdrawn by the 
instituting authority.'' We believe it is appropriate to limit 
disclosure in the relationship summary to disciplinary information 
or history that would be released to BrokerCheck.
    \281\ Form U4 (Uniform Application for Securities Industry 
Registration or Transfer) requires disclosure of registered 
representatives' criminal, regulatory, and civil actions similar to 
those reported on Form BD as well as certain customer-initiated 
complaints, arbitration, and civil litigation cases. See generally 
Form U4.
    \282\ Form U5 (Uniform Termination Notice for Securities 
Industry Registration) requires information about representatives' 
termination from their employers. See Form U5.
    \283\ Form U6 (Uniform Disciplinary Action Reporting Form) is 
used by SROs, regulators, and jurisdictions to report disciplinary 
actions against broker-dealers and associated persons. This form is 
also used by FINRA to report final arbitration awards against 
broker-dealers and associated persons. See Form U6.
    \284\ The disclosure would be triggered by reportable 
information on Items 7(a) and 7(c) through (f). Item 7(b) (Internal 
Review Disclosure) is not released to BrokerCheck by FINRA, pursuant 
to FINRA Rule 8312(d)(3). As noted above (see supra note 280), we 
believe it is appropriate to limit disclosure in the relationship 
summary to disciplinary information or history that would be 
released to BrokerCheck.
    \285\ Proposed Item 7.B.3. of Form CRS.
---------------------------------------------------------------------------

    We considered requiring firms to provide additional details about 
the reported legal and disciplinary events of the firms and their 
financial professionals. For example, we could have proposed to require 
firms to include details about the type and number of the reported 
events. Broker-dealers and investment advisers do not report all of the 
same types of disciplinary events. We also considered whether to 
require firms to only discuss the types of disciplinary events that 
both broker-dealers and investment advisers report, require investment 
advisers to disclose complaints and other disciplinary events that only 
broker-dealers report, or create separate requirements to require firms 
to disclose certain types of events in the relationship summary without 
reference to information in other disclosures.
    We are not proposing to take any of these approaches because this 
is summary disclosure rather than a comprehensive discussion of a 
firm's legal and disciplinary history. We believe that for many firms, 
requiring additional information would include too much detail for 
short summary disclosure, and updating these details in the 
relationship summary on an ongoing basis would add significant costs 
without compensating benefit. The information already is required to be 
disclosed elsewhere, and the relationship summary as proposed would 
direct retail investors to those resources. We believe that requiring 
an affirmative statement that the firm and its financial professionals 
have reportable legal or disciplinary events, if applicable, will flag 
this important issue for retail investors and help them to determine 
whether they want additional information in other disclosures. By 
proposing to base the new disclosure on information that is already 
reported elsewhere and also to include details about where to find more 
information, we would give retail investors the tools to learn 
more.\286\ Furthermore, as discussed below, the statement encouraging 
retail investors to visit Investor.gov for more information would help 
retail investors to more easily learn additional details from the firms 
themselves and from their existing disclosures.\287\
---------------------------------------------------------------------------

    \286\ Proposed Item 7.D. of Form CRS.
    \287\ Id.
---------------------------------------------------------------------------

    Next, all firms would be required to include the following wording 
to highlight where retail investors can find more information about the 
disciplinary history of the firm and its financial professionals, 
whether or not the firm is required to state the existence of legal or 
disciplinary events in the relationship summary: ``Visit Investor.gov 
for a free and simple search tool to research our

[[Page 21448]]

firm and our financial professionals.'' \288\
---------------------------------------------------------------------------

    \288\ Proposed Item 7.C. of Form CRS.
---------------------------------------------------------------------------

    Retail investors would further benefit from understanding how to 
report problems and complaints to the firm and regulators. Accordingly, 
we propose to require that firms include the following wording next in 
this section:
    ``To report a problem to the SEC, visit Investor.gov or call the 
SEC's toll-free investor assistance line at (800) 732-0330. [To report 
a problem to FINRA, [ ].] If you have a problem with your investments, 
account or financial professional, contact us in writing at [insert 
your primary business address].\289\
---------------------------------------------------------------------------

    \289\ Proposed Item 7.D. of Form CRS.

Broker-dealers and dual registrants also would include the bracketed 
language regarding how to report a problem to FINRA. Firms would be 
required to review and update (if needed) the current telephone numbers 
for the SEC and FINRA at least annually.\290\
---------------------------------------------------------------------------

    \290\ Id.
---------------------------------------------------------------------------

    Firms would be required to state where the retail investor can find 
additional information about their brokerage and investment advisory 
services, as applicable. Broker-dealers would be required to direct 
retail investors to additional information about their brokers and 
services on BrokerCheck (https://brokercheck.finra.org), their firm 
websites (including a link to the portion of the website that provides 
up-to-date information for retail investors), and the retail investor's 
account agreement.\291\ Broker-dealers that do not have public websites 
would be required to state where retail investors can find up-to-date 
information.\292\
---------------------------------------------------------------------------

    \291\ Proposed Item 7.E.1. of Form CRS.
    \292\ Id.
---------------------------------------------------------------------------

    Investment advisers likewise would be required to direct retail 
investors to additional information in the firm's Form ADV Part 2 
brochure and any brochure supplement provided by a financial 
professional to the retail investor.\293\ If an adviser has a public 
website and maintains a current version of its firm brochure on the 
website, the firm would be required to provide the website 
address.\294\ If an adviser does not have a public website or does not 
maintain its current brochure on its public website, then the adviser 
would provide the IAPD website address (https://
adviserinfo.sec.gov).\295\
---------------------------------------------------------------------------

    \293\ Proposed Item 7.E.2. of Form CRS.
    \294\ Id.
    \295\ Id. SEC- and state-registered investment advisers are 
required to file their brochures and brochure amendments through the 
IARD system. See rules 203-1 and 204-1 of the Advisers Act and 
similar state rules. Members of the public can view an adviser's 
most recent Form ADV online at the IAPD website: 
www.adviserinfo.sec.gov.
---------------------------------------------------------------------------

    Unlike investment advisers, which deliver brochures and brochure 
supplements to clients, broker-dealers are not currently required to 
deliver to their retail investors written disclosures covering their 
services, fees, conflicts, and disciplinary history in one place.\296\ 
However, under Regulation Best Interest, broker-dealers would be 
required to disclose, in writing, the material facts relating to the 
scope and terms of the relationship with the retail customer including 
all material conflicts of interest that are associated with the 
recommendation.\297\ We understand that, under current practice, 
broker-dealers typically provide information about some or all of the 
categories of disclosure included in this relationship summary on their 
firm websites and in their account opening agreements. We recognize 
that the different disclosure requirements for investment advisers and 
broker-dealers may result in retail investors having access to more 
information about investment advisers on a particular topic as compared 
to information about broker-dealers and vice versa. We request comment 
on whether we should take additional steps to ensure that retail 
investors have access to a similar amount of additional information 
about each of the topics covered by the relationship summary, such as 
by requiring firms to include appendices or hyperlinks with specific 
information.
---------------------------------------------------------------------------

    \296\ Broker-dealers are required under certain circumstances, 
such as when effecting certain types of transactions, to disclose 
certain conflicts of interest to their customers in writing, in some 
cases at or before the time of the completion of the transaction. 
See, e.g., supra notes 228 and 241 and accompanying text. See also 
913 Study, supra note 3, at nn.256-259 and accompanying text; supra 
notes 230 and 243-243 and accompanying text (describing broker-
dealer obligations under proposed Regulation Best Interest).
    \297\ See Regulation Best Interest Proposal, supra note 24, at 
section II.D.1.
---------------------------------------------------------------------------

    We request comment generally on the disclosure about where to find 
additional information, and in particular on the following issues:
     Do commenters agree that it is important for retail 
investors to know of a firm and its financial professionals' legal and 
disciplinary events before entering into an agreement with a firm? Why 
or why not?
     Is including the disciplinary history disclosure in the 
additional information section sufficient to draw a retail investors' 
attention or encourage retail investors to ask follow-up questions on 
this topic?
     Would the proposed format with prescribed wording 
effectively communicate information about disciplinary events to retail 
investors? Or should we use a table with yes/no check boxes or another 
graphical format to describe this information, or should we permit a 
firm to state in its own words whether it has reported any events? What 
approach would permit easier comparison by retail investors across 
firms, including dual registrants?
     Would more detail about these events be more beneficial 
and easily understandable for retail investors? For example, should 
firms be required to provide background about the types of events that 
would trigger the disclosure (such as criminal, civil, and regulatory 
actions and, for broker-dealers and financial professionals, customer 
complaints, arbitrations and bankruptcies)? Should we require separate 
disclosures for firms and their financial professionals? Should we 
consider requiring a more specific list of the types of disciplinary 
events that firms and financial professionals report and require firms 
to state whether there are reported disclosures for each type? For 
example, should firms be required to state they have reported 
disclosures for criminal actions, civil actions and administrative 
proceedings, and for broker-dealers specifically, arbitrations and 
complaints? Should we instead require firms to disclose the total 
number of the legal and disciplinary events that are reported on Form 
BD, Form ADV, and/or Forms U4, U5, and U6, as applicable? Or should we 
require firms to report the total number of all reported criminal 
actions, civil actions, administrative proceedings, arbitrations, and 
complaints for them and their financial professionals, as applicable? 
Would this information be confusing for retail investors without more 
information about each reported event? If we do require this 
information, should we require firms to disclose the percentage of a 
firm's total financial professionals that have reported disciplinary 
events? As part of this approach, should we require a firm to disclose 
its total number of financial professionals to provide additional 
context for the percentage?
     Should we require firms to include specific wording 
directing retail investors to ask them questions about these events and 
to review more detailed disclosures by searching Investor.gov?
     Should firms be required or permitted to state that they 
do not currently have reportable legal and/or disciplinary events, if 
that is the case? Should we require firms to distinguish whether they 
or their financial professionals have reportable

[[Page 21449]]

disciplinary events, for example by stating ``Our firm has legal and 
disciplinary events'' or ``We have financial professionals who have 
legal and disciplinary events''?
     Do commenters agree with requiring disclosure if firms or 
financial professionals have reported legal and/or disciplinary events 
on Form BD, Forms U4, U5 or U6, and Form ADV, as applicable? Do 
commenters agree with the specific items on those forms that we have 
identified as triggering reportable events? Should we only require 
disclosure of the types of legal events that both broker-dealers and 
investment advisers report? For example, should we require all firms to 
disclose financial information, which broker-dealers are required to 
report pursuant to Items 11 (I, J, and K) on Form BD but investment 
advisers do not report? Or, in the alternative, should we exclude 
financial disclosures from a broker-dealer's reportable legal or 
disciplinary events? Do commenters agree that the legal or disciplinary 
events triggering disclosure on the relationship summary should be the 
same for financial professionals working for broker-dealers as for 
investment advisers? If not, why not?
     Do commenters agree that, for broker-dealers and financial 
professionals of broker-dealers and investment advisers, we should 
exclude information that is not released to BrokerCheck or IAPD 
pursuant to FINRA Rule 8312? BrokerCheck and IAPD include additional 
information, including summary information about certain arbitration 
awards against a financial professional, or against a firm in 
BrokerCheck, involving a securities or commodities dispute with a 
public customer. Although broker-dealers are not required to report 
arbitrations on Form BD, should we include arbitrations as reportable 
events in light of the BrokerCheck disclosures? If so, how would 
commenters suggest articulating the required disclosure?
     Pursuant to FINRA Rule 4530, broker-dealers are required 
to disclose certain information to FINRA that is not reported on Form 
BD (e.g., customer complaints and arbitrations). Should we include 
disclosures made to FINRA pursuant to FINRA Rule 4530 as reportable 
events? If so, should we require disclosure of similar events by 
investment advisers? Why or why not?
     Do commenters believe that stating whether a firm has 
legal and disciplinary events and then providing hyperlinks on where to 
find additional information is the correct approach? Should we 
explicitly require deep links? Why or why not? Do commenters believe 
that retail investors will check Investor.gov? Should we require firms 
to cross reference other sources of disciplinary information, including 
providing direct links to the IAPD or BrokerCheck? Why or why not?
     Rather than asking firms to identify whether they have 
legal and disciplinary events, should the relationship summary note 
that retail investors may want to consider this information and then 
encourage retail investors to ask their financial professional for more 
details and include cross references to where further information can 
be found? Why or why not? With respect to robo-advisers or broker-
dealers providing online services, will a financial professional be 
available to answer these types of questions? \298\
---------------------------------------------------------------------------

    \298\ Robo-advisers should also keep in mind the considerations 
set forth in the robo-adviser guidance update specifically as it 
relates to the substance and presentation of disclosures. See Robo-
Advisers, IM Guidance Update No. 2017-02 (Feb. 23, 2017), available 
at https://www.sec.gov/investment/im-guidance-2017-02.pdf.
---------------------------------------------------------------------------

     Should we adopt a definition of ``financial professional'' 
for purposes of this disclosure? If so, how would commenters suggest 
formulating the definition?
     Our intent in using layered disclosure, with short 
summaries of selected disclosures and information on where retail 
investors can find more information, is to encourage retail investors 
to ask questions and seek more information about the firm's and their 
financial professionals' services, fees, conflicts of interest and 
disciplinary events. Does the proposed relationship summary, in 
general, and this additional information section, in particular, 
achieve this goal? Are there modifications or alternatives we should 
consider to achieve this goal?
     In addition or as an alternative to the proposed cross 
references to an investment adviser's Form ADV brochure and brochure 
supplement(s) and account agreement, and to a broker-dealer's public 
website, account agreement and BrokerCheck, should the relationship 
summary direct retail investors to other sources of information? Should 
we require firms to include public website addresses and hyperlinks to 
the sources of additional information, if available? Do firms' websites 
typically include additional information about topics included in the 
relationship summary? Given that not all firms have a public website or 
maintain current information on a public website (e.g., its current 
brochure or other current information), are there other places to which 
firms should direct retail investors to look for up-to-date 
information? Should we require firms that do not already maintain a 
public website to establish one for purposes of making the relationship 
summary publicly available?
8. Key Questions
    We are proposing to require that firms include questions for retail 
investors to ask their financial professionals in the relationship 
summary. By requiring these questions, we intend to encourage retail 
investors to have conversations with their financial professionals 
about how the firm's services, fees, conflicts and disciplinary events 
affect them. We encourage financial professionals to engage in balanced 
and meaningful conversations with their retail investors to facilitate 
investors making informed decisions, using these key questions as a 
guide. Firms should use formatting to make the questions more 
noticeable and prominent (for example, by using a larger font, a text 
box, different font, or lines to offset the questions from the other 
sections).\299\ Firms would be required to include ten questions, as 
applicable to their particular business, under the heading ``Key 
Questions to Ask'' after stating the following: ``Ask our financial 
professionals these key questions about our investment services and 
accounts.'' The required questions would be:
---------------------------------------------------------------------------

    \299\ Proposed Item 8 of Form CRS.
---------------------------------------------------------------------------

    1. Given my financial situation, why should I choose an advisory 
account? Why should I choose a brokerage account?
    2. Do the math for me. How much would I pay per year for an 
advisory account? How much for a typical brokerage account? What would 
make those fees more or less? What services will I receive for those 
fees?
    3. What additional costs should I expect in connection with my 
account?
    4. Tell me how you and your firm make money in connection with my 
account. Do you or your firm receive any payments from anyone besides 
me in connection with my investments?
    5. What are the most common conflicts of interest in your advisory 
and brokerage accounts? Explain how you will address those conflicts 
when providing services to my account.
    6. How will you choose investments to recommend for my account?
    7. How often will you monitor my account's performance and offer 
investment advice?
    8. Do you or your firm have a disciplinary history? For what type 
of conduct?

[[Page 21450]]

    9. What is your relevant experience, including your licenses, 
education, and other qualifications? Please explain what the 
abbreviations in your licenses are and what they mean.
    10. Who is the primary contact person for my account, and is he or 
she a representative of an investment adviser or a broker-dealer? What 
can you tell me about his or her legal obligations to me? If I have 
concerns about how this person is treating me, who can I talk to? \300\
---------------------------------------------------------------------------

    \300\ Proposed Item 8 of Form CRS.
---------------------------------------------------------------------------

    We are proposing to allow firms to modify or omit portions of these 
questions, as applicable to their business.\301\ We are also proposing 
to require a standalone broker-dealer and a standalone investment 
adviser, to modify the questions to reflect the type of account they 
offer to retail investors (e.g., advisory or brokerage account).\302\ 
In addition, we are proposing that firms could include any other 
frequently asked questions they receive following these questions. 
Firms would not, however, be permitted to exceed fourteen questions in 
total in order to limit the length of the relationship summary.\303\
---------------------------------------------------------------------------

    \301\ Id.
    \302\ Id.
    \303\ Id.
---------------------------------------------------------------------------

    We recognize that advisers providing computer-generated, automated 
advice, often referred to as ``robo-advisers,'' and online-only broker-
dealers may employ business models that offer varying levels of 
interaction or no interaction with a financial professional. We are 
proposing to require advisers providing automated advice or broker-
dealers providing online-only services without a particular individual 
with whom a retail investor can discuss these questions to include a 
section or page on their website that answers each of the above 
questions, and provide a hyperlink in the relationship summary to that 
section or page.\304\ If the firm provides automated advice, but makes 
a financial professional available to discuss the existing account with 
a retail investor, that firm generally should also make the financial 
professional available to discuss these questions with the retail 
investor.
---------------------------------------------------------------------------

    \304\ Id.
---------------------------------------------------------------------------

    We believe that many of these questions would help retail investors 
to elicit more detail concerning the items discussed in the 
relationship summary. For example, the questions asking why an investor 
should choose an advisory or brokerage account and how much the 
investor can expect to pay are intended to help the retail investor 
receive information about services and fees that are tailored to that 
particular investor's circumstances. We believe that the financial 
professional generally would have access to the information needed to 
provide this information to a particular retail investor during the 
account opening process.\305\ Questions about how the financial 
professional and the firm make money and about conflicts of interest 
would assist investors in understanding the extent to which 
compensation creates incentives for a financial professional to take 
his or her own interests into account in providing services. Similarly, 
the last question in the list of questions, which asks about a retail 
investor's primary contact at the firm and that financial 
professional's legal obligations, is intended to elicit a conversation 
about the different legal obligations of firms and financial 
professionals acting in an investment advisory capacity and in a 
brokerage capacity. Other items allow the investor to learn more 
specific information about the firms and financial professional, such 
as additional conflicts the firms or its financial professionals might 
have or disciplinary history.
---------------------------------------------------------------------------

    \305\ See supra Section II.B.4, ``Summary of Fees and Costs.''
---------------------------------------------------------------------------

    The proposed questions cover all of the sections in the 
relationship summary. They also include one additional topic about the 
financial professional's relevant experience, including licenses and 
other qualifications. In our experience, the relevant experience, 
including licenses, education, and other qualifications for a 
particular financial professional are important to retail 
investors.\306\ However, if we required firms to disclose the 
educational and professional certifications of each financial 
professional, firms would have to attach a separate disclosure for each 
particular financial professional (similar to the Form ADV brochure 
supplement or the information about financial professionals provided on 
BrokerCheck and IAPD) or would have to include lengthy disclosure with 
information about all of their financial professionals. We believe this 
would be more burdensome than prompting retail investors to ask their 
financial professionals these questions to encourage a conversation 
about these topics, if such a conversation is important to that 
investor. We understand that including ``Key Questions to Ask'' would 
result in some firms creating policies and procedures, including 
supervision and compliance reviews, relating to how their financial 
professionals respond to the questions.
---------------------------------------------------------------------------

    \306\ See 917 Financial Literacy Study, supra note 20, at 24 
(``Some examples of information that commenters indicated should be 
included in a summary disclosure document for an investment product 
or service include descriptions of. . . any eligibility 
requirements.''); Brochure Adopting Release, supra note 157, at 
nn.213-216 and accompanying text (discussing commenters that 
supported the brochure supplement, which contains information about 
the educational background, business experience, and disciplinary 
history (if any) of the supervised persons who provide advisory 
services to the client).
---------------------------------------------------------------------------

    We request comment generally on the questions proposed to be 
included in the relationship summary, and in particular on the 
following issues:
     Would our proposed questions encourage discussions between 
retail investors and their financial professionals? Would they help 
retail investors become informed about how a firm's services, fees, 
conflicts, and disciplinary events affect them? Would they help 
investors to compare investment advisers and broker-dealers?
     Would financial professionals be able to answer these 
``Key Questions to Ask''? Do they have access to personalized 
information about the retail investor and the retail investor's account 
to be able to, for example, put together personalized fee information 
and estimates during the account opening process? To the extent 
responses would require information about the particular retail 
investor, would firms need to change the account opening process in 
order to obtain that information and provide responses?
     Should we require or permit firms to include these 
questions throughout the relationship summary rather than, or in 
addition to, including the questions in the ``Key Questions to Ask''? 
In our proposal, for example, the fees and costs section of the 
relationship summary directs retail investors to ask their financial 
professionals for personalized fee information. Are there other 
disclosures in the relationship summary for which we should require or 
permit firms to also include a question to ask as part of the 
disclosure? If so, which disclosures? Could firms use technology such 
as pop-ups or hovers, or internal links, to connect the relevant 
question(s) in the key questions to ask to the disclosure in the 
relationship summary?
     Would firms create policies and procedures, including 
supervision and compliance reviews, relating to how their financial 
professionals respond to these questions? Would implementing and 
maintaining such processes be burdensome or costly for firms? Why or 
why not? Do investment advisers and broker-dealers currently have 
systems in place to answer these questions, particularly the request to 
``do the math for me'' and provide not only fee

[[Page 21451]]

information related to the relationship and certain externalized fees, 
but also information about fees that are implicit to a given product?
     Do firms anticipate that they would implement 
recordkeeping policies and procedures to address communications between 
financial professionals and retail investors about the ``Key Questions 
to Ask''? What kind of recordkeeping policies and procedures would 
firms anticipate implementing in order to address such communications? 
Should we require financial professionals to highlight these key 
questions when they deliver a relationship summary to a retail 
investor? How could the questions be highlighted when the relationship 
summary is delivered electronically?
     Should we require financial professionals to initiate a 
conversation about these key questions if the retail investor does not 
raise these questions?
     Should we, as proposed, permit firms to omit any of the 
proposed questions that are not applicable to their business, and 
permit firms to add additional questions for retail investors to ask 
about the disclosures in their relationship summaries? For example, 
should robo-advisers and online broker-dealers be allowed to omit the 
questions concerning the financial professional's relevant experience 
and whether the investor's primary contact is an investment adviser or 
broker-dealer? Should we add questions specific to investment advisers 
offering automated advice, such as how the robo-adviser's models are 
designed, including the underlying assumptions?
     Should we include any additional questions in our proposed 
list of questions, or remove any proposed questions? If so, what 
additional questions should we add, and which questions should we 
remove, and why? For example, instead of including a question about a 
financial professional's licenses and other qualifications in this 
section, should we instead require firms to discuss information about 
licensing and other qualifications in the relationship summary, 
including educational background, designations held, and examinations 
passed? Should we add a question comparing services offered with 
financial planning and wrap fee programs?
     Do commenters agree that including a question about a 
financial professional's licenses and other qualifications would 
provide useful information to retail investors, given the expansive 
list of professional designations? Should we instead permit or require 
financial professionals to include a list of certain licenses or other 
qualifications in a separate disclosure and, if so, which designations 
should be included?
     We are proposing to permit firms to include up to fourteen 
questions. Do commenters agree with this approach? Should we allow 
firms to include more or fewer questions?
     We are proposing to require that robo-advisers and online-
only brokers include a section or page on their websites that answers 
each of these proposed questions, and include a hyperlink in the 
relationship summary to where the answers are posted. How will these 
advisers and broker-dealers be able to answer the fact specific 
questions in a generalized format on the website? Are there alternative 
ways in which such advisers or broker-dealers should be required to 
provide answers to these proposed questions? For example, should robo-
advisers use a chat or other message function, or answer questions by 
email? Would this work for robo-advisers that offer recommendations to 
retail investors without providing them any way to reach a financial 
professional at the firm? Should we require all advisers to include the 
responses to these questions on their websites, including robo-advisers 
that make available financial professionals to answer retail investors' 
questions?
     Should we require the order of the questions to be fixed? 
Does the proposed order advance our goal? What changes, if any, should 
be made to the proposed order? Should there be sub-categories of 
questions?

C. Delivery, Updating, and Filing Requirements

    Our proposal would require registered investment advisers, 
registered broker-dealers that serve retail customers and dual 
registrants to deliver a relationship summary.\307\ Delivery of the 
relationship summary would not necessarily relieve the firm of any 
other disclosure obligations it has to its retail investors or 
prospective retail investors under any federal or state laws or 
regulations.
---------------------------------------------------------------------------

    \307\ See Advisers Act proposed rule 204-5 and Exchange Act 
proposed rule 17a-14.
---------------------------------------------------------------------------

    The relationship summary requirement would be in addition to, and 
not in lieu of, current disclosure and reporting requirements or other 
obligations for broker-dealers and investment advisers.\308\ Broker-
dealers are liable under the antifraud provisions of the federal 
securities laws for failure to disclose material information to their 
customers when they have a duty to make such disclosure.\309\ When 
recommending a security, broker-dealers may be 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-interest.\310\ Among 
other specific disclosure obligations, broker-dealers are required to 
disclose certain potential conflicts to their customers under certain 
circumstances, such as disclosing at or before the time of the 
completion of the transaction whether the broker-dealer is acting as 
agent or principal, and its compensation and any third-party 
remuneration it has received or will receive.\311\ Broker-dealers 
typically provide information about their services, fees, and conflicts 
on their websites and in their account opening agreements. Disciplinary 
history on broker-dealers, details on the background, qualifications, 
and disciplinary history of financial professionals associated with 
broker-dealers, and customer complaints and arbitrations against them, 
are available on FINRA's BrokerCheck website.\312\
---------------------------------------------------------------------------

    \308\ For example, the relationship summary would not 
necessarily satisfy the disclosure requirements under proposed 
Regulation Best Interest. Regulation Best Interest would require 
broker-dealers to disclose in writing, before or at the time of a 
recommendation, the material facts related to the scope and terms of 
the relationship with the retail customer, including all material 
conflicts of interest that are associated with the recommendation. 
Regulation Best Interest Proposal, supra note 24, at section II.D.1 
(noting that the relationship summary would reflect initial layers 
of disclosure, and the disclosure obligation of proposed Regulation 
Best Interest would reflect more specific and additional, detailed 
layers of disclosure).
    \309\ See Basic v. Levinson, 485 U.S. 224, 239 n.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'').
    \310\ See, e.g., De Kwiatkowski v. Bear, Stearns & Co., 306 F.3d 
at 1302; Chasins v. Smith, Barney & Co., 438 F.2d at 1172.
    \311\ 17 CFR 240.10b-10(a)(2).
    \312\ See https://brokercheck.finra.org.
---------------------------------------------------------------------------

    Investment advisers deliver to clients a ``brochure'' (and/or a 
``wrap fee program brochure,'' as applicable) and ``brochure 
supplement'' required by Form ADV Part 2.\313\ The brochure is a plain 
language, narrative document that addresses, among other things, an 
investment adviser's advisory business,

[[Page 21452]]

conflicts of interest with its clients, fees, and disciplinary 
history.\314\ The brochure supplement contains information about the 
advisory personnel providing clients with investment advice.\315\ The 
wrap fee program brochure provides prospective wrap fee program clients 
with important information regarding the cost of the programs and the 
services provided. The current Form ADV Parts 1 and 2A are filed by 
investment advisers, and details about the background qualifications, 
registrations and disciplinary history of financial professionals 
supervised by the investment adviser, are available on IAPD.\316\
---------------------------------------------------------------------------

    \313\ See Advisers Act rule 204-3; Instructions 1 and 2 of 
Instructions for Part 2A of Form ADV; Instructions 2 and 3 of 
Instructions for Part 2B of Form ADV. An investment adviser that 
sponsors a wrap fee program is generally required to complete a wrap 
fee program brochure. See Appendix 1 to Form ADV Part 2A.
    \314\ Much of the disclosure in Part 2A addresses an investment 
adviser's conflicts of interest with its clients, and is disclosure 
that the adviser, as a fiduciary, must make to clients in some 
manner regardless of the form requirements. See Brochure Adopting 
Release, supra note 157, at 9.
    \315\ Form ADV Part 2B includes information about certain 
advisory personnel on whom clients may rely for investment advice, 
including their educational background, disciplinary history, and 
the adviser's supervision of the advisory activities of its 
personnel. Investment advisers are not required to file with the 
Commission the brochure supplements required by Form ADV Part 2B. 
Advisers Act rules 203-1(a), 204-1(b).
    \316\ IAPD is available at https://www.adviserinfo.sec.gov.
---------------------------------------------------------------------------

    The current disclosure requirements and obligations result in 
varying degrees and kinds of information to investors, but we believe 
that all retail investors would benefit from a short summary that 
focuses on certain key aspects of the firm and its services. By 
requiring both investment advisers and broker-dealers to deliver a 
relationship summary that discusses both types of services and their 
differences, the relationship summary would help all retail investors, 
whether they are considering an investment adviser or a broker-dealer. 
A relationship summary would help retail investors to understand key 
aspects of a particular firm, to compare different types of accounts, 
and to compare that firm with other firms. While the information 
required by the relationship summary is generally already provided in 
greater detail for investment advisers by Form ADV Part 2, the 
relationship summary would provide in one place, for the first time, 
summary information about the services, fees, conflicts, and 
disciplinary history for broker-dealers.
1. Filing Requirements
    As proposed, firms would be required to file their relationship 
summary with the Commission, and the relationship summary will be 
available on the Commission's public disclosure website. The essential 
purpose of the relationship summary is to provide information to retail 
investors to help them decide whether to engage a particular firm or 
financial professional and open an investment advisory or brokerage 
account. If a firm does not have retail investor clients or customers 
and is not required to deliver a relationship summary to any clients or 
customers, the firm would not be required to prepare or file a 
relationship summary.\317\ Broker-dealers would file their relationship 
summaries electronically in a text-searchable format with the 
Commission on EDGAR. Investment advisers would file their relationship 
summaries electronically in a text-searchable format through IARD in 
the same manner as they currently file Form ADV Parts 1A and 2A. Dual 
registrants would file on both EDGAR and IARD. All previously filed 
versions of relationship summaries filed via EDGAR will remain 
available to the public. Although previously filed versions of an 
adviser's relationship summary would remain stored as Commission 
records in IARD, only the most recent version of an adviser's 
relationship summary will be available through the Commission's public 
disclosure website.
---------------------------------------------------------------------------

    \317\ See proposed amended Advisers Act rule 203-1 note to 
paragraph (a)(1); proposed Exchange Act rule 17a-14(a), (b). See 
infra Section II.C.2 for a discussion of the delivery requirements.
---------------------------------------------------------------------------

    We considered proposing other electronic filing platforms, either 
maintained by the Commission or by a third-party contractor. We are 
proposing IARD and EDGAR because they are familiar filing systems for 
investment advisers and broker-dealers. Investment advisers registered 
with the Commission file Form ADV on IARD.\318\ Many broker-dealers 
submit documents to the Commission on EDGAR and all broker-dealers have 
an EDGAR CIK number.\319\ As mentioned above, a dual registrant would 
be required to file the relationship summary on EDGAR and IARD. The 
information for dual registrants would be accessible through IARD or 
EDGAR, which are both available through the Commission's website 
www.Investor.gov. Exact processes for firms to follow in filing under 
each system is specified on the IARD system website and in the EDGAR 
filer manual, respectively.
---------------------------------------------------------------------------

    \318\ Investment advisers may instead file a paper copy of the 
Form ADV with the Commission if they apply for a hardship exemption 
by filing Form ADV-H.
    \319\ During fiscal year 2017, approximately 1,100 broker-
dealers submitted documents to the Commission using EDGAR. Broker-
dealers can file their annual reports on EDGAR and broker-dealers 
that also conduct another business activity (e.g., broker-dealers 
that are also municipal advisers or large traders) use EDGAR for 
other required filings.
---------------------------------------------------------------------------

    There are several reasons we propose having the relationship 
summaries filed with the Commission. First, every relationship summary 
would be easily accessible through the Commission's website. The public 
would benefit by being able to use a central location to find any 
firm's relationship summary. Easy access to various relationship 
summaries through one source may facilitate simpler comparison across 
firms. Second, some firms may not maintain a website, and therefore 
their relationship summaries would not otherwise be accessible to the 
public. Although we are proposing that firms without a website include 
a toll-free telephone number in their relationship summaries that 
retail investors can call to obtain up-to-date information,\320\ 
requiring filing with the Commission will allow the public to access 
any firm's relationship summary. Lastly, by having firms file the 
relationship summaries with the Commission, the Commission can more 
easily monitor the filings for compliance with Form CRS.
---------------------------------------------------------------------------

    \320\ Proposed General Instruction 8.(a) to Form CRS.
---------------------------------------------------------------------------

2. Delivery Requirements
    We propose to require that a firm deliver the relationship summary 
to each retail investor, in the case of an investment adviser, before 
or at the time the firm enters into an investment advisory agreement 
or, in the case of a broker-dealer, before or at the time the retail 
investor first engages the firm's services.\321\ A dual registrant 
should deliver the relationship summary at the earlier of entering into 
an investment advisory agreement with the retail investor or the retail 
investor engaging the firm's services.\322\ We encourage delivery of 
the relationship summary far enough in advance of a final decision to 
engage the firm to allow for meaningful discussion between the 
financial professional and retail investor, including by using the Key 
Questions, and for the retail investor to understand the information 
and weigh the available options. The delivery requirement

[[Page 21453]]

applies to investment advisers even if the investment advisory 
agreement is oral, and to broker-dealers even if a transaction is 
executed outside of an account or without an account opening agreement, 
as further discussed below. In the case of paper delivery, if firms do 
not deliver the relationship summary as the sole document, firms should 
ensure that it is the first among any documents that are delivered at 
that time.\323\ A firm would be permitted to deliver the relationship 
summary (including updates) electronically, consistent with the 
Commission's guidance regarding electronic delivery.\324\ We are also 
proposing a requirement for firms that maintain a public website to 
post their relationship summaries on their websites in a way that is 
easy for retail investors to find.\325\ Firms that do not maintain a 
website would be required to include in their relationship summaries a 
toll-free number for investors to call to obtain documents.\326\
---------------------------------------------------------------------------

    \321\ Advisers Act proposed rule 204-5(b)(1) and Exchange Act 
proposed rule 17a-14(c)(1); proposed General Instruction 5.(b) to 
Form CRS.
    \322\ Advisers Act proposed rule 204-5(b)(1) (investment 
advisers or their supervised persons must deliver to each retail 
investor a current Form CRS before or at the time the investment 
adviser enters into an investment advisory contract with the retail 
investors) and Exchange Act proposed rule 17a-14(c)(1) (broker-
dealers must deliver to each retail investor a current Form CRS 
before or at the time the retail investor first engages the broker-
dealer's services). See also proposed General Instruction 5.(b) to 
Form CRS.
    \323\ Proposed General Instruction 8.(c) to Form CRS.
    \324\ See Use of Electronic Media by Broker-Dealers, Transfer 
Agents, and Investment Advisers for Delivery of Information; 
Additional Examples Under the Securities Act of 1933, Securities 
Exchange Act of 1934, and Investment Company Act of 1940, Exchange 
Act Release No. 37182 (May 9, 1996) [61 FR 24644 (May 15, 1996)] 
(``96 Guidance''). See also Use of Electronic Media, Exchange Act 
Release No. 42728 (Apr. 28, 2000) [65 FR 25843 (May 4, 2000)] 
(``2000 Guidance''); and Use of Electronic Media for Delivery 
Purposes, Exchange Act Release No. 36345 (Oct. 6, 1995) [60 FR 53458 
(Oct. 13, 1995)] (``95 Guidance'').
    \325\ Advisers Act proposed rule 204-5(b)(3) and Exchange Act 
proposed rule 17a-14(c)(3); proposed General Instruction 8.(a) to 
Form CRS.
    \326\ Proposed General Instruction 8.(a) to Form CRS.
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    The timing of the initial delivery of the relationship summary for 
investment advisers generally tracks that of Form ADV Part 2A.\327\ The 
requirement for broker-dealers is intended to capture the earliest 
point in time at which a retail investor engages the services of a 
broker-dealer, including instances when a customer opens an account 
with the broker-dealer, or effects a transaction through the broker-
dealer in the absence of an account, for example, by purchasing a 
mutual fund through the broker-dealer via ``check and application.'' 
\328\ We believe that providing the retail investor the relationship 
summary at this first juncture would better assist the retail investor 
in making a determination whether to open an account with a broker-
dealer. The rule does not require delivery to a retail investor to whom 
a broker-dealer makes a recommendation, if that retail investor does 
not open or have an account with the broker-dealer, or that 
recommendation does not lead to a transaction with that broker-dealer. 
If the recommendation leads to a transaction with the broker-dealer who 
made the recommendation, we would consider the retail investor to be 
``engaging the services'' of that broker-dealer at the time the 
customer places the order or an account is opened, whichever occurs 
first.
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    \327\ See Instruction 1 of General Instructions for Part 2A of 
Form ADV.
    \328\ The obligation for a broker-dealer to deliver a 
relationship summary is broader than the proposed application of 
Regulation Best Interest, which would apply when a broker-dealer 
provides a recommendation. See supra note 29. Broker-dealers and 
investment advisers that offer online services would be required to 
provide the relationship summary to retail investors even if the 
only services provided to the customer or client is to offer a 
choice of investment options from an online menu of products, i.e., 
even if the broker-dealer does not provide a recommendation, 
provided that the retail investor engages its services. See also 
infra note 337 and accompanying text.
---------------------------------------------------------------------------

    In addition, a firm would be required to provide a relationship 
summary to an existing client or customer who is a retail investor 
before or at the time a new account is opened or changes are made to 
the retail investor's account(s) that would materially change the 
nature and scope of the firm's relationship with the retail 
investor.\329\ Such changes would include a recommendation that the 
retail investor transfer from an investment advisory account to a 
brokerage account or from a brokerage account to an investment advisory 
account, or move assets from one type of account to another in a 
transaction that is not in the normal, customary, or already agreed 
course of dealing.\330\ A move of assets from one type of account to 
another in a transaction not in the normal, customary, or already 
agreed course of dealing could include, for example, asset transfers 
due to an IRA rollover; deposits or the investment of monies based on 
infrequent events or unusual size, such as an inheritance or receipt 
from a property sale; or a significant migration of funds from savings 
to an investment account. If a firm does not have any retail investors 
to whom it must deliver a relationship summary, it would not be 
required to prepare one.\331\ A firm would be required to deliver the 
relationship summary to a retail investor within 30 days upon 
request.\332\
---------------------------------------------------------------------------

    \329\ Advisers Act proposed rule 204-5(b)(2) and Exchange Act 
proposed rule 17a-14(c)(2); proposed General Instruction 7.(a) to 
Form CRS.
    \330\ Advisers Act proposed rule 204-5(b)(2) and Exchange Act 
proposed rule 17a-14(c)(2); proposed General Instruction 7.(a) to 
Form CRS.
    \331\ Proposed General Instruction 5.(a) to Form CRS.
    \332\ Advisers Act proposed rule 204-5(b)(5) and Exchange Act 
proposed rule 17a-14(c)(5); proposed General Instruction 7.(b) to 
Form CRS.
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    We are proposing different triggers for initial delivery of the 
relationship summary by investment advisers (before or at the time the 
firm enters into an investment advisory agreement with the retail 
investor) and by broker-dealers (before or at the time the retail 
investor first engages the firm's services). These proposed 
requirements are intended to make the relationship summary readily 
accessible to retail investors at the time when they are choosing 
investment services and are generally consistent with the approach many 
commenters recommended.\333\ In addition, the trigger for investment 
advisers is consistent with current requirements for investment 
advisers to deliver the Form ADV Part 2 brochure.\334\ A few commenters 
suggested that disclosures be delivered before a broker-dealer first 
executes a transaction based on a recommendation to a retail 
investor.\335\ Along these lines, we believe that retail investors 
should receive the relationship summary as part of the process of 
engaging the services of a financial professional or firm so the retail 
investor has the relevant information to make that decision.\336\ In 
particular, because broker-dealers are not required to enter into a 
formal agreement with a customer in order to provide services, there 
may be instances in which retail investors engage the services of a 
broker-dealer without (or before) formally opening a brokerage account 
(e.g., by entering an agreement

[[Page 21454]]

with the broker-dealer). For example, some broker-dealers assist their 
customers in purchasing mutual funds or variable insurance products to 
be held with the mutual fund or variable insurance product issuer, by 
sending checks and applications directly to the fund or issuer (this is 
sometimes referred to as ``check and application,'' ``application-
way,'' ``subscription-way'' or ``direct application'' business; we use 
the term ``check and application'' for simplicity).\337\ In light of 
these types of circumstances, we are proposing to require broker-
dealers to deliver the relationship summary before or at the time the 
retail investor first engages the firm's services. As noted above, we 
would not interpret the term ``engage the firm's services'' to capture 
a recommendation by a broker-dealer to a retail investor who does not 
already have an account with that broker-dealer, if that recommendation 
does not lead to a transaction with that broker-dealer.
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    \333\ Many commenters suggested that the document be provided at 
the beginning of the relationship with a firm; such as before or at 
the time the retail investor enters into the agreement. See, e.g., 
Stifel 2017 Letter; Equity Dealers of America 2017 Letter; Fidelity 
2017 Letter; AARP 2017 Letter; State Farm 2017 Letter; AFL-CIO 2017 
Letter; CFA 2017 Letter; Wells Fargo 2017 Letter.
    \334\ An investment adviser is required to give a firm brochure 
to each client before or at the time the adviser enter into an 
advisory agreement with that client. See Advisers Act rule 204-3(b).
    \335\ See, e.g., SIFMA 2017 Letter.
    \336\ See, e.g., 917 Financial Literacy Study, supra note 20, at 
iv (``Generally, retail investors prefer to receive disclosures 
before making a decision on whether to engage a financial 
intermediary or purchase an investment product or service.''); 
Equity Dealers of America 2017 Letter, at 2 (``[W]e believe that [a 
relationship summary] should be a pillar to any new standard when 
establishing a new brokerage or advisory account relationship . . . 
Whether a client wants incidental advice, the ability to provide 
their own investment ideas or to direct their own transactions as 
associated with a brokerage account or whether a client wants 
ongoing advice, monitoring, and a level fee as associated with an 
advisory account will determine the type of account they choose.''); 
State Farm 2017 Letter; AARP 2017 Letter; AFL-CIO 2017 Letter, at 3 
(``If [a proposed enhanced standard of conduct] were supplemented by 
pre-engagement disclosures that briefly and clearly describe the 
sales nature of the broker's services, . . . investors would be 
modestly better off than they are today.''); Fidelity 2017 Letter; 
Kiley 2017 Letter; CFA 2017 Letter.
    \337\ The broker-dealer is typically listed as the broker-dealer 
of record on the retail investor's account application, and 
generally receives fees or commissions resulting from the retail 
investor's transactions in the account. See, e.g., Transfers of 
Mutual Funds and Variable Annuities, FINRA Notice to Members 04-72 
(Oct. 2004), available at https://www.finra.org/sites/default/files/NoticeDocument/p011634.pdf. See also supra note 328 and accompanying 
text.
---------------------------------------------------------------------------

    We also believe that retail investors who are existing clients and 
customers should be reminded of the information highlighted in the 
relationship summary before or at the time (i) a new account is opened 
that is different from the retail investor's existing account(s); or 
(ii) changes are made to the retail investor's existing accounts that 
would materially change the nature and scope of the firm's relationship 
with the retail investor.\338\ For example, firms would be required to 
provide a current version of the relationship summary before or at the 
time a recommendation is made that the retail investor transfers from 
an investment advisory account to a brokerage account, transfers from a 
brokerage account to an investment advisory account, or moves assets 
from one type of account to another in a transaction not in the normal, 
customary or already agreed course of dealing.\339\ In these instances, 
retail investors are again making decisions about whether to invest 
through an advisory account or a brokerage account and would benefit 
from information about the different services and fees that the firm 
offers to make an informed choice. Therefore, we are proposing that 
firms be required to deliver the relationship summary to existing 
retail investors before or at the time these changes occur. Whether a 
change would require delivery of the relationship summary would depend 
on the specific facts and circumstances.\340\ For example, transfers 
among accounts that occur in the ordinary course of business, such as a 
periodic rebalancing of assets among two accounts or quarterly 
investments in a retirement account, would not require the delivery of 
a relationship summary.\341\
---------------------------------------------------------------------------

    \338\ Advisers Act proposed rule 204-5(b)(2) and Exchange Act 
proposed rule 17a-14(c)(2); proposed General Instruction 7.(a) to 
Form CRS.
    \339\ Id.
    \340\ Id.
    \341\ Id.
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    As with other disclosures firms must deliver, firms would be able 
to deliver the relationship summary (including updates) electronically, 
within the framework of the Commission's guidance regarding electronic 
delivery of documents.\342\ The Commission's previously issued guidance 
applicable to electronic delivery of certain documents by investment 
advisers and broker-dealers consists of the following elements: (i) 
Notice to the investor that information is available electronically; 
(ii) access to information comparable to that which would have been 
provided in paper form and that is not so burdensome that the intended 
recipients cannot effectively access it; and (iii) evidence to show 
delivery, i.e., reason to believe that electronically delivered 
information will result in the satisfaction of the delivery 
requirements under the federal securities laws.\343\
---------------------------------------------------------------------------

    \342\ Proposed General Instruction 8.(b) to Form CRS. See 96 
Guidance, supra note 324.
    \343\ 96 Guidance, supra note 324.
---------------------------------------------------------------------------

    We believe that retail investors who are prospective clients or 
customers of a firm would benefit from receiving the relationship 
summary as early as possible when engaging the services of a financial 
professional or firm, so the retail investor has the relevant 
information to make that decision. Further to that goal, and in an 
effort to provide flexibility and recognize the proliferation of means 
of electronic communications that firms and retail investors may 
utilize, a firm would be able to deliver the relationship summary to 
new or prospective clients or customers in a manner that is consistent 
with how the retail investor requested information about the firm or 
financial professional.\344\ This method of initial delivery for the 
relationship summary would be consistent with the Commission 
guidance.\345\ With respect to existing clients or customers, firms 
should deliver the relationship summary in a manner consistent with the 
firm's existing arrangement with that client or customer and with the 
Commission guidance.
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    \344\ For example, a retail investor without access to a 
computer or email would likely request information in person or by 
telephone, and the financial professional would deliver a hard copy 
of the relationship summary in person or by mail.
    \345\ Firms could meet the elements of the Commission's 
electronic delivery guidance in other ways as well when delivering 
the relationship summary to new or prospective clients or customers. 
See 2000 Guidance, supra note 324, at 65 FR 25845-46; 96 Guidance, 
supra note 324, at 61 FR at 24647; 95 Guidance, supra note 324, at 
60 FR at 53461.
---------------------------------------------------------------------------

    In connection with account openings conducted online, the 
Commission previously stated in its 2000 Guidance that broker-dealers 
could obtain consent from a new customer to electronic delivery of 
documents through an account-opening agreement that contains a separate 
section with a separate e-delivery authorization, or through a separate 
document altogether.\346\ The Commission noted that a global consent to 
e-delivery would not be an informed consent if the opening of a 
brokerage account were conditioned upon providing the consent; in such 
cases other evidence of delivery would be required.\347\ However, the 
2000 Guidance made an exception for brokerage firms that require 
accounts to be opened online and all account transactions to be 
initiated and conducted online, stating, ``In these instances only, the 
opening of a brokerage account may be conditioned upon providing global 
consent to electronic delivery.'' \348\ We understand that for some 
robo-advisers, the account opening process and subsequent investment 
decisions and transactions may involve similarly limited interaction 
with a financial professional. Therefore, it would be consistent with 
the Commission's prior guidance if firms that offer only online account 
openings and account transactions, including robo-advisers and online 
broker-dealers, made global consent to electronic delivery a condition 
of account opening, for purposes of delivering the relationship 
summary.
---------------------------------------------------------------------------

    \346\ 2000 Guidance, supra note 324, at 65 FR 25846.
    \347\ Id. Evidence of delivery could include, for example: 
Obtaining evidence that an investor actually received the 
information such as by electronic mail return receipt or 
confirmation of access, downloading, or printing; an investor's 
accessing a document with hyperlinking to a required document; or 
using other forms or material available only by accessing the 
information. See 1995 Guidance, supra note 324, at section II.C.
    \348\ Id. at n.27.
---------------------------------------------------------------------------

    We request comment on whether the Commission should provide 
additional guidance with respect to electronic delivery of the 
relationship summary to

[[Page 21455]]

new and prospective or existing clients and customers.
3. Updating Requirements
    The relationship summary is designed to provide information to 
assist retail investors in making a decision about whether to engage a 
firm and open a particular type of account, but it is also important 
for retail investors to know when there have been changes to this 
information to inform their continuing choice to keep their account 
with the firm. For example, as noted above, the staff's 917 Financial 
Literacy Study indicates that retail investors find the nature and 
scope of a firm's services, its fees and conflicts of interest, and the 
disciplinary history of financial professionals to be important in 
choosing financial intermediaries.\349\ To the extent that this 
information changes in a material way, existing clients and customers 
should be made aware so that they can decide whether the choice of that 
particular firm or financial professional remains appropriate and 
consistent with their decision-making criteria. Therefore, we are 
proposing to require a firm to update its relationship summary within 
30 days whenever the relationship summary becomes materially 
inaccurate.\350\ Firms also would be required to post the latest 
version on their websites (if they have one), and electronically file 
the relationship summary with the Commission.\351\ We believe this 
approach is consistent with the current requirements for investment 
advisers to update the Form ADV Part 2 brochure,\352\ and with broker-
dealers' current obligations, including to update Form BD if its 
information is or becomes inaccurate for any reason, which information 
generally would be made available through EDGAR.\353\ We believe 
allowing 30 days for firms to make updates provides sufficient time for 
firms to make the necessary changes and gives the benefit of certainty 
of when the updates must be made.
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    \349\ See 917 Financial Literacy Study, supra notes 20-21 and 
accompanying text.
    \350\ Advisers Act proposed rule 204-1(a)(2) and Exchange Act 
proposed rule 17a-14(b)(3); proposed General Instruction 6.(a) to 
Form CRS.
    \351\ Advisers Act proposed rules 203-1(a)(1), 204-5(b)(3) and 
Exchange Act proposed rule 17a-14(b)(2), 17a-14(c)(3); proposed 
General Instructions 5.(a), 6.(c) and 8 to Form CRS.
    \352\ See, e.g., Advisers Act proposed rule 204-5(b)(4) and 
Exchange Act proposed rule 17a-14(a)(3); proposed General 
Instruction 6 to Form CRS. Generally, an investment adviser 
registered with the SEC or a state securities authority is required 
to amend its Form ADV promptly if information it provided in its 
brochure becomes materially inaccurate. See Advisers Act rule 204-
1(a)(2); Instruction 4 of General Instructions to Form ADV.
    \353\ See, e.g., Exchange Act rule 15b3-1.
---------------------------------------------------------------------------

    Our proposal would also require firms to communicate without charge 
the information in an amended relationship summary to retail investors 
who are existing clients or customers of the firm within 30 days after 
the updates are required to be made.\354\ Firms could communicate this 
information by delivering the amended relationship summary or by 
communicating the information another way to the retail investor.\355\ 
For example, if an investment adviser communicated a material change to 
information contained in its relationship summary to a retail investor 
by delivering an amended Form ADV brochure or Form ADV summary of 
material changes containing the updated information, this would support 
a reasonable belief that the information had been communicated to the 
retail investor, and the investment adviser would not be required to 
deliver an updated relationship summary to that retail investor. This 
requirement provides firms the ability to disclose changes without 
requiring them to duplicate disclosures and incur additional costs. A 
retail investor also would be able to find the latest version of the 
relationship summary on the firm's website, if it has one, and firms 
would be required to deliver it upon the retail investor's 
request.\356\
---------------------------------------------------------------------------

    \354\ Advisers Act proposed rule 204-5(b)(4) and Exchange Act 
proposed rule 17a-14(c)(4); proposed General Instruction 6.(b) to 
Form CRS.
    \355\ Id.
    \356\ Advisers Act proposed rules 204-5(b)(3) and 204-5(b)(5) 
and Exchange Act proposed rules 17a-14(c)(3) and 17a-14(c)(5); 
proposed General Instructions 7 and 8 to Form CRS.
---------------------------------------------------------------------------

    For purposes of this requirement, it is important that broker-
dealers identify their existing customers who are retail investors and 
recognize that a customer relationship may take many forms. For 
example, under this requirement, a broker-dealer would be required to 
provide the relationship summary to customers who have so-called 
``check and application'' arrangements with the broker-dealer, under 
which a broker-dealer directs the customer to send the application and 
check directly to the issuer. We believe this approach would facilitate 
broker-dealers building upon their current compliance infrastructure in 
identifying existing customers \357\ and would enhance investor 
protections to retail investors engaging the financial services of 
broker-dealers.
---------------------------------------------------------------------------

    \357\ For example, broker-dealers may already have compliance 
infrastructure to identify customers pursuant to FINRA's suitability 
rule, which applies to dealings with a person (other than a broker 
or dealer) who opens a brokerage account at a broker-dealer or who 
purchases a security for which the broker-dealer receives or will 
receive, directly or indirectly, compensation even though the 
security is held at an issuer, the issuer's affiliate or custodial 
agent, or using another similar arrangement. See Guidance on FINRA's 
Suitability Rule, FINRA Regulatory Notice 12-55 (Dec. 2012), at 
Q6(a), available at https://finra.complinet.com/net_file_store/new_rulebooks/f/i/FINRANotice12_55.pdf.
---------------------------------------------------------------------------

    Finally, our proposal would require a firm to file its relationship 
summary with the Commission and to maintain the relationship summary 
and all updates as part of its books and records and make it available 
to Commission staff upon request, as discussed in Section IV 
below.\358\
---------------------------------------------------------------------------

    \358\ See Advisers Act proposed rule 204-2(a)(14)(i) and 
Exchange Act proposed rule 17a-3(a)(24).
---------------------------------------------------------------------------

    We request comment on filing, delivery, and updating requirements 
generally, and on the following areas specifically:
     Does this approach to filing, delivery, and updating 
create unique challenges for firms that are providing the relationship 
summary electronically? Does this approach provide retail investors 
with ready access to the information that they need and want in 
connection with the decision to engage a broker-dealer or investment 
adviser?
     Should a relationship summary be required for all 
investment advisers, broker-dealers and dual registrants that provide 
services to retail investors, or should there be any exceptions? For 
example, should execution-only broker-dealers be excluded from the 
requirement to provide the relationship summary because they do not 
provide investment advice to their customers? Should clearing broker-
dealers be excluded from the requirement to prepare and deliver the 
relationship summary to the extent their customers are introduced by an 
introducing broker-dealer pursuant to a clearing agreement? If so, why? 
Should the Commission consider any other exclusions for clearing 
broker-dealers or other entities? If so, why?
     Should a clearing broker-dealer and introducing broker-
dealer be allowed to agree to allocate the responsibility to deliver 
the relationship summary pursuant to applicable self-regulatory rules? 
\359\ Should investment advisers with sub-advisory relationships be 
allowed to receive the relationship summary, and any updated 
information in relationship summaries, from the

[[Page 21456]]

sub-advisers, on behalf of the primary investment adviser's clients? 
Should such clients receive the relationship summary of the sub-
adviser?
---------------------------------------------------------------------------

    \359\ See, e.g., FINRA Rule 4311(c) (Carrying Agreements) 
(requiring each carrying agreement in which accounts are to be 
carried on a fully disclosed basis to specify the responsibilities 
of each party to the agreement), available at https://finra.complinet.com/en/display/display.html?rbid=2403&element_id=10028.
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     Should the relationship summary be required in addition to 
firms' existing disclosure requirements, as proposed? Is the 
relationship summary duplicative of or does it conflict with any 
existing disclosure requirements in any way? What, if any, changes 
would we need to make to the relationship summary if we were to permit 
its delivery in lieu of other disclosures and why would those changes 
be appropriate? Should the Commission instead make any changes to 
existing rules to permit the relationship summary to serve as the venue 
for disclosures required by those rules?
     Should investment advisers that deliver a relationship 
summary have different delivery requirements for the Form ADV brochure 
and brochure supplement?
     Is IARD the optimal system for investment advisers to file 
Form CRS with the Commission? Is EDGAR the optimal system for broker-
dealers to file Form CRS with the Commission? Should dual registrants 
be required to file on both EDGAR and IARD? \360\ Should broker-dealers 
instead be required to file Form CRS solely through IARD? What would be 
the costs or benefits associated with broker-dealers becoming familiar 
with and filing through IARD system rather than through EDGAR? Is there 
another method of electronic filing the Commission should consider for 
Form CRS and why? If broker-dealers should file using a system other 
than EDGAR, what would be the costs and benefits associated with 
creation of, and/or becoming familiar with and filing through, that 
system? Should investment advisers and broker-dealers be required to 
file on the same system?
---------------------------------------------------------------------------

    \360\ See proposed General Instruction 5.(a) to Form CRS.
---------------------------------------------------------------------------

     How important to investors and other interested parties is 
the fact that IAPD serves as the single public disclosure website to 
access an adviser's current filings with the Commission, and compare 
certain filings of other advisers? What would be the impact of retail 
investors having to access a separate website for the relationship 
summary?
     How should the relationship summary be filed? Should it be 
filed as a text-searchable PDF, similar to how Form ADV is currently 
filed? Would a structured PDF, a web-fillable form, HTML, XML, XBRL, 
Inline XBRL or another format be more appropriate, and why? Should the 
Commission require a single, specified format for all firms, require 
one format for EDGAR filings and another format for IARD filings, or 
permit filers to select from two or more possible formats? Would retail 
investors use the relationship summary to obtain information about one 
particular firm, or to compare information among firms? What type of 
format would make it easier for retail investors to use the 
relationship summary in these ways? For example, would retail investors 
seek to compare the information about fees across a number of firms, 
and if so, would a structured format, such as XML or Inline XBRL or an 
unstructured format, such as PDF or HTML, better facilitate such a 
comparison? Which filing formats would illustrate the formatting of 
relationship summaries that are provided electronically, for example, 
relationship summaries sent in the body of an email, posted on the 
firm's website, or formatted for a mobile device? Which formats might 
be most beneficial to retail investors?
     What time or expense is associated with particular 
formats? What time or expense would be required of the public to view 
disclosures in a particular format? Would open source, freely available 
formats be preferred by users and filers, or would commercial 
proprietary formats be preferred? Would a particular format require any 
filers or users to license commercial software they otherwise would 
not, and, if so, at what expense? Would a particular format or formats 
provide more or fewer features with respect to comparability, 
reusability, validation, or analysis? What other considerations are 
related to specific formats? Would a particular format make it possible 
to confirm that a firm complied with the Form CRS requirements and 
validate the information provided before filing? If so, which format 
would filers or users find the most useful?
     We propose to require that an investment adviser deliver 
the relationship summary before or at the time the firm enters into an 
investment advisory agreement with a retail investor or, in the case of 
a broker-dealer, before or at the time the retail investor first 
engages the firm's services. Would this requirement give a retail 
investor ample time to process the information and ask questions before 
entering into an agreement? Or should we require that the relationship 
summary be delivered a certain amount of time before the firm enters 
into an agreement with a retail investor (e.g., 48 hours or a 15 minute 
waiting period)? For broker-dealers, should we require delivery of the 
relationship summary at the earlier of a recommendation or engagement, 
as opposed to just engagement? We also propose that a broker-dealer 
would not need to deliver the relationship summary to a retail investor 
to whom a broker-dealer makes a recommendation, if that retail investor 
does not open or have an account with the broker-dealer, or that 
recommendation does not lead to a transaction with that broker-dealer. 
Should we instead require that broker-dealers deliver the relationship 
summary to prospective customers regardless of whether that leads to a 
transaction or account opening?
     Would the delivery requirements applicable to firms that 
offer only online account openings, investment advice, and transactions 
provide sufficient notice to retail investors of the relationship 
summary's availability and content? Should the Commission require such 
firms to ensure that the relationship summary is delivered separately 
from other disclosures, with additional prominence and emphasis? For 
example, should firms consider employing the technology to require a 
retail investor to scroll through the entirety of the relationship 
summary before entering the next stage in the account opening process, 
accessing a different part of the website in order to obtain more 
information, or permitting the retail investor to check a box in order 
to accept the client agreement? Are there other requirements that 
should be considered for such firms in the delivery of the relationship 
summary when entering into the brokerage or advisory relationship, when 
the nature of that relationship changes, or when updates to the 
relationship summary are made?
     We also propose to require that a firm deliver a 
relationship summary before or at the time the firm implements changes 
that would materially change the nature and scope of the existing 
relationship with a retail investor, for example by the opening of an 
additional account or accounts and/or the migration of assets from one 
account type to another. Should the Commission provide more guidance 
for what might constitute a material change to the nature and scope of 
the relationship or the moving of a significant amount of assets from 
one type of account to another? If so, do commenters have suggestions 
on how the Commission should interpret ``material change to the nature 
and scope of the relationship'' and ``significant amount of assets''? 
Should the delivery of the relationship summary under these 
circumstances be accompanied by additional oral

[[Page 21457]]

disclosures or other types of supplemental information? Would this 
requirement give retail investors sufficient opportunity to process the 
information and ask questions before the changes are made? Should we 
specify how far in advance a firm should deliver the relationship 
summary before making such changes?
     Should we require that firms deliver an updated 
relationship summary to retail investors periodically (e.g., quarterly, 
semi-annually or annually) or whenever there is a material change, as 
proposed, such as a change in fees or commission structure?
     We propose to require that a firm deliver the relationship 
summary to a retail investor upon request. Would that requirement be 
helpful for retail investors? Would that requirement be burdensome for 
firms? Should we require firms to deliver the relationship summary upon 
request by any investor, not just retail investors and any trust or 
other similar entity that represents natural persons?
     We propose to require broker-dealers to initially deliver 
the relationship summary ``before or at the time the retail investor 
first engages the firm's services.'' Would the proposed formulation 
capture instances where a retail investor engages the services of a 
broker-dealer to carry out a transaction outside of an account, for 
example, by purchasing a mutual fund or variable annuity product 
through the broker-dealer via ``check and application''? We do not 
intend to capture instances in which a broker-dealer makes a 
recommendation to a retail investor who does not already have an 
account with that broker-dealer, if that recommendation does not lead 
to a transaction with that broker-dealer. Would such recommendations be 
captured by the proposed language? Would a different formulation be 
clearer (e.g., ``before or at the time the retail investor first enters 
a relationship,'' or ``before or at the time the retail investor 
engages in a transaction or opens an account, whichever occurs first,'' 
or ``before or at the time the retail investor indicates an intent to 
open an account or engage in a transaction, whichever occurs first'')? 
Why or why not? Should the delivery requirements for investment 
advisers and broker-dealers be identical? Why or why not?
     For investment advisers, our proposal generally tracks the 
initial delivery requirements for Form ADV Part 2.\361\ Should we 
instead follow a different disclosure delivery requirement? Should we 
adopt a different delivery requirement, recognizing that the purpose of 
the relationship summary is to provide information to retail investors 
to help them decide whether to engage a particular firm and open an 
investment advisory or brokerage account?
---------------------------------------------------------------------------

    \361\ See Advisers Act rule 204-3.
---------------------------------------------------------------------------

     We propose to permit firms to deliver the relationship 
summary electronically consistent with prior Commission guidance on 
electronic delivery, as discussed above. Is the guidance clear on how 
firms may meet their obligations with respect to delivering the 
relationship summary, or should we provide more guidance? Should any 
additional guidance be more or less prescriptive? Would our proposed 
approach adequately protect investors who have no internet access or 
limited internet access or who prefer not to receive information about 
firms electronically? Is the guidance workable for a disclosure 
delivered at or before the retail investor enters into an agreement 
with an investment adviser or first engages the services of a broker-
dealer?
     Should we permit firms to meet their relationship summary 
obligations by filing their relationship summary with the Commission or 
by posting it online without giving or sending it to specific retail 
investors?
     Should firms also be required to notify retail investors 
that an updated relationship summary is available online? Should we 
require firms to highlight the information that has changed since the 
prior version in an updated relationship summary? If firms communicate 
the changes in the relationship summary by means other than delivery of 
the updated relationship summary, should they be required to inform 
existing retail investors that the existing version is outdated? Are 
there additional requirements that we should consider for amendments to 
relationship summaries, particularly for firms without a website?
     How can we encourage the prominence of the relationship 
summary for retail investors? We are proposing that, if the 
relationship summary is delivered on paper and not as a standalone 
document, firms should ensure that it is the first among any other 
materials or documents that are delivered at that time. Should we 
require that the relationship summary be given greater prominence than 
other materials that accompany it in some other way or that the 
relationship summary not be bound together with any of those materials? 
Should we impose additional requirements to encourage the prominence 
and separateness of the relationship summary? Should we include 
additional or different requirements for relationship summaries that 
are delivered electronically? Should we require that the entire text of 
the relationship summary be provided in the text of an email or other 
form of electronic messaging, instead of an attachment or a link to the 
summary disclosure on the firm's website? Are there more dynamic ways 
to present the relationship summary information online, such as with 
the use of tool tips, explanatory videos, or chat bots to provide 
answers to questions? Are there other ways of increasing the prominence 
of the relationship summary, whether delivered in paper format or 
electronically?
     Should we require a financial professional to make certain 
oral disclosures at time of delivery? For example, should we require 
that a financial professional ask the retail investor if he or she has 
any questions about the relationship summary? How would this be 
satisfied in the context of a primarily or exclusively online or 
electronic delivery?
     Should a firm be required to communicate any material 
changes made to the relationship summary within 30 days, as proposed, 
or sooner, for example in the case of transactions not in the normal, 
customary, or already agreed course of dealing? Should a firm have the 
option of choosing to communicate the new information by either filing 
an amended Form CRS or by communicating the new information to retail 
investors in another way? Should we provide more guidance on the types 
of ways in which the information may be communicated? Should we instead 
require a firm to deliver an amended relationship summary to its 
existing retail investors?
     Are there other changes in conditions that should trigger 
a delivery requirement?
     We are proposing that firms that do not maintain a website 
include in their relationship summaries a toll-free phone number for 
investors to call to obtain documents. Are there additional 
requirements or different approaches that we should consider for firms 
that do not maintain websites, to make it easier for the public to 
access their relationship summaries?

D. Transition Provisions

    To provide adequate notice and opportunity to comply with the 
proposed relationship summary filing requirements, newly registered 
broker-dealers and new applicants for registration with the Commission 
as

[[Page 21458]]

investment advisers would not be required to file or deliver their 
relationship summaries until the date six months after the effective 
date of the proposed new rules and rule amendments.\362\ After that 
date, newly registered broker-dealers would be required to file their 
Form CRS with the Commission by the date on which their registration 
with the Commission becomes effective, and the Commission would not 
accept any initial application for registration as an investment 
adviser that does not include a relationship summary that satisfies the 
requirements of Form ADV, Part 3: Form CRS.\363\
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    \362\ See Advisers Act proposed rule 203-1(a)(2) and Exchange 
Act proposed rule 17a-14(f)(1).
    \363\ See Advisers Act proposed rule 203-1(a)(2) and Exchange 
Act proposed rule 17a-14(f)(3).
---------------------------------------------------------------------------

    Similarly, we believe it would be helpful to provide sufficient 
time for advisers and broker-dealers already registered with us to 
prepare the new Form CRS and file it electronically with the 
Commission. Accordingly, we propose to require a broker-dealer that is 
registered with us as of the effective date of the proposed new rules 
and rule amendments to comply with the new Form CRS filing requirements 
by the date that is six months after the effective date of the proposed 
new rules and rule amendments.\364\ We also propose requiring an 
investment adviser or a dual registrant that is registered with us as 
of the effective date to comply with the new filing requirements as 
part of the firm's next annual updating amendment to Form ADV that is 
required after six months after the rule's effective date.\365\ Such an 
adviser or dual registrant would be required to include Form CRS as 
part of its next such annual updating amendment filing with the 
Commission.\366\
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    \364\ See Exchange Act proposed rule 17a-14(f)(1); proposed 
General Instruction 5.(c)(i) to Form CRS.
    \365\ See Advisers Act proposed rule 204-1(b)(3); proposed 
General Instruction 5.(c)(i) to Form CRS.
    \366\ See id.
---------------------------------------------------------------------------

    We are proposing to require that a firm deliver its relationship 
summary to all of its existing clients and customers who are retail 
investors on an initial one-time basis within 30 days after the date 
the firm is first required to file its relationship summary with the 
Commission.\367\ This proposed requirement would allow existing retail 
investor clients and customers to receive the important disclosures in 
the relationship summary that will be provided to new and prospective 
retail investor customers and clients. A firm would be required to give 
its relationship summary to its new and prospective clients and 
customers who are retail investors beginning on the date the firm is 
first required to electronically file its relationship summary with the 
Commission, and would be required to give the relationship summary to 
its existing clients and customers who are retail investors within 30 
days, pursuant to the rule's requirements for initial delivery and 
updating.\368\
---------------------------------------------------------------------------

    \367\ See Advisers Act proposed rule 204-5(e)(1) and Exchange 
Act proposed rule 17a-14(f)(2); proposed General Instruction 
5.(c)(iii) to Form CRS.
    \368\ See Advisers Act proposed rule 204-5(e) and Exchange Act 
proposed rule 17a-14(f)(1), (2); proposed General Instruction 
5.(c)(ii), (iii) to Form CRS.
---------------------------------------------------------------------------

    We request comment on our proposed implementation requirements.
     Would a six-month period from the effective date of Form 
CRS provide enough time for newly registered broker-dealers and 
investment advisers that are filing their initial applications for 
registration with the Commission to complete Form CRS? If not, please 
explain why and how much time these advisers and broker-dealers would 
need to complete Form CRS.
     Should implementation of Form CRS filing requirements for 
broker-dealers be on a separate timetable from implementation of Form 
CRS filing requirements for investment advisers, as we have proposed, 
because registered investment advisers are not all required to file 
their Form ADV annual updating amendments on the same timetable? If 
not, please explain why and whether, in order to have one uniform 
initial filing date for broker-dealers and investment advisers, we 
should require investment advisers to potentially file their initial 
Form CRS more than once.
     Should a firm be required to comply with the rule's 
requirements for initial delivery to new and prospective clients and 
customers and for updating beginning on the date the firm is first 
required to electronically file its relationship summary with the 
Commission, as proposed? Should a firm deliver the relationship summary 
to all existing clients and customers who are retail investors within 
30 days after first filing the relationship summary with the 
Commission, as proposed? These requirements would result in a different 
delivery timetable for broker-dealers and investment advisers because 
investment advisers would file Form CRS with their Form ADV annual 
updating amendments. Should we instead require all firms to deliver the 
relationship summary to retail investors beginning on the same date 
(e.g., within six months from the effective date of Form CRS), even if 
investment advisers file Form CRS after that date? Or should we require 
firms to deliver to existing retail investor customers and clients 
initial relationship summaries at a later date? For example, firms 
could be required to deliver the relationship summary only before or at 
the time a new account is opened or changes are made to the retail 
investor's account(s) that would materially change the nature and scope 
of the firm's relationship with the retail investor (including before 
or at the time the firm recommends that the retail investor transfers 
from an investment advisory account to a brokerage account or from a 
brokerage account to an investment advisory account, or moves assets 
from one type of account to another in a transaction not in the normal, 
customary or already agreed course of dealing).

E. Recordkeeping Amendments

    We are also proposing conforming amendments to Advisers Act rule 
204-2 and Exchange Act rules 17a-3 and 17a-4, which set forth 
requirements for maintaining, making and preserving specified books and 
records, to require SEC-registered investment advisers and broker-
dealers to retain copies of each relationship summary.\369\ Firms would 
also be required to maintain each amendment to the relationship summary 
as well as to make and preserve a record of dates that each 
relationship summary and each amendment was delivered to any client or 
to any prospective client who subsequently becomes a client, as well as 
to any retail investor before such retail investor opens an 
account.\370\ Requiring maintenance of these disclosures as part of the 
firm's books and records would facilitate the Commission's ability to 
inspect for and enforce compliance with firms' obligations with respect 
to Form CRS.
---------------------------------------------------------------------------

    \369\ Advisers Act proposed rule 204-2(a)(14)(i); Exchange Act 
proposed rules 17a-3(a)(24) and 17a-4(e)(10).
    \370\ Id.
---------------------------------------------------------------------------

    These proposed changes are designed to update the books and records 
rules in light of our proposed addition of Form ADV Part 3 for 
registered investment advisers and Form CRS for broker-dealers, and 
they mirror the current recordkeeping requirements for the Form ADV 
brochure and brochure supplement. The records for investment advisers 
would be required to be maintained in the same manner, and for the same 
period of time, as other books and records required to be maintained 
under rule 204-2(a), and the records for broker-dealers would be 
required to

[[Page 21459]]

maintained for a period of six years.\371\ The proposed required 
documentation, like other records, would be required to be provided to 
the staff ``promptly'' upon request.\372\
---------------------------------------------------------------------------

    \371\ See Advisers Act rule 204-2(e)(1); Exchange Act rule 17a-
4(e)(10). Pursuant to Advisers Act rule 204-2(e)(1), investment 
advisers will be required to maintain the relationship summary for a 
period of five years, while Exchange Act proposed rule 17a-4(e)(10) 
would require broker-dealers to maintain the relationship summary 
for a period of six years.
    \372\ See Advisers Act rule 204-2(g)(2); Exchange Act rule 17a-
4(j).
---------------------------------------------------------------------------

    We request comment on these proposed amendments.
     Are there other records related to the relationship 
summary or its delivery that we should require firms to keep? Should we 
require them to maintain copies of the relationship summary for a 
longer or shorter period than we have proposed? Should broker-dealers 
and investment advisers be required to keep relationship summary-
related records for the same amount of time? Should firms be required 
to document their responses to the ``key questions'' from investors?

III. Restrictions on the Use of Certain Names and Titles and Required 
Disclosures

    As discussed above, both broker-dealers and investment advisers 
provide investment advice to retail investors, but the regulatory 
regimes and business models under which they give that advice are 
different. For example, the principal services, compensation 
structures, conflicts, disclosure obligations, and legal standards of 
conduct can differ.\373\ We therefore believe that it is vital that 
retail investors understand whether the firm is a registered investment 
adviser or registered broker-dealer, and whether the individual 
providing services is associated with one or the other (or both), so 
that retail investors can make an informed selection of their financial 
professional, and then appropriately monitor their financial 
professional's conduct.
---------------------------------------------------------------------------

    \373\ See, e.g., 913 Study, supra note 3.
---------------------------------------------------------------------------

    While investors should understand who their financial professional 
is, and why that matters, studies indicate that retail investors do not 
understand these differences and are confused about whether their firm 
or financial professional is a broker-dealer or an investment adviser, 
or both.\374\ Proposed Form CRS, as set out in Section II above, should 
help to ameliorate this confusion by helping retail investors 
understand the services that a particular firm offers, and how those 
services differ based on whether the firm is a registered broker-
dealer, registered investment adviser, or both. We preliminarily 
believe, however, that Form CRS is not a complete remedy for investor 
confusion. The education and information that Form CRS provides to 
retail investors could potentially be overwhelmed by the way in which 
financial professionals present themselves to potential or current 
retail investors, including through advertising and other 
communications. This could particularly be the case where the 
presentation could be misleading in nature, or where advertising and 
communications precede the delivery of Form CRS and may have a 
disproportionate impact on shaping or influencing retail investor 
perceptions.
---------------------------------------------------------------------------

    \374\ See, e.g., Siegel & Gale Study, supra note 5; RAND Study, 
supra note 5; 913 Study, supra note 3. Additionally, the RAND Study 
noted that participants ``commented that the interchangeable titles 
and `we do it all' advertisements [by broker-dealers] made it 
difficult to discern broker-dealers from investment advisers.'' 
Those participants also stated that these lines were further blurred 
by the marketing efforts which depicted an ``ongoing relationship 
between the broker and the investor. . . .'' See RAND Study, supra 
note 5, at xix, 19.
---------------------------------------------------------------------------

    Specifically, we believe that certain names or titles used by 
broker-dealers, including ``financial advisor,'' contribute to retail 
investor confusion about the distinction among different firms and 
investment professionals, and thus could mislead retail investors into 
believing that they are engaging with an investment adviser--and are 
receiving services commonly provided by an investment adviser and 
subject to an adviser's fiduciary duty, which applies to the retail 
investors' entire relationship--when they are not.\375\ Additionally, 
broker-dealers and investment advisers, and the financial professionals 
that are associated with them, currently engage in communications with 
prospective or existing retail investors without making clear whether 
they are a broker-dealer or an investment adviser, which can further 
confuse retail investors if this distinction is not clear from context 
(whether intentionally or not).
---------------------------------------------------------------------------

    \375\ See supra notes 122 and 216 and accompanying texts.
---------------------------------------------------------------------------

    As discussed below, our proposed restriction seeks to mitigate the 
risk that the names or titles used by a firm or financial professional 
result in retail investors being misled, including believing that the 
financial professional is a fiduciary, leading to uninformed decisions 
regarding which firm or financial professional to engage, which may in 
turn result in investors being harmed. Additionally, we believe that 
requiring firms and their associated natural persons or supervised 
persons to disclose whether the firms are broker-dealers or investment 
advisers and whether such financial professionals are associated with 
or supervised by, respectively, such firms would also help to address 
investor confusion and mitigate potential harm to investors resulting 
from that confusion. We preliminarily believe that restricting certain 
persons from using the term ``adviser'' or ``advisor'' coupled with the 
requirement that firms disclose their regulatory status in retail 
investor communications would deter potentially misleading sales 
practices. Investors who understand whether their financial 
professional or firm is a broker-dealer or investment adviser will be 
better consumers of the information presented in Form CRS, and less 
likely to mistakenly obtain the services of a broker-dealer when they 
intend to engage an investment adviser, or vice versa.\376\
---------------------------------------------------------------------------

    \376\ Section 15(l)(2) of the Exchange Act and section 211(h)(2) 
of the Advisers Act.
---------------------------------------------------------------------------

A. Investor Confusion

    Over the past decade, various studies have documented that retail 
investors are confused regarding the services offered by, and the 
standards of conduct applicable to, broker-dealers and investment 
advisers, including their use of certain titles.\377\
---------------------------------------------------------------------------

    \377\ See, e.g., Siegel & Gale Study, supra note 5; RAND Study, 
supra note 5; 913 Study, supra note 3.
---------------------------------------------------------------------------

    In 2005, the Siegel & Gale Study found that with respect to titles 
specifically, ``[r]espondents in all focus groups were generally 
unclear about the distinctions among the titles brokers, financial 
advisors/financial consultants, investment advisers, and financial 
planners . . .'' \378\ The following year, the Commission retained RAND 
to conduct a study of broker-dealers and investment advisers for the 
purpose of examining, among other things, whether investors understood 
the duties and obligations owed by investment advisers and broker-
dealers.\379\ The RAND Study

[[Page 21460]]

noted that ``thousands of firms'' are structured in a variety of ways 
and provide various different combinations of services and 
products.\380\ The RAND Study concluded that ``partly because of this 
diversity of business models and services, investors typically fail to 
distinguish broker-dealers and investment advisers along the lines 
defined by federal regulations.'' \381\
---------------------------------------------------------------------------

    \378\ See Siegel & Gale Study, supra note 5, at 2. The study 
used focus groups in both Baltimore, MD and Memphis, TN to ``explore 
investor opinions regarding the services, compensation and legal 
obligations of several types of financial services professionals.'' 
Id., at 5.
    \379\ See RAND Study, supra note 5, at xiv. In conducting the 
study, RAND used several methods to study current practices in the 
financial industry and analyze whether investors understand 
differences between types of financial service professionals. Among 
these methods, RAND sent out national household surveys through the 
internet which studied ``household investment behavior and 
preferences, experience with financial service providers, and 
understanding of the different types of financial service 
providers.'' Additionally, RAND conducted six focus groups with 
investors in Alexandria, Virginia, and Fort Wayne, Indiana to gain 
additional evidence on investor beliefs about and experience with 
financial service providers. RAND also conducted two sets of [in 
person] interviews: one set of interviews with interested parties 
and one set with financial service firms. See RAND Study, supra note 
5, at 3[dash]4.
    \380\ See RAND Study, supra note 5, at 118.
    \381\ Id.
---------------------------------------------------------------------------

    The RAND Study concluded that, based on interviews with industry 
representatives, investor surveys, and focus groups, there was 
generally investor confusion about the distinction between broker-
dealers and investment advisers. In particular, ``[interview] 
participants [in the RAND Study] mentioned that the line between 
investment adviser and broker-dealers has become further blurred, as 
much of the recent marketing by broker-dealers focuses on the ongoing 
relationship between the broker and the investor and as brokers have 
adopted such titles as `financial advisor' and `financial manager.' '' 
\382\ Additionally, participants in RAND's survey believed that 
financial professionals using the title ``financial advisor'' were 
``more similar to investment advisers than to brokers . . .'' \383\
---------------------------------------------------------------------------

    \382\ See id., at 19.
    \383\ See id., at xix.
---------------------------------------------------------------------------

    Moreover, focus group participants shed further light on this 
confusion when they ``commented that the interchangeable titles and `we 
do it all' advertisements by broker-dealers made it difficult to 
discern broker-dealers from investment advisers.'' \384\ More 
specifically, focus group participants observed that ``common job 
titles for investment advisers and broker-dealers are so similar that 
people can easily get confused over the type of professional with which 
they are working.'' \385\ The focus group results also showed that when 
``[c]omparing beliefs on services provided by investment advisers to 
services provided by brokers, participants were more likely to say that 
investment advisers provide advice about securities, recommend specific 
investments, and provide planning services.'' \386\ According to the 
RAND Study, focus-group participants were more likely to say that 
brokers rather than investment advisers execute stock transactions and 
earn commissions and believed ``that investment advisers and brokers 
are required to act in the client's best interest'' and ``were more 
likely to say that brokers rather than investment advisers are required 
to disclose any conflicts of interest.'' \387\ In highlighting part of 
the confusion, the RAND Study noted that the responses from survey 
participants indicated the opposite conclusion from those of the focus-
group participants, namely, that investment advisers are more likely to 
disclose conflicts of interest.\388\
---------------------------------------------------------------------------

    \384\ See id., at xix. Interview participants also stated that 
these lines were further blurred by the marketing efforts which 
depicted an ``ongoing relationship between the broker and the 
investor. . . .''. See id., at 19.
    \385\ See id., at 111.
    \386\ See id., at 109.
    \387\ Id.
    \388\ Id.
---------------------------------------------------------------------------

    As discussed above, in light of significant intervening market 
developments and advances in technology, Chairman Clayton in 2017 
invited input on, among other things, investor concerns about the 
current regulatory framework. Commenters highlighted the risk of harm 
to investors who obtain services from broker-dealers under the 
misimpression that they are receiving services protected by the 
fiduciary duty that applies to investment advisers.\389\ For example, 
one commenter examined the websites of nine different brokerage firms 
and ``found that the firms' advertising presents the image that the 
firms are acting in a fiduciary capacity'' with many firm 
advertisements continuing to present the firm ``as providing all-
encompassing advice, with no differentiation between the firms' 
investment adviser services and brokerage services.'' \390\ This 
commenter also noted that ``[w]ithout uniform standards, persons 
seeking financial advice are left to fend for themselves in deciding 
whether their financial advisor is serving two masters or only one, and 
whether one of those masters is the advisor's financial self-
interest.'' \391\ In addition, a different commenter argued that the 
use of certain titles, such as ``advisor,'' should be standardized by 
the Commission because they are currently ``catch all'' terms for firms 
with ``wildly different practices, standards, and responsibilities to 
their clients.'' \392\ Some of the commenters to Chairman Clayton's 
Request for Comment also noted that this confusion is the result of the 
misleading nature of these titles. Specifically, one commenter stated 
that ``[t]he problem is that investors are being misled into relying on 
biased sales recommendations as if they were objective, best interest 
advice and are suffering significant financial harm as a result.'' 
\393\ The commenter noted that ``these titles and marketing materials 
are misleading'' [if] . . . broker-dealers truly are the ``mere 
salespeople they've claimed to be in their legal challenge to the DOL 
fiduciary rule.'' \394\ A different commenter stated that ``a financial 
professional should not be able to use a title that conveys a standard 
of conduct to which the professional is not in fact held under the law. 
. . .'' \395\ Additionally, another commenter noted that customer 
confusion is ``also driven by misleading marketing and misleading 
titles.'' \396\ Finally, one commenter stated that ``having SEC 
registered entities and their agent, claim such title gives false 
credence and implies a responsibility which the agent never claims to 
provide (numerous brokers go by the title `Financial Advisor', implying 
Fiduciary standard that is not being upheld).'' \397\
---------------------------------------------------------------------------

    \389\ See, e.g., CFA 2017 Letter; PIABA 2017 Letter; IAA 2017 
Letter; Pefin 2017 Letter; First Ascent 2018 Letter.
    \390\ See PIABA 2017 Letter, at 7. See also IAA 2017 Letter, at 
11 (``investor confusion persists where certain financial 
professionals are permitted to use terms such as ``financial 
adviser'' or ``financial advisor'' that imply a relationship of 
trust and confidence but, in effect, disclaim fiduciary 
responsibility for such a relationship''); Pefin 2017 Letter, at 3 
(noting that `` `Investment Advisor' or `Financial Advisor' are not 
defined terms, and are currently a ``catch all'' for firms with 
wildly different practices, standards, and responsibilities to their 
clients. Many of these firms attempt to imply in external 
communication that they are a Fiduciary, while disclaiming their 
responsibilities in the fine print.''); CFA 2017 Letter.
    \391\ See PIABA 2017 Letter, at 17.
    \392\ See Pefin 2017 Letter, at 3. See also First Ascent 2017 
Letter.
    \393\ See CFA 2017 Letter, at 2.
    \394\ See id., at 11.
    \395\ See Comment letter of the U.S. Chamber of Commerce (Dec. 
13, 2017), at 10.
    \396\ See Comment letter of the Steering Group for the Committee 
for the Fiduciary Standard (Nov. 8, 2017) (``Committee for the 
Fiduciary Standard 2017 Letter''), at 3.
    \397\ See Pefin 2017 Letter, at 9.
---------------------------------------------------------------------------

    For many years, the Commission has considered approaches for 
remedying investor confusion about the differing services and 
obligations of broker-dealers and investment advisers. In particular, 
in 2005 we considered addressing how investors perceive the differences 
between broker-dealers and investment advisers by proposing to 
proscribe the use of certain broker-dealer titles.\398\ In adopting our 
final rule, which was subsequently vacated on other grounds by the 
Court of

[[Page 21461]]

Appeals for the D.C. Circuit,\399\ we declined to follow this approach, 
believing that the better approach was to require broker-dealers to 
clearly inform their customers receiving investment advice that they 
are entering into a brokerage, and not an advisory, relationship.\400\ 
However, in light of comments in response to Chairman Clayton's Request 
for Comment and our experience, we believe that it is appropriate to 
revisit that approach.
---------------------------------------------------------------------------

    \398\ Certain Broker-Dealers Deemed Not To Be Investment 
Advisers, Exchange Act Release No. 50980 (Jan. 6, 2005), [70 FR 2716 
(Jan. 14, 2005)] (``Broker Dealer Reproposing Release'').
    \399\ Financial Planning Association v. Securities and Exchange 
Commission, 482 F.3d 481 (D.C. Cir. 2007).
    \400\ As further discussed in the 2005 final rule release, we 
considered but did not adopt a rule which would have placed 
limitations on how a broker-dealer may hold itself out or titles it 
may employ without registering as an investment adviser and 
complying with the Advisers Act. In deciding to not prohibit the use 
of specific titles such as ``financial advisor,'' ``financial 
consultant'' or other similar names, we noted that ``the statutory 
broker-dealer exception is a recognition by Congress that a broker-
dealer's regular activities include offering advice that could bring 
the broker-dealer within the definition of investment adviser, but 
which should nonetheless not be covered by the Act.'' As a result, 
we noted that the ``terms `financial advisor' and `financial 
consultant,' for example, were descriptive of such services provided 
by broker-dealers.'' We also stated our view that these titles were 
generic terms that describe what various persons in the financial 
services industry do, including banks, trust companies, insurance 
companies, and commodity professionals. See 2005 Broker Dealer 
Release, supra note 7; see also Broker Dealer Reproposing Release, 
supra note 398.
---------------------------------------------------------------------------

    A broker-dealer can, and does, provide investment advice to retail 
investors without being regulated as an investment adviser, provided 
that such advice is ``solely incidental to'' its brokerage business and 
the broker-dealer receives no ``special compensation'' for the 
advice.\401\ While we believe such advice is important for providing 
retail investors access to a variety of services, products, and payment 
options, for example, thereby increasing investor choice, we are 
concerned that use of the terms ``adviser'' and ``advisor'' in a name 
or title would continue to result in some retail investors being misled 
that their firm or financial professional is an investment adviser 
(i.e., a fiduciary), resulting in investor harm. We believe that these 
terms can obscure the fact that investment advisers and broker-dealers 
typically have distinct business models with varying services, fee 
structures, standards of conduct, and conflicts of interest.\402\
---------------------------------------------------------------------------

    \401\ The Advisers Act regulates the activities of certain 
``investment advisers,'' which are defined in section 202(a)(11) as 
persons who receive compensation for providing advice about 
securities as part of a regular business. Broker-dealers are 
excluded from the definition of investment adviser by section 
202(a)(11)(C) provided that they meet two prongs: (i) The broker-
dealer's advisory services must be ``solely incidental to'' its 
brokerage business; and (ii) the broker-dealer must receive no 
``special compensation'' for the advice.
    \402\ See RAND Study, supra note 5, at 18 (``There were also 
concerns as to what investors understand regarding similarities and 
differences of brokerage and advisory accounts, the legal 
obligations of each type of account, and the effect of titles and 
marketing used by investment professionals on the expectations of 
investors.'').
---------------------------------------------------------------------------

    It is important for retail investors to better understand the 
distinction between investment advisers and broker-dealers and to have 
access to the information necessary to make an informed choice and 
avoid potential harm. Investor choices of firm type and financial 
professionals can, for example, affect the extent or type of services 
received, the amount and type of fees investors pay for such services, 
and the conflicts of interest associated with any such services. For 
example, if a retail investor prefers an advisory relationship with an 
active trading strategy, and he or she mistakenly retains a broker-
dealer ``financial adviser,'' this investor potentially could incur 
more costs if he or she is placed in a brokerage account than he or she 
would have paid in an advisory account with an asset-based fee. 
Likewise, an investor could also be misled into believing that the 
broker-dealer is subject to a fiduciary standard that may not 
apply,\403\ and provides services it may not offer, such as regular 
monitoring of the account, offering advice on a regular basis, and 
communicating with the investor on a regular basis.
---------------------------------------------------------------------------

    \403\ See supra note 375. Cf. Comment letter of Russel Walker 
(Jun. 17, 207); Comment letter of Jeanne Davis (Jul. 20, 2017); 
Comment letter of Nancy Lowell (Jul. 20, 2017); Comment letter of 
John Dalton (Jul. 21, 2017); Comment letter of Nancy Tew (Jul. 21, 
2017); Comment letter of Bonitta Knapp (Jul. 21, 2017); Comment 
letter of Alan Gazetski (Jul. 21, 2017); Comment letter of A. Arias 
(Jul. 21, 2017); Comment letter of Al Cohen (Jul. 21, 2017); Comment 
letter of James Melloh (Jul. 21, 2017); Comment letter of Mary 
Pellecchia (Jul. 21, 2017); Comment letter of William Muller (Jul. 
21, 2017); Comment letter of Susan Lee (Jul. 22, 2017); Comment 
letter of Steve Daniels (Jul. 22, 2017); AARP 2017 Letter; AFL-CIO 
2017 Letter; Pefin 2017 Letter; PIABA 2017 Letter; IAA 2017 Letter; 
CFA 2017 Letter. These commenters argued that as a result of the use 
of certain titles and communications, retail investors are confused 
and are erroneously led to believe that their financial 
professionals are required to act ``in their best interest.''
---------------------------------------------------------------------------

    While we are proposing to require broker-dealers and investment 
advisers to provide retail investors with a relationship summary that 
would highlight certain features of an investment advisory or brokerage 
relationship, that information might be provided after the retail 
investor has initially decided to meet with the firm or its financial 
professional. The retail investor may make a selection based on such 
person's name or title. If firms and financial professionals that are 
not investment advisers are restricted from using ``adviser'' or 
``advisor'' in their names or titles, retail investors would be less 
likely to be confused or potentially misled about the type of financial 
professional being engaged or nature of the services being received. 
Conversely, an associated natural person of a broker-dealer using the 
term ``adviser'' or ``advisor'' may result in an investor believing 
that such financial professional is an adviser with a fiduciary duty, 
as discussed in the relationship summary the investor would 
receive.\404\ Similarly, requiring firms and their associated natural 
persons or supervised persons, as applicable, to disclose whether the 
firms are broker-dealers or investment advisers would help to address 
investor confusion and complement the information provided in the 
proposed relationship summary.
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    \404\ See proposed Item 5.B.3. of Form CRS.
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B. Restrictions on Certain Uses of ``Adviser'' and ``Advisor''

    We are proposing to restrict any broker or dealer, and any natural 
person who is an associated person of such broker or dealer, when 
communicating with a retail investor, from using as part of its name or 
title the words ``adviser'' or ``advisor'' unless such broker or 
dealer, is registered as an investment adviser under the Advisers Act 
or with a state, or any natural person who is an associated person of 
such broker or dealer is a supervised person of an investment adviser 
registered under section 203 of the Advisers Act or with a state and 
such person provides investment advice on behalf of such investment 
adviser.\405\
---------------------------------------------------------------------------

    \405\ See Exchange Act proposed rule 151-2.
---------------------------------------------------------------------------

1. Firms Solely Registered as Broker-Dealers and Associated Natural 
Persons
    In relevant part, the proposed rule would restrict a broker-
dealer's or its associated natural persons' use of the term ``adviser'' 
or ``advisor'' as part of a name or title when communicating with a 
retail investor in particular circumstances.\406\ This would include 
names or titles which include, in whole or in part, the term 
``adviser'' or ``advisor'' such as financial advisor (or adviser), 
wealth advisor (or adviser), trusted advisor (or adviser), and advisory 
(e.g., ``Sample Firm Advisory'') when communicating with any retail 
investor. In addition, we believe that the proposed rule should apply 
to communications with retail investors (i.e., natural persons), rather 
than

[[Page 21462]]

institutions, for reasons similar to those detailed above for the 
relationship summary.\407\ Additionally, our proposed rule 
appropriately applies to retail investors and not to institutions, as 
institutions generally would be less likely to be misled by such names 
or titles. The proposed rule, however, would not restrict a broker-
dealer's or its associated natural persons' use of the terms 
``adviser'' or ``advisor'' when acting on behalf of a bank or insurance 
company, or when acting on behalf of a municipal advisor or a commodity 
trading advisor.
---------------------------------------------------------------------------

    \406\ See id.
    \407\ See supra note 29 and accompanying text. See also Exchange 
Act proposed rule 151-2(b).
---------------------------------------------------------------------------

    We acknowledge that there may be titles other than ``adviser'' or 
``advisor'' used by financial professionals that might confuse and thus 
potentially mislead investors. We considered whether we should restrict 
broker-dealers from using additional terms, such as, for example, 
``financial consultant.'' Given this concern, we focused our proposal 
on the terms ``adviser'' or ``advisor'' because they are more closely 
related to the statutory term ``investment adviser.'' Thus, as compared 
to additional terms such as ``financial consultant,'' ``adviser'' and 
``advisor'' are more likely to be associated with an investment adviser 
and its advisory activities rather than with a broker-dealer and its 
brokerage activities. Moreover, the term ``investment adviser,'' as 
compared to terms like ``financial consultant,'' is a defined term 
under the Advisers Act as any person who, for compensation, engages in 
the business of advising others, either directly or through 
publications or writings, as to the value of securities.\408\ As 
discussed above, we believe that use of the terms ``adviser'' and 
``advisor'' by broker-dealers and their associated natural persons has 
particularly contributed to investor confusion about the typical 
services, fee structures, conflicts of interest, and legal standards of 
conduct to which broker-dealers and investment advisers are 
subject.\409\ Conversely, we preliminarily believe that other terms, 
even if investors might find them confusing, unclear, or misleading (as 
some commenters have suggested), do not necessarily imply that a firm 
or its financial professional is an ``investment adviser'' who would 
have the principal services, compensation structures, conflicts of 
interest, disclosure obligations, and legal standards of conduct that 
are typically associated with being an investment adviser.\410\
---------------------------------------------------------------------------

    \408\ See section 202(a)(11)(A) of the Advisers Act, defining an 
``investment adviser'' as ``any person who, for compensation, 
engages in the business of advising others, either directly or 
through publications or writings, as to the value of securities or 
as to the advisability of investing in, purchasing, or selling 
securities, or who, for compensation and as part of a regular 
business, issues or promulgates analyses or reports concerning 
securities.''
    \409\ See supra note 402 and accompanying text. We are not 
proposing restrictions on names or titles for investment advisers. 
Our staff is not aware of an investment adviser using a name or 
title that could cause retail investors to mistakenly believe that 
such adviser provides brokerage services. Studies and commenters 
also have not identified retail investor confusion as relating to an 
investment adviser's use of names or titles. We request comment on 
our understanding below.
    \410\ Firms and 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 section 
10(b) of the Exchange Act and rule 10b-5 thereunder, to the use of 
names or titles. See also generally FINRA Rule 2210 (stating in part 
``[a]ll retail communications and correspondence must: (A) 
Prominently disclose the name of the member, or the name under which 
the member's broker-dealer business primarily is conducted as 
disclosed on the member's Form BD, and may also include a fictional 
name by which the member is commonly recognized or which is required 
by any state or jurisdiction; (B) reflect any relationship between 
the member and any non-member or individual who is also named; and 
(C) if it includes other names, reflect which products or services 
are being offered by the member.'')
---------------------------------------------------------------------------

    Accordingly, we preliminarily do not believe these terms would 
cause retail investors to believe that their financial professional is 
an investment adviser when he or she is, in fact, a broker-dealer. We 
therefore preliminarily believe that restricting use of terms that are 
similar to ``investment adviser'' appropriately tailors the rule to 
terms that are likely to result in confusion or mislead retail 
investors about whether such broker-dealer is an investment adviser and 
thus a fiduciary.
    As we discuss in more detail above, the proposed relationship 
summary is designed to provide clarity to retail investors regarding 
information about broker-dealers and investment advisers under a 
prescribed set of topics (e.g., services, fees, standards of conduct, 
conflicts). While the proposed relationship summary is designed to help 
retail investors to distinguish between investment advisers and broker-
dealers, we are concerned that the effectiveness of the relationship 
summary could be undermined if we do not restrict a broker-dealer from 
using in a name or title the terms ``adviser'' and ``advisor.''
    For instance, we preliminarily believe that restricting a broker-
dealer or its associated natural persons from using ``adviser'' or 
``advisor'' in a name or title would mitigate the risk that a retail 
investor would be misled into believing and expecting that his or her 
``financial advisor,''--who may solely provide brokerage services at a 
broker-dealer--is an investment adviser because of the name or title. 
For example, if a retail investor were to engage a financial 
professional with the title ``wealth advisor'' who solely provides 
brokerage services but who is associated with a dually registered 
firm,\411\ such investor would likely receive the dually registered 
firm's relationship summary. The relationship summary would include a 
description of both business models; however, the retail investor could 
incorrectly match the services he or she would receive from such 
``wealth advisor'' to the description in the relationship summary of 
investment advisory services. As a result, the retail investor may be 
misled to believe that the brokerage services provided by the ``wealth 
advisor'' are in fact the investment advisory services as described in 
the relationship summary.
---------------------------------------------------------------------------

    \411\ For the purposes of Section III, we are defining a 
``dually registered firm'' in the same manner as it is defined in 
the baseline of the Economic Analysis. See infra Section IV, note 
453.
---------------------------------------------------------------------------

    Similarly, a retail investor who engages a financial professional 
with the title ``wealth advisor'' who is associated solely with a 
broker-dealer entity would likely receive the broker-dealer's 
relationship summary, which focuses on the characteristics of the 
broker-dealer business model. As a result, there would be an 
inconsistency between the description of the broker-dealer business 
model and the investors' likely perceptions that their professional is 
an investment adviser. Therefore, the proposed restriction on the use 
of names or titles would increase the effectiveness of the relationship 
summary by reducing the risk of a mismatch between investor preferences 
and type of services received.
    We acknowledge that studies have demonstrated that many retail 
investors select financial professionals and firms based on personal 
referrals by family, friends, or colleagues.\412\ Even if the name or 
title of the firm or professional may not impact choices made by such 
investors, we preliminarily believe that the protections offered to 
other investors by the proposed restriction and disclosure requirements 
justify the rules.
---------------------------------------------------------------------------

    \412\ See infra note 546 and accompanying text. See also Section 
IV.A.3.g.
---------------------------------------------------------------------------

2. Dually Registered Firms and Dual Hatted Financial Professionals
    The proposed rule would permit firms that are registered both as 
investment advisers (including state-registered investment advisers) 
and broker-dealers to use the term ``adviser'' or ``advisor'' in their 
name or title.\413\ The proposed

[[Page 21463]]

rule would, however, only permit an associated natural person of a 
dually registered firm to use these terms where such person is a 
supervised person of a registered investment adviser and such person 
provides investment advice on behalf of such investment adviser.\414\ 
This would limit the ability of natural persons associated with a 
broker-dealer who do not provide investment advice as an investment 
adviser from continuing to use the term ``adviser'' or ``advisor'' 
simply by virtue of the fact that they are associated with a dually 
registered firm.\415\ We discuss these aspects of the rule in further 
detail below.
---------------------------------------------------------------------------

    \413\ See Exchange Act proposed rule 151-2(a)(1).
    \414\ See Exchange Act proposed rule 151-2(a)(2).
    \415\ See section 202(a)(25) of the Advisers Act [15 U.S.C. 80b-
2(a)(25)] defining ``supervised person'' as ``any partner, officer, 
director (or other person occupying a similar status or performing 
similar functions), or employee of an investment adviser, or other 
person who provides investment advice on behalf of the investment 
adviser and is subject to the supervision and control of the 
investment adviser''.
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a. Dually Registered Firms
    We are not proposing to apply the restriction to dually registered 
firms. We believe that it is inappropriate to restrict a dually 
registered firm from using a name or title that accurately describes 
its registration status. We recognize that under our proposed rule 
there might be occasions where a dually registered firm provides a 
particular retail investor only brokerage services, which could lead to 
some investor confusion.
    At the firm level, we do not believe that the determination of when 
the restriction applies should be based on what capacity a dually 
registered firm is acting in a particular circumstance, i.e., whether a 
dually registered firm is acting solely as a broker-dealer and not 
offering investment advisory services. If we were to apply the 
restriction in this manner, it could result in firms using multiple 
names and titles, which may lead to further confusion and create 
operational and compliance complexities. Accordingly, this could lead 
to dually registered firms avoiding the use of the title ``adviser'' or 
``advisor'' unless they believe they would always offer investment 
advisory services, which we believe is not necessary to avoid the 
potential investor harm. Additionally, we also seek to avoid the 
potential misimpression that may result should a firm use a name or 
title to reflect only its brokerage services and not its investment 
advisory services. In such a circumstance, a retail investor may not 
know that such firm offers both business models and could be led to 
believe that only brokerage services are available.
b. Dual Hatted Financial Professionals
    Dual hatted financial professionals of dually registered firms 
(including state-registered investment advisers) can provide brokerage 
services, advisory services, or both. We believe it is appropriate for 
financial professionals that provide services as an investment adviser 
to retail investors to be permitted to use names or titles which 
include ``adviser'' and ``advisor,'' even if, as a part of their 
business, they also provide brokerage services. As such, our proposed 
rule would not restrict, for example, a financial professional that is 
both a supervised person of an investment adviser and an associated 
person of a broker-dealer from using the term ``adviser'' or 
``advisor'' in his or her name or title if such person provides 
investment advice to retail investors on behalf of the investment 
adviser.\416\ We believe that the relationship summary can sufficiently 
reduce the risk of investors being misled and avoid investor harm 
because it contains parallel information with respect to each of the 
services the dual hatted financial professional offers.
---------------------------------------------------------------------------

    \416\ See Exchange Act proposed rule 151-2(a)(2).
---------------------------------------------------------------------------

    By contrast, we recognize that some financial professionals of 
dually registered firms only provide brokerage services. We are 
concerned that if these financial professionals use ``adviser'' or 
``advisor'' in their names or titles, retail investors may be misled 
about the nature of services they are receiving, and may incorrectly 
believe that such person would provide them investment advisory 
services rather than brokerage services. Therefore, we believe that a 
financial professional who does not provide investment advice to retail 
investors on behalf of the investment adviser, i.e., a financial 
professional that only offers brokerage services to retail investors, 
should be restricted from using the title ``adviser'' or ``advisor'' 
despite such person's association with a dually registered firm.
    We recognize that, as with dually registered firms, some dual 
hatted financial professionals may under some circumstances only offer 
brokerage services to a particular retail investor, which has the 
potential to cause confusion. For the same reasons discussed above 
regarding dually registered firms, however, we do not believe that the 
determination of when the restriction applies should be based on what 
capacity a dual hatted financial professional is acting in a particular 
circumstance, i.e., whether a dual hatted professional is offering only 
brokerage services to that particular investor and not offering 
investment advisory services.\417\ Moreover, we are proposing in 
Regulation Best Interest to require a broker-dealer to make certain 
disclosures, including the capacity of the financial professional and 
firm.\418\ We request comment below on whether and if so how the 
proposed rule should address this particular circumstance.
---------------------------------------------------------------------------

    \417\ See supra note 410. Firms and 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 section 10(b) of the Exchange Act and rule 10b-5 
thereunder, to the use of names or titles.
    \418\ See Regulation Best Interest Proposal, supra note 24.
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C. Alternative Approaches

    Over the past decade, we and commenters have expressed concern 
about broker-dealer marketing efforts, including through the use of 
titles, and whether these efforts are consistent with a broker-dealer's 
reliance on the exclusion from the definition of investment adviser 
under section 202(a)(11)(C) of the Advisers Act.\419\ Under section 
202(a)(11)(C), a broker-dealer is excluded from the definition of 
investment adviser if its ``performance of [advisory] services is 
solely incidental to the conduct of his business as a broker or dealer 
and who receives no special compensation therefor.'' \420\ In this 
regard, and as an alternative to our proposed rule today, we considered 
proposing a rule which would have stated that a broker-dealer that uses 
the term ``adviser'' or ``advisor'' as part of a name or title cannot 
be considered to provide investment advice solely incidental to the 
conduct of its business as a broker-dealer and therefore is not 
excluded from the definition of investment adviser under section 
202(a)(11)(C). We also considered proposing a rule that would preclude 
a broker-dealer from relying on the exclusion when such a broker-dealer 
held itself out as an investment adviser. We are not proposing these 
alternatives for the reasons discussed below. However, we request 
comment on these alternatives below.
---------------------------------------------------------------------------

    \419\ See, e.g., Comment letter of Investment Counsel 
Association of America (Feb. 7, 2005) (``ICAA 2005 Letter); Comment 
letter of T. Rowe Price (Feb. 22, 2005) (``T. Rowe Price 2005 
Letter'') on Broker Dealer Reproposing Release, supra note 398. See 
also Certain Broker-Dealers Deemed Not to Be Investment Advisers, 
Exchange Act Release No. 42099 (Nov. 4, 1999) (``Release 42099'').
    \420\ Section 202(a)(11)(C) of the Advisers Act.
---------------------------------------------------------------------------

    Our concerns regarding broker-dealer marketing efforts are not new. 
For example, we have previously requested comment on whether we should 
preclude broker-dealers from relying on the solely incidental prong of 
the exclusion if they market their services

[[Page 21464]]

in a manner that suggests that they are offering advisory accounts, 
including through the use of names or titles.\421\ While we have never 
viewed the broker-dealer exclusion as precluding a broker-dealer from 
marketing itself as providing some amount of advisory services, we have 
noted that these marketing efforts raised ``troubling questions as to 
whether the advisory services are not (or would be perceived by 
investors not to be) incidental to the brokerage services.'' \422\ 
Certain commenters have voiced similar concerns, arguing that the use 
of certain titles, such as ``financial advisor,'' is inconsistent with 
the broker-dealer exclusion, with some noting that the marketing of 
advisory services by a broker-dealer is inconsistent with those 
services being solely incidental to the brokerage business.\423\ 
Others, however, contended that the titles are consistent with the 
services provided by broker-dealers, whether in fee-based or 
commission-based accounts.\424\
---------------------------------------------------------------------------

    \421\ See, e.g., Release 42099, supra note 419.
    \422\ See id.
    \423\ See, e.g., ICAA 2005 Letter; T. Rowe Price 2005 Letter. 
See also e.g. AFL-CIO 2017 Letter; CFA 2017 Letter; Comment letter 
of CFA Institute (Jan. 10, 2018); Comment letter of The Committee 
for the Fiduciary Standard (Jan. 12, 2018).
    \424\ See Broker Dealer Reproposing Release.
---------------------------------------------------------------------------

    Taking into account our concerns and the views of commenters, we 
considered proposing a rule which would have stated that a broker-
dealer that uses the term ``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 brokerage business and therefore would 
not be excluded from the definition of investment adviser under section 
202(a)(11)(C) of the Advisers Act.\425\ In considering this 
alternative, we questioned whether a broker-dealer that uses these 
terms to market or promote its services to retail investors is doing so 
because its advice is significant or even instrumental to its brokerage 
business. Consequently, we questioned whether that broker-dealer's 
provision of advice is therefore no longer solely incidental to its 
brokerage business. Similarly, we believe that if a broker-dealer 
invests its capital into marketing, branding, and creating intellectual 
property in using the terms ``adviser'' or ``advisor'' in its name or 
its financial professionals' titles, the broker-dealer is indicating 
that advice is an important part of its retail investor broker-dealer 
business. As compared to the more principles-based ``holding out'' 
approach below, this alternative may offer more certainty and clarity 
to broker-dealers. It also specifically addresses our concerns about 
the use of ``adviser'' and ``advisor,'' as discussed in this release.
---------------------------------------------------------------------------

    \425\ As with the proposal, our alternative approach would 
likewise preclude an associated natural person of a dually 
registered firm from using the term ``adviser'' or ``advisor'' in a 
name or title unless he or she is a supervised person of an 
investment adviser and provides investment advice on behalf of such 
investment adviser.
---------------------------------------------------------------------------

    We also considered a broader approach that would have precluded a 
broker-dealer from relying on the solely incidental exclusion of 
section 202(a)(11)(C) if a broker-dealer ``held itself out'' as an 
investment adviser to retail investors.\426\ For example, ``holding 
out'' could encompass a broker-dealer that represented or implied 
through any communication or other sales practice (including through 
the use of names or titles) that it was offering investment advice to 
retail investors subject to a fiduciary relationship with an investment 
adviser. As with our alternative approach above, we questioned whether 
these activities could suggest, or could reasonably be understood as 
suggesting, that such broker-dealer or its associated natural persons 
were performing investment advisory services in a manner that was not 
solely incidental to their business as a broker-dealer. In particular, 
this approach could reduce the risk that if we restricted certain 
titles (or limited the use of certain titles used to market services) 
other potentially misleading titles could proliferate. Certain 
commenters to Chairman Clayton's Request for Comment also supported 
this approach, so that retail investors receiving advice from firms 
``holding out'' as investment advisers would receive appropriate 
protections, either under the Advisers Act or through a heightened 
standard of conduct for broker-dealers.\427\ However, we preliminarily 
believe that a ``holding out'' approach would create uncertainty 
regarding which activities (and the extent of such activities) would be 
permissible. Such an approach could also reduce investor choice, as 
broker-dealers may decide to provide fewer services out of an abundance 
of caution.
---------------------------------------------------------------------------

    \426\ See AFL-CIO 2017 Letter, at 3 (stating that ``[o]ne way 
for the SEC to proceed is to clarify that those firms that offer 
advisory services, or hold themselves out as offering such services, 
cannot take advantage of the existing broker-dealer `solely 
incidental to' exemption from the Investment Advisers Act.''); IAA 
2017 Letter; AICPA 2017 Letter.
    \427\ See IAA 2017 Letter, at 11 (``We urge the Commission to 
address this source of investor confusion by prohibiting firms or 
individuals from holding themselves out as trusted advisers without 
being subject to either the Advisers Act fiduciary principles or a 
new equally stringent best interest standard under the Exchange Act, 
discussed above.''). See also, e.g. AFL-CIO 2017 Letter, at 3 
(``clarify that those firms that offer advisory services, or hold 
themselves out as offering such services, cannot take advantage of 
the existing broker-dealer ``solely incidental to'' exemption from 
the Investment Advisers Act. Permitting brokers to rely on this 
exemption when engaged in advisory activities has had the effect of 
exempting them from the fiduciary duty appropriate to that advisory 
role. Adopting this approach would require the SEC to determine what 
constitutes ``holding out'' as an adviser, addressing marketing 
practices, as well as job titles, that create the reasonable 
expectation among investors that they will receive advice and not 
just sales recommendations.'').
---------------------------------------------------------------------------

    We are not proposing any of these approaches however, because we 
preliminarily believe that a restriction on the use of ``adviser'' and 
``advisor'' in names and titles in combination with the requirement to 
deliver a relationship summary would be a simpler, more administrable 
approach to address the confusion about the difference between 
investment advisers and broker-dealers, and to prevent investors from 
being potentially misled, compared to the alternatives presented above. 
While we acknowledge that there are other titles or marketing 
communications that may contribute to investor confusion or mislead 
investors, our proposal is tailored toward creating greater clarity 
with respect to the names and titles that are most closely related to 
the statutory term investment adviser. In particular, our proposed 
rule, in combination with the relationship summary, would help 
distinguish between who is and who is not an investment adviser and 
allow retail investors to select the business model that best suits 
their financial goals. The restriction of the use of the terms 
``adviser'' and ``advisor'' that we are proposing is intended to 
augment protections provided to investors by applicable provisions of 
the federal securities laws. Broker-dealers and their natural 
associated persons can face liability for intentionally, recklessly, or 
negligently misleading investors about the nature of the services they 
are providing through, among other things, materially misleading 
advertisements or other communications that include statements or 
omissions, or deceptive practices or courses of business.\428\
---------------------------------------------------------------------------

    \428\ See, e.g., rule 10b-5 under the Securities Exchange Act 
and section 17(a) of the Securities Act.
---------------------------------------------------------------------------

    We request comment generally on our proposed restriction on the use 
of certain titles and in particular on the following issues:
     Given the required relationship summary, is it necessary 
to impose any restrictions on the use of names or titles?
     Do you agree with our proposed restriction on the use of 
``adviser'' and ``advisor''? Why or why not? To what extent does the 
disclosure provided in Form CRS complement our proposed

[[Page 21465]]

restriction? To what extent could it be a substitute?
     Is our approach too broad or too narrow? Are there 
additional terms that we should explicitly include in the rule? For 
example, do any of the following names or titles have the potential to 
confuse investors about the differences between investment advisers and 
broker-dealers: Wealth manager; financial consultant; financial 
manager; money manager; investment manager; and investment consultant? 
Why or why not? What are the names or titles most commonly used that 
have the potential for investor confusion? Should we consider 
restricting the use of names, titles, or terms that are synonymous with 
``adviser'' or ``advisor'' and if so, what would those names, titles, 
or terms be?
     Do commenters believe that names or titles are a main 
factor contributing to investor confusion and the potential for 
investors to be misled, or are there other more significant factors? 
For example, do particular services offered by broker-dealers 
contribute to, or primarily cause, investor confusion and the potential 
for the broker-dealer's customers to be misled into believing that the 
broker-dealer is an investment adviser? If so, which services 
specifically? For example, do commenters believe that retirement and 
financial planning is more often associated with investment advisers 
rather than broker-dealers or vice versa? Additionally, do commenters 
believe that monitoring is more often associated with investment 
advisers than broker-dealers or vice versa?
     Our proposed rule does not apply to financial 
professionals of a broker-dealer when acting in the capacity, for 
example, as an insurance broker on behalf of an insurance company or a 
banker on behalf of a bank. Do you believe our proposed rule is clear 
that such persons are excluded from the restriction? If not, how should 
we provide such clarification?
     As discussed above, our proposed rule would not prohibit 
dually registered firms from using the term ``adviser'' or ``advisor'' 
in their name or title. However, it would restrict the use of such 
names or titles by some associated natural persons and supervised 
persons of those firms, depending on whether they provide investment 
advice to retail investors on behalf of the investment adviser. Do you 
agree with our proposed approach? Is there investor confusion 
concerning what capacity a dually registered firm, a dual hatted 
financial professional, or an associated or supervised person of a 
dually registered firm is acting in when communicating with a retail 
investor? If such confusion exists, how should we address it, in 
addition to the proposed relationship summary? For example, are retail 
investors confused about which type of account their financial 
professional is referring to when he or she makes a particular 
recommendation? If this is a source of confusion, how should we address 
it (e.g., should we address it through affirmative disclosures of 
account types in account statements or another form of disclosure)?
     Given the prevalence of dually registered firms and their 
associated dual hatted financial professionals, do retail investors 
typically believe they are engaging a financial professional who is 
solely a broker-dealer or investment adviser, or do investors 
understand that such person is a dual hatted professional and therefore 
may be able to engage with them as a broker-dealer and an investment 
adviser? Or do retail investors currently not understand enough to 
distinguish among these options in any meaningful manner?
     Do commenters believe that retail investors will 
understand that there is, and will continue to be under proposed 
Regulation Best Interest, differences in the standards of conduct, 
compensation structures, and services offered (among other items) 
depending on the capacity in which such professional engages a retail 
investor?
     We are proposing to permit or restrict financial 
professionals associated with dually registered firms from using the 
term ``adviser'' or ``advisor'' in their name or title based on whether 
they provide investment advice on behalf of such investment advisers. 
Are there alternatives we should consider in implementing this portion 
of the rule? For example, should we only allow a supervised person to 
use such names or titles where ``a substantial part of his or her 
business consists of rendering investment supervisory services'' to 
retail investors, based upon a facts and circumstances determination? 
\429\
---------------------------------------------------------------------------

    \429\ See section 208(c) of the Advisers Act: ``[i]t shall be 
unlawful for any person registered under section 203 of this title 
to represent that he is an investment counsel or to use the name 
`investment counsel' as descriptive of his business unless (1) his 
or its principal business consists of acting as investment adviser, 
and (2) a substantial part of his or its business consists of 
rendering investment supervisory services.''
---------------------------------------------------------------------------

     Our proposed rule would not prohibit dually registered 
firms or dually hatted financial professionals from using ``adviser'' 
or ``advisor'' in their names or titles, even in circumstances where 
the firm or financial professional provides only brokerage services to 
a particular retail investor. Do you agree with our approach? Why or 
why not? For example, should the proposed rule's application depend on 
the capacity in which a financial professional engages a particular 
retail investor? If so, should financial professionals use multiple 
titles that would vary based on the capacity in which they are acting, 
and what titles would they use? Are there compliance challenges 
associated with this approach? Conversely, would this discourage dually 
registered firms or dually hatted financial professionals from using 
any title with ``adviser'' or ``advisor,'' even when they are providing 
advisory services? Would this discourage dually hatted financial 
professionals from providing brokerage services? Would a firm use 
different names or titles for different subsets of their financial 
professionals?
     Do you agree that the use of the terms ``adviser'' or 
``advisor'' by broker-dealers are the main sources of investor 
confusion? If so, what do these terms confuse investors about (e.g., 
the differences as to the standard of conduct their financial 
professional owes, the duration of the relationship, fees charged, 
compensation)? Are investors harmed by this confusion? If so, how? Do 
you agree that ``adviser'' and ``advisor'' are often associated with 
the statutory term ``investment adviser''? Do you believe that retail 
investors understand what the terms ``adviser'' and ``broker-dealer'' 
mean and can correctly identify what type of financial professional 
they have engaged?
     We understand that the terms ``adviser'' or ``advisor'' 
are included in some professional designations earned by financial 
professionals.\430\ We also understand that particular professional 
designations have been an area of concern for FINRA and NASAA.\431\ 
Should we include an exception to permit the use of professional 
designations that use the terms ``adviser'' or ``advisor''? What 
factors should the Commission consider if it were to include such an 
exception? For example, should such an exception be conditioned on 
prominent disclosure

[[Page 21466]]

that the individual is not an investment adviser or supervised by one?
---------------------------------------------------------------------------

    \430\ See FINRA, Professional Designations, available at https://www.finra.org/investors/professional-designations.
    \431\ See Senior Designations, FINRA Notice 11-52 (Nov. 2011), 
available at https://www.finra.org/sites/default/files/NoticeDocument/p125092.pdf; NASAA, NASAA Model Rule on the Use of 
Senior-Specific Certifications and Professional Designations (Mar. 
20, 2008), available at https://www.nasaa.org/wp-content/uploads/2011/07/3-Senior_Model_Rule_Adopted.pdf.
---------------------------------------------------------------------------

     Do you agree with the proposed approach in Exchange Act 
proposed rules 15l-2 and 15l-3 and Advisers Act proposed rule 211h-1 of 
limiting our proposed rules to ``retail investors'' where such persons 
are defined to include all natural persons as discussed above? \432\ 
Should we instead exclude certain categories of natural persons based 
on their net worth or income level, such as accredited investors,\433\ 
qualified clients \434\ or qualified purchasers? \435\ If we did 
exclude certain categories of natural persons based on their net worth, 
what threshold should we use for measuring net worth? Should we exclude 
certain categories of natural persons for other reasons?
---------------------------------------------------------------------------

    \432\ See supra notes 28-32 and accompanying text.
    \433\ See supra note 66.
    \434\ See supra note 67.
    \435\ See supra note 68.
---------------------------------------------------------------------------

     Should we conform the definition of retail investor to the 
definition of retail customer as proposed in Regulation Best Interest, 
which would include non-natural persons, provided the recommendation is 
primarily for personal, family, or household purposes? What kind of 
compliance burdens would it create to base Form CRS delivery off of a 
definition of retail investor that only included recommendations 
primarily for personal, family, or household purposes? Should the 
definition of retail investor include trusts or similar entities that 
represent natural persons, as proposed? Are there other persons or 
entities that should be covered? Should we expand the definition to 
cover plan participants in workplace retirement plans who receive 
services from a broker-dealer or investment adviser for their 
individual accounts within a plan?
     What costs would broker-dealers impacted by our proposed 
rule incur as a result of having to rebrand themselves and their 
financial professionals along with revising their communications? Are 
there means to mitigate such costs? Would the costs differ if we made 
the broker-dealer exclusion in the Advisers Act unavailable to broker-
dealers that use the terms ``adviser'' or ``advisor''?
     How would broker-dealers and associated natural persons of 
broker-dealers who would be impacted by our proposed rule change the 
way they market themselves or communicate with retail investors as a 
result of our proposed rule? Would this cause any other changes to 
their business? For example, would more broker-dealer firms also 
register with the Commission or the states as investment advisers as a 
result of our proposed rule? Will firms exit the brokerage business as 
a result of our proposed rule? Would more associated natural persons of 
broker-dealers become dual hatted?
     Would our proposed rule impact the marketing and 
communications of dually registered firms and their professionals in 
any manner? If so, how?
     Do investment advisers and their supervised persons also 
use names, titles, or professional designations that can lead or 
contribute to retail investor confusion? If so, please provide examples 
of these names or titles and how they can lead or contribute to 
confusion. Should we restrict investment advisers and their supervised 
persons from using these names or titles?
     What costs would our proposed restriction on certain names 
and titles impose? Are there greater or lower costs associated with our 
proposed rules as compared to alternative approaches that consider 
whether certain titles or marketing practices are consistent with 
advice being ``solely incidental'' to the firm's brokerage activities 
and thus permissible for a firm relying on the broker-dealer exclusion 
from the Advisers Act? If so, what are the specific cost estimates of 
each approach and the components of those estimates? Are there ways to 
mitigate their impact and if so, what methods could be taken? Are there 
operational and compliance challenges associated with our proposed 
approach as compared to the alternatives approaches, and if so, what 
are they?
     We request comment on the alternative approach in which a 
broker-dealer would not be considered to provide investment advice 
solely incidental to the conduct of its brokerage business if it uses 
the term ``adviser'' or ``advisor'' to market or promote its services 
and would instead treat such practices as indicating that the broker-
dealer's advisory services are not ``solely incidental'' to its conduct 
of business as a broker-dealer. What would be the advantages or 
disadvantages of using this approach instead of the approach we have 
proposed? Would the alternative approach address and mitigate investor 
confusion about the differences between broker-dealers and investment 
advisers? Would the alternative approach reduce the likelihood that 
investors may be misled as to the type of firm they are engaging with 
and therefore make an uninformed decision? Would the alternative 
approach have other effects on the analysis of when advisory activities 
are or are not solely incidental to brokerage activities? How would 
this alternative approach impact dually registered firms and dual 
hatted financial professionals? Are there operational and compliance 
challenges associated with this approach, and if so, what are they? How 
would broker-dealers and associated natural persons of broker-dealers 
impacted by the alternative approach change the way they market 
themselves or communicate with retail investors as a result of our 
proposed rule? Would this cause any other changes to their business?
     Would the alternative approach discussed above that would 
preclude a broker-dealer or an associated natural person of a broker-
dealer from relying on the broker-dealer exclusion of section 
202(a)(11)(C) of the Advisers Act if it ``held itself out'' as an 
investment adviser address investor confusion? What would be the 
advantages or disadvantages of using this approach instead of the 
approach we have proposed? Which communications or level of advice do 
you think imply that a broker-dealer or its associated natural person 
is ``holding out'' as an investment adviser? How would an approach that 
focuses on ``holding out'' as an investment adviser impact access to 
advice from different kinds of firms, and how retail investors pay for 
this advice? How would this approach affect competition? Would this 
``holding out'' approach address any confusion that may arise from 
broker-dealer marketing efforts focusing on the ongoing relationship 
between the broker and the investor? Are there operational and 
compliance challenges associated with this approach, and if so, what 
are they?
     Instead of a prohibition or restriction on the use of 
certain terms, should we permit such terms but require broker-dealers 
and their associated natural persons other than dual registrants and 
dual hatted financial professionals to include a disclaimer in their 
communications that they are not an investment adviser or investment 
adviser representative, respectively, each time they use or refer to 
the term ``adviser'' or ``advisor''? Would this approach address 
investor confusion or mitigate the likelihood that investors may be 
misled when broker-dealers and their associated natural persons use the 
term ``adviser'' or ``advisor''? Should this approach be coupled with 
an affirmative obligation that a dually registered broker-dealer or its 
dual hatted associated natural persons disclose that it is an 
investment adviser or an investment adviser representative, 
respectively, when using terms other than ``adviser'' or ``advisor''? 
Would this requirement discourage broker-dealers from using

[[Page 21467]]

these terms even if they were not prohibited? How would this approach 
impact our proposed rule requiring disclosure of the firm's regulatory 
status and the financial professional's association with the firm? How 
would this approach impact dually registered firms and dually hatted 
financial professionals? Are there operational and compliance 
challenges associated with this approach, and if so, what are they?
     We recognize that the term ``adviser'' is used differently 
in connection with the regulation of investment advisory services 
provided to workplace retirement plans and IRAs under ERISA and the 
prohibited transaction provisions of the Internal Revenue Code. For 
example, a statutory exemption for the provision of investment advice 
to participants of ERISA-covered workplace retirement plans and IRAs, 
and related DOL regulations, define the term ``fiduciary adviser'' 
broadly to include a variety of persons acting in a fiduciary capacity 
in providing investment advice, including investment advisers 
registered under the Advisers Act or under state laws, registered 
broker-dealers, banks or similar financial institutions providing 
advice through a trust department, and insurance companies, and their 
affiliates, employees and other agents.\436\ Given that there are 
definitions of ``adviser'' under other federal regulations that capture 
entities and individuals who are not regulated under the Advisers Act, 
would a restriction on the use of the term ``adviser'' that applies 
only to registered broker-dealers and their registered representatives 
contribute to investor confusion or result in conflicting regulations, 
and possibly increased compliance burdens, or affect competition?
---------------------------------------------------------------------------

    \436\ See ERISA Sec.  408 (g)(11)(A); Code Sec.  
4975(f)(8)(J)(i) and 29 CFR 2550.408g-1. In addition, under the 
DOL's BIC Exemption, the term ``Adviser'' would mean an individual 
who is an employee or other agent (including a registered 
representative) of a state or federally registered investment 
adviser, registered broker-dealer, bank or similar financial 
institution, or an insurance company. See Corrected BIC Exemption, 
infra note 504, section VIII(a).
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     What would be the effect on competition by prohibiting 
broker-dealers from using these terms? What would be the effect on 
competition by the alternative approaches described?

D. Disclosures About a Firm's Regulatory Status and a Financial 
Professional's Association

    We are also proposing rules under the Exchange Act and the Advisers 
Act to require a broker-dealer and an investment adviser registered 
under section 203 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.\437\ We are also 
proposing as part of our proposed Exchange Act rule to require an 
associated natural person of a broker or dealer to prominently disclose 
that he or she is an associated person of a broker-dealer registered 
with the Commission in print or electronic retail investor 
communications.\438\ In addition, we are proposing as part of our 
Advisers Act rule to require a supervised person of an investment 
adviser registered under section 203 to prominently disclose that he or 
she is a supervised person of an investment adviser registered with the 
Commission in print or electronic retail investor communications.\439\ 
For example, an investment adviser registered with the Commission would 
prominently disclose the following on its print or electronic 
communications: ``[Name of Firm], an investment adviser registered with 
the Securities and Exchange Commission'' or ``[Name of Firm], an SEC-
registered investment adviser.'' Dually registered firms would 
similarly be required to prominently disclose both registration 
statuses in their print or electronic communications, for example: 
``[Name of Firm], an SEC-registered broker-dealer and SEC-registered 
investment adviser.'' Similarly, an associated natural person of a 
broker-dealer would prominently disclose the following, for example, on 
his or her business card or signature block: ``[Name of professional], 
a [title] of [Name of Firm], an associated person of an SEC-registered 
broker-dealer.'' Alternatively, a supervised person of an investment 
adviser would prominently disclose the following on, for example, his 
or her business card or signature block: ``[Name of professional], a 
[title] of [Name of Firm], a supervised person of an SEC-registered 
investment adviser.'' Finally, a financial professional who is both an 
associated person of a broker-dealer and a supervised person of an 
investment adviser would prominently disclose the following, for 
example: ``[Name of professional], a [title] of [Name of Firm], an 
associated person of an SEC-registered broker-dealer and a supervised 
person of an SEC- registered investment adviser.''
---------------------------------------------------------------------------

    \437\ See Exchange Act proposed rule 15l-3(a) and Advisers Act 
proposed rule 211h-1(a). We note that in Form ADV investment 
advisers are required to state that registration with the Commission 
does not imply a certain level of skill or training. See Item 1.C. 
of Form ADV Part 2A. We are requesting comment on whether we should 
require broker-dealers and investment advisers to include this 
statement in addition to disclosing their applicable regulatory 
status.
    \438\ See Exchange Act proposed rule 15l-3(b).
    \439\ See Advisers Act proposed rule 211h-1(b).
---------------------------------------------------------------------------

    Our proposed registration disclosure rules, like the proposed 
restriction on names and titles, or our proposed alternative 
approaches, complement our proposed requirement that broker-dealers and 
investment advisers deliver a relationship summary to retail investors. 
Even if a firm uses various titles, such as ``wealth consultant'' or 
``wealth manager,'' the legal term for these firms is ``investment 
adviser'' and/or ``broker-dealer.'' These statutory terms have meaning 
because they relate to a particular regulatory framework that is 
designed to address the nature and scope of the firm's activities, 
which the firm would describe for a retail investor in the relationship 
summary.\440\ Accordingly, we preliminarily believe that requiring a 
firm to disclose whether it is a broker-dealer or an investment adviser 
in print or electronic communications to retail investors would assist 
retail investors to determine which type of firm is more appropriate 
for their specific investment needs.
---------------------------------------------------------------------------

    \440\ For similar reasons, we are requiring the use of the terms 
``supervised person'' and ``associated person'' as they are defined 
legal terms generally describing the financial professional's 
association with the investment adviser or broker-dealer, 
respectively.
---------------------------------------------------------------------------

    For similar reasons, we preliminarily believe that because retail 
investors interact with a firm primarily through financial 
professionals, it is important that financial professionals disclose 
the firm type with which they are associated. We acknowledge that in 
the studies and the comments received, retail investors generally 
believe broker-dealers and investment advisers are similar, and that 
they did not understand differences between them.\441\ As discussed 
above, while we acknowledge that broker-dealers and investment advisers 
are similar in that they provide investment advice, they commonly are 
dissimilar in a variety of key areas such as disclosure of conflicts of 
interest, types of fees charged, and standard of conduct. In 
particular, the

[[Page 21468]]

proposed relationship summary would inform retail investors about many 
of these differences, and in so doing, would be addressing investor 
confusion. As a result, even if investors are currently confused, over 
time they should better understand that investment advisers and broker-
dealers may be different, and how they are different.
---------------------------------------------------------------------------

    \441\ See supra Section III.A. See also, e.g., RAND Study, supra 
note 5, at 19, 20 (``Many [industry interview] participants reported 
that they thought that offering such [fee-based account] products 
and services meant that broker-dealers and investment advisers 
became less distinguishable from one another. They claimed that 
bundling of advice and sales by broker-dealers also added to 
investor confusion . . . . [Industry Representative] interviews 
suggest that individual investors do not distinguish between 
investment advisers and broker-dealers. Marketplace changes that 
have resulted in investment advisers and broker-dealers offering 
similar services have added to investor confusion.'').
---------------------------------------------------------------------------

    Similarly, our proposed rules to require a firm to disclose whether 
it is a broker-dealer or an investment adviser in print or electronic 
communications to retail investors would help to facilitate investor 
understanding, even if investors currently may not understand the 
differences between investment advisers and broker-dealers.
    We believe that disclosures that are as important as whether a firm 
is a broker-dealer or an investment adviser or whether a financial 
professional is associated with a broker-dealer or is a supervised 
person of an investment adviser, should not be inconspicuous or placed 
in fine print. Accordingly, we are proposing to require a firm and its 
financial professionals to disclose their registration statuses in 
print communications in a type size at least as large as and of a font 
style different from, but at least as prominent as, that used in the 
majority of the communication.\442\ To be ``prominent,'' for example, 
we believe the disclosures should be included, at a minimum, on the 
front of a business card or in another communication, in a manner 
clearly intended to draw attention to it. In addition, we are proposing 
to require the disclosure to be presented in the body of the 
communication and not in a footnote.\443\ If a communication is 
delivered through an electronic communication or in any publication by 
radio or television, the disclosure must be presented in a manner 
reasonably calculated to draw retail investors' attention to it.\444\ 
For example, in a televised or video presentation, a voice overlay and 
on-screen text could clearly convey the required information. Finally, 
we propose to stage the compliance date to ensure that firms and 
financial professionals can phase out certain older communications from 
circulation through the regular business lifecycle rather than having 
to retroactively change them.\445\
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    \442\ See Exchange Act proposed rule 15l-3(c)(1) and Advisers 
Act proposed rule 211h-1(c)(1).
    \443\ See supra note 442.
    \444\ See Exchange Act proposed rule 15l-3(c)(2) and Advisers 
Act proposed rule 211h-1(c)(2). See also Proposed Amendments to 
Investment Company Advertising Rules, Investment Company Act Release 
No. 25575 (May 17, 2002); Amendments to Investment Company 
Advertising Rules, Investment Company Act Release No. 26195 (Sept. 
29, 2003) (stating that ``radio and television advertisements [must] 
give the required narrative disclosures emphasis equal to that used 
in the major portion of the advertisement''). See also 17 CFR 
230.420.
    \445\ Similarly, we are not requiring firms to send new 
communications to replace all older print communications as this 
would be overly burdensome and costly for firms.
---------------------------------------------------------------------------

    We request comment generally on our proposed requirement to 
disclose a firm's regulatory status and, for financial professionals, 
their association with such firm, and in particular on the following 
issues:
     Does our proposed rule requiring disclosure of a firm's 
registration status, either alone or in combination with the proposed 
relationship summary, sufficiently address the concerns addressed by 
our proposed restriction on certain names or titles? If not, why not?
     Would the proposed rules requiring disclosure of 
registration status and the financial professional's association with 
the firm give retail investors greater clarity about various aspects of 
their relationship with a financial professional (e.g., his or her 
services, compensation structures, conflicts of interest, and legal 
obligations)?
     To what extent do firms already clearly and conspicuously 
disclose their federal and/or state registration as investment advisers 
or broker-dealers? To what extent do financial professionals already 
disclose their association with the broker-dealer or investment 
adviser? If such status is disclosed, is it typically in fine print or 
presented in a manner that it is not easily recognizable to investors?
     Do retail investors understand what it means for a firm to 
be ``registered'' with the Commission or a state? Additionally, do 
retail investors understand what it means for a financial professional 
to be an ``associated person'' of a broker-dealer or a ``supervised 
person'' of an investment adviser?
     Would our proposed rules improve clarity and consistency 
for investors in identifying a firm's regulatory status and a financial 
professional's association with a firm or will it lead to unnecessary, 
wordy, and possibly redundant disclosure? If the latter, how can we 
address this?
     Are we correct that investors would find it helpful to 
know whether a firm is registered as an investment adviser or a broker-
dealer or a financial professional is associated with a broker-dealer 
or supervised by an investment adviser so that they can refer to the 
relationship summary to better understand the practical implications of 
the firm's registration and such financial professional's association 
with that firm?
     Should dually registered firms be required to disclose 
both registration statuses? Would this requirement cause more confusion 
or help to address it? If so, how? By requiring a financial 
professional to disclose whether he or she is an associated person of a 
broker-dealer or a supervised person of an investment adviser, would we 
be assisting retail investors in understanding the capacity in which 
their financial professional services them? For example, would retail 
investors serviced by dual hatted financial professionals understand 
that their financial professional may act in dual capacities (i.e., 
brokerage and advisory)?
     Are our proposed requirements prescribing the presentation 
of the disclosure appropriate? Should we consider removing any of these 
requirements? Alternatively, are there requirements we should add? If 
so, which requirements and why? Are there requirements that we should 
modify? For example, could the Commission's objective of ensuring 
prominence of disclosure be served through a more principles-based 
approach, or through different requirements (e.g., that the disclosure 
be not 20% smaller than the principal text)?
     Should the account statement or other disclosure clarify 
whether a retail investor has an advisory or a brokerage account? If 
so, how?
     Should our proposed rules define ``communication''? For 
example, should we include in the rule a definition that tracks FINRA's 
definition of ``communication'' in Rule 2210? In particular, FINRA Rule 
2210 defines a ``communication'' as correspondence, retail 
communications and institutional communications. ``Correspondence'' 
means any written (including electronic) communication that is 
distributed or made available to 25 or fewer retail investors within 
any 30 calendar day period and ``Retail communication'' means any 
written (including electronic) communication that is distributed or 
made available to more than 25 retail investors within any 30 calendar 
day period. Finally, ``Institutional communication'' means any written 
(including electronic) communication that is distributed or made 
available only to institutional investors, but does not include a 
member's internal communications. Are there other definitions of 
``communication'' we should consider? As an alternative to the word

[[Page 21469]]

``communication'' in our proposed rules, should we use 
``advertisements'' as defined in rule 206(4)-1 under the Advisers Act, 
or a different term? \446\
---------------------------------------------------------------------------

    \446\ See FINRA Rule 2210(a); rule 206(4)-1 under the Advisers 
Act.
---------------------------------------------------------------------------

     Should the proposed rules apply to all communications to 
retail investors, including oral communications? On the other hand, are 
there certain types of written communications that could be exempted, 
e.g. communications that do not make any financial or investment 
recommendation or otherwise promote a product or service of the member? 
\447\
---------------------------------------------------------------------------

    \447\ See FINRA Rule 2210(b)(1)(D)(iii) (exempting certain 
communications from principal pre-approval).
---------------------------------------------------------------------------

     Should we permit the use of hyperlinks to the registration 
status disclosure statement for electronic communications rather than 
requiring the disclosure statement on the communication itself? Would 
permitting hyperlinks limit or promote the effectiveness of this 
disclosure requirement, and if so, how?
     Should we require broker-dealers, investment advisers and 
financial professionals to state that registration with the Commission 
does not imply a certain level of skill or training? Are there 
potential benefits or drawbacks to requiring this type of statement?

IV. Economic Analysis

    We are sensitive to the economic effects, including the costs and 
benefits that stem from the proposed rules. Whenever the Commission 
engages in rulemaking 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 requires the Commission to consider whether 
the action would promote efficiency, competition, and capital 
formation, in addition to the protection of investors.\448\ Further, 
when making rules under the Exchange Act, section 23(a)(2) of the 
Exchange Act requires the Commission to consider the impact such rules 
would have on competition.\449\ Section 23(a)(2) of the Exchange Act 
also prohibits the Commission from adopting any rule that would impose 
a burden on competition not necessary or appropriate in furtherance of 
the purposes of the Exchange Act.\450\
---------------------------------------------------------------------------

    \448\ See 15 U.S.C. 77b(b) and 15 U.S.C. 78c(f).
    \449\ See 15 U.S.C. 78w(a)(2).
    \450\ Id.
---------------------------------------------------------------------------

    Section 202(c) of the Advisers Act requires the Commission, when 
engaging in rulemaking and required to consider or determine whether an 
action is necessary or appropriate in the public interest, also to 
consider whether the action will promote efficiency, competition, and 
capital formation, in addition to the protection of investors.\451\ The 
Commission provides both a qualitative assessment of the potential 
effects and, where feasible, quantitative estimates of the potential 
aggregate initial and aggregate ongoing costs. In some cases, however, 
quantification is particularly challenging due to the difficulty of 
predicting how market participants would act under the conditions of 
the proposed rules. For example, although we expect that the proposal 
would increase retail investors' understanding of the services provided 
to them, investors could respond differently to the increased 
understanding--by transferring to a different financial firm or 
professional, hiring a financial professional for the first time, or 
entirely abandoning the financial services market while moving their 
assets to other products or markets (e.g., bank deposits or insurance 
products). The Commission encourages commenters to provide any data and 
information that could help us quantify these long-term effects.
---------------------------------------------------------------------------

    \451\ 15 U.S.C. 80b-2(c).
---------------------------------------------------------------------------

    In the economic analysis that follows, we first examine the current 
regulatory and economic landscape to form a baseline for our analysis. 
We then analyze the likely economic effects--including benefits and 
costs and impact on efficiency, competition, and capital formation--
arising from the proposed rules relative to the baseline discussed 
below.

A. Baseline

    This section discusses, as it relates to this proposal, the current 
state of the broker-dealer and investment adviser markets, the current 
regulatory environment, and the current state of retail investor 
perceptions in the market.
1. Providers of Financial Services
a. Broker-Dealers
    As noted above, one market that would be affected by these proposed 
rules \452\ is the market for broker-dealer services, including firms 
that are dually registered as broker-dealers and investment 
advisers.\453\ The market for broker-dealer services encompasses a 
small set of large broker-dealers and thousands of small broker-dealers 
competing for niche or regional segments of the market.\454\
---------------------------------------------------------------------------

    \452\ ``Proposed rules'' used in this economic analysis is 
inclusive of Form CRS and related proposed forms as well as the 
proposed rules themselves.
    \453\ 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 dual registrants 
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 dual registrant is any firm that is dually registered 
with the Commission as an investment adviser and a broker-dealer. 
For the purposes of the relationship summary, however, we propose to 
define dual registrant as a firm that is dually registered as a 
broker-dealer and an investment adviser and offers services to 
retail investors as both a broker-dealer and investment adviser. See 
supra note 25.
    \454\ 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)].
---------------------------------------------------------------------------

    As of December 2017, there were approximately 3,841 registered 
broker-dealers with over 130 million customer accounts. In total, these 
broker-dealers have close to $4 trillion in total assets.\455\ More 
than two-thirds of all brokerage assets and close to one-third of all 
customer accounts are held by the 16 largest broker-dealers, as shown 
in Table 1, Panel A.\456\ Of the broker-dealers registered with the 
Commission as of December 2017, 366 broker-dealers were dually 
registered as investment advisers; \457\ however, these firms hold 
nearly 90 million (68%) customer accounts.\458\ Approximately 546 
broker-

[[Page 21470]]

dealers (14%) reported at least one type of non-securities business, 
including insurance, retirement planning, mergers & acquisitions, and 
real estate, among others.\459\ Approximately 74% of registered broker-
dealers report retail customer activity.\460\
---------------------------------------------------------------------------

    \455\ 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.
    \456\ Approximately $3.91 trillion of total assets of broker-
dealers (98%) are at firms with total assets in excess of $1 
billion. Of the 30 dual registrants in the group of broker-dealers 
with total assets in excess of $1 billion, total assets for these 
dual registrants are $2.46 trillion (62%) of aggregate broker-dealer 
assets. Of the remaining 88 firms, 81 have affiliated investment 
advisers.
    \457\ Because this number does not include the number of broker-
dealers who are also registered as state investment advisers, the 
number undercounts the full number of broker-dealers that operate in 
both capacities. Further, 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 dual 
registrants offer advisory accounts to retail investors but offer 
only brokerage services, such as underwriting services, to 
institutional customers. For purposes of the discussion of the 
baseline in this economic analysis, a dual registrant is any firm 
that is dually registered with the Commission as an investment 
adviser and a broker-dealer.
    \458\ Some broker-dealers may be affiliated with investment 
advisers without being dually registered. From Question 10 on Form 
BD, 2,145 broker-dealers report that directly or indirectly, they 
either control, are controlled by, or under common control with an 
entity that is engaged in the securities or investment advisory 
business. Comparatively, 2,478 (19.57%) SEC-registered investment 
advisers report an affiliate that is a broker-dealer in Section 7A 
of Schedule D of Form ADV, including 1,916 SEC-registered investment 
advisers that report an affiliate that is a registered broker-
dealer. Approximately 75% of total assets under management of 
investment advisers are managed by these 2,478 investment advisers.
    \459\ We examined Form BD filings to identify broker-dealers 
reporting non-securities business. For the 546 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 (208), management/financial/other 
consulting (101), advisory/retirement planning (80), mergers & 
acquisitions (71), foreign exchange/swaps/other derivatives (31), 
real estate/property management (31), tax services (15), and other 
(141). Note that a broker-dealer may have more than one line of non-
securities business.
    \460\ 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 broker-dealers 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. We request comment on whether 
firms that intermediate both retail and institutional customer 
activity generally market only ``sales'' on Form BR.
---------------------------------------------------------------------------

    Panel B of Table 1 limits the broker-dealers to those that report 
some retail investor activity. As of December 2017, there were 
approximately 2,857 broker-dealers that served retail investors, with 
over $3.6 trillion in assets (90% of total broker-dealer assets) and 
128 million (96%) customer accounts.\461\ Of those broker-dealers 
serving retail investors, 360 are dually registered as investment 
advisers.\462\
---------------------------------------------------------------------------

    \461\ Total assets and customer accounts for broker-dealers 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.
    \462\ Of the 36 dual registrants in the group of retail broker-
dealers with total assets in excess of $500 million, total assets 
for these dual registrants are $2.19 trillion (60%) of aggregate 
retail broker-dealer assets. Of the remaining 72 retail broker-
dealers, 67 have affiliated investment advisers.
    \463\ The data is obtained from FOCUS filings as of December 
2017. Note that there may be a double-counting 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.
    \464\ In addition to the approximately 130 million individual 
accounts at broker-dealers, there are approximately 293,000 omnibus 
accounts (0.2% of total accounts at broker-dealers), across all 
3,841 broker-dealers, of which approximately 99% are held at broker-
dealers with greater than $1 billion in total assets. See also supra 
note 455. Omnibus accounts reported in FOCUS data are the accounts 
of non-carrying broker-dealers with carrying broker-dealers. These 
accounts may have securities of multiple customers (of the non-
carrying firm), or securities that are proprietary assets of the 
non-carrying broker-dealer. We are unaware from the data available 
to determine 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 underinclusive of all customer 
accounts held at broker-dealers.
    \465\ Customer Accounts includes both broker-dealer and 
investment adviser accounts for dual registrants.

                      Table 1--Panel A: Registered Broker-Dealers as of December 2017 \463\
                       [Cumulative Broker-Dealer Total Assets and Customer Accounts \464\]
----------------------------------------------------------------------------------------------------------------
                                                                                                    Cumulative
                                                   Total number      Number of      Cumulative       number of
      Size of broker-dealer  (total assets)           of BDs           dual-       total assets      customer
                                                                  registered BDs                  Accounts \465\
----------------------------------------------------------------------------------------------------------------
>$50 billion....................................              16              10     $2,717 bil.      40,969,187
$1 billion to $50 billion.......................             102              20      1,196 bil.      81,611,933
$500 million to $1 billion......................              38               7         26 bil.       4,599,330
$100 million to $500 million....................             118              26         26 bil.       1,957,981
$10 million to $100 million.....................             482              94         17 bil.       2,970,133
$1 million to $10 million.......................           1,035             141          4 bil.         233,946
<$1 million.....................................           2,055              68          1 bil.           5,588
                                                 ---------------------------------------------------------------
    Total.......................................           3,841             366      3,987 bil.     132,348,098
----------------------------------------------------------------------------------------------------------------


                     Table 1--Panel B: Registered Retail Broker-Dealers as of December 2017
                          [Cumulative Broker-Dealer Total Assets and Customer Accounts]
----------------------------------------------------------------------------------------------------------------
                                                                                                    Cumulative
                                                   Total number      Number of      Cumulative       number of
      Size of broker-dealer  (total assets)           of BDs           dual-       total assets      customer
                                                                  registered BDs                     accounts
----------------------------------------------------------------------------------------------------------------
>$50 billion....................................              15              10     $2,647 bil.      40,964,945
$1 billion to $50 billion.......................              70              19        923 bil.      77,667,615
$500 million to $1 billion......................              23               7         16 bil.       4,547,574
$100 million to $500 million....................              93              25         20 bil.       1,957,981
$10 million to $100 million.....................             372              94         14 bil.       2,566,203
$1 million to $10 million.......................             815             139          3 bil.         216,158
<$1 million.....................................           1,469              66        $.4 bil.           5,588
                                                 ---------------------------------------------------------------
    Total.......................................           2,857             360     $3,624 bil.     127,926,064
----------------------------------------------------------------------------------------------------------------


[[Page 21471]]

    Table 2 reports information on brokerage commissions,\466\ fees, 
and selling concessions from the fourth quarter of 2017 for all broker-
dealers, including dual registrants.\467\ On average, broker-dealers, 
including those that are dually registered as investment advisers, earn 
about $2.1 million per quarter in revenue from commissions and more 
than double that amount in fees,\468\ although the Commission notes 
that fees encompass a variety of fees, not just those related to 
advisory services.\469\ The level of revenues earned from broker-
dealers for commissions and fees increases with broker-dealer size, but 
also tends to be more heavily weighted towards commissions for broker-
dealers with less than $10 million in assets and is weighted more 
heavily towards fees for broker-dealers with assets in excess of $10 
million. For example, for the 102 broker-dealers with assets between $1 
billion and $50 billion, average revenues from commissions are $25 
million, while average revenues from fees are approximately $91 
million.\470\
---------------------------------------------------------------------------

    \466\ FOCUS data does not provide mark-ups or mark-downs as a 
separate revenue category and they are not included as part of the 
brokerage commission revenue.
    \467\ Source: FOCUS data.
    \468\ Fees, as detailed in the FOCUS data, include fees for 
account supervision, investment advisory and administrative 
services. Beyond the broad classifications of fee types included in 
fee revenue, we are unable to determine whether fees such as 12b-1 
fees, sub-accounting, or other such service fees 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).
    \469\ With respect to the FOCUS data, additional granularity of 
what services comprise ``advisory services'' is not available.
    \470\ A rough estimate of total fees in this size category would 
be 102 broker-dealers with assets between $1 billion and $50 billion 
multiplied by the average fee revenue of $91 million, or $9.381 
billion in total fees. Divided by the number of customer accounts in 
this size category (81,611,933), the average account would be 
charged approximately $115 in fees per quarter, or $460 per year.
---------------------------------------------------------------------------

    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 broker-dealer revenues than either commissions or 
fees, except for broker-dealers 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 44% of total revenues earned by these firms.
    Table 2, Panel B, below provides aggregate revenues by revenue type 
(commissions, fees, or selling concessions) for broker-dealers 
delineated by whether the broker-dealer is also a dual registrant. 
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 generated approximately 43% of their advice-related 
revenues as commissions and only 32% 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 broker-dealers.

            Table 2--Panel A: Average Broker-Dealer Revenues From Revenue Generating Activities \471\
----------------------------------------------------------------------------------------------------------------
                                                                                                   Sales of  IC
      Size of broker-dealer in total assets              N          Commissions     Fees \472\        shares
----------------------------------------------------------------------------------------------------------------
>$50 billion....................................              16    $176,193,599    $365,014,954     $20,493,769
$1 billion-$50 billion..........................             102      25,109,619      91,966,559      18,808,687
$500 million-$1 billion.........................              38       6,322,803      11,312,112       6,724,401
$100 million-$500 million.......................             118       7,698,889      11,338,175       4,536,407
$10 million-$100 million........................             483       1,801,079       2,811,290       3,653,475
$1 million-$10 million..........................           1,035         633,720         372,757         217,444
<$1 million.....................................           2,049          66,503          38,618          26,270
                                                 ---------------------------------------------------------------
    Average of All Broker-Dealers...............           3,841       2,132,544       4,897,521       1,322,759
----------------------------------------------------------------------------------------------------------------


---------------------------------------------------------------------------

    \471\ The data obtained from December 2017 FOCUS reports and 
averaged across size groups.
    \472\ Fees, as detailed in the FOCUS data, include fees for 
account supervision, investment advisory and administrative 
services. The data covers both broker-dealers and dually-registered 
firms.
---------------------------------------------------------------------------


---------------------------------------------------------------------------

    \473\ See id.

 Table 2--Panel B: Aggregate Total Revenues From Revenue Generating Activities for Broker-Dealers Based on Dual
                                                Registrant Status
----------------------------------------------------------------------------------------------------------------
                                                                                                    Sales of IC
               Broker-dealer type                        N          Commissions     Fees \473\        shares
----------------------------------------------------------------------------------------------------------------
Dual Registered as IAs..........................             366      $4.27 bil.     $15.88 bil.       $2.8 bil.
Standalone Registered BDs.......................           3,475       3.92 bil.       2.93 bil.       2.28 bil.
                                                 ---------------------------------------------------------------
    All.........................................           3,841       8.19 bil.      18.81 bil.       5.08 bil.
----------------------------------------------------------------------------------------------------------------


[[Page 21472]]

i. Disclosures for Broker-Dealers
    Broker-dealers register with and report information to the 
Commission, the SROs, and other jurisdictions through Form BD. Form BD 
requires information about the background of the applicant, its 
principals, controlling persons, and employees, as well as information 
about the type of business the broker-dealer proposes to engage in and 
all control affiliates engaged in the securities or investment advisory 
business.\474\ Broker-dealers report whether a broker-dealer or any of 
its control affiliates have been subject to criminal prosecutions, 
regulatory actions, or civil actions in connection with any investment-
related activity, as well as certain financial matters.\475\ Once a 
broker-dealer is registered, it must keep its Form BD current by 
amending it promptly when the information is or becomes inaccurate for 
any reason.\476\ In addition, firms report similar information and 
additional information to FINRA pursuant to FINRA Rule 4530.\477\ The 
current Paperwork Reduction Act estimate for the total industry-wide 
annual filing burden to comply with rule 15b1-1 and file Form BD is 
approximately 4,999 hours, with an estimated internal cost of 
compliance associated with those burden hours for all broker-dealers of 
$1,394,721.
---------------------------------------------------------------------------

    \474\ See generally Form BD.
    \475\ See Item 11 and Disclosure Reporting Pages, Form BD.
    \476\ See Exchange Act rule 15b3-1(a).
    \477\ See supra Section II.B.7.
---------------------------------------------------------------------------

    A significant amount of information concerning broker-dealers and 
their associated natural persons, including information from Form BD, 
Form BDW, and Forms U4, U5, and U6, is publicly available through 
FINRA's BrokerCheck system. This information includes violations of and 
claims of violations of the securities and other financial laws by 
broker-dealers and their financial professionals; criminal or civil 
litigation, regulatory actions, arbitration, or customer complaints 
against broker-dealers and their financial professionals; and the 
employment history and licensing information of financial professionals 
associated with broker-dealers, among other things.\478\
---------------------------------------------------------------------------

    \478\ FINRA Rule 8312 governs the information FINRA releases to 
the public via BrokerCheck. See supra note 280 and accompanying 
text.
---------------------------------------------------------------------------

    Broker-dealers are subject to other disclosure requirements under 
the federal securities laws and SRO rules. For instance, under existing 
antifraud provisions of the Exchange Act, a broker-dealer has a duty to 
disclose material information to its customers conditional on the scope 
of the relationship with the customer.\479\ Disclosure has also been a 
feature of other regulatory efforts related to financial services, 
including those of DOL and certain FINRA rules.\480\
---------------------------------------------------------------------------

    \479\ A broker-dealer also may be liable if it does not disclose 
``material adverse facts of which it is aware''. See, e.g., Chasins 
v. Smith, Barney & Co., 438 F.2d at 1172; SEC v. Hasho, 784 F. Supp. 
at 1110; Release 48758, supra note 243 (``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).
    \480\ See, infra Section IV.A.1.c; FINRA Notice 10-54, supra 
note 12. 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. FINRA 
disclosure rules include but are not limited FINRA rules 2210(d)(2) 
(communications with the public), 2260 (disclosures), 2230 (customer 
account statements and confirmations), and 2270 (day-trading risk 
disclosure statement).
---------------------------------------------------------------------------

b. Investment Advisers
    Other parties that would be affected by the proposed rules and 
proposed Form CRS are SEC-registered investment advisers.\481\ This 
section first discusses SEC-registered investment advisers, followed by 
a discussion of state-registered investment advisers.
---------------------------------------------------------------------------

    \481\ In addition to SEC-registered investment advisers, which 
are the focus of this section, the proposed rules and proposed Form 
CRS could also affect banks, trusts, insurance companies, and other 
providers of financial advice.
---------------------------------------------------------------------------

    As of December 2017, there are approximately 12,700 investment 
advisers registered with the Commission. The majority of SEC-registered 
investment advisers report that they provide portfolio management 
services for individuals and small businesses.\482\
---------------------------------------------------------------------------

    \482\ Of the approximately 12,700 SEC-registered investment 
advisers, 7,979 (64%) 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 17,800 state-
registered investment advisers, of which 145 are also registered 
with the Commission. Approximately 13,800 state-registered 
investment advisers are retail facing (see Item 5.D of Form ADV).
---------------------------------------------------------------------------

    Of all SEC-registered investment advisers, 366 identified 
themselves as dually registered broker-dealers.\483\ Further, 2,478 
investment advisers (20%) reported an affiliate that is a broker-
dealer, including 1,916 investment advisers (15%) that reported an SEC-
registered broker-dealer affiliate.\484\ As shown in Panel A of Table 3 
below, in aggregate, investment advisers have over $72 trillion in 
assets under management (``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, although the dollar value of AUM for 
investment advisers and of customer assets in broker-dealer accounts is 
comparable, the total number of accounts for investment advisers is 
only 27% of the number of customer accounts for broker-dealers.
---------------------------------------------------------------------------

    \483\ See supra note 457.
    \484\ Item 7.A.1 of Form ADV.
---------------------------------------------------------------------------

    Based on staff analysis of Form ADV data, approximately 60% of 
investment advisers (7,600) have some portion of their business 
dedicated to retail investors, including both high net worth and non-
high net worth individual clients, as shown in Panel B of Table 3.\485\ 
In total, these firms have approximately $32 trillion of assets under 
management.\486\ Approximately 6,600 registered investment advisers 
(52%) serve 29 million non-high net worth individual clients and have 
approximately $5.33 trillion in assets under management, while nearly 
7,400 registered investment advisers (58%) serve approximately 4.8 
million high net worth individual clients with $6.56 trillion in assets 
under management.\487\
---------------------------------------------------------------------------

    \485\ 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.
    \486\ 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.
    \487\ Estimates are based on IARD system data as of December 31, 
2017. The AUM reported here is specifically that of those non-high 
net worth clients. Of the 7,600 investment advisers serving retail 
investors, 360 may also be dually registered as broker-dealers.

[[Page 21473]]



                   Table 3--Panel A: Registered Investment Advisers (RIAs) as of December 2017
                           [Cumulative RIA assets under management (AUM) and accounts]
----------------------------------------------------------------------------------------------------------------
                                                                  Number of dual-                   Cumulative
        Size of investment adviser  (AUM)         Number of RIAs    registered    Cumulative AUM     number of
                                                                       RIAs                          accounts
----------------------------------------------------------------------------------------------------------------
>$50 billion....................................             246              15    $48,221 bil.      17,392,968
$1 billion to $50 billion.......................           3,238             115     21,766 bil.      11,560,805
$500 million to $1 billion......................           1,554              53      1,090 bil.       2,678,084
$100 million to $500 million....................           5,568             129      1,303 bil.       3,942,639
$10 million to $100 million.....................           1,103              24         59 bil.         198,659
$1 million to $10 million.......................             172               2          1 bil.           5,852
<$1 million.....................................             778              28        .02 bil.          31,291
                                                 ---------------------------------------------------------------
    Total.......................................          12,659             366     72,439 bil.      35,810,298
----------------------------------------------------------------------------------------------------------------


               Table 3--Panel B: Retail Registered Investment Advisers (RIAs) as of December 2017
                           [Cumulative RIA assets under management (AUM) and accounts]
----------------------------------------------------------------------------------------------------------------
                                                                     Number of
                                                                       dual-                        Cumulative
        Size of investment adviser  (AUM)         Number of RIAs    registered    Cumulative AUM     number of
                                                                       RIAs                          accounts
----------------------------------------------------------------------------------------------------------------
>$50 billion....................................             106              15    $22,788 bil.      16,638,548
$1 billion to $50 billion.......................           1,427             114      8,472 bil.      10,822,275
$500 million to $1 billion......................             934              52        652 bil.       2,602,220
$100 million to $500 million....................           4,114             126        917 bil.       3,814,900
$10 million to $100 million.....................             711              24         40 bil.         231,663
$1 million to $10 million.......................              98               1         .4 bil.           5,804
<$1 million.....................................             198              29        .02 bil.          31,271
                                                 ---------------------------------------------------------------
    Total.......................................           7,588             361     32,870 bil.      34,146,681
----------------------------------------------------------------------------------------------------------------

    As an alternative to registering with the Commission, smaller 
investment advisers could register with state regulators.\488\ As of 
December 2017, there are 17,635 state registered investment 
advisers,\489\ of which 145 are also registered with the Commission. Of 
the state-registered investment advisers, 236 are dually registered as 
broker-dealers, while 5% (920) report a broker-dealer affiliate. In 
aggregate, state-registered investment advisers have approximately $341 
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 just 64% for SEC-
registered investment advisers.
---------------------------------------------------------------------------

    \488\ Pursuant to the Dodd-Frank Act, Item 2.A. of Part 1A of 
Form ADV requires an investment adviser to register with the SEC if 
it (i) is a large adviser that has $100 million or more of 
regulatory assets under management (or $90 million or more if an 
adviser is filing its most recent annual updating amendment and is 
already registered with the SEC); (ii) is a mid-sized adviser that 
does not meet the criteria for state registration or is not subject 
to examination; (iii) meets the requirements for one or more of the 
revised exemptive rules under section 203A discussed below; (iv) is 
an adviser (or subadviser) to a registered investment company; (v) 
is an adviser to a business development company and has at least $25 
million of regulatory assets under management; or (vi) received 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 for those investment advisers that do not 
already file with the SEC.
    \489\ There are 79 investment advisers with latest reported 
Regulatory Assets Under Management in excess of $110 million but are 
not listed as registered with the SEC. For the purposes of this 
rulemaking, these are considered erroneous submissions.
---------------------------------------------------------------------------

    Approximately 77% of state-registered investment advisers (13,470) 
have some portion of their business dedicated to retail investors,\490\ 
and in aggregate, these firms have approximately $308 billion in 
AUM.\491\ Approximately 12,700 (72%) state-registered advisers serve 
616,000 non-high net worth retail clients and have approximately $125 
billion in AUM, while over 11,000 (63%) state-registered advisers serve 
approximately 194,000 high net worth retail clients with $138 billion 
in AUM.\492\
---------------------------------------------------------------------------

    \490\ 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.
    \491\ 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.
    \492\ Estimates are based on IARD system data as of December 31, 
2017. The AUM reported here is specifically that of those non-high 
net worth investors. Of the 13,471 investment advisers serving 
retail investors, 144 may also be dually registered as broker-
dealers.
---------------------------------------------------------------------------

    Table 4 details the compensation structures employed by 
approximately 12,700 investment advisers. Approximately 95% are 
compensated through a fee-based arrangement, where a percentage of 
assets under management are remitted to the investment adviser from the 
investor for advisory services. As shown in the table below, most 
investment advisers rely on a combination of different compensation 
types, beyond fee-based compensation, including fixed fees, hourly 
charges, and performance based fees. Less than 4% of investment 
advisers charge commissions \493\ to their investors.
---------------------------------------------------------------------------

    \493\ Some investment advisers report on Item 5.E. of Form ADV 
that they receive ``commissions.'' As a form of deferred sales load, 
all payments of ongoing sales charges to intermediaries would 
constitute transaction-related compensation. Intermediaries 
receiving those payments should consider whether they need to 
register as broker-dealers under section 15 of the Exchange Act.

[[Page 21474]]



      Table 4--Registered Investment Advisers Compensation by Type
------------------------------------------------------------------------
            Compensation type                   Yes             No
------------------------------------------------------------------------
A percentage of assets under management.          12,041             617
Hourly charges..........................           3,670           8,988
Subscription fees (for a newsletter or               119          12,539
 periodical)............................
Fixed fees (other than subscription                5,406           7,252
 fees)..................................
Commissions.............................             490          12,168
Performance-based fees..................           4,780           7,878
Other...................................           1,846          10,812
------------------------------------------------------------------------

    As discussed above, many investment advisers participate in wrap 
fee programs. As of December 31, 2017, more than 5% of the SEC-
registered investment advisers sponsor a wrap fee program and more than 
9% act as a portfolio manager for one or more wrap fee programs.\494\ 
From the data available, we are unable to determine how many advisers 
provide advice about investing in wrap fee programs, because advisers 
providing such advice may be neither sponsors nor portfolio managers.
---------------------------------------------------------------------------

    \494\ A wrap fee program sponsor is as a firm that sponsors, 
organizes, or administers the program or selects, or provides advice 
to clients regarding the selection of, other investment advisers in 
the program. See General Instructions to Form ADV.
---------------------------------------------------------------------------

ii. Disclosures for Investment Advisers
    As fiduciaries, investment advisers have a duty to provide full and 
fair disclosure of material facts and are subject to express disclosure 
requirements in Form ADV.\495\ Consistent with this duty and those 
requirements, investment advisers file Form ADV to register with the 
Commission or state securities authorities, as applicable, and provide 
an annual update to the form.\496\ Part 1 of Form ADV provides 
information to regulators, and made available to clients, prospective 
clients, and the public, about the registrants' ownership, investors, 
and business practices. Advisers also prepare a Form ADV Part 2A 
narrative brochure that contains information about the investment 
adviser's business practices, fees, conflicts of interest, and 
disciplinary information,\497\ in addition to a Part 2B brochure 
supplement that includes information about the specific individuals, 
acting on behalf of the investment adviser, who actually provide 
investment advice and interact with the client.\498\ Currently, the 
Part 2A brochure is the primary client-facing disclosure document,\499\ 
however, Parts 1 and 2A are both made publicly available by the 
Commission through IAPD,\500\ and advisers are generally required to 
deliver Part 2A and Part 2B to their clients. The current Paperwork 
Reduction Act estimate of the average annual cost and hour burden for 
investment advisers to complete, amend, and file all parts of Form ADV 
are $6,051 and 23.77 hours.\501\
---------------------------------------------------------------------------

    \495\ See SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 
at 194; see also Brochure Adopting Release, supra note 157. See also 
913 Study, supra note 3, at n.92. For example, if an adviser selects 
or recommends other advisers to investors, it must disclose any 
compensation arrangements or other business relationships between 
the advisory firms, along with the conflicts created, and explain 
how it addresses these conflicts. See Item 10 of Form ADV Part 2A. 
See also 913 Study, supra note 3, at n.93. Other potential conflicts 
of interest include acting as a principal in transactions with 
investors and compensation received thereof; incentives provided by 
third parties to sell their services and products; and agency cross-
trades, where the advisers is also a broker-dealer and executes a 
client's order by crossing the orders with those of non-advisory 
clients. See Interpretation of Section 206(3) of the Investment 
Advisers Act of 1940, Investment Advisers Act Release No. 1732 (Jul. 
20, 1998), at n.3.
    \496\ See Advisers Act rules 203-1 and 204-1. Part 1A (1B) of 
Form ADV is the registration application for the Commission (and 
state securities authorities). Part 2 of Form ADV consists of a 
narrative ``brochure'' about the adviser and ``brochure 
supplements'' about certain advisory personnel on whom clients may 
rely for investment advice. See Brochure Adopting Release, supra 
note 157.
    \497\ Part 2A of Form ADV contains 18 mandatory disclosure items 
about the advisory firm, including information about an adviser's: 
(1) Range of fees; (2) methods of analysis; (3) investment 
strategies and risk of loss; (4) brokerage, including trade 
aggregation polices and directed brokerage practices, as well as the 
use of soft dollars; (5) review of accounts; (6) client referrals 
and other compensation; (7) disciplinary history; and (8) financial 
information, among other things. Much of the disclosure in Part 2A 
addresses an investment adviser's conflicts of interest with its 
investors, and is disclosure that the adviser, as a fiduciary, must 
make to investors in some manner regardless of the form 
requirements. See Brochure Adopting Release, supra note 157.
    \498\ Part 2B, or the ``brochure supplement,'' includes 
information about certain advisory personnel that provide retail 
client investment advice, and contains educational background, 
disciplinary history, and the adviser's supervision of the advisory 
activities of its personnel. See Instruction 5 of General 
Instructions for Form ADV. Registrants are not required to file Part 
2B (brochure supplement) electronically, but must preserve a copy of 
the supplement(s) and make them available upon request.
    \499\ See Brochure Adopting Release, supra note 157.
    \500\ See Investment Adviser Public Disclosure, available at 
https://adviserinfo.sec.gov/.
    \501\ See infra Section V.A.2.
---------------------------------------------------------------------------

c. Disclosure Obligations for Broker-Dealers and Investment Advisers 
Under DOL Rules and Exemptions
    As noted, firms and financial professionals providing services to 
customers in retirement accounts, including workplace retirement plans 
and IRAs, are subject to certain disclosure obligations under rules and 
exemptions issued by the DOL under ERISA and the prohibited transaction 
provisions of the Code.\502\ For example, DOL regulations under a 
statutory exemption for investment advice services provided to plan 
participants and IRAs requires firms and financial professionals to 
disclose information about the services that they will provide and 
their fees and other compensation, and to acknowledge that the adviser 
is acting as a fiduciary.\503\
---------------------------------------------------------------------------

    \502\ See supra note 11.
    \503\ See 29 CFR 2550.408g-1(b)(7). In general, firms and 
financial professionals who receive commissions or other 
transaction-related compensation in connection with providing 
certain fiduciary investment recommendations relating to the assets 
of ERISA-covered workplace retirement plans and IRAs could violate 
provisions under the Code prohibiting fiduciaries from engaging in 
self-dealing and receiving compensation from third parties in 
connection with investments by these plans and IRA (and, with 
respect to such plans, substantially similar prohibited transaction 
rules that apply under ERISA to transactions involving ERISA plans 
but not IRAs). To receive such compensation, firms have historically 
complied with one or more prohibited transaction exemptions 
(``PTEs'') issued by the DOL over time, which generally required 
(among other conditions) disclosures about, e.g., direct and 
indirect compensation received in connection with a recommended 
transactions. See Definition of the Term ``Fiduciary;'' Conflict of 
Interest Rule--Retirement Investment Advice, 81 FR 20945, 20991-92 
(Apr. 8, 2016) (to be codified at 20 C.F.R. pts. 2509, 2510 and 
2550) (``DOL Fiduciary Rule Adopting Release'') (describing action 
to adopt new and amended PTEs and revoke certain PTEs applicable to 
investment advice services).
---------------------------------------------------------------------------

    More recently, the DOL's BIC Exemption would require that firms 
seeking to rely on the exemption to receive commissions and other fees 
in connection with making investment recommendations to IRAs and 
participants of ERISA-covered plans (including advice relating to 
rollovers from plans or between account types) \504\

[[Page 21475]]

generally must (among other conditions) provide disclosure about the 
services to be performed (including monitoring of recommendations, 
offering proprietary products and limiting recommendations) and how the 
investor will pay for services, material conflicts of interest 
(including third party compensation to the firm, affiliates and 
financial professionals), and must also make certain ongoing 
disclosures on a public website.\505\ The DOL adopted the BIC Exemption 
in connection with the amendment of its regulation defining 
``investment advice,'' which had the effect of expanding the 
circumstances under which broker-dealers and investment advisers may be 
fiduciaries for purposes of the prohibited transaction provisions under 
ERISA and the Code (the ``DOL Fiduciary Rule'').\506\ Although a 
decision of the Court of Appeals for the Fifth Circuit recently vacated 
the DOL Fiduciary Rule,\507\ we understand that many firms already have 
taken steps to implement conditions under the BIC Exemption.\508\
---------------------------------------------------------------------------

    \504\ See Best Interest Contract Exemption, 81 FR 21002, 21006-7 
(Apr. 8, 2016) (``BIC Exemption Release'') Best Interest Contract 
Exemption; Correction (Prohibited Transaction Exemption 2016-01), 81 
FR 44773 (July 11, 2016) (``Corrected BIC Exemption''), as amended 
18-Month Extension of Transition Period and Delay of Applicability 
Dates; Best Interest Contract Exemption (PTE 2016-01); Class 
Exemption for Principal Transactions in Certain Assets Between 
Investment Advice Fiduciaries and Employee Benefit Plans and IRAs 
(PTE 2016-02); Prohibited Transaction Exemption 84-24 for Certain 
Transactions Involving Insurance Agents and Brokers, Pension 
Consultants, Insurance Companies, and Investment Company Principal 
Underwriters (PTE 84-24), 82 FR 56545 (Nov. 29, 2017). Depending on 
how they are compensated, investment advisers receiving a level fee 
may not be subject to the full set of contract, disclosure and other 
conditions of the BIC Exemption.
    \505\ See Corrected BIC Exemption, supra note, 504, at sections 
II and III. Ongoing website disclosure would include information 
about certain material conflicts of interest and third party 
payments, a schedule of typical fees and service charges, a 
description of the compensation and incentive arrangements for 
individual financial professionals, and a written description of the 
financial institution's policies and procedures. Id., at section 
III. In the case of recommendations provided to an IRA, the firm 
also would be required to enter into a written contract with the IRA 
owner that includes an acknowledgement of fiduciary status and an 
enforceable promise to adhere to certain ``impartial conduct 
standards'' (including a best interest standard of conduct). Id., at 
section II(a).
    \506\ See DOL Fiduciary Rule Adopting Release, supra note 503.
    \507\ See Chamber of Commerce of the U.S.A., e. al. v. U.S. 
Dep't of Labor, et. al., No. 17-10238 (5th Cir. Mar 15, 2018).
    \508\ See SIFMA and 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-Fiduciary-Rule-August-2017.pdf.
---------------------------------------------------------------------------

    The Commission does not currently have data on the number of firms 
that are subject to disclosure obligations under applicable DOL rules 
and exemptions.\509\ However, because we understand that most broker-
dealers expected that they would be required to comply with the BIC 
Exemption to continue to provide services to retail investors in IRAs 
and participant-directed workplace retirement plans,\510\ the 
Commission can broadly estimate the maximum number of broker-dealers 
that could be subject to disclosure obligations under DOL rules and 
exemption including the BIC Exemption from the number of broker-dealers 
that have retail investor accounts. Approximately 74.4% (2,857) of 
registered broker-dealers report sales to retail customers.\511\ 
Similarly, approximately 60% (7,600) of investment advisers serve high 
net worth and non-high net worth individual clients. The Commission 
believes that this number likely overestimates those broker-dealers and 
investment advisers that provide retirement account services. 
Therefore, these 2,850 broker-dealers and 7,600 investment advisers 
that provide retail services represent an upper bound of the number of 
broker-dealers and investment advisers that would likely be subject to 
compliance with disclosure obligations under DOL rules and exemptions 
and may have taken steps to comply with the contract, disclosure and 
other conditions under the DOL's BIC Exemption.\512\
---------------------------------------------------------------------------

    \509\ In order to obtain this information, the Commission would 
need to know which financial firms have retirement-based accounts as 
part of their business model. Under the current reporting regime 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-based accounts.
    \510\ See BIC Exemption Release, supra note 504, at 21006-07 
(DOL states that it ``anticipates that the [DOL Fiduciary Rule] will 
cover many investment professionals who did not previously consider 
themselves to be fiduciaries under ERISA or the Code.'').
    \511\ As of December 2017, 3,841 broker-dealers filed Form BD. 
Retail sales by broker-dealers were obtained from Form BD.
    \512\ The DOL's Regulatory Impact Analysis estimated that the 
numbers of broker-dealers and investment advisers (including state-
registered investment advisers) that could be affected by their rule 
are approximately 2,500 and 17,500, respectively. See Regulatory 
Impact Analysis for Final Rule and Exemptions, Definition Of The 
Term ``Fiduciary'' Conflicts Of Interest--Retirement Investment 
Advice (Apr. 2016), at 215-229, available at https://www.dol.gov/sites/default/files/ebsa/laws-and-regulations/rules-and-regulations/completed-rulemaking/1210-AB32-2/conflict-of-interest-ria.pdf.
---------------------------------------------------------------------------

d. 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 shows the time series 
trend of growth in broker-dealers and investment advisers between 2005 
and 2017. Over the last 13 years, the number of broker-dealers has 
declined from over 6,000 in 2005 to less than 4,000 in 2017, while the 
number of investment advisers has increased from approximately 9,000 in 
2005 to over 12,000 in 2017. This change in the relative numbers of 
broker-dealers and investment advisers over time likely affects the 
competition for advice, and potentially alters the choices available to 
investors on how to receive or pay for such advice, the nature of the 
advice, and the attendant conflicts of interest.
BILLING CODE 8011-01-P

[[Page 21476]]

[GRAPHIC] [TIFF OMITTED] TP09MY18.002

    Increases in the number of investment advisers and decreases in the 
number of broker-dealers could have occurred for a number of reasons, 
including anticipation of possible regulatory changes to the industry, 
other regulatory restrictions, technological innovation (i.e., robo-
advisers 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.\513\ Commission staff has observed the transition 
by broker-dealers from traditional brokerage services to also providing 
investment advisory services (often under an investment adviser 
registration, whether federal or state), and many firms have been more 
focused on offering fee-based accounts than accounts that charge 
commissions. \514\ Broker-dealers have indicated that the following 
factors have contributed to this migration: Provision of stability or 
increase in profitability,\515\ perceived lower regulatory burden, and 
provisions of more services to retail customers.
---------------------------------------------------------------------------

    \513\ See, Hester Peirce, Dwindling numbers in the financial 
industry, Brookings Center on Markets and Regulation (May 15, 2017), 
available at https://www.brookings.edu/research/dwindling-numbers-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, page 5. 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, SROs, NFA, or the MSRB.
    \514\ The Brookings Report, supra note 513, also discusses the 
shift from broker-dealer to investment advisory business models for 
retail investors, in part due to the DOL Fiduciary Rule (page 7). 
See also the RAND Study, supra note 5, which documents a shift from 
transaction-based to fee-based accounts prior to recent regulatory 
changes. Declining transaction-based revenue due to declining 
commission rates and competition from discount brokerage firms has 
made fee-based products and services more attractive. 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.
    \515\ Commission staff examined a sample of recent Form 10-K or 
Form 10-Q filings of large broker-dealers, many of which are dually 
registered as investment advisers, that have a large fraction of 
retail customer accounts to identify relevant broker-dealers. See, 
e.g., Edward Jones 9/30/2017 Form 10-Q available at https://www.sec.gov/Archives/edgar/data/815917/000156459017023050/ck0000815917-10q_20170929.htm; Raymond James 9/30/2017 Form 10-K 
available at https://www.sec.gov/Archives/edgar/data/720005/000072000517000089/rjf-20170930x10k.htm; Stifle 12/31/2016 Form 10-K 
available at https://www.sec.gov/Archives/edgar/data/720672/000156459017022758/sf-10q_20170930.htm; Wells Fargo 9/30/2017 10-Q 
available at https://www.sec.gov/Archives/edgar/data/72971/000007297117000466/wfc-09302017x10q.htm; and Ameriprise 12/31/2016 
Form 10-K available at https://www.sec.gov/Archives/edgar/data/820027/;000082002717000007/ameriprisefinancial12312016.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. Some firms have 
reported record profits as a result of moving clients into fee-based 
accounts, and cite that it provides ``stability and high returns.'' 
See ``Morgan Stanley Wealth Management fees climb to all-time 
high,'' Bloomberg, Jan. 18, 2018, available at https://www.bloomberg.com/news/articles/2018-01-18/morgan-stanley-wealth-management-fees-hit-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 (Morgan 
Stanley Strategic Update, (Jan. 18, 2018), available at https://www.morganstanley.com/about-us-ir/shareholder/4q2017-strategic-update.pdf). See also Beilfuss, Lisa & Brian Hershberg, WSJ Wealth 
Adviser Briefing: The Reinvention of Morgan and Merrill, Adviser 
Profile, The Wall Street Journal (Jan. 25, 2018), available at 
https://blogs.wsj.com/moneybeat/2018/01/25/wsj-wealth-adviser-briefing-the-reinvention-of-morgan-and-merrill-adviser-profile/.
---------------------------------------------------------------------------

    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, since 2012, more than 12 million new non-

[[Page 21477]]

high net worth retail clients have been added. With respect to assets 
under management, 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 has been a pronounced increase in AUM 
since 2012, although AUM has leveled off since 2015.
[GRAPHIC] [TIFF OMITTED] TP09MY18.003

BILLING CODE 8011-01-C
e. Registered Representatives of Broker-Dealers, Investment Advisers 
and Dually Registered Firms
    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 a self-regulatory 
organization (``registered

[[Page 21478]]

representatives'' or ``RR''s). \516\ Similarly, we approximate the 
number of supervised persons of registered investment advisers through 
the number of registered investment adviser representatives (or 
``registered IAR''s), 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.\517\
---------------------------------------------------------------------------

    \516\ 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 the firm. Therefore, using 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.
    \517\ See Advisers Act rule 203A-3. 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.'' As discussed above, the definition of retail 
investor for purposes of this proposed rulemaking would include 
qualified clients who are natural persons and trusts that represent 
natural persons. Proposed General Instruction 9.(e) to Form CRS. In 
addition, state securities authorities may impose different criteria 
for requiring registration as an investment adviser representative.
---------------------------------------------------------------------------

    We estimate the number of registered representatives and registered 
IARs (together ``registered financial professionals'') at broker-
dealers, investment advisers, and dual registrants by considering only 
the employees of those firms that have Series 6 or Series 7 licenses or 
are registered with a state as a broker-dealer agent or investment 
adviser representative.\518\ We only consider employees at firms who 
have retail-facing business, as defined previously.\519\ We observe in 
Table 5, that approximately 61% 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, 72% of all registered financial 
professionals in that size category are employed by dually registered 
firms. Focusing on dually registered firms only, approximately 59.7% of 
total licensed representatives at these firms are dual-hatted, 
approximately 39.9% are only registered representatives; and less than 
one percent are only registered investment adviser representatives.
---------------------------------------------------------------------------

    \518\ 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 self-regulatory organizations. 
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 financial 
professional if he has an approved, pending, or temporary 
registration status for either Series 6 or 7 (RR) 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 to 
be licensed as an RR or IAR.
    \519\ See supra notes 460 and 485.
    \520\ 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.

Table 5--Total Licensed Representatives at Broker-Dealers, Investment Advisers, and Dually Registered Firms With
                                             Retail Investors \520\
----------------------------------------------------------------------------------------------------------------
                                                                     % of
  Size of firm (total assets for standalone                    representatives        % of              %
  BDs and dually registered firms; AUM for    Total number of     in  dually    representatives  representatives
               standalone IAs)                representatives     registered     in  standalone    in standalone
                                                                    firms              BD               IA
----------------------------------------------------------------------------------------------------------------
>$50 billion................................           82,668               75                8               18
$1 billion to $50 billion...................          150,662               72               10               18
$500 million to $1 billion..................           31,673               67               16               16
$100 million to $500 million................           62,539               58               24               18
$10 million to $100 million.................          116,047               52               47                1
$1 million to $10 million...................           37,247               34               63                2
<$1 million.................................           13,563                7               87                6
                                             -------------------------------------------------------------------
    Total Licensed Representatives..........          494,399               61               27               12
----------------------------------------------------------------------------------------------------------------

    In Table 6 below, we estimate the number of employees who are 
registered representatives, registered investment adviser 
representatives, or both (``dual-hatted representatives'').\521\ 
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.\522\
---------------------------------------------------------------------------

    \521\ We calculate these numbers based on Form U4 filings.
    \522\ See supra notes 460 and 485.
---------------------------------------------------------------------------


---------------------------------------------------------------------------

    \523\ Firm size is defined as total assets from the balance 
sheet (source: FOCUS reports) for broker-dealers and dual 
registrants and is assets under management for investment advisers 
(source: Form ADV).
---------------------------------------------------------------------------

    In Table 6, approximately 24% of registered employees at registered 
broker-dealers or investment advisers are dual-hatted representatives. 
However, this proportion varies significantly across size categories. 
For example, for firms with total assets between $1 billion and $50 
billion,\523\ approximately 36% of all registered employees are both 
registered representatives and investment adviser representatives. In 
contrast, for firms with total assets below $1 million, 15% of all 
employees are dual-hatted representatives.

[[Page 21479]]



   Table 6--Number of Employees at Retail Facing Firms Who Are Registered Representatives, Investment Adviser
                                         Representatives, or Both \524\
----------------------------------------------------------------------------------------------------------------
 Size of firm  (total assets for standalone                     Percentage of
  BDs and dually registered firms;  AUM for    Total  number     dual-hatted     Percentage of    Percentages of
               standalone IAs)                 of  employees   representatives      RRs only        IARs only
----------------------------------------------------------------------------------------------------------------
>$50 billion................................          216,655               18               17                1
$1 billion to $50 billion...................          292,663               36               11                3
$500 million to $1 billion..................           50,531               15               40                6
$100 million to $500 million................          112,119               23               24                8
$10 million to $100 million.................          189,318               19               41                1
$1 million to $10 million...................           61,310               19               39                1
<$1 million.................................           19,619               15               46                3
                                             -------------------------------------------------------------------
    Total Employees at Retail Facing Firms..          942,215               24               24                3
----------------------------------------------------------------------------------------------------------------

    Approximately 88% of investment adviser representatives are dual-
hatted as 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 mid-October 2010.\525\ In contrast, approximately 
50% of registered representatives were dually registered as investment 
adviser representatives at the end of 2017.\526\
---------------------------------------------------------------------------

    \524\ See supra notes 520-521. Note that all percentages in the 
table have been rounded to the nearest whole percentage point.
    \525\ Comment letter of FINRA to 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.
    \526\ 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.
---------------------------------------------------------------------------

    With respect to disclosure made about licensed individuals, broker-
dealers and investment advisers must report certain criminal, 
regulatory, and civil actions and complaint information and information 
about certain financial matters in Forms U4 \527\ and U5 \528\ for 
their representatives. Self-regulatory organizations, regulators and 
jurisdictions report disclosure events on Form U6.\529\ FINRA's 
BrokerCheck system discloses to the public certain information on 
registered representatives and investment adviser representatives such 
as principal place of business, business activities, owners, and 
criminal prosecutions, regulatory actions, and civil actions in 
connection with any investment-related activity.
---------------------------------------------------------------------------

    \527\ Form U4 requires disclosure of registered representatives' 
and investment adviser representatives' criminal, regulatory, and 
civil actions similar to those reported on Form BD or Form ADV as 
well as certain customer-initiated complaints, arbitration, and 
civil litigation cases. See generally Form U4.
    \528\ Form U5 requires information about representatives' 
termination from their employers.
    \529\ See FINRA, Current Uniform Registration Forms for 
Electronic Filing in Web CRD, available at https://www.finra.org/industry/web-crd/current-uniform-registration-forms-electronic-filing-web-crd.
---------------------------------------------------------------------------

f. Current Use of Names and Titles
    Although many financial services firms are registered as broker-
dealers, investment advisers, or are dually registered, both firms and 
financial professionals use a variety of terms to label both the firm 
and the professional. Approximately 103 broker-dealers that are not 
dually registered as investment advisers use the term ``adviser,'' 
``advisor,'' or ``advisory'' as part of their current company 
name.\530\ Of these broker-dealers, 16 reported at least one type of 
non-securities business. Approximately 39 percent of the 103 broker-
dealers described above used a proper name coupled with the term 
``advisor'' alone,\531\ and an additional 31 percent used a proper name 
coupled with the term ``capital advisor.'' In addition to those terms, 
less than 10% of these broker-dealers use the terms ``financial 
advisor,'' ``investment advisor,'' or ``wealth advisor'' in their 
corporate name. The remainder of the broker-dealers (approximately 25 
firms) use unique combinations of other words along with ``adviser,'' 
``advisor'' or ``advisory.''
---------------------------------------------------------------------------

    \530\ Source: Form BD.
    \531\ E.g. ``ABC Advisor.''
---------------------------------------------------------------------------

    In addition to company names or professional titles, firms are 
likely to use labels or terms other than their formal company names to 
describe themselves in corporate descriptions, marketing material, or 
other communications with the public. To gauge the extent that 
registered broker-dealers and investment advisers use terms other than 
their registration status as descriptors, Commission staff conducted an 
analysis to evaluate the different terms that broker-dealer, investment 
adviser, and dually-registered firms use to describe themselves.\532\ 
Commission staff reviewed firm websites to collect the terms that were 
used on the website to describe the firm.\533\ Many firms provided 
multiple descriptions of their businesses.\534\
---------------------------------------------------------------------------

    \532\ From the full sample of broker-dealers with retail 
investors (2,857) and investment advisers with retail investors 
(7,600), the Commission staff used a random number generator to 
select 20 firms in each of the size categories listed in Table 7, 
from which to construct a sample of firms for which staff hand-
collected data on firm descriptions from firm website homepages and 
``About'' pages, as available. When a size category contained less 
than 20 firms we sampled all firms in that category. Relative to the 
overall proportion of firms, we oversampled firms from the larger 
size categories because they employ a majority of all licensed 
representatives and are therefore the firms the average retail 
investor is most likely to come in contact with. Overall, 83 
randomly selected standalone broker-dealers, 100 randomly selected 
investment advisers, and 91 randomly selected dual registrants based 
on the previously identified size categories (either total assets 
for broker-dealers and dual registrants or assets under management 
for investment advisers) provided the sample reviewed in the staff 
study. Further, the 917 Financial Literacy Study (see supra note 20) 
showed that a substantial percentage of retail investors use 
information obtained from firm websites in making the selection of 
their financial professional.
    \533\ See Table 7, Panel A for firm level identifiers for 
broker-dealers, Panel B for identifiers for investment advisers, and 
Panel C for dual registrants. Not all firms provided a description 
of their firm on their website, which we coded as ``N/A'' for not 
available.
    \534\ For purposes of our classification analysis, if ``ABC & 
Co.'' were to be a SEC-registered standalone broker-dealer and, on 
ABC's webpage in describing its business and operations, ABC refers 
to itself as a brokerage firm and a wealth manager, we would 
classify, ABC & Co. as using both ``brokerage'' and ``wealth 
manager'' as descriptors in our analysis.
---------------------------------------------------------------------------

    As shown below in Panel A of Table 7, over 50% of broker-dealers 
sampled use the term ``broker,'' ``dealer,'' ``broker-dealer,'' or 
``brokerage'' to

[[Page 21480]]

describe their business, while less than 10% use ``financial advisor,'' 
``wealth advisor,'' or ``investment advisor.'' Registered investment 
advisers (Panel B) are more likely to use the term ``investment 
advisor,'' ``wealth advisor,'' or ``financial advisor'' as a 
description of their business compared to broker-dealers (approximately 
40%). Nearly 50% of the sampled standalone investment advisers use the 
term ``investment manager'' or ``wealth manager'' to describe their 
business model compared to less than 10% of broker-dealers that use 
these terms. Dually registered firms (Panel C) are much more diverse in 
their use of firm descriptions; approximately 40% use the term 
``brokerage,'' ``broker-dealer,'' ``broker,'' or ``dealer,'' while 
nearly 30% use a firm description that contains the term ``adviser'' or 
``advisor.''
---------------------------------------------------------------------------

    \535\ Broker-dealers are randomly drawn from Form BD data (as of 
Dec. 2017). The data on firm descriptions is hand collected from 
individual broker-dealer websites.
    \536\ Investment advisers are randomly drawn from Form ADV data 
(as of Dec. 2017). The data on firm descriptions is hand collected 
from individual investment adviser websites.
    \537\ Dual registrants are randomly drawn from Form BD data (as 
of Dec. 2017). The data on firm descriptions is hand collected from 
individual dually-registered firms' websites.

                                 Table 7--Panel A: Description of Standalone Broker-Dealer Firms on Firm Websites \535\
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                              Wealth/
                                                          Broker- dealer    Investment      investment       Advisory          Other            N/A
                                                                               bank         management
--------------------------------------------------------------------------------------------------------------------------------------------------------
>$50 billion............................................               2               2               0               2               0               0
$1 billion to $50 billion...............................              15               6               0               0               0               1
$500 million to $1 billion..............................              14               2               0               0               1               0
$100 million to $500 million............................              12               7               4               2               4               0
$10 million to $100 million.............................              11               2               5               3               4               0
                                                         -----------------------------------------------------------------------------------------------
    Total...............................................              54              19               9               7               9               1
--------------------------------------------------------------------------------------------------------------------------------------------------------


                               Table 7--Panel B: Description of Standalone Investment Adviser Firms on Firm Website \536\
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                              Wealth/
                                                          Broker- dealer    Investment      investment       Advisory          Other            N/A
                                                                               bank         management
--------------------------------------------------------------------------------------------------------------------------------------------------------
>$50 billion............................................               0               1              16               3               4               0
$1 billion to $50 billion...............................               0               0              13               5               8               0
$500 million to $1 billion..............................               0               0              10              13               9               0
$100 million to $500 million............................               0               0               6               7               9               3
$10 million to $100 million.............................               2               0               2              10               7               1
                                                         -----------------------------------------------------------------------------------------------
    Total...............................................               2               1              47              38              37               4
--------------------------------------------------------------------------------------------------------------------------------------------------------


                                     Table 7--Panel C: Description of Dually-Registered Firms on Firm Website \537\
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                              Wealth/
                                                          Broker- dealer    Investment      investment       Advisory          Other            N/A
                                                                               bank         management
--------------------------------------------------------------------------------------------------------------------------------------------------------
>$50 billion............................................               5               8               2               4               1               0
$1 billion to $50 billion...............................               7               8               5               6               9               0
$500 million to $1 billion..............................               3               1               2               1               2               0
$100 million to $500 million............................              13               3               1               7               6               0
$10 million to $100 million.............................              10               1               3              10               7               0
                                                         -----------------------------------------------------------------------------------------------
    Total...............................................              38              21              13              28              25               0
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Regarding the use of titles by individual financial professionals, 
a 2008 RAND Study,\538\ found that households responding to the survey 
\539\ reported a wide variety of titles were used by financial 
professionals with whom they worked. The RAND Study Table 6.3 
(replicated below in Table 8) provides an overview of the most commonly 
used titles by services provided. As shown in the table, financial 
professionals providing brokerage services use a large variety of 
titles to describe their business and the services that they offer, 
including ``financial advisor,'' ``financial consultant,'' ``banker,'' 
and ``broker.'' Around 31% of professionals providing only brokerage 
services used titles containing the terms ``adviser'' or ``advisor.'' 
Professionals providing advisory services or both brokerage and 
advisory services similarly also use a wide variety of titles, but the 
proportion of professionals who use titles containing the terms 
``adviser'' or ``advisor'' are somewhat larger at 35%. Note that the 
RAND Study did not distinguish financial professionals' use of tiles 
based on whether they were RRs or IARs, but rather by type of services 
provided.
---------------------------------------------------------------------------

    \538\ RAND Study, supra note 5.
    \539\ Internet survey administered to members of the American 
Life Panel; 654 (out of 1000) households completed the survey.

[[Page 21481]]



                     Table 8--Replication of Table 6.3 of the RAND Study--Professional Titles Most Commonly Reported by Respondents
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                  Provide         Provide      Provide both
                            Title                             All individual     advisory        brokerage       types of
                                                               professionals   services only   services only     services
----------------------------------------------------------------------------------------------------------------------------
Advisor.....................................................              11               1               1               9
Banker......................................................              21               2               8              11
Broker, stockbroker, or registered representative...........              38               0               8              30
CFP (Certified Financial Planner)...........................              21               3               3              15
Financial adviser or financial advisor......................              78               7              11              60
Financial consultant........................................              25               2               0              23
Financial planner...........................................              44               6               1              37
Investment adviser or investment advisor....................              22               3               3              16
President or vice president.................................              20               0               2              18
--------------------------------------------------------------------------------------------------------------------------------------------------------

2. Investor Account Statistics
    Investors seek financial advice and services to achieve a number of 
different goals, such as saving for retirement or children's college 
education. As shown above in Figures 2 and 3, the number of retail 
investors and their assets under management 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.\540\ In 2016, a total of 
43.3 million U.S. households have either an IRA or a brokerage account, 
of which 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).\541\ Table 9 below 
provides an overview of account ownership segmented by account type 
(e.g., IRA, brokerage, or both) and investor income category based on 
the Survey of Consumer Finances (SCF).\542\
---------------------------------------------------------------------------

    \540\ See ICI Research Perspective, The Role of IRAs in U.S. 
Households' Saving for Retirement, 2016 (Jan. 2017), available at 
https://www.ici.org/pdf/per23-01.pdf.
    \541\ The data is obtained from the Federal Reserve System's 
2016 Survey of Consumer Finances (``SCF''), 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. 
Federal Reserve, Survey of Consumer Finances (2016), available at 
https://www.federalreserve.gov/econres/scfindex.htm. The SCF 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.
    \542\ Id. 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 this proposed rulemaking.

                         Table 9--Ownership by Account Type in the U.S. by Income Group
                                          [As reported by the 2016 SCF]
----------------------------------------------------------------------------------------------------------------
                                                                                                      % Both
                         Income category                            % Brokerage     % IRA only    brokerage  and
                                                                       only                             IRA
----------------------------------------------------------------------------------------------------------------
Bottom 25%......................................................             1.2             7.6             2.4
25%-50%.........................................................             3.2            14.5             5.4
50%-75%.........................................................             4.1            21.4            11.4
75%-90%.........................................................             7.5            33.4            16.5
Top 10%.........................................................            12.0            24.7            43.9
Average.........................................................             4.4            18.3            11.6
----------------------------------------------------------------------------------------------------------------

    One question in the SCF 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.\543\ Panel A of Table 10 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) used 
advice services of broker-dealers for savings and investment decisions, 
while 49% (7.8 million households) took advice from a ``financial 
planner.'' Approximately 36% (7.2 million households) sought advice 
from other sources such as bankers, accountants, and lawyers. Almost 
25% (5.0 million households) did not use advice from the above sources.
---------------------------------------------------------------------------

    \543\ The SCF 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 
included ``Calling Around,'' ``Magazines,'' ``Self,'' ``Past 
Experience,'' ``Telemarketer,'' and ``Insurance Agent,'' as well as 
other choices. Respondents could also choose ``Do Not Save/Invest.'' 
The SCF allows for multiple responses, so these categories are not 
mutually exclusive. However, we would note that the list of terms in 
the question did not specifically include ``investment adviser.''
---------------------------------------------------------------------------

    Panel B of Table 10 below presents the breakdown of advice received 
for households who have an IRA. 15% (5.7 million households) relied on 
advice services of their broker-dealers, 48% (18.3 million households) 
obtained advice from financial planners. Approximately 41% (15.5 
million households) sought advice from bankers, accountants, or 
lawyers, while the 25% (9.5 million households) used no advice or 
sought advice from other sources.

[[Page 21482]]



  Table 10--Panel A: Sources of Advice for Households Who Have a Brokerage Account in the U.S. by Income Group
                                                      \544\
----------------------------------------------------------------------------------------------------------------
                                                                                     % Taking
                                                     % Taking        % Taking       advice from    % Taking  no
                 Income category                    advice from     advice from      lawyers,        advice or
                                                      brokers        financial      bankers, or     from other
                                                                     planners       accountants       sources
----------------------------------------------------------------------------------------------------------------
Bottom 25%......................................           20.55           53.89           35.64           24.30
25%-50%.........................................           22.98           38.03           43.92           32.36
50%-75%.........................................           20.75           52.00           31.42           23.61
75%-90%.........................................           22.56           48.94           32.25           28.10
Top 10%.........................................           25.29           50.53           38.47           21.06
                                                 ---------------------------------------------------------------
    Average.....................................           23.02           49.02           35.99           24.94
----------------------------------------------------------------------------------------------------------------


      Table 10--Panel B: Sources of Advice for Households Who Have an IRA in the U.S. by Income Group \545\
----------------------------------------------------------------------------------------------------------------
                                                                                     % Taking
                                                     % Taking        % Taking       advice from    % Taking  no
                 Income category                    advice from     advice from      bankers,        advice or
                                                      brokers        financial     accountants,     from other
                                                                     planners       or lawyers        sources
----------------------------------------------------------------------------------------------------------------
Bottom 25%......................................           12.14           38.30           43.69           31.85
25%-50%.........................................            9.79           43.82           40.67           32.74
50%-75%.........................................           14.93           45.20           41.23           25.23
75%-90%.........................................           14.68           52.14           41.65           24.26
Top 10%.........................................           21.40           55.40           40.03           18.56
                                                 ---------------------------------------------------------------
    Average.....................................           15.25           48.45           41.17           25.28
----------------------------------------------------------------------------------------------------------------

3. Investor Perceptions About Broker-Dealers and Investment Advisers
---------------------------------------------------------------------------

    \544\ Id.
    \545\ Id.
---------------------------------------------------------------------------

    Although many retail investors rely on broker-dealers and 
investment advisers to help them achieve financial goals, evidence 
indicates that many retail investors do not understand, or are confused 
by, among other items, the different standards of conduct applicable to 
broker-dealers and investment advisers, and are also confused and 
potentially misled by the titles used by firms and financial 
professionals. In the subsections below, we review in greater detail 
five aspects of investor perceptions with respect to: (1) How investors 
search for financial professionals and firms and; (2) the nature of the 
relationship with their financial professional (investment adviser or 
broker-dealer) and the meaning of company names and professional 
titles; (3) the structure and level of fees in the industry; (4) the 
existing conflicts of interest; (5) and the disciplinary history of the 
financial professional or firm.
g. How Investors Select Financial Firms or Professionals
    A number of surveys show that retail investors predominantly find 
their current financial firm or financial professional from personal 
referrals by family, friends, or colleagues.\546\ For instance, the 
RAND Study reported that 46% of survey respondents indicated that they 
located a financial professional from personal referral, although this 
percentage varied depending on the type of service provided (e.g., only 
35% of survey participants used personal referrals for brokerage 
services). After personal referrals, RAND survey participants ranked 
professional referrals (31%), print advertisements (4%), direct 
mailings (3%), online advertisements (2%), and television 
advertisements (1%), as their source of locating individual 
professionals. The RAND Study separately inquired about locating a 
financial firm, which yielded substantially different results from the 
selection of the financial professional.\547\ Respondents reported 
selecting financial firm (of any type) based on: Referral from family 
or friends (29%), professional referral (18%), print advertisement 
(11%), online advertisements (8%), television advertisements (6%), 
direct mailings (2%), with a general ``other'' category (36%).
---------------------------------------------------------------------------

    \546\ See RAND Study, supra at 5; 917 Financial Literacy Study, 
supra note 20.
    \547\ The Commission notes that only one-third of the survey 
respondents that responded to ``method to locate individual 
professionals'' also provided information regarding locating the 
financial firm.
---------------------------------------------------------------------------

    The 917 Financial Literacy Study provides similar responses, 
although it allowed survey respondents to identify multiple sources 
from which they obtained information that facilitated the selection of 
the current financial firm or financial professional.\548\ In the 917 
Financial Literacy Study,\549\ 51% of survey participants received a 
referral from family, friends, or colleagues. Other sources of 
information or referrals came from: referral from another financial 
professional (23%), online search (14%), attendance at a financial 
professional-hosted investment seminar (13%), advertisement (e.g., 
television or newspaper) (11.5%), other (8%), while approximately 4% 
did not know or could not remember how they selected their financial 
firm or financial professional. Twenty-five percent of survey 
respondents indicated that the ``name or reputation of the financial 
firm or financial professional'' affected the selection decision.
---------------------------------------------------------------------------

    \548\ See 917 Financial Literacy Study, supra note 20.
    \549\ The data used in the 917 Financial Literacy Study comes 
from the Siegel & Gale Investor Research Report (Jul. 26, 2012), 
available at https://www.sec.gov/news/studies/2012/917-financial-literacy-study-part3.pdf, at 249-250.
---------------------------------------------------------------------------

h. Nature of the Relationship
    Comment letters as well as several studies provide us with 
information about retail investor confusion about the distinctions 
among different types firms and financial professionals. Several

[[Page 21483]]

commenters in response to Chairman Clayton's recent Request for Comment 
highlighted investor confusion about whether financial services 
providers are subject to the fiduciary duty.\550\ Particularly, some 
commenters tied investor confusion about the standard of care 
applicable to financial service providers to the names or titles of 
such firms and financial professionals.\551\ Similarly, during the 
public comment process as part of the 913 Study, commenters indicated 
that retail investors did not understand or found confusing the 
distinctions between broker-dealers and investment advisers, for 
example, in terms of services provided and applicable standards of 
care.\552\ Investor advocate groups submitted comments that reiterated 
the view that many market participants also believe that financial 
professionals should act in investors' best interests.\553\ 913 Study 
commenters also expressed beliefs that certain titles used by firms and 
financial professionals are confusing to investors.\554\
---------------------------------------------------------------------------

    \550\ See, e.g., CFA 2017 Letter; PIABA 2017 Letter; IAA 2017 
Letter; Pefin 2017 Letter.
    \551\ See Chamber 2017 Letter, at 10; Committee for the 
Fiduciary Standard 2017 Letter, at 3; Pefin 2017 Letter, at 9.
    \552\ See 913 Study, supra note 3, at section III.A.
    \553\ Id. See also AFL-CIO 2017 Letter; AARP 2017 Letter.
    \554\ See, e.g., Comment letters on 913 Study, available at 
https://www.sec.gov/comments/4-606/4-606.shtml. Comment letter of 
Bert Oshiro (Aug. 29, 2010) (``Years ago, I was pretty sure who I 
was dealing with based on their titles. . . Today it's a totally 
different story. All kinds of products such as securities, 
insurance, fee based products, bank accounts, loans, health 
insurance, auto/homeowners insurance, etc. are sold by people 
calling themselves: Financial advisors; financial consultants; 
investment advisors; investment consultants; financial planners; 
asset managers; financial services advisors; [and] registered 
representatives. . . It has come to the point that I really don't 
know who I'm dealing with.''); Comment letter of Larry J. Massung 
(Aug. 29, 2010) (``I believe there is considerable confusion within 
the general public with the fiduciary duty, responsibilities, and 
titles of brokers, dealers and investment advisors''); and Comment 
letter of Cecylia Escarcega (Aug. 30, 2010) (``Personally, I find 
the titles confusing because the broker, dealer or investment 
advisor typically does not tell me what their role is and the scope 
of their fiduciary duty to me as an investor'').
---------------------------------------------------------------------------

    Further findings of investor confusion about the roles and titles 
of financial professionals comes from studies conducted by Siegel & 
Gale \555\ in 2004, RAND \556\ in 2008 and CFA in 2010.\557\ The Siegel 
& Gale Study found that focus group participants did not understand 
that the roles and legal obligations of broker-dealers differed from 
investment advisers, and were further confused by different labels or 
titles used by advice providers (e.g., financial planner, financial 
advisor, financial consultant, broker-dealer, or investment adviser). 
More specifically, participants in the Siegel & Gale Study focus groups 
believed that brokers executed trades and were focused on ``near-term'' 
advice, while financial advisors and consultants provided many of the 
same services as brokers, but also provided a greater scope of long-
term planning advice (e.g., portfolio allocation). ``Investment 
adviser,'' on the other hand, was a term unfamiliar to many 
participants, but financial professionals using this label were 
perceived to provide similar services to financial advisors and 
financial consultants. Financial planners were viewed to provide 
services related to insurance and estate planning in addition to 
investment advice, and encompassed long-term financial planning 
including college, retirement, and other long-term savings and 
investment goals. The Siegel & Gale Study focus group participants 
assumed that financial advisors/consultants, investment advisers, and 
financial planners provided planning services, while brokers, financial 
advisors/consultants, and investment advisers provided trade execution 
services.\558\ Further, the focus group participants generally did not 
understand certain legal terms, such as ``fiduciary.''
---------------------------------------------------------------------------

    \555\ The Commission retained Siegel and Gale in 2004 to conduct 
the focus group testing in order to determine how investors 
distinguish the roles, legal obligations, and compensation 
structures between broker-dealers and investment advisers. See 
Siegel & Gale Study, supra note 549.
    \556\ The RAND Study contained two components: (1) An analysis 
of business practices at broker-dealers and investment advisers 
based on regulatory filings and interviews with stakeholders 
(including members of the broker-dealer and investment adviser 
industries); and (2) a survey of 654 households or focus group 
testing on household investment behavior and preferences, experience 
with financial service providers, and understanding of the different 
types of providers. See RAND Study, supra note 5.
    \557\ See CFA Survey, supra note 5.
    \558\ The Commission notes that the results of the Siegel & Gale 
Study relied on a small sample of focus group testing conducted over 
a decade ago. While relevant to our understanding of investor 
perception about broker-dealers and investment advisers, the results 
of the study may not reliably reflect the current views of the 
general population of U.S. retail investors.
---------------------------------------------------------------------------

    Similarly, the RAND Study generally concluded that investors did 
not understand the differences between broker-dealers and investment 
advisers and that common job titles contributed to investor 
confusion.\559\ Further, participants responded similarly that 
investment advisers and brokers are required to act in the client's 
best interest. Similar to the Siegel and Gale Study, focus group 
participants did not understand the term fiduciary, or how the 
fiduciary standard differed from suitability. In addition, the RAND 
Study noted that the confusion about titles, services, legal 
obligations, and compensation persisted even after a fact sheet on 
broker-dealers and investment advisers was provided to 
participants.\560\
---------------------------------------------------------------------------

    \559\ RAND study participants ``commented that the 
interchangeable titles and `we do it all' advertisements [by broker-
dealers] made it difficult to discern broker-dealers from investment 
advisers.'' Although the RAND Study indicates that investors are 
confused the services provided and the titles used by financial 
professionals, more than 70% of participants also answered that they 
were ``very satisfied with the service received from the firm,'' 
that ``they trust the firm acts in their best interest,'' and that 
``the firm provides a valuable service.'' These numbers increased to 
80% when the length of time spent at a firm was at least 10 years. 
The Commission notes that the results of the RAND Study relied on 
testing conducted nearly 10 years ago; therefore, the results of the 
study may not reliably reflect the current views of the general 
population of U.S. retail investors
    \560\ See RAND Study, supra note 5, at 111. The fact sheet 
provided to RAND Study participants included information on the 
definition of broker and investment adviser, including a description 
of common job titles, legal duties and typical compensation. 
Participants in the RAND Study focus groups indicated that they were 
confused over common job titles of broker-dealers and investment 
advisers, thought that because brokers are required to be licensed, 
investment advisers were not as qualified as brokers, deemed the 
term ``suitable'' too vague, and concluded that it would be 
difficult to prove whether or not an investment adviser was not 
acting in the client's best interest.
---------------------------------------------------------------------------

    Similar to the Siegel and Gale Study and the RAND Study, the CFA 
Survey concluded that investors do not understand differences between 
broker-dealers and investment advisers, or the standards of conduct 
that apply to advice or recommendations made by these firms. For 
example, approximately 34% of investors surveyed believed that 
``offering advice'' was a primary service of broker-dealers.\561\ With 
respect to conduct-related questions, 91% of those surveyed believed 
that broker-dealers and investment advisers should follow the same 
investor protection rules if providing the same sort of advisory 
services, while 85% believed that the person providing advice should 
put the retail customer's interest ahead of theirs and should disclose 
fees and commissions earned or any conflicts of interest that could 
affect the advice provided. More than two-thirds believed that a 
fiduciary duty is owed to customers by broker-dealers, suggesting a 
degree of investor confusion.\562\
---------------------------------------------------------------------------

    \561\ See CFA Study, supra note 5.
    \562\ In some circumstances, broker-dealers may owe a fiduciary 
duty to their customers. For example, 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, owe customers a fiduciary duty, or the scope of 
obligations that attach by virtue of that duty. 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) (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).

---------------------------------------------------------------------------

[[Page 21484]]

i. Fees
    The 917 Financial Literacy Study showed that, prior to engaging an 
investment adviser,\563\ approximately 76.4% of survey participants 
indicated that disclosure of the fees and compensation of investment 
advisers was an absolutely essential element to any disclosure.\564\ 
With respect to how investors prefer information about fees and 
compensation to advisers, 23% of respondents preferred a table format 
with examples, 21% preferred a bulleted format with examples, 20% 
preferred a bulleted format, and 12% preferred a table format.\565\
---------------------------------------------------------------------------

    \563\ The 917 Financial Literacy Study, supra note 20, uses the 
term financial intermediary when discussing the importance of 
certain disclosures of firms or financial professionals.
    \564\ See 917 Financial Literacy Study, supra note 20, at 67.
    \565\ 23% of respondents also preferred the ``status quo''--
``the way it was presented'' in the example.
---------------------------------------------------------------------------

    In 2015, FINRA conducted an ``Investor Survey'' which included 
questions about investors' understanding of fees charged for investment 
services.\566\ Approximately 70% of survey participants reported that 
they thought investment firm (generically referred to as ``adviser'' in 
the study) compensation and account fees to be very clear, with less 
than 4% stating that they thought compensation to be unclear. Between 
54.7% and 57.6% of respondents indicated that they considered account 
fees to be ``reasonable,'' while between 0% and 2.3% of respondents 
indicated that account fees were not reasonable. Of investors that have 
commission-based accounts, approximately 28% believed that commissions 
did not affect advice given. Those percentages decline to 15% or less 
when asked to consider whether selling incentives and third party 
compensation had not affected the advice provided by investment firms.
---------------------------------------------------------------------------

    \566\ See FINRA Report on Conflicts of Interest, (Oct. 2013), at 
6, available at https://www.finra.org/sites/default/files/Industry/p359971.pdf (``Investor Survey'').

                    Table 11--Investor Perception of Compensation to Financial Professionals
                                [As obtained from the 2015 FINRA Investor Survey]
----------------------------------------------------------------------------------------------------------------
                                                                                                     Advised:
                                                                   Unadvised (%)  Advised: asset    commission-
                                                                                      fee (%)      based fee (%)
----------------------------------------------------------------------------------------------------------------
Advisor Compensation Clear?
    Very........................................................              NA            70.9            68.5
    Somewhat....................................................              NA            27.6            28.0
    Not.........................................................              NA             1.5             3.5
Account Fees Clear?
    Very........................................................            68.0            70.3            74.7
    Somewhat....................................................            29.0            29.7            23.5
    Not.........................................................             2.9               0             1.8
Account Fees Reasonable?
    Agree.......................................................            55.6            54.7            57.6
    Somewhat Agree..............................................            42.1            45.3            40.2
    Disagree....................................................             2.3               0             2.2
Commissions Affect Advice?
    Great Deal..................................................            58.3            21.8            29.7
    Somewhat....................................................            32.8            57.8            42.5
    Not At All..................................................             8.9            20.4            27.7
Selling Incentives Affect Advice?
    Great Deal..................................................            66.1            41.9            44.3
    Somewhat....................................................            28.4            43.7            40.6
    Not At All..................................................             5.5            14.4            15.1
Third Party Compensation Affects Advice?
    Great Deal..................................................            68.6            32.8            41.4
    Somewhat....................................................            26.3            56.4            45.3
    Not At All..................................................             5.1            10.8            13.4
----------------------------------------------------------------------------------------------------------------


[[Page 21485]]

    Academic evidence also indicates that retail investors exhibit 
limited understanding of the fees and commissions of financial 
products. Several academic studies show that even when disclosures are 
provided to investors, investors experience difficulty in accounting 
for and understanding how fees affect their financial choices.\567\
---------------------------------------------------------------------------

    \567\ Experimental evidence from the U.S. mutual fund market is 
provided by, James J. Choi, David Laibson, & Brigitte C. Madrian, 
Why Does the Law of One Price Fail? An Experiment on Index Mutual 
Funds Review of Financial Studies 23(4): 1405-1432 (Nov. 14, 2009) 
(``Choi Laibson Article'') (finding that experimental subjects fail 
to minimize fees among four different actual S&P 500 index funds and 
80-90% of the subjects in the study presented with simplified fee 
disclosures still failed to select the lowest-priced options among 
products with similar characteristics). Field-based evidence from 
the payday loans market is provided by, Marianne Bertrand & Adair 
Morse, Information Disclosure, Cognitive Biases, and Payday 
Borrowing, The Journal of Finance 46(6): 1865-1893 (Nov. 14, 2011). 
For a comprehensive survey of the literature see George Loewenstein, 
Cass R. Sunstein, & Russell Golman, Disclosure: Psychology Changes 
Everything, Annual Review of Economics 6: 391-419 (Aug. 2014) 
(``Loewenstein Sunstein Article'').
---------------------------------------------------------------------------

j. Conflicts of Interest
    Studies have found that investors consider conflicts of interest to 
be an important factor in the market for financial advice. For example, 
in the 917 Financial Literacy Study,\568\ approximately 52.1% of survey 
participants indicated that an essential component of any disclosure 
would be their financial intermediary's conflicts of interest, while 
30.7% considered information about conflicts of interest to be 
important, but not essential. Investors also were asked to rate their 
level of concern about potential conflicts of interest that their 
adviser might have. Approximately 36% of the investors expressed 
concerns that their adviser might recommend investments in products for 
which its affiliate receives a fee or other compensation, while 57% 
were concerned that their adviser would recommend investments in 
products for which it gets paid by other sources. In addition to 
conflicts directly related to compensation practices of financial 
professionals, some investors were concerned about conflicts related to 
the trading activity of these firms. For example, more than 26% of 
participants were concerned that an adviser might buy and sell from its 
account at the same time it is recommending securities to investors; 
and more than 55% of investors were also concerned about their 
adviser's engaging in principal trading.
---------------------------------------------------------------------------

    \568\ Section 917 of the Dodd-Frank Act further required the 
Commission to conduct a study to identify the level of financial 
literacy among retail investors as well as methods and efforts to 
increase the financial literacy of investors. See 917 Financial 
Literacy Study, supra note 20.
---------------------------------------------------------------------------

    Approximately 70% of the participants in the 917 Financial Literacy 
Study indicated that they would read disclosures on conflicts of 
interest if made available, with 48% requesting additional information 
from their adviser, 41% increasing the monitoring of their adviser, and 
33% proposing to limit their exposure of specific conflicts. The 
majority of investors (70%) also wanted to see specific examples of 
conflicts and how those related to the investment advice provided. 
Academic research also suggests that information about conflicts of 
interest could improve individual decisions.\569\
---------------------------------------------------------------------------

    \569\ See S. Sah & G. Loewenstein, Nothing to declare: Mandatory 
and voluntary disclosure leads advisors to avoid conflicts of 
interest, Psychological Science 25, 575-584 (2014).
---------------------------------------------------------------------------

k. Disciplinary History
    Survey evidence indicates that knowledge of a firm's and financial 
professional's disciplinary history is among the most important items 
for retail investors deciding whether to receive financial services 
from a particular firm, according to one study.\570\ Despite this, most 
investors do not actively seek disciplinary information for their 
advisers and broker-dealers.\571\ A recent FINRA survey, however, found 
that only 15% of survey respondents checked their financial 
professional's background, although the Commission notes that the study 
encompasses a wide group of advisers, such as debt counselors and tax 
professionals.\572\ Another FINRA survey found that only 7% of survey 
respondents use FINRA's BrokerCheck and approximately 14% of survey 
respondents are aware of the Investment Adviser Public Disclosure 
(IAPD) website.\573\
---------------------------------------------------------------------------

    \570\ See 917 Financial Literacy Study, supra note 20, at nn. 
311 and 498 and accompanying text (Approximately 67.5% of the online 
survey respondents considered information about an adviser's 
disciplinary history to be absolutely essential, and about 20.0% 
deemed it important, but not essential, and ``When asked how 
important certain factors would be to them if they were to search 
for comparative information on investment advisers, the majority of 
online survey respondents identified the fees charged and the 
adviser's disciplinary history as the most important factors.'').
    \571\ For example, the FINRA 2015 Investor Survey finds that 
only 24% of investors are aware of Investor.gov; only 16% are aware 
of BrokerCheck; only 14% are aware of the IAPD website, and only 7% 
have used BrokerCheck. Investor Survey, supra note 566.
    \572\ 2009 National Survey Initial Report, supra note 275.
    \573\ See Investor Survey, supra note 566.
---------------------------------------------------------------------------

B. Form CRS Relationship Summary

1. Broad Economic Considerations
    We are proposing to require broker-dealers, investment advisers, 
and firms that are dually registered to deliver a relationship summary 
to retail investors.\574\ The economic tradeoffs involved in 
disclosures made by financial firms and financial professionals are 
complex and affected by a wide range of factors, which we consider in 
more detail below. In this section, we discuss the characteristics of 
disclosures that may effectively convey information that is useful to 
retail investors when they are searching for a financial firm and to 
facilitate matching between retail investors' expectations and the 
choice of financial firm or financial professional.
---------------------------------------------------------------------------

    \574\ See supra Section II.
---------------------------------------------------------------------------

    Disclosure requirements provide benefits to participants in 
financial markets because disclosing parties may lack private 
incentives to voluntarily disclose or standardize relevant 
information.\575\ Disclosure can benefit not only investors but also 
the disclosing parties,\576\ as well as provide indirect benefits to 
financial markets.\577\
---------------------------------------------------------------------------

    \575\ See, e.g., Confirmation Requirements and Point of Sale 
Disclosure Requirements for Transactions in Certain Mutual Funds and 
Other Securities, and Other Confirmation Requirement Amendments, and 
Amendments to the Registration Form for Mutual Funds, Exchange Act 
Release No. 8358 (Jan. 29, 2004) [69 FR 6437 (Feb. 10, 2004)] (``The 
Commission believes that permitting investors to more readily obtain 
information about distribution-related costs that have the potential 
to reduce their investment returns and to give investors a better 
understanding of some of the distribution-related arrangements that 
create conflicts of interest for brokers, dealers, municipal 
securities dealers, and their associated natural persons. The 
disclosure of information about these costs and arrangements can 
help investors make better informed investment decisions.''). See 
also P. Healy & K. Palepu, Information asymmetry, corporate 
disclosure, and the capital markets: A review of the empirical 
corporate disclosure literature, Journal of Accounting and Economics 
31, 405-440 (2001).
    \576\ See, Michael Jensen & William Meckling, Theory of the 
firm: Managerial behavior, agency costs, and ownership structure, 
Journal of Financial Economics 3, 305-360 (1976); Patel, S. and G. 
Dallas, Transparency and disclosure: Overview of methodology and 
study results, United States, Standard & Poor's, New York (2002); A. 
Ferrell, Mandatory disclosure and stock returns: Evidence from the 
over-the-counter market, The Journal of Legal Studies 36, 213-253 
(2007). Regarding the effect of corporate disclosures on improved 
corporate governance, see, e.g. B. Hermalin & M. Weisbach, 
Transparency and corporate governance, NBER Working paper No. W12875 
(2007); R. Lambert, C. Leuz, & R. Verrecchia, Accounting 
information, disclosure, and the cost of capital, Journal of 
Accounting Research 45, 385-420 (2007).
    \577\ See L. Holder-Webb, J. Cohen, L. Nath, & D. Wood, A survey 
of governance disclosures among U.S. firms, Journal of Business 
Ethics 83, 543-563 (2008); Z. Rezaee, Causes, consequences, and 
deterrence of financial statement fraud, Critical Perspectives on 
Accounting 16, 277-298 (2005).

---------------------------------------------------------------------------

[[Page 21486]]

    Although the majority of the information proposed for Form CRS may 
be publicly available in a number of existing regulatory forms and 
platforms, including, for example, Form ADV (and IAPD) or BrokerCheck, 
or may be included in disclosures developed to meet disclosure 
requirements under DOL regulations or exemptions, such as the BIC 
Exemption, the Commission preliminary believes that all retail 
investors would benefit from short summary disclosure that focuses on 
certain aspects of a firm and its services to retail investors which 
could be supplemented by additional disclosure. Like other public-
facing disclosures, the objective of Form CRS would be to provide 
relevant and reliable information to investors. The relationship 
summary would apply to a broad array of relationships, spanning 
different firms as well as both retirement and non-retirement 
accounts.\578\ By requiring both investment advisers and broker-dealers 
to deliver to existing and prospective retail investors and file a 
publicly available concise relationship summary that discusses, in one 
place, both types of services and their differences, the proposed rules 
for Form CRS would also help retail investors to compare certain 
different types of accounts and firms.
---------------------------------------------------------------------------

    \578\ For comparison, the disclosure conditions under applicable 
DOL regulations and exemptions apply only to financial firms and 
financial professionals servicing IRAs and ERISA-covered retirement 
plans and participants in such plans.
---------------------------------------------------------------------------

    Given that most of the information provided by Form CRS would 
already have been made available by investment advisers through other 
regulatory disclosures, and by some broker-dealers through contracts or 
other voluntary disclosures, the focus of this economic analysis is on 
the effects of the format and structure of the proposed Form CRS 
disclosures. Studies have found that the format and structure of 
disclosure may improve (or decrease) investor understanding of the 
disclosures being made.\579\
---------------------------------------------------------------------------

    \579\ See, Justine S. Hastings & Lydia Tejeda-Ashton, Financial 
Literacy, Information, and Demand Elasticity: Survey and 
Experimental Evidence from Mexico, NBER Working Paper 14538 (Dec. 
2008) (finding that providing fee disclosures to Mexican investors 
in peso rather than percentage terms caused financially 
inexperienced investors to focus on fees); See, Richard G. Newell & 
Juha Siikamaki, Nudging Energy Efficiency Behavior, Resources for 
the Future Discussion Paper 13-17 (Jul. 10, 2013) (finds that 
providing dollar operating costs in simplified energy efficiency 
labeling significantly encouraged consumers to choose higher energy 
efficiency appliances, while another related study presents similar 
evidence from payday loans).
---------------------------------------------------------------------------

    Before elaborating on the characteristics of an effective 
disclosure regime, we note that some studies undertaken outside the 
market for financial services find that sometimes certain disclosures 
may result in unintended consequences. In general, the structure of the 
disclosure may affect the choices that investors make. Every disclosed 
item not only presents a piece of new information to retail investors 
but also provides a frame within which all other items are 
evaluated.\580\ This framing effect could lead investors to draw 
different conclusions depending on how information is presented. For 
example, if the disciplinary history information is presented first, it 
could affect the way investors perceive all subsequent disclosures in 
the relationship summary and, possibly, discount more heavily the 
information provided by firms with disciplinary events than by firms 
with clean record. The effect of the disciplinary history information 
would be moderated if this information is provided at the end of the 
relationship summary.
---------------------------------------------------------------------------

    \580\ See Tversky, A., Kahneman, D., 1981. The framing of 
decisions and the psychology of choice. Science 211, 453-458 
(``Tversky Kahneman Article'').
---------------------------------------------------------------------------

    Existing research has also found that conflict of interest 
disclosures can increase the likelihood that the disclosing party would 
act on the conflict of interest.\581\ This bias can be caused by 
``moral licensing,'' a belief that the disclosing party has already 
fulfilled its moral obligations in the relationship and therefore can 
act in any way, or it can be caused by ``strategic biasing,'' aimed at 
compensating the disclosing party for the anticipated loss of profit 
due to the disclosure.\582\ Experimental evidence also suggests that 
disclosure could turn some clients or customers into ``reluctant 
altruists.'' \583\ For example, if financial professionals disclose 
that they earn a referral fee if a customer enrolls in a program, the 
customer may implicitly feel that they are being asked to help their 
financial professional receive the fee. One study also found evidence 
that disclosure of a professional's financial interests (particularly 
in face-to-face interactions) can induce a panhandler effect, whereby 
customers may face an implicit social pressure to meet the 
professional's financial interests.\584\ The above literature indicates 
that conflicts of interest disclosures could undermine the intended 
benefits of the disclosures for investors if investors become reluctant 
altruists or feel an obligation to succumb to the panhandler effect. 
However, these studies also suggest certain factors that may mitigate 
the unintended consequences. For example, in the case of the 
``panhandler effect,'' researchers have found that distancing the 
client or customer from the financial professional either in the 
decision or disclosure phase can dampen this effect.\585\
---------------------------------------------------------------------------

    \581\ See, Daylian Cain, George Loewenstein & Don Moore, The 
Dirt on Coming Clean: Perverse Effects of Disclosing Conflicts of 
Interest, Journal of Legal Studies 34: 1-25 (Jan. 2005) (``Cain 2005 
Article''); Daylian Cain, George Loewenstein & Don Moore, When 
Sunlight Fails to Disinfect: Understanding the Perverse Effects of 
Disclosing Conflicts of Interest, Journal of Consumer Research 37: 
1-45 (Aug. 27, 2010); Bryan Church & Xi Kuang, Conflicts of 
Disclosure and (Costly) Sanctions: Experimental Evidence, Journal of 
Legal Studies 38 2: 505-532 (Jun. 2009); Christopher Tarver 
Robertson, Biased Advice, Emory Law Journal 60: 653-703 (Feb. 17, 
2011). These papers study conflicts of interest in general, 
experimental settings, not specialized to the provision of financial 
advice.
    \582\ Although disclosures in general may cause negative 
unintended consequences, existing rules and regulations for broker-
dealers and investment advisers, as well as proposed Regulation Best 
Interest, are likely to moderate the effects of moral licensing or 
strategic bias for financial professionals.
    \583\ See J. Dana, D. Cain & R. Dawes, What you don't know won't 
hurt me: Costly (but quiet) exit in dictator games, Organizational 
Behavior and Human Decision Processes 100:193-201 (2006).
    \584\ Daylian Cain, George Loewenstein & Don Moore, The burden 
of disclosure: Increased compliance with distrusted advice, Journal 
of Personality and Social Psychology, 104(2): 289-304 (2013) 
(``Burden of Disclosure Article'').
    \585\ See id.
---------------------------------------------------------------------------

    Academic research has identified a set of characteristics, 
including targeted and simple disclosures, salience, and 
standardization, that may increase the effectiveness of a disclosure 
regime. Adhering to these characteristics is expected to increase the 
benefits of a disclosure document to consumers. These characteristics, 
discussed below, frame our analysis of the economic impacts of the 
proposed rule.\586\
---------------------------------------------------------------------------

    \586\ See Loewenstein Sunstein Article, supra note 567. The 
paper provides a comprehensive survey of the literature relevant to 
disclosure regulation.
---------------------------------------------------------------------------

    First, existing research demonstrates that individuals exhibit 
limited ability to absorb and process information.\587\ These cognitive 
limitations suggest that more targeted and simpler disclosures may be 
more effective in communicating information to investors than more 
complex disclosures. As discussed more thoroughly below, costs, such as 
increased investor confusion or reduced understanding of the key 
elements of the disclosure, are likely to

[[Page 21487]]

increase as disclosure documents become longer, more convoluted, or 
more reliant on narratives.\588\ Moreover, empirical evidence suggests 
that simplification benefits consumers of disclosed information.\589\ 
These results appear to support requirements of simple disclosures, 
which provide benefits to consumers of that information.
---------------------------------------------------------------------------

    \587\ See Nisbett RE & Ross L. Human Inference: Strategies and 
Shortcomings of Social Judgment (1980). Englewood Cliffs, NJ: 
Prentice Hall. David Hirshleifer & Siew Hong Teoh, Limited 
attention, information disclosure, and financial reporting, Journal 
of Accounting and Economics 36, 337-386 (Dec. 2003).
    \588\ See, e.g., S.B. Bonsall IV & B.P. Miller, The Impact of 
Narrative Disclosure Readability on Bond Ratings and the Cost of 
Capital, The Review of Accounting Studies 2 (2017) and A. Lawrence, 
Individual Investors and Financial Disclosure, Journal of Accounting 
& Economics 56, 130-47 (2013).
    \589\ See supra notes 35, 46--48 and accompanying text. See also 
S. Agarwal, S. Chomsisengphet, N. Mahoney & J. Stroebel, Regulating 
consumer financial products: evidence from credit cards, NBER 
Working Paper 19484 (Jun. 2014) (finding that a series of 
requirements in the Credit Card Accountability Responsibility and 
Disclosure Act (CARD Act), including several provisions designed to 
promote simplified disclosure, has produced substantial decreases in 
both over-limit fees and late fees, thus saving U.S. credit card 
users $12.6 billion annually).
---------------------------------------------------------------------------

    A second characteristic of an effective disclosure is salience, or 
the tendency to `stand out' or contrast with other information on a 
page. Salience detection is a key feature of the 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.\590\ Within the 
context of disclosures, more salient information, such as information 
presented in bold text, would be more effective in attracting attention 
than less salient information, such as information presented in a 
footnote. There is also empirical evidence that visualization improves 
individual perception of information.\591\ For example, one 
experimental study shows that tabular reports lead to better decision 
making and graphical reports lead to faster decision making (when 
people are subject to time constraints).\592\
---------------------------------------------------------------------------

    \590\ Daniel Kahneman, Thinking, Fast and Slow, New York: 
Farrar, Strauss, Giroux (2013). Susan Fiske & Shelley E. Taylor, 
Social cognition: From Brains to Culture, SAGE Publications Ltd; 3rd 
ed. (2017).
    \591\ J. Hattie, Visible learning. A synthesis of over 800 meta-
analyses relating to achievement, Oxon: Routledge (2008) 
(``Hattie'').
    \592\ I. Benbasat & A.S. Dexter, An Investigation of the 
Effectiveness of Color and Graphical Presentation under Varying Time 
Constraints, MIS Quarterly 10, 59-83 (Mar. 1986) (``Benbasat & 
Dexter'').
---------------------------------------------------------------------------

    A third characteristic of effective disclosure is standardization. 
People are generally able to make more coherent and rational decisions 
when they have comparative information that allows them to assess 
relevant trade-offs.\593\ Standardization could be particularly 
important for the disclosure of certain quantitative aspects of 
financial services, such as the level and structure of fees.
---------------------------------------------------------------------------

    \593\ See, e.g., JR Kling, S. Mullainathan, E. Shafir, LC 
Vermeulen & MV Wrobel, Comparison friction: experimental evidence 
from Medicare drug plans, Quarterly Journal of Economics 127, 199-
235 (2012) (finding that in a randomized field experiment, in which 
some senior citizens choosing between Medicare drug plans that were 
randomly selected to receive a letter with personalized, 
standardized, comparative cost information (``the intervention 
group'') while another group (``the comparison group'') received a 
general letter referring them to the Medicare website, plan 
switching was 28% in the intervention group, but only 17% in the 
comparison group, and the intervention caused an average decline in 
predicted consumer cost of about $100 a year among letter 
recipients); CK Hsee, GF Loewenstein, S. Blount & MH Bazerman, 
Preference reversals between joint and separate evaluations of 
options: a review and theoretical analysis, Psychological Bulletin 
125, 576-590 (Oct. 2006).
---------------------------------------------------------------------------

    Finally, personalization may further enhance the effectiveness of 
disclosure.\594\ This approach might involve, for example, adjusting 
the presentation to take account of the receiver's interests, 
expectations, or format preferences or to tailor the information based 
on what the receiver already knows in order not to repeat existing 
knowledge. Personalization is usually achieved at the expense of 
standardization, however, and can be costly to create.
---------------------------------------------------------------------------

    \594\ See Loewenstein Sunstein Article, supra note 567.
---------------------------------------------------------------------------

    Current reporting and disclosure requirements for broker-dealers 
and registered investment advisers including Form BD and Form ADV may 
provide detailed information to investors. However, because these 
existing reports and disclosures (which serve the purposes for which 
they were created) are made in multiple, sometimes lengthy forms, and 
made available at different websites or delivery methods, it can be 
difficult for investors to grasp the most important features of the 
financial services and products they receive. In addition, the 
information available to retail investors about broker-dealers on 
BrokerCheck does not include the same information that investment 
advisers provide in the Form ADV brochure and brochure supplement. The 
relatively low financial literacy of many investors also makes it less 
likely that they would be able to effectively compile this information 
on their own and use it in their decision making. Furthermore, most 
financial firms and professionals could lack the incentives and 
resources to disclose the main aspects of their business practices to 
their customers in the absence of the proposed requirements.
    In evaluating the broad economic issues related to disclosure, the 
Commission preliminarily believes that all retail investors would 
benefit from a short summary that focuses on certain aspects of the 
firm and its financial professionals and its services. By requiring 
both investment advisers and broker-dealers to provide a concise 
relationship summary that discusses both types of services and their 
differences, the relationship summary would help all retail investors 
to understand these aspects of a particular firm, to compare different 
types of accounts, and to compare one firm with other firms. The 
relationship summary would also highlight, in one place, the services, 
some categories of fees, specified conflicts of interest, and whether 
the firm or its financial professionals currently have reportable 
disciplinary events.
2. Economic Effects of the Relationship Summary
    This section analyzes the anticipated economic effects from the 
proposed relationship summary to the directly affected parties: retail 
investors, and broker-dealers and investment advisers that offer 
brokerage or advisory services to retail investors.\595\
---------------------------------------------------------------------------

    \595\ Economic effects of the proposal on the market for 
financial services, including on indirectly-affected parties such as 
banks or insurers that are not regulated by the SEC, are considered 
in the following section.
---------------------------------------------------------------------------

a. Retail Investors
    As noted above, substantial evidence suggests that retail investors 
lack financial literacy and do not understand many basic financial 
concepts, such as the implications of investment costs for investment 
performance.\596\ This, in turn, supports the notion that a well-
functioning market for financial services may provide benefits to 
investors by helping them obtain information and guidance from firms 
and financial professionals and thereby make better investment 
decisions. At the same time, however, evidence also suggests that 
investors do not fully comprehend the nature of the business 
relationships and responsibilities in the market which makes them 
vulnerable to confusion and being misled by firms and financial 
professionals; \597\ it also implies that any improvement of retail 
investor understanding of their relationship with

[[Page 21488]]

financial professionals could improve investor's investment decisions.
---------------------------------------------------------------------------

    \596\ See 917 Financial Literacy Study, supra note 20.
    \597\ See 913 Study, supra note 3, at section III.A.; Siegel & 
Gale Study, supra note 550; RAND Study, supra note 5.
---------------------------------------------------------------------------

    The content of the proposed relationship summary is intended to 
alert retail investors to information that would help them to choose a 
firm or a financial professional and prompt retail investors to ask 
informed questions. It is also intended to facilitate comparisons 
across firms that offer the same or substantially similar services. 
Specifically, the relationship summary would provide information on the 
relationships and services offered by investment advisers and broker-
dealers, the standards of conduct applicable to those services, certain 
categories of fees and costs of the services offered, comparisons of 
brokerage and investment advisory services (for standalone broker-
dealers and investment advisers),\598\ conflicts of interest, and some 
additional information, including the existence of currently reportable 
legal or disciplinary events. The Commission believes that the 
information in the relationship summary could help alleviate investor 
confusion and would promote effective communication between the firm 
and its retail investors and assist investors in making an informed 
choice when choosing an investment firm and professional and type of 
account to help to ensure they receive services that meet their 
preferences and expectations. Although the relationship summary applies 
only to broker-dealers and registered investment advisers, its impact 
could extend beyond the current and prospective clients of these 
institutions and impact a larger set of investors through various 
channels such as public filings and website posting. Both the content 
and the form of the relationship summary are designed to increase the 
likelihood that the disclosed information is consumed easily and 
effectively by retail investors. We discuss the potential benefits and 
costs of the relationship summary and its components in detail below.
---------------------------------------------------------------------------

    \598\ For purposes of the relationship summary, we propose to 
define a standalone investment adviser as a registered investment 
adviser that offers services to retail investors and (i) is not 
dually registered as a broker-dealer or (ii) is dually registered as 
a broker-dealer but does not offer services to retail investors as a 
broker-dealer. We propose to define a standalone broker-dealer as a 
registered broker-dealer that offers services to retail investors 
and (i) is not dually registered as an investment adviser or (ii) is 
dually registered as an investment adviser but does not offer 
services to retail investors as an investment adviser. Proposed 
General Instruction 9.(f) to Form CRS.
---------------------------------------------------------------------------

i. Structure of the Relationship Summary
    The structure of the relationship summary is designed to facilitate 
retail investors' absorption of the provided information. The proposed 
design intentionally restricts the length of the relationship summary, 
whether in electronic or paper format, to four pages on 8\1/2\ x 11 
inch paper if converted to PDF format, with a specified font size and 
margin requirements. Existing research suggests that shorter 
disclosures help investors absorb and process information.\599\ Shorter 
disclosure would also facilitate a layered approach to disclosure. The 
Commission acknowledges that a limit on overall document length (or 
equivalent length for electronic disclosure) may entail limiting the 
information provided through the relationship summary. However, based 
on the studies described above, we preliminarily believe that limiting 
the length of the relationship summary appropriately trades off the 
benefits of additional detail against the costs of increased complexity 
associated with longer disclosures. Similarly, while the required 
standardization across the relationship summary limits the ability of 
firms to provide customized information to potential retail investors, 
we preliminarily believe these constraints are appropriate to 
facilitate comparability.
---------------------------------------------------------------------------

    \599\ See supra Section IV.B.1.
---------------------------------------------------------------------------

    In addition, firms would be required to use short sentences, active 
voice, and plain language throughout the relationship summary. Firms 
would not be permitted to use legal jargon, highly technical business 
terms, or multiple negatives. Existing research also shows that 
visualization helps individuals absorb information more 
efficiently.\600\ Consistent with this research, firms would be 
permitted to use graphical presentations, and dual registrants would be 
required in certain aspects, to use tables to simplify and highlight 
the information. For example, dual registrants will be required to 
provide a side-by-side tabular presentation of all relevant information 
provided in the relationship summary.
---------------------------------------------------------------------------

    \600\ See commenters' feedback in the Financial Literacy Study, 
supra note 20, at iv, xx, 21-22.
---------------------------------------------------------------------------

    Moreover, the disclosure would involve a certain degree of 
standardization across firms. In particular, firms would be required to 
use the same headings, prescribed wording, and present the information 
under the headings in the same order. \601\ Additionally, firms would 
be prohibited from adding any items to those prescribed by the 
Commission and any information other than what the Instructions require 
or permit. As discussed above, standardization facilitates comparisons 
of content across disclosures.\602\ We believe that allowing only the 
required and permitted information would promote standardization of the 
information presented to retail investors, and would allow retail 
investors to focus on information that we believe is particularly 
helpful in deciding among firms. At the same time, we acknowledge that 
standardization of disclosures not only limits personalization that may 
be valuable to retail investors but also could result in disclosures 
that are less precise. Further, all information in the relationship 
summary must be true and not misleading. In particular, the 
Instructions permit firms to omit or modify any prescribed statement 
that is inapplicable to their business or would be misleading to a 
reasonable retail investor. In addition, for certain items, firms will 
have some flexibility in how they include the required information.
---------------------------------------------------------------------------

    \601\ See supra note 593.
    \602\ See supra Section IV.B.1.
---------------------------------------------------------------------------

ii. Introduction
    The proposed Introduction of the relationship summary would 
highlight to retail investors the type of accounts and services the 
firm offers to retail investors, and the firm's SEC registration 
status. In addition, the introduction would require prescribed wording 
stating there are different ways for investors to get help with their 
investments, and that they should carefully consider what type of 
account and services would be right for them and that there are 
suggested questions at the end of the disclosure. An introduction 
designed in this manner may benefit retail investors by clarifying that 
there are choices available in terms of accounts and services and that 
the some services, firms, or financial professionals may be a better 
fit than others for the investor. This in turn may trigger a closer 
read of the relationship summary and perhaps also additional 
information gathering by the investor that could lead to a more 
informed choice of financial professional and better fit between the 
investor's need and the type of accounts and services they use.
iii. Relationships and Services
    In the second section of the relationship summary, firms would 
discuss specific information about the nature, scope, and duration of 
its relationships and services, including the types of accounts and 
services the firm offers, how often it offers investment advice, and 
whether the firm monitors

[[Page 21489]]

the account. As noted above, the relationships and services of firms 
can differ in nature, scope, and duration. The Commission believes that 
a better understanding of the relationships and services could lower 
search costs and the risk of mismatch for retail investors, by 
facilitating cross-firm comparisons, and make it easier for them to 
find a firm and a financial professional that most closely meet their 
expectations, depending on how important different types of fee 
structures, services, standards of conduct or other information points 
are to them.
iv. Obligations to the Retail Investor--Standard of Conduct
    The third section of the relationship summary briefly describes in 
plain language the firm's legal standard of conduct. As noted above, 
studies show that many retail investors are confused about the standard 
of conduct that applies to firms and financial professionals,\603\ and 
the Commission believes that providing retail investors with a brief 
description of legal obligations of firms and professionals could help 
alleviate this confusion. Furthermore, to the extent this section makes 
the issue of standard of conduct more salient to the investors, it may 
encourage additional information gathering by the investors about the 
standard of conduct, which could further increase investors' 
understanding.
---------------------------------------------------------------------------

    \603\ See, e.g., Siegel & Gale Study, supra note 5 and RAND 
Study, supra note 5. See also CFA Survey, supra note 5.
---------------------------------------------------------------------------

    Investor understanding of the obligations of their firms and 
financial professionals with respect to each type of account could help 
investors align their expectations with the expected conduct of their 
firm or financial professional. For example, depending on their 
preferences, some investors might find an advisory account more 
appropriate. Other investors could prefer the services and standards of 
conduct associated with a brokerage account. Thus, to the extent the 
proposed disclosure of obligations in the relationship summary increase 
investors understanding in this area, it may improve the match between 
investors' preferences and expectations and the type of accounts and 
services they select while preserving investor choice.
v. Summary of Fees and Costs
    The Commission is also proposing that firms include an overview of 
specified types of fees and expenses that retail investors will pay in 
connection with their brokerage and investment advisory accounts.\604\ 
This section would include a description of the principal type of fees 
that the firm will charge retail investors as compensation for the 
firm's advisory or brokerage services, including whether the firm's 
fees vary and are negotiable, and factors that would help a reasonable 
retail investor understand the fees that he or she is likely to pay. As 
such, the improved disclosure of the categories of fees, including wrap 
fees, could help improve retail investor's decision to engage a firm 
and a financial professional.
---------------------------------------------------------------------------

    \604\ See supra Section II.B.4.
---------------------------------------------------------------------------

vi. Comparisons
    The Commission is also proposing to require standalone investment 
advisers and standalone broker-dealers to provide comparisons to the 
other type of firm. Standalone broker-dealers would include information 
about the following: (i) The primary types of fees that investment 
advisers charge; (ii) services generally provided by investment 
advisers, (iii) advisers' standard of conduct; and (iv) certain 
incentives advisers have based on the investment adviser's asset-based 
fee structure. For investment advisers, this section would include 
parallel categories of information regarding broker-dealers.
    The choice between a brokerage account and an advisory account in 
part may determine the types of fees and costs and standard of conduct 
associated with the account. Retail investors who are provided with 
more information would be more likely to match their choice of the type 
of account with their expectations; if retail investors do not 
understand the differences between of broker-dealers and investment 
advisers, they are less likely to be able to match their expectations 
for financial services providers with their choices. Thus, the 
Commission preliminary believes that having a clear explanation of 
differences in the fees, scope of services, standard of conduct, and 
incentives that are generally relevant to advisory and brokerage 
accounts may help retail investors who are considering one such type of 
relationship to compare how their preferences and expectations might be 
better met with the other type of relationship.
vii. Conflicts of Interest
    The Commission is also proposing that firms summarize their 
conflicts of interest related to certain financial incentives. 
Specifically, firms would be required to disclose conflicts relating 
to: (i) Financial incentives to offer to, or recommend that the retail 
investor invest in, certain investments because (a) such products are 
issued, sponsored, or managed by the firm or its affiliates, (b) third 
parties compensate the firm when it recommends or sells the 
investments, or (c) both; (ii) financial incentives to offer to, or to 
recommend that the retail investor invest in, certain investments 
because the manager or sponsor of those investments or another third 
party (such as an intermediary) shares revenue it earns on those 
products with the firm; and (iii) the firm buying investments from and 
selling investments to a retail investor from the firm's account (i.e., 
principal trading). Including these disclosures prominently, in one 
place, at or before the start of a retail investor's relationship with 
a firm or financial professional could facilitate retail investors' 
understanding of the incentives that may be present throughout the 
course of the relationship. Such disclosure of financial incentives 
could assist investors in matching their expectations when choosing a 
firm or professional and type of account to help to ensure they receive 
services that meet their expectations. In addition, to the extent that 
the specified conflicts of interest disclosures could draw retail 
investors' attention to conflicts, monitoring of firms and financial 
professionals by retail investors could be improved.
    The first category of conflicts noted above makes the promotion of 
own and third party products more salient for retail investors. The 
possibility that an investor may request an explanation of a 
transaction regarding a recommended investment or strategy, and 
associated costs thereof, could serve as an additional disciplinary 
device for firms and financial professionals and align better their 
interests with the interests of retail investors. Similarly, the 
disclosures in the relationship summary about revenue sharing 
arrangements may induce retail investors to more carefully pay 
attention to investments with such arrangements and request further 
information. Principal trading could also make retail investors 
vulnerable to transactions that transfer value from their accounts to 
the accounts of the firm, and so the disclosure of principal trading 
information could draw retail investors' attention to possible 
conflicts that could emerge from principal transactions and generate 
increased scrutiny of such transactions by investors.
    While the Commission preliminarily believes that disclosures of 
conflicts of

[[Page 21490]]

interest in the relationship summary could match retail investor 
expectations with the choices of firms and financial professionals, 
some studies have found that disclosures of conflicts of interest, in 
some cases, could undermine the motivations of people to behave 
ethically or to take moral license in their actions.\605\ In the 
context of providing investment advice, the perception that an investor 
has been warned (via the disclosure) of a firm's and financial 
professional's potential bias may make them believe that they are less 
obligated to provide unbiased advice.\606\ Further, other studies have 
suggested that disclosures of conflicts of interest could also make 
firms and financial professionals appear more trustworthy and as a 
result reduce the incentives for retail investors to examine additional 
information more carefully.\607\ The Commission preliminarily believes, 
however, that the securities laws and existing rules and regulations 
thereunder, such as investment advisers' fiduciary duty,\608\ broker-
dealers' requirements under proposed Regulation Best Interest \609\ 
standard, as well as under existing self-regulatory organizations' 
rules and the Exchange Act,\610\ reduce the risk that broker-dealers 
and investment advisers might use the proposed relationship summary to 
exploit potential conflicts of interest between themselves and their 
retail investors because these regulations may raise the cost of 
misconduct.\611\
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    \605\ See Genevi[egrave]ve Helleringer, Trust Me, I Have a 
Conflict of Interest! Testing the Efficacy of Disclosure in Retail 
Investment Advice, Oxford Legal Studies Research Paper No. 14/2016 
(Mar. 2016), available at https://ssrn.com/abstract=2755734; and 
Cain 2005 Article, supra note 581. As discussed above, existing and 
proposed rules and regulations for broker-dealers and investment 
advisers could mitigate the negative unintended consequences of 
disclosures of conflicts of interest.
    \606\ See supra Section IV.B.1.
    \607\ See Burden of Disclosure Article, supra note 584. Further, 
this ``panhandler effect'' suggests that in some cases disclosure of 
financial professionals' conflicts of interests (particularly in 
face-to-face interactions) may create social pressure on retail 
investors to meet the financial professionals' interests.
    \608\ Under the Advisers Act, an adviser is a fiduciary whose 
duty is to serve the best interest of its clients, including an 
obligation not to subrogate clients' interest to its own. SEC v. 
Capital Gains Research Bureau, Inc., 375 U.S. at 194 (the United 
States Supreme Court held that, under section 206 of the Investment 
Advisers Act of 1940, advisers have an affirmative obligation of 
utmost good faith and full and fair disclosure of all material facts 
to their clients, as well as a duty to avoid misleading them). 
Section 206 applies to all firms and persons meeting the Advisers 
Act's definition of investment adviser, whether registered with the 
Commission, a state securities authority, or not at all. See also 
Transamerica Mortgage Advisors, Inc. v. Lewis, 444 U.S. 11, 17 
(1979) (``[T]he Act's legislative history leaves no doubt that 
Congress intended to impose enforceable fiduciary obligations.'').
    \609\ See Regulation Best Interest Proposal, supra note 24. 
Proposed Regulation Best Interest would establish a standard of 
conduct for broker-dealers and associated persons of broker-dealers 
to act in the best interest of the retail customer at the time at 
recommendation is made without placing the financial or other 
interest of the broker-dealer or associated person of a broker-
dealer ahead of the interest of the retail customer. The standard of 
conduct obligation shall be satisfied if the broker-dealer or 
associated person of the broker-dealer discloses at the time of the 
recommendation material facts relating to the scope and terms of the 
relationship, which may be satisfied in part by the relationship 
summary, and all material conflicts associated with the 
recommendation. In addition, broker-dealers would be required to 
satisfy the Care and Conflicts of Interest Obligations, as discussed 
more fully in the Regulation Best Interest Proposal.
    \610\ For example, a broker-dealer may recommend a security even 
when a conflict of interest is present, but that recommendation must 
be suitable. See FINRA Rule 2111. The antifraud provisions of the 
federal securities laws and the implied obligation of fair dealing 
prohibit a broker-dealer from, among other things, making unsuitable 
recommendations and require broker-dealers to investigate an issuer 
before recommending the issuer's securities to a customer. See, 
e.g., Hanly v. SEC, 415 F.2d 589, 596 (2d Cir. 1969). See also 
Municipal Securities Disclosure, Exchange Act Release No. 26100 
(Sept. 22, 1988), at n.75. The fair dealing obligation also requires 
a broker-dealer to reasonably believe that its securities 
recommendations are suitable for its customer in light of the 
customer's financial needs, objectives and circumstances (customer-
specific suitability). See Release 8662, supra note 118, at 18 
(involving excessive trading and recommendations of speculative 
securities without a reasonable basis).
    \611\ Consistent with this belief, one study also finds that 
regulations and legal sanctions on conflicted advice can mitigate 
the effects of moral licensing discussed above. See Bryan Church & 
Xi Kuang, Conflicts of Disclosure and (Costly) Sanctions: 
Experimental Evidence, Journal of Legal Studies 38 2: 505-532 (Jun. 
2009).
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viii. Additional Information
    To facilitate the layered disclosure that the relationship summary 
provides, we are proposing to require that firms include a separate 
section (``Additional Information'') in the relationship summary 
outlining where retail investors can find more information about the 
firm's legal and disciplinary events, services, fees, and conflicts.
    Retail investors may benefit from information on where to find 
disclosures of the disciplinary events of firms and financial 
professionals. For some retail investors, the disciplinary history of 
the firm or the financial professional may affect their choices related 
to obtaining investment advice. By providing information on whether the 
firm or financial professionals have disciplinary history and where to 
obtain more detailed information through layered disclosure may 
facilitate retail investors' ability to match their expectations with 
their choice of financial service provider. The required disclosure 
would succinctly state whether or not the firm or its financial 
professionals have legal and disciplinary events, based on whether or 
not they or their financial professionals currently disclose or are 
currently required to disclose certain legal or disciplinary events to 
the Commission, self-regulatory organizations, state securities 
regulators or other jurisdictions, as applicable. The Additional 
Information section would also highlight where retail investors can 
find more information about the disciplinary history of the firm and 
its financial professionals on ``Investor.gov.'' While the disclosure 
of the existence of disciplinary events does not provide new 
information to the market,\612\ this simple disclosure in the 
relationship summary, if applicable, could help retail investors more 
easily identify firms that have reported disciplinary events for 
themselves or their financial professionals and where to find more 
information about the events. By including this disclosure, in 
combination with the requirement to include a specific question for 
retail investors to ask about disciplinary history in the ``Key 
Questions to Ask'' section (discussed further below), the relationship 
summary would potentially make retail investors more likely to seek out 
disciplinary history information to use in their evaluation of firms 
and financial professionals and would make them better informed when 
they choose a firm and a financial professional. Finally, retail 
investors themselves have indicated that they consider disciplinary 
information important.\613\
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    \612\ See Parts 1 and 2 of Form ADV; Form BD; Form U4.
    \613\ See 917 Financial Literacy Study, supra note 20.
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    Further, by drawing attention to disciplinary histories of 
financial professionals for retail investors, firms could become more 
selective in their employment decisions, which could benefit retail 
investors by having a potentially more trustworthy pool of financial 
professionals to select from when they choose providers of investment 
advice, and reduce potential harm to retail investors. As such, the 
overall quality of financial advice provided to retail investors could 
increase, to the extent that legal and regulatory compliance is 
correlated with advice quality.\614\ As a consequence, such disclosures 
of disciplinary history could promote retail investor confidence in the 
market.
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    \614\ See Mark Egan, Gregor Matvos & Amit Seru, The Market for 
Financial Adviser Misconduct, Journal of Political Economy (Dec. 14, 
2017), available at https://ssrn.com/abstract=2739170.
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    One potential cost of the increased salience of the existence of 
disciplinary events may be that retail investors could

[[Page 21491]]

be deterred from hiring a firm or financial professional with a 
disciplinary record, even if they would be better off to do so, without 
further investigating the nature of the disciplinary event. 
Alternatively, an investor may also incorrectly assume that a firm that 
does not report legal/disciplinary history is a ``better'' or a ``more 
compliant'' firm than a firm that does report such history; i.e., the 
lack of currently reportable disciplinary history could signify a stamp 
of approval for some investors. Therefore, disclosures of the existence 
of disciplinary events could have an unintended consequence of keeping 
some investors out of the market for financial advice or by selecting 
financial professionals that could lead to a mismatch with the 
expectations of the retail investor.
    This section would also include disclosure of how investors can 
contact the firm, the SEC, or FINRA (when applicable) if they have 
problems with their investments, investment accounts, or financial 
professionals. Highlighting this information may encourage more 
outreach by investors when they experience such problems, which may 
increase the likelihood of investors seeking resolution of their or the 
firm's problems. Further, to the extent investors' awareness of how to 
report problems is increased, it may have some incremental disciplining 
effect ex ante on financial professionals to the benefit of all retail 
investors in this market. For example, if retail investors, once aware 
of how to contact the Commission or FINRA are more likely to do so as a 
result of the information provided by the relationship summary, firms 
and financial professionals may improve standards and implement 
policies and procedures aimed at reducing conduct that would warrant 
potential outreach to regulators by retail investors.
    Finally, this section would state where to find more information 
about the firm and its financial professionals. Broker-dealers would be 
required to direct retail investors to additional information about 
their brokers and services on BrokerCheck, their firm websites (if they 
have a website; if not, they would state where retail investors can 
find up-to-date information), and the retail investor's account 
agreement. Investment advisers likewise would be required to direct 
retail investors to additional information in the firm's Form ADV Part 
2 brochure and any brochure supplement provided by a financial 
professional to the retail investor. If an adviser has a public website 
and maintains a current version of its firm brochure on the website, 
the firm would be required to provide the website address (if an 
adviser does not have a public website or does not maintain its current 
brochure on its public website, then the adviser would provide the IAPD 
website address). Making these links to websites available could be 
important given that low levels of financial literacy could make it 
less likely that investors would effectively compile information on 
their own to use in decision making.
ix. Key Questions To Ask
    The proposed relationship summary is expected to benefit retail 
investors either directly, by providing information about the 
corresponding firm and financial professional, or indirectly, by 
encouraging investors to acquire additional information. The 
relationship summary would also include suggested key questions to 
encourage retail investors to have conversations with their financial 
professionals about how the firm's services, fees, conflicts, and 
disciplinary events affect them.
    Under the ``Key Questions To Ask'' heading, firms would be required 
to include ten questions,\615\ as applicable to their particular 
business, to help retail investors to elicit more information 
concerning the items discussed in the relationship summary.\616\ Given 
that standardization of disclosures limits personalization that may be 
valuable to retail investors, the Commission preliminarily believes 
that the proposed questions would serve an important purpose in the 
relationship summary--namely, to prompt retail investors to ask their 
financial professionals for more personalized information.
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    \615\ We are proposing to allow firms to modify or omit portions 
of any of these questions that are not applicable to their business. 
We are also proposing to require a standalone broker-dealer and a 
standalone investment adviser, to modify the questions to reflect 
the type of account they offer to retail investors (e.g., advisory 
or brokerage account). In addition, we are proposing that firms 
could include any other frequently asked questions they receive 
following these questions. Firms would not, however, be permitted to 
exceed fourteen questions in total. See supra Section II.B.8.
    \616\ See proposed Item 8 of Form CRS.
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    The proposed list of questions in the relationship summary may 
alter the actions not only of retail investors but also of firms and 
their financial professionals. In anticipation of having to answer 
these key questions, firms may find it in their self-interest to train 
their staff and develop materials that could help them address the 
question in greater detail. Such a voluntary response by firms would 
likely benefit investors to the extent the answers given to the 
questions may become more informative and more accurate. However, some 
firms may develop standardized answers in anticipation of the key 
questions that become less informative to the retail investor than a 
back and forth conversation.
    We believe the proposed set of questions cover a broad range of 
issues that are likely to be important to retail investors and provide 
benefits, such as a platform from which to begin a dialogue with their 
financial professional. However, potential costs may arise for some 
retail investors. One such potential cost of the proposed questions is 
that they may anchor the attention of retail investors to the list and 
reduce the likelihood that they would explore other potential questions 
that could be important to them based on their unique 
circumstances.\617\ In addition, framing the questions as ``Key 
Questions'' could lead some retail investors to believe that any other 
questions they may have due to their own particular circumstances may 
be of second order importance, even if they may not be.\618\
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    \617\ Anchoring is a cognitive bias, whereby receivers of 
information strongly rely on the initial information received when 
making decisions, and do not sufficiently adjust to new information 
received. See, Anderson, Jorgen Vitting, Detecting Anchoring in 
Financial Markets, Journal of Behavior Finance 11, 129-133 (2010) 
available at https://www.tandfonline.com/doi/abs/10.1080/15427560.2010.483186.
    \618\ See, e.g., Tversky Kahneman Article, supra note 580, on 
the importance of framing.
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x. Other Benefits and Costs to Investors
    As indicated in the 917 Financial Literacy Study, retail investors 
consider the proposed disclosures in the relationship summary to be 
important pieces of information. With respect to content, disclosure 
items identified as absolutely essential for retail investors were: 
Adviser's fees (76%), disciplinary history (67%), adviser's conflicts 
of interest (53%), and adviser's methodology in providing advice (51%). 
Approximately 54% of investors also believe that disclosures that 
provided comparative adviser information would be useful. In light of 
this evidence, the Commission preliminarily believes the disclosure 
would provide valuable information to retail investors and potentially 
encourage further information gathering by retail investors that assist 
them in making an informed choice of what type of account matches their 
preferences and expectations.\619\
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    \619\ Although the 917 Financial Literacy Study indicated that 
nearly 90% of survey participants believed that certain disclosures 
would have been helpful to have in advance of their selection of 
their current adviser, under the current proposal, firms may and are 
highly encouraged, though not required, to deliver the relationship 
summary in advance of the time a retail investor enters into an 
advisory contract with an investment adviser or engages the services 
of a broker-dealer. Firms would be required to file the relationship 
summary with the Commission and the disclosure would be made 
available on public websites of broker-dealers and investment 
advisers, which indicates that prospective investors could have 
access to a given firm's relationship summary in advance of initial 
contact with the firm or its financial professionals. In general, 
however, the Commission preliminarily anticipates that most 
prospective retail investors would receive the relationship summary 
at the time that they meet with a financial professional to consider 
entering into an agreement or engaging services.

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[[Page 21492]]

    By providing specified disclosures in an abbreviated and simplified 
format, the proposed relationship summary could also improve the 
effectiveness of the communication between investors and investment 
advisers or broker-dealers. A more effective communication may enable 
retail investors to more quickly reach an understanding of what type of 
firm and financial professional or type of account offered by the 
broker-dealer or the investment adviser best matches their preferences. 
As a result, search costs may be reduced as retail investors may need 
to contact fewer broker-dealers or investment advisers and financial 
professionals given that they have access to information about those 
firms or financial professionals.\620\ The inclusion of key questions 
as part of the relationship summary also could serve to reduce search 
costs as well as the potential for mismatched expectations borne by 
retail investors if such questions foster greater discussion about the 
services, costs and fees, and possible conflicts associated with 
broker-dealer and investment adviser business models.
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    \620\ Insofar as retail customers may also search for other 
providers of financial advice, such as insurance companies or banks 
and trust companies, the reduction in search costs obtainable from 
the relationship summary would be lower.
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    The Commission preliminarily believes that the proposed 
relationship summary could benefit not only the existing and 
prospective customers and clients of broker-dealers and investment 
advisers but also the public more broadly. First, recipients of the 
relationship summary, to the extent they discuss investing in general, 
may discuss the topics covered in the summary with family and friends 
and in the process increase the degree of public awareness about the 
issues discussed in the disclosure. Second, some prospective retail 
investors could access the relationship summary independently through 
the company website or the Commission's website.
    The proposed relationship summary may also impose some additional 
costs on retail investors. As described more fully in the section that 
follows, brokers-dealers and investment advisers will bear compliance 
costs associated with the production and dissemination of the 
relationship summary. As a result of such increased costs, some firms 
or financial professionals may transfer retail investors from 
potentially lower cost transaction-based accounts to higher cost asset-
based fee advisory accounts, if the firm or the financial professional 
is dually registered.
    In addition to these compliance burdens which may indirectly be 
borne by retail investors, the disclosures themselves may impose 
certain indirect costs on retail investors. For example, since the 
proposed disclosures in the relationship summary are general and 
contain prescribed language in many parts, they could steer retail 
investor attention away from some specific and potentially important 
characteristics of the business practices of the firm or the financial 
professional. This potential cost is likely to be mitigated to the 
extent the required Additional Information section employs layered 
disclosure and the Key Questions encourage more personalized 
information gathering on part of the retail investors.
b. Broker-Dealers and Investment Advisers
    The proposed disclosure requirements would impose direct costs on 
broker-dealers and investment advisers, including costs associated with 
delivery, filing, preparation, and firm-wide implementation of the 
relationship summary, as well as training and monitoring for 
compliance.\621\
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    \621\ See infra Section V.A. for estimates of some of these 
compliance costs for purposes of the Paperwork Reduction Act.
---------------------------------------------------------------------------

    With respect to initial delivery, the relationship summary would 
need to be provided to retail investors \622\ in the case of an 
investment adviser, before or at the time the firm enters into an 
advisory agreement or, in the case of a broker-dealer, before or at the 
time the retail investor first engages the firm's services. A dual 
registrant should deliver the relationship summary at the earlier of 
entering into an investment advisory agreement with the retail investor 
or the retail investor engaging the firm's services. Firms would be 
permitted to deliver the relationship summary (including updates) 
electronically, consistent with prior Commission guidance.\623\ Firms 
would also be required to post their relationship summaries on their 
websites in a way that is easy for retail investors to find, if they 
maintain a public website. Firms that do not maintain a website would 
be required to include in their relationship summaries a toll-free 
number for investors to call to obtain documents. In addition, firms 
would be required to provide a relationship summary to an existing 
client or customer who is a retail investor before or at the time a new 
account is opened or changes are made to the retail investor's 
account(s) that would materially change the nature and scope of the 
firm's relationship with the retail investor. Firms also would be 
required to implement a one-time delivery of the relationship summary 
to all existing retail investors within 30 days after the date the firm 
is first required to file its relationship summary with the 
Commission.\624\
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    \622\ In addition to the firm's delivery requirements, firms 
would also file their relationship summary with the Commission, to 
be publicly available. See supra Section II.C.1.
    \623\ See supra Section II.C.2.
    \624\ Currently, investment advisers have approximately 29 
million non-high net worth individual clients and 5 million high net 
worth individual clients, and the total number of individual clients 
of investment advisers has increased by 10 million since 2012. 
Therefore, investment advisers would need to deliver relationship 
summaries to approximately 35 million existing retail clients, and 
on average, would expect approximately 2.5 million new clients per 
year. Item 5.D of Form ADV. Although the Commission is unable to 
estimate the number of broker-dealer retail customers, we could 
assume that the number of relationship summaries for broker-dealer 
customers would be at least as many, if not more, than what would 
have to be delivered for investment advisers.
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    Regardless of the method of delivery (e.g., paper or electronic 
delivery) firms would incur costs associated with delivering the 
relationship summary to retail investors. Such flexibility in the 
method of delivery, while being consistent with Commission guidance, 
could increase efficiency by allowing a firm to communicate with retail 
investors in the same medium by which it typically communicates other 
information. Further, firms could reduce costs by utilizing 
technologies to deliver information to retail investors at lower costs 
than they may face with paper delivery.\625\ While we recognize that 
some firms are likely to use electronic delivery methods, and that 
these methods may be lower cost than paper delivery, some firms may 
still produce paper versions of the relationship

[[Page 21493]]

summary, particularly if they have some retail investors that prefer 
delivery of disclosure in this method, or do not have access to the 
Internet, or if firms are delivering the relationship summary in the 
same format alongside other deliverables, such as Form ADV or account 
statements. Firms would also incur costs of posting the relationship 
summary on their websites and filing the summary with the Commission.
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    \625\ Firms would be required to create and maintain records of 
deliveries of the relationship summary. See supra Section II.E. See 
supra Section II.E (discussing recordkeeping requirements relating 
to the relationship summary). If choosing electronic delivery, firms 
would have compliance costs in providing notice to retail investors 
that the relationship summary would be available electronically. See 
supra Section II.C.2 (discussing elements of Commission guidance 
about electronic delivery of certain documents).
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    Beyond costs associated with delivery of the relationship summary 
to retail investors, firms would be required to prepare the 
relationship summary. The Commission preliminarily believes, however, 
that these costs would be limited for several reasons. First, the 
relationship summary is concise (limited to four pages in length or the 
equivalent length for electronic disclosure), and would contain a 
mandated set and sequence of topic areas, with much of the language to 
be prescribed, thus limiting the time required to prepare the 
disclosure. Second, the relationship summary will be uniform across 
retail investors and would not be customized or personalized to 
potential investors. Finally, the relationship summary would contain 
some standardized elements across investment advisers and broker-
dealers, allowing for potential economies of scale for entities that 
may have subsidiaries that would also be required to produce the 
disclosure.
    Further to the costs of preparing the relationship summary, we 
consider the implication of the disclosure requirements attributable to 
the DOL rules and exemptions, including the DOL's BIC Exemption, and 
the potential effects of those disclosures relative to the relationship 
summary for broker-dealers and investment advisers. The conditions of 
the DOL rules and exemptions, including the BIC Exemption, discussed 
above in the baseline section, are limited to retirement accounts. 
Although some firms may have voluntarily adopted disclosure 
requirements of the BIC Exemption for non-retirement accounts, the 
proposed relationship summary would apply to a broader array of 
relationships, spanning both retirement and non-retirement accounts for 
broker-dealers and investment advisers. To the extent that the 
information provided by the relationship summary would be duplicative 
of information that would be required by the BIC Exemption (or other 
DOL rules and exemptions) and provided to the same group of account 
holders that would receive the DOL required disclosures, the overall 
benefits of the relationship summary could be reduced. Lastly, to the 
extent that some financial firms already have set up procedures and 
systems to comply with the DOL disclosure requirements, these firms may 
incur lower incremental compliance burdens. The Commission 
preliminarily believes, however, that the scope of the disclosure 
requirements under DOL rules and exemptions and the systems that firms 
would have put in place to accommodate such disclosures are unlikely to 
have a significant overlap with the relationship summary. Therefore, 
the Commission anticipates that any potential cost savings for firms to 
comply with disclosure obligations under DOL rules and exemptions and 
the relationship summary are likely to be minimal.
    With respect to preparing and implementing the relationship 
summary, firms would also need to expend resources with respect to the 
required Key Questions in the relationship summary. Firms would bear 
costs of preparing responses the questions from the list and training 
their employees on how to respond. Financial professionals need to 
spend time to prepare their responses to the questions and to respond 
to these questions when asked. As a result, some firm employees or 
financial professionals could take away from the time they dedicate to 
investigate investment recommendations, which could inadvertently harm 
investors if financial professionals divert resources to answering key 
questions but reduce their time devoted to arriving at investment 
strategies. In this case, the quality of their recommendations could 
decline. In both cases, the possible additional costs to firms could be 
(partially) transferred to retail investors.
    In addition to the costs associated with preparation, delivery, 
filing, and posting on websites of the initial relationship summary, 
firms would also bear costs for updating the relationship summary 
within 30 days whenever any information becomes materially 
inaccurate.\626\ The firm would be required to communicate updated 
information to retail investors who are existing customers or clients 
of the firm within 30 days whenever any information in the relationship 
summary becomes materially inaccurate.\627\ Firms could communicate 
this information by delivering the amended relationship summary or by 
communicating the information another way to the retail investor. For 
example, if an investment adviser communicated a material change to 
information contained in its relationship summary to a retail investor 
by delivering an amended Form ADV brochure or Form ADV summary of 
material changes containing the updated information, this generally 
would support a reasonable belief that the information had been 
communicated to the retail investor, and the investment adviser 
generally would not be required to deliver an updated relationship 
summary to that retail investor. This requirement provides firms the 
ability to disclose changes without requiring them to duplicate 
disclosures and incur additional costs. The updated relationship 
summary would also need to be posted prominently to the firm's website 
if the firm has one and filed electronically with the Commission. In 
addition, firms could also incur some costs to keep records of how the 
updated relationship summary or the information in the updated 
relationship summary was delivered to retail investors.
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    \626\ Along this line, firms could also incur some costs of 
modifying prescribed disclosure per the parameters of Instruction 3.
    \627\ The requirement to communicate updated information to 
retail investors, rather than deliver an updated relationship 
summary could reduce the effectiveness of the information to the 
extent that the communication does not allow retail investors to see 
the context in which information was changed.
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    We anticipate that the compliance costs associated with producing 
updates of the relationship summary would be also relatively minor 
given that the relationship summary uses largely prescribed language 
and updates of the relationship summary, which are only required for 
material changes, are expected to be infrequent. As a result, the costs 
of such updates are expected to be small relative to the costs 
associated with the initial production of the disclosure. Further, 
annual costs associated with communications regarding updates to the 
relationship summary are anticipated to be lower than the costs of the 
initial delivery to existing retail investors to the extent the 
frequency of updates is low or the firm communicates the updates 
through other ways than formal delivery. The Commission anticipates 
that some of the costs associated with preparation, delivery, filing, 
website posting, and updates to the relationship summary for an average 
broker-dealer or average dual registrant could exceed the costs for the 
average investment adviser. As Table 1 and Table 3 indicate, broker-
dealers maintain a larger number of accounts than investment advisers 
do; therefore, delivery costs for broker-dealers could exceed those of 
investment advisers, if the number of accounts is a good indicator of 
the number of retail

[[Page 21494]]

investor customers.\628\ Similarly, given that the average dual 
registrant has more customer accounts than the average investment 
adviser, and that the preparation of relationship summaries for dual 
registrants may require more effort than for standalone broker-dealers 
or investment advisers, the compliance costs could be larger for these 
firms.
---------------------------------------------------------------------------

    \628\ The Commission is unable to obtain from Form BD or FOCUS 
data information on broker-dealer numbers of customers, and instead, 
is only provided with the number of customer accounts. The number of 
customer accounts will exceed the number of customers as a customer 
could have multiple accounts at the same broker-dealer.
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    In addition, unlike investment advisers, which produce Part 2A of 
Form ADV, a broker-dealer currently is not required to prepare a 
narrative disclosure document for its retail investors, although under 
existing antifraud provisions of the Exchange Act, a broker-dealer may 
be liable if it does not disclose material information to its retail 
investors. Thus, broker-dealers could expend additional time and effort 
to aggregate the information required by the relationship summary 
relative to investment advisers. As a result, the Commission 
preliminarily believes that the investment advisers should be able to 
produce the relationship summary at a relatively lower cost than 
broker-dealers, given investment advisers' experience with preparing 
and distributing Part 2A of Form ADV.\629\
---------------------------------------------------------------------------

    \629\ For example, investment advisers may already have 
specialized staff dealing with disclosure issues.
---------------------------------------------------------------------------

    The Commission preliminary believes that compliance costs would 
also be different across firms with relatively smaller or larger 
numbers of retail investors as customers or clients. For example, to 
the extent that developing the relationship summary entails a fixed 
cost, firms with a relatively smaller number of retail investors as 
customers or clients may be at a disadvantage relative to firms with a 
larger number of such customers or clients since the former would 
amortize these costs over a smaller retail investor base. Firms with a 
relatively larger number of existing retail investors would face higher 
costs of initial distribution of the relationship summary compared to 
firms with a relatively smaller retail investor base. Further, to the 
extent that certain costs associated with preparing different versions 
of the proposed relationship summary scale with the number of branches 
and associated financial professionals that a firm has, firms with a 
relatively larger number of branches and employees may bear higher 
costs than firms with a smaller number.
    While the imposed four-page limit is expected to impose nominal 
compliance costs on market participants, it could also generate 
additional costs for some firms relative to others. For example, the 
four-page limit may be more costly for firms that have more complex 
business models because it will limit the information they can present 
within the relationship summary.\630\ For example, a firm with a 
disciplinary history that provides exceptionally good customer service 
could be at a disadvantage compared to other firms with no disciplinary 
history because the relationship disclosure may not summarize relevant 
information about the quality of customer service or the full scope of 
services offered by the firm.
---------------------------------------------------------------------------

    \630\ Complexity is not necessarily linked to size--for example, 
there are large, simple firms and small, complex firms.
---------------------------------------------------------------------------

    Based on the estimates provided in Section V.A for Paperwork 
Reduction Act purposes, the average cost burden for an investment 
adviser to prepare the proposed Form CRS for the first time is 
estimated to range between approximately $1,300 and $3,400, depending 
on the extent to which external help is used.\631\ The estimated 
aggregate combined internal and external costs to investment advisers 
industry-wide for initially preparing and filing the relationship 
summary would be approximately $22 million.\632\ Similarly, for broker-
dealers, the average cost to a firm for preparing Form CRS for the 
first time is estimated to range between approximately $4,000 and 
$6,100, based on the estimate provided in Section V.D.\633\ The 
estimated aggregate combined internal and external costs to broker-
dealers industry-wide of initially preparing and filing the 
relationship summary would be approximately $15 million.\634\ In terms 
of the initial cost of delivering the relationship summary to current 
retail investors, we estimate that the cost to existing and newly 
registered investment advisers would be approximately $43.4 million in 
aggregate, or approximately $5,350 per adviser.\635\ For broker-
dealers, the estimated initial cost of delivering the relationship 
summary to current retail investors would be approximately $121.5 
million in aggregate, or approximately $42,500 per broker-dealer.\636\ 
For both investment advisers and broker-dealers, the estimated annual 
costs of the requirement to deliver the relationship summary before or 
at the time a new account is opened, or changes are made to the retail 
investor's account(s) that would materially change the nature and scope 
of the firm's relationship with the retail investor, is approximately 
10% of the respective estimated costs of the initial delivery to 
existing retail investors.\637\
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    \631\ The lower end estimate is based on the assessment that, 
without additional external help, it will take an average investment 
adviser 5 hours to prepare the relationship summary for the first 
time, see infra Section V.A.2.a. We assume that performance of this 
function will be equally allocated between a senior compliance 
examiner and a compliance manager at a cost of $229 and $298 per 
hour, (see infra note 743 for how we arrived at these costs). Thus, 
the cost for one investment adviser to produce the relationship 
summary for the first time is estimated at $1,317 (2.5 hours x $229 
+ 2.5 hours x $298 = $1,317) if no external help is needed. In 
addition, we estimate that if the investment adviser needs external 
help, the average cost to an investment adviser for the most 
expensive type of such help (i.e., compliance consulting services) 
would be $2,109, see infra note 732, which brings the total cost to 
$3,426.
    \632\ See infra Sections V.A.2.a and V.A.2.b for estimates of 
aggregate internal and external costs, respectively, of the initial 
preparation and filing of the relationship summary.
    \633\ The lower end estimate is based on the assessment that, 
without additional external help, it will take an average broker-
dealer 15 hours to prepare the relationship summary for the first 
time, see infra Section V.D.2.a. We assume that performance of this 
function will be equally allocated between a senior compliance 
examiner and compliance manager at a cost of $229 and $298 per hour, 
respectively (see infra note 743 for how we arrived at these costs). 
Thus, the cost for one broker-dealer to produce the relationship 
summary for the first time is estimated a $3,953 (7.5 hours x $229 + 
7.5 hours x $298 = $3,953) if no external help is needed. In 
addition, we estimate that if the broker-dealer needs external help, 
the average cost to a broker-dealer for the most expensive type of 
such help (i.e., compliance consulting services) would be $2,109, 
see infra note 826, which brings the total cost to $6,062.
    \634\ See infra Sections V.D.2.a and V.D.2.b for estimates of 
aggregate internal and external costs, respectively, of the initial 
preparation and filing of the relationship summary.
    \635\ See infra Section V.C.2.b.i for the estimate of costs 
investment advisers would incur to deliver the relationship summary 
to their existing clients. Note that the analysis includes 
investment advisers that are dual registrants.
    \636\ See infra Section V.D.2.d.i for the estimate of costs 
investment advisers would incur to deliver the relationship summary 
to their existing clients. Note that thee analysis includes broker-
dealers that are dual registrants.
    \637\ See infra Section V.C.2.b.ii for the estimate of these 
costs for investment advisers and infra Section V.D.2.d.ii for the 
analysis of these costs for broker-dealers.
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    Finally, the Commission believes that the proposed relationship 
summary would bring tangible benefits to many broker-dealers and 
investment advisers. Although the possibility of mismatched 
expectations for retail investors and their choice of financial firm or 
professional generally are most costly to the retail investors, such 
mismatch also imposes costs on broker-dealers and investment advisers. 
For instance, some investors who have mismatched their

[[Page 21495]]

expectations of a financial services provider with the type of provider 
they have engaged may lodge complaints with the SEC or FINRA for 
perceived misconduct by their financial professional without 
understanding the nature of their relationship (e.g., an investor may 
file a complaint of discretionary trading in an investment advisory 
account because they did not understand the nature of the services for 
which they contracted). These complaints are costly to firms and 
financial professionals, and the Commission preliminarily believes that 
the relationship summary could alleviate search costs for investors and 
the likelihood of mismatch between investor expectations and their 
choice of firm or financial professional.
    With respect to particular elements of the relationship summary, 
firms with relatively no currently reportable legal and disciplinary 
disclosures could benefit directly from the reporting in the 
relationship summary because the reporting would make these 
characteristics more salient for retail investors by prompting 
investors to research disciplinary history of firms with currently 
reportable legal and disciplinary disclosures. To the extent that 
including disciplinary history information in the relationship summary 
increases the propensity of retail investors to consider this 
information when selecting firms and financial professionals, it could 
also ultimately increase the cost of misconduct for firms and financial 
professionals (for example, by making it more difficult to attract 
retail investors), which would make it more likely that firms take 
disciplinary information into account when making employment choices, 
thereby potentially raising the overall quality of their workforce. The 
relationship summary could further exhibit some positive long-term 
effects on the markets for broker-dealers and investment advisers and 
we elaborate on these long-term effects in greater detail in the next 
subsection.
3. Impact on Efficiency, Competition, and Capital Formation
    In addition to the specific benefits and costs discussed in the 
previous section, the Commission expects that the proposed disclosure 
could cause some broader long-term effects on the market for financial 
advice. Below, we elaborate on these possible effects, including a 
discussion of their impact on efficiency, competition, and capital 
formation.
    The primary long-term effect of the disclosure on the market is 
that it could enhance the competitiveness of the broker-dealer and 
investment adviser markets. The increased transparency with respect to 
the nature of the relationship between broker-dealers or investment 
advisers and their retail investors may allow retail investors to 
better evaluate their firms and financial professionals as well as the 
options for financial services that are advertised by them, which may 
increase the overall level of retail investor understanding in the 
market. When retail investor understanding increases, the degree of 
competitiveness of the financial services industry may also increase 
because retail investors could better assess the types of services 
available in the market. Market competitiveness could be further 
enhanced by the fact that, by prompting investors to understand better 
and obtain more information on the services provided as well as the 
types of fees and costs associated with such services, the relationship 
summary may reduce search costs for retail investors associated with 
acquiring this information, thus allowing them to more readily identify 
less expensive services that match their preferences and expectations 
for financial services. The relationship summary also could cause 
additional competition around conflicts of interest, resulting in some 
firms changing their practices to decrease conflicts. Proposed 
Regulation Best Interest also requires broker-dealers to disclose all 
material facts relating to the scope and terms of the relationship, and 
all material conflicts of interest associated with the 
recommendation.\638\ The Commission preliminarily believes that the 
relationship summary, which draws investor awareness to potential 
conflicts of interest at the outset of the relationship with a firm or 
financial professional, would address similar concerns related to the 
material facts associated with the scope and terms of the relationship 
as required by proposed Regulation Best Interest. Relative to the 
disclosures required by proposed Regulation Best Interest, the 
relationship summary conflicts of interest disclosures apply not only 
to broker-dealers and dually-registered firms, but also to investment 
advisers.
---------------------------------------------------------------------------

    \638\ Further, proposed Regulation Best Interest would establish 
policies and procedures to identify and at a minimum disclose or 
mitigate material conflicts of interest associated with such 
recommendations, as well as policies and procedures to identify, 
disclose and mitigate or eliminate material conflicts of interest 
arising from financial incentives associated with such 
recommendations.
---------------------------------------------------------------------------

    Increased competitiveness in the market for financial services 
could have ancillary effects as well, including reduced pricing power 
for firms and incentives for firms to innovate products and services. 
Reduced pricing power, as a result of increased competitiveness, could 
benefit retail investors through lower fees, effectively redistributing 
value from holders of financial firm equity to their retail 
investors.\639\ We note, however, that this effect could be mitigated 
by the possibility that people may still be willing to pay higher 
prices for other reasons, including firm reputation. Competition also 
provides incentives for firms to develop and innovate. Additional 
competition among financial services firms could provide incentives for 
broker-dealers and investment advisers to seek alternative ways to 
generate profits. In the process, firms could develop new and better 
ways of providing services to retail investors, for example, by 
utilizing recent developments in information technologies to deliver 
information to retail investors at lower cost. In this way, innovation 
could thus improve the satisfaction of retail investors and the 
profitability of firms in the financial services provider market.
---------------------------------------------------------------------------

    \639\ See Jean Tirole, The Theory Of Industrial Organization, 
M.I.T. Press (1989).
---------------------------------------------------------------------------

    Another potential positive effect of the relationship summary is 
that, by reporting whether a firm or financial professional has 
currently reportable legal or disciplinary events, the relationship 
summary could prompt retail investors to seek out disciplinary 
information on their current and prospective firms and financial 
professionals and take that information into account when considering 
whom to engage for financial services. In this respect, the proposed 
relationship summary may also enhance competition if, for example, 
firms and financial professionals with better disciplinary records 
outcompete those with worse records. We note, however, that reporting 
whether a firm or financial professional has currently reportable legal 
or disciplinary events may also bias firms toward hiring firms or 
financial professionals with fewer years of experience (i.e., fewer 
opportunities for customer complaints) and against hiring experienced 
financial professionals with some (minor) customer complaints. The 
expected economic impact of the above effect across small and large 
firms, however, is generally unclear. For investment advisers and 
broker-dealers, reportable disciplinary events are less common for 
smaller firms than for larger firms.\640\
---------------------------------------------------------------------------

    \640\ For example, while only 10% of registered investment 
advisers with less than $1 million of AUM disclose at least one 
disciplinary action as of January 1, 2018, 66% of registered 
investment advisers with more than $50 billion of AUM disclosed at 
least one disciplinary action that year. Form ADV. Similarly, while 
89% of broker-dealers with less than $1 million in total assets 
disclose at least one disciplinary action as of January 1, 2018, 
100% of broker-dealers with more than $50 billion total assets 
disclosed at least one disciplinary action that year. Form BD.

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[[Page 21496]]

    However, in the market for financial services between investment 
advisers and broker-dealers, disclosing the existence of currently 
reportable legal and disciplinary events in the relationship summary 
may confer a small competitive advantage for investment advisers 
because broker-dealers are more likely to have to report that they have 
a disciplinary history due to broader broker-dealer disclosure 
obligations.\641\ They are also more likely to report if they have more 
disciplinary issues. Reporting from Form BD with respect to broker-
dealer disclosures of disciplinary actions taken by any regulatory 
agency or SRO shows that 308 (84%) out of 366 dual-registered broker-
dealers disclosed a disciplinary action. By contrast, 1,650 (47%) out 
of 3,475 standalone broker-dealers have a disclosed disciplinary 
action. For investment advisers, Form ADV requires disclosures of any 
disciplinary actions taken in the past ten years. 289 (79%) out of 366 
dual-registered investment advisers disclosed a disciplinary action. A 
much lower fraction, 1,732 (14%) of 12,293, standalone investment 
advisers disclosed a disciplinary action.\642\ The fact that broker-
dealers have relatively more reportable legal and disciplinary events 
than investment advisers may cause retail investors to engage 
investment advisers rather than broker-dealers, thus creating a 
competitive advantage for some investment advisers.
---------------------------------------------------------------------------

    \641\ See supra notes 251, 253--255 and accompanying text.
    \642\ Source: Items 11C, 11D, and 11E of Form BD and Items 
11.C., 11.D. and 11.E. of Form ADV. Form BD asks if the SEC, CFTC, 
other federal, state, or foreign regulatory agency, or a self-
regulatory organization have ever found the applicant broker-dealer 
or control affiliate to have (1) made a false statement or omission, 
(2) been involved in a violation of its regulations or statues, (3) 
been a cause of an investment related business having its 
authorization to do business denied, suspended, revoked, or 
restricted, or (4) imposed a civil money penalty or cease and desist 
order against the applicant or control affiliate. Likewise, Form ADV 
asks similar questions of registered investment advisers and 
advisory affiliates.
---------------------------------------------------------------------------

    Although the proposed relationship summary applies to SEC-
registered broker-dealers and SEC-registered investment advisers, it 
could exhibit some spillover effects for other categories of firms not 
affected by the proposal such as investment advisers not registered 
with the SEC, bank trust departments, and others. In particular, the 
relationship summary could change the size of the broker-dealer and 
investment adviser markets--relative to each other, as well as relative 
to other markets. To the extent the relationship summary reduces retail 
investors' confusion and makes it easier for them to choose a 
relationship in line with their preferences and expectations, the 
Commission expects that this could attract new retail investors to 
these markets, coming from firms in other markets. Firms' current 
retail investors also may consider switching to a different type of 
firm if the relationship summary makes the different services provided 
and the fees and costs of investment advisory and brokerage services 
more prominent. The exact extent and direction of substitution between 
brokerage and advisory services is hard to predict and depends on the 
nature of the current mismatch between retail investor preferences and 
expectations and the type of services for which they have contracted.
    The proposed relationship summary may also benefit financial 
markets more broadly. Recent survey evidence suggests that 60% of all 
American households have sought advice from a financial 
professional.\643\ Despite their prevalence and importance, however, 
financial professionals are often perceived as dishonest and 
consistently rank among the least trustworthy professionals.\644\ This 
perception has been partly shaped by highly publicized scandals that 
have affected the industry over the past decade. Systematic mistrust 
may suppress household stock market participation below the optimal 
threshold predicted by academic investment theory, as documented in 
household survey based studies.\645\ The Commission preliminarily 
believes that the increased transparency of the existing business 
practices of financial professionals could raise the level of investor 
trust in the market. The enhanced trust could promote retail investor 
participation in capital markets which could increase the availability 
of funds for businesses. Depending on the magnitude of the effect, 
greater availability of funds could lower firms' cost of capital, 
allowing firms to accumulate more capital over time.
---------------------------------------------------------------------------

    \643\ See supra note 541. Survey of Consumer Finances, 2016. The 
percentage aggregates all respondents indicating that they use at 
least one of the following sources in making saving and investment 
decisions--brokers, financial planners, accountants, lawyers, or 
bankers. 26% of the respondents indicate that they have used brokers 
or financial planners.
    \644\ See Edelman Trust Barometer, 2015 Edleman Trust Barometer 
Executive Summary (2015), available at https://www.edelman.com/2015-edelman-trust-barometer/; Anna Prior, Brokers are Trusted Less than 
Uber Drivers, Survey Finds, Wall Street Journal (Jul. 28, 2015), 
available at https://www.wsj.com/articles/brokers-are-trusted-less-than-uber-drivers-survey-finds-1438081201; Luigi Zingales, Does 
Finance Benefit Society, Journal of Finance 70, 1327-1363 (Jan. 
2015).
    \645\ See, e.g., Luigi Guiso, Paola Sapienza & Luigi Zingales, 
Trusting in the Stock Market, The Journal of Finance, Vol. 63, No. 
6, 2557-2600 (2012); and J. Campbell, Household Finance, The Journal 
of Finance, Vol. 61, No. 4, 1553-1604 (2006) (``Campbell Article'').
---------------------------------------------------------------------------

    We note a possible negative effect on the trust of some retail 
investors due to the disclosure on the relationship summary that a firm 
or financial professional has currently reportable legal or 
disciplinary events. The decrease in the trust levels of some retail 
investors, however, could also benefit these investors by bringing 
their expectations and perceptions in line with their choice of a firm 
or financial professional.\646\
---------------------------------------------------------------------------

    \646\ See Jeremy Ko, Economics Note: Investor Confidence (Oct. 
2017), available at https://www.sec.gov/files/investor_confidence_noteOct2017.pdf.
---------------------------------------------------------------------------

    Another possible long-term effect of the relationship summary is 
that it could decrease the prevalence of third-party selling 
concessions in the market by requiring broker-dealers and dual 
registrants to include prescribed disclosure about indirect fees 
associated with investments that compensate the broker-dealer, 
including mutual fund loads. Currently, selling concessions constitute 
a significant part of the compensation of broker-dealers selling mutual 
fund products.\647\ For example, a mutual fund may provide a selling 
concession, in the form of a sales charge, some portion of which could 
be remitted to the broker-dealer that recommended the product.
---------------------------------------------------------------------------

    \647\ See supra Table 2, Section IV.A.1.a.
---------------------------------------------------------------------------

    Table 2, Panel A also indicates that selling concessions constitute 
a larger fraction of total revenue (commissions, fees, and sales of IC 
shares) for smaller broker-dealers--for example, selling concessions as 
a fraction of revenues represent around 20% for broker-dealers with 
total assets less than $1 million and less than 4% for broker-dealers 
with total assets in excess of $50 billion. To compensate for the 
potential loss of concession-based revenue, broker-dealers could try to 
switch customers to advisory accounts. As noted above, however, if the 
proposed disclosure also increases the competitiveness in the broker-
dealer and investment adviser markets the increased competitiveness 
would create some downward price pressure in the market.

[[Page 21497]]

4. Alternatives to the Proposed Relationship Summary
    This section highlights alternatives to the relationship summary 
concerning an amendment of existing Forms BD and ADV for broker-dealers 
and investment advisers, respectively; the form and format of the 
relationship summary; extensiveness of disclosure; delivery; and 
communicating information about the updated relationship summary.
a. Amendment to Existing Disclosures
    As proposed, the relationship summary would be a new, standalone 
disclosure produced by broker-dealers and investment advisers, in 
addition to the other required information disclosed by broker-dealers 
and investment advisers. As an alternative, the Commission could 
consider incorporating the relationship summary information into 
existing disclosures.
    For example, Part 2A of Form ADV currently has 18 mandatory 
reporting elements, produced as a narrative discussion, as part of the 
disclosure ``brochure'' provided to prospective retail investors 
initially and to existing retail investors annually. Instead of 
requiring investment advisers to produce a completely new disclosure as 
a separate Form CRS, the Commission could instead make an amendment to 
Part 2A of Form ADV to require a brief summary at the beginning of the 
brochure in addition to the existing narrative elements, or to change 
certain of the disclosure requirements to reduce or eliminate 
redundancy. Similarly, broker-dealers could be required to deliver 
longer narrative disclosure to their retail investors with specified 
elements. Such disclosure could also be required as part of Form BD or 
a standalone requirement.\648\ For example, the instructions to Form BD 
contain a section on the explanation of terms which could be extended 
to include basic (registrant-specific) information on the business 
practices of the registrant.
---------------------------------------------------------------------------

    \648\ We note, however, that Form BD is a registration/
application form (rather than an existing brochure-type disclosure 
form).
---------------------------------------------------------------------------

    Although modifying existing disclosure and reporting in these ways 
could provide the same information to retail investors as the proposed 
relationship summary, the Commission believes that these approaches 
would be less suited for the objective of this disclosure, which is to 
provide a short, simple overview. The proposed relationship summary 
would provide disclosure in a standardized, simplified manner, that 
would allow retail investors not only to compare information within a 
category (e.g., two investment advisers), but also across categories 
(e.g., investment advisers and broker-dealers). Further, the 
relationship summary would be designed to be easily comprehensible by 
retail investors, relying on short, easy-to-read disclosure that would 
provide an overview of information about the firm and its financial 
professionals to retail investors when choosing a firm and account 
type. We believe that the proposed relationship summary would benefit 
retail investors by highlighting succinct information that is relevant 
to a decision to select a firm, financial professional, or account type 
and services, at the time such decisions are made, and relying on 
layered disclosure to provide additional detail.
b. Form and Format of the Relationship Summary
    The Commission is proposing to require broker-dealers and 
investment advisers to create and deliver a short relationship summary 
to retail investors that would highlight specified information under 
prescribed headings in the same order to facilitate comparability. The 
relationship summary would be limited in length and would contain a mix 
of prescribed and firm-specific language. The proposal does not specify 
a single format for filing the disclosure.
    The Commission could require the relationship summary be filed with 
the Commission in a specified format, such as an text-searchable PDF 
file or in some other format, for example, an unstructured PDF or HTML, 
structured PDF, a web-fillable form, XML, XBRL or Inline XBRL. Further 
to this alternative, the Commission could require that the relationship 
summary information be filed in a structured format to facilitate 
validation, aggregation and comparison of disclosures, and the 
Commission could then make the data available on IARD and EDGAR. 
Structured format, such as XML, can enable the automatic generation of 
unstructured formats such as PDF, HTML, and others to meet the needs of 
those users who would prefer a paper-oriented layout.
    As an alternative to the largely prescribed language for the 
relationship summaries, the Commission could instead allow broker-
dealers and investment advisers to construct bespoke disclosure, while 
providing guidance to firms on the elements of the relationship 
disclosure that are required to be included. Although this disclosure 
would allow firms to tailor the discussion of the nature of the 
business, fees and costs, conflicts of interest, and disciplinary 
history specifically to their business model, this approach would 
likely be more costly to retail investors, as it would likely diminish 
the usefulness of a concise, simplified disclosure that is capable of 
being used by retail investors to understand firm types. Longer firm-
specific disclosures could also increase the search costs for retail 
investors which could ultimately result in worse choices by lowering 
investor ability and incentives to screen a large number of firms. 
Higher search costs for investors could also lower the competitiveness 
of the market by allowing some firms with lower-quality services to 
maintain customers and sustain market share, even if better choices are 
available to retail investors. As discussed above in Section III.B, 
simplification of disclosures, in terms of size, presentation, and 
readability, allows for ease of processing of information, while 
standardization of the content would facilitate identification of 
information most useful to a retail investor. Finally, lengthier 
bespoke disclosure would be also costlier for firms to produce. As 
another alternative, the Commission could have required the 
relationship summaries to include only prescribed wording. However, the 
Commission believes that a mix of prescribed and firm-drafted language 
provides both information that is useful for retail investors in 
comparing different firms along with some flexibility for firms to 
determine how best to communicate the information about their 
particular practices to retail investors.
c. Extensiveness of Disclosure
    As currently proposed, the relationship summary would include high-
level information on (i) introduction; (ii) the relationships and 
services provided in the firm's advisory accounts and brokerage 
accounts; (iii) the standard of conduct applicable to those services; 
(iv) the fees and costs that retail investors will pay, (v) comparison 
to other account types; (vi) specified conflicts of interest; (vii) 
where to find additional information, including whether the firm and 
its financial professionals currently have reportable legal or 
disciplinary events and who to contact about complaints; and (viii) key 
questions for retail investors to ask the firm's financial 
professional. As an alternative, the Commission could require the 
inclusion of additional topics or additional disclosures on one or more 
topics proposed to be covered by the relationship summary. These 
disclosures could be required as part of the relationship summary or as 
separate appendices.

[[Page 21498]]

    With respect to the additional topics to be disclosed, the 
Commission could request that firms disclose additional information on 
their performance, investment style, or other business practices. 
Retail investors, however, may become overwhelmed if presented with a 
number of very lengthy disclosures, which therefore could bury the 
information that is most useful to investors and reduce the 
effectiveness of those disclosures.\649\ With respect to the specific 
topics of additional information, evaluating the performance, 
investment style and business practices of a firm or financial could be 
subjective or speculative, and may be more suited for marketing 
materials rather than prescribed language in the relationship 
summary.\650\ For all these reasons, we believe that these additional 
disclosure topics are not appropriate for inclusion in the relationship 
summary.
---------------------------------------------------------------------------

    \649\ See also supra note 50 and accompanying text (discussing 
comment letters to the 917 Financial Literacy Study regarding the 
length of disclosure documents).
    \650\ In terms of performance, studies have shown that investors 
take into account information about historic fund performance in 
their investment choice; see, e.g., Choi Laibson Article, supra note 
567.
---------------------------------------------------------------------------

    Regarding alternatives to the disclosure of fees and costs as 
proposed here, the relationship summary could require additional 
disclosures on one or more of these topics. For example, the 
relationship summary could include the firm's fee schedule, either as 
part of the body of the relationship summary or as an attachment. 
Alternatively, we could require each relationship summary to include a 
personalized fee schedule,\651\ to be created for each retail investor, 
detailing the specific fees and costs associated with the retail 
investor's account, presented both in dollars and as a percentage of 
the value of the retail investor's account. These fee schedules could 
also include compensation received by the firm and its financial 
professionals related to the account, and the indirect fees that are 
payable by the retail investor to others (e.g., mutual fund and 
exchange-traded fund fees and expenses). However, ex ante identifying 
possible fee schedules for investors at the outset of a relationship as 
opposed to at the time of the transaction could impose costs to both 
investors and firms. For example, firms might need to outline a long 
list of possible transactions and the associated fee schedules, which 
in turn could be confusing to investors.
---------------------------------------------------------------------------

    \651\ One requirement of proposed Regulation Best Interest would 
be to provide to investors at the time of or prior to a 
recommendation the expected fees and costs, and possibly a fee 
schedule, associated with the individual transaction.
---------------------------------------------------------------------------

    We could also require more comprehensive disclosures regarding 
conflicts of interest and disciplinary history, including requiring 
firms to summarize more or all of their conflicts of interest.\652\ For 
example, firms could disclose potential conflicts of interest 
associated with execution services, such as those required to be 
reported in rule 606 disclosures.\653\
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    \652\ See supra Section II.B.6 for a discussion of conflicts, or 
specific details of conflicts, that would not be required to be 
disclosed in the proposed Form CRS.
    \653\ See 17 CFR 242.606 (requiring that broker-dealers make 
publicly available a quarterly report on order routing information, 
including a discussion of the material aspects of their relationship 
with venues executing non-directed orders, including arrangements 
for payment for order flow and any profit-sharing arrangement).
---------------------------------------------------------------------------

    We could also require additional details about a firms' and its 
financial professionals' disciplinary history. Instead of requiring 
firms to disclose whether or not they have currently reportable legal 
or disciplinary history, as proposed, we could require firms to 
disclose the number of disciplinary events, expressed as a number or as 
a percentage of the size of the firm or the number of firm 
professionals. We could further differentiate the disclosures by 
requiring firms to disclose the existence and numbers of disciplinary 
histories within categories of disciplinary history.
    More detailed disclosures about fees, compensation, conflicts and 
disciplinary history could help retail investors understand better the 
differences between types of accounts, and could facilitate the 
decision about the most appropriate account for each retail investor. 
As noted above, current disclosures on these topics cover only subsets 
of firms and relationships and could take different forms. For example, 
firms wishing to make investment recommendations to IRAs and 
participants of ERISA-covered plans may be subject to certain 
disclosure obligations.\654\ This disclosure, however, does not apply 
to non-retirement accounts. Investment advisers also prepare a Form ADV 
Part 2A narrative brochure but such a retail disclosure document is not 
currently required for broker-dealers. As a result, the Commission 
preliminary believes that retail investors could benefit from the 
proposed relationship summary given its wide coverage, delivery method, 
and design.
---------------------------------------------------------------------------

    \654\ See supra Section IV.A.1.c (discussing disclosure 
obligations under DOL rules and exemptions).
---------------------------------------------------------------------------

    In particular, the disclosures about types of fees and costs 
included in the relationship summary could help retail investors 
understand better the types of fees that they will pay and how those 
types of fees and costs affect their accounts. As discussed in the 
baseline, the 917 Financial Literacy Study highlighted that 
transparency and disclosure about fees charged by financial 
intermediaries was one of the most essential elements that investors 
would consider in making their decision about which financial 
professional to choose.\655\
---------------------------------------------------------------------------

    \655\ See supra note 20.
---------------------------------------------------------------------------

    Similarly, the information provided about conflicts of interest in 
the relationship summary could help retail investors understand how 
such conflicts that might be pertinent to their account. The disclosure 
about whether the firm or financial professional has currently 
reportable legal or disciplinary events could encourage retail 
investors to research the extensiveness and nature of the disciplinary 
history of a firm, therefore allowing retail investors to further 
evaluate firms based on the types of disciplinary events.
    Although additional disclosures on account types, fees and 
compensation (including a fee/compensation schedule), conflicts of 
interest and disciplinary history could enhance retail investors' 
understanding of the accounts that are available to them, there are a 
number of additional costs associated with these alternatives. As noted 
earlier in the release, extensive empirical evidence suggests that as 
documents get lengthier and more complex, readers either stop reading 
or read less carefully.\656\ Retail investors, therefore, may become 
overwhelmed if presented with lengthy disclosure, which could bury the 
information that is most important to investors and reduce the 
effectiveness of those disclosures.\657\ Further, the compliance and 
production costs of additional disclosure would increase significantly 
the overall compliance costs to broker-dealers and registered 
investment advisers.
---------------------------------------------------------------------------

    \656\ See, e.g., 917 Financial Literacy Study, supra note 20.
    \657\ See also supra note 50 and accompanying text (discussing 
comment letters to the 917 Financial Literacy Study regarding the 
length of disclosure documents).
---------------------------------------------------------------------------

    As another alternative, the Commission could require a shorter 
relationship summary, limited to one page (or equivalent limit for 
electronic format) that would highlight important topics for retail 
investors and/or including only key questions for retail investors to 
ask. This alternative relationship summary would be highly readable, 
with prescribed formatting,

[[Page 21499]]

and could highlight the differences between brokerage and advisory 
services and fees, and flag for retail investors the existence of 
firms' and financial professionals' conflicts of interest without 
discussing any specific conflicts. However, the one-page relationship 
summary would be the same or very similar across firms, and therefore 
likely would not facilitate detailed comparison across firms or provide 
enough information to highlight the differences for most retail 
investors.
    We alternatively could require firms to create separate 
relationship summaries for each account type they offer to retail 
investors, and require firms to provide a retail investor only the 
relationship summary for the service being offered.\658\ This would 
result in more detailed disclosures on specific account types, and 
would potentially provide retail investors with more relevant 
information about account types that they are interested in reviewing 
(and less extraneous information about account types that they are not 
interested in reviewing). However, providing such focused relationship 
summaries could decrease comparability across account types, as the 
relationship summary would not present, in one place, the differences 
in accounts and services offered.\659\ In addition, this would result 
in more costs to firms with multiple advisory and brokerage services, 
as they would be required to prepare several relationship summaries, 
although they may also have the resources to do this. The Commission 
preliminarily believes that, as a tool for layered disclosure, the 
relationship summary as proposed facilitates retail investors' ability 
to obtain more detailed disclosures on account types by encouraging 
retail investors to ask questions and request more information.
---------------------------------------------------------------------------

    \658\ See Comment letter of Fidelity responding to FINRA's 
Regulatory Notice 10-54 (Dec. 27, 2010), available at https://www.finra.org/sites/default/files/NoticeComment/p122723.pdf.
    \659\ We note that firms with multiple account types within 
brokerage or advisory would not have the flexibility to describe/
distinguish the different account types (e.g., a brokerage firm that 
offers a range of accounts--from completely self-directed to mutual-
fund only to full-service).
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d. Delivery
    As currently proposed, firms would be required to deliver the 
relationship summary before or at the time an investment adviser enters 
into an advisory agreement with a retail investor, or, for broker-
dealers, before or at the time the retail investor first engages the 
firm's services. Dual registrants would be required to deliver the 
relationship summary at the earlier of entering into an investment 
advisory agreement with a retail investor or the retail investor 
engaging the firm's services. As with other disclosure, a firm would be 
permitted to deliver the relationship summary (including updates) 
electronically, consistent with the Commission's guidance regarding 
electronic delivery. In addition, firms would be required to implement 
a one-time delivery of the relationship summary to existing retail 
investors as a transition requirement. We are also proposing a 
requirement for firms to post their relationship summaries on their 
websites in a way that is easy for retail investors to find, if they 
maintain a public website. Firms that do not maintain a website would 
be required to include in their relationship summaries a toll-free 
number for investors to call to obtain documents.
    In addition, a firm would be required to provide a relationship 
summary to an existing client or customer who is a retail investor 
before or at the time a new account is opened or changes are made to 
the retail investor's account(s) that would materially change the 
nature and scope of the firm's relationship with the retail investor, 
as described in more detail in Section III.C.2 above. A firm would also 
be required to deliver the relationship summary to a retail investor 
within 30 days upon request. Furthermore, firms would be required to 
file current relationship summaries with the Commission, which would be 
made publicly available, and would be required to post a current 
version of their relationship summary on their website, if they 
maintain one.
    As an alternative regarding delivery, the Commission could require 
that the relationship summary would only be available through 
electronic delivery, such as an email attachment, an email with the 
full text of the relationship summary in the body of the text, or an 
email with a hyperlink to the firm's website. Although alternatives 
relying exclusively on electronic delivery could reduce costs 
associated with the production of those disclosures, the proposed 
approach would give the potential benefits of providing information to 
retail investors in a timely fashion in order to help retail investors 
select a financial professional or firm, while recognizing the 
proliferation of the various means of communications, electronic or 
otherwise, available to firms and retail investors. Our approach also 
recognizes that some retail investors may not have Internet access or 
may prefer delivery in paper.
    The Commission could have also eliminated the requirement for firms 
to post the relationship summary on their websites and file the 
disclosure with the Commission. However, we believe that the relatively 
minimal cost to firms for posting and filing is outweighed by the 
benefit of providing easily accessible information to retail investors 
to assist them in deciding among firms and financial professionals.
    Another possibility would have been also not to require a one-time 
delivery of the relationship summary to existing retail investors. The 
Commission believes that since the information in the relationship 
summary is potentially valuable to new investors it would be also 
potentially valuable for the existing customers of broker-dealers and 
investment advisers. While existing retail investors would face higher 
costs to change from an existing financial services provider to a new 
one than new potential investors would, most existing investors would 
be still able to reevaluate their relationships with their current firm 
and investment professionals. Furthermore, there is an inherent cost to 
retail investors when the services they receive do not meet their 
expectations. To the extent delivery of the relationship summary to 
existing retail investors fosters greater understanding and decreases 
the mismatch, this could mitigate any costs of changing financial 
service providers. Distributing the relationship summary to a larger 
group of initial investors further increases the group of individuals 
that could become familiar with the disclosure indirectly through 
interactions with family and friends.
    As another alternative, the Commission could have proposed only a 
delivery requirement for the relationship summary, like Form ADV Part 
2B, instead of also requiring that firms file it with the Commission. 
As discussed also in Section III.A above, although not requiring the 
summaries to be filed with the Commission could reduce the costs to 
firms for preparing the document to be filed, the Commission believes 
that public access to relationship summaries benefits prospective 
retail investors by allowing them to compare firms when deciding 
whether to engage a particular firm or financial professional or open 
an advisory or brokerage account, particularly if the summaries can be 
located on a single point of access. Further, filing the relationship 
summary with the Commission provides public access regardless of 
whether a particular firm has a website with which to provide public 
access to the disclosure.

[[Page 21500]]

e. Communicating Updated Information
    As currently proposed, firms would need to update their 
relationship summary within 30 days whenever any information in the 
relationship summary becomes materially inaccurate. Our proposal would 
also require firms to communicate the information in the amended 
relationship summary to retail investors who are existing clients or 
customers of the firm within 30 days after the updates are required to 
be made and without charge. The communication can be made by delivering 
the relationship summary or by communicating the information in another 
way to the retail investor.\660\ Each firm would also be required to 
post the updated relationship summary prominently on its website (if it 
has one) and electronically file the current version of the summary 
with the Commission.
---------------------------------------------------------------------------

    \660\ See supra Section II.C.3.
---------------------------------------------------------------------------

    Alternatively, the Commission could require that the relationship 
summary also be updated and delivered annually, which would be similar 
to the current requirements for investment advisers to provide an 
updated ``brochure'' derived from Part 2A of Form ADV to their existing 
retail investors both annually and upon any changes to the Item 9 of 
Part 2A (disciplinary information). The Commission preliminarily 
believes that the benefits of preparing and delivering an annual 
relationship summary, regardless of the format of that delivery, would 
not outweigh the costs to produce and distribute. As noted earlier, the 
Commission anticipates that the terms of the business relationship 
between most firms and their retail investors would be relatively 
stable over time, except when a new account is opened or a significant 
amount of assets is moved from one type of account to another that is 
different from the retail investor's existing accounts, or other 
changes are made that result in a material change to the nature and 
scope of the firm's relationship with the retail investor. As a result, 
every new delivery would bring relatively small amount of information 
to retail investors.
    We believe that mere public posting of the updated summary would 
not itself adequately inform retail investors about material changes to 
the relationship summary, and that firms providing communication of 
information about relationship summary updates to investors as 
described above is therefore necessary.
    Finally, instead of proposing that firms may choose to communicate 
information about updated relationship summaries to existing retail 
investors instead of delivering an updated relationship summary, the 
Commission could have proposed that firms must deliver the updated 
relationship summary to each existing retail investor regardless of 
whether or not it communicated the information to retail investors in 
another way. While delivering the summary would provide retail 
investors with the full scope of changes being made to the summary in 
the context of existing information, the Commission preliminarily 
believes that allowing firms to communicate information about the 
updates as well as making the current version of the summary publicly 
available, via a firm's website (if the firm has a website) and on the 
Commission's website, provides flexibility for firms to utilize 
existing communication methods and reduces the costs of delivery on 
firms while providing adequate notice to retail investors about the 
updates to the relationship summary, as well as access to the updated 
summaries.
5. Request for Comments
    The Commission requests comment on all aspects of the economic 
analysis, including the analysis of: (i) Potential benefits and costs 
and other economic effects; (ii) long-term effects of the proposed 
relationship summary on efficiency, competition, and capital formation; 
and (iii) reasonable alternatives to the proposed regulations. We also 
request comments identifying sources of data and that could assist us 
in analyzing the economic consequences of the proposed regulations.
    In addition to our general request for comment on the economic 
analysis, we request specific comment on certain aspects of the 
proposal:
     Do commenters agree with the overall assessment that the 
relationship summary would benefit retail investors and assist them in 
making a choice of what type of account matches their preferences? Do 
commenters believe there are alternatives to the structure and content 
of the relationship summary that we have not considered that could make 
it more beneficial to retail investors? Are there any unintended costs 
of the relationship summary for retail investors that we have not 
considered?
     Do commenters believe that the proposed disclosures about 
relationships and services and fees are clear and effective enough? How 
would you recommend altering the presentation of these disclosures in 
order to increase their effectiveness?
     Do commenters agree the proposed disclosure of the 
categories of conflicts of interest would be beneficial to retail 
investors? How would you recommend altering the presentation of the 
conflicts of interest information so that costs are minimized?
     What additional costs and benefits do you envision with 
extending the disclosure of disciplinary history?
     Are there alternative key questions we should consider 
recommending that retail investors ask their financial professional? 
Are there questions we should exclude, and, if so, why? Do commenters 
agree with the concern that there could be potential costs associated 
with the list of proposed questions, such as anchoring the attention of 
retail investors to the list and thereby reducing the likelihood that 
they would explore other potential questions that could be important to 
them?
     What costs do commenters anticipate that firms and 
financial professionals will incur in implementing and complying with 
the proposed Form CRS, both initial and ongoing? Please provide 
estimates of the time and cost burdens for preparing, delivering and 
filing the proposed form. What costs do commenters expect firms and 
financial professionals will incur to prepare answers to the ``Key 
Questions to Ask'' in the proposed Form CRS? Please provide estimates 
of the time and cost burden for preparing to answer the questions.
     How do commenters anticipate that the benefits and costs 
of the proposed rule will be shared between broker-dealers and their 
clients; or between investment advisers and their clients?
     Do commenters anticipate that the benefits and costs of 
the proposed rule would be different across broker-dealers and 
investment advisers? What about dually-registered firms?
     Are retail investors likely to access and download 
relationship summaries of broker-dealers through EDGAR and investment 
advisers through IAPD?
     Are there other reasonable alternatives that the 
Commission should consider? If so, please provide additional 
alternatives and how their costs and benefits would compare to the 
proposal.

C. Restrictions on the Use of Certain Names and Titles and Required 
Disclosures

    As discussed above, several studies suggest that retail investors 
may lack financial literacy and are confused about the differences 
between broker-

[[Page 21501]]

dealers and investment advisers.\661\ Part of this confusion may be 
related to the current use of professional names and titles as 
indicated by these studies and commenters.\662\ This proposal would 
seek to reduce investor confusion related to the use of certain terms 
in firm names and professional titles and prevent retail investors from 
potentially being misled that their firm or financial professional is 
an investment adviser, resulting in investor harm. In particular, our 
proposed rule seeks to restrict a broker or dealer, and any natural 
person who is an associated person of such broker or dealer, when 
communicating with a retail investor, from using as part of its name or 
title the words ``adviser'' or ``advisor'' unless such broker or dealer 
is registered as an investment adviser under the Advisers Act or with a 
state, or such natural person who is an associated person of a broker 
or dealer is a supervised person of an investment adviser registered 
under section 203 of the Advisers Act or with a state, and such person 
provides investment advice on behalf of such investment adviser.\663\ 
In addition to the restriction on the use of certain names and titles, 
we are proposing rules that require both broker-dealers and investment 
advisers to prominently disclose their registration status with the 
Commission and for their financial professionals to disclose their 
association with such firm in all print and electronic retail investor 
communications. Dual registrants would be required to disclose both 
registration statuses.
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    \661\ See Siegel & Gale Study, supra note 549 and RAND Study, 
supra note 5. Although these studies do not limit the types of 
financial professionals exclusively to broker-dealers or investment 
advisers, the majority of the survey questions focus on differences 
between advisory services versus brokerage services.
    \662\ Id. See supra note 4.
    \663\ See section 202(a)(25) of the Advisers Act [15 U.S.C. 80b-
2(a)(25)] defining ``supervised person'' as any partner, officer, 
director (or other person occupying a similar status or performing 
similar functions), or employee of an investment adviser, or other 
person who provides investment advice on behalf of the investment 
adviser and is subject to the supervision and control of the 
investment adviser.
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    This section provides an analysis of the economic effects of the 
proposed rules relative to the baseline, including a discussion of the 
benefits and costs to the affected parties and the impact on 
efficiency, competition and capital formation. We also discuss 
reasonable alternatives to the proposed rules.
1. Broad Economic Considerations
    The economic tradeoffs involved in the choice of names and titles 
by firms and financial professionals are complex and affected by a wide 
range of factors. In this section, we discuss under what conditions 
firm names and financial professionals' titles may convey information 
that is important to retail investors when they are searching for a 
provider of financial advice, as well as factors that are likely to 
matter for firms and financial professionals when choosing their names 
and titles. We also discuss some conditions where investor confusion 
over the information conveyed by the names and titles chosen by firms 
and financial professionals may lead to investor harm.
    We believe that investors fall into a spectrum of knowledge about 
the providers in the market for financial advice. On one end of the 
spectrum, there are investors who may understand and correctly 
distinguish the types of services and standard of conduct provided by 
different types of firms and financial professionals. If firms and 
financial professionals use names that accurately describe their 
regulatory type, these types of investors would understand and expect 
that ``broker-dealers,'' or close synonyms thereof, would provide the 
services of, and be subjected to the standard of conduct applicable to, 
a broker-dealer, while ``investment advisers,'' or similar names and 
titles, would provide the services of, and be subject to the standard 
of conduct applicable to, an investment adviser. On the other end of 
the spectrum there are less knowledgeable investors who do not 
understand that there are different types of services that can be 
provided by firms or financial professionals, or differing applicable 
standards of conduct. These investors may not be able to discern from 
the name or title what type of service will be provided by a firm or 
financial professional. As a result, these investors may bear costs 
associated with their confusion, such as increased time and effort 
(``search costs'') to identify the right type of financial 
professional,\664\ or harm associated with inadvertently selecting, or 
potentially being misled to select, a type of firm and financial 
professional that is not consistent with their preferences and 
expectations. The harm from a mismatched relationship could be, for 
example, a higher-than-expected cost of services or reduced protection 
for the investor.
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    \664\ According to the 2009 National Survey Initial Report (see 
supra note 275), of the 816 survey respondents that used a financial 
professional in the last five years, 56% indicated that when looking 
for a financial professional, they met or talked with more than one 
professional before making their choice.
---------------------------------------------------------------------------

    In addition to confusion over firm names and professional titles, 
and what they may represent, some investors may also have confusion 
over the type of brokerage, advisory and other services and standard of 
conduct that best match their preferences. Retail investors, therefore, 
can also be categorized based on whether they know the type of advice 
relationship (and associated payment model) that they would prefer, 
regardless of whether they understand the names and titles of firms and 
professionals. For instance, some investors may know that they prefer 
to receive and pay for advice on a per transaction basis, such as that 
provided typically by a broker-dealer, while others know they prefer an 
ongoing advisory relationship with an asset-based fee model, such as 
that typically provided by an investment adviser. On the other hand, 
some other investors may only understand that they are seeking 
financial advice but do not understand that there are different types 
of advice relationships, and different ways to pay for advice, and may 
not correctly identify the type of advice relationship that would be 
most consistent with their preferences. This dimension of investor 
confusion could also lead to investor harm such as increased search 
costs, an overall mismatch in the type of advice relationship, or 
paying more than expected for services received.
    In principle, firm names and professional titles used by financial 
intermediaries, to the extent that names and titles accurately reflect 
the financial services provided, may serve as a search tool for some 
investors when they initially select which financial professionals to 
approach. In particular, for investors that both understand and 
correctly interpret company or professional names and titles and also 
know the type of investment advice relationship that they prefer, names 
and titles of firms and financial professionals that are mainly 
associated with one type of financial services could be used as an 
initial sorting mechanism that may reduce search costs. For example, to 
the extent names and titles accurately reflect the type of firms and 
financial professionals, knowledgeable investors that prefer only 
brokerage services could lower their search costs by using names and 
titles to increase the likelihood they would contact broker-dealers 
rather than investment advisers in their search. Similarly, 
knowledgeable investors looking to hire an investment adviser would 
more easily be able to contact investment advisers and avoid contacting 
broker-dealers simply by observing the firm or professional names and 
titles. We also note that investors who understand the

[[Page 21502]]

differences between broker-dealers and investment advisers generally 
are unlikely to face a mismatch in the selection of a financial 
professional, and that the names and titles, in this case primarily 
serve to reduce search costs.
    Less knowledgeable investors may face confusion over either the 
information conveyed by firm or professional names and titles or the 
preferred scope of their advice relationship. To the extent that names 
or titles used by financial intermediaries accurately reflect services 
provided, any reduction in search costs or reduction of the risk of 
investors matching with the wrong type of firm and financial 
professional will depend on the nature of the investor confusion, as we 
discuss in more detail below.
    When selecting firm or professional names and titles, financial 
services providers may account for the level of investor understanding 
(or confusion). For example, they may be aware that some investors are 
informed by the use of particular names and titles, and the 
implications for the services provided and applicable standard of 
conduct, while other investors may face confusion over the use of 
particular names and titles or the type of advice relationship they 
seek. The incentives of financial intermediaries are two-fold: (1) They 
seek to build their client/customer base; and (2) they desire to reduce 
the costs associated with building that client/customer base, such as 
the time, effort, and marketing costs incurred in the initial client 
acquisition process. Therefore, financial intermediaries would 
rationally choose titles that effectively attract the attention of 
potential investors, while reducing the likelihood of ``false starts'' 
with investors that are not the right match (and understand what type 
of advice that they seek). For example, if investors that fully 
understand the differences between different types of financial 
intermediaries are a significant majority of the potential investor 
pool, then profit maximizing financial intermediaries would likely 
choose names and titles that clearly identify the nature of services 
provided and applicable standard of conduct. These knowledgeable 
investors will then be able to identify from that choice of name or 
title whether the firm or financial professional will meet their 
preferred type of investment advice relationship, and therefore, the 
unambiguous choice of title by the financial professional both reduces 
search costs incurred by these investors and reduces the effort 
expended by the financial professionals to build their customer base.
    Continuing the same example, the remainder of the investor pool 
would then consist of less knowledgeable investors, which would 
represent a small portion of the aggregate investor pool. These 
investors, in particular those who are confused about the differences 
among firms and financial professionals and what type of investment 
advice relationship they should seek, may be unlikely to understand 
from names or titles alone how well the financial intermediary would 
match their preferences, and therefore, will bear search costs and the 
possibility of mismatch even when names and titles provide little 
ambiguity for informed investors. However, we expect that when the 
hypothetical investor pool predominantly consists of investors who 
fully understand the differences between different financial 
intermediaries, as we assumed for this example, overall costs borne by 
both investors (e.g., search costs) and financial intermediaries (e.g., 
customer acquisition costs) are minimized by the use of distinct names 
and titles clearly identifying financial intermediary type.
    As the hypothetical pool of less knowledgeable investors that face 
confusion over company names, titles, or services increases, the choice 
of names and professional titles by financial intermediaries become 
more complex to analyze and depends on a number of factors related to 
investors. These factors include, among others: (i) Whether and how 
much these investors infer information from titles about the type of 
advisory or other services provided; (ii) the source of investors' 
confusion, such as (a) a lack of understanding about the type of 
service they would prefer, (b) an inability (in the absence of 
additional information) to understand the differences in the services 
offered and their associated payment models, or (c) a lack of knowledge 
about professional titles and information provided therein; (iii) how 
easily investors can learn, upon meeting with a financial professional, 
about whether the type of advice or other services provided by the 
financial professional meets their preferences; (iv) whether investors 
could be persuaded to choose a type of advisory service that is not 
consistent with the investor's preferences after meeting with a 
financial professional; (v) investors willingness or ability to keep 
searching for a financial professional until they find one that best 
matches their preferences; and (vi) the distribution in the investor 
pool of investors with different levels of knowledge and understanding 
as described above.
    When less knowledgeable investors are confused not only about what 
services broker-dealers and investment advisers provide, but also are 
confused about the types of services that they would prefer, the 
factors noted above may lead firms and financial professionals of 
either type to rationally choose generic or common terms in names and 
titles. Consider the example where retail investors know they would 
benefit from financial advice in a general sense, but are confused 
about which type of investment advice relationship and associated 
payment model would be best for them.\665\ A portion of these investors 
are also persuadable, to some degree, to contract for whatever service 
is offered to them by any given financial professional they contact, 
regardless of whether that type of service matches the investors' 
preferences.
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    \665\ The assumptions underlying this hypothetical example are 
meant to be illustrative of the incentives of firms and financial 
professionals to pick certain names and titles when their pool of 
potential customers is relatively uninformed. Should the 
relationship summary disclosure be provided to potential and 
existing customers, we believe that some of the confusion regarding 
the nature of services would be addressed/mitigated; however, some 
investors may still, even in the event that the relationship summary 
is provided be confused about what type of firm or financial 
professional or which particular service is best for their investing 
situation.
---------------------------------------------------------------------------

    In this case, and in order to maximize the number of investors that 
a firm or financial professional may be able to contract with, both 
broker-dealers and investment advisers facing these less knowledgeable 
investors would have incentives to pick names and titles that are the 
most effective at getting these investors to approach them, to the 
extent that names or titles alone have any impact on the choices made 
by these investors.\666\ Once these investors make contact, a firm and 
financial professional hypothetically may be able to persuade the 
investor to hire them regardless of the type of financial advice 
relationship offered, to the extent that the investor cannot 
distinguish the characteristics of different types of advice 
relationships that best fit their preferences, does not know the most

[[Page 21503]]

cost effective way to pay for that relationship, and cannot easily 
distinguish between the types of relationships that are offered by 
different firms and their financial professionals. In order to attract 
this type of investors, firms may favor titles that indicate their 
financial professionals' ability to dispense guidance and advice. For 
example, they may select titles that include the word ``adviser'' or 
``advisor,'' such as ``financial advisor''.\667\
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    \666\ Although a number of studies discussed in the baseline 
provide survey evidence that investors are confused about titles, we 
are unaware of any direct evidence that titles alone affect the 
choice of firms or financial professionals that are contacted or 
eventually hired. However, in conjunction with the proposed 
relationship summary, we expect that investors would gain better 
understanding of the services provided by, and standards of conduct 
applicable to, broker-dealers and investment advisers, which could 
lead to more informed decision making about choosing the type of 
financial intermediary that best matches to the investors' own 
expectations regarding services and standard of conduct.
    \667\ Alternatively, these firms may choose relatively generic 
names or titles that in other ways suggest an advisory service, such 
as ``financial planner'' or ``financial consultant,'' which are not 
subject to the present rulemaking proposal.
---------------------------------------------------------------------------

    In addition to potential search costs expended by less 
knowledgeable investors, these investors also bear a greater risk of 
mismatch between the type of advice relationship that best fits their 
preference and the actual advisory service for which they contract. 
However, in this example, the mismatch arises because of investor 
confusion over the type of relationship that best would meet their 
preference, and this confusion itself may lead the investor to, by 
chance, seek out a type of firm or financial professional that is 
inconsistent with the investor's preference, rather than any confusion 
directly related to the firm's or financial professional's use of a 
common name or title. Conversely, generic names and titles may make it 
easier for less knowledgeable investors to identify a broader class of 
firms or financial professionals that can meet their perceived need for 
financial advice to some extent.\668\ In situations where the pool of 
less knowledgeable investors is likely to be large, one likely outcome 
is that many firms and financial professionals could end up using 
similar names or titles, which would potentially increase search costs 
for those more knowledgeable investors who otherwise may use names and 
titles as an initial sorting mechanism.
---------------------------------------------------------------------------

    \668\ To the extent generic titles in use today such as 
``financial planner'' and ``financial consultant'' make it more 
likely less knowledgeable investors can identify both investment 
advisers and broker-dealers that offer advice, there may be benefits 
to some of these investors if they in their contacts with financial 
professionals of both types learn about which relationship and 
payment models is most consistent with their preferences.
---------------------------------------------------------------------------

    Other particular kinds of investor confusion, which could impose 
costs on some investors, may provide benefits, such as increased 
customer flow, to only a certain type of firm or financial 
professional. For example, some investors may be fully aware of the 
type of advice relationship that they prefer, but are confused about 
which firm or professional names and titles are associated with that 
type of advice relationship. In particular, consider a situation where 
investors know that they would like an advice relationship that is 
provided by investment advisers. In this case, some broker-dealers may 
have incentives to use titles such as ``advisor'' that suggest such an 
advice relationship to maximize their customer flow. As a result, some 
less knowledgeable investors may be misled to wrongly approach broker-
dealers rather than investment advisers in their search for advice, and 
bear both potentially higher search costs and an increased likelihood 
of a mismatch between the type of advice that is received and the type 
of advice that is preferred. The risk of a mismatch and associated harm 
in this case would be especially large for any of these investors that 
primarily base their choice of firm and financial professional on names 
and titles, rather than any information they would receive from a firm 
or financial professional about the type of services or applicable 
standards of conduct.
    In addition to the factors related to investors discussed above, 
the selection of names and titles by financial intermediaries also 
depend on other factors specific to the intermediary. For example, 
competitive concerns may cause some financial intermediaries to simply 
choose terms in names and titles that are commonly used by other 
financial intermediaries of their type. Alternatively, firms may choose 
names and titles that distinguish them from their competitors. Some 
firms or financial professionals may choose ambiguous generic titles, 
such as ``financial consultant,'' in order to capture a larger fraction 
of the investor pool, thinking that investors may seek information if 
the title does not clearly identify the kinds or levels of services 
provided or the applicable standard of conduct. We acknowledge that 
these factors could also be important determinants of the choice of 
names and titles.
2. Economic Effects of the Proposed Restrictions on the Use of Certain 
Titles and Required Disclosures
    In this section we discuss the potential economic effects from the 
proposed rules to the directly affected parties: Investors, standalone 
broker-dealers, standalone investment advisers, dually registered 
firms, and financial professionals. Potential economic effects on 
indirectly-affected parties, in particular financial intermediaries not 
regulated by the Commission, are discussed in the next section.
a. Investors
    The objective of the proposed rules is to reduce retail investor 
confusion and limit the ability for retail investors to be misled that 
a firm or financial professional is an investment adviser as a result 
of the use of firm and financial professional names and titles that 
contain either ``adviser'' or ``advisor''. Specifically, our proposed 
rule seeks to enable retail investors to be able to discern more fully 
whether a particular firm or financial professional will offer advisory 
or other services provided by investment advisers versus those provided 
by broker-dealers. In this section, we discuss the potential benefits 
to investors as a result of the proposed rules, while considering the 
potential costs that could be borne by investors. In general, we expect 
the benefits and costs are unlikely to be evenly distributed among 
investors, but will rather depend on both the differences in investors' 
preferences for broker-dealer or investment adviser services, and 
investors' individual degree of understanding what services any given 
firm or financial professional is providing and the standard of conduct 
that is applicable.
i. Benefits of Restrictions on the Use of Certain Names or Titles
    The proposed restriction on the use of the terms ``adviser'' and 
``advisor'' in names and titles of broker-dealers who are not also 
dually registered as investment advisers and of financial professionals 
who are not supervised persons of investment advisers and who provide 
advice on behalf of such advisers, may reduce investor confusion about 
what type of firm or financial professional is likely to match with 
their preferences for a particular type of investment advice 
relationship. The proposed rule may also reduce corresponding search 
costs for some investors under certain conditions. Moreover, the 
proposed rule may reduce the likelihood that a mismatch between an 
investor's preferences and the services offered by a firm or financial 
professional occur.\669\ Specifically, to the extent investors looking 
for an advice relationship of the type provided by investment advisers, 
and believe that

[[Page 21504]]

names or titles containing the terms ``adviser'' or ``advisor'' are 
associated with this type of advice relationship, the proposed rule 
would make it easier to identify firms and financial professionals that 
offer such advice relationships, thereby reducing investor confusion, 
search costs, and any mismatch in the advice relationship that may 
occur from the potential misleading nature of such names or titles, as 
well as any associated harm with such mismatch.\670\
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    \669\ We note that a potential mismatch could occur because 
investors may contact the wrong type of firm or financial 
professional and may not fully understand the type of financial 
advice that best match their preferences (even if the proposed 
relationship summary is made available), may be persuaded to hire 
the wrong type of firm or financial professional, or may be misled 
that a firm or financial professional will provide the type of 
service that the investor prefers, but in fact, does not.
    \670\ See supra discussion in Section IV.C.1.
---------------------------------------------------------------------------

    As a result of the proposed restriction on the use of certain 
terms, we expect the greatest potential reduction in search costs for 
retail investors who know that they specifically want the services 
provided by investment advisers and also would use names and titles in 
their search. The proposed rule would potentially make it easier for 
such investors to distinguish firms and professionals providing 
investment adviser services from firms and professionals providing 
brokerage services. The proposed rules may also reduce search costs for 
investors that prefer brokerage services, if standalone registered 
broker-dealers and financial professionals who are not supervised 
persons of an investment adviser or who are supervised persons but do 
not provide investment advice on behalf of such investment adviser are 
using names or titles including ``adviser'' and ``advisor,'' would 
choose new names and titles due to the proposed rule that more 
distinctly indicate the types of services they provide, such as 
``broker'' or ``broker representative.''
    However, the reduction in search costs for retail investors as a 
result of the proposed rule would be limited to the extent the firms 
and financial professionals covered by the restriction on the use of 
the terms ``adviser'' or ``advisor'' are not currently using the 
proposed terms in their names and titles. Further, the potential impact 
of the proposed rule on search costs is likely to be mitigated to the 
extent the proposed rule is limited to firm names and job titles, and 
would not itself affect the use of terms, such as ``advisory services'' 
in other communications or using those terms in metadata to attract 
internet search engines.\671\ Moreover, beyond registered investment 
advisers, dual registrants, and their supervised persons, other types 
of financial services providers, such as insurance companies and banks, 
may also continue to use the terms ``adviser'' and ``advisor'' in their 
names and professional titles, and any confusion and search costs borne 
by investors related to the use of such names and titles by financial 
intermediaries not affected by this proposed rule would not be reduced. 
As noted above, the Commission recognizes that terms such as 
``financial advisor'' or ``financial consultant'' may be used by banks, 
trust companies, insurance companies, and commodities 
professionals.\672\
---------------------------------------------------------------------------

    \671\ As discussed above, these other communications by firms 
and financial professionals would continue to be subject to 
antifraud rules. See supra note 309.
    \672\ See supra note 400. Further, as identified by Commission 
staff, as of December 2017, approximately 546 broker-dealers 
reported at least one type of non-securities business, such as 
insurance, retirement planning, and real estate; see supra note 459.
---------------------------------------------------------------------------

    As discussed above in Section IV.C.1, some investors may be 
confused by names and titles and believe that certain names and titles 
are likely to specifically signal the type of advice services provided 
by firms and financial professionals that use those names and titles 
and the associated standard of conduct.\673\ In particular, investors 
that prefer the type of investment advice relationship and the 
associated standard of conduct offered by investment advisers may 
believe that names or titles containing the terms ``adviser'' or 
``advisor'' are only associated with that type of advisory 
relationship. If some of these investors are persuaded by financial 
professionals associated with broker-dealers (who are not themselves 
investment advisers or supervised persons of investment advisers who 
provide advice on behalf of such adviser) that they could have a 
similar type of advice relationship as they would with an investment 
adviser, a potential mismatch between investor preferences and the 
advice relationship received may occur, which in turn may lead to 
investor harm such as higher payments for the services by the investor 
than necessary.\674\ Thus, the proposed prohibition on the use of 
``adviser'' or ``advisor'' by certain broker-dealers may reduce the 
risk of a mismatch between investors seeking advisory services of the 
type provided by investment advisers and the type of services for which 
they contract, as these investors under the proposed restriction would 
be potentially less likely to be misled or inadvertently approach and 
hire a type of firm or financial professional that does not match with 
their preferences and expectations.
---------------------------------------------------------------------------

    \673\ As discussed in Section IV.A.3.b, survey evidence suggest 
that many investors in general do not have a clear understanding 
about the differences in the nature of the advisory services 
provided by, and standard of conduct applicable to, different types 
of financial professionals.
    \674\ Broker-dealers may elect to provide some services similar 
to those of many investment advisers, such as ongoing monitoring, 
thereby potentially mitigating any mismatches between preferred 
services and the services provided.
---------------------------------------------------------------------------

    Because mismatch in investor preferences and the type of advice 
relationship they receive can potentially be very costly for investors 
by resulting in inefficient advice relationships, reducing this cost 
could be a potential benefit of the proposed rule for some investors. 
In particular, if an investor seeks an advice relationship of the type 
offered by investment advisers, but mismatches to a brokerage 
relationship, then the frequency of advice received may not be the most 
appropriate, or the cost for the advice may be too high if it leads to 
frequent trading, and could result in suboptimal investment decisions 
or lower investment returns net of costs. The Commission preliminarily 
believes this reduction in mismatch risk would mainly apply to those 
investors seeking a relationship similar to that provided by investment 
advisers, as discussed above. However, for at least some investors 
requiring advice on a per-transaction basis, the confusion about the 
use of titles or the services provided by financial professionals could 
potentially lead them to inadvertently select investment advisers even 
if they truly want a broker-dealer. To the extent the proposed rule 
would also help these investors more clearly distinguish between 
broker-dealers and investment advisers, they may avoid inadvertently 
hiring an investment adviser and thereby avoid paying potentially 
higher fees for that type of advice relationship.
    At this time the Commission is unable to estimate how many 
investors have contracted for services that do not meet their 
preferences, or are paying more than they would have preferred for 
services, due to confusion about the names and titles of financial 
intermediaries. Further, to the extent that confusion exists among 
retail investors regarding the names and titles used by firms and their 
financial professionals, surveys of retail investors with brokerage 
accounts suggest that they tend to be satisfied with their firms and 
financial professionals, and also believe that services provided by 
these firms and financial professionals are valuable, which further 
complicates any estimate of the incidence or magnitude of harmful 
mismatch.\675\
---------------------------------------------------------------------------

    \675\ See RAND Study, supra note 5, at 98.
---------------------------------------------------------------------------

    As discussed above with respect to search costs, any reduction in 
mismatch risk associated with investor confusion over names and titles 
would be limited to the extent that standalone registered

[[Page 21505]]

broker-dealers and their associated natural persons do not use the 
proposed prohibited terms in their names and titles. This would also be 
the case to the extent that registered representatives of dually-
registered broker-dealers who are not themselves supervised persons of 
an investment adviser or who are supervised persons but do not provide 
investment advice on behalf of such investment adviser do not use those 
terms. The potential reduction in mismatch risk due to this proposed 
rule would also be limited to extent the rule is limited to firm name 
and individual job titles, and would not itself affect firms and 
financial professionals from using terms such as ``advisory'' in other 
content. Moreover, other types of financial intermediaries may use the 
terms ``adviser'' and ``advisor'' in their names and titles, such as 
banks, trust companies, insurance companies, and commodities 
professionals.\676\ Therefore, the potential gains associated with a 
reduction in mismatch risk due to the prohibition on certain names and 
titles may be limited because some confused investors seeking an advice 
relationship from investment advisers could continue to inadvertently 
hire these other types of financial intermediaries that also use 
``adviser'' or advisor'' in their names and titles.
---------------------------------------------------------------------------

    \676\ See supra note 400.
---------------------------------------------------------------------------

    Another potential limitation of the proposed restriction on the use 
of certain titles is that a dual registrant could still call itself an 
``adviser'' or ``advisor,'' but then only offer brokerage services to 
investors that may not be legally and financially sophisticated enough 
to understand the differences in types of relationships and standards 
of conduct available.\677\ Finally, for retail investors that rely on 
professional or personal recommendations in their search for financial 
professionals, the proposed prohibition on the use of certain titles is 
likely to have a limited effect on both search costs and the risk of 
mismatch in the advice relationship.
---------------------------------------------------------------------------

    \677\ As discussed above, however, financial professionals who 
are not themselves investment advisers or supervised persons of 
investment advisers and who provide advice on behalf of such 
advisers would also not be able to use the terms ``adviser'' or 
``advisor'' in their professional titles.
---------------------------------------------------------------------------

ii. Costs of the Restriction on the Use of Certain Titles
    Although the Commission preliminarily believes that the proposed 
rule would decrease investor confusion, search costs, and mismatch for 
some segment of the investor pool that search for professionals based 
on names or titles, investor confusion and search costs could increase 
for those that would have, in the absence of the rule, selected broker-
dealers and associated natural persons that would have to change their 
company names or titles as a result of the proposed rule.\678\ For 
example, prospective customers familiar with a firm's name or financial 
professional's title may be especially confused by a change of either 
name or title to the extent that the term ``adviser'' or ``advisor'' is 
part of the firm's name brand or the titles of the professionals. Any 
increase in confusion as a result of the rule along these lines would 
likely be larger if the changed names or titles of broker-dealer firms 
that currently contain the words ``adviser'' or ``advisor'' are widely 
recognized as brands by investors.\679\ Further, even if the broker-
dealer name or title is unlikely to change, some investors may remove 
certain firms from their search list as professional names or titles 
change as a result of the rule. If, for example, a prospective investor 
is using the search term ``financial advisor'' to search for firms and 
financial professionals located in their city, some firms and financial 
professionals will be removed from any possible searches by these 
investors as a result of the proposed rule, even though these financial 
professionals might have been the best match to the preferences and 
expectations of the investor. However, these kind of potential costs to 
some current investors are likely to be limited to the extent that 
proposed rule is limited to firm name or title and individual job name 
or title and would not require firms and financial professionals to 
remove the restricted terms from other content, if they are not using 
such terms as a name or a title.
---------------------------------------------------------------------------

    \678\ As discussed in the baseline, several studies indicate 
that many investors receive personal or professional referrals in 
the selection of their broker-dealer or investment advisor. However, 
even these investors may investigate these referrals prior to 
undertaking outreach, and therefore, may avoid certain financial 
professionals as a result of the name or title change.
    \679\ As discussed in the baseline, approximately 87 broker-
dealers that are not dually registered as investment advisers and do 
not report non-securities business use the words ``adviser,'' 
``advisor,'' or ``advisory'' as part of their current company name. 
These firms would likely have to change their company name as a 
result of this proposed rule. However, any loss in brand value due 
to this change could be mitigated to the extent the prohibited terms 
are not an important part of the firm's brand.
---------------------------------------------------------------------------

    The proposed rule may also increase investor confusion to the 
extent some firms and financial professionals invent new names or 
titles to substitute for the restricted ones. Studies already indicate 
that the wide variety of names and titles used by firms and financial 
professionals causes general investor confusion about the market for 
investment advice. The magnitude of such costs is hard to predict, but 
would likely increase search costs for less knowledgeable retail 
investors that use names or titles to search for financial 
professionals or firms, and may also increase the likelihood of a 
mismatch for some of these investors between the type of advice 
relationship they prefer and the type of firm and financial 
professional they hire.
    Investors seeking advice from broker-dealers may also face 
potential harm if some broker-dealers change their business model as a 
result of the proposed rule. As discussed above, we believe that most 
broker-dealers that would be subject to the restrictions of the 
proposed rule have chosen names and titles to build their customer 
base. Given that the market for investment advice overall appears to be 
relatively competitive, with respect to the number of firms and 
financial professionals, firms and financial professionals likely have 
chosen names or titles that they view as effective in marketing their 
services to investors. Therefore, being forced to switch names or 
titles could reduce the potential customer flow for some broker-dealers 
(and registered representatives of dual registrants who are not 
supervised persons of an investment adviser or who are supervised 
persons but do not provide investment advice on behalf of such 
investment adviser) who currently are using name or titles which 
include the term ``adviser'' and ``advisor'' and who serve retail 
investors. In lieu of adopting a new name or title without ``adviser'' 
or ``advisor,'' these firms or financial professionals might respond by 
exiting the retail investor market, or may bypass the compliance and 
other costs associated with this proposed rule by also registering as 
investment advisers or becoming supervised persons of an investment 
adviser who provide investment advice on behalf of such investment 
adviser, which would change their incentives to market their brokerage 
services to investors.\680\ Either of these changes to business 
practices could reduce the availability of broker-dealer services for 
investors.\681\ To the

[[Page 21506]]

extent the costs of exiting the retail investor market or associated 
initial and ongoing costs of becoming a registered investment adviser 
(or a supervised person of an investment adviser who provides 
investment advice on behalf of such investment adviser) are greater 
than the costs associated with complying with the proposed rule, the 
likelihood of exit from the retail market or a change to the existing 
business model from a brokerage to advisory model would be low. In this 
case, the anticipated effect on investors from the loss of existing 
broker-dealer advice is expected to be limited. However, if it is 
costlier to change names or titles than to switch business model for 
broker-dealers, we expect some investors may experience a reduction in 
supply of broker-dealer advice services. Finally, because the 
Commission recognizes that a standalone broker-dealer can provide 
advice to retail investors without being regulated as an investment 
adviser provided that such advice is merely ``solely incidental to'' 
its brokerage business and the broker-dealer receives no ``special 
compensation'' for the advice, the proposed restriction would not 
prevent standalone broker-dealers from conveying the services that they 
provide in other content, without using the titles or names ``adviser'' 
or ``advisor.'' This may also limit the likelihood of exit from the 
retail market or a change to the existing business model from a 
brokerage to an advisory model.
---------------------------------------------------------------------------

    \680\ Some firms could potentially increase their profits by 
moving some customers from a brokerage account to an advisory 
account (e.g., customers who rarely trade). Such firms would have 
incentives to cut back on marketing of existing brokerage services 
to such customers and instead market the new advisory services.
    \681\ For example, in the event of exit by a broker-dealer, 
investors who want broker-dealer services would be forced to 
undertake search costs to find another firm and financial 
professional to meet their perceived needs, but also bear an 
increased cost associated with mismatch if they choose the wrong 
type of firm and financial professional. In the event of a switch 
from a brokerage model to an advisory model, investors may be forced 
to bear the costs associated with an advisory account that could 
exceed costs associated with services provided by a broker-dealer, 
or face costs associated with search and mismatch if they choose to 
change financial intermediaries, as discussed above.
---------------------------------------------------------------------------

    The proposed rule could, however, also increase the risk of 
mismatch for some investors by removing standalone registered broker-
dealers and registered representatives of dual registrants who are not 
supervised persons of an investment adviser from the pool of financial 
intermediaries that use the terms ``adviser'' or ``advisor'' in names 
and titles, while not affecting the use of these terms by other types 
of financial intermediaries, including banks, trust companies, 
insurance companies, and commodities professionals. Investors who are 
seeking financial services from either investment advisers or broker-
dealers could instead inadvertently hire other types of financial 
intermediaries that would continue use these terms ``adviser'' or 
``advisor,'' thereby potentially exacerbating the degree of mismatch 
between the type of relationship that they seek and what they receive. 
Further, neither this rule nor the proposed relationship summary would 
address the potential mismatch because these entities and natural 
persons are outside of the scope of the Commission rules. The 
Commission is not able to estimate the scope of this continuing 
potential for mismatch because we do not have access to information on 
the extent to which retail investors include these other types of 
financial intermediaries (deliberately or inadvertently) in their 
search for financial advice, nor the extent to which they see the 
services provided by these other financial intermediaries as substitute 
for the services provided by investment advisers or broker-dealers.
    Another potential cost for investors is that affected broker-
dealers may attempt to directly pass through any costs they would incur 
due to the proposed restriction on certain names and titles. A broker-
dealer's incentives for such pass-through behavior would be attenuated 
the more competitive the broker-dealer's local market is in the sense 
that price sensitivity of demand is high.
    Finally, we note that many of the costs and benefits to investors 
that we discussed above depend on the extent that titles and names 
affect investors' selection of their financial professional. The 
evidence discussed in Section IV.A.3.a suggests that between 40% and 
50% of investors find their financial professionals through personal 
recommendations.\682\ For this set of investors, the proposed rule 
would likely have little impact on search costs or potential for 
mismatch between their preferences and expectations and the type of 
advisory service for which they contract. We also note that we are not 
able to provide quantitative estimates of potential changes in search 
costs. Search costs for investors as well as costs due to mismatch 
would depend on a large set of individual specific factors, such as 
exactly what procedures investors use to search for financial 
professionals, what restrictions they put on their search (for example, 
choice of market, how many firms or professionals they are willing to 
sample before making a decision), the method they use to evaluate 
different alternative financial professionals they have identified, 
etc. The costs will to a large part not be monetary in nature but 
rather in the form of time and effort spent. The monetized value of 
that time and effort will also be individual specific. We do not have 
access to data that would provide us with this type of information, 
which we would need to estimate search costs. Similarly, we also are 
unable to provide estimates of changes in costs due to changes in the 
potential for mismatch as we do not currently have data on the 
percentage of the investor population that is mismatched, or the extent 
of harm that comes from mismatch.\683\ For example, we don't have an 
analysis of how well someone would have done in their portfolio 
(especially after costs) if they had been correctly matched.
---------------------------------------------------------------------------

    \682\ RAND Study, supra note 5 and 917 Financial Literacy Study, 
supra note 20.
    \683\ To estimate the potential harm from mismatch we would need 
to analyze how well someone could have done in their portfolio 
(after costs) if they had been correctly matched. This requires a 
rich set of investor characteristics as well as information about 
the investment menus and fee structures of potential alternative 
firms and financial professionals investors could have hired. We do 
not currently have access to such detailed information.
---------------------------------------------------------------------------

iii. Benefits and Costs of the Required Disclosures About Regulatory 
Status of a Financial Services Provider
    We anticipate the proposed requirements for broker-dealers and 
investment advisers and their associated natural persons and supervised 
persons to prominently disclose their registration (or firm association 
for financial professionals) status in retail investor communications 
would reduce investor confusion as well as search costs associated with 
locating and hiring a firm, which could reduce the probability of 
mismatch for investors seeking advice. In particular, for investors who 
understand the meaning of the registration status and know they want to 
hire either a registered broker-dealer or a SEC-registered investment 
adviser, we expect the search for the correct type of firm will be made 
both clearer and less time consuming, as these investors will more 
readily observe the registration status. Search costs for investors for 
whom the registration status has little meaning, however, are not 
expected to experience a decrease in either confusion or search costs 
due to these disclosure requirements. Disclosure may also reduce the 
possibility of mismatch of hiring the wrong type of firm for investors 
who understand the meaning of the registration status and know what 
type of financial intermediary they want to hire, although we note that 
the likelihood for such mismatch is likely lower in the first place for 
such investors compared to less knowledgeable investors. For the pool 
of investors that are confused by both the type of advice relationship 
that they

[[Page 21507]]

prefer, including how they want to pay for it, as well as 
professionals' titles, disclosure of registration status alone may not 
be sufficient to alleviate confusion in the type of advisory services 
provided by or the standard of conduct applicable to firms or financial 
professionals. Finally, for retail investors that rely on professional 
or personal recommendations in their search for financial 
professionals, the disclosure requirement is likely to have a limited 
effect on both search costs and the risk of mismatch in the advice 
relationship. As discussed above, we do not have access to information 
that would allow us to provide quantitative estimates of the potential 
costs and benefits to the investor from these proposed disclosure 
requirements.
    In general, we do not anticipate any costs to investors from the 
proposed rules to disclose registration status. However, it could be 
that firms may attempt to pass through any compliance costs to 
investors through higher fees, in particular those that operate in 
markets where the price sensitivity of demand may be lower. Given that 
compliance costs would be of a one-time nature, as discussed above, we 
believe the likelihood and magnitude of such pass-through would be low.
b. Standalone Registered Broker-Dealers
    The proposed rule would restrict broker-dealers who are not dually 
registered as investment advisers and their associated natural persons 
who are not themselves investment advisers or supervised persons of 
investment advisers that provide advice on behalf of such advisers from 
using the terms ``adviser'' or ``advisor'' when communicating with 
retail investors. As described previously in Section IV.A.1, 
approximately 87% of retail facing broker-dealer firms and 50% of 
registered representatives are not dually registered as investment 
advisers, and therefore potentially could be affected by the proposed 
restriction. The fraction of standalone broker-dealer firms that are 
currently using the terms ``adviser'' or ``advisor'' in their firm 
names or titles and do not report a non-securities business, is only 
approximately 3.5%.\684\ When it comes to names or titles by registered 
representatives at standalone broker-dealers, the RAND Study evidence 
discussed in Section IV.A.1.f suggests that around 31% of professionals 
providing only brokerage services used titles containing the terms 
``adviser'' or ``advisor.'' If the evidence presented in the baseline, 
is representative of the overall universe of standalone registered 
broker-dealers, the fraction of firms and associated natural persons 
that would be affected by the proposed prohibition may be relatively 
low.\685\
---------------------------------------------------------------------------

    \684\ As discussed in supra Section IV.A.1.f, there are 87 (103-
16 = 87) retail facing standalone broker-dealers without non-
securities business that are currently using one of these terms in 
their firm names, which represents approximately 3.5% of the 2,497 
retail acing standalone broker-dealers (2,857-360 = 2,497; see supra 
Table 1, Panel B). If we go beyond firm names and instead look at 
how firms' publicly describe themselves on their websites, the 
evidence presented in Section IV.A.1.f suggests that of the sampled 
standalone broker-dealers, less than 10% describe themselves using 
the terms ``adviser'' or ``advisor.'' Although some of these website 
descriptions may still be allowed under the proposed rule, it 
suggests that the fraction of standalone broker-dealers that rely on 
these terms to describe themselves may be relatively low.
    \685\ We estimate that approximately 226,132 (942,215 x 0.24 = 
226,132; see supra Table 6) registered representatives of broker-
dealers are not also registered as investment advisory 
representatives. Among these registered representatives, 
approximately 119,729 are employed by dually registered firms 
(494,399 x 0.61 x 0.397 = 119,729; see supra Section IV.A.1.e), 
which means 106,403 are employed by standalone broker-dealers. 
Further, if only 31% of broker-dealer registered representatives 
that are not dual-hatted (see supra Table 8) use titles containing 
the terms ``adviser'' or ``advisor,'' then we estimate that the 
total number of non-dual hatted registered representatives that 
would be potentially subject to this proposed prohibition would be 
70,101, which is approximately 15.5% of all registered 
representatives. Of these representatives, 32,985 (0.31 x 106,403 = 
32,985) are employed by standalone broker-dealers and approximately 
37,116 (0.31 x 119,729 = 37,116) are employed by dual registrants. 
Note, the number of non-dual hatted registered representatives at 
dual registrants that would be potentially affected by the rule is 
likely lower than the estimated 37,166 because some of these 
representatives may be supervised persons providing advisory service 
without being dual-hatted. We are not able to estimate how large the 
fraction of such registered representatives would be. On the other 
hand, we do not have information about how many dual-hatted 
registered representatives among dual registrants that they are not 
supervised persons providing advisory services despite being dual-
hatted, and therefore would also be subject to the proposed 
restriction on the use of certain titles.
---------------------------------------------------------------------------

    If the proposed restriction on certain names or titles would reduce 
potential investor confusion and prevent retail investors from 
potentially being misled, it could have some positive benefits for the 
subset of broker-dealers that would be impacted by this restriction but 
are not marketing advice services to attract business. In particular, 
these broker-dealers may be able to better attract customer flow and 
more efficiently target their marketing and advertising campaigns to 
reduce the likelihood of ``false starts'' associated with the potential 
mismatch with retail investors. Moreover, broker-dealers that are not 
dually registered may similarly benefit from the requirement to 
prominently display registration status as that may also help reduce 
investor confusion. Firms and financial professionals may also realize 
a limited benefit from this disclosure such that they can more 
effectively signal their type in communications, even when the firm or 
professional names or titles are not perfectly aligned with the 
registration status.\686\
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    \686\ Note that any such benefits from the proposed rules relies 
on an assumption that some broker-dealers are not currently 
optimizing to receive such benefits by voluntarily changing names 
and titles or prominently display their registration status. 
However, as noted above, we expect in an efficient market, firms 
have already chosen names and titles that they view as effective 
marketing tools. As a result, we expect this benefit will be limited 
to the extent firms are currently rationally optimizing their choice 
of names and titles.
---------------------------------------------------------------------------

    For the segment of broker-dealers that would be affected by a 
restriction of using the terms ``adviser'' or ``advisor,'' we 
anticipate potentially substantial, one-time costs associated with the 
proposed rule. Broker-dealer firms subject to the restrictions on the 
use of certain names or titles would be required to change current 
company names or titles (if the company name or title contains 
``adviser/advisor''), and marketing materials, advertisements (e.g., 
print ads or television commercials), website and social media 
appearances that use the current company name or title, among other 
items, resulting in direct compliance costs. Similarly, all personal 
communications tools used by financial professionals, such as business 
cards, letterhead, social media profiles, and signature blocks would 
need to be amended to reflect new company and financial professionals' 
names or titles. The proposed requirement to prominently disclose 
registration status in print or electronic retail investor 
communications is also expected to require changes to the same set of 
materials and communication tools, and therefore, also would have to be 
modified to incorporate the registration status in the manner the rule 
prescribes.\687\
---------------------------------------------------------------------------

    \687\ See infra Section V.G for estimates of some of these 
compliance costs developed for the purpose of the Paperwork 
Reduction Act.
---------------------------------------------------------------------------

    To the extent that the costs discussed above have a fixed-cost 
component (i.e., a print ad would likely cost the same regardless of 
the size of the firm), the costs associated with producing new 
communication and advertising materials would be disproportionately 
higher for smaller broker-dealer firms. Other costs, however, may 
increase with the size of the broker-dealer, such as costs associated 
with revisions to each individual representative's communication and 
advertising materials, and therefore would increase with a broker-
dealer's size.

[[Page 21508]]

    In addition to direct compliance costs associated with producing 
new materials, broker-dealers would likely bear costs associated with 
contacting current and prospective customers, whether by email, mass 
mailings, one-on-one meetings, or telephone conversations, to inform 
them of changes to names and titles. Such outreach on behalf of the 
broker-dealer or the individual representatives would inform existing 
and prospective investors of a name or title change, and whether or not 
any services have changed and may be necessary in order to minimize any 
confusion among current and prospective customers that could 
potentially lead to a loss of business during a ``changeover'' 
period.\688\ This kind of outreach, however, could be costly to 
financial professionals and firms if it diverted time and resources 
away from the core business of the broker-dealer.\689\ Further, the 
greater the name recognition of a current company or the larger the 
size of the company, the costlier such an outreach is likely to be as 
more current and prospective customers would need to be informed of the 
name change. Finally, to the extent that a broker-dealer's company name 
is recognized as a brand in the market and therefore represents a 
valuable intangible asset to the firm, some of its ``brand value'' may 
be lost following a company name change.\690\ We note that the number 
of broker-dealer firms whose brand value may be negatively affected by 
the rule is relatively limited, as only around 3.5% of the broker-
dealer firms that would be subject to the rule are using any of the 
prohibited terms in their company names.\691\
---------------------------------------------------------------------------

    \688\ In particular, without outreach, some broker-dealers could 
experience a temporary reduction in the flow of prospective 
customers that would have relied on the use of titles prohibited by 
the proposed rule. In the absence of the prohibitions, these 
investors would have ended up contracting with the broker-dealers, 
but due to confusion over new company names and titles that would be 
required to be used, these investors may avoid broker-dealers 
subject to the change in names and titles, and these broker-dealers 
could earn less revenue. Only after the potential customer base 
becomes familiar with the new names and titles associated with a 
given broker-dealer and its financial professionals, or the search 
costs associated with these new titles decline, could these firms 
potentially recover a portion of the prospective customer base that 
was originally lost during the name transition period as a result of 
the changeover confusion. The Commission does not have access to the 
type of detailed customer information of individual broker-dealers 
that would allow us to estimate the percentage of customers that 
might be confused as a result of the name change or what fraction of 
these customers might eventually be recovered by a broker-dealer.
    \689\ Although such outreach is not required by the proposed 
rule, we anticipate that at least some percentage of affected 
broker-dealers or financial professionals would undertake such 
efforts in order to maintain good relationships with existing 
customers.
    \690\ Academic evidence suggest corporate brands are valuable 
intangible assets to firms; see, e.g., M. E. Barth, M. B. Clement, 
G. Foster, & R. Kasznik, Brand values and capital market valuation, 
Review of Accounting Studies, 3(1), 41-68 (1998).
    \691\ See supra note 648. Specifically, 3% refers to the total 
number of broker-dealers that do not report non-securities business.
---------------------------------------------------------------------------

    Likewise, broker-dealers facing no constraints on their choice of 
names and titles may choose the names and titles that they believe are 
the most effective at helping attract customers, and may best describe 
their business model, and reduce the effort associated with building a 
customer base, as described above.\692\ Therefore, a segment of broker-
dealers that are currently using terms that would be restricted under 
the proposed rule could experience a reduction in the efficiency of 
their marketing efforts, which in turn might lead to fewer customers 
and a loss of revenue compared to the baseline. In particular, those 
broker-dealers that rely on advice services as an important part of 
their value proposition to retail investors and directly compete with 
investment advisers may lose competiveness, if names and titles become 
less descriptive of this aspect of their business in the eyes of retail 
investors. These marketing efficiency costs would be mitigated to the 
extent the broker-dealers would use new names and titles that are 
equally efficient at conveying they are providing advice, or to the 
extent that the proposed restriction would not affect the use of terms 
such as ``advisory services'' in other content, or using them in 
metadata to attract internet search engines.\693\
---------------------------------------------------------------------------

    \692\ See discussion in Section IV.C.1.
    \693\ Note that to the extent affected broker-dealers would 
choose other names and titles that convey a similar signal to 
investors as those containing the terms ``adviser'' or ``advisor,'' 
it would reduce the efficiency of the proposed prohibition. In 
Section IV.C.4.a we discuss an alternative that would prohibit a 
broker-dealer from otherwise ``holding out'' as an investment 
adviser, which would potentially also prevent the use of some 
similar names and titles.
---------------------------------------------------------------------------

    Although we recognize that a significant fraction of a broker-
dealer's customer base is attributed to referrals, as noted in the 917 
Financial Literacy Study, approximately 25% of survey respondents rely 
on broker-dealer or financial professional names or titles in selecting 
their current advisor.\694\ Depending on how effective the terms 
``adviser'' or ``advisor'' are at attracting customers, costs 
associated with the loss of certain titles or names could be 
substantial for some broker-dealers.\695\
---------------------------------------------------------------------------

    \694\ See supra note 20.
    \695\ For example, if investors know that they are seeking 
advice related to individual transactions (e.g., the type of mutual 
fund or exchange-traded fund in which to invest), they may have a 
preference for terms such as ``financial advisor'' compared to terms 
such as ``financial planner'' or ``investment strategist,'' 
depending on their colloquial understanding of what an these terms 
might imply for the level of service and standard of conduct. If 
certain broker-dealers are restricted from using ``financial 
advisor,'' these firms may lose these potential customers. Moreover, 
these investors could potentially expend search costs as they sort 
through investment advisers that use the term ``financial advisor'' 
until the investor is able to match with the right type of financial 
professional.
---------------------------------------------------------------------------

    One way that affected broker-dealers could potentially mitigate the 
costs associated with the potential loss of titles or names could be 
for these firms to dually register as investment advisers. However, 
dual registration imposes an additional layer of regulatory oversight 
and compliance and need for training and licensing of employees to work 
as investment adviser representatives, which would also be costly. A 
broker-dealer would likely pursue such a strategy only if it expected 
the costs of regulation as an investment adviser were lower than the 
expected costs of modifying names and titles. We do not have access to 
data that would allow us to estimate either the total costs for 
modifying names and titles for broker-dealers, or the total costs of 
becoming an investment adviser for these broker-dealers.
c. Investment Advisers (Including Dual Registrants)
    The proposed restriction on the use of the terms ``adviser'' and 
``advisor'' in names and titles does not apply to registered investment 
advisers, whether they are solely registered as investment advisers or 
whether they are dually registered. Consequently, there would be no 
compliance costs for registered investment advisers associated with the 
restriction on the use of certain terms in names or titles. Some 
benefits could accrue to investment advisers at the expense of impacted 
broker-dealers. However, supervised persons of investment advisers who 
are dually registered but do not provide investment advice on behalf of 
such investment adviser would be prohibited from using the terms, which 
could lead to costs for those financial professionals or their firms.
    Because the proposed restriction would force some standalone 
registered broker-dealers to change their names and titles in a way 
that may lead to less efficient marketing aimed at attracting potential 
investors, as discussed above, some customer flow that might have gone 
to these broker-dealers could be permanently diverted to investment 
advisers who will not be required to

[[Page 21509]]

change their names.\696\ As a result, some investment advisers could 
experience an increase in revenues due to an increase in customer flow. 
The benefits may also be larger for investment advisers or dual 
registrants that are able to continue to use names or titles that 
include the term ``adviser'' or ``advisor'' as these terms could be the 
draw that currently attracts customer flow to certain firms and 
financial professionals, and that would be diverted due to a 
restriction on the use of these terms by standalone registered broker-
dealers. In addition, assuming that small broker-dealers and investment 
advisers select geographic areas where competition from larger firms is 
low, then, as result of the proposed rule restricting the use of 
certain names or titles by broker-dealers, small investment advisers 
could especially benefit at the expense of small broker-dealers in 
these locations.
---------------------------------------------------------------------------

    \696\ To the extent that investor confusion about the market for 
financial services generally increases during the period when 
affected firms and financial professionals remove the term 
``adviser'' or ``advisor'' from their names and titles, investment 
advisers that are not required to change their names or titles may 
see an increase in the diversion of customer flow from broker-
dealers to investment advisers until investor confusion over the 
change in titles subsides. To the extent that some investors that 
are not currently making an efficient choice of a broker-dealer as 
indicated by investor confusion about titles and associated 
standards of conduct, and would choose an investment adviser after 
the proposed rules were adopted, this proposed rule change may 
assist them in making a more efficient choice to a service they 
would prefer.
---------------------------------------------------------------------------

    In terms of additional potential benefits, investment advisers and 
dual registrants, like standalone broker-dealers, will be subject to 
the required disclosure of their registration status, as part of the 
proposed rules. As we discussed in the case of standalone registered 
broker-dealers above, the prominent display of registration status 
could help reduce investor confusion, and could be used by both firms 
and their financial professionals as a marketing tool. Moreover, firms 
may benefit from this disclosure such that they can more effectively 
signal their type, even if the firm or professional names or titles are 
not perfectly aligned with the registration status. These potential 
benefits may be larger for dual registrants, as the prominent display 
of both their registrations may help attract investors that are looking 
for both types of services or investors who are generally unsure about 
which type of services they want.\697\
---------------------------------------------------------------------------

    \697\ However, as noted previously, all firms and financial 
professionals can already voluntarily choose to prominently display 
their registration status, therefore implying that the direct 
benefits to firms and financial professionals from the proposed rule 
requiring disclosure of registration status may be limited.
---------------------------------------------------------------------------

    The proposed restriction on the use of certain names and titles 
would apply to financial professionals of dual registrant investment 
advisers who are not supervised persons of an investment adviser or who 
are supervised persons of an investment adviser but who do provide 
investment advice on behalf of such investment adviser, which could 
lead to costs for those financial professionals or their firms. 
Consistent with the discussion of standalone registered broker-dealer 
firms above, this segment of persons associated with dual registrants, 
and the dual registrants themselves, could bear a potentially 
substantial, one-time costs associated with the proposed rule to change 
marketing materials and other communications to remove the restricted 
terms and to explain the change to their customers. Further, some 
financial professionals using the restricted terms could experience a 
reduction in the efficiency of their marketing efforts. This could 
happen to the extent the terms were optimally chosen in the first place 
from a marketing perspective. This, in turn, might lead to fewer 
customers for the financial professional and his or her associated firm 
and a loss of revenue compared to the baseline. Furthermore, financial 
professionals that are not currently supervised persons of an 
investment adviser, or cannot immediately qualify to be hired in such a 
professional role may become less attractive to retain or hire by dual 
registrants, to the extent their services would be less valuable to 
dual registrants if they cannot use the terms ``adviser'' or 
``advisor'' in their names or titles. These financial professionals 
could potentially mitigate the costs associated with the potential loss 
of names or titles by becoming a supervised person of an investment 
adviser and providing investment advice on behalf of such investment 
adviser. A financial professional would likely pursue such a strategy 
only if it expected the costs of becoming a supervised person of an 
investment adviser who provides investment advice on behalf of such 
investment adviser were lower than the expected costs of modifying 
their professional names or titles.
    We expect the proposed requirements to prominently disclose 
registration status to impose one-time direct compliance costs 
associated with changes to written and electronic retail investor 
communications on both investment advisers and dually registered 
financial firms.\698\ Similar to standalone registered broker-dealers, 
we expect that to the extent the required changes have a fixed-cost 
component, smaller investment adviser firms would incur relatively 
higher costs associated with this disclosure. Larger investment 
advisers and dual registrants, however, would likely bear an increase 
in the variable costs associated with such disclosures, as the amount 
of revisions associated with individual representative's and firm's 
communications will rise.\699\
---------------------------------------------------------------------------

    \698\ See infra Section V.H. for estimates of some of these 
compliance costs developed for the purpose of the Paperwork 
Reduction Act.
    \699\ Consistent with this argument, we estimate in the 
Paperwork Reduction Act analysis in infra Section V.H.2, that the 
initial one-time burden for complying with the disclosure 
requirements would be 72 hours per large investment adviser and 15 
hours per small investment adviser.
---------------------------------------------------------------------------

3. Impact on Efficiency, Competition, and Capital Formation
    In addition to the specific benefits and costs discussed in the 
previous section, the Commission expects that the proposed disclosure 
could cause some broader long-term effects on the market for financial 
advice. Below, we elaborate on these possible effects, specifically 
discussing the impact on efficiency, competition and capital formation.
a. Efficiency
    As discussed above, the proposed rules have the potential to reduce 
investor confusion about the meaning of the names and titles used by 
firms and their financial professionals and to improve the matching 
between investor preferences and types of services they receive. To the 
extent retail investors use titles and names in their search for firms 
and financial professionals, the potential reduction in search costs 
would improve the overall efficiency of the market for financial advice 
by making the search process shorter in time and more cost effective. 
Moreover, to the extent the proposed rules would reduce the risk of any 
mismatch between investor preferences and the type of relationship 
their financial professional provides, it could lead to potentially 
improved efficiency in retail investors' asset allocation as investors 
would be more likely to receive investment advice that is optimal for 
their individual situation. A reduced risk of mismatch in the 
relationship would also make it less likely that investors pay more 
than necessary for the services they receive, which could lead to 
higher investment returns net of cost.

[[Page 21510]]

    Alternatively, as discussed previously, investor confusion may 
increase rather than decrease under certain circumstances, which would 
increase search costs for investors. In this case, we would instead 
expect a negative effect on efficiency. Moreover, there could also be 
negative effects on efficiency to the extent affected broker-dealers 
start using new names and titles that potentially convey the same 
information to investors as the restricted terms. Under such 
circumstances, the proposed rules would then only impose cost increases 
on broker-dealers without achieving any reduction of investor 
confusion. These costs may or may not be passed through to investors. 
In addition, some of the other potential costs outlined previously 
could have negative effects on efficiency. For example, this proposed 
rule could have a direct negative impact on efficiency in the 
registered broker-dealer segment of the market by making marketing less 
efficient for any affected broker-dealers (including any affected dual 
registrants with affected registered representatives). Further, any 
compliance costs or increased marketing costs may be passed through to 
investors in local markets where the competitive pressure is relatively 
low--for example, due to, a relatively low supply of financial 
professionals--and some investors may then face higher costs for 
broker-dealer services as a result. Finally, some affected firms and 
financial professionals may decide to exit the market if their costs of 
doing business go up substantially, which could decrease supply and 
increase costs of brokerage services for retail investors in some 
segments of the market. Any such increases in costs of broker-dealer 
services may also price some investors with limited ability to absorb a 
cost increase out of the brokerage market altogether, thereby limiting 
their access to advice and investment choices offered by broker-dealers 
and potentially hurting the efficiency of their investment allocation.
    Because of the complexity associated with the use of names or 
titles by firms and their financial professionals, and their potential 
importance for investors both with respect to investor confusion and as 
a selection mechanism for hiring financial professionals, coupled with 
the lack of data on how investors could react to a restriction of the 
use of certain names and titles among broker-dealers and their 
associated natural persons, we are unable to provide estimates for the 
potential effects on efficiency. However, we preliminarily believe that 
any potential effects on the overall efficiency in the market for 
financial advice, or in segments of this market, are likely to be 
limited because of several factors that would mitigate the potential 
impact on investor confusion and/or the potential costs imposed on 
firms and financial professionals from the proposed restriction: (i) 
Only a fraction of standalone registered broker-dealers and their 
associated natural persons, as well as registered representatives 
working for dual registrants that are not dual-hatted are currently 
using the terms ``adviser'' and ``advisor'' in names and titles; \700\ 
(ii) the extent to which the proposed restriction would not affect the 
use of terms such as ``advisory services'' in communications which do 
not convey a name or title; (iii) financial intermediaries and 
professionals not regulated by the Commission could still use the terms 
``adviser'' or advisor'' in their names and titles.\701\
---------------------------------------------------------------------------

    \700\ The use of names and titles by firms and financial 
professionals is discussed in Section IV.A.1.f. Only around 87 
current standalone broker-dealers with retail investors use the 
terms ``advisor'' or ``adviser'' in their company names. Further, 
around 31% of professionals providing only brokerage services used 
titles containing the terms ``adviser'' or ``advisor'' according to 
the RAND Study.
    \701\ See discussion of other such financial intermediaries and 
professionals in supra Section III.B.1.
---------------------------------------------------------------------------

    The proposed requirements to disclose a firm's regulatory status 
and a financial professional's association may increase the efficiency 
in the search and matching process in the market for financial advice 
to the extent retail investors understand the meaning of the 
registration status and would use it in their search for financial 
professionals. Among firms, the potential efficiency benefits may be 
larger for dual registrants, as the prominent display of both types of 
registrations may help attract investors that are looking for both 
brokerage services and an investment advice relationship, or investors 
who are in general unsure about which type of services they want.
b. Competition
    The proposed rules could affect competition in the market for 
financial advice through potential effects on both demand and supply in 
the market. In terms of potential effects on demand, to the extent 
search costs are reduced for investors, it may raise the price 
elasticity of demand and consequently we would expect the competition 
between firms in this market to increase.\702\ To the extent it is 
primarily investors who prefer the services provided by investment 
advisers who would experience a reduction in search costs, we would 
expect in particular an increase in the average price elasticity of 
demand for investment adviser services and therefore greater 
competition in the investment adviser market segment. However, a 
reduction in search cost may also increase retail investor 
participation in the market for financial advice. Investors at the high 
end of the search cost distribution who previously may have refrained 
from seeking financial advice altogether may enter the market for 
financial advice if there is a reduction in search costs. Because these 
new entrants to the market for financial advice would likely have 
higher search costs than the existing investors in the market, average 
investor demand elasticity may go down, which in turn would reduce 
competition at the margin.\703\ To the extent it is mainly investors 
that prefer investment adviser services who would experience a 
reduction in search costs; we expect the new entrants to primarily 
belong to this group of investors. Therefore, the average demand 
elasticity may potentially decrease in particular for investment 
adviser services and reduce competition in the investment adviser 
market segment.
---------------------------------------------------------------------------

    \702\ All else equal, we would expect customers in a marketplace 
with differentiated products to prolong their search for the right 
product at the right price if search costs are reduced. The 
resulting increase in demand elasticity would increase downward 
pressure on prices in the market, see, e.g. S. Anderson & R. 
Renault, Pricing, Product Diversity, and Search Costs: A Bertrand-
Chamberlin-Diamond Model, The RAND Journal of Economics, 30, 719-735 
(1999).
    \703\ For a theoretical model on how lower search costs may 
increase the average price elasticity of demand in this manner, see, 
e.g., J. L. Moraga-Gonz[aacute]lez, Z. S[aacute]ndor, & M.R. 
Wildenbeest, Prices and heterogeneous search costs, The RAND Journal 
of Economics, 48, 125-146 (2017). A study of the U.S. mutual fund 
industry also provide empirical evidence consistent with this type 
of effect; see A. Horta[ccedil]su & C. Syverson, Product 
differentiation, search costs, and competition in the mutual fund 
industry: A case study of S&P 500 Index funds, The Quarterly Journal 
of Economics, Vol. 119, Issue 2, 403-456 (May 2004).
---------------------------------------------------------------------------

    Conversely, if investor confusion and associated search costs 
instead are increased by the proposed rules, which as we discussed 
previously may happen under certain circumstances, it would likely 
lower price elasticity of demand among current retail investor market 
participants and reduce competition in the market for financial advice. 
However, if search costs are increased to the extent that current 
investors at the high end of the search cost distribution are induced 
to exit the market for financial advice altogether, it could instead 
increase average demand elasticity and increase competition among the 
firms in this market, as the

[[Page 21511]]

remaining investors would be those at the lower end of the search cost 
distribution and consequently would have higher price sensitivity. To 
the extent it is mainly investors that prefer broker-dealer services 
who would experience an increase in search costs we expect the 
investors exiting the market to primarily be such investors. Therefore, 
the average demand elasticity may potentially increase in particular 
for broker-dealer adviser services and increase competition in the 
broker-dealer market segment.
    In terms of the effect on the supply of advice services, to the 
extent the proposed restriction on the use of certain names or titles 
would cause affected broker-dealers to register as investment advisers 
and start promoting that side of their business, or perhaps completely 
move to an investment adviser model, there would likely be a shift in 
the mix of supply of advice services, where the supply of broker-dealer 
(and associated registered representative) services could potentially 
decrease and the supply of investment adviser services could increase. 
Such a shift in the mix of the supply of advice services could 
potentially raise brokerage account prices, reduce choice for investors 
who prefer to pay for execution of trades on a transactional basis, and 
lower the costs of advisory accounts with investment advisers. However, 
to the extent some broker-dealers would exit the market for retail 
investors altogether, the overall supply of advice services could go 
down and we may see a decrease in competition not only in the market 
for broker-dealer services but also in the overall market for 
investment adviser services, assuming that retail investors view 
broker-dealer and investment adviser services as substitutes for one 
another, thereby increasing costs and limiting choices for retail 
investors. This potential negative effect on competition would be 
mitigated to the extent other firms (whether other broker-dealers or 
investment advisers) decide to compete for the customers of any broker-
dealers exiting the market.
    Further, to the extent the proposed restriction would make 
standalone broker-dealers services more costly and marketing less 
effective, non-affected standalone broker-dealers (i.e., broker-dealers 
that do not use the restricted terms), dual-registrants, investment 
advisers, and financial intermediaries that are not registered as 
investment advisers (such as banks, trust companies, insurance 
companies, commodity trading advisers, and municipal advisors) may to a 
varying degree gain business at these affected firms expense. That is, 
by only affecting a subset of firms, the proposed restriction on the 
use of certain names and titles may change competitive positions among 
different suppliers in the market for financial advice. In addition, 
the proposed requirement to disclose registration status may benefit 
the competitive positon of dual registrants, as the prominent display 
of both types of registrations may help attract investors that are 
looking for both brokerage services and an investment advice 
relationship, or investors who are in general unsure about which type 
of services they want.
    In addition, assuming that small broker-dealers and investment 
advisers select geographic areas where competition from larger firms is 
low, then any reduction of competition in the broker-dealer market due 
to a switch to an investment adviser business model would be 
particularly large in such geographic areas. Similarly, any reduction 
in competition due to exit of standalone registered broker-dealer 
altogether from the retail market would be particularly large in such 
geographic areas, where smaller investment advisers and dual 
registrants could especially see competitive benefits at the expense of 
small standalone registered broker-dealers.
    We are not able to assess the magnitude of the potential demand or 
supply related effects as we do not have access to information that 
would allow us to do so, such as the distribution of search costs 
across the population of retail investors, estimates of the effect of 
the proposed rules on search costs, the internal cost functions of 
broker-dealers, etc. However, we preliminarily believe that the impact 
of any effects on the overall competitive situation in the market for 
financial advice is likely to be limited because of the same three 
mitigating factors we discussed above regarding the potential impact on 
efficiency.\704\
---------------------------------------------------------------------------

    \704\ See discussion of mitigating factors in supra Section 
IV.C.3.a.
---------------------------------------------------------------------------

c. Capital Formation
    Some aspects of the proposed rules could lead to increased capital 
formation, if, for example, retail investors are better able to 
allocate capital due to a better match with financial professionals or 
more retail investors enter the market for financial advice and start 
investing in securities. However, as discussed above, if some broker-
dealers exit the market or move to an advisory business model as a 
result of the proposed rules, some investors may lose access to the 
market for advice serviced by broker-dealers, which may cause them to 
exit the market for financial advice altogether and reduce their 
(direct or indirect) investments in productive assets, thereby reducing 
capital formation. Alternatively, any investors who lose access to 
broker-dealers services may switch to an investment adviser 
relationship, which could reduce their investment returns net of costs 
to the extent the broker-dealer payment model was more optimal for 
their investment preferences, thereby also potentially reducing capital 
formation. Overall, the Commission is unable to determine how these 
countervailing effects could impact capital formation, and what the 
likely magnitude of those impacts would be. However, we preliminarily 
believe that the proposed rules would have a limited impact on capital 
formation because of the same three mitigating factors we discussed 
above regarding the potential impact on efficiency.\705\
---------------------------------------------------------------------------

    \705\ See discussion of mitigating factors in supra Section 
IV.C.3.a.
---------------------------------------------------------------------------

4. Alternatives to the Proposed Rules
    As discussed above, the proposed rule would restrict broker-dealers 
and their associated natural persons from using as part of a name or 
title the term ``adviser'' or ``advisor,'' unless such broker-dealer is 
dually registered as an investment adviser or the associated natural 
person is a supervised person of an investment adviser and provides 
advice on behalf of such investment adviser. Further, our proposed 
rules would also require both broker-dealers and investment advisers to 
disclose their registration status in print or electronic retail 
investor communications. Finally, the proposed rules would require 
associated natural persons of a broker-dealer and supervised persons of 
an investment adviser to disclose their association with a particular 
firm in print or electronic retail investor communications. Below, the 
Commission describes several alternatives to the proposed rules, 
including the continued ability of broker-dealers to rely on section 
202(a)(11)(C) of the Advisers Act (the ``Solely Incidental'' 
exclusion), prohibitions on a broker-dealer ``holding out'' as an 
investment adviser, disclosure of the registration status only, or 
additional requirements for dual registrants.

[[Page 21512]]

a. No ``Solely Incidental'' Exclusion
    As an alternative to the proposed rule restricting the use of the 
term ``adviser'' or ``advisor'' in names and titles, the Commission 
could propose a rule that stated that a broker-dealer cannot be 
considered to provide investment advice solely incidental to the 
conduct of its business as a broker-dealer under section 202(a)(11)(C) 
of the Advisers Act if the broker-dealer used the term ``adviser'' or 
``advisor'' in names or titles, and therefore, would not be excluded 
from the definition of investment adviser. This alternative would rely 
on the assumption that a broker-dealer that uses these terms in its 
name to market or promote its services is doing so because its advice 
is significant or even instrumental to its brokerage business, and 
consequently, the broker-dealer's provision of advice is therefore no 
longer solely incidental to its brokerage business. Similarly, it would 
also rely on the assumption that if a broker-dealer invests its capital 
into marketing, branding, and creating intellectual property in using 
the terms ``adviser'' or ``advisor'' in its name or title, the broker-
dealer is indicating that advice is an important part of its broker-
dealer's business.
    This alternative, like the proposed rule, would not permit an 
associated natural person of a dually registered firm to use the terms 
``adviser'' or ``advisor'' in their names or titles unless such person 
was a supervised person of a registered investment adviser who provides 
investment advice on behalf of such investment adviser. For standalone 
broker-dealers, and their associated natural persons as well as 
associated natural person of a dually registered firm that are not 
supervised persons of a registered investment adviser providing advice 
on behalf of such investment adviser, that are currently marketing 
their services to retail investors using the terms ``adviser'' and 
``advisor,'' in their name or title, the economic effects of this 
alternative would be expected to be substantially the same as under the 
proposed restriction on the use of the terms in names and titles.
b. Prohibit Broker-Dealers From Holding Themselves Out as Investment 
Advisers
    Instead of prohibiting a broker-dealer from using certain names or 
titles, we could propose a rule to preclude a broker-dealer from 
relying on the solely incidental exclusion of section 202(a)(11)(C) if 
a broker-dealer ``held itself out'' as an investment adviser to retail 
investors. This approach could encompass a broker-dealer and its 
associated natural persons representing or implying through any 
communication or other sales practice (including through the use of 
names or titles) that they are offering investment advice subject to a 
fiduciary relationship with an investment adviser.
    This approach would reduce the risk that by only proscribing 
``adviser'' and ``advisor,'' or any other specific names and titles, 
new names and titles could arise with similar, confusing connotations. 
Moreover, this alternative could promote informed investor choices by 
focusing more comprehensively on broker-dealer marketing and titles 
that may confuse or mislead investors into believing that a brokerage 
relationship is an advice relationship of the type provided by 
investment advisers. Relative to either the baseline or the proposed 
rule, the ``holding out'' alternative could have a broader application 
because it could capture any communication or other sales practices 
that may lead to confusion by investors in believing that their firms 
or financial professionals provide more or different services than they 
provide. As a result, investor confusion and associated costs may be 
reduced more compared to the proposed rule.
    This alternative, however, could create uncertainty for broker-
dealers as to which activities (and the extent of such activities) 
would be permissible and not considered ``holding out'' as an 
investment adviser and therefore triggering the need to register as 
such. As a result of a ``holding out'' alternative, broker-dealers may 
feel compelled to avoid fully describing even the types of advisory 
services they are allowed to provide in their communications and 
marketing efforts and may also limit or reduce allowable advice 
provided by broker-dealers to avoid any instances where the advice 
provided could be misconstrued that such person is ``holding out'' as 
an investment adviser. Given that broker-dealers under the current 
regulatory environment are permitted to provide incidental advice 
related to recommendations of securities or investment strategies, 
investor confusion may be increased and some investors may believe that 
as a result of the ``holding out'' alternative that this advice could 
no longer be offered, and could face a mismatch in their preferences 
and expectations if they sub-optimally choose to hire investment 
advisers and avoid broker-dealers. Therefore, implementing a rule along 
these lines could have significant competitive effects for broker-
dealers, and could reduce the effectiveness in how investors choose 
their firms and financial professionals. As a result of increased 
investor confusion, both search costs and costs associated with 
choosing the wrong type of firm and financial professional could be 
increased under this alternative. Moreover, if some broker-dealers 
avoid providing advice as a result of this alternative, some retail 
investors may be shut out of the advice market entirely or may have to 
incur higher costs that may be associated with investment advisory 
services.
    From a compliance cost perspective, broker-dealers that could be 
subject to the ``holding out'' alternative would face costs in revising 
their communications and advertisements in order to eliminate any 
discussion about them implying they are offering investment advice 
subject to a fiduciary relationship with an investment adviser. To the 
extent such revisions have a significant fixed cost component or there 
are other economies of scale, such as decreasing variable costs for 
printed material as the number of copies increase, we would expect 
smaller broker-dealers to face relatively higher costs following the 
implementation of this alternative. There could also be increased costs 
under this alternative from training and monitoring of associated 
natural persons to ensure compliance with the rule, as the restrictions 
would be more principles-based than prescriptive compared to the 
proposed rule.
c. Disclosure of Registration Status Only
    The proposed rules both prohibit certain names or titles and 
require disclosure of broker-dealer or investment adviser registration 
status in all written and electronic retail investor communications of 
broker-dealers and SEC-registered investment advisers, including those 
of individual representatives, such as business cards, social media 
profiles, and signature blocks on paper or electronic correspondence. 
As an alternative to the proposed rules, the Commission could not 
propose a restriction on the use of certain names or titles by 
standalone registered broker-dealers, and solely propose requiring 
disclosure of registration status in all written and electronic retail 
investor communications given by the firm or its representatives.
    Although both broker-dealers and SEC-registered investment advisers 
would have to bear the cost of including a disclosure of their 
registration status in all written and electronic retail investor 
communications under this alternative, they would have to bear this 
cost under the proposed rules, as well.

[[Page 21513]]

This alternative, however, would allow broker-dealers to continue to 
use titles or names that include ``Adviser/Advisor'' and therefore 
would likely result in a lower overall cost of rebranding their 
financial professionals or the firm itself in all other communications.
    While the costs of compliance with a disclosure of registration 
status only requirement would be lower than under the proposed rules, 
and would apply uniformly to all broker-dealers and investment 
advisers, this alternative could be less effective in reducing investor 
confusion over the titles or names used by financial professionals and 
firms, and the implications of the types of services provided by, or 
standard of conduct applicable to, these professionals to the extent 
the registration status is uninformative to retail investors because 
they do not understand the regulatory implications of a firm being 
registered as either a broker-dealer or an investment adviser.
    Another potential, related, alternative would be to limit the 
disclosure of registration status only to certain marketing 
communications. The overall compliance costs to broker-dealers, 
particularly small broker-dealers that are less likely to produce 
advertising campaigns in either print media, television/radio 
broadcasts, mass mailings, or on websites, would be lower than under 
the requirements of the proposed rules for disclosure of registration 
status in all communications. This alternative, however, would likely 
reduce the potential benefits to retail investors, as only 
``advertisements'' would be required to produce the disclosure of 
registration status, and could increase both search costs and the 
possibility of mismatch associated with choosing the wrong type of 
financial firm or professional. To the extent small broker-dealers or 
investment advisers are less likely to use these types of marketing 
communications to reach potential customers relative to larger broker-
dealers and investment advisers (e.g., because there are fixed costs in 
producing an advertisement, the reduction in benefits is more likely to 
affect retail investors that use such small broker-dealers or 
investment advisers). Therefore, the Commission preliminarily believes 
that the potential compliance cost savings for limiting communications 
that would require such disclosure do not justify the reduced level of 
investor protection under such alternative.
    Another ``disclosure only'' alternative to the proposed restriction 
on the use of the terms ``adviser'' and ``advisor'' in names and titles 
would be to propose a rule that would provide that when any broker-
dealer not registered under the Advisers Act chooses to distribute 
advertisements or other communications using the term ``adviser'' or 
``advisor'' as part of a name or title, each use of the term would have 
to include an asterisked disclaimer clarifying its registration status. 
Under this alternative broker-dealers and their associated natural 
persons could continue to use these terms in their names and titles in 
retail investor communications, but investors would be potentially 
alerted by the asterisk to the actual registration status of the 
broker-dealer, which may reduce investors confusion about the type of 
services provided the associated standard of care to the extent they 
understand the meaning of the registration status. One limitation of 
this alternative, as well as the other alternatives discussed in this 
section, compared to the proposed rule is that some of the evidence on 
investor perceptions discussed previously in Section IV.A.3 suggest 
that many retail investors may not fully understand the meaning of the 
registration status. Moreover, the asterisked declaimer may not be 
salient enough to attract investors' attention to the disclaimer.
d. Additional Requirements for Dual Registrants
    We estimate that the number of dual registrants represents 
approximately 13% of all retail broker-dealer firms and that 
approximately 65% of registered representatives of retail broker-
dealers work at these dual registrants.\706\ Although the proposed rule 
restricts supervised persons of dual registrants who do not provide 
investment advice on behalf of such investment adviser, a percentage of 
dually registered firms would not be affected by the proposed 
restriction of certain names and titles. To address this issue, we 
considered an alternative to the proposed rule which would prohibit the 
name or title containing the terms ``adviser'' or ``advisor'' unless a 
``a substantial part of the business consists of rendering investment 
supervisory services.'' \707\ We also considered limiting dual 
registrants' use of the term ``adviser'' or ``advisor'' to when they 
provide advice to a retail investor in the capacity as an investment 
adviser, and prohibiting dual registrants from using such terms when 
acting in the capacity of a broker-dealer to a particular customer.
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    \706\ As shown in supra Table 1, Panel B those broker-dealer 
firms that were registered in a dual capacity were 360 of 
approximately 2,857 firms (about 13%) as of December 31, 2017. Using 
data from Form ADV filings, these 360 dually-registered firms had 
approximately $4.3 trillion of AUM. As discussed in Section 
IV.A,1.e, almost all registered financial professionals at dual 
registrants are either dual-hatted or registered representatives. 
Because dual registrants employ approximately 61% of all licensed 
financial professionals (see supra Table 5) and approximately 94% of 
all financial professionals are either dual hatted or registered 
representatives (48/51 = 0.94; see supra Table 6), it means that 
approximately 65% (0.61/0.94 = 0.65) of all registered 
representatives, whether dual hatted or not, work at dual 
registrants.
    \707\ See section 208(c) of the Advisers Act.
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    Under this alternative, some of the investor pool may face reduced 
confusion in their communications with their financial professional 
with regard to the use of specific names and titles, because these 
names and titles containing the term ``adviser'' or ``advisor'' would 
be limited only to the accounts or the instances in which the financial 
professional actually serves in the capacity as an investment adviser. 
However, these alternatives for dual registrants would create 
substantial compliance challenges for dual registrants. For example, 
dual registrants would have to ensure the appropriate name or title is 
being used when the financial professional is engaging in multiple 
capacities with investors. Moreover, requiring financial professionals 
that are dual registrants to tailor their names or titles based on what 
capacity they are acting in could increase confusion to investors, 
given that some dual registrants might act in broker-dealer and 
investment adviser capacities for a single investor. For example, a 
retail investor may have both a brokerage account and an advisory 
account, and may receive advice related to both brokerage 
recommendations as well as ongoing advice in the advisory account in a 
single communication.
5. Request for Comments
    The Commission requests comment on all aspects of the economic 
analysis, including the analysis of: (i) Potential benefits and costs 
and other economic effects; (ii) long-term effects of the proposed 
restriction on the use of certain titles and required disclosure of 
registration status on efficiency, competition, and capital formation; 
and (iii) reasonable alternatives to the proposed regulations. We also 
request comments identifying sources of data and that could assist us 
in analyzing the economic consequences of the proposed regulations.
    In addition to our general request for comment on the economic 
analysis, we request specific comment on certain aspects of the 
proposal:
     Do commenters agree with our assessment that the main 
potential

[[Page 21514]]

benefits to retail investors are reduced search costs and a lower risk 
of mismatch? Are there other benefits of the proposed rule that have 
not been identified in our discussion and that warrant consideration? 
Are the assumptions that form the basis of our analysis of the benefits 
appropriate? Can commenters provide data that supports or opposes these 
assumptions?
     Do commenters agree with our characterization of the 
costs? Are the assumptions that form the basis of our analysis of the 
costs appropriate? Are there other costs to investors of the proposed 
rule that have not been identified in our discussion and that warrant 
consideration? Can commenters provide data that supports or opposes 
these assumptions?
     We request additional information on how retail investors 
search for financial professionals. In particular, are there studies, 
evidence or data available on how investors use company names and 
titles of representatives in their search for a financial professional?
     We request comments on our characterization of the 
benefits and costs to broker-dealers and investment advisers of the 
proposed rule. Do commenters agree with our characterization of the 
benefits and costs? Are there other benefits or costs of the proposed 
rule that have not been identified in our discussion and that warrant 
consideration? Are the assumptions that form the basis of our analysis 
of the benefits and costs appropriate? Can commenters provide data that 
supports or opposes these assumptions?
     We specifically request comments on the costs to broker-
dealers from having to change their company names as a result of the 
rule. How costly do commenters believe it would be for affected 
entities that would be required to their change current company names, 
including the costs of marketing materials and advertisements? Do 
broker-dealer company names have significant brand value? To what 
extent does the brand value lie in terms such as ``adviser'' or 
``advisor''?
     Do commenters believe standalone broker-dealers that would 
be affected by the proposed rule may decide to register as an 
investment advisers? Are there any specific types of standalone broker-
dealers that would be more likely to respond in this way? Do you 
believe standalone broker-dealers registering as investment advisers 
would affect their supply of brokerage services? What are the 
compliance and indirect costs for broker-dealers who would seek to 
register as an investment adviser? Is there additional data to estimate 
such costs, either initially or on an ongoing basis?
     Are there any effects on efficiency, competition, and 
capital formation that are not identified or are misidentified in our 
economic analysis? Please be specific and provide data and analysis to 
support your views.
     Do commenters believe that the alternatives the Commission 
considered are appropriate? Are there other reasonable alternatives 
that the Commission should consider? If so, please provide additional 
alternatives and how their costs and benefits would compare to the 
proposal.

D. Combined Economic Effects of Form CRS Relationship Summary and 
Restrictions on the Use of Certain Titles and Required Disclosures 
About a Firm's Regulatory Status

    Above, we have described the anticipated standalone economic 
effects of the proposed Form CRS relationship summary and the proposed 
restrictions on the use of certain titles and required disclosures 
about a firm's regulatory status relative to the current baseline. In 
this section, we discuss how we anticipate these economic effects could 
change when considering both these proposed rules in combination.
    To the extent that investors may be confused and potentially misled 
about what type of investment advice relationship is best for their 
investing situation, being provided with the proposed Form CRS, along 
with the proposed restriction on names and titles, could incrementally 
reduce some of the investor confusion and mismatch risk. In particular, 
if a retail investor communicates with a financial professional 
associated with a dual registrant and the professional has a name or 
title containing either of the terms ``adviser'' or ``advisor'' but 
solely provides brokerage services, such investor would likely receive 
the dually registered firm's relationship summary. Because Form CRS 
would include a description of both business models, without the 
restriction on names and titles and the requirement of disclosure of 
registration status, some retail investors might incorrectly match the 
services they would receive from this financial professional to the 
description in the relationship summary of investment advisory 
services. In this case, the proposed restriction on names or titles and 
the requirement to disclose regulatory status would increase the 
effectiveness of Form CRS by reducing the risk of any mismatch between 
investor preferences and type of services received due to this kind of 
misunderstanding, which in turn may lead to harm such as the investor 
paying too much for advice if it if it leads to frequent trading. To 
the extent investors who received a relationship summary shares it with 
family and friends, the potential importance of having the restriction 
on the use of certain names and titles would be increased, because it 
could also reduce the risk of this type of misunderstanding being 
spread to a greater set of retail investors.
    However, for those investors whose confusion about the differences 
between broker-dealers' and investment advisers' services and standards 
of conduct would be substantially reduced once receiving and reading a 
firm's relationship summary we expect a reduced overall incremental 
benefit of the proposed restriction on the use of certain names and 
titles. Specifically, because such investors would learn about the 
differences between broker-dealer and investment adviser services 
through the relationship summary, they may be unlikely to hire the 
wrong type of firm or financial professional even without the proposed 
restriction on the use of certain names or titles.
    With respect to the initial search costs borne by investors, we do 
not believe that the relationship summary would alter the incremental 
effects the proposed restriction on certain names and titles may have 
on search costs, because the proposed Form CRS would generally be 
provided at a later stage in the search process (e.g., after initial 
contact with a financial professional is made) relative to the initial 
stage where names and titles of firms and financial professionals may 
be a useful search tool to investors. Similarly, we do not believe that 
the relationship summary would alter the incremental effects on search 
costs from the proposed requirement to disclose registration status in 
retail investor communications, because investors would likely 
encounter communications disclosing a firm's registration status prior 
to being provided a firm's relationship summary.
    We believe that the proposed Form CRS and the proposed required 
disclosures of registration status would complement each other because 
both are designed to reduce investor confusion. In particular, for less 
knowledgeable investors, the disclosure of registration status may 
raise awareness about the different forms of registration among 
financial intermediaries and their associated natural persons and 
prompt questions about the difference between registered broker-dealers 
and registered investment advisers. The relationship summary 
potentially could work in concert with the disclosure of

[[Page 21515]]

registration status to facilitate investors' learning about the 
different types of financial firms and professionals because it would 
highlight many of the key differences between investment advisers and 
broker-dealers in different communications and different times, 
consistent with the layered approach to disclosure that the 
relationship summary is designed to further. Likewise, if the 
disclosure of registration status makes such status more salient to 
less knowledgeable investors, such disclosure may induce a more careful 
reading of related parts in the relationship summary or provide 
incentives to discuss the information contained in disclosure with a 
financial professional. Thus, the combination of the disclosure of 
registration status and the relationship summary may further help 
facilitate the search process also for investors initially confused 
about the difference between broker-dealers and investment advisers, 
and help them ultimately better match to an appropriate financial 
professional.
    However, for more knowledgeable investors, there may be some 
overlap in function that could reduce the potential benefits to either 
the relationship summary or the disclosure of regulatory status without 
offsetting anticipated costs. As discussed previously, the disclosure 
of registration status may help to reduce search costs for investors 
who already understand the meaning of the registration status. These 
relatively knowledgeable investors may therefore already be familiar 
with some of the information in relationship summary by having 
encountered the disclosure of the registration status beforehand. In 
this case, the relationship summary may provide fewer additional 
benefits for these investors in either reducing search costs or the 
likelihood of mismatch, but would impose costs on both broker-dealers 
and investment advisers that must produce both the relationship summary 
and the disclosures of registration status.
    Finally, we note that any complementarities between the proposed 
restrictions on the use of certain names and titles, required 
disclosures about a firm's regulatory status, and the proposed 
relationship summary would be constrained by the fact (1) the 
relationship summary does not need to be provided by state-registered 
standalone investment advisers and (2) these state-registered 
investment advisers (and their supervised persons) would not be 
required to provide registration status disclosures in retail investor 
communications pursuant to this proposed rule.

V. Paperwork Reduction Act Analysis

    Certain provisions of our proposal contain ``collection of 
information'' requirements within the meaning of the Paperwork 
Reduction Act of 1995 (``PRA'').\708\ The Commission is submitting 
these collections of information to the Office of Management and Budget 
(``OMB'') for review in accordance with 44 U.S.C. 3507(d) and 5 CFR 
1320.11. The titles for the existing collections of information that we 
are proposing to amend are (i) ``Form ADV'' (OMB control number 3235-
0049), (ii) ``Rule 204-2 under the Investment Advisers Act of 1940'' 
(OMB control number 3235-0278), (iii) ``Rule 17a-3; Records to be Made 
by Certain Exchange Members, Brokers and Dealers'' (OMB control number 
3235-0033) and (iv) ``Rule 17a-4; Records to be Preserved by Certain 
Exchange Members, Brokers and Dealers'' (OMB control number 3235-0279). 
The new collections of information relate to (i) ``Rule 204-5 under the 
Investment Advisers Act of 1940,'' (ii) ``Form CRS and rule 17a-14 
under the Exchange Act,'' (iii) ``Rule 15l-3 under the Securities 
Exchange Act,'' and (iv) ``Rule 211h-1 under the Investment Advisers 
Act of 1940.'' 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 control number. The Commission is also 
including a short-form tear sheet for investors to provide feedback on 
the relationship summary.\709\
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    \708\ 44 U.S.C. 3501 et seq.
    \709\ See Appendix F. The Commission determines that using this 
short-form tear sheet to obtain information from investors is in the 
public interest and will protect investors. See Securities Act 
section 19(e).
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A. Form ADV

    Form ADV (OMB Control No. 3235-0049) is currently a two-part 
investment adviser registration form. Part 1 of Form ADV contains 
information used primarily by Commission staff, and Part 2 is the 
client brochure. We are not proposing amendments to Part 1 or 2. We use 
the information to determine eligibility for registration with us and 
to manage our regulatory and examination programs. Clients use certain 
of the information to determine whether to hire or retain an investment 
adviser. The collection of information is necessary to provide advisory 
clients, prospective clients and the Commission with information about 
the investment adviser and its business, conflicts of interest and 
personnel. Rule 203-1 under the Advisers Act requires every person 
applying for investment adviser registration with the Commission to 
file Form ADV. Rule 204-4 under the Advisers Act requires certain 
investment advisers exempt from registration with the Commission 
(``exempt reporting advisers'') to file reports with the Commission by 
completing a limited number of items on Form ADV. Rule 204-1 under the 
Advisers Act requires each registered and exempt reporting adviser to 
file amendments to Form ADV at least annually, and requires advisers to 
submit electronic filings through IARD. The paperwork burdens 
associated with rules 203-1, 204-1, and 204-4 are included in the 
approved annual burden associated with Form ADV and thus do not entail 
separate collections of information. These collections of information 
are found at 17 CFR 275.203-1, 275.204-1, 275.204-4 and 279.1 (Form ADV 
itself) and are mandatory. Responses are not kept confidential.
    We are proposing to amend Form ADV to add a new Part 3, requiring 
certain registered investment advisers to prepare and file a 
relationship summary for retail investors. As with Form ADV Parts 1 and 
2, we will use the information to determine eligibility for 
registration with us and to manage our regulatory and examination 
programs. Similarly, clients can use the information required in Part 3 
to determine whether to hire or retain an investment adviser, as well 
as what types of accounts and services are appropriate for their needs. 
The collection of information is necessary to provide advisory clients, 
prospective clients and the Commission with information about the 
investment adviser and its business, conflicts of interest and 
personnel. The proposal requiring investment advisers to deliver the 
relationship summary is contained in a new collection of information 
under proposed new rule 204-5 under the Advisers Act, which estimates 
are discussed in Section V.B below. We are not proposing amendments to 
Part 1 or 2 of Form ADV.\710\
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    \710\ We are proposing conforming technical amendments to the 
General Instructions of Form ADV to add references to the Part 3, 
but these amendments would not affect the burden of Part 1 or Part 
2. See proposed amendments to Form ADV: General Instructions.
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1. Respondents: Investment Advisers and Exempt Reporting Advisers
    The respondents to current Form ADV are investment advisers 
registered with the Commission or applying for registration with the 
Commission and

[[Page 21516]]

exempt reporting advisers.\711\ As of December 31, 2017, 12,721 
investment advisers were registered with the Commission, and 3,848 
exempt reporting advisers report information to the Commission.
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    \711\ An exempt reporting adviser is an investment adviser that 
relies on the exemption from investment adviser registration 
provided in either section 203(l) of the Advisers Act because it is 
an adviser solely to one or more venture capital funds or 203(m) of 
the Advisers Act because it is an adviser solely to private funds 
and has assets under management in the United States of less than 
$150 million. An exempt reporting adviser is not a registered 
investment adviser and therefore would not be subject to the 
relationship summary requirements.
---------------------------------------------------------------------------

    As discussed in Section II above, we propose to adopt amendments to 
Form ADV that would add a new Part 3, requiring certain registered 
investment advisers to prepare and file a relationship summary for 
retail investors. Only those registered investment advisers offering 
services to retail investors would be required to prepare and file a 
relationship summary. Based on IARD system data, the Commission 
estimates that 7,625 investment advisers provide advice to individual 
high net worth and individual non-high net worth clients.\712\
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    \712\ Based on responses to Item 5.D. of Form ADV. These 
advisers indicated that they advise either high net worth 
individuals or individuals (other than high net worth individuals), 
which includes trusts, estates, and 401(k) plans and IRAs of 
individuals and their family members, but does not include 
businesses organized as sole proprietorships. The proposed 
definition of retail investor would include a trust or other similar 
entity that represents natural persons, even if another person is a 
trustee or managing agent of the trust. We are not able to 
determine, based on responses to Form ADV, exactly how many advisers 
provide investment advice to these types of trusts or other 
entities; however, we believe that these advisers most likely also 
advise individuals and are therefore included in our estimate.
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    This would leave 5,096 registered investment advisers that do not 
provide advice to retail investors \713\ and 3,848 exempt reporting 
advisers that would not be subject to Form ADV Part 3 requirements, but 
are included in the PRA analysis for purposes of updating the overall 
Form ADV information collection.\714\ We also note that these figures 
include the burdens for 366 registered broker-dealers that are dually 
registered as investment advisers as of December 31, 2017.\715\
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    \713\ 12,721 registered investment advisers--7,625 = 5,096 
registered investment advisers not providing advice to retail 
investors.
    \714\ Based on IARD system data.
    \715\ See supra note 457.
---------------------------------------------------------------------------

2. Changes in Burden Estimates and New Burden Estimates
    Based on the prior revision of Form ADV,\716\ the currently 
approved total aggregate annual hour burden estimate for all advisers 
of completing, amending and filing Form ADV (Part 1 and Part 2) with 
the Commission is 363,082 hours, or a blended average of 23.77 hours 
per adviser,\717\ with a monetized total of $92,404,369, or $6,051 per 
adviser.\718\ The currently approved annual cost burden is $13,683,500. 
This burden estimate is based on: (i) The total annual collection of 
information burden for SEC-registered advisers to file and complete 
Form ADV (Part 1 and Part 2); and (ii) the total annual collection of 
information burden for exempt reporting advisers to file and complete 
the required items of Part 1A of Form ADV. Broken down by adviser type, 
the current approved total annual hour burden is 29.22 hours per SEC-
registered adviser, and 3.60 hours per exempt reporting adviser.\719\ 
The proposed amendments would increase the current burden estimate due 
in part to the proposed amendments to Form ADV to add Form ADV Part 3: 
Form CRS (the relationship summary) and the increased number of 
investment advisers and exempt reporting advisers since the last burden 
estimate. We are not proposing any changes to Part 1 or Part 2 of Form 
ADV.
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    \716\ See Form ADV and Investment Advisers Act Rules, Final 
Rule, Investment Advisers Act Release No. 4509 (Aug. 25, 2016) [81 
FR 60418 (Sep. 1, 2016)] (``2016 Form ADV Paperwork Reduction 
Analysis'').
    \717\ 363,082 hours/(12,024 registered advisers + 3,248 exempt 
reporting advisers) = 23.77 hours.
    \718\ $92,404,369 hours/(12,024 registered advisers + 3,248 
exempt reporting advisers) = $6,051.
    \719\ See 2016 Form ADV Paperwork Reduction Analysis, supra note 
716, at 81 FR 60454.
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    The proposed amendments to Form ADV to add Part 3 would increase 
the information collection burden for registered investment advisers 
with retail investors. As discussed above in Section II, we propose to 
adopt amendments to Form ADV, under Part 3, that would require certain 
registered investment advisers to prepare and file a relationship 
summary for retail investors. Only those registered investment advisers 
providing services to retail investors would be required to prepare and 
file a relationship summary. We propose to require that those 
investment advisers file their relationship summaries with the 
Commission electronically through IARD in the same manner as they 
currently file Form ADV Parts 1 and 2. Investment advisers also would 
need to amend and file an updated relationship summary within 30 days 
whenever any information becomes materially inaccurate.
    As noted in Section V.A.1 above, not all investment advisers would 
be required to prepare and file the relationship summary. For those 
investment advisers, the per adviser annual hour burden for meeting 
their Form ADV requirements would remain the same, in particular, 29.22 
hours per registered investment adviser without relationship summary 
obligations. Similarly, because exempt reporting advisers also would 
not have relationship summary obligations, the annual hour burden for 
exempt reporting advisers to meet their Form ADV obligations would 
remain the same, at 3.60 hours per exempt reporting adviser. However, 
although we are not proposing changes to Form ADV Part 1 and Part 2, 
and the per adviser information collection burden would not increase 
for those without the obligation to prepare and file the relationship 
summary, the information collection burden attributable to Parts 1 and 
2 of Form ADV would increase due to an increase in the number of 
registered investment advisers and exempt reporting advisers since the 
last information collection burden estimate. In this section, we 
discuss the increase in burden for Form ADV overall attributable to the 
proposed amendments, i.e., new Form ADV Part 3: Form CRS, and the 
increase due to the updated number of respondents that would not be 
subject to the proposed amendments.
a. Initial Preparation and Filing of Relationship Summary
    For investment advisers that provide advice to retail investors, we 
estimate that the initial first year burden for preparing and filing 
the relationship summary would be five hours per registered adviser. As 
discussed above, much of the language of the proposed relationship 
summary is prescribed. Furthermore, much of the information proposed to 
be required in the relationship summary overlaps with that required by 
Form ADV Part 2 and therefore should be readily available to registered 
investment advisers because of their existing disclosure obligations. 
Investment advisers also already file the Form ADV Part 2 brochure on 
IARD, and we have considered this factor in determining our estimate of 
the additional burden to file Form ADV Part 3: Form CRS. In addition, 
the narrative descriptions required in the relationship summary should 
be narrowly tailored and brief, and the relationship summary must be 
limited to four pages (or

[[Page 21517]]

equivalent limit if in electronic format). Thus, while we recognize 
that different firms may require different amounts of time to prepare 
the relationship summary, we believe that this is an appropriate 
average number for estimating an aggregate amount for the industry for 
purposes of the PRA analysis. Moreover, a considerable amount of 
language within each topic area also would be prescribed, thereby 
limiting the amount of time required to prepare the relationship 
summary. Based on these factors, we believe that the estimate of five 
hours to prepare and file the relationship summary is appropriate. We 
therefore estimate that the total burden of preparing and filing the 
relationship summary would be 38,125 hours.\720\ As with the 
Commission's prior Paperwork Reduction Act estimates for Form ADV, we 
believe that most of the paperwork burden would be incurred in 
advisers' initial preparation and submission of Part 3: Form CRS, and 
that over time this burden would decrease substantially because the 
paperwork burden would be limited to updating information.\721\ As 
under the currently approved collection, the estimated initial burden 
associated with preparing the relationship summary would be amortized 
over the estimated period that advisers would use the relationship 
summary, i.e., over a three-year period.\722\ The annual hour burden of 
preparing and filing the relationship summary would therefore be 
12,708.\723\ In addition, based on IARD system data, the Commission 
assumes that 1,000 new investment advisers will file Form ADV with us 
annually. Of these, we estimate that 477 would be required to prepare 
and file the relationship summary.\724\ Therefore, the aggregate 
initial burden for newly registered advisers to prepare the 
relationship summary would be 2,385 \725\ and, amortized over three 
years, 795 on an annual basis.\726\ In sum, the annual hour burden for 
existing and newly registered investment advisers to prepare and file a 
relationship summary would be 13,503 hours,\727\ or 1.67 hours per 
adviser.\728\
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    \720\ 5.0 hours x 7,625 investment advisers = 38,125 total 
aggregate initial hours.
    \721\ We discuss the burden for advisers making annual updating 
amendments to Form ADV in Section V.A.3 below.
    \722\ See 2016 Form ADV Paperwork Reduction Analysis, supra note 
716.
    \723\ 5.0 hours x 7,625 investment advisers/3 = 12,708 total 
annual aggregate hours.
    \724\ The number of new investment advisers is calculated by 
looking at the number of new advisers in 2016 and 2017 and then 
determining the number each year that serviced retail investors. 
(455 for 2016 + 499 for 2017)/2 = 477.
    \725\ 477 new RIAs required to prepare relationship summary x 
5.0 hours = 2,385 hours for new RIAs to prepare relationship 
summary.
    \726\ 477 x 5.0 hours/3 = 795.
    \727\ (38,125 + 2,385)/3 years = 13,503 annual hour burden for 
existing and new advisers to prepare and file relationship summary.
    \728\ 13, 503 hours/(7,625 existing advisers + 477 new advisers) 
= 1.67 hours per year.
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b. Estimated External Costs for Investment Advisers Preparing the 
Relationship Summary
    The currently approved total annual collection of information 
burden estimate for Form ADV anticipates that there will be external 
costs, including (i) a one-time initial cost for outside legal and 
compliance consulting fees in connection with the initial preparation 
of Part 2 of Form ADV, and (ii) the cost for investment advisers to 
private funds to report the fair value of their private fund 
assets.\729\ We do not anticipate that the amendments we are proposing 
today will affect the per adviser cost burden for those existing 
requirements but anticipate that some advisers may incur a one-time 
initial incremental cost for outside legal and consulting fees in 
connection with the initial preparation of the relationship summary. We 
do not anticipate external costs to investment advisers in the form of 
website set-up, maintenance, or licensing fees because they would not 
be required to establish a website for the sole purpose of posting 
their relationship summary if they do not already have a website. We 
also do not expect other ongoing external costs for the relationship 
summary. Although advisers would be required to amend the relationship 
summary within 30 days whenever any information becomes materially 
inaccurate, given the standardized nature and prescribed language of 
the relationship summary, we expect that amendments would be factual 
and require relatively minimal wording changes. We believe that the 
investment adviser would be more knowledgeable about these facts than 
outside legal or compliance consultants and would be able to make these 
revisions in-house. Therefore, we do not expect that investment 
advisers will need to incur ongoing external costs for the preparation 
and review of relationship summary amendments. Although advisers that 
would be subject to the relationship summary requirement may vary 
widely in terms of the size, complexity and nature of their advisory 
business, we believe that the amount of disclosure required would not 
vary substantially among advisers. Accordingly, we believe that the 
amount of time, and thus cost, required for outside legal and 
compliance review is unlikely to vary substantially among those 
advisers who elect to obtain outside assistance.\730\
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    \729\ See 2016 Form ADV Paperwork Reduction Analysis, supra note 
716, at 81 FR 60452. We do not anticipate that the amendments we are 
proposing to add Form ADV Part 3 will affect those per adviser cost 
burden estimates for outside legal and compliance consulting fees. 
The estimated external costs of outside legal and consulting 
services for the relationship summary are in addition to the 
estimated hour burden discussed above.
    \730\ We estimate that an external service provider would spend 
3 hours helping an adviser prepare an initial relationship summary. 
In estimating the external cost for the initial preparation of Form 
ADV Part 2, we estimated that small, medium, and large advisers 
would require 8, 11, and 26 hours of outside assistance, 
respectively, to prepare Form ADV Part 2. In comparison, as 
discussed above, the relationship summary is limited to four pages 
in length (or equivalent limit if in electronic format) and is 
standardized across investment advisers in terms of the mandated 
selection and sequence of topic areas. While we recognize that 
different firms may require different amounts of external assistance 
in preparing the relationship summary, we believe that this is an 
appropriate average number for estimating an aggregate amount for 
the industry purposes of the PRA analysis. See Brochure Adopting 
Release, supra note 157, at 75 FR at 49257.
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    Most of the information proposed to be required in the relationship 
summary is readily available to investment advisers from Form ADV Part 
2, and the narrative descriptions are narrowly tailored and brief or 
prescribed. As a result, we anticipate that a quarter of advisers will 
seek the help of outside legal services and half will seek the help of 
compliance consulting services in connection with the initial 
preparation of the relationship summary. We estimate that the initial 
per existing adviser cost for legal services related to the preparation 
of the relationship summary would be $1,416.\731\ We estimate that the 
initial per existing adviser cost for compliance consulting services 
related to the preparation of the relationship summary would be 
$2,109.\732\ Thus, the incremental external cost burden for existing 
investment advisers is estimated to be $10,739,813, or $3,579,938 
annually when amortized over a three-year

[[Page 21518]]

period.\733\ In addition, we assume that 1,000 new advisers will 
register with us annually, 477 of which would be required to prepare a 
relationship summary. For these 477 new advisers, we estimate that they 
will require $671,855 in external costs to prepare the relationship 
summary.\734\ In summary, the annual external legal and compliance 
consulting cost for existing and new advisers relating to relationship 
summary obligations is estimated to total $4,251,792, or $525 per 
adviser.\735\
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    \731\ External legal fees are in addition to the projected hour 
per adviser burden discussed above. $472 per hour for legal services 
x 3 hours per adviser = $1,416. The hourly cost estimate of $472 is 
based on an inflation-adjusted figure and our consultation with 
advisers and law firms who regularly assist them in compliance 
matters.
    \732\ External compliance consulting fees are in addition to the 
projected hour per adviser burden discussed above. Data from the 
SIFMA Management and Professional Earnings Report, modified to 
account for an 1,800-hour work year and multiplied by 5.35 to 
account for bonuses, firm size, employee benefits, and overhead, and 
adjusted for inflation (``SIFMA Management and Professional Earnings 
Report''), suggest that outside management consulting services cost 
approximately $703 per hour. $703 per hour for outside consulting 
services x 3 hours per adviser = $2,109.
    \733\ 25% x 7,625 existing advisers x $1,416 for legal services 
= $2,699,250 for legal services. 50% x 7,625 existing advisers x 
$2,109 for compliance consulting services = $8,040,563. $2,699,250 + 
$8,040,563 = $10,739,813 in external legal and compliance consulting 
costs for existing advisers. $10,739,813/3 = $3,579,938 annually.
    \734\ 25% x 477 new advisers x $1,416 for legal services = 
$168,858. 50% x 477 new advisers x $2,109 for compliance consulting 
services = $502,997. $168,858 + $502,997 = $671,855 annually in 
external legal and compliance consulting costs for newly registered 
advisers.
    \735\ $3,579,938 in external legal and compliance consulting 
costs for existing advisers + $671,855 for new advisers = $4,251,792 
annually for existing and new advisers. $4,251,792/($7,625 existing 
advisers + 477 new advisers) = $525 per adviser.
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c. Amendments to the Relationship Summary and Filing of Amendments
    The current approved information collection burden for Form ADV 
also includes the hour burden associated with annual and other 
amendments to Form ADV, among other requirements. We anticipate that 
the proposed relationship summary would increase the annual burden 
associated with Form ADV by 0.5 hours \736\ due to amendments to the 
relationship summary,\737\ for those advisers required to prepare and 
file a relationship summary. We do not expect amendments to be 
frequent, but based on the historical frequency of amendments made on 
Form ADV Parts 1 and 2, estimate that on average, each adviser 
preparing a relationship summary will likely amend the disclosure an 
average of 1.80 times per year.\738\ The collection of information 
burden of 0.5 hours for amendments to the relationship summary would 
include filing it. Based on the number of other-than-annual amendments 
filed by investment advisers with retail investors last year, we 
estimate that advisers will file an estimated total of 1.80 \739\ 
relationship summary amendments per year for an estimated total 
paperwork burden of 6,878 hours per year.\740\
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    \736\ We have previously estimated that investment advisers 
would incur 0.5 hours to prepare an interim (other-than-annual) 
amendment to Form ADV. See 2016 Form ADV Paperwork Reduction 
Analysis, supra note 716, at 81 FR at 60452. We believe that an 
amendment to the relationship summary would take a similar amount of 
time, if not less.
    \737\ Similarly, we estimated that 0.5 hours would be required 
for interim updating amendments to Form ADV Part 2. See Brochure 
Adopting Release, supra note 157, at 75 FR at 49257.
    \738\ This estimate is based on IARD system data regarding the 
number of filings of Form ADV amendments.
    \739\ Based on IARD data, 7,625 investment advisers with retail 
clients filed 13,756 other-than-annual amendments to Form ADV. 
13,756 other-than-annual amendments/7,625 investment advisers = 1.80 
amendments per investment adviser.
    \740\ 7,625 investment advisers amending relationship summaries 
x 1.80 amendments per year x 0.5 hours = 6,878 hours.
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d. Incremental Increase to Form ADV Hourly and External Cost Burdens 
Attributable to Proposed Amendments
    For existing and newly-registered advisers with relationship 
summary obligations, the additional burden attributable to amendments 
to Form ADV to add Part 3: Form CRS, (including the initial preparation 
and filing of the relationship summary and amendments thereto) totals 
20,381 hours,\741\ or 2.52 hours per adviser,\742\ and a monetized cost 
of $5,248,193, or $648 per adviser.\743\ The incremental external legal 
and compliance cost is estimated to be $4,251,792.\744\
---------------------------------------------------------------------------

    \741\ 13,503 hours for initial preparation and filing of the 
relationship summary + 6,878 hours for amendments to the 
relationship summary = 20,381 total aggregate annual hour burden 
attributable to the Form ADV amendments to add Part 3: Form CRS.
    \742\ 20,381 hours/(7,625 existing advisers + 477 newly 
registered advisers) = 2.52 hours per adviser.
    \743\ 20,381 total aggregate annual hour burden for preparing 
and filing a relationship summary. We expect 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 suggest that costs for 
these positions are $229 and $298 per hour, respectively. 20,381 
hours x 0.5 x $229 = $2,211,375. 20,381 hours x 0.5 x $298 = 
$3,036,819. $2,211,375 + $3,036,819 = $5,248,193. $5,248,193/(7,625 
existing registered advisers + 477 newly registered advisers) = $648 
per adviser.
    \744\ See supra note 735.
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3. Total Revised Burden Estimates for Form ADV
a. Revised Hourly and Monetized Value of Hourly Burdens
    As discussed above, the currently approved total aggregate annual 
hour burden for all registered advisers completing, amending, and 
filing Form ADV (Part 1 and Part 2) with the Commission is 363,082 
hours, or a blended average per adviser burden of 23.77 hours, with a 
monetized cost of $92,404,369, or $6,051 per adviser. This includes the 
total annual hour burden for registered advisers of 351,386 hours, or 
29.22 hours per registered adviser, and 11,696 hours for exempt 
reporting advisers, or 3.60 hours per exempt reporting adviser. For 
purposes of updating the total information collection based on the 
proposed amendments to Form ADV, we consider three categories of 
respondents, as noted above: (i) Existing and newly-registered advisers 
preparing and filing a relationship summary, (ii) registered advisers 
with no obligation to prepare and file a relationship summary, and 
(iii) exempt reporting advisers.
    For existing and newly-registered advisers preparing and filing a 
relationship summary, including amendments to the disclosure, the total 
annual collection of information burden for preparing all of Form ADV, 
updated to reflect the proposed amendments to Form ADV, equals 31.74 
hours per adviser, with 2.52 hours attributable to the proposed 
amendments.\745\ On an aggregate basis, this totals 257,122 hours for 
existing and newly registered advisers, with a monetized value of 
$66,208,857.\746\
---------------------------------------------------------------------------

    \745\ 29.22 hours + 2.52 hours for increase in burden 
attributable to initial preparation and filing of, and amendments 
to, relationship summary = 31.74 hours total.
    \746\ 31.74 hours x 7,625 existing RIAs required to prepare a 
relationship summary + 477 newly registered RIAs required to prepare 
a relationship summary = 257,122 total aggregate annual hour burden 
for preparing, filing and amending a relationship summary. We expect 
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 suggest that costs for these positions are $229 and $298 per 
hour, respectively. 257,122 hours x 0.5 x $229 = $27,897,712. 
257,122 hours x 0.5 $298 = $38,311,144. $27,897,712 + $38,311,144 = 
$66,208,857.
---------------------------------------------------------------------------

    As noted above, we estimate 5,096, or approximately 40% of existing 
registered advisers, would not have retail investors; therefore, they 
would not be obligated to prepare and file relationship summaries, so 
their annual per adviser hour burden would remain unchanged.\747\ To 
that end, using the currently approved total annual hour estimate of 
29.22 hours per registered investment adviser to prepare and amend Form 
ADV, we estimate that the updated annual hourly burden for all existing 
and newly-registered investment advisers not required to prepare a 
relationship summary would be 164,187,\748\ with a monetized value

[[Page 21519]]

of $43,263,322.\749\ The revised total annual collection of information 
burden for exempt reporting advisers, using the currently approved 
estimate of 3.60 hours per exempt reporting adviser, would be 15,653 
hours,\750\ for a monetized cost of $4,124,513, or $949 per exempt 
reporting adviser.\751\
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    \747\ 12,721 registered investment advisers--7,625 registered 
investment advisers with retail investors = 5,096 registered 
investment advisers without retail investors.
    \748\ 29.22 hours x (5,096 existing and 523 newly-registered 
investment advisers without retail investors) = approximately 
164,187 total annual hour burden for RIAs not preparing a 
relationship summary.
    \749\ We expect that performance of this function for registered 
advisers will most likely be equally allocated between a senior 
compliance examiner and a compliance manager. Data from the 2018 
SIFMA Management and Professional Earnings Report suggest that costs 
for these positions are $229 and $298 per hour, respectively. 
164,187 hours x 0.5 x $229 = $18,799,432. 164,187 hours x 0.5 x $298 
= $24,463,890. $18,799,432 + $24,463,890 = $43,263,322.
    \750\ 3.60 hours x 3,848 exempt reporting advisers currently + 
500 new exempt reporting advisers = 15,653 hours.
    \751\ As with preparation of the Form ADV for registered 
advisers, we expect that performance of this function for exempt 
reporting advisers will most likely be equally allocated between a 
senior compliance examiner and a compliance manager. Data from the 
2018 SIFMA Management and Professional Earnings Report suggest that 
costs for these positions are $229 and $298 per hour, respectively. 
15,653 hours x 0.5 x $229 = $1,792,246. 15,653 hours x 0.5 x $298 = 
$2,322,267. $1,792,246 + $2,322,267 = $4,124,513. $4,124,513/(3,848 
exempt reporting advisers currently + 500 new exempt reporting 
advisers) = $949 per exempt reporting adviser.
---------------------------------------------------------------------------

    In summary, factoring in the proposed amendments to Form ADV to add 
Part 3, the revised aggregate burden for Form ADV for all registered 
advisers and exempt reporting advisers would be 436,962,\752\ for a 
monetized cost of $115,139,422.\753\ This results in a blended average 
per adviser burden for Form ADV of 26.37 hours \754\ and $6,949 per 
adviser.\755\ This is an increase of 73,880 hours, \756\ or $22,735,053 
\757\ in the monetized value of the hour burden, from the currently 
approved annual aggregate burden estimates, increases which are 
attributable primarily to the proposed burden estimates on the larger 
registered investment adviser and exempt reporting adviser population 
since the most recent approval, adjustments for inflation, and the 
amendments to Form ADV.
---------------------------------------------------------------------------

    \752\ 257,122 annual hour burden for RIAs preparing relationship 
summary + 164,187 annual hour burden for RIAs not preparing 
relationship summary + 15,653 annual hour burden for exempt 
reporting advisers = 436,962 total updated Form ADV annual hour 
burden.
    \753\ $66,208,857 for RIAs preparing relationship summary + 
$43,263,890 for RIAs not preparing relationship summary + $4,124,513 
for exempt reporting advisers = $115,139,422 total updated Form ADV 
annual monetized hourly burden.
    \754\ 436,962/(12,721 registered investment advisers + 3,843 
exempt reporting advisers) = 26.37 hours per adviser.
    \755\ $115,139,422/12,721 registered investment advisers + 3,843 
exempt reporting advisers) = $6,949 per adviser.
    \756\ 436,962 hours estimated--363,082 hours currently approved 
= 73,880 hour increase in aggregate annual hourly burden.
    \757\ $115,139,422 monetized hourly burden-$92,404,369 = 
$22,735,053 increase in aggregate annual monetized hourly burden.
---------------------------------------------------------------------------

b. Revised Estimated External Costs for Form ADV
    The currently approved total annual collection of information 
burden estimate for Form ADV anticipates that there will be external 
costs, including (i) a one-time initial cost for outside legal and 
compliance consulting fees in connection with the initial preparation 
of Part 2 of Form ADV, and (ii) the cost for investment advisers to 
private funds to report the fair value of their private fund 
assets.\758\ The currently approved annual cost burden for Form ADV is 
$13,683,500, $3,600,000 of which is attributable to external costs 
incurred by new advisers to prepare Form ADV Part 2, and $10,083,500 of 
which is attributable to obtaining the fair value of certain private 
fund assets.\759\ We do not expect any change in the annual external 
costs relating to new advisers preparing Form ADV Part 2. Due to the 
slightly higher number of registered advisers with private funds, 
however, the cost of obtaining the fair value of private fund assets 
may be higher. We estimate that 6% of registered advisers have at least 
one private fund client that may not be audited. Based on IARD system 
data as of December 31, 2017, 4,670 registered advisers advise private 
funds. We therefore estimate that approximately 281 registered advisers 
may incur costs of $37,625 each on an annual basis, for an aggregate 
annual total cost of $10,572,625.\760\
---------------------------------------------------------------------------

    \758\ See 2016 Form ADV Paperwork Reduction Analysis, supra note 
716, at 81 FR 60452. We do not anticipate that the amendments we are 
proposing to add to Form ADV Part 3 will affect those per adviser 
cost burden estimates for outside legal and compliance consulting 
fees. The estimated external costs of outside legal and compliance 
consulting services for the relationship summary are in addition to 
the estimated hour burden discussed above.
    \759\ See 2016 Form ADV Paperwork Reduction Analysis, supra note 
716, at 81 FR at 60452-53. The $10,083,500 is based on 4,469 
registered advisers reporting private fund activity as of May 16, 
2016.
    \760\ 6% x 4,760 = 281 advisers needing to obtain the fair value 
of certain private fund assets. 281 advisers x $37,625 = 
$10,572,625.
---------------------------------------------------------------------------

    In summary, taking into account (i) a one-time initial cost for 
outside legal and compliance consulting fees in connection with the 
initial preparation of Part 2 of Form ADV, (ii) the cost for investment 
advisers to private funds to report the fair value of their private 
fund assets, and (iii) the incremental external legal or compliance 
costs for the preparation of the proposed relationship summary, we 
estimate the annual aggregate external cost burden of the Form ADV 
information collection would be $18,424,417, or $1,448 per registered 
adviser.\761\ This represents a $4,740,917 increase from the current 
external costs estimate for the information collection.\762\
---------------------------------------------------------------------------

    \761\ $3,600,000 for preparation of Form ADV Part 2 + 
$10,572,625 for registered investment advisers to fair value their 
private fund assets + $4,251,792 to prepare relationship summary = 
$18,424,417 in total external costs for Form ADV. $18,424,417/12,721 
total registered advisers as of December 31, 2017 = $1,448 per 
registered adviser.
    \762\ $18,424,417 - $13,683,500 = $4,740,917.
---------------------------------------------------------------------------

B. Rule 204-2 Under the Advisers Act

    Under section 204 of the Advisers Act, investment advisers 
registered or required to register with the Commission under section 
203 of the Advisers Act must make and keep for prescribed periods such 
records (as defined in section 3(a)(37) of the Exchange Act), furnish 
copies thereof, and make and disseminate such reports as the 
Commission, by rule, may prescribe as necessary or appropriate in the 
public interest or for the protection of investors. Rule 204-2 sets 
forth the requirements for maintaining and preserving specified books 
and records. We are proposing amendments to rule 204-2 that would 
require registered advisers to retain copies of each relationship 
summary. Investment advisers would also be required to maintain each 
amendment to the relationship summary as well as to make and preserve a 
record of dates that each relationship summary and each amendment was 
delivered to any client or to any prospective client who subsequently 
becomes a client, as well as to any retail investor before such retail 
investor opens an account. These records would be required to be 
maintained in the same manner, and for the same period of time, as 
other books and records required to be maintained under rule 204-2(a), 
to allow regulators to access the relationship summary during an 
examination. Specifically, investment advisers would be required to 
maintain and preserve a record of the relationship summary in an easily 
accessible place for not less than five years from the end of the 
fiscal year during which the last entry was made on such record, the 
first two years in an appropriate office of the investment adviser. 
This collection of information is found at 17 CFR 275.204-2 and is 
mandatory. The Commission staff uses the collection of information in 
its examination and oversight program. Requiring maintenance of these 
disclosures as part of the firm's books and records would facilitate 
the Commission's ability to inspect for and enforce compliance with 
firms' obligations with respect to Form CRS.

[[Page 21520]]

The information generally is kept confidential.\763\
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    \763\ See section 210(b) of the Advisers Act (15 U.S.C. 80b-
10(b)).
---------------------------------------------------------------------------

    The likely respondents to this collection of information are all of 
the approximately 12,721 advisers currently registered with the 
Commission. We estimate that based on updated IARD data as of December 
31, 2017, 7,625 existing advisers will be subject to the amended 
provisions of rule 204-2 to preserve the relationship summary as a 
result of the proposed amendments.
1. Changes in Burden Estimates and New Burden Estimates
    The approved annual aggregate burden for rule 204-2 is currently 
2,199,791 hours, with a total annual aggregate monetized cost burden of 
approximately $130,316,112, based on an estimate of 12,024 registered 
advisers, or 183 hours per registered adviser.\764\ We estimate that 
the proposed amendments would result in an increase in the collection 
of information burden estimate by 0.2 hours \765\ for each of the 
estimated 7,625 registered advisers with relationship summary 
obligations,\766\ resulting in a total of 183.2 hours per adviser. This 
would yield an annual estimated aggregate burden of 1,396,900 hours 
under amended rule 204-2 for all registered advisers with relationship 
summary obligations,\767\ for a monetized cost of $85,476,311.\768\ In 
addition, the 5,096 advisers \769\ not subject to the proposed 
amendments would continue to be subject to an unchanged burden of 183 
hours under rule 204-2, or a total aggregate annual hour burden of 
932,568,\770\ for a monetized cost of $57,063,836.\771\ In summary, 
taking into account the estimated annual burden of registered advisers 
that would be required to maintain records of the relationship summary, 
as well as the estimated annual burden of registered advisers that do 
not have relationship summary obligations and whose information 
collection burden is unchanged, the revised annual aggregate burden for 
all respondents to rule 204-2, under the proposed amendments, would be 
estimated to be 2,329,468 total hours,\772\ for a monetized cost of 
$142,540,147.\773\
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    \764\ See 2016 Form ADV Paperwork Reduction Analysis, supra note 
716, at 81 FR at 60454-55.
    \765\ In the Paperwork Reduction Act analysis for amendments to 
Form ADV adopted in 2016, we estimated that 1.5 hours would be 
required for each adviser to make and keep records relating to (i) 
the calculation of performance the adviser distributes to any person 
and (ii) all written communications received or sent relating to the 
adviser's performance. Because the burden of preparing of the 
relationship summary is already included in the collection of 
information estimates for Form ADV, and because the relationship is 
a short, standardized document, we assume that recordkeeping burden 
for the relationship summary would be considerably less than 1.5 
hours and estimate that 0.2 hours would be appropriate.
    \766\ See supra note 674.
    \767\ 7,625 registered investment advisers required to prepare 
relationship summary x 183.2 hours = 1,396,900 hours.
    \768\ As with our estimates relating to the previous amendments 
to rule 204-2 (see 2016 Form ADV Paperwork Reduction Analysis, supra 
note 716, at 81 FR at 60454-55, we expect that performance of this 
function will most likely be allocated between compliance clerks and 
general clerks, with compliance clerks performing 17% of the 
function and general clerks performing 83% of the function. Data 
from the SIFMA Office Salaries in the Securities Industry Report, 
modified to account for an 1,800-hour work year and multiplied by 
2.93 to account for bonuses, firm size, employee benefits, and 
overhead (``SIFMA Office Salaries Report), suggest that costs for 
these positions are $67 and $60, respectively. (17% x 1,396,9001 
hours x $67) + (83% x 1,396,900 hours x $60) = $85,476,311.
    \769\ See supra note 681.
    \770\ 5,096 registered investment advisers not required to 
prepare the relationship summary x 183 hours = 932,568.
    \771\ As with our estimates relating to the previous amendments 
to rule 204-2 (see 2016 Form ADV Paperwork Reduction Analysis, supra 
note 716, at 81 FR at 60454-55, we expect that performance of this 
function will most likely be allocated between compliance clerks and 
general clerks, with compliance clerks performing 17% of the 
function and general clerks performing 83% of the function. Data 
from the SIFMA Office Salaries Report suggest that costs for these 
positions are $67 and $60, respectively. (17% x 932,568 hours x $67) 
+ (83% x 932,568 hours x $60) = $57,063,836.
    \772\ 7,625 registered investment advisers required to prepare 
relationship summary x 183.2 hours = 1,396,900 hours. 5,096 
registered investment advisers not required to prepare the 
relationship summary x 183 hours = 932,568 hours. 1,396,900 hours + 
932,568 hours = 2,329,468 hours.
    \773\ $85,476,311 + $57,063,836 = $142,540,147.
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2. Revised Annual Burden Estimates
    As noted above, the approved annual aggregate burden for rule 204-2 
is currently 2,199,791, hours based on an estimate of 12,024 registered 
advisers, or 183 hours per registered adviser.\774\ The revised annual 
aggregate hourly burden for rule 204-2 would be 2,329,468 \775\ hours, 
represented by a monetized cost of $142,540,147,\776\ based on an 
estimate of 7,625 registered advisers with the relationship summary 
obligation and 5,096 registered advisers without, as noted above. This 
represents an increase of 129,677 \777\ annual aggregate hours in the 
hour burden and an annual increase of $12,224,035 from the currently 
approved total aggregate monetized cost for rule 204-2.\778\ These 
increases are attributable to a larger registered investment adviser 
population since the most recent approval and adjustments for 
inflation, as well as the proposed rule 204-2 amendments relating to 
the relationship summary as discussed in this proposing release.
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    \774\ 2,199,791 hours/12,024 registered advisers = 183 hours per 
adviser.
    \775\ See supra note 772.
    \776\ See supra note 773.
    \777\ 2,329,467 hours - 2,199,791 hours = 129,677 hours.
    \778\ $142,540,073 - $130,316,112 = $12,224,035.
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C. Rule 204-5 Under the Advisers Act

    Proposed new rule 204-5 would require an investment adviser to 
deliver the relationship summary to each retail investor before or at 
the time the adviser enters into an investment advisory agreement (even 
if the adviser's agreement with the retail investor is oral) as well as 
to existing clients one time within a specified time period after the 
effective date of the proposed amendments. The adviser also would 
deliver the relationship summary to existing clients before or at the 
time (i) a new account is opened that is different from the retail 
investor's existing account(s); or (ii) changes are made to the retail 
investor's existing account(s) that would materially change the nature 
and scope of the adviser's relationship with the retail investor, as 
further discussed in Section II.C.2 above. In addition, advisers would 
be required to post a current version of their relationship summary 
prominently on their public website (if they have one). Investment 
advisers would be required to communicate any changes in an updated 
relationship summary to retail investors who are existing clients or 
customers of the firm within 30 days after the updates are required to 
be made and without charge. The communication can be made by delivering 
the relationship summary or by communicating the information in another 
way to the retail investor.
    Proposed new rule 204-5 contains a collection of information 
requirement. The collection of information is necessary to provide 
advisory clients, prospective clients and the Commission with 
information about the investment adviser and its business, conflicts of 
interest and personnel. Clients would use the information contained in 
the relationship summary to determine whether to hire or retain an 
investment adviser and what type of accounts and services are 
appropriate for their needs. The Commission would use the information 
to determine eligibility for registration with us and to manage our 
regulatory and examination programs. This collection of information 
would be found at 17 CFR 275.204-5 and would be mandatory. Responses 
would not be kept confidential.
1. Respondents: Investment Advisers
    The likely respondents to this information collection would be the 
approximately 7,625 investment

[[Page 21521]]

advisers registered with the Commission that would be required to 
deliver a relationship summary per proposed new rule 204-5. We also 
note that these figures include the 366 registered broker-dealers that 
are dually registered as investment advisers.\779\
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    \779\ See supra note 457 and accompanying text.
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2. Initial and Annual Burdens
a. Posting of the Relationship Summary to Website
    Under proposed new rule 204-5, advisers would be required to post a 
current version of their relationship summary prominently on their 
public website (if they have one). We estimate that each adviser would 
incur 0.5 hours to prepare the relationship summary, such as to ensure 
proper electronic formatting, and to post the disclosure to the 
adviser's website, if the adviser has one.\780\ Based on IARD system 
data, 91.1% of investment advisers with individual clients report at 
least one public website. Therefore, we estimate that 91.1% of the 
7,625 existing and 477 newly-registered investment advisers with 
relationship summary obligations would incur a total of 3,690 aggregate 
burden hours to post relationship summaries to their websites,\781\ 
with a monetized cost of $221,428.\782\ As with the initial preparation 
of the relationship summary, we amortize the estimated initial burden 
associated with posting the relationship summary over a three-year 
period.\783\ Therefore, the total annual aggregate hourly burden 
related to the initial posting of the relationship summary is estimated 
to be 1,230 hours, with a monetized cost of $73,809.\784\ We do not 
anticipate external costs to rule 204-5 because investment advisers 
without a public website would not be required to establish or maintain 
one. External costs for the preparation of the relationship summary are 
already included for the collection of information estimates for Form 
ADV, in Section V.A, above.
---------------------------------------------------------------------------

    \780\ This estimate is based upon staff experience. See e.g., 
Enhanced Mutual Fund Disclosure Adopting Release, supra note 47 
(``we estimate, as we did in the proposing release, that rule 498 
will impose a \1/2\ hour burden per portfolio annually associated 
with the compilation of the additional information required on a 
cover page or at the beginning of the Summary Prospectus. Rule 498 
also imposes annual hour burdens associated with the posting of a 
fund's Summary Prospectus, statutory prospectus, SAI, and most 
recent report to shareholders on an Internet website. We estimate 
that the average hour burden for one portfolio to comply with the 
Internet website posting requirements will be approximately one hour 
annually.'') Because rule 204-5 pertains to one document, the 
relationship summary, which is much shorter than the several 
documents to which rule 498 applies, we estimate that each adviser 
on average would incur approximately 0.5 hours for the preparation 
of the relationship summary for posting, and for the posting itself.
    \781\ 0.5 hours to prepare and post the relationship summary x 
91.1% x (7,625 existing advisers + 477 newly-registered advisers 
with relationship summary obligations) x 0.5 hours = 3,690 hours.
    \782\ Based on data from the SIFMA Office Salaries Report, we 
expect that requirement for investment advisers to post their 
relationship summaries to their websites will most likely be 
performed by a general clerk at an estimated cost of $60 per hour. 
0.5 hours per adviser x $60 = $30 in monetized costs per adviser. 
$30 per adviser x (7,625 existing advisers + 477 newly registered 
advisers = $221,428 total aggregate monetized cost.
    \783\ See 2016 Form ADV Paperwork Reduction Analysis, supra note 
716.
    \784\ 43,688 hours/3 years = 1,230 hours annually. $221,428/3 
years = $73,809 in annualized monetized costs.
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b. Delivery to Existing Clients
i. One-Time Initial Delivery to Existing Clients
    The burden for this proposed rule is based on each adviser with 
retail investors having, on average, an estimated 4,461 clients who are 
retail investors.\785\ Although advisers may either deliver the 
relationship summary separately, in a ``bulk delivery'' to clients, or 
as part of the delivery of information that advisers already provide, 
such as the annual Form ADV update, account statements or other 
periodic reports, we base our estimates here on a ``bulk delivery'' to 
existing clients. This is similar to the approach we took in estimating 
the delivery costs for amendments to rule 204-3 under the Advisers Act, 
which requires investment advisers to deliver their Form ADV Part 2 
brochures and brochure supplements to their clients.\786\ As with the 
estimates for rule 204-3, we estimate that advisers would require 
approximately 0.02 hours to deliver the relationship summary to each 
client.\787\ Based on IARD data as of December 31, 2017, we estimate 
that advisers with the obligation to deliver the relationship summary 
under proposed rule 204-5 have, on average, 4,461 clients who are 
retail investors, per adviser. Thus, we estimate the total burden hours 
for 7,625 advisers for initial delivery of the relationship to existing 
clients to be 89.22 hours per adviser, or 722,860 total aggregate 
hours, for the first year after the rule is in effect,\788\ with a 
monetized cost of $5,353 \789\ per adviser or $43,339,507 in 
aggregate.\790\ Amortized over three years, the total annual hourly 
burden is estimated to be 29.74 hours per adviser, or 240,953 annual 
hours in aggregate,\791\ with annual monetized costs of $1,784 per 
adviser, or $14,457,209 in aggregate.\792\ We do not expect that 
investment advisers will incur external costs for the initial delivery 
of the relationship summary to existing clients because we assume that 
advisers will make such deliveries along with another required 
delivery, such as an interim or annual update to the Form ADV Part 2.
---------------------------------------------------------------------------

    \785\ Based on IARD system data as of December 31, 2017.
    \786\ See Brochure Adopting Release, supra note 157, at 75 FR at 
49259.
    \787\ This is the same estimate we made in the Form ADV Part 2 
proposal and for which we received no comment. Brochure Adopting 
Release, supra note 157, at 75 FR at 49259 We note that the burden 
for preparing relationship summaries is already incorporated into 
the burden estimate for Form ADV discussed above.
    \788\ (0.02 hours per client x 4,461 retail clients per adviser) 
= 89.22 hours per adviser. 89.22 hours per adviser x (7,625 existing 
advisers + 477 newly registered advisers) = 722,860 total aggregate 
hours.
    \789\ Based on data from the SIFMA Office Salaries Report, we 
expect that initial delivery requirement to existing clients of rule 
204-5 will most likely be performed by a general clerk at an 
estimated cost of $60 per hour. 89.22 hours per adviser x $60 = 
$5,353 in monetized costs per adviser. We estimate that advisers 
will not incur any incremental postage costs because we assume that 
they will make such deliveries with another mailing the adviser was 
already delivering to clients, such as interim or annual updates to 
the Form ADV, or will deliver the relationship summary 
electronically.
    \790\ $5,353 in monetized costs per adviser x (7,625 existing 
advisers + 477 newly registered advisers) = $43,339,507 in total 
aggregate costs.
    \791\ 89.22 initial hours per adviser/3 = 29.74 total annual 
hours per adviser. 722,860 initial aggregate hours/3 = 240,953 total 
annual aggregate hours.
    \792\ $5,353 in monetized costs per adviser/3 = $1,784 
annualized monetized cost per adviser. $43,339,507 initial aggregate 
monetized cost/3 = $14,14,457,209 in total annual aggregate 
monetized cost.
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ii. Delivery for New Account Types or Material Changes in the Nature or 
Scope of the Advisory Relationship
    As noted above, investment advisers also would be required to 
deliver the relationship summary to existing clients before or at the 
time (i) a new account is opened that is different from the retail 
investor's existing account(s); or (ii) changes are made to the retail 
investor's existing account(s) that would materially change the nature 
and scope of the adviser's relationship with the retail investor, as 
further discussed in Section II.C.2. With respect to delivery of the 
relationship summary in the event new account types are opened or 
material changes occur in the nature or scope of the advisory 
relationship, we expect that such delivery would take place among 10% 
of an adviser's retail investors annually. We would therefore estimate 
a total annual hourly burden of 9 hours per adviser and 72,286 hours in 
total annual aggregate hours,\793\ with a monetized cost of $535 per 
adviser \794\

[[Page 21522]]

and $4,337,163 in aggregate.\795\ We do not expect advisers to incur 
external costs related to deliveries of the relationship summary due to 
new account type openings, or material changes to the nature or scope 
of the relationship, because we assume that advisers will deliver the 
relationship summary along with new account agreements and other 
information normally required in such circumstances.
---------------------------------------------------------------------------

    \793\ 10% of 4,461 retail clients per adviser x .02 hours to 
deliver the relationship summary = 9 hours per adviser. 9 hours x 
(7,625 existing advisers + 477 new advisers) = 72,286 total 
aggregate hours.
    \794\ Based on data from the SIFMA Office Salaries Report, we 
expect that delivery requirements of rule 204-5 will most likely be 
performed by a general clerk at an estimated cost of $60 per hour. 9 
hours per adviser x $60 = $535 per adviser. We estimate that 
advisers will not incur any incremental postage costs in the 
delivery of the relationship summary to existing clients for changes 
in accounts, because we assume that advisers will make such 
deliveries with another mailing the adviser was already delivering 
to clients, such as new account agreements and other documentation 
normally required in such circumstances.
    \795\ $535 in monetized costs per adviser x (7,625 existing 
advisers + 477 newly registered advisers) = $4,337,163 in total 
aggregate costs.
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iii. Posting of Amended Relationship Summaries to Websites and 
Communicating Changes to Amended Relationship Summaries, Including by 
Delivery
    Investment advisers would be required to amend their relationship 
summaries within 30 days when any of the information becomes materially 
inaccurate. We do not expect amendments to be frequent, but based on 
the historical frequency of amendments made on Form ADV Parts 1 and 2, 
estimate that on average, each adviser preparing a relationship summary 
will likely amend the disclosure and average of 1.81 times per 
year.\796\ As above, we estimate that preparation of the relationship 
summary for posting to the web and the posting itself will require 0.5 
hours. Therefore, once again using the same percentage of investment 
advisers reporting public websites, 91.1% of 7,625 advisers would incur 
a total annual burden of 0.91 hours per adviser, or 6,286 hours in 
aggregate,\797\ to post the amended relationship summaries to their 
website. This translates into an annual monetized cost of $54.30 per 
adviser, or $377,188 in the aggregate for existing registered advisers 
with relationship summary obligations.\798\ Investment advisers also 
will be required to communicate any changes in an amended relationship 
summary to existing clients who are retail investors. The communication 
can be made by delivering the relationship summary or by communicating 
the information in another way. For this requirement, we estimate that 
50% of advisers will choose to deliver the relationship summary to 
communicate the updated information, and that the delivery will be made 
along with other disclosures already required to be delivered, such as 
an interim or annual Form ADV update. We therefore estimate a burden of 
615,674 \799\ hours, or 161.5 hours per adviser,\800\ at a monetized 
cost of $36,940,426 in aggregate,\801\ or $9,689 per adviser,\802\ for 
the 50% of advisers that choose to deliver amended relationship 
summaries in order to communicate updated information. Similar to the 
other delivery requirements discussed above for proposed rule 204-5, we 
do not expect investment advisers to incur external costs in delivering 
amended relationship summaries because we assume that they will make 
this delivery with other disclosures required to be delivered, such as 
an interim or annual update to Form ADV.
---------------------------------------------------------------------------

    \796\ This estimate is based on IARD system data regarding the 
number of filings of Form ADV amendments. See also supra note 702 
and accompanying text.
    \797\ 0.5 hours to post the amendment x 1.81 amendments annually 
= 0.91 hours per adviser annually to post amendments to the website. 
0.91 x 7,625 existing advisers amending the relationship summary x 
91.1% of advisers with public websites = 6,286 aggregate annual 
hours to post amendments of the relationship summary.
    \798\ Based on data from the SIFMA Office Salaries Report, we 
expect that the posting requirements of rule 204-5 will most likely 
be performed by a general clerk at an estimated cost of $60 per 
hour. 0.91 hours per adviser x $60 = $54.30 per adviser. $54.30 per 
adviser x 91.1% x 7,625 existing advisers = $377,188 in annual 
monetized costs.
    \799\ 7,625 advisers amending the relationship summary x 4,461 
retail clients per adviser x 50% delivering the amended relationship 
summary to communicate updated information x 0.02 hours per delivery 
x 1.81 amendments annually = 615,674 hours to deliver amended 
relationship summaries.
    \800\ 4,461 retail clients per adviser x 0.02 hours per delivery 
x 1.81 amendments annually = 161.5 hours per adviser.
    \801\ Based on data from the SIFMA Office Salaries Report, we 
expect that delivery requirements of rule 204-5 will most likely be 
performed by a general clerk at an estimated cost of $60 per hour. 
615,674 hours x $60 = $36,940,426. We estimate that advisers will 
not incur any incremental postage costs to deliver the relationship 
summary for communicating updated information by delivering the 
relationship summary, because we assume that advisers will make the 
delivery along with other documents already required to be 
delivered, such as an interim or annual update to Form ADV, or will 
deliver the relationship summary electronically.
    \802\ Based on data from the SIFMA Office Salaries Report, 
modified to account for an 1,800-hour work-year and multiplied by 
2.93 to account for bonuses, firm size, employee benefits and 
overhead, we expect that delivery requirements of rule 204-5 will 
most likely be performed by a general clerk at an estimated cost of 
$60 per hour. 161.5 hours per adviser x $60 per hour = $9,689 per 
adviser.
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c. Delivery to New Clients or Prospective New Clients
    Data from the IARD system indicate that of the 12,721 advisers 
registered with the Commission, 7,625 have retail investors, and on 
average, each has 4,461 clients who are retail investors.\803\ Based on 
IARD system data from 2015 to 2017, we estimate that the client base 
for investment advisers will grow by approximately 4.5% annually.\804\ 
Based on our experience with Form ADV Part 2, we estimate the annual 
hour burden for initial delivery of a relationship summary would be the 
same by paper or electronic format, at 0.02 hours for each relationship 
summary,\805\ or 4 annual hours per adviser.\806\ Therefore, we 
estimate that the aggregate annual hour burden for initial delivery of 
the relationship summary to new clients would be 30,614 hours,\807\ at 
a monetized cost of $1,836,817, or $241 per adviser.\808\ We do not 
expect that advisers will incur external costs to deliver the 
relationship summary to new or prospective clients because we assume 
that advisers will make the delivery along with other documentation 
normally provided in such circumstances, such as Form ADV Part 2, or 
will deliver the relationship summary electronically.
---------------------------------------------------------------------------

    \803\ This average is based on advisers' responses to Item 5 of 
Part 1A of Form ADV as of December 31, 2017.
    \804\ The number of retail clients reported by RIAs changed by 
6.7% between December 2015 and 2016, and by 2.3% between December 
2016 and 2017. (6.7% + 2.3%)/2 = 4.5% average annual rate of change 
over the past two years.
    \805\ This is the same as the estimate for the burden to deliver 
the brochure required by Form ADV Part 2. See Brochure Adopting 
Release, supra note 157.
    \806\ 4,461 clients per adviser with retail clients x 4.5% = 201 
new clients per adviser. 201 new clients per adviser x .02 hours per 
delivery = 4.0 hours per adviser for delivery of a relationship 
summary to new or prospective new clients.
    \807\ 4.0 hours per adviser for delivery obligation to new or 
prospective clients x 7,625 advisers = 30,614 hours.
    \808\ Based on data from the SIFMA Office Salaries Report, 
modified to account for an 1,800-hour work-year and multiplied by 
2.93 to account for bonuses, firm size, employee benefits and 
overhead, we expect that delivery requirements of rule 204-5 will 
most likely be performed by a general clerk at an estimated cost of 
$60 per hour. 7,625 hours x $60 = $1,836,817. We estimate that 
advisers will not incur any incremental postage costs to deliver the 
relationship summary to new or prospective clients because we assume 
that advisers will make the delivery along with other documentation 
normally provided in such circumstances, such as Form ADV Part 2. 
$1,835,371/7,625 investment advisers = $241 per adviser.
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d. Total New Initial and Annual Burdens
    Altogether, we estimate the total collection of information burden 
for proposed new rule 204-5 to be 967,044 annual aggregate hours per 
year,\809\ or

[[Page 21523]]

126.8 hours per respondent,\810\ for a total annual aggregate monetized 
cost of $58,022,611,\811\ or $7,610 \812\ per adviser. We request 
comment on the estimated hourly and cost burdens for the new collection 
of information under proposed rule 204-5.
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    \809\ 1,230 annual hours for posting initial relationship 
summaries to adviser websites + 240,953 annual hours for initial 
delivery to existing clients + 72,286 hours for delivery to existing 
clients based on material changes to accounts or scope of 
relationship + 6,286 annual hours to post amended relationship 
summary to website + 615,674 hours for delivery to existing clients 
to communicate updated information in amended relationship summaries 
+ 30,614 hours for delivery to new or prospective clients = 967,044 
annual total hours for investment advisers to post and deliver the 
relationship summary under proposed rule 204-5.
    \810\ 967,044 hours (initial and other deliveries)/7,625 
advisers = 126.8 hours per adviser.
    \811\ $73,809 for posting initial relationship summaries to 
adviser websites + $14,457,209 for initial delivery to existing 
clients + $4,337,162 for delivery to existing clients based on 
material changes to accounts or scope of relationship + $377,188 to 
post amended relationship summary to website + $36,940,426 for 
delivery to existing clients to communicate updated information in 
amended relationship summaries + $1,836,817 for delivery to new or 
prospective clients = $58,022,611 in total annual aggregate 
monetized cost for investment advisers to post and deliver the 
relationship summary under proposed rule 204-5.
    \812\ $58,022,611/7,625 advisers = $7,610 per adviser.
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D. Form CRS and Rule 17a-14 Under the Exchange Act

    New proposed rule 17a-14 under the Exchange Act [17 CFR 240.17a-14] 
and Form CRS [17 CFR 249.640] would require a broker-dealer that offer 
services to retail investors to prepare, file with the Commission, post 
to the broker-dealer's website (if it has one), and deliver to retail 
investors a relationship summary, as discussed in greater detail in 
Section II above. Broker-dealers would file the relationship summary 
with EDGAR and deliver the relationship summary to both existing 
customers and new or prospective new customers who are retail 
investors. New proposed rule 17a-14 under the Exchange Act [17 CFR 
240.17a-14] and Form CRS [17 CFR 249.640] contain a collection of 
information requirement. We will use the information to manage our 
regulatory and examination programs. Clients can use the information 
required in Form CRS to determine whether to hire or retain a broker-
dealer, as well as what types of accounts and services are appropriate 
for their needs. The collection of information is necessary to provide 
broker-dealer customers, prospective customers, and the Commission with 
information about the broker-dealer and its business, conflicts of 
interest and personnel. This collection of information would be found 
at 17 CFR 249.640 and would be mandatory. Responses would not be kept 
confidential.
1. Respondents: Broker-Dealers
    The respondents to this information collection would be the broker-
dealers registered with the Commission that would be required to 
deliver a relationship summary in accordance with proposed new rule 
17a-14 under the Exchange Act [17 CFR 240.17a-14]. As of December 31, 
2017, there were 2,857 broker-dealers registered with the Commission 
that reported sales to retail customer investors,\813\ and therefore 
likely would be required to prepare and deliver the relationship 
summary.\814\ We also note that these include 366 broker-dealers that 
are dually registered as investment advisers.\815\ To a great extent, 
the burden for dual registrants to prepare and deliver the relationship 
summary and post it to a website is already accounted for in the 
estimated burdens for investment advisers under the proposed amendments 
to Form ADV and proposed new rule 204-5, discussed in Sections V.A and 
V.C above. However, dually registered broker-dealers will incur burdens 
related to their business as an investment adviser that standalone 
broker-dealers will not incur, such as the requirement to file the 
relationship summary with IAPD (in addition to EDGAR as a broker-
dealer), and to deliver to both investment advisory clients and 
brokerage customers, to the extent those groups of retail investors do 
not overlap. Therefore, although treating dually registered broker-
dealers in this way may be over-inclusive, we base our burden estimates 
for proposed rule 17a-14 and Form CRS on 2,857 broker-dealers with 
relationship summary obligations, including those dually registered as 
broker-dealers. \816\
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    \813\ See supra note 461 and accompanying text. Retail sales 
activity is identified from Form BR (see supra note 280, 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.
    \814\ For purposes of Form CRS, a ``retail investor'' would be 
defined as: a prospective or existing client or customer who is a 
natural person (an individual) and would include a trust or other 
similar entity that represents natural persons, even if another 
person is a trustee or managing agent of the trust.
    \815\ See supra note 457 and accompanying text.
    \816\ See supra note 457 and accompanying text.
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2. Initial and Annual Burdens
a. Initial Preparation, Filing, and Posting of Relationship Summary
    Unlike investment advisers, broker-dealers currently are not 
required to disclose in one place all of the information required by 
the relationship summary or to file a narrative disclosure document 
with the Commission. We estimate, therefore, that the initial first 
year burden for preparing and filing the relationship summary would be 
15.0 hours per registered broker-dealer. The narrative descriptions 
required in the relationship summary should be narrowly tailored and 
brief, and the relationship summary must be limited to four pages (or 
equivalent limit if in electronic format). The relationship summary 
would be standardized across broker-dealers given the mandated set and 
sequence of topic areas, and moreover, a considerable amount of 
language within each topic area also would be prescribed, thereby 
limiting the amount of time required to prepare the disclosure. 
Therefore, we believe that the time needed to prepare the relationship 
summary should not vary significantly based on the size of the broker-
dealer. However, unlike investment advisers, which already prepare Form 
ADV Part 2 brochures and have information readily available to prepare 
the relationship summary, broker-dealers would be required for the 
first time to prepare disclosure that contains all the information 
proposed to be required by the relationship summary. In addition, 
investment advisers already file their brochures on IARD, while broker-
dealers may incur new burdens to file their relationship summaries on 
EDGAR. Therefore, we believe that each broker-dealer respondent would 
incur 15 hours on a one-time basis, instead of five hours for 
investment advisers, for the initial preparation and filing of the 
relationship summary. However, we believe that the amount of time 
needed to post the relationship summary on the broker-dealer's website, 
if it has one, would not vary significantly from the time needed by 
investment advisers because the time required to prepare and post 
disclosure that is standardized in length and content should not vary 
significantly across firms. As with investment advisers, we estimate 
that each broker-dealer would incur 0.5 hours to prepare the 
relationship summary for posting to its website, if it has one, such as 
to ensure proper electronic formatting, and to perform the actual 
posting.\817\
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    \817\ See supra note 780.
---------------------------------------------------------------------------

    Given these assumptions, we estimate the total one-time initial 
hourly burden for broker-dealers to prepare the relationship summary 
and file it with the Commission would be 42,855

[[Page 21524]]

hours,\818\ for a monetized value of $11,292,293.\819\ We estimate that 
the initial burden of posting the relationship summary to their 
websites, if they have one, would be 1,428 hours,\820\ for a monetized 
value of $85,710.\821\ To arrive at an annual burden for preparing, 
filing, and posting the relationship summary, as for advisers, the 
initial burden would be amortized over a three-year period. Therefore, 
the total annual aggregate hour burden for registered broker-dealers to 
prepare, file, and post a relationship summary to their website, if 
they have one, would be 14,761 hours, or 5.17 hours per broker-
dealer,\822\ for an annual monetized cost of $3,792,668, or $1,328 per 
broker-dealer.\823\
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    \818\ 15.0 hours x 2,857 broker-dealers with retail accounts = 
42,855 total hours.
    \819\ 42,855 total aggregate initial hour burden for preparing 
and filing a relationship summary. We expect 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 suggest that costs for 
these positions are $229 and $298 per hour, respectively. (21,427.5 
hours x $229 + (21,427.5 hours x $298 = $11,292,293).
    \820\ 0.5 hours x 2,857 broker-dealers = 1,248 hours to prepare 
and post relationship summary to the website.
    \821\ Based on data from the SIFMA Office Salaries Report, 
modified to account for an 1,800-hour work-year and multiplied by 
2.93 to account for bonuses, firm size, employee benefits and 
overhead, we expect that performance of this function will most 
likely be performed by a general clerk at an estimated cost of $60 
per hour. 1,429 hours x $60 = $85,710 total aggregate monetized 
cost.
    \822\ 42,855 hours/3 years = 14,761 total aggregate annual hour 
burden to prepare and file relationship summary. 14,761 hours/2,857 
broker-dealers with retail accounts = 5.17 hours annually per 
broker-dealer.
    \823\ ($11,292,293 total initial aggregate monetized cost for 
preparation and filing + $85,710 for posting to the website)/3 = 
$3,792,668 total annual monetized cost for preparation, filing and 
posting the relationship summary. $3,792,668/2,857 broker-dealers 
subject to relationship summary obligations = $1,328 per broker-
dealer.
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b. Estimated External Costs for Initial Preparation of Relationship 
Summary
    Under proposed new rule 17a-14, broker-dealers would be required to 
prepare and file a relationship summary, as well as post it to their 
website if they have one. We do not anticipate external costs in the 
form of website set-up, maintenance, or licensing fees because broker-
dealers would not be required to establish a website for the sole 
purpose of posting their relationship summary if they do not already 
have a website. We do anticipate that some broker-dealers may incur a 
one-time initial cost for outside legal and consulting fees in 
connection with the initial preparation of the relationship summary. 
Although broker-dealers subject to the relationship summary requirement 
may vary widely in terms of the size, complexity and nature of their 
businesses, the amount of disclosure required would not vary 
substantially among broker-dealers. Accordingly, the amount of time, 
and thus cost, required for outside legal and compliance review is 
unlikely to vary substantially among those broker-dealers who elect to 
obtain outside assistance.\824\ The relationship summary is short, 
standardized, and contains largely prescribed language. Because the 
information required in the relationship summary pertains largely to 
the broker-dealer's own business practices, the information is likely 
more readily available to the broker-dealer than to an external legal 
or compliance consultant. As a result, we anticipate that only a 
quarter of broker-dealers will seek the help of outside legal services 
and half will seek the help of compliance consulting services in 
connection with the initial preparation of the relationship summary. We 
estimate that the initial per broker-dealer cost for legal services 
related to the preparation of the relationship summary would be 
$1,416.\825\ We estimate that the initial per broker-dealer cost for 
compliance consulting services related to the preparation of the 
relationship summary would be $2,109.\826\ Accordingly, we estimate 
that 715 broker-dealers will use outside legal services, for a total 
initial aggregate cost burden of $1,011,378,\827\ and 1,429 broker-
dealers will use outside compliance consulting services, for a total 
initial aggregate cost burden of $3,012,707,\828\ resulting in a total 
initial aggregate cost burden among all respondents of $4,024,085, or 
$1,409 per broker-dealer, for outside legal and compliance consulting 
fees related to preparation of the relationship summary.\829\ Annually, 
this represents $1,341,362, or $470 per broker-dealer, when amortized 
over a three-year period.\830\
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    \824\ We estimate that an external service provider would spend 
3 hours helping a broker-dealer prepare an initial relationship 
summary.
    \825\ External legal fees are in addition to the projected hour 
per broker-dealer burden discussed above. $472 per hour for legal 
services x 3 hours per broker-dealer = $1,416. The hourly cost 
estimate of $472 is adjusted for inflation and based on our 
consultation with broker-dealers and law firms who regularly assist 
them in compliance matters.
    \826\ External compliance consulting fees are in addition to the 
projected hour per broker-dealer burden discussed above. Data from 
the SIFMA Management and Professional Earnings Report suggest that 
outside management consulting services cost approximately $703 per 
hour. $703 per hour for outside consulting services x 3 hours per 
adviser = $2,109.
    \827\ 25% x 2,857 SEC registered broker-dealers = 715 broker-
dealers. $1,416 for legal services x 715 broker-dealers = 
$1,011,378.
    \828\ 50% x 2,857 SEC registered broker-dealers = 1,429 broker-
dealers. $2,109 for compliance consulting services x 1,429 broker-
dealers = $3,012,707.
    \829\ $1,011,378 + $3,012,707 = $4,024,085. $4,024,085/2,857 
broker-dealers = $1,409 per broker-dealer.
    \830\ $4,024,085 initial aggregate hours/3 years = $1,341,362 
annually. $1,409 initial hours per broker-dealer/3 years = $469.50.
---------------------------------------------------------------------------

    We do not expect ongoing external legal or compliance consulting 
costs for the relationship summary. Although broker-dealers would be 
required to amend the relationship summary within 30 days whenever any 
information becomes materially inaccurate, given the standardized 
nature and prescribed language of the relationship summary, we expect 
that amendments would be factual and require relatively minimal wording 
changes. We believe that broker-dealers would be more knowledgeable 
about these facts than outside legal or compliance consultants and 
would be able to make these revisions in-house. Therefore, we do not 
expect that broker-dealers will need to incur ongoing external costs 
for the preparation and review of relationship summary amendments.
c. Amendments to the Relationship Summary and Filing and Posting of 
Amendments
    As with our estimates above for investment advisers, we do not 
expect broker-dealers to amend their relationship summaries frequently. 
Based on staff experience, we believe that many broker-dealers, as a 
matter of best practices, would update their relationship summary at a 
minimum once a year, after conducting an annual supervisory review, for 
example.\831\ We also estimate that on average, each broker-dealer 
preparing a relationship summary may amend the disclosure once more 
during the year, due to emerging issues. Therefore, we assume that 
broker-dealers would update their relationship summary, on average, 
twice a year, and as with investment advisers, we estimate that broker-
dealers would require 0.5 hours to amend and file the updated 
relationship summary, and 0.5 hours to post it to their website. Thus, 
we estimate that broker-dealers would incur a total annual aggregate 
hourly

[[Page 21525]]

burden of 5,714 hours per year, to prepare and file, and post to their 
websites an estimated total of 5,714 amendments per year.\832\
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    \831\ 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).
    \832\ 2,857 broker-dealers amending relationship summaries x 2 
amendments per year = 5,714 amendments per year. 5,714 amendments x 
(0.5 hours to amend and file + 0.5 hours to post to website) = 5,714 
hours.
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d. Delivery of the Relationship Summary
    Proposed rule 17a-14 under the Exchange Act would require a broker-
dealer to deliver the relationship summary, with respect to a retail 
investor that is a new or prospective customer, before or at the time 
the retail investor first engages the broker-dealer's services. Broker-
dealers also would make a one-time, initial delivery of the 
relationship summary to all existing customers within a specified time 
period after the effective date of the proposal. Also with respect to 
existing customers, broker-dealers would deliver the relationship 
summary before or at the time (i) a new account is opened that is 
different from the retail investor's existing account(s); or (ii) 
changes are made to the retail investor's account(s) existing 
account(s) that would materially change the nature and scope of the 
broker-dealer's relationship with the retail investor, as further 
discussed in II.C.2 above.
i. One-Time Initial Delivery to Existing Customers
    We estimate the burden for broker-dealers to make a one-time 
initial delivery of the relationship summary to existing customers 
based on an estimate of the number of accounts held by these broker-
dealers. Based on FOCUS data, we estimate that the 2,857 broker-dealers 
that report retail activity have approximately 128 million customer 
accounts, and that approximately 79%, or 101.248 million, of those 
accounts belong to retail customers.\833\ We estimate that, under the 
proposed rule, broker-dealers would send their relationship summary 
along with other required disclosures, such as periodic account 
statements, in order to comply with initial delivery requirement for 
the relationship summary. As with investment advisers, we estimate that 
a broker-dealer will require no more than 0.02 hours to send the 
relationship summary to each customer, or an aggregate initial burden 
of 2,024,960 hours, or approximately 709 hours per broker-dealer for 
the first year after the rule is in effect.\834\ We would therefore 
expect the aggregate monetized cost for broker-dealers to make a one-
time initial delivery of relationship summaries to existing customers 
to be $121,497,600.\835\ Amortized over three years, the total annual 
hourly burden is estimated to be 674,987 hours, or approximately 236.3 
hours per broker-dealer,\836\ with annual monetized costs of 
$40,499,200 and $14,175, respectively.\837\ We do not expect that 
broker-dealers will incur external costs for the initial delivery of 
the relationship summary to existing clients because we assume that 
they will make such deliveries along with another required delivery, 
such as periodic account statements.
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    \833\ See supra notes 428-437 and accompanying text. 2,857 
broker-dealers (including dual registrants) report 128 million 
customer accounts. We are aware that, based on data from IARD, 
investment advisers reporting retail activity have approximately 
79.1% retail clients and 21.9% non-retail clients. While 
acknowledging the differences between the investment adviser and 
broker-dealer models, we apply the 79.1% in estimating the 
proportion of broker-dealer accounts that belong to retail 
customers. Therefore, 79.1% x 128 million accounts = 101.248 million 
accounts. This number likely overstates 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.
    \834\ (0.02 hours per customer account x 101.248 million 
customer accounts) = 2,024,960 hours. We note that the burden for 
preparing updated relationship summaries is already incorporated 
into the burden estimate for Form CRS discussed above. 2,024,960 
hours/2,857 broker-dealers = approximately 709 hours per broker-
dealer.
    \835\ Based on data from SIFMA's Office Salaries Report, we 
expect that initial delivery requirement to existing clients of rule 
17a-14 will most likely be performed by a general clerk at an 
estimated cost of $60 per hour. 2,024,960 hours x $60 = 
$121,497,600. 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 clients, such as periodic account statements.
    \836\ 2,024,960 initial aggregate hours/3 = 674,987 total annual 
aggregate hours. 709 initial hours per broker-dealer/3 = 236.3 total 
annual hours per broker-dealer.
    \837\ $121,497,600 initial aggregate monetized cost/3 = 
$40,499,200 annual aggregate monetized cost. $40,499,200/2,857 
broker-dealers = $14,175 annual monetized cost per broker-dealer.
---------------------------------------------------------------------------

ii. Delivery for New Account Types or Material Changes in the Nature or 
Scope of the Brokerage Relationship
    Broker-dealers would be required to deliver the relationship 
summary to existing customers before or at the time (i) a new account 
is opened that is different from the retail investor's existing 
account(s); or (ii) changes are made to the retail investor's existing 
account(s) that would materially change the nature and scope of the 
adviser's relationship with the retail investor, as further discussed 
in Section II.C.2. With respect to delivery of the relationship summary 
in the event of material changes in the nature or scope of the 
brokerage relationship, as with investment advisers, we estimate that 
this would take place among 10% of a broker-dealer's retail investors 
annually. We would therefore estimate broker-dealers to incur a total 
annual aggregate burden of 202,496 hours, or 71 hours per broker-
dealer,\838\ at an annual aggregate monetized cost of $12,149,760, or 
approximately $4,253 per broker-dealer.\839\ We do not expect broker-
dealers to incur external costs related to deliveries of the 
relationship summary due to new account type openings, or material 
changes to the nature or scope of the relationship, because we assume 
that broker-dealers will deliver the relationship summary along with 
new account agreements and other documentation normally required in 
such circumstances, or with periodic account statements.
---------------------------------------------------------------------------

    \838\ 10% of 101.248 million customers x .02 hours = 202,496 
hours. 202,496 hours/2,857 broker-dealers = 71 hours per broker-
dealer.
    \839\ Based on data from the SIFMA Office Salaries Report, 
modified to account for an 1,800-hour work-year and multiplied by 
2.93 to account for bonuses, firm size, employee benefits and 
overhead, we expect that delivery requirements of rule 17a-14 will 
most likely be performed by a general clerk at an estimated cost of 
$60 per hour. 202,496 hours x $60 = $12,149,760. $12,149,760/2,857 
broker-dealers = $4,253 per broker-dealer. We estimate that broker-
dealers will not incur any incremental postage costs in these 
deliveries of the relationship summary to existing customers, 
because we assume that broker-dealers will make such deliveries with 
another mailing the broker-dealer was already delivering to clients, 
such as periodic account statements, or new account agreements and 
other similar documentation.
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iii. Communicating Changes to Amended Relationship Summaries, Including 
by Delivery
    As discussed above, broker-dealers must communicate any changes in 
an updated relationship summary to retail investors who are existing 
customers of the firm within 30 days after the updates are required to 
be made and without charge. The communication can be made by delivering 
the relationship summary or by communicating the information in another 
way to the retail investor. Consistent with our discussion on broker-
dealers' amendments to the relationship summary we are assuming that 
the 2,857 broker-dealers with relationship summaries will amend them 
twice each year. We also assume that 50% will choose to deliver the 
relationship summary to communicate the update information. As with 
investment advisers, we estimate that broker-dealers would require 0.02 
hours to make a delivery to each customer. Therefore, the estimated 
burden for those broker-dealers choosing to deliver an amended 
relationship summary to meet this communication requirement

[[Page 21526]]

would be approximately 2,024,960 hours, or 709 hours per broker-
dealer,\840\ translating into a monetized cost of $121,497,600 in 
aggregate, or $42,526 per broker-dealer.\841\ Similar to the other 
delivery requirements relating to proposed rule 17a-14, we do not 
expect broker-dealers to incur external costs in delivering amended 
relationship summaries because we assume that they will make this 
delivery with other documents required to be delivered, such as 
periodic account statements.
---------------------------------------------------------------------------

    \840\ 2 amendments per year x 101.248 million customer accounts 
x 50% delivering the amended relationship summary to communicate 
updated information x 0.02 hours per delivery = 2,024,960 hours to 
deliver amended relationship summaries. 2,024,960 hours/2,857 
broker-dealers = 709 hours per broker-dealer.
    \841\ Based on data from the SIFMA Office Salaries Report, 
modified to account for an 1,800-hour work year and multiplied by 
2.93 to account for bonuses, firm size, employee benefits and 
overhead, we expect that delivery requirements of rule 17a-14 will 
most likely be performed by a general clerk at an estimated cost of 
$60 per hour. 2,024,960 hours x $60 = $121,497,600. $121,467,600/
2,857 broker-dealers = $42,526 per broker-dealer. We estimate that 
broker-dealers will not incur any incremental postage costs to 
deliver these relationship summaries, because we assume that 
advisers will make the delivery along with other documentation they 
normally would provide, such as account opening documents.
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e. Delivery to New Clients or Prospective New Customers
    To estimate the delivery burden for broker-dealers' new or 
prospective new customers, as discussed above, we estimate that the 
2,857 standalone broker-dealers with retail activity have approximately 
101.248 million retail customer accounts.\842\ Based on FOCUS data over 
the past five years, we estimate that broker-dealers grow their 
customer base and enter into new agreements with, on average, 8% more 
new retail investors each year.\843\ We estimate the hour burden for 
initial delivery of a relationship summary would be the same by paper 
or electronic format, at 0.02 hours for each relationship summary, as 
we have estimated above. Therefore, the aggregate annual hour burden 
for initial delivery of the relationship summary by broker-dealers to 
new or prospective new customers would be 161,917 hours, or 56.7 hours 
per broker-dealer.\844\ at a monetized cost of $9,715,001 at an 
aggregate level, or $3,400 per broker-dealer.\845\
---------------------------------------------------------------------------

    \842\ See supra notes 429-439 and accompanying text.
    \843\ This represents the average annual rate of growth from 
2012-2016 in the number of accounts for all broker-dealers reporting 
retail activity.
    \844\ 101.248 million customer accounts x 8% increase = 
8,095,834 new customers. 8,095,834 new customers x 0.02 hours per 
delivery = 161,917 total annual aggregate hours. 161,917/2,857 
broker-dealers = 56.7 hours per broker-dealer for delivery to new 
customers.
    \845\ Based on data from the SIFMA Office Salaries Report, 
modified to account for an 1,800-hour work-year and multiplied by 
2.93 to account for bonuses, firm size, employee benefits and 
overhead, we expect that these functions will most likely be 
performed by a general clerk at an estimated cost of $60 per hour. 
161,917 hours x $60 = $9,715,001. $9,715,001/2,857 broker-dealers = 
$3,400 per broker-dealer for delivery to new customers. We estimate 
that broker-dealers will not incur any incremental postage costs to 
deliver the relationship summary to new or prospective clients 
because we assume that broker-dealers will make the delivery along 
with other documentation, such as periodic account statements.
---------------------------------------------------------------------------

f. Total New Initial and Annual Burdens
    As discussed above, we estimate the total annual collection of 
information burden for proposed new rule 17a-14 in connection with 
obligations relating to the relationship summary, including (i) initial 
preparation, filing, and posting to a website; (ii) amendments to the 
relationship summary for material updates and related filing and 
website posting burdens; (iii) one-time initial delivery to existing 
customers; (iv) delivery to existing customers who are opening new 
accounts or materially changing the nature or scope of their 
relationship with the broker-dealer; (v) delivery of amended 
relationship summaries; and (vi) delivery to new and prospective 
customers. Given these proposed requirements, we estimate the total 
annual aggregate hourly burden to be approximately 3,084,835 hours per 
year, or 1,080 hours on a per broker-dealer basis.\846\ This translates 
into an aggregate annual monetized cost of $188,578,462, or $66,066 on 
a broker-dealer basis per year.\847\ In addition, we estimate that 
broker-dealers would incur external legal and compliance costs in the 
initial preparation of the relationship summary of approximately 
$4,024,085 in aggregate, or $1,409 per broker-dealer, translating into 
$1,341,362 annually, or $470 per broker-dealer, when amortized over a 
three year period.
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    \846\ 14,761 hours per year for initial preparation, filing, and 
posting of relationship summary + 5,714 hours per year for 
amendments, filing, and posting of amendments + 674,987 hours for 
one-time initial delivery to existing customers + 202,496 hours for 
delivery to existing customers making material changes to their 
accounts + 2,024,960 hours for delivery of amendments + 161,917 
hours for delivery to new customers = 3,084,835 total annual 
aggregate hours. 3,084,835 hours/2,857 broker-dealers = 1,080 hours 
per broker-dealer.
    \847\ $3,792,668 per year for initial preparation, filing, and 
posting of relationship summary + $924,240 per year for amendments, 
filing, and posting of amendments + $40,499,200 for one-time initial 
delivery to existing customers (amortized over three years) + 
$12,149,760 for delivery to existing customers making material 
changes to their accounts + $121,497,600 for delivery of amendments 
+ $9,715,001 for delivery to new customers = $188,578,468 in total 
annual aggregate monetized cost. $188,578,468/2,857 broker-dealers = 
$66,066 per broker-dealer.
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E. Recordkeeping Obligations Under Rule 17a-3 of the Exchange Act \848\
---------------------------------------------------------------------------

    \848\ In a concurrent release, we are proposing additional 
burden adjustments to rules 17a-3 and 17a-4 of the Exchange Act. See 
Regulation Best Interest Proposal, supra note 24.
---------------------------------------------------------------------------

    The proposed requirement to make a record indicating the date that 
a relationship summary was provided to each customer and to each 
prospective customer who subsequently becomes a customer would contain 
a collection of information that would be found at 17 CFR 240.17a-
3(a)(24) and would be mandatory. The Commission staff would use this 
collection of information in its examination and oversight program, and 
the information generally is kept confidential.\849\ The likely 
respondents to this collection of information requirement are the 
approximately 2,857 broker-dealers currently registered with the 
Commission that offer services to retail investors, as defined 
above.\850\
---------------------------------------------------------------------------

    \849\ See section 24(b) of the Exchange Act (15 U.S.C. 78x-
24(b)).
    \850\ See supra note 29 and accompanying text.
---------------------------------------------------------------------------

    Exchange Act section 17(a)(1) requires registered broker-dealers to 
make and keep for prescribed periods such records as the Commission 
deems ``necessary or appropriate in the public interest, for the 
protection of investors or otherwise in furtherance of the purposes 
of'' the Exchange Act.'' \851\ Exchange Act rules 17a-3 and 17a-4 
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.
---------------------------------------------------------------------------

    \851\ See section 17(a) of the Exchange Act.
---------------------------------------------------------------------------

    The amendments to rule 17a-3 that we are proposing today would 
require SEC-registered broker-dealers to make a record indicating the 
date that a relationship summary was provided to each customer and to 
each prospective customer who subsequently becomes a customer. 
Commission staff has estimated that the proposed amendments to rule 
17a-3(a)(24) would result in an incremental burden increase of 0.1 
hours annually for each of the estimated SEC-registered broker-dealers 
that would be required to prepare and preserve the initial relationship 
summary and any amendments.\852\
---------------------------------------------------------------------------

    \852\ We apply the same 0.2 hour estimate as with investment 
advisers, but divided equally between creating a record of the 
relationship summary and its deliveries and the maintenance of those 
records.
---------------------------------------------------------------------------

    The incremental hour burden for broker-dealers to maintain the 
relationship summary would therefore

[[Page 21527]]

be 286 hours,\853\ for a monetized cost of 17,481 in aggregate, or 
$6.00 per broker-dealer.\854\
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    \853\ 2,857 broker-dealers x 0.1 hours annually = 286 annual 
hours for recordkeeping.
    \854\ As with our estimates relating to the proposed amendments 
to rule 204-2 under the Advisers Act (see, e.g., supra note 771 and 
accompanying text), we expect that performance of this function will 
most likely be allocated between compliance clerks and general 
clerks, with compliance clerks performing 17% of the function and 
general clerks performing 83% of the function. Data from the SIFMA 
Office Salaries Report suggest that costs for these position are $67 
and $60, respectively. (17% x 286 hours x $67) + (83% x 286 hours x 
$60) = $17,481. $17,481/2,857 broker-dealers = $6.00 per broker-
dealer.
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F. Record Retention Obligations Under Rule 17a-4 of the Exchange Act

    Exchange Act section 17(a)(1) requires registered broker-dealers to 
make and keep for prescribed periods such records as the Commission 
deems ``necessary or appropriate in the public interest, for the 
protection of investors or otherwise in furtherance of the purposes 
of'' the Exchange Act.'' \855\ Exchange Act rule 17a-4 specifies 
minimum requirements with respect to how long records created under 
Exchange Act rule 17a-3 and other documents must be kept. We are 
proposing amendments to rule 17a-4 that would require broker-dealers to 
retain copies of each relationship summary, including amendments, and 
to preserve the record of dates that each relationship summary and each 
amendment thereto was delivered to any existing customer or to any new 
or prospective customer, pursuant to the proposed new requirements 
under amended rule 17a-3, discussed above. These records would be 
required to be maintained in an easily accessible place for at least 
six years after such record or relationship summary is created. This 
collection of information would be found at 17 CFR 240.17a-4 and would 
be mandatory. The Commission staff would use the collection of 
information in its examination and oversight program. Requiring 
maintenance of these disclosures as part of the broker-dealer's books 
and records would facilitate the Commission's ability to inspect for 
and enforce compliance with firms' obligations with respect to Form 
CRS. The information generally is kept confidential.\856\
---------------------------------------------------------------------------

    \855\ See section 17(a) of the Exchange Act.
    \856\  See section 24(b) of the Exchange Act (15 U.S.C. 78x-
24(b)).
---------------------------------------------------------------------------

    The likely respondents to this collection of information 
requirement are the approximately 2,857 broker-dealers that report 
retail activity, as described above.
1. Changes in Burden Estimates and New Burden Estimates
    The approved annual aggregate burden for rule 17a-4 is currently 
1,042,416 hours, with a total annual aggregate monetized cost burden of 
approximately $67.8 million, based on an estimate of 4,104 broker-
dealers and 150 broker-dealers maintaining an internal broker-dealer 
system.\857\ The currently approved external cost estimate to 
respondents is $20,520,000.\858\ We estimate that the proposed 
amendments would result in an increase in the collection of information 
burden estimate by 0.10 hours \859\ for each of the estimated 2,857 
currently registered broker-dealers that report retail sales activity 
and would have relationship summary obligations.\860\ This would yield 
an annual estimated aggregate burden of 754,964 hours for all broker-
dealers with relationship summary obligations to comply with rule 17a-
4,\861\ for a monetized cost of approximately $48.6 million.\862\ In 
addition, the 984 broker-dealers \863\ not subject to the proposed 
amendments would continue to be subject to an unchanged burden of 254 
hours per broker-dealer, or 249,936 hours for these broker-
dealers.\864\ In addition, those maintaining an internal broker-dealer 
system would continue to be subject to an unchanged burden of 450 hours 
annually, under rule 17a-4. In summary, taking into account the 
estimated annual burden of broker-dealers that would be required to 
maintain records of the relationship summary, as well the estimated 
annual burden of broker-dealers that do not have relationship summary 
obligations and whose information collection burden is unchanged, the 
revised annual aggregate burden for all broker-dealer respondents to 
the recordkeeping requirements under rule 17a-4 is estimated to be 
976,350 total annual aggregate hours,\865\ for a monetized cost of 
approximately $65.4 million.\866\
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    \857\ (4,104 broker-dealers x 254 hours per broker-dealer) + 
(150 broker-dealers maintaining internal broker-dealer systems x 3 
hours) = (1,042,416 hours + 450 hours ) = 1,042,866 hours each year. 
The monetized cost was based on these functions being performed by a 
compliance clerk earning an average of $65 per hour, resulting in a 
total internal cost of compliance of (1,042,416 x $65) + (450 x $65) 
= $67,786. See 17a-4 Supporting Statement, available at https://www.reginfo.gov/public/do/PRAViewDocument?ref_nbr=201607-3235-007.
    \858\ 4,104 broker-dealers x $5,000 annual recordkeeping cost 
per broker-dealer = $20,520,000. See id.
    \859\ We apply the same 0.2 hour estimate as with investment 
advisers, but divided equally between creating a record of the 
relationship summary and its deliveries and the maintenance of those 
records.
    \860\ See supra note 616.
    \861\ 2,857 broker-dealers required to prepare relationship 
summary x (254 hours + 0.1 hour) = 725,964 hours.
    \862\ Consistent with our prior paperwork reduction analyses for 
rule 17a-4, we expect that performance of this function will most 
likely be performed by compliance clerks. Data from the SIFMA Office 
Salaries Report suggest that costs for these positions are $67 per 
hour. 725,964 hours x $67 = $48,639,568.
    \863\ See supra note 618.
    \864\ 984 broker-dealers x 254 hours = 249,936 hours for broker-
dealers not preparing a relationship summary.
    \865\ 725,964 + 249,936 + 450 = 976,350 total aggregate hours.
    \866\ Consistent with our prior paperwork reduction analyses for 
rule 17a-4, we expect that performance of this function will most 
likely be performed by compliance clerks. Data from the SIFMA Office 
Salaries Report suggest that costs for these positions are $67 per 
hour. 976,650 hours x $67 = $65,415,430.
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2. Revised Annual Burden Estimates
    As noted above, the approved annual aggregate burden for rule 17a-4 
is currently 1,042,416 hours, with a total annual aggregate monetized 
cost burden of approximately $67.8 million, based on an estimate of 
4,104 broker-dealers and 150 broker-dealers maintaining an internal 
broker-dealer system. The revised annual aggregate hourly burden for 
rule 17a-4 would be 976,350 \867\ hours, represented by a monetized 
cost of approximately $65.4 million,\868\ based on an estimate of 2,857 
broker-dealers with the relationship summary obligation and 984 broker-
dealers without, as noted above. This represents a decrease of 66,516 
\869\ annual aggregate hours in the hour burden and an annual decrease 
of approximately $2.37 million from the currently approved total 
aggregate monetized cost for rule 17a-4.\870\ These changes are 
attributable to the proposed amendments to rule 17a-4 relating to the 
relationship summary as discussed in this proposing release and the 
decline in the number of registered broker-dealer respondents. The 
revised external cost to respondents is estimated at approximately 
$19.2 million, or a reduction of $1.3 million from the currently 
approved external cost burden of $20,520,000.\871\
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    \867\ See supra note 865.
    \868\ See supra note 739.
    \869\ 1,042,866 hours - 976,350 hours = 66,516 hours.
    \870\ $67,786,290 - $65,415,430 = $2,370,860.
    \871\ 3,841 registered broker-dealers as of December 31, 2017 x 
$5,000 per broker-dealer in record maintenance costs = $19,205,000. 
$20,520,000-$19,205,000 = $1,315,000.
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G. Rule 151-3 Under the Exchange Act

    Proposed new rule 151-3 would require broker-dealers and their 
associated natural persons to prominently disclose that it is, or in 
the case of a natural person that such person is associated with a 
broker-

[[Page 21528]]

dealer that is, registered with the Commission as a broker-dealer in 
print or electronic retail investor communications. For print 
communications, we propose to require that such registration status be 
displayed in a type size at least as large as and of a font style 
different from, but at least as prominent as, that used in the majority 
of the communication. In addition, such disclosure must be presented in 
the body of the communication and not in a footnote. For electronic 
communications, or in any publication by radio or television, we 
propose to require that such disclosure be presented in a manner 
reasonably calculated to draw retail investor attention to it.
    Rule 151-3 contains a collection of information requirement. This 
collection of information would be found at [17 CFR 240.15l-3] and 
would be mandatory. The likely respondents to this information 
collection would be all broker-dealers and their associated natural 
persons that distribute print or electronic retail investor 
communications.
    The Commission believes that the collection of information is 
necessary to provide retail investors and the Commission with 
information to better determine whether a communication is from a 
broker-dealer or investment adviser, and, for retail investors 
specifically, to allow them to better identify which type of firm is 
more appropriate for their specific investment needs. Additionally, by 
requiring an affirmative identification, retail investors would also be 
better informed whether a financial professional is an associated 
person of a broker-dealer rather than a supervised person of an 
investment adviser, allowing them to make a more informed choice as to 
which type of professional is appropriate for their financial goals.
1. Respondents: Broker-Dealers and Associated Natural Persons
    Currently, there are 3,841 registered broker-dealers and 435,071 
associated natural persons licensed with FINRA.\872\ Of these 
registered broker-dealers, we estimate that approximately 74% or 2,857 
distribute print or electronic retail investor communications \873\ 
while 435,071 associated natural persons distribute print or electronic 
retail investor communications at standalone broker-dealers or dually 
registered firms.\874\ Of these broker-dealers that distribute print or 
electronic retail investor communications, 1,388 are large broker-
dealers and 1,469 are small broker-dealers.\875\ Accordingly, the 
Commission estimates that 2,857 broker-dealers and 435,071 associated 
natural persons would be required to comply with proposed rule 15l-3. 
For the purposes of this analysis of the paperwork burden associated 
with the proposed rules, the Commission preliminarily estimates that 
there would be approximately 2,857 broker-dealer respondents and 
435,071 associated natural person respondents. \876\
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    \872\ The number of broker-dealers is as of Dec. 31, 2017. Such 
associated natural persons are registered as registered 
representatives with FINRA through Form U4 as of Dec. 31, 2017. We 
took the total 494,399 registered representatives across standalone 
broker-dealers, dually registered firms, and standalone investment 
advisers and isolated those registered representatives that act on 
behalf of standalone broker-dealers and dually registered firms 
(i.e. 88%). See supra Section IV.A.1.e, Economic Analysis: 
Registered Representatives of Broker-Dealers, Investment Advisers 
and Dually Registered Firms.
    \873\ See Section IV.A, supra note 460 and accompanying text. As 
noted above, as of December 2017, 3,841 broker-dealers filed Form 
BD. Retail sales by broker-dealers were obtained from Form BR.
    \874\ See supra Section IV.A.1.e, at Table 5. For the purposes 
of the Paperwork Reduction Act analysis applicable to proposed rules 
15l-3 and 211h-1, we are defining a ``dually registered firm'' in 
the same manner as ``dual registrant'' is defined in the baseline of 
the Economic Analysis. See supra Section IV, note 453.
    We assume for the purposes of this rule that all 435,071 
registered representatives engage retail investors. This estimate is 
based on the following calculation: (494,399 total licensed 
registered representatives) x (12% (the percentage of pure 
investment adviser representatives)) = 59,328 representatives at 
standalone investment advisers. Then, to isolate the number of 
representatives at standalone broker-dealers and dually registered 
firms, subtract 59,328 from 494,399 = 435,071 retail-facing, 
licensed registered representatives at standalone broker-dealers or 
dually registered firms.
    \875\ For the purposes of this proposed rule, we define large 
broker-dealers as those with total assets greater than 1 million and 
small broker-dealers as those with less than 1 million in total 
assets. See Table 1, Panel B supra Section IV.A.1.a. We note that 
this distinction differs from the distinction used for proposed rule 
211h-1 below because historically we have used the number of 
employees rather than total assets to distinguish small and large 
investment advisers. See cf. Rules Implementing Amendments to the 
Investment Advisers Act of 1940, Investment Advisers Act Release No. 
3221 (Jun. 22, 2011), at n.727 (``Release 3221''). Additionally, we 
believe that because broker-dealer services encompass a small set of 
large broker-dealers and thousands of smaller broker-dealers 
competing for niche or regional segments of the market, the number 
of employees would not provide the best estimate for how firms would 
be impacted by our proposed rule based on the number of 
communications produced. Instead, we believe that total assets 
properly account for the varying sizes of these smaller broker-
dealers and are a better indicator as to how many communications 
would be impacted in proportion to a firm's size. More specifically, 
we assume that the greater the total assets, the larger the firm and 
associated number of customer accounts which in turn would lead to a 
greater number of communications with retail investors.
    \876\ We note that we are not analyzing new broker-dealers or 
associated natural persons because there has been a downward trend 
in broker-dealer registration and the number of associated natural 
persons has not shown signs of a noticeable increase over the past 
few years. From 2016 through 2018 the number of broker-dealers 
registered with the Commission decreased by 160. (4064 - 3904) = 
160. See also FINRA Statistics, available at https://www.finra.org/newsroom/statistics#reps.
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2. Initial and Annual Burdens
    We estimate that the initial one time burden for complying with the 
disclosure requirements would be 72 hours per large broker-dealer \877\ 
and 15 hours per small broker-dealer.\878\ We note that we are staging 
the compliance date to ensure that firms can phase out certain older 
communications from circulation through the regular business lifecycle 
rather than having to retroactively change them.\879\ As a result of 
this staged compliance, our burden estimates do not reflect the burdens 
that would have been imposed had these firms had to replace all 
outstanding communications.
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    \877\ (8 hours for print communications per large broker-dealer 
+ 64 hours for electronic communications per large broker-dealer).
    \878\ (5 hours for print communications per small broker-dealer 
+ 10 hours for electronic communications per small broker-dealer).
    \879\ Similarly, we are not requiring firms to send new 
communications to replace all older print communications as this 
would be overly burdensome and costly for firms.
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    Aside from certain anticipated outside legal costs, as discussed 
below, we preliminary estimate that to comply with our proposed rule 
with respect to print communications,\880\ broker-dealers would need to 
review their communications, identify which would need to be amended, 
make the changes, and verify that all firm communications comply with 
the rule's requirements including its technical specifications such as 
the type size, font, and prominence. Therefore, for existing print 
communications for large broker-dealers, we preliminarily estimate that 
the total burden for broker-dealers would be 8 hours for compliance and 
business operations personnel to review, identify, and make changes 
across all print communications.\881\ For

[[Page 21529]]

smaller broker-dealers, we preliminarily estimate that the total burden 
for broker-dealers would be 5 hours for compliance and business 
operations personnel to review, identify, and make changes across all 
print communications.\882\ We note that there is a difference between 
large broker-dealers and smaller broker-dealers. We assume that large 
broker-dealers will have to review, identify and change more print 
communications and in turn have their compliance staff verify more 
print communications as being compliant with our proposed rule as 
compared to small broker-dealers which will have fewer print 
communications.
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    \880\ Such communications could include business cards, 
letterheads, newspaper advertisements, and article reprints from an 
unaffiliated magazine or newspaper.
    \881\ This estimate is based upon staff experience and industry 
sources more generally. See e.g., Self-Regulatory Organizations; 
Financial Industry Regulatory Authority, Inc.; Notice of Filing of a 
Proposed Rule Change to Amend FINRA Rule 2210, Exchange Act Release 
No. 34-75377 (Jul. 7, 2015), at Economic Impact Assessment (``FINRA 
2015-22 Notice'') (stating with reference to adding BrokerCheck 
links to mid-size and smaller firm communications, which we believe 
is analogous to the manual changes made to print communications, 
that ``mid-size and small members typically have less complex 
websites, which they manage and maintain with nontechnical staff. 
These members would use personnel in non-technical roles to 
accomplish the required updates to their websites . . . [I]t would 
take mid-size or small members approximately eight hours of non-
technical staffs' time to make the required updates . . .'').
    To compute the 8 hours internal initial burden we assume 2 hours 
by compliance personnel and 6 hours by business operations personnel 
of the broker-dealer.
    \882\ This estimate is based upon staff experience and industry 
sources more generally. See e.g., FINRA 2015-22 Notice, supra note 
881. To compute the 5 hours internal initial burden we assume 1 hour 
by compliance personnel and 4 hours by business operations personnel 
of the broker-dealer.
---------------------------------------------------------------------------

    With respect to electronic communications,\883\ we preliminarily 
anticipate that it would take large broker-dealers approximately 64 
hours \884\ to review, identify and make the required updates coupled 
with verifying that such communications (present and future) would be 
compliant with the proposed rule. Our estimates take into account that 
larger firms likely have full-featured websites that generate other 
webpages based on complex system code and logic.\885\ In order to make 
changes to comply with our proposed rule, we assume that business 
operations and information technology personnel would likely be 
required to update the underlying code and logic to automate the 
implementation of the required language to populate across all 
associated electronic media. Additionally, we assume that these teams 
would need to test to ensure that such changes were implemented 
correctly.
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    \883\ We believe such communications could include websites, 
smart phone apps, social media, emails, and blogs.
    \884\ This estimate is based upon staff experience and industry 
sources more generally. See e.g., FINRA 2015-22 Notice, supra note 
881. (``These estimates are based on FINRA's assumption that large 
members typically have full-featured websites that dynamically 
generate webpages based on data and logic. The technology personnel 
at these members would be required to update the underlying 
information in order to automate the implementation of references 
and hyperlinks to BrokerCheck across all applicable webpages. FINRA 
estimates that on average it would take large members approximately 
60 hours of technology staffs' time to make the required updates . . 
.''). To compute the 64 hours internal initial burden we assume 4 
hours by compliance personnel and 60 hours by business operations 
and information technology personnel of the broker-dealer.
    \885\ This is based upon staff experience and industry sources 
more generally. See e.g., FINRA 2015-22 Notice, supra note 
(discussing the burdens associated with the inclusion of a 
BrokerCheck reference and hyperlink across all firm communications 
for certain firms).
---------------------------------------------------------------------------

    With respect to smaller broker-dealers, we preliminarily anticipate 
that it would take approximately 10 hours \886\ to review, identify and 
make the required updates coupled with verifying that such 
communications (present and future) would be compliant with the 
proposed rule. Our estimate for smaller broker-dealers assumes that 
smaller broker-dealers have fewer electronic communications that would 
be subject to our proposed rule as compared to larger firms, resulting 
in a lower burden preliminary estimate.
---------------------------------------------------------------------------

    \886\ This estimate is based upon staff experience and industry 
sources more generally. See e.g., FINRA 2015-22 Notice, supra note 
881 (stating with reference to adding BrokerCheck links to firm 
communications that ``mid-size and small members typically have less 
complex websites, which they manage and maintain with nontechnical 
staff. These members would use personnel in non-technical roles to 
accomplish the required updates to their websites . . . [I]t would 
take mid-size or small members approximately eight hours of non-
technical staffs' time to make the required updates . . .'').
    To compute the 10 hours internal initial burden, we assume 2 
hours by compliance personnel and 8 hours by business operations and 
information technology personnel of the broker-dealer.
---------------------------------------------------------------------------

    We preliminarily estimate that the total initial burden for broker-
dealers is 121,971 hours.\887\ We preliminarily estimate a cost of 
approximately $33,179,514 for broker-dealers.\888\ This would be an 
annual average burden of 43 hours per broker-dealer \889\ (as 
monetized, is an average annual burden per broker-dealer of 
$11,613).\890\
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    \887\ (8 hours for print communications per large broker-dealer 
+ 64 hours for electronic communications per large broker-dealers) = 
72 hours per large broker-dealer. (72 hours x 1,388 large broker-
dealers) = 99,936 total initial burden for large broker-dealers.
    (5 hours for print communications per small broker-dealer + 10 
hours for electronic communications per small broker-dealer) = 15 
hours per small broker-dealer. (15 hours x 1,469 small broker-
dealers) = 22,035 total initial burden for small broker-dealers.
    (99,936 total initial burden large broker-dealers + 22,035 total 
initial burden small broker-dealers) = 121,971 total broker-dealer 
initial burden.
    \888\ Based on the SIFMA Management and Professional Earnings 
Report, Commission staff preliminarily estimates that the average 
hourly rate for compliance services is $298, for business operation 
services is $268, and for information technology services is $270. 
The average technology and business rate is ($268 business rate + 
$270 technology rate)/2 = $269 average rate.
    This figure was calculated as follows: (6 compliance hours x 
$298 compliance rate) + (66 technology/business hours x $269 
averaged technology/business rate) x 1,388 large broker-dealers = 
$27,124,296 total initial costs for large broker-dealers.
    (3 compliance hours x $298 compliance rate) + (12 technology/
business hours x $269 averaged technology/business rate) x 1,469 
small broker-dealers = $6,055,218 total initial costs for small 
broker-dealers.
    $27,124,296 total initial cost for large broker-dealers + 
$6,055,218 total initial cost for small broker-dealers = $33,179,514 
total initial costs for all broker-dealers.
    \889\ (8 hours for print communications per large broker-dealer 
+ 64 hours for electronic communications per large broker-dealers) = 
72 hours per large broker-dealer. (72 hours x 1,388 large broker-
dealers) = 99,936 total initial burden for large broker-dealers.
    (5 hours for print communications per small broker-dealer + 10 
hours for electronic communications per small broker-dealer) = 15 
hours per small broker-dealer. (15 hours x 1,469 small broker-
dealers) = 22,035 total initial burden for small broker-dealers.
    99,936 total initial burden large broker-dealers + 22,035 total 
initial burden small broker-dealers = 121,971 total broker-dealer 
initial burden/2,857 total broker-dealers = 43 total initial burden 
per broker-dealer.
    \890\ Based on the SIFMA Management and Professional Earnings 
Report, Commission staff preliminarily estimates that the average 
hourly rate for compliance services is $298, for business operation 
services is $268, and for information technology services is $270. 
The average technology and business rate is ($268 business rate + 
$270 technology rate)/2 = $269 average rate.
     This figure was calculated as follows: (6 compliance hours x 
$298 compliance rate) + (66 technology/business hours x $269 
averaged technology/business rate) x 1,388 large broker-dealers = 
$27,124,296 total initial costs for large broker-dealers.
    (3 compliance hours x $298 compliance rate) + (12 technology/
business hours x $269 averaged technology/business rate) x 1,469 
small broker-dealers = $6,055,218 total initial costs for small 
broker-dealers.
    $27,124,296 total initial cost for large broker-dealers + 
$6,055,218 total initial cost for small broker-dealers = $33,179,514 
total initial costs for all broker-dealers/2,857 total number of 
broker-dealers = $11,613 total initial cost per broker-dealer.
---------------------------------------------------------------------------

    We further preliminarily anticipate that associated natural persons 
would have an initial one-time burden of 0.5 hours for each associated 
natural person respondent to review, identify, and make changes to 
their individual communications, both print and electronic.\891\ Based 
on staff experience,

[[Page 21530]]

we anticipate that many firms will make many communication changes for 
their associated natural persons, including their business cards and 
letterheads, leaving only certain responsibilities to the individual 
such as changes to their individual social media profile(s) and email 
signatures. Therefore, we preliminarily estimate that the total initial 
one-time burden for associated natural persons is 217,536 hours.\892\ 
We preliminarily estimate a monetized cost of approximately 
$31,107,576.50 for associated natural persons.\893\ This would be an 
annual average burden of 0.5 hours per associated natural person \894\ 
(as monetized, is an average annual burden per associated natural 
person of $71.50).\895\
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    \891\ This estimate is based upon staff experience. See e.g., 
Custody of Funds or Securities of Clients by Investment Advisers, 
Investment Advisers Act Release No. 2968 (Dec. 30, 2009) (``Release 
2968'') (``We further estimate that the adviser will spend 10 
minutes per client drafting and sending the notice.''); Enhanced 
Mutual Fund Disclosure Adopting Release, supra note 47 (``we 
estimate, as we did in the proposing release, that rule 498 will 
impose a \1/2\ hour burden per portfolio annually associated with 
the compilation of the additional information required on a cover 
page or at the beginning of the Summary Prospectus. Rule 498 also 
imposes annual hour burdens associated with the posting of a fund's 
Summary Prospectus, statutory prospectus, SAI, and most recent 
report to shareholders on an Internet website. We estimate that the 
average hour burden for one portfolio to comply with the Internet 
website posting requirements will be approximately one hour 
annually.'').
    \892\ (0.5 hours x 435,071 associated natural persons) = 217,536 
total initial burden for associated natural persons.
    \893\ Based on the SIFMA Management and Professional Earnings 
Report, Commission staff preliminarily estimates that the average 
hourly rate for compliance services is $298, for business operation 
services is $268, and for information technology services is $270.
    This figure was calculated as follows: 0.5 hours/3 firm staff 
categories (i.e., compliance, business operations, and information 
technology) = 0.17 hours per staff category
    ($298 compliance/hour x 0.17) = $51 per 0.17 of an hour.
    ($268 business operations rate/hour x 0.17) = $46 per 0.17 of an 
hour.
    ($270 information technology rate/hour x 0.17) = $46 per 0.17 of 
an hour.
    $51 + $46 + $46 = $143 total cost per associated natural person.
     (0.5 x $143 total cost per associated natural person x 435,071 
associated natural persons) = $31,107,576.50 total initial cost for 
associated natural persons.
    \894\ (0.5 hours x 435,071 associated natural persons) = 217,536 
total initial burden for associated natural persons.
    (217,536 total initial burden/435,071 total associated natural 
persons) = 0.5 total initial burden per associated natural person.
    \895\ Based on the SIFMA Management and Professional Earnings 
Report, Commission staff preliminarily estimates that the average 
hourly rate for compliance services is $298, for business operation 
services is $268, and for information technology services is $270.
    This figure was calculated as follows: 0.5 hours/3 firm staff 
categories (i.e., compliance, business operations, and information 
technology) = 0.17 hours per staff category
    ($298 compliance/hour x 0.17) = $51 per 0.17 of an hour.
    ($268 business operations rate/hour x 0.17) = $46 per 0.17 of an 
hour.
    ($270 information technology rate/hour x 0.17) = $46 per 0.17 of 
an hour.
    $51 + $46 + $46 = $143 total cost per associated natural person.
     (0.5 x $143 total cost per associated natural person x 435,071 
associated natural persons) = $31,107,576.50 total initial cost for 
associated natural persons.
    ($31,107,576.50 total initial cost for associated natural 
persons/435,071 total number of associated natural persons) = $71.50 
total initial cost per associated natural person.
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    Aside from the internal initial burden, we anticipate that there 
will be certain associated outside costs as well. We believe that 
broker-dealers and their associated natural persons may engage outside 
counsel to assist them in understanding our proposed rule should it be 
adopted.\896\ We assume that the amount of outsourced legal assistance 
would vary among various sizes of broker-dealers and their number of 
associated natural persons. As a result, we preliminarily estimate that 
large broker-dealers together with their associated natural persons may 
initially outsource approximately 8 hours of legal time in order to 
understand the implications of our proposed rule, including which 
communications are subject to the proposed rule and how best to comply 
with the technical specifications.\897\ For small broker-dealers, we 
anticipate that such firms will outsource 4 hours of legal time.\898\ 
Our preliminary estimates take into account that large firms have more 
communications affected by our proposed rule and more associated 
natural persons to supervise than smaller firms. We estimate initial 
outside legal costs associated with the proposed rule of $8,014,560 for 
broker-dealers \899\ or $2,805 per broker-dealer.\900\
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    \896\ We are assuming that associated natural persons would not 
independently seek outside counsel and would instead rely on the 
advice received from outside counsel to the firm. Therefore, we are 
not including a separate estimate for associated natural persons.
    \897\ This estimate is based upon staff experience. See e.g. 
Disclosure of Order Handling Information Proposed Rule, Securities 
Exchange Act Release No. 34-78309 (July 13, 2016) (``Release 34-
78309'') (estimating 4 hours for legal burden ``to assign each order 
routing strategy for institutional orders into passive, neutral, and 
aggressive categories and establish and document its specific 
methodologies for assigning order routing strategies as required by 
Rule 606(b)(3)(v)''); Regulation of NMS Stock Alternative Trading 
Systems Proposed Rule, Securities Exchange Act Release No. 34-76474 
(Nov. 18, 2015) (``Release 34-76474'') (estimating 7 legal hours 
``to put in writing its safeguards and procedures to protect 
subscribers' confidential trading information and the oversight 
procedures to ensure such safeguards and procedures are followed . . 
.'').
    \898\ This estimate is based upon staff experience. See supra 
note 897.
    \899\ Based on the SIFMA Management and Professional Earnings 
Report, Commission staff preliminarily estimates that the average 
hourly rate for legal services is $472/hour.
    ($472 x 8 legal hours = $3,776 x 1,388 large broker-dealers = 
$5,241,088) + ($472 x 4 legal hours = $1,888 x 1,469 small broker-
dealers = $2,773,472).
    ($5,241,088 large broker-dealers + $2,773,472 small broker-
dealers) = $8,014,560 total cost.
    \900\ Based on the SIFMA Management and Professional Earnings 
Report, Commission staff preliminarily estimates that the average 
hourly rate for legal services is $472/hour.
    ($472 x 8 legal hours = $3,776 x 1,388 large broker-dealers = 
$5,241,088) + ($472 x 4 legal hours = $1,888 x 1,469 small broker-
dealers = $2,773,472).
    $5,241,088 large broker-dealers + $2,773,472 small broker-
dealers = $8,014,560 total cost/2,857 broker-dealers = $2,805 total 
cost per broker-dealer.
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    Additionally, we anticipate that firms will also have one-time 
outside cost associated with the cost of printing new communications 
including new business cards, envelopes, pitch books, and letterheads. 
As part of these costs, we anticipate that both large and small broker-
dealers will have to work with printers to set the disclosure on, for 
example, business cards. We estimate initial costs to amend certain 
communications associated with the proposed rule of $617,848,307 for 
broker-dealers \901\ (or $216,258 per broker-dealer).\902\ We assume 
that because small broker-dealers have fewer associated natural persons 
there will be less communications that will require printing.
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    \901\ Our estimates are based on staff experience and industry 
sources. In particular, staff factored in its cost estimate the 
costs associated with printing envelopes, pitch books, letterheads, 
and business cards. For large broker-dealers, the staff assumes a 
printing cost of $445,121. For small broker-dealers, the staff 
assumes a printing cost of $20,359.
    ($445,121 x 1,388 large broker-dealers = $617,827,948) + 
($20,359 x 1,469 small broker-dealers = $29,907,371) = $617,848,307 
total broker-dealer outside costs.
    \902\ ($445,121 x 1,388 large broker-dealers = $617,827,948) + 
($20,359 x 1,469 small broker-dealers = $29,907,371) = $617,848,307 
total broker-dealer outside costs/2,857 broker-dealers = $216,258 
total cost per broker-dealer.
---------------------------------------------------------------------------

    For the ongoing burden of new communications for broker-dealers, we 
preliminarily estimate that the burden for legal, compliance, business 
operations, and technology services for adding a registration status 
statement would be 0.5 hours annual hours per broker-dealer.\903\ We 
anticipate that broker-dealers will need to add the registration 
disclosure to each new communication which they create, however we 
anticipate the burdens associated with this task to be minimal and 
therefore we do not believe there is a material difference between 
large and small broker-dealers.\904\ We

[[Page 21531]]

preliminarily estimate that the total ongoing annual aggregate burden 
for broker-dealers is 1,429 hours.\905\ We preliminarily estimate a 
total ongoing monetized cost of approximately $204,275.50 for broker-
dealers.\906\ This would be an annual average burden of 0.5 hours per 
broker-dealer \907\ (as monetized, is an average annual burden per 
broker-dealer of $71.50).\908\
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    \903\ This estimate is based upon staff experience. See e.g., 
Release 2968, supra note 891; Enhanced Mutual Fund Disclosure 
Adopting Release, supra note 47.
    In this estimate we are not calculating the print and 
technological associated burdens of updating communications which we 
analyzed earlier as we are assuming those burdens to be a one-time 
initial burden for a firm seeking compliance with the proposed rule.
    \904\ Our assumption of no material difference between large and 
small rests on the fact that all major systems changes would already 
have been implemented as part of the initial one-time burden. 
Therefore, any new electronic communications would have the 
disclosure statement required by our proposed rule built in at the 
outset which should take minimal time rather than having to 
retroactively insert it into the systems logic which is a more 
onerous task. We note that such communications will need to be 
reviewed by compliance staff for compliance with applicable 
securities laws and associated self-regulatory agency rules, 
including FINRA Rule 2210. We anticipate that compliance with 
proposed rule 151-3's requirements will be reviewed as part of this 
larger compliance check.
    \905\ (0.5 hours x 2,857 broker-dealers) = 1,429 total ongoing 
burden for broker-dealers.
    \906\ Based on the SIFMA Management and Professional Earnings 
Report, Commission staff preliminarily estimates that the average 
hourly rate for compliance services is $298, for business operation 
services is $268, and for information technology services is $270.
    This figure was calculated as follows: 0.5 hours/3 firm staff 
categories (i.e., compliance, business operations, and information 
technology) = 0.17 hours per staff category
    ($298 compliance/hour x 0.17) = $51 per 0.17 of an hour.
    ($268 business operations rate/hour x 0.17) = $46 per 0.17 of an 
hour.
    ($270 information technology rate/hour x 0.17) = $46 per 0.17 of 
an hour.
    $51 + $46 + $46 = $143 total cost per broker-dealer.
     (0.5 hours x $143 total cost per broker-dealer x 2,857 broker-
dealers) = $204,275.50 total ongoing cost for broker-dealers.
    \907\ (0.5 hours x 2,857 broker-dealers) = 1,429 total ongoing 
burden for broker-dealers.
    (1,429 total ongoing burden for broker-dealers/2,857 total 
broker-dealers) = 0.5 total initial burden per broker-dealer.
    \908\ Based on the SIFMA Management and Professional Earnings 
Report, Commission staff preliminarily estimates that the average 
hourly rate for compliance services is $298, for business operation 
services is $268, and for information technology services is $270.
    This figure was calculated as follows: 0.5 hours/3 firm staff 
categories (i.e., compliance, business operations, and information 
technology) = 0.17 hours per staff category
    ($298 compliance/hour x 0.17) = $51 per 0.17 of an hour.
    ($268 business operations rate/hour x 0.17) = $46 per 0.17 of an 
hour.
    ($270 information technology rate/hour x 0.17) = $46 per 0.17 of 
an hour.
    $51 + $46 + $46 = $143 total cost per broker-dealer.
     (0.5 hours x $143 total cost per broker-dealer x 2,857 broker-
dealers) = $204,275.50 total ongoing cost for broker-dealers/2,857 
total number of broker-dealers = $71.50 total ongoing cost per 
broker-dealer.
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    For the ongoing burden of new communications for associated natural 
persons of a broker-dealer, we preliminarily estimate that the burden 
for compliance, business operations, and technology services for adding 
a registration status statement would be 0.5 hours.\909\ Therefore, we 
preliminarily estimate that the total ongoing annual aggregate burden 
for associated natural persons is 217,536 hours.\910\ We preliminarily 
estimate a total ongoing monetized cost of approximately $31,107,576.50 
for associated natural persons.\911\ This would be an ongoing annual 
average burden of 0.5 hours per associated natural person \912\ (as 
monetized, is an average ongoing annual burden per associated natural 
person of $71.50).\913\
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    \909\ This estimate is based upon staff experience. See e.g., 
Release 2968, supra note 891; Enhanced Mutual Fund Disclosure 
Adopting Release, supra note 47.
    In this estimate we are not calculating the print and 
technological associated burdens of updating communications which we 
analyzed earlier as we are assuming those burdens to be a one-time 
initial burden for an associated natural person of a broker-dealer 
seeking compliance with the proposed rule.
    \910\ (0.5 hours x 435,071 associated natural persons) = 217,536 
total ongoing burden for associated natural persons.
    \911\ Based on the SIFMA Management and Professional Earnings 
Report, Commission staff preliminarily estimates that the average 
hourly rate for compliance services is $298, for business operation 
services is $268, and for information technology services is $270.
    This figure was calculated as follows: 0.5 hours/3 firm staff 
categories (i.e., compliance, business operations, and information 
technology) = 0.17 hours per staff category
    ($298 compliance/hour x 0.17) = $51 per 0.17 of an hour.
    ($268 business operations rate/hour x 0.17) = $46 per 0.17 of an 
hour.
    ($270 information technology rate/hour x 0.17) = $46 per 0.17 of 
an hour.
    $51 + $46 + $46 = $143 total cost per associated natural person.
     (0.5 hours x $143 total cost per associated natural person x 
435,071 associated natural person) = $31,107,576.50 total ongoing 
cost for associated natural persons.
    \912\ (0.5 hours x 435,071 associated natural persons) = 217,536 
total ongoing annual burden for associated natural persons.
    (217,536 total ongoing burden/435,071 total associated natural 
persons) = 0.5 total ongoing annual burden per associated natural 
person.
    \913\ Based on the SIFMA Management and Professional Earnings 
Report, Commission staff preliminarily estimates that the average 
hourly rate for compliance services is $298, for business operation 
services is $268, and for information technology services is $270.
    This figure was calculated as follows: 0.5 hours/3 firm staff 
categories (i.e., compliance, business operations, and information 
technology) = 0.17 hours per staff category
    ($298 compliance/hour x 0.17) = $51 per 0.17 of an hour.
    ($268 business operations rate/hour x 0.17) = $46 per 0.17 of an 
hour.
    ($270 information technology rate/hour x 0.17) = $46 per 0.17 of 
an hour.
    $51 + $46 + $46 = $143 total cost per associated natural person.
     (0.5 hours x $143 total cost per associated natural person x 
435,071 associated natural person) = $31,107,576.50 total ongoing 
cost for associated natural persons/435,071 total number of 
associated natural persons) = $71.50 total ongoing annual cost per 
associated natural person.
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H. Rule 211h-1 Under the Advisers Act

    Proposed rule 211h-1 would require investment advisers registered 
under section 203 and their supervised persons to prominently disclose 
that it is, or in the case of supervised persons that such persons are 
supervised by an investment adviser that is, registered with the 
Commission as an investment adviser in print or electronic retail 
investor communications. For print communications, we propose to 
require that such registration status be displayed in a type size at 
least as large as and of a font style different from, but at least as 
prominent as, that used in the majority of the communication. In 
addition, such disclosure must be presented in the body of the 
communication and not in a footnote. For electronic communications, or 
in any publication by radio or television, we propose to require that 
such disclosure be presented in a manner reasonably calculated to draw 
retail investor attention to it. This collection of information would 
be found at [17 CFR 240.15l-3] and would be mandatory. The likely 
respondents to this information collection would be all investment 
advisers and their supervised persons that distribute print or 
electronic retail investor communications.
    The Commission believes that the collection of information is 
necessary to provide retail investors and the Commission with 
information to better determine whether a communication is from a 
broker-dealer or investment adviser, and, for retail investors 
specifically, to allow them to better identify which type of firm is 
more appropriate for their specific investment needs. Additionally, by 
requiring an affirmative identification, retail investors would also be 
better informed whether a financial professional is a supervised person 
of an investment adviser rather than an associated person of a broker-
dealer. For similar reasons, we believe that because retail investors 
interact with a firm primarily through financial professionals, it is 
important that financial professionals disclose the firm type with 
which they are associated.
1. Respondents: Investment Advisers and Supervised Persons
    Currently, there are 12,721 registered investment advisers and 
approximately 942,215 supervised persons.\914\ Of these, 7,625 
investment advisers distribute print or electronic retail investor

[[Page 21532]]

communications while 245,408 supervised persons distribute print or 
electronic retail investor communications at standalone investment 
advisers or dually registered firms.\915\ Additionally, of these 
investment advisers 2,738 are large advisers and 4,887 are small 
advisers.\916\ Accordingly, the Commission estimates that 7,625 
investment advisers and 245,408 supervised persons would be required to 
comply with proposed rule 211h-1. There are also 477 new SEC registered 
investment advisers per year on average and 3,000 new supervised 
persons per year.\917\
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    \914\ The investment adviser and supervised person numbers are 
as of December 31, 2017. See supra Section IV.A.1.b, at Table 3, 
Panel A. We note that our estimate of supervised persons is based on 
those supervised persons identified in the baseline in the Economic 
Analysis. See Section IV.A.1.e, at Table 6.
    \915\ We estimate the number of supervised persons who 
distribute print or electronic retail investor communications using 
several data points. First, we analyzed those supervised persons who 
only hold a series 65 at a dual registrant or an investment adviser 
firm, totaling 27,879. Next we analyzed those supervised persons at 
dual registrants or investment advisers holding a combination of 
either a series 6 and 65 or a series 7 and 65, totaling 15,381 and 
172,304 respectively. Finally, we analyzed those supervised persons 
at dual registrants or investment advisers holding a series 6, 7, 
and 65, totaling 29,944. (27,879 + 15,281 + 172,304 + 29,944) = 
245,408 total supervised persons who engage retail investors through 
print or electronic communications. We note that our estimate does 
not reflect supervised persons who hold various designations (e.g. 
Chartered Financial Analyst) in lieu of the licenses we used to 
identify supervised persons of investment advisers who distribute 
print or electronic retail investor communications. Finally, our 
estimate does not employ rounding as compared to Table 6 in the 
Economic Analysis Baseline. See Table 6: Number of Employees at 
Retail Facing Firms who are Registered Representatives, Investment 
Adviser Representatives, or Both, Section I.V.A.1.e. These numbers 
are as of December 31, 2017.
    \916\ For purposes of this estimate, we categorize small 
advisers as advisers with 10 or fewer employees and large advisers 
as those with 10 or more employees. See cf. Release 3221, supra note 
875, at n.727.
    \917\ The number of new investment advisers is calculated by 
looking at the number of new advisers in 2016 and 2017 and then 
isolating the number each year that services retail investors. (455 
for 2016 + 499 for 2017)/2) = 477.
     The number of new supervised persons is calculated by looking 
at the difference in the number of supervised persons in 2017 as 
compared to 2016 at firms which service retail investors.
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2. Initial and Annual Burdens
    We estimate that the initial one-time burden for complying with the 
disclosure requirements would be 72 hours per large investment adviser 
\918\ and 15 hours per small investment adviser.\919\ We note that we 
are staging the compliance date to ensure that firms can phase out 
certain older communications from circulation through the regular 
business lifecycle rather than having to retroactively change 
them.\920\ As a result of this staged compliance, our burden estimates 
do not reflect the burdens that would have been imposed had these firms 
had to replace all outstanding communications.
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    \918\ (8 hours for print communications per broker-dealer + 64 
hours for electronic communications per broker-dealer).
    \919\ (5 hours for print communications per broker-dealer + 10 
hours for electronic communications per broker-dealer).
    \920\ Similarly, we are not requiring firms to send new 
communications to replace all older print communications as this 
would be overly burdensome and costly for firms.
---------------------------------------------------------------------------

    Aside from certain anticipated outside legal costs, as discussed 
below, we preliminary estimate that to comply with our proposed rule 
with respect to print communications,\921\ investment advisers would 
need to review their communications, identify which would need to be 
amended, make the changes, and verify that all firm communications 
comply with the rule's requirements including its technical 
specifications such as the type size, font, and prominence. Our 
preliminary estimates differ for large and small investment advisers. 
We drew these distinctions because we assume that the larger an adviser 
is the more communications it would need to review, identify and change 
and in turn have its compliance staff verify that such communications 
are compliant with our proposed rule.
---------------------------------------------------------------------------

    \921\ Such communications could include business cards, 
letterheads, newspaper advertisements, and article reprints from an 
unaffiliated magazines or newspaper.
---------------------------------------------------------------------------

    For existing print communications for large investment advisers we 
preliminarily estimate that the total burden for investment advisers 
would be 8 hours for compliance and business operations personnel to 
review, identify, and make changes across all print 
communications.\922\ For small investment advisers, we preliminarily 
estimate that the total burden for investment advisers would be 5 hours 
for compliance and business operations personnel to review, identify, 
and make changes across all print communications.\923\
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    \922\ This estimate is based upon staff experience and industry 
sources more generally. See e.g., FINRA 2015-22 Notice, supra note 
881.
    To compute the 8 hours internal initial burden we assume 2 hours 
by compliance personnel and 6 hours by business operations personnel 
of the broker-dealer.
    \923\ This estimate is based upon staff experience and industry 
materials more generally. See e.g., FINRA 2015-22 Notice, supra note 
881. To compute the 5 hours internal initial burden we assume 1 hour 
by compliance personnel and 4 hours by business operations personnel 
of the investment adviser.
---------------------------------------------------------------------------

    With respect to electronic communications \924\ we preliminarily 
anticipate that it would take large investment advisers approximately 
64 hours \925\ to review, identify and make the required updates 
coupled with verifying that such communications (present and future) 
would be compliant with the proposed rule. Our estimates take into 
account that larger firms likely have full-featured websites that 
generate other webpages based on complex system code and logic.\926\ In 
order to make changes to comply with our proposed rule, we assume that 
business operations and information technology personnel would likely 
be required to update the underlying code and logic to automate the 
implementation of the required language to populate across all 
associated electronic media. Additionally, we assume that these teams 
would need to test to ensure that such changes were implemented 
correctly.
---------------------------------------------------------------------------

    \924\ We believe such communications could include websites, 
smart phone apps, social media, emails, and blogs.
    \925\ This estimate is based upon staff experience and industry 
materials more generally. See e.g., FINRA 2015-22 Notice, supra note 
881. To compute the 64 hours internal initial burden we assume 4 
hours by compliance personnel and 60 hours by business operations 
and information technology personnel of the investment adviser.
    \926\ This is based upon staff experience and industry materials 
more generally. See e.g., FINRA 2015-22 Notice, supra note 881 
(discussing the burdens associated with the inclusion of a 
BrokerCheck reference and hyperlink across all firm communications 
for certain firms).
---------------------------------------------------------------------------

    With respect to small investment advisers, we preliminarily 
anticipate that it would take approximately 10 hours \927\ to review, 
identify and make the required updates coupled with verifying that such 
communications (present and future) would be compliant with the 
proposed rule. Our estimate for small investment advisers assumes that 
small investment advisers have fewer electronic communications that 
would be subject to our proposed rule as compared to larger firms, 
resulting in a lower burden preliminary estimate.
---------------------------------------------------------------------------

    \927\ This estimate is based upon staff experience and industry 
materials more generally. See e.g., FINRA 2015-22 Notice, supra note 
881.
    To compute the 10 hours internal initial burden, we assume 2 
hours by compliance personnel and 8 hours by business operations and 
information technology personnel of the investment adviser.
---------------------------------------------------------------------------

    We preliminarily estimate that the total initial burden for 
investment advisers is 270,441 hours.\928\ We

[[Page 21533]]

preliminarily estimate a cost of approximately $73,650,210 for 
investment advisers.\929\ This would be an annual average burden of 35 
hours per investment adviser \930\ (as monetized, an annual average 
cost of $9,659 per investment adviser).\931\
---------------------------------------------------------------------------

    \928\ (8 hours for print communications per large investment 
adviser + 64 hours for electronic communications per large 
investment adviser) = 72 hours per large investment adviser.
    (72 hours x 2,738 large investment advisers) = 197,136 total 
initial burden for large investment advisers.
    (5 hours for print communications per small investment adviser + 
10 hours for electronic communications per small investment adviser) 
= 15 hours per small investment adviser. (15 hours x 4887 small 
investment advisers) = 73,305 total initial burden for small 
investment advisers.
    (197,136 total burden large investment advisers + 73,305 total 
burden small investment advisers) = 270,441 hours.
    \929\ Based on the SIFMA Management and Professional Earnings 
Report, Commission staff preliminarily estimates that the average 
hourly rate for compliance services in the securities industry is 
$298, for business services is $268, and for technology services is 
$270. The average technology and business rate is ($270 technology 
rate + $268 business rate)/2 = $269 average rate.
     This figure was calculated as follows: (6 compliance hours x 
$298 compliance rate) + (66 technology/business hours x $269 
averaged technology/business rate) x 2,738 large investment advisers 
= $53,505,996 total initial costs for large investment advisers.
    (3 compliance hours x $298 compliance rate) + (12 technology/
business hours x $269 averaged technology/business rate) x 4,887 
small investment advisers = $20,144,214 total initial costs for 
small investment advisers.
    ($53,505,996 total initial costs for large investment advisers + 
$20,144,214 total initial costs for small investment advisers) = 
$73,650,210 total initial costs for investment advisers.
    \930\ (8 hours for print communications per large investment 
adviser + 64 hours for electronic communications per large 
investment adviser) = 72 hours per large investment adviser.
    (72 hours x 2,738 large investment advisers) = 197,136 total 
initial burden for large investment advisers.
    (5 hours for print communications per small investment advisers 
+ 10 hours for electronic communications per small investment 
adviser) = 15 hours per small investment adviser. (15 hours x 4887 
small investment advisers) = 73,305 total initial burden for small 
investment advisers.
    197,136 total burden large investment advisers + 73,305 total 
burden small investment advisers = 270,441 hours/7,625 total 
investment advisers = 35 hours average initial burden per investment 
adviser.
    \931\ Based on the SIFMA Management and Professional Earnings 
Report, Commission staff preliminarily estimates that the average 
hourly rate for compliance services is $298, for business operation 
services is $268, and for information technology services is $270. 
The average technology and business rate is ($268 business rate + 
$270 technology rate)/2 = $269 average rate.
     This figure was calculated as follows: (6 compliance hours x 
$298 compliance rate) + (66 technology/business hours x $269 
averaged technology/business rate) x 2,738 large investment advisers 
= $53,505,996 total initial costs for large investment advisers.
     (3 compliance hours x $298 compliance rate) + (12 technology/
business hours x $269 averaged technology/business rate) x 4,887 
small investment advisers = $20,144,214 total initial costs for 
small investment advisers.
    $53,505,996 total initial cost large investment advisers + 
$20,144,214 total initial costs small investment advisers = 
$73,650,210 total initial cost investment advisers/7,625 total 
number of investment advisers = $9,659 average initial cost per 
investment adviser.
---------------------------------------------------------------------------

    We further preliminarily anticipate that supervised persons would 
have an initial burden of 0.5 hours for each supervised person 
respondent to review, identify, and make changes to their individual 
communications, both print and electronic.\932\ Based on staff 
experience, we anticipate that many firms will make many communication 
changes for their supervised persons, including their business cards 
and letterheads, leaving only certain responsibilities to the 
individual such as changes to their individual social media profile(s) 
and email signatures. Therefore, we preliminarily estimate that the 
total initial one-time burden for supervised persons is 122,704 
hours.\933\ We preliminarily estimate a monetized cost of approximately 
$17,546,672 for supervised persons.\934\ This would be an annual 
average burden of 0.5 hours per supervised person \935\ (as monetized, 
is an annual average cost of $71.50 per supervised person).\936\
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    \932\ This estimate is based upon staff experience. See e.g., 
Release 2968, supra note 891; Enhanced Mutual Fund Disclosure 
Adopting Release, supra note 47.
    \933\ (0.5 hours x 245,408 supervised persons) = 122,704 total 
initial burden for supervised persons.
    \934\ Based on the SIFMA Management and Professional Earnings 
Report, Commission staff preliminarily estimates that the average 
hourly rate for compliance services is $298, for business operation 
services is $268, and for information technology services is $270.
    This figure was calculated as follows: 0.5 hours/3 firm staff 
categories (i.e., compliance, business operations, and information 
technology) = 0.17 hours per staff category
    ($298 compliance/hour x 0.17) = $51 per 0.17 of an hour.
    ($268 business operations rate/hour x 0.17) = $46 per 0.17 of an 
hour.
    ($270 information technology rate/hour x 0.17) = $46 per 0.17 of 
an hour.
    $51 + $46 + $46 = $143 total cost per supervised person.
     (0.5 hours x $143 total cost per supervised person x 245,408 
supervised persons) = $17,546,672 total initial cost for supervised 
persons.
    \935\ (0.5 hours x 245,408 supervised persons) = 122,704 total 
initial burden for supervised persons.
    (122,704 total initial burden for supervised persons/245,408 
total supervised persons) = 0.5 hours average initial burden per 
investment adviser.
    \936\ Based on the SIFMA Management and Professional Earnings 
Report, Commission staff preliminarily estimates that the average 
hourly rate for compliance services is $298, for business operation 
services is $268, and for information technology services is $270.
    This figure was calculated as follows: 0.5 hours/3 firm staff 
categories (i.e., compliance, business operations, and information 
technology) = 0.17 hours per staff category
    ($298 compliance/hour x 0.17) = $51 per 0.17 of an hour.
    ($268 business operations rate/hour x 0.17) = $46 per 0.17 of an 
hour.
    ($270 information technology rate/hour x 0.17) = $46 per 0.17 of 
an hour.
    $51 + $46 + $46 = $143 total cost per supervised person.
     (0.5 hours x $143 total cost per supervised person x 245,408 
supervised persons) = $17,546,672 total initial cost for supervised 
persons/245,408 total number of supervised persons) = $71.50 average 
initial cost per supervised person.
---------------------------------------------------------------------------

    Aside from the internal initial burden, we anticipate that there 
would be certain associated outside costs as well. We believe that 
investment advisers and their supervised persons may engage outside 
counsel to assist them in understanding our proposed rule should it be 
adopted.\937\ We assume that the amount of outsourced legal assistance 
would vary among various sizes of investment advisers and their number 
of supervised persons. As a result, we preliminarily estimate that 
large investment advisers together with their supervised persons may 
initially outsource approximately 8 hours of legal time in order to 
understand the implications of our proposed rule and how best to comply 
with the technical specifications.\938\ For small investment advisers, 
we anticipate that such firms will outsource 4 hours of legal 
time.\939\ The hour differences in our preliminary estimates take into 
account that larger firms have more communications affected by our 
proposed rule and more supervised persons to supervise than small 
firms. We estimate initial outside legal costs associated with the 
proposed rule of $19,565,344 for investment advisers \940\ (or $2,566 
on average per investment adviser.) \941\
---------------------------------------------------------------------------

    \937\ We are assuming that supervised persons would not 
independently seek outside counsel and would instead rely on the 
advice received from outside counsel to the firm. Therefore, we are 
not including a separate estimate for supervised persons.
    \938\ This estimate is based upon staff experience. See e.g., 
Release 34-78309, supra note 897; Release 34-76474, supra note 897.
    \939\ This estimate is based upon staff experience. See supra 
note 938.
    \940\ Based on the SIFMA Management and Professional Earnings 
Report, Commission staff preliminarily estimates that the average 
hourly rate for legal services is $472/hour.
    ($472 x 8 legal hours) = $3,776 x 2,738 large investment 
advisers = $10,338,688.
    ($472 x 4 legal hours) = $1,888 x 4,887 small investment 
advisers = $9,226,656.
    ($10,338,688 total large investment advisers costs + $9,226,656 
total small investment advisers costs) = $19,565,344.
    \941\ Based on the SIFMA Management and Professional Earnings 
Report, Commission staff preliminarily estimates that the average 
hourly rate for legal services is $472/hour.
    ($472 x 8 legal hours) = $3,776 x 2,738 large investment 
advisers = $10,338,688.
    ($472 x 4 legal hours) = $1,888 x 4,887 small investment 
advisers = $9,226,656.
    $10,338,688 total large investment advisers costs + $9,226,656 
total small investment advisers costs = $19,565,344/7625 total 
investment advisers = $2,566 total cost per investment adviser.
---------------------------------------------------------------------------

    Additionally, we anticipate that firms will also have one-time 
outside costs associated with the cost of printing new communications 
including new business cards, envelopes, pitch books, and letterheads. 
As part of these costs, we anticipate that both large and small 
investment advisers will have to work with printers to set the 
disclosure on, for example, business cards. We

[[Page 21534]]

estimate initial costs to amend certain communications associated with 
the proposed rule of $346,787,187 for investment advisers \942\ (or 
$45,480 per investment adviser.) \943\ We assume that because small 
investment advisers have fewer supervised persons there will be less 
communications that will require printing.
---------------------------------------------------------------------------

    \942\ Our estimates are based on staff experience and industry 
materials. In particular, staff factored in its cost estimate the 
costs associated with printing envelopes, pitch books, letter heads, 
and business cards. For large investment advisers, we assume 
printing costs of $65,973. For small investment advisers, we assume 
printing costs of $33,999.
    ($65,973 x 2,738 large investment advisers = $180,634,074) + 
($33,999 x 4,887 small investment advisers = $166,153,113) = 
$346,787,187 total investment adviser outside costs.
    \943\ ($65,973 x 2,738 large investment advisers = $180,634,074) 
+ ($33,999 x 4,887 small investment advisers = $166,153,113) = 
$346,787,187 total investment adviser outside costs/7,625 investment 
advisers = $45,480 total cost per investment adviser.
---------------------------------------------------------------------------

    For the ongoing burden of new communications for investment 
advisers, we preliminarily estimate that the burden for compliance, 
business operations, and technology services for adding a registration 
status statement would be 0.5 hours annual hours per investment 
adviser.\944\ We anticipate that investment advisers will need to add 
the registration disclosure to each new communication which they 
create, however we anticipate the burdens associated with this task to 
be minimal and therefore we do not believe there is a material 
difference between large and small investment advisers.\945\ We 
preliminarily estimate that the total ongoing annual aggregate burden 
for investment advisers is 3,812.50 hours.\946\ We preliminarily 
estimate a total ongoing monetized cost of approximately $545,187.50 
for investment advisers.\947\ This would be an annual average burden of 
0.5 hours per investment advisers \948\ (as monetized, is an annual 
average cost of $71.50 per investment adviser).\949\
---------------------------------------------------------------------------

    \944\ This estimate is based upon staff experience. See e.g., 
Release 2968, supra note 891; Enhanced Mutual Fund Disclosure 
Adopting Release, supra note 47.
    In this estimate we are not calculating the print and 
technological associated burdens of updating communications which we 
analyzed earlier as we are assuming those burdens to be a one-time 
initial burden for a firm seeking compliance with the proposed rule.
    \945\ Our assumption of no material difference between large and 
small investment advisers rests on the fact that all major systems 
changes would already have been implemented as part of the initial 
burden. Therefore, any new electronic communications would have the 
disclosure statement required by our proposed rule built in at the 
outset which should take minimal time rather than having to 
retroactively insert it into the systems logic which is a more 
onerous task. We note that such communications would likely be 
reviewed by compliance staff for compliance with applicable 
securities laws including rule 206(4)-1 of the Advisers Act. We 
anticipate that compliance with proposed rule 211h-1's requirements 
would be reviewed as part of this larger compliance check.
    \946\ (0.5 hours x 7,625 investment advisers) = 3,812.50 total 
ongoing burden for investment advisers.
    \947\ Based on the SIFMA Management and Professional Earnings 
Report, Commission staff preliminarily estimates that the average 
hourly rate for compliance services is $298, for business operation 
services is $268, and for information technology services is $270.
    This figure was calculated as follows: 0.5 hours/3 firm staff 
categories (i.e., compliance, business operations, and information 
technology) = 0.17 hours per staff category
    ($298 compliance/hour x 0.17) = $51 per 0.17 of an hour.
    ($268 business operations rate/hour x 0.17) = $46 per 0.17 of an 
hour.
    ($270 information technology rate/hour x 0.17) = $46 per 0.17 of 
an hour.
    $51 + $46 + $46 = $143 total cost per investment adviser.
     (0.5 hours x $143 total cost per investment adviser x 7,625 
investment advisers) = $545,187.50 total ongoing cost for investment 
advisers.
    \948\ (0.5 hours x 7,625 investment advisers) = 3,812.50 total 
ongoing burden for investment advisers.
    (3,812.5/7,625 total investment advisers) = 0.5 hours average 
initial burden per investment adviser.
    \949\ Based on the SIFMA Management and Professional Earnings 
Report, Commission staff preliminarily estimates that the average 
hourly rate for compliance services is $298, for business operation 
services is $268, and for information technology services is $270.
    This figure was calculated as follows: 0.5 hours/3 firm staff 
categories (i.e., compliance, business operations, and information 
technology) = 0.17 hours per staff category
    ($298 compliance/hour x 0.17) = $51 per 0.17 of an hour.
    ($268 business operations rate/hour x 0.17) = $46 per 0.17 of an 
hour.
    ($270 information technology rate/hour x 0.17) = $46 per 0.17 of 
an hour.
    $51 + $46 + $46 = $143 total cost per investment adviser.
     (0.5 hours x $143 total cost per investment adviser x 7,625 
investment advisers) = $545,187.50 total ongoing cost for investment 
advisers/7,625 total number of investment advisers = $71.50 average 
annual ongoing cost per investment adviser.
---------------------------------------------------------------------------

    For the ongoing burden of new communications for supervised persons 
of an investment adviser, we preliminarily estimate that the burden for 
compliance, business operations, and technology services for adding a 
registration status statement would be 0.5 hours.\950\ Therefore, we 
preliminarily estimate that the total ongoing annual aggregate burden 
for supervised persons is 122,704 hours.\951\ We preliminarily estimate 
a total ongoing monetized cost of approximately $17,546,672 for 
supervised persons.\952\ This would be an annual average burden of 0.5 
hours per supervised person \953\ (as monetized, is an annual average 
cost of $71.50 per supervised person).\954\
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    \950\ This estimate is based upon staff experience. See e.g., 
Release 2968, supra note 891; Enhanced Mutual Fund Disclosure 
Adopting Release, supra note 47.
    In this estimate we are not calculating the print and 
technological associated burdens of updating communications which we 
analyzed earlier as we are assuming those burdens to be a one-time 
initial burden for a supervised person of an investment adviser 
seeking compliance with the proposed rule.
    \951\ (0.5 hours x 245,408 supervised persons) = 122,704 total 
ongoing burden for supervised persons.
    \952\ Based on the SIFMA Management and Professional Earnings 
Report, Commission staff preliminarily estimates that the average 
hourly rate for compliance services is $298, for business operation 
services is $268, and for information technology services is $270.
    This figure was calculated as follows: 0.5 hours/3 firm staff 
categories (i.e., compliance, business operations, and information 
technology) = 0.17 hours per staff category
    ($298 compliance/hour x 0.17) = $51 per 0.17 of an hour.
    ($268 business operations rate/hour x 0.17) = $46 per 0.17 of an 
hour.
    ($270 information technology rate/hour x 0.17) = $46 per 0.17 of 
an hour.
    $51 + $46 + $46 = $143 total cost per supervised person.
     (0.5 hours x $143 total cost per supervised person x 245,408 
supervised persons) = $17,546,672 total ongoing cost for supervised 
persons.
    \953\ (0.5 hours x 245,408 supervised persons) = 122,704 total 
ongoing annual burden for supervised persons.
    (122,704 total initial burden for supervised persons/245,408 
total supervised persons) = 0.5 hours average ongoing annual burden 
per supervised person.
    \954\ Based on the SIFMA Management and Professional Earnings 
Report, Commission staff preliminarily estimates that the average 
hourly rate for compliance services is $298, for business operation 
services is $268, and for information technology services is $270.
    This figure was calculated as follows: 0.5 hours/3 firm staff 
categories (i.e., compliance, business operations, and information 
technology) = 0.17 hours per staff category
    ($298 compliance/hour x 0.17) = $51 per 0.17 of an hour.
    ($268 business operations rate/hour x 0.17) = $46 per 0.17 of an 
hour.
    ($270 information technology rate/hour x 0.17) = $46 per 0.17 of 
an hour.
    $51 + $46 + $46 = $143 total cost per supervised person.
     (0.5 hours x $143 total cost per supervised person x 245,408 
supervised persons) = $17,546,672 total ongoing cost for supervised 
persons/245,408 total number of supervised persons = $71.50 average 
ongoing annual cost per supervised person.
---------------------------------------------------------------------------

    Additionally, we believe that any new investment advisers and their 
supervised persons would likely only incur the same ongoing annual 
burden estimate rather than the initial burden because they would 
incorporate the proposed registration status in all communications at 
their inception and not have to conduct a review and identification of 
outstanding communications nor make changes to their already existing 
communications. We do anticipate that such persons would also incur 
similar outside legal

[[Page 21535]]

costs, depending on their size, as discussed above. We do not believe 
that such new investment advisers would incur outside printing costs as 
a result of our proposed rule because these new firms would have their 
print communications produced with the appropriate disclosure initially 
as part of other materials they seek to have printed. Therefore, we 
preliminarily estimate that the total burden for new investment 
advisers is 238.50 hours.\955\ Additionally, we preliminarily estimate 
a cost of approximately $34,105.50 for new investment advisers.\956\ 
This would be an initial average burden of 0.5 hours per new investment 
adviser \957\ (as monetized, is an initial average cost of $71.50 per 
new investment adviser).\958\ Additionally, we anticipate 1,500 hours 
\959\ for new supervised persons of an investment adviser and costs of 
approximately $214,500 for new supervised persons \960\ of an 
investment adviser resulting from these requirements. This would be an 
initial average burden of 0.5 hours per new supervised person \961\ (as 
monetized, is an initial average cost of $71.50 per supervised 
person).\962\
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    \955\ (0.5 hours x 477 new investment advisers) = 238.50 total 
burden for new investment advisers.
    \956\ Based on the SIFMA Management and Professional Earnings 
Report, Commission staff preliminarily estimates that the average 
hourly rate for compliance services is $298, for business operation 
services is $268, and for information technology services is $270.
    This figure was calculated as follows: 0.5 hours/3 firm staff 
categories (i.e., compliance, business operations, and information 
technology) = 0.17 hours per staff category
    ($298 compliance/hour x 0.17) = $51 per 0.17 of an hour.
    ($268 business operations rate/hour x 0.17) = $46 per 0.17 of an 
hour.
    ($270 information technology rate/hour x 0.17) = $46 per 0.17 of 
an hour.
    $51 + $46 + $46 = $143 total cost per investment adviser.
     (0.5 hours x $143 total cost per investment adviser x 477 new 
investment advisers) = $34,105.50 total initial cost for new 
investment advisers.
    \957\ (0.5 hours x 477 new investment advisers) = 238.50 total 
initial burden for new investment advisers.
    (238.50 total initial burden for new investment advisers/477 
total new investment advisers) = 0.5 hours average initial burden 
per investment adviser.
    \958\ Based on the SIFMA Management and Professional Earnings 
Report, Commission staff preliminarily estimates that the average 
hourly rate for compliance services is $298, for business operation 
services is $268, and for information technology services is $270.
    This figure was calculated as follows: 0.5 hours/3 firm staff 
categories (i.e., compliance, business operations, and information 
technology) = 0.17 hours per staff category
    ($298 compliance/hour x 0.17) = $51 per 0.17 of an hour.
    ($268 business operations rate/hour x 0.17) = $46 per 0.17 of an 
hour.
    ($270 information technology rate/hour x 0.17) = $46 per 0.17 of 
an hour.
    $51 + $46 + $46 = $143 total cost per investment adviser.
     (0.5 hours x $143 total cost per investment adviser x 477 new 
investment advisers) = $34,105.50 total cost for new investment 
advisers/477 total number of new investment advisers = $71.50 
average initial cost per new investment adviser.
    \959\ (0.5 hours x 3,000 new supervised persons) = 1,500 total 
burden for new supervised persons.
    \960\ Based on the SIFMA Management and Professional Earnings 
Report, Commission staff preliminarily estimates that the average 
hourly rate for compliance services is $298, for business operation 
services is $268, and for information technology services is $270.
    This figure was calculated as follows: 0.5 hours/3 firm staff 
categories (i.e., compliance, business operations, and information 
technology) = 0.17 hours per staff category
    ($298 compliance/hour x 0.17) = $51 per 0.17 of an hour.
    ($268 business operations rate/hour x 0.17) = $46 per 0.17 of an 
hour.
    ($270 information technology rate/hour x 0.17) = $46 per 0.17 of 
an hour.
    $51 + $46 + $46 = $143 total cost per supervised person.
     (0.5 hours x $143 total cost per supervised person x 3,000 new 
supervised persons) = $214,500 total cost for new supervised 
persons.
    \961\ (0.5 hours x 3,000 new supervised persons) = 1,500 total 
initial burden for new supervised persons.
    (1,500 total initial burden for new supervised persons/3000 
total new supervised persons) = 0.5 hours average initial burden per 
new supervised person.
    \962\ Based on the SIFMA Management and Professional Earnings 
Report, Commission staff preliminarily estimates that the average 
hourly rate for compliance services is $298, for business operation 
services is $268, and for information technology services is $270.
    This figure was calculated as follows: 0.5 hours/3 firm staff 
categories (i.e., compliance, business operations, and information 
technology) = 0.17 hours per staff category
    ($298 compliance/hour x 0.17) = $51 per 0.17 of an hour.
    ($268 business operations rate/hour x 0.17) = $46 per 0.17 of an 
hour.
    ($270 information technology rate/hour x 0.17) = $46 per 0.17 of 
an hour.
    $51 + $46 + $46 = $143 total cost per supervised person.
     (0.5 hours x $143 total cost per supervised person x 3,000 new 
supervised persons) = $214,500 total cost for new supervised 
persons/3,000 total number of new supervised persons = $71.50 
average initial cost per new supervised person.
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I. Request for Comment

    We request comment on our estimates for the new estimated burden 
hours and change in current burden hours, and their associated costs 
described above. Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission 
solicits comments in order to: (i) Evaluate whether the proposed 
collections of information are necessary for the proper performance of 
the functions of the Commission, including whether the information will 
have practical utility; (ii) evaluate the accuracy of the Commission's 
estimate of the burden of the proposed collections of information; 
(iii) determine whether there are ways to enhance the quality, utility, 
and clarity of the information to be collected; and (iv) determine 
whether there are ways to minimize the burden of the collections of 
information on those who are to respond, including through the use of 
automated collection techniques or other forms of information 
technology.
    The agency has submitted the proposed collections of information to 
OMB for approval. Persons wishing to submit comments on the collection 
of information requirements of the proposed amendments should direct 
them to the Office of Management and Budget, Attention Desk Officer for 
the Securities and Exchange Commission, Office of Information and 
Regulatory Affairs, Washington, DC 20503, and should send a copy to 
Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F 
Street NE, Washington, DC 20549, with reference to File No. S7-08-18. 
As OMB is required to make a decision concerning the collections of 
information between 30 and 60 days after publication of the proposal, a 
comment to OMB is best assured of having its full effect if OMB 
receives it within 30 days of publication. Requests for materials 
submitted to OMB by the Commission with regard to these collections of 
information should be in writing, refer to File No. S7-08-18, and be 
submitted to the Securities and Exchange Commission, Office of FOIA 
Services, 100 F Street NE, Washington, DC 20549.

VI. Initial Regulatory Flexibility Analysis

    The Commission has prepared the following Initial Regulatory 
Flexibility Analysis (``IRFA'') in accordance with section 3(a) of the 
Regulatory Flexibility Act (``RFA'').\963\ It relates to: (i) Proposed 
new rule 204-5 under the Advisers Act and proposed amendment to, Form 
ADV (17 CFR 279.1), to add a new Part 3: Form CRS; (ii) proposed 
amendments to rule 203-1 under the Advisers Act; (iii) proposed 
amendments to rule 204-1 under the Advisers Act; (iv) proposed 
amendments to rule 204-2 under the Advisers Act; (v) proposed new rule 
17a-14 under the Exchange Act and new Form CRS (17 CFR 249.640); (vi) 
proposed amendments to rules 17a-3 and 17a-4 under the Exchange Act; 
(vii) proposed new rules 15l-2 and 15l-3 under the Exchange Act; and 
(viii) proposed new rule 211h-1 under the Advisers Act.
---------------------------------------------------------------------------

    \963\ 5 U.S.C. 603(a).

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[[Page 21536]]

A. Reason for and Objectives of the Proposed Action

    Individual investors rely on the services of broker-dealers and 
investment advisers when making and implementing investment decisions. 
Such ``retail investors'' can receive investment advice from a broker-
dealer, an investment adviser, or both, or decide to make their own 
investment decisions. Broker-dealers, investment advisers and dually 
registered firms all provide important services for individuals who 
invest in the markets. Studies show that retail investors are confused 
about the differences among them.\964\ These differences include the 
scope and nature of the services they provide, the fees and costs 
associated with those services, conflicts of interest, and the 
applicable legal standards and duties owed to investors. Studies also 
indicate that retail investors are confused about whether their firm 
and financial professional are broker-dealers or investment advisers, 
or both.\965\ Based on these studies, it appears that certain names or 
titles used by broker-dealers, including ``financial advisor,'' 
contribute to this confusion and could mislead retail investors into 
believing that they are engaging with an investment adviser--and are 
receiving services commonly provided by an investment adviser and 
subject to an adviser's fiduciary duty, which applies to the retail 
investors' entire relationship--when they are not.\966\
---------------------------------------------------------------------------

    \964\ See Siegel & Gale Study, supra note 5; Rand Study, supra 
note 5; and CFA Survey, supra note 5.
    \965\ See Siegel & Gale Study, supra note 5; Rand Study, supra 
note 5; and 913 Study, supra note 3.
    \966\ See supra note 375.
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    We recognize the benefits of retail investors having access to 
diverse business models and of preserving investor choice among 
brokerage services, advisory services, or both. However, we believe 
that retail investors need clear information in order to understand the 
differences and key characteristics of each type of service. Providing 
this clarity is intended to assist investors in making an informed 
choice when choosing an investment firm and professional and type of 
account to help to ensure they receive services that meet their needs 
and expectations. We also believe it is important to mitigate the risk 
that certain names or titles could result in retail investors being 
misled, including believing that the financial professional is a 
fiduciary, leading to uninformed decisions regarding which firm or 
financial professional to engage, which may in turn result in investors 
being harmed.
    The Commission considered ways to address investor confusion and 
preserve investor choice, including reviewing studies, comment letters, 
and committee recommendations.\967\ We believe it is important to 
ensure that retail investors receive the information they need to 
clearly understand the services, standard of conduct, fees, conflicts, 
and disciplinary history of firms and financial professionals they are 
considering. We also believe it is important for retail investors to 
better understand the distinction between investment advisers and 
broker-dealers and to have access to the information necessary to make 
an informed decision about which firm type and financial professional 
they are engaging or seeking to engage and avoid potential harm.
---------------------------------------------------------------------------

    \967\ See supra notes 6-22 and accompanying text, referring to 
the Siegel & Gale Study, the RAND Study, the 913 Study, commenters 
responding to the 2013 Request for Data, the 917 Financial Literacy 
Study, comment letters of commenters providing input for these 
studies, the recommendation of the Commission's Investor Advisory 
Committee, and comment letters of commenters responding to Chairman 
Clayton's Request for Comment.
---------------------------------------------------------------------------

1. Proposed Form CRS Relationship Summary
    We are proposing new rules and rule amendments to require broker-
dealers and investment advisers to deliver a Form CRS (or relationship 
summary) to retail investors that would include general information 
about each of these topics, including where to find additional 
information. We preliminarily believe that providing this information 
before or at the time a retail investor enters into an investment 
advisory agreement or first engages a brokerage firm's services, as 
well as at certain points during the relationship (e.g., switching or 
adding account types), as further discussed above, is appropriate and 
in the public interest and will improve investor protection, and will 
deter potentially misleading sales practices by helping retail 
investors to make a more informed choice among the types of firms and 
services available to them.\968\
---------------------------------------------------------------------------

    \968\ See supra note 36 and accompanying text.
---------------------------------------------------------------------------

    As discussed above in Section II.A, the relationship summary would 
be short, with a mix of tabular and narrative information, and contain 
sections covering: (i) Introduction; (ii) the principal relationships 
and services the firm offers to retail investors; (iii) the standard of 
conduct applicable to those services; (iv) the fees and costs that 
retail investors will pay; (v) comparisons of brokerage and investment 
advisory services (for standalone broker-dealers and investment 
advisers); (vi) conflicts of interest; (vii) where to find additional 
information, including whether the firm or its financial professionals 
currently have reportable legal or disciplinary events and who to 
contact about complaints; and (viii) key questions for retail investors 
to ask the firm's financial professional.
    The proposed rules and rule amendments would require advisers and 
broker-dealers to deliver their relationship summaries to retail 
investors, to file them electronically with the Commission, and to post 
them electronically on their public websites (if they have a public 
website). If they do not have a public website, they would be required 
to include in their relationship summary a toll-free number that retail 
investors may call to request documents. We are also proposing to 
require firms to update their relationship summaries within 30 days 
whenever any information in the relationship summary becomes materially 
inaccurate. Firms would be required to file the updated version 
electronically with the Commission, and post them on their firms' 
websites (if they have a public website). Firms would be required to 
communicate any changes in an updated relationship summary to retail 
investors who are existing clients or customers of the firm within 30 
days after the updates are required to be made and without charge. The 
communication could be made by delivering the relationship summary or 
by communicating the information in another way to the retail investor. 
The proposal would require a firm to maintain a copy of the 
relationship summary and each amendment or revision as part of its 
books and records and make them available to Commission staff upon 
request, as discussed in Section II.E above. All of these requirements 
are discussed in detail above in Sections I through IV. The burdens of 
these requirements on small advisers and broker-dealers are discussed 
below as well as above in our Economic Analysis and Paperwork Reduction 
Act Analysis, which discuss the burdens on all advisers and broker-
dealers.\969\
---------------------------------------------------------------------------

    \969\ See, e.g., Sections IV.B.2.b and V.
---------------------------------------------------------------------------

    As discussed in Section II above, the relationship summary would be 
in addition to, and not in lieu of, current disclosure and reporting 
requirements for broker-dealers and investment

[[Page 21537]]

advisers.\970\ The relationship summary would alert retail investors to 
important information for them to consider when choosing a firm and a 
financial professional and prompt retail investors to ask informed 
questions. In addition, the content of the relationship summary would 
facilitate comparisons across firms. As discussed in Section II above, 
while the information required by the relationship summary is generally 
already provided in greater detail for investment advisers by Form ADV 
Part 2, the relationship summary would provide in one place information 
about the services, fees, conflicts, and disciplinary history for 
broker-dealers.\971\
---------------------------------------------------------------------------

    \970\ See, e.g., supra note 33 and accompanying text.
    \971\ See supra text accompanying note 316. In addition, under 
Regulation Best Interest, broker-dealers would be required to 
disclose, in writing, the material facts relating to the scope and 
terms of the relationship with the retail customer and all material 
conflicts of interest that are associated with the recommendation. 
See supra note 296.
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2. Proposed Rules Relating to Restrictions on the Use of Certain Terms 
and Required Disclosure of Regulatory Status and a Financial 
Professional's Firm Association
    We are also proposing a rule under the Exchange Act that would 
restrict broker-dealers and their associated natural persons, when 
communicating with a retail investor, from using as part of a name or 
title the term ``adviser'' or ``advisor'' unless any such (1) broker or 
dealer is an investment adviser registered under section 203 of the 
Advisers Act or with a state, or (2) natural person who is an 
associated person of a broker or dealer is a supervised person of an 
investment adviser registered under section 203 of the Advisers Act or 
with a state, and such person provides investment advice on behalf of 
such investment adviser. We are also proposing rules under the Exchange 
Act and Advisers Act that would require broker-dealers and investment 
advisers and their associated natural persons and supervised persons, 
respectively, to prominently disclose the firm's registration status 
with the Commission and the financial professional's association with 
such firm in print and electronic retail investor communications. As 
discussed above in Section III, the proposed restriction is designed to 
address the risk that retail investors could be misled by the term 
``adviser'' or ``advisor'' and, as a result, make an uninformed 
decision regarding which firm or financial professional they are 
engaging or seeking to engage, resulting in investors being harmed. 
Additionally, as discussed above in Section III, we believe that 
requiring firms and their associated natural persons or supervised 
persons, respectively, to disclose whether a firm is a broker-dealer or 
investment adviser and requiring a financial professional to disclose 
his or her association with such firm would assist retail investors in 
determining which type of firm is more appropriate for their specific 
investment needs. Similarly, our proposed rules to require a firm to 
disclose whether it is a broker-dealer or an investment adviser in 
print or electronic communications to retail investors would help to 
facilitate investor understanding, even if investors currently may not 
understand the differences between investment advisers and broker-
dealers. For similar reasons, we preliminarily believe that because 
retail investors interact with a firm primarily through financial 
professionals, it is important that financial professionals disclose 
the firm type with which they are associated.

B. Legal Basis

    The Commission is proposing the following new rule and rule 
amendments under the authority set forth in section 19(a) of the 
Securities Act of 1933 [15 U.S.C. 77s(a)], sections 23(a) and 28(e)(2) 
of the Securities Exchange Act of 1934 [15 U.S.C. 78w(a) and 
78bb(e)(2)], section 319(a) of the Trust Indenture Act of 1939 [15 
U.S.C. 7sss(a)], section 38(a) of the Investment Company Act of 1940 
[15 U.S.C. 80a-37(a)], and sections 203(c)(1), 204, 206A, 206(4), 
211(a) and 211(h), and of the Investment Advisers Act of 1940 [15 
U.S.C. 80b-3(c)(1), 80b-4, 80b-6a, 80b-6(4), 80b-11(a) and 80b-11(h)], 
and section 913(f) of Title IX of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act of 2010 (the ``Dodd-Frank Act''): (i) Proposed 
new rule 204-5 under the Advisers Act ; (ii) amendments to rule 279.1, 
Form ADV, to create Form CRS for investment advisers; (iii) amendments 
to rule 203-1 under the Advisers Act; (iv) amendments to rule 204-1 
under the Advisers Act; and (v) amendments to rule 204-2 under the 
Advisers Act. The Commission is proposing the following rule amendments 
under the authority set forth in section 913(f) of Title IX of the 
Dodd-Frank Act, sections 3, 10, 15, 23 and 36 of the Exchange Act [15 
U.S.C. 78c, 78j, 78o, 78q, 78w and 78mm]: (i) Proposed new rule 17a-14 
under the Exchange Act; (ii) proposed Form CRS (17 CFR 249.640) under 
the Exchange Act; and (iii) amendments to rule 17a-3 and 17a-4 under 
the Exchange Act. The Commission is also proposing the following new 
rules under the authority set forth in sections 15(l), 23(a), and 36 of 
the Securities Exchange Act of 1934 (78o(l), 78w(a), and 78mm), 
sections 211(h), 206A, 211(a) of the Investment Advisers Act of 1940, 
15 U.S.C. 80b-1 et seq., (80b-11(h), 80b-6a, 80b-11(a), sections 913(f) 
and 913(g)(2) of Title IX of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act of 2010; (i) proposed new rule 15l-2 under the 
Exchange Act; (ii) proposed new rule 15l-3 under the Exchange Act; and 
(iii) proposed new rule 211h-1 under the Advisers Act.

C. Small Entities Subject to the Rule and Rule Amendments

    In developing these proposals, we have considered their potential 
impact on small entities that would be subject to the proposed 
amendments. The proposed amendments would affect many, but not all, 
broker-dealers and investment advisers registered with the Commission, 
including some small entities.
1. Investment Advisers
    Under Commission rules, for the purposes of the Advisers Act and 
the RFA, an investment adviser generally is a small entity if it: (1) 
Has assets under management having a total value of less than $25 
million; (2) did not have total assets of $5 million or more on the 
last day of the most recent fiscal year; and (3) does not control, is 
not controlled by, and is not under common control with another 
investment adviser that has assets under management of $25 million or 
more, or any person (other than a natural person) that had total assets 
of $5 million or more on the last day of its most recent fiscal 
year.\972\ As discussed in Section V, above, the Commission estimates 
that based on IARD data as of December 31, 2017, approximately 7,625 
investment advisers would be subject to the proposed new rule 204-5 
under the Advisers Act, Form CRS (required by a new Part 3 of Form 
ADV), the proposed amendments to rules 203-1, 204-1, and rule 204-2 
under the Advisers Act, and the proposed new rule 211h-1 under the 
Advisers Act.\973\ Our proposed new

[[Page 21538]]

rules and amendments would not affect most investment advisers that are 
small entities (``small advisers'') because they are generally 
registered with one or more state securities authorities and not with 
the Commission. Under section 203A of the Advisers Act, most small 
advisers are prohibited from registering with the Commission and are 
regulated by state regulators. Based on IARD data, we estimate that as 
of December 31, 2017, approximately 618 SEC-registered advisers are 
small entities under the RFA.\974\ Of these, 179 provide advice to 
individual high net worth and individual non-high net worth clients, 
and would therefore be subject to the proposed Form CRS requirements 
and the related new and amended rules under the Advisers Act, and 
proposed new rule 211h-1 under the Advisers Act requiring disclosure of 
Commission registration status and a financial professional's 
association in certain communications with retail investors.\975\
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    \972\ Advisers Act rule 0-7(a).
    \973\ See supra Section V, at note 712 and accompanying text. 
Based on responses to Item 5.D. of Form ADV. These advisers 
indicated that they advise either high net worth individuals or 
individuals (other than high net worth individuals), which includes 
trusts, estates, and 401(k) plans and IRAs of individuals and their 
family members, but does not include businesses organized as sole 
proprietorships. The proposed definition of retail investor would 
include a trust or other entity similar entity that represents of 
natural persons, even if another person is a trustee or managing 
agent of the trust. We are not able to determine, based on responses 
to Form ADV, exactly how many advisers provide investment advice to 
these types of trusts or other entities; however, we believe that 
these advisers most likely also advise individuals and are therefore 
included in our estimate.
    \974\ Based on SEC-registered investment adviser responses to 
Items 5.F. and 12 of Form ADV.
    \975\ Based on SEC-registered investment adviser responses to, 
Items 5.D.(a), 5.D.(b), 5.F. and 12 of Form ADV, which indicate that 
the adviser has clients that are high net worth individuals and/or 
individuals (other than high net worth individuals) and that the 
adviser is a small entity. Of these, 3 firms are dually registered 
as a broker-dealer and an investment adviser and may offer services 
to retail investors as both a broker-dealer and investment adviser 
(e.g., ``dual registrants'' for purposes of the relationship 
summary). See supra note 25. Dual registrants would file Form CRS on 
both IARD and EDGAR describing their retail advisory and retail 
brokerage businesses. In this RFA, dual registrants are counted in 
both the total number of small entity investment advisers and 
broker-dealers that would be subject to Form CRS and the proposed 
related rules and rule amendments. We believe that counting these 
firms twice is appropriate because of their additional burdens of 
complying with the rules with respect to both their advisory and 
brokerage businesses and filing Form CRS with IARD and EDGAR.
---------------------------------------------------------------------------

2. Broker-Dealers
    For purposes of a Commission rulemaking in connection with the RFA, 
a broker-dealer will be deemed a small entity if it: (1) 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,\976\ or, if not required to file such statements, had total 
capital (net worth plus subordinated liabilities) of less than $500,000 
on the last day of the preceding fiscal year (or in the time that it 
has been in business, if shorter); and (2) is not affiliated with any 
person (other than a natural person) that is not a small business or 
small organization.
---------------------------------------------------------------------------

    \976\ See 17 CFR 240.0-10(c).
---------------------------------------------------------------------------

    As discussed in Sections IV and V, above, the Commission estimates 
that as of December 31, 2017, approximately 2,857 retail broker-dealers 
would be subject to the proposed Form CRS requirements and new rule 
17a-14 under the Exchange Act, and proposed amendments to rule 17a-3 
and 17a-4 under the Exchange Act, and proposed new rules 15l-2 and 15l-
3 under the Exchange Act.\977\ Further, based on FOCUS Report data, the 
Commission estimates that as of December 31, 2017, approximately 1,040 
broker-dealers may be deemed small entities under the RFA.\978\ Of 
these, approximately 802 have retail business, and would be subject to 
the proposed Form CRS requirements and related proposed new and amended 
rules, the proposed rule requiring disclosure of Commission 
registration status in certain communications with retail investors, 
and the proposed rule regarding the prohibition of certain terms in 
names or titles in certain communications with retail investors.\979\
---------------------------------------------------------------------------

    \977\ See supra note 461 and accompanying text. Retail sales 
activity is identified from Form BD, 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.
    \978\ 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, broker-dealers 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 
2017.
    \979\ Id.
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D. Projected Reporting, Recordkeeping and Other Compliance Requirements

1. Initial Preparation of Form CRS Relationship Summary
    Proposed Form CRS and the proposed rules and rule amendments would 
impose certain reporting and compliance requirements on certain 
advisers and broker-dealers, including those that are small entities, 
requiring them to create and update relationship summaries containing 
specified information regarding their advisory and brokerage 
businesses, as applicable. The proposed rules and rule amendments, 
including new recordkeeping requirements, are summarized in this RFA 
(Section VI.A., above). All of these proposed requirements are also 
discussed in detail, above, in Sections II.A-E., and these requirements 
and the burdens on advisers and broker-dealers, including those that 
are small entities, are discussed above in Sections IV and V (the 
Economic Analysis and Paperwork Reduction Act Analysis) and below.
    The proposed amendments to Form ADV that would require each 
registered investment adviser that offers advisory services to retail 
investors to prepare, file and deliver Form CRS would impose additional 
costs on many registered advisers, including some small advisers. Our 
Economic Analysis, discussed in Section IV, above, discusses these 
costs and burdens for investment advisers, which include small 
advisers.\980\ In addition, as discussed in our Paperwork Reduction 
Analysis, above, we anticipate that some advisers may incur a one-time 
initial cost for outside legal and consulting fees in connection with 
the initial preparation of the relationship summary.\981\ Generally, 
all advisers, including small advisers that advise retail investors are 
currently required to prepare and distribute Part 2 of Form ADV (the 
firm brochure). Because advisers already provide disclosures about 
their services, fees, conflicts and disciplinary history in their firm 
brochures,\982\ they would be able to use some of this information to 
respond to the disclosure requirements of the relationship summary. 
They would, however, have to draft completely new disclosure to comply 
with the proposed new format of Form CRS. As discussed above, 
approximately 179 small advisers currently registered with us would be 
subject to the proposed new Form ADV

[[Page 21539]]

Part 3.\983\ As discussed above in our Paperwork Reduction Act 
Analysis, we expect these 179 small advisers to spend, on average, an 
additional total of 23,152 annual hours, or approximately 129.34 hours 
per adviser,\984\ which translates into an approximate monetized cost 
of $1,478,055, or $8,257 per adviser, attributable to the initial 
preparation, filing, posting, and delivery related to Form CRS.\985\ We 
expect the incremental external legal and compliance cost for small 
entity investment advisers to be estimated at $525 per adviser, or 
$93,936 in aggregate for small advisers.\986\
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    \980\ See supra notes 621-637 and accompanying text (discussing 
the direct costs of Form CRS and related requirements on broker-
dealers and investment advisers, including costs associated with 
delivery, preparation, and firm-wide implementation of the 
relationship summary, as well as training and monitoring for 
compliance).
    \981\ See supra notes 729-730 and accompanying text (stating, 
however, that we do not anticipate external costs to investment 
advisers in the form of website set-up, maintenance, or licensing 
fees because they would not be required to establish a website for 
the sole purpose of posting their relationship summary if they do 
not already have a website, and we also do not expect other ongoing 
external costs for the relationship summary).
    \982\ Much of the disclosure in Part 2A addresses an investment 
adviser's conflicts of interest with its clients, and is disclosure 
that the adviser, as a fiduciary, must make to clients in some 
manner regardless of the form requirements. See supra note 314.
    \983\ See supra note 975 and accompanying text.
    \984\ See supra Sections V.A.2, V.B, and V.C. 2.52 hours for 
preparing and filing of the relationship summary + 126.8 hours for 
posting to the website and delivery = 129.3 hours per adviser.
    \985\ See supra Sections V.A.2, V.B, and V.C. 129.3 hours x 179 
small advisers = $23,152 in total annual aggregate hours for small 
advisers. $8,257 x 179 small advisers = $1,478,055 in total annual 
aggregate monetized cost for small advisers.
    \986\ See supra Section V.A.2.b.
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    Similarly, requiring each broker-dealer that offers brokerage 
services to retail investors to prepare, file and deliver Form CRS 
would impose additional costs on many broker-dealers, including some 
small broker-dealers. Our Economic Analysis, discussed in Section IV, 
above, discusses these costs and burdens for broker-dealers, which 
include small broker-dealers.\987\ In addition, as discussed in our 
Paperwork Reduction Analysis, above, we anticipate that some broker-
dealers may incur a one-time initial cost for outside legal and 
consulting fees in connection with the initial preparation of the 
relationship summary.\988\ As discussed above,\989\ unlike investment 
advisers, broker-dealers are not currently required to deliver to their 
retail investors written disclosures covering their services, fees, 
conflicts, and disciplinary history in one place such as the investment 
advisory firm brochure.\990\ Under existing provisions of the Exchange 
Act and self-regulatory organization rules, however, a broker-dealer is 
required to disclose certain information to its customers.\991\ To the 
extent that some of the new Form CRS disclosure burdens would apply to 
small broker-dealers, these broker-dealers are therefore already 
obligated to make certain of these disclosures to retail investors, 
although the disclosure is not currently required to be included in one 
comprehensive document such as Form ADV. As discussed above,\992\ 
approximately 802 broker-dealers that are small entities would be 
subject to the proposed Form CRS requirements and proposed new and 
amended rules. As discussed above, we expect these 802 small broker-
dealers to spend, on average, 1,080 hours per broker-dealer,\993\ for a 
monetized value of $66,006 per broker-dealer,\994\ or 865,956 aggregate 
annual hours to respond to the proposed new Form CRS requirements,\995\ 
for an annual monetized burden of approximately $52,936,812. We expect 
the aggregate annual external third-party cost to small broker-dealers 
associated with this process would be $376,940.\996\
---------------------------------------------------------------------------

    \987\ See supra notes 621-637 and accompanying text (discussing 
the direct costs of Form CRS and related requirements on broker-
dealers and investment advisers, including costs associated with 
delivery, preparation, and firm-wide implementation of the 
relationship summary, as well as training and monitoring for 
compliance).
    \988\ See supra Section V.D.1. (stating, however, that we do not 
expect ongoing external legal or compliance consulting costs for the 
relationship summary).
    \989\ See supra Section IV, at note 629 and accompanying text.
    \990\ Broker-dealers are required under certain circumstances, 
such as when effecting certain types of transactions, to disclose 
certain conflicts of interest to their customers in writing, in some 
cases at or before the time of the completion of the transaction. 
See 913 Study, supra note 3, at nn.256-259 and accompanying text. 
See supra note 311 and accompanying text. Under Regulation Best 
Interest, broker-dealers would also be required to disclose the 
material facts relating to the scope and terms of the relationship. 
Regulation Best Interest Proposal, supra note 24.
    \991\ See supra Section II, at notes 309-312 and accompanying 
text. See also Regulation Best Interest Proposal, supra note 24.
    \992\ See supra note 979.
    \993\ See supra note 846.
    \994\ See supra note 847.
    \995\ See supra note 823 and accompanying text. 802 small 
broker-dealers x 1,080 hours per broker-dealer = 865,956 annual 
aggregate hours. 802 small broker-dealers x $66,006 in monetized 
cost per broker-dealer = 52,936,812 annual aggregate hours.
    \996\ See supra note 829 and accompanying text. 802 small 
broker-dealers x $470 in external legal and compliance costs on 
average per broker-dealer = $376,940.
---------------------------------------------------------------------------

    The costs associated with preparing the new relationship summaries 
will be limited for investment advisers and broker-dealers, including 
small entities, for several reasons. First, the disclosure document is 
concise (no more than four pages in length or equivalent limit if in 
electronic format), and much of the information is already provided by 
the broker-dealers and investment advisers as part of current 
disclosure practices. Second, the disclosure will be uniform across 
retail investors and would not be customized or personalized to 
potential investors. Third, the disclosure would involve a certain 
degree of standardization across firms. In particular, firms would be 
required to use the same headings, prescribed wording, and present the 
information under the headings in the same order. Additionally, firms 
would be prohibited from adding any items to those prescribed by the 
Commission and any information other than what the Instructions require 
or permit. These standardized elements allow for potential economies of 
scale for entities that may have subsidiaries that would also be 
required to produce the disclosure. The compliance costs could, 
however, be different across firms with relatively smaller or larger 
numbers of retail investors as customers or clients.\997\
---------------------------------------------------------------------------

    \997\ See supra note 628 and accompanying text (discussing the 
Commission's preliminary belief that compliance costs could be 
different across firms with relatively smaller or larger numbers of 
retail investors as customers or clients).
---------------------------------------------------------------------------

    Filing, Delivery, and Updating Requirements Related to Form CRS. As 
discussed above, a firm would be required to give a relationship 
summary to each retail investor, if the firm is an investment adviser, 
before or at the time the firm enters into an investment advisory 
agreement with the retail investor, or if the firm is a broker-dealer, 
before or at the time the retail investor first engages the services of 
the broker-dealer.\998\ A firm would be required to deliver the 
relationship summary even if the firm's agreement with the retail 
investor is oral. A dual registrant would deliver the relationship 
summary at the earlier of entering into an investment advisory 
agreement with the retail investor or the retail investor engaging the 
firm's services. In order to ensure that existing retail investors 
receive the disclosures in the relationship summary, the Commission 
proposes that firms would deliver the relationship summary to retail 
investors who are existing clients and customers on an initial one-time 
basis within 30 days after the date the firm is first required to file 
its relationship summary with the Commission.\999\ In addition, firms 
would be required to deliver the relationship summary to a retail 
investor who is an existing client or customer before or at the time a 
new account is opened or changes are made to the retail investor's 
account(s) that would materially change the nature and scope of the 
firm's relationship with the retail investor. This would include, for 
example, before or at the time the firm recommends that the retail 
investor transfers from an investment advisory account to a brokerage 
account or from a brokerage account to an investment advisory account, 
or moves assets from one type of account to another in a

[[Page 21540]]

transaction not in the normal, customary or already agreed course of 
dealing.
---------------------------------------------------------------------------

    \998\ See supra Section II.C for a discussion of the delivery 
requirements.
    \999\ See supra Section II.D for a discussion of the delivery 
requirements during the proposed transition period following the 
effectiveness of the proposed new rule.
---------------------------------------------------------------------------

    As discussed above, firms would be required to update the 
relationship summary within 30 days whenever any information in the 
relationship summary becomes materially inaccurate.\1000\ Firms also 
would be required to post the latest version on its website (if it has 
one), and electronically file the relationship summary with the 
Commission. Firms would be required to communicate any changes in the 
updated relationship summary to retail investors who are existing 
clients or customers of the firm within 30 days after the updates are 
required to be made and without charge. The firm could communicate the 
information by delivering the amended relationship summary or by 
communicating the information in another way to the retail investor. We 
believe that this flexibility would minimize the burden of the 
communication requirement for all firms, including small advisers and 
broker-dealers. Firms also would also be required to deliver the 
relationship summary to a retail investor upon the retail investor's 
request.
---------------------------------------------------------------------------

    \1000\ See supra Section II.C.3 for a discussion of updating 
requirements.
---------------------------------------------------------------------------

    In addition, firms would be permitted to deliver the relationship 
summary, as well as updates, electronically consistent with the 
Commission's prior guidance regarding electronic delivery. We believe 
that this would further minimize the burden of delivery for all firms, 
including small advisers and broker-dealers. To the extent that small 
advisers and broker-dealers are more likely to have fewer retail 
investors than larger advisers and broker-dealers, the proposed 
delivery requirements should impose lower variable costs on small 
advisers and broker-dealers than on larger firms. The additional hours 
per adviser and broker-dealer, the monetized cost per adviser and 
broker-dealer, and the incremental external legal and compliance cost 
for small entity investment advisers and broker-dealers, attributable 
to the initial preparation, filing, posting, delivery, and 
recordkeeping related to Form CRS, are estimated above and in the 
Paperwork Reduction Analysis.\1001\
---------------------------------------------------------------------------

    \1001\ See supra Sections V.A.-F.
---------------------------------------------------------------------------

    Recordkeeping Requirements Related to Form CRS. The proposed 
amendments would impose new recordkeeping requirements on many 
investment advisers and broker-dealers, including some small advisers 
and broker-dealers. We are proposing amendments to Advisers Act rule 
204-2 and Exchange Act rules 17a-3 and 17a-4, which set forth 
requirements for maintaining, making and preserving specified books and 
records, to require SEC-registered investment advisers and broker-
dealers to retain copies of each relationship summary. Firms would also 
be required to maintain each amendment and revision to the relationship 
summary and a record of dates that each relationship summary and each 
amendment was delivered.
    These proposed changes are designed to update the books and records 
rules in light of proposed Form CRS, and they mirror the current 
recordkeeping requirements for the Form ADV brochure and brochure 
supplement. The records for investment advisers would be required to be 
maintained in the same manner, and for the same period of time, as 
other books and records required to be maintained under rule 204-2(a) 
under the Advisers Act, and the records for broker-dealers would be 
required to maintained for six years after the record was created in 
accordance with rule 17a-4(e)(10) under the Exchange Act.\1002\ As 
discussed in the Paperwork Reduction Act Analysis in Section IV above, 
the proposed amendments to rule 204-2 under the Advisers Act would 
increase the annual burden by approximately 0.2 hours per adviser, or 
35.80 hours in aggregate for small advisers.\1003\ We therefore expect 
the annual monetized aggregate cost to small advisers associated with 
our proposed amendments would be $2,148.\1004\ Also as discussed in the 
Paperwork Reduction Act Analysis in Section IV above, the proposed 
amendments to rules 17a-3 and 17a-4 under the Exchange Act would 
increase the burden by approximately 0.2 annual hours per broker-
dealer, or 160.4 annual hours in the aggregate.\1005\ We expect the 
aggregate cost to small broker-dealers associated with our proposed 
amendments would be $9,624.\1006\
---------------------------------------------------------------------------

    \1002\ See supra note 371 (referencing Advisers Act rule 204-
2(e)(1) and Exchange Act rule 17a-4(e)(10), and stating that 
pursuant to Advisers Act rule 204-2(e)(1), investment advisers will 
be required to maintain the relationship summary for a period of 
five years, while Exchange Act rule 17a-4(e)(5) will require broker-
dealers to maintain the relationship summary for a period of six 
years).
    \1003\ See supra note 765. 0.2 hours x 179 small entity retail 
investment advisers = 35.8.
    \1004\ See supra note 768.
    \1005\ 0.2 hours x 802 small broker-dealers = 160.4 hours.
    \1006\ See supra note 854 and accompanying text. $12 per broker-
dealer x 802 small broker-dealers = $9,624.
---------------------------------------------------------------------------

2. Rule 15l-2 Relating to Restrictions on the Use of Certain Terms in 
Names and Titles
    As discussed above in Section III, we are proposing to restrict 
broker-dealers and associated natural persons of broker-dealers, when 
communicating with a retail investor, from using as part of a name or 
title the term ``adviser'' or ``advisor'' unless any such (1) broker or 
dealer is an investment adviser registered under section 203 of the 
Advisers Act or with a state, or (2) natural person who is an 
associated person of a broker or dealer is a supervised person of an 
investment adviser registered under section 203 of the Advisers Act or 
with a state, and such person provides investment advice on behalf of 
such investment adviser.
    This would include such names or titles as, for example, financial 
advisor (or adviser), wealth advisor (or adviser), and trusted advisor 
(or adviser), and advisory (e.g., ``Sample Firm Advisory'') when 
communicating with any retail investor.
    The proposed rule would permit firms that are registered both as 
investment advisers and broker-dealers to use the term ``adviser'' or 
``advisor'' in their name or title. The proposed rule would, however, 
only permit an associated natural person of a dually registered firm 
\1007\ to use these terms where such person is also a supervised person 
of an investment adviser registered with the Commission or with a state 
and provides investment advice on behalf of such investment adviser. 
This would limit the ability of natural persons associated with a 
broker-dealer that do not typically provide investment advisory 
services to retail investors from continuing to use the term 
``adviser'' or ``advisor'' by virtue of the fact that they are 
affiliated with a dually registered firm.
---------------------------------------------------------------------------

    \1007\ For purposes of rules 15l-2, 15l-3 and 211h-1, we are 
defining a ``dually registered firm'' in the same manner as a ``dual 
registrant'' is defined in the baseline of the Economic Analysis. 
See supra Section IV, note 453. See also supra note 411. We use the 
more narrowly defined ``dual registrant'' for purposes of the 
relationship summary discussion only.
---------------------------------------------------------------------------

    Proposed rule 15l-2 would impose certain compliance requirements on 
broker-dealers, including small broker-dealers, but would not impose 
reporting or recordkeeping requirements on broker-dealers. The 
compliance burdens on broker-dealers, including small broker-dealers, 
are described above in our Economic Analysis in Section IV. They would 
need to change their names or titles where their names or titles 
include ``adviser'' or ``advisor'' in violation of the proposed rule. 
As

[[Page 21541]]

discussed in Section IV above, the Commission estimates that as of 
December 31, 2017, approximately 2,857 broker-dealers would be subject 
to the proposed rule 151-2 under the Exchange Act.\1008\ As discussed 
in Section IV, above, approximately 103 broker-dealers that are not 
dually registered as investment advisers use the term ``adviser,'' 
``advisor,'' or ``advisory'' as part of their current company name. To 
the extent these broker-dealers, some of which may be small entities, 
advise retail investors and would be subject to proposed rule 151-2, 
they would be subject to potentially substantial, one-time costs 
associated with the proposed rule. Broker-dealer firms subject to the 
restriction on the use of certain names or titles would be required to 
change current company names (if the company name contains ``adviser/
advisor''), marketing materials, advertisements (e.g., print ads or 
television commercials), website and social media appearance, among 
other items, resulting in direct compliance costs.
---------------------------------------------------------------------------

    \1008\ See supra Section IV.A.1.a.
---------------------------------------------------------------------------

    In addition, as discussed in Section IV, as a result of the 
proposed rule 151-2, broker-dealers would need to assess whether their 
associated natural persons use as part of a name or title the term 
``adviser'' or ``advisor.'' As discussed in Section IV, financial 
professionals providing brokerage services use a large variety of names 
or titles to describe their business and the services that they offer, 
including ``financial advisor,'' ``financial consultant,'' ``banker,'' 
and ``broker.'' \1009\ To the extent their associated natural persons 
use the terms adviser'' or ``advisor'' when communicating with a retail 
investor, firms would need to assess whether to require their 
associated natural persons to change their names or title to comply 
with the proposed rule and modify their retail investor communications. 
We request comment on how many associated natural persons of broker-
dealers, including small entity broker-dealers, are currently using the 
terms ``adviser'' or ``advisor'' in their names or titles, and how many 
of these associated natural persons are supervised persons of an 
investment adviser registered with the Commission or with a state and 
who provide investment advice on behalf of such investment adviser.
---------------------------------------------------------------------------

    \1009\ As discussed in Section IV, approximately 39 percent of 
the 103 broker-dealers described above used a proper name coupled 
with the term ``advisor'' alone, and an additional 31 percent used a 
proper name coupled with the term ``capital advisor.'' Additionally, 
as discussed in the RAND Study, professionals providing advisory 
services or both brokerage and advisory services similarly also use 
a wide variety of titles, but the proportion of professionals who 
use titles containing the terms ``adviser'' or ``advisor'' are 
somewhat larger at 35%. See supra Section IV, Table 8: Replication 
of Table 6.3 of the RAND Study--Professional Titles Most Commonly 
Reported by Respondents, and accompanying text.
---------------------------------------------------------------------------

    The proposed restriction on the use of the term ``adviser'' and 
``advisor'' in a name or title does not apply to registered investment 
advisers, whether they are solely registered as investment advisers or 
whether they are dually registered as broker-dealers. Consequently, 
there would be no compliance costs for registered investment advisers 
associated with the restriction on certain terms in names or titles. 
However, as discussed in Sections III and IV, supervised persons of 
dually registered investment advisers who do not provide investment 
advice on behalf of such investment adviser would be restricted from 
using these terms when communicating with a retail investor, which 
could lead to costs for those financial professionals or their firms.
3. Rules 15l-3 and 211h-1 Relating to Disclosure of Commission 
Registration Status and Financial Professional Association
    As discussed above, we are proposing rule 15l-3 under Exchange Act 
and rule 211h-1 under the Advisers Act that would require broker-
dealers and investment advisers and their associated natural persons 
and supervised persons, respectively, to disclose the firm's 
registration status with the Commission and such financial 
professional's relationship with the firm in print or electronic retail 
investor communications. These rules would impose certain compliance 
requirements on many broker-dealers and investment advisers but would 
not impose separate reporting or recordkeeping requirements on 
investment advisers and broker-dealers. The compliance burdens on 
broker-dealers and investment advisers, including small broker-dealers 
and investment advisers, are described above in our Economic Analysis 
in Section IV and the Paperwork Reduction Act discussion in Section V. 
These include the requirement for investment advisers and broker-
dealers that would be subject to the proposed rule to prominently 
disclose their registration status in print or electronic retail 
investor communications. In addition, associated natural persons would 
need to prominently disclose that they are associated persons of a 
broker-dealer registered with the Commission, and supervised persons 
would need to prominently disclose that they are supervised persons of 
an investment adviser registered with the Commission.
    As discussed in Sections IV and V above, the Commission estimates 
that as of December 31, 2017, approximately 2,857 broker-dealers would 
be subject to the proposed rule 15l-3 under the Exchange Act. As 
discussed above, of these, approximately 802 are small entities. These 
broker-dealers would be subject to the rule's requirements described in 
the previous paragraph. As discussed above, the Commission estimates 
that as of December 31, 2017, approximately 7,625 investment advisers 
would be subject to the proposed rule 211h-1 under the Advisers Act. 
Based on IARD data, we estimate that as of December 31, 2017, 
approximately 618 advisers are small entities under the RFA. Of these, 
approximately 179 advise retail investors, and would therefore be 
subject to the proposed rule 211h-1 under the Advisers Act.
    Compliance with these proposed rules would require changes to 
retail investor communications, which would have to be modified to 
incorporate the registration status in the manner the rule prescribes. 
As discussed above in Sections IV and V, to comply with our proposed 
rule with respect to print communications, broker-dealers and 
investment advisers would need to review their print and electronic 
retail investor communications, identify which would need to be 
amended, make the changes, and verify that all firm retail investor 
communications comply with the rule's requirements including its 
technical specifications such as the type size, font, and prominence. 
As discussed above in Section V, we preliminarily anticipate that the 
costs associated with complying with the proposed rule with respect to 
print communications would be larger for large broker-dealers than for 
small broker-dealers, because we assume large broker-dealers will have 
to review, identify and change more print communications and in turn 
have their compliance staff verify more print communications as being 
compliant with our proposed rule as compared to small broker-dealers 
which will have fewer print communications. With respect to electronic 
communications, broker-dealers would need to review, identify and make 
the required updates coupled with verifying that such retail investor 
communications (present and future) would be compliant with the 
proposed rule.\1010\ We preliminarily

[[Page 21542]]

estimate that the costs associated with complying with the proposed 
rule regarding electronic communications would similarly be lower for 
small broker-dealers than for large broker-dealers, because we assume 
that small broker-dealers have fewer electronic communications that are 
subject to our proposed rule as compared to large firms. For investment 
advisers, as discussed above in Section V, we preliminarily estimate 
that large firms would require larger costs than small firms to comply 
with the proposed rule (e.g., large firms have a greater amount of 
retail investor communications subject to our proposed rule that would 
need to be reviewed, changed, and verified).
---------------------------------------------------------------------------

    \1010\ As stated in Section III.D above, we are not requiring 
firms to send new communications to replace all older print 
communications as this would be overly burdensome and costly for 
firms. Instead, we are staging the compliance date to ensure that 
firms can phase out certain older communications from circulation 
through the regular business lifecycle rather than having to 
retroactively change them.
---------------------------------------------------------------------------

    The Commission also preliminarily estimates that the costs 
associated with complying with the proposed rules' disclosure 
requirements for broker-dealers, investment advisers, and their 
associated natural persons and supervised persons, respectively, would 
also be smaller for small firms than for large firms. With respect to 
broker-dealers, we estimate that the costs would increase with the size 
of the broker-dealer, such as costs associated with revisions to each 
individual representative's communication and advertising 
materials.\1011\ Specifically, large broker-dealers would have to 
review, identify and change more print and electronic communications 
and in turn have their compliance staff verify more communications as 
being compliant with our proposed rules as compared to small broker-
dealers which would have fewer communications. Similarly, with respect 
to investment advisers, we estimate that small investment advisers 
would have fewer print and electronic communications that would be 
subject to our proposed rule as compared to large firms, resulting in a 
lower burden preliminary estimate. In addition, the Commission 
estimates that small entity advisers have fewer employees performing 
investment advisory functions than large advisers.\1012\ Therefore, we 
anticipate that small entity retail investment advisers would require 
fewer resources to oversee their employees' compliance with the 
proposed rule.
---------------------------------------------------------------------------

    \1011\ See Section IV.
    \1012\ Based on adviser responses to Item 5.B.(1) of Form ADV, 
we estimate that as of September 30, 2017, the median small entity 
retail investment adviser employed 1 person performing investment 
advisory functions, and the median non-small entity retail 
investment advisers employed 5 persons performing investment 
advisory functions.
---------------------------------------------------------------------------

E. Duplicative, Overlapping, or Conflicting Federal Rules

    As noted above, broker-dealers and investment advisers have other 
disclosure obligations under the federal securities laws and other 
federal laws.\1013\ For example, the information required by the 
relationship summary is generally already provided in greater detail 
for investment advisers by Form ADV Part 2. The current disclosure 
requirements and obligations result in varying degrees and kinds of 
information to investors, but we believe that all retail investors 
would benefit from a short summary that focuses on certain key aspects 
of the firm and its services. By requiring both investment advisers and 
broker-dealers to deliver a relationship summary that discusses both 
types of services and their differences, the relationship summary would 
help all retail investors, whether they are considering an investment 
adviser or a broker-dealer. A relationship summary would help retail 
investors to understand their relationship with a particular firm, to 
compare different types of accounts, and to compare that firm with 
other firms. The relationship summary would provide in one place, for 
the first time, summary information about the services, fees, 
conflicts, and disciplinary history for broker-dealers.
---------------------------------------------------------------------------

    \1013\ See supra notes 308-316.
---------------------------------------------------------------------------

    Under our proposed rules, firms would be required to file their 
relationship summary with the Commission, and the relationship summary 
will be available on the Commission's public disclosure website. Dual 
registrants would be required to file Form CRS on both IARD and EDGAR. 
We are proposing IARD and EDGAR because they are familiar filing 
systems for investment advisers and broker-dealers.\1014\ By having 
firms file the relationship summaries with the Commission, the 
Commission can more easily monitor the filings for compliance with Form 
CRS. We believe that requiring dual registrants to file on both EDGAR 
and IARD is appropriate and in the public interest and will improve 
investor protection. This is because retail investors seeking brokerage 
services (but not investment advisory services) would be likely to 
search EDGAR, and retail investors seeking investment advisory services 
(but not brokerage services) would be likely to search IARD.
---------------------------------------------------------------------------

    \1014\ See supra Section II.C.1.
---------------------------------------------------------------------------

F. Significant Alternatives

    The RFA directs the Commission to consider significant alternatives 
that would accomplish our stated objectives, while minimizing any 
significant adverse impact on small entities. We considered the 
following alternatives for small entities in relation to the proposed 
Form CRS required by Part 3 of Form ADV, the proposed amendments to 
Form ADV (17 CFR 279.1) and rules 203-1, 204-1, and 204-2 under the 
Advisers Act, the proposed new rule 204-5 under the Advisers Act, the 
proposed amendments to rules 17a-3 and 17a-4 under the Exchange Act, 
the proposed new rule 17a-14 and new Form CRS (17 CFR 249.640) under 
the Exchange Act, the proposed new rules 15l-2 and 15l-3 under the 
Exchange Act, and the proposed new rule 211h-1 under the Advisers Act: 
(i) The establishment of differing compliance or reporting requirements 
that take into account the resources available to small entities; (ii) 
the clarification, consolidation, or simplification of compliance and 
reporting requirements under the proposed Form CRS, and proposed new 
rules and rule amendments for such small entities; (iii) the use of 
performance rather than design standards; and (iv) an exemption from 
coverage of the proposed Form CRS, and proposed rules and rule 
amendments, or any part thereof, for such small entities.
1. Form CRS Relationship Summary
    Regarding the first alternative, the Commission believes that 
establishing different compliance or reporting requirements for small 
advisers and broker-dealers would be inappropriate under these 
circumstances. Because the protections of the Advisers Act and Exchange 
Act are intended to apply equally to retail investor clients and 
customers of both large and small firms, it would be inconsistent with 
the purposes of the Advisers Act and the Exchange Act to specify 
differences for small entities under the proposed rules and rule 
amendments. As discussed above, we believe that the proposed new Form 
CRS, and the proposed rules and rule amendments would result in 
multiple benefits to all retail investors, including alerting retail 
investors to certain information to consider when choosing a firm and a 
financial professional and prompting retail investors to ask informed 
questions. In addition, the content of the relationship summary would 
facilitate comparisons across firms. We believe that these benefits 
should apply to retail investors of smaller firms as well as retail

[[Page 21543]]

investors of larger firms.\1015\ To establish different disclosure 
requirements for small entities would diminish this investor protection 
for clients of small advisers.
---------------------------------------------------------------------------

    \1015\ See supra Section I (discussing the benefits of retail 
investors having access to diverse business models and of preserving 
investor choice among brokerage services, advisory services, or 
both).
---------------------------------------------------------------------------

    It would also be inappropriate to establish different recordkeeping 
requirements for small entities, because requiring maintenance of Form 
CRS and related records as part of the firm's books and records would 
facilitate the Commission's ability to inspect for and enforce 
compliance with firms' obligations with respect to Form CRS, which is 
important for retail investors clients of both large and small firms.
    In addition, as discussed above in Section II, we are proposing to 
require that investment advisers and dual registrants file their 
relationship summaries with the Commission electronically through IARD 
in the same manner as they currently file Form ADV Parts 1 and 2. We 
are proposing to require that broker-dealers file their relationship 
summaries with the Commission electronically on EDGAR. As discussed 
above, there are several reasons we propose having the relationship 
summaries filed with the Commission, including that the public would 
benefit by being able to use a central location to find any firm's 
relationship summary, and that easy access to various relationship 
summaries through one source may facilitate simpler comparison across 
firms.\1016\ In addition, as also discussed below, some firms may not 
maintain a website, and therefore their relationship summaries would 
not otherwise be accessible to the public.\1017\ We do not believe that 
proposing different filing requirements for large and small firms would 
be appropriate given our belief that the benefits of electronic filing 
are important for retail investors clients and customers of both large 
and small firms. Furthermore, almost all advisers, including small 
advisers, have Internet access and use the Internet for various 
purposes.\1018\
---------------------------------------------------------------------------

    \1016\ See supra note 320 and accompanying text.
    \1017\ Id.
    \1018\ See 2000 Brochure Proposing Release, supra note 271, at 
n.304 and accompanying text. However, an adviser that is a small 
business may be eligible for a continuing hardship exemption for 
Form ADV filings, which would include proposed Form CRS, if it can 
demonstrate that filing electronically would impose an undue 
hardship. See Instruction 17 of General Instructions to Form ADV.
---------------------------------------------------------------------------

    Finally, the proposal to require investment advisers and broker-
dealers post their relationship summary on their public websites, if 
they have a public website, in a way that is easy for retail investors 
to find, already incorporates the flexibility to permit different 
compliance and reporting requirements for small entities, if 
applicable. To the extent that broker-dealers and investment advisers 
that are small entities are less likely to have public websites and do 
not have them, they would not be required under our proposal to post 
the relationship summary on their websites.\1019\ In other ways, as 
well, the proposal incorporates flexibility for smaller broker-dealers 
and investment advisers to comply with the proposed requirements. For 
instance, we are proposing to require firms to communicate the 
information in an amended relationship summary to retail investors who 
are existing clients or customers of the firm within 30 days after the 
updates are required to be made and without charge.\1020\ This 
requirement provides firms the ability to disclose changes without 
requiring them to duplicate disclosures and incur additional costs.
---------------------------------------------------------------------------

    \1019\ See supra note 320 (we are proposing that firms without a 
website include a toll-free telephone number in their relationship 
summaries that retail investors can call to obtain up-to-date 
information).
    \1020\ Advisers Act proposed rule 204-5(b)(4) and Exchange Act 
proposed rule 17a-14(c)(2)(iv4); proposed General Instruction 6.(b) 
to Form CRS. See supra Section II.C.3. Firms could communicate this 
information by delivering the amended relationship summary or by 
communicating the information another way to the retail investor. 
Id.
---------------------------------------------------------------------------

    Regarding the second alternative, we believe the current proposal 
is clear and that further clarification, consolidation, or 
simplification of the compliance requirements is not necessary. The 
proposed Instructions are designed to present requirements for 
advisers' and broker-dealers' relationship summaries clearly and simply 
to all such firms, including small entities. In addition, to aid firms 
in understanding the type of disclosures we propose to require, we have 
created mock-ups of a relationship summary for an investment advisory 
firm, a brokerage firm, and a dual registrant, and have included them 
as appendices to this release. These mock-ups examples are designed to 
illustrate the application of the proposed requirements. We also 
believe that the delivery and filing requirements are clear. As further 
discussed above, our proposal would require: Delivery of the 
relationship summary to each retail investor before or at the time of 
beginning a relationship with a firm,\1021\ updating the relationship 
summary within 30 days whenever any information in the relationship 
summary becomes materially inaccurate,\1022\ and delivery of the 
relationship summary to an existing retail investor client or customer 
at certain points during the relationship.\1023\ Firms would also be 
required to file their relationship summaries with the Commission and 
post them on their firm websites, if they have a public website.
---------------------------------------------------------------------------

    \1021\ See supra Section II.C.2. We are proposing different 
triggers for initial delivery of the relationship summary by 
investment advisers (before or at the time the firm enters into an 
investment advisory agreement with the retail investor) and by 
broker-dealers (before or at the time the retail investor first 
engages the firm's services). These proposed requirements are 
intended to make the relationship summary readily accessible to 
retail investors at the time when they are choosing investment 
services and are generally consistent with the approach many 
commenters recommended. Id.
    \1022\ See supra Section II.C.3.
    \1023\ See supra Section II.C.2. For example, our proposal would 
require firms to communicate the information in an amended 
relationship summary to retail investors who are existing clients or 
customers of the firm within 30 days after the updates are required 
to be made and without charge.
---------------------------------------------------------------------------

    Regarding the third alternative, the Commission believes that 
proposed Form CRS and the related new rules and amendments 
appropriately use a combination of performance and design standards. We 
are proposing to standardize the relationship summaries among firms by 
specifying the headings, sequence, and content of the topics; 
prescribing language for firms to use as applicable; and limiting the 
length of the relationship summary. We believe that the standardization 
will provide comparative information in a user-friendly format that 
helps retail investors with informed decision making. For example, we 
are prescribing the use of graphical formats in specified 
circumstances, based on studies that indicate the effectiveness of 
graphical presentation for retail investors.\1024\ Also, as discussed 
above, we are requiring firms to use prescribed wording in many items, 
and we are proposing that firms may not include disclosure in the 
relationship summary other than disclosure that is required or 
permitted by the Instructions.\1025\ We believe that allowing only the 
proposed mandatory or permissible information would promote consistency 
of

[[Page 21544]]

information presented to investors, and allow investors to focus on 
information that we believe is particularly helpful in deciding among 
firms.\1026\
---------------------------------------------------------------------------

    \1024\ For example we are proposing to require dual registrants 
to present all of the information required by Items 2 through 4 and 
Item 6 in a tabular format, comparing advisory services and 
brokerage services side-by-side, with prescribed headings. See 
proposed General Instruction 1.(e) to Form CRS. Similarly, 
standalone broker-dealers and investment advisers would be required 
to provide general information about fee types in tabular format, in 
a separate comparison section. See proposed Item 5 of Form CRS.
    \1025\ See supra notes 54-55 and accompanying text.
    \1026\ It would also encourage impartial information by 
preventing firms from adding information commonly used in marketing 
materials, such as performance.
---------------------------------------------------------------------------

    Within the framework of standardization, we are proposing that for 
certain disclosure Items in Form CRS, firms would have some flexibility 
in how they include the required information.\1027\ In addition, we 
have proposed permitting, but not requiring, the use of graphical 
formats where doing so does not unduly constrain effective description 
of a range of information. With respect to the prescribed wording, we 
are proposing that if a prescribed statement is inapplicable to a 
firm's business or would be misleading to a reasonable retail investor, 
the firm would be permitted to omit or modify that statement.\1028\
---------------------------------------------------------------------------

    \1027\ See supra note 56.
    \1028\ See proposed General Instruction 3 to Form CRS. Firms may 
omit or modify prescribed wording or other statements required to be 
part of the relationship summary if such statements are inapplicable 
to a firm's business or would be misleading to a reasonable retail 
investor.
---------------------------------------------------------------------------

    We believe that this approach of using both performance and design 
standards balances the need to provide firms flexibility in making the 
presentation of information consistent with their particular business 
model while ensuring that all investors receive certain information 
regardless of the firm in a manner that promotes comparability. In the 
sections above, we request comment on whether the proposed mix of 
design and performance standards would work for investment advisers and 
broker-dealers, including small entities, and what the impact of such 
standards would be on firms.\1029\
---------------------------------------------------------------------------

    \1029\ See requests for comment in Sections II.A and II.B with 
respect to the proposed prescribed wording in places throughout the 
relationship summary, and the proposed prescribed headings, order 
and format.
---------------------------------------------------------------------------

    Regarding the fourth alternative, we believe that, similar to the 
first alternative, it would be inconsistent with the purposes of the 
Advisers Act and the Exchange Act to exempt small advisers and broker-
dealers from the proposed rule and form amendments, or any part 
thereof. Because the protections of the Advisers Act and Exchange Act 
are intended to apply equally to retail investors that are clients and 
customers of both large and small advisers and broker-dealers, it would 
be inconsistent with the purposes of the Advisers Act and Exchange Act 
to specify differences for small entities under the proposed 
amendments. As discussed above, the information in the relationship 
summary would alert retail investors to important information for them 
to consider when choosing a firm and a financial professional, and 
would prompt retail investors to ask informed questions. In addition, 
the content of the relationship summary would facilitate comparisons 
across firms that offer the same or substantially similar services. We 
preliminarily believe that providing this information before or at the 
time a retail investor enters into an investment advisory agreement or 
first engages a brokerage firm's services, as well as at certain points 
during the relationship (e.g., switching account types) is appropriate 
and in the public interest and will improve investor protection, and 
will deter potentially misleading sales practices by helping retail 
investors to make a more informed choice among the types of firms and 
services available to them. Since we view investor confusion about 
brokerage and advisory services as an issue for many retail investors 
who are clients and customers of advisers and broker-dealers, it would 
be inconsistent with the purpose of the relationship summary to specify 
different requirements for small entities.\1030\
---------------------------------------------------------------------------

    \1030\ See supra note 3, citing studies that show retail 
investor confusion about the differences among broker-dealers and 
investment advisers.
---------------------------------------------------------------------------

2. Rule 15l-2 Relating to Restrictions on the Use of Certain Terms in 
Names and Titles
    Regarding the first alternative, the Commission preliminarily 
believes that establishing different compliance or reporting 
requirements for small broker-dealers would be inappropriate under 
these circumstances. We believe it is important to address the risk 
that retail investors are confused and potentially misled based on the 
names or titles of their firms and financial professionals and as a 
result, make uninformed decisions regarding which firm or financial 
professional they are engaging or seeking to engage. Because the 
protections of the Exchange Act are intended to apply equally to retail 
investor clients of both large and small firms, the Commission 
preliminarily believes it would be inconsistent with the purposes of 
the Exchange Act to specify differences for small entities under the 
proposed rule.
    Regarding the second alternative, we believe that the current 
proposal is clear and that further clarification, consolidation, or 
simplification is not necessary. As discussed in Section III above, the 
restriction is limited to use of the terms ``adviser'' and ``advisor.'' 
As discussed above in Section III, we considered whether we should 
restrict broker-dealers from using additional terms, such as, for 
example, ``financial consultant.'' We believe, however, that the term 
``adviser'' or ``advisor'' is more closely related to the statutory 
term ``investment adviser,'' which makes it more likely than these 
other terms that retail investors would associate such terms with an 
investment adviser and its advisory activities than with a broker-
dealer and its brokerage activities. We preliminarily believe that the 
use of the terms ``adviser'' and ``advisor'' by broker-dealers and 
their associated natural persons has particularly contributed to 
investor confusion about the typical services, fee structures, 
conflicts of broker-dealers and investment advisers, and legal 
standards of conduct to which broker-dealers and investment advisers 
are subject. Therefore, we believe that the current proposal is clear 
in its limited scope of restricted terms.
    Regarding the third alternative, we believe that using performance 
rather than our proposed design standards would be less effective in 
addressing the issue of investor confusion based on the names or titles 
of their firms and financial professionals. As discussed in Section 
III, the proposed rule would restrict broker-dealers' or its associated 
natural persons' use of the term ``adviser'' or ``advisor'' as part of 
a name or title when communicating with a retail investor. We believe 
that the use of the terms ``adviser'' and ``advisor'' has particularly 
contributed to investor confusion about the typical services, fee 
structures, conflicts of interest, and legal standards of conduct to 
which broker-dealers and investment advisers are subject and as a 
result has potentially misled retail investors as to the type of firm 
or financial professional they are engaging or seeking to engage. 
Accordingly, we believe that restricting these terms appropriately 
addresses these issues based on a broker-dealer's or its associated 
natural persons' use of the term ``adviser'' or ``advisor'' as part of 
a name or title. As discussed above in Section III, we preliminarily 
believe that without restricting a broker-dealer or its associated 
natural person(s) from using ``adviser'' or ``advisor'' in a name or 
title, a retail investor may be misled into believing and expecting 
that their ``financial advisor,'' who may, for example, solely provide 
brokerage services at a broker-dealer, is an

[[Page 21545]]

investment adviser (i.e., a fiduciary) on the basis of his name or 
title.
    Additionally, we considered two performance-based standards, as 
discussed above in Section III.C.\1031\ However, we believe that either 
performance standard would be less effective than our proposed design 
standard in addressing investor confusion stemming from their 
association with the statutory term investment adviser. In the first 
alternative approach, we considered proposing a rule which would have 
stated that a broker-dealer that uses the term ``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 
brokerage business and therefore would not be excluded from the 
definition of investment adviser under section 202(a)(11)(C) of the 
Advisers Act. For the second alternative approach, we considered 
precluding a broker-dealer from relying on the solely incidental 
exclusion of section 202(a)(11)(C) if it ``held itself out'' as an 
investment adviser to retail investors such as by representing or 
implying through any communication or other sales practice (including 
through the use of names or titles) that they are offering investment 
advice subject to a fiduciary relationship with an investment adviser. 
Under this second approach, there would be a prohibition on certain 
broker-dealer and its associated natural person communications that 
suggest, or could reasonably be understood as suggesting, that such 
broker-dealer or its associated natural persons are performing 
investment advisory services in a manner that would subject them to the 
Advisers Act rather than as solely incidental to their business as a 
broker-dealer. For the reasons we set out in Section III above, we 
believe that our proposed restriction on the use of ``adviser'' and 
``advisor'' in combination with the requirement to deliver a 
relationship summary is a simpler, more administrable approach to 
address the confusion about the difference between investment advisers 
and broker-dealers, and to prevent investors from being potentially 
misled. As a result, we believe that our proposed approach is more 
tailored toward creating greater clarity than our alternative 
approaches.
---------------------------------------------------------------------------

    \1031\ See supra Section III.C.
---------------------------------------------------------------------------

    Regarding the fourth alternative, we preliminarily believe that, 
similar to the first alternative, it would be inconsistent with the 
purposes of the Exchange Act to exempt small broker-dealers from the 
proposed rule, or any part thereof.
3. Rule 15l-3 Relating to Disclosure of Commission Registration Status 
and Financial Professional Association
    Regarding the first alternative, the Commission believes that 
establishing different compliance or reporting requirements for small 
advisers and broker-dealers would be inappropriate under these 
circumstances. We believe it is important to assist retail investors in 
determining which type of firm is more appropriate for their specific 
investment needs and promote better informed decisions regarding which 
firm or financial professional they are engaging or seeking to engage. 
Because the protections of the Advisers Act and Exchange Act are 
intended to apply equally to retail investor clients of both large and 
small firms, we preliminarily believe it would be inconsistent with the 
purposes of the Exchange Act and the Advisers Act to specify 
differences for small entities under the proposed rule.
    Regarding the second alternative, we believe that the current 
proposal is clear and that further clarification, consolidation, or 
simplification of the compliance requirements is not necessary. As 
discussed in Section III.D, we are proposing rules under the Exchange 
Act and Advisers Act that would require broker-dealers and investment 
advisers and their associated natural persons and supervised persons, 
respectively, to prominently disclose the firm's registration status 
with the Commission and the associated natural persons and supervised 
person's relationship with the firm in print and electronic retail 
investor communications. As discussed above in Section III, our 
proposal would subject broker-dealers and investment advisers to the 
same requirements, adding to the clarity and consolidation of the 
compliance requirements. Finally, we note that our proposed rules 
contain specific presentation and prominence requirements, as discussed 
above in Section III, for both print and electronic communications.
    Regarding the third alternative, we believe that using performance 
rather than design standards would be less effective in assisting 
retail investors in determining which type of firm is more appropriate 
for their specific investment needs. Specifically, we are concerned 
that in the absence of the specific prominence and formatting 
requirements, firms and financial professionals may disclose their 
registration status in a footnote or at the bottom of a website and in 
small print as they do today with other regulatory mandated disclosures 
(e.g., member of Securities Investor Protection Corporation). In such 
cases, retail investors would be unable to readily discern whether a 
firm is a broker-dealer or investment adviser and thus avoid making an 
uniformed choice of which firm or financial professional to engage or 
seek to engage, undermining a key purpose of our proposed rules. 
Therefore, we believe that our proposed design standards would 
facilitate the presentation of required information to retail 
investors. Specifically, as we noted above, disclosures as important as 
a firm's registration status or a financial professional's association 
with such firm should not be disclosed inconspicuously or placed in 
fine print. Accordingly, we are proposing to require a firm and its 
financial professionals to disclose their registration statuses in 
print communications in a type size at least as large as and of a font 
style different from, but at least as prominent as, that used in the 
majority of the communication. In addition, we are proposing to require 
the disclosure to be presented in the body of the communication and not 
in a footnote. Finally, we are also proposing that if a communication 
is delivered through an electronic communication or in any publication 
by radio or television, the disclosure must be presented in a manner 
reasonably calculated to draw retail investors' attention to it. We 
believe that through these design standards retail investors would have 
the information necessary to facilitate an informed choice of financial 
firm and its professionals.
    Regarding the fourth alternative, we preliminarily believe that, 
similar to the first alternative, it would be inconsistent with the 
purposes of the Advisers Act and the Exchange Act to exempt small 
advisers and broker-dealers from the proposed rule, or any part 
thereof.

G. Solicitation of Comments

    We encourage written comments on the matters discussed in this 
IRFA. We solicit comment on the number of small entities subject to the 
proposed Form CRS, and the proposed rules and rule amendments as well 
as the potential impacts discussed in this analysis; and whether the 
proposal could have an effect on small entities that has not been 
considered. We request that commenters describe the nature of any 
impact on small entities and provide empirical data to support the 
extent of such impact.

[[Page 21546]]

VII. Consideration of the Impact on the Economy

    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996, or ``SBREFA,'' \1032\ we must advise OMB whether a 
proposed regulation constitutes a ``major'' rule. Under SBREFA, a rule 
is considered ``major'' where, if adopted, it results in or is likely 
to result in (1) an annual effect on the economy of $100 million or 
more; (2) a major increase in costs or prices for consumers or 
individual industries; or (3) significant adverse effects on 
competition, investment or innovation.
---------------------------------------------------------------------------

    \1032\ Public Law 104-121, Title II, 110 Stat. 857 (1996) 
(codified in various sections of 5 U.S.C., 15 U.S.C. and as a note 
to 5 U.S.C. 601).
---------------------------------------------------------------------------

    We request comment on the potential effect of the proposed 
amendments on the U.S. economy on an annual basis; any potential 
increase in costs or prices for consumers or individual industries; and 
any potential effect on competition, investment or innovation. 
Commenters are requested to provide empirical data and other factual 
support for their views to the extent possible.

VIII. Statutory Authority

    The Commission is proposing amendments to rule 203-1 under the 
Advisers Act pursuant to authority set forth in sections 203(c)(1), 
204, and 211(a) of the Investment Advisers Act of 1940 [15 U.S.C. 80b-
3(c)(1), 80b-4, and 80b-11(a)].
    The Commission is proposing amendments to rule 204-1 under the 
Advisers Act pursuant to authority set forth in sections 203(c)(1) and 
204 of the Investment Advisers Act of 1940 [15 U.S.C. 80b-3(c)(1) and 
80b-4].
    The Commission is proposing new rule 204-5 under the Advisers Act 
pursuant to authority set forth in sections 204, 206A, 206(4), 211(a), 
and 211(h) of the Investment Advisers Act of 1940 [15 U.S.C. 80b-4, 
80b-6a, 80b-6(4), 80b-11(a), 80b-11(h)], and section 913(f) of Title IX 
of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 
2010 (the ``Dodd-Frank Act'').
    The Commission is proposing amendments to rule 279.1, Form ADV, 
under section 19(a) of the Securities Act of 1933 [15 U.S.C. 77s(a)], 
sections 23(a) and 28(e)(2) of the Securities Exchange Act of 1934 [15 
U.S.C. 78w(a) and 78bb(e)(2)], section 319(a) of the Trust Indenture 
Act of 1939 [15 U.S.C. 7sss(a)], section 38(a) of the Investment 
Company Act of 1940 [15 U.S.C. 80a-37(a)], and sections 203(c)(1), 204, 
206A, 211(a) and 211(h), and of the Investment Advisers Act of 1940 [15 
U.S.C. 80b-3(c)(1), 80b-4, 80b-6a, 80b-11(a) and 80b-11(h)], and 
section 913(f) of Title IX of the Dodd-Frank Act.
    The Commission is proposing to amend rule 204-2 under the Advisers 
Act pursuant to authority set forth in sections 204 and 211 of the 
Advisers Act [15 U.S.C. 80b-4 and 80b-11].
    The Commission is proposing new rule 17a-14 under the Exchange Act, 
Form CRS, and amendments to rules 17a-3 and 17a-4 under the Exchange 
Act pursuant to the authority set forth in the Exchange Act and 
particularly sections 3, 10, 15, 17, 23 and 36 thereof 15 U.S.C. 78c, 
78j, 78o, 78q, 78w and 78mm, and section 913(f) of Title IX of the 
Dodd-Frank Act.
    The Commission is proposing new rules 15l-2 and 15l-3 under the 
authority set forth in sections 10, 15, 23, and 36 of the Securities 
Exchange Act of 1934 [15 U.S.C. 78j, 78o, 78w, and 78mm] and new rule 
211h-1 under the authority set forth in sections 211(h), 206A, 211(a) 
of the Investment Advisers Act of 1940 [15 U.S.C. 80b-11(h), 80b-6a, 
80b-11(a)].

IX. Text of Rule and Form

List of Subjects

17 CFR Parts 240 and 249

    Brokers, Reporting and recordkeeping requirements, Sales practice 
and disclosure requirements, Securities.

17 CFR Parts 275 and 279

    Investment advisers, Reporting and recordkeeping requirements, 
Securities.

Text of Proposed Rules

    For the reasons set out in the preamble, title 17, chapter II of 
the Code of Federal Regulations is proposed to be amended as follows:

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 
1934

0
1. The general authority citation for part 240 continues to read as 
follows and sectional authorities for 240.15l-2, 240.15l-3, and 
240.17a-14 are added to read as follows:

    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. 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-2 is also issued under Public Law 111-203, sec. 
913, 124 Stat. 1376 (2010).
    Section 240.15l-3 is also issued under Public Law 111-203, sec. 
913, 124 Stat. 1376 (2010).
    Section 240.17a-14 is also issued under Public Law 111-203, sec. 
913, 124 Stat. 1376 (2010).
* * * * *
0
2. Section 240.15l-2 is added to read as follows:


Sec.  240.15l-2  Use of the Term ``Adviser'' or ``Advisor''.

    (a) A broker or dealer, or a natural person who is an associated 
person of a broker or dealer shall be restricted, when communicating 
with a retail investor, from using as part of a name or title the term 
``adviser'' or ``advisor'' unless any such:
    (1) Broker or dealer is an investment adviser registered under 
Section 203 of the Investment Advisers Act of 1940 or with a State, or
    (2) Natural person who is an associated person of a broker or 
dealer is a supervised person of an investment adviser registered under 
Section 203 of the Investment Advisers Act of 1940 or with a State, and 
such person provides investment advice on behalf of such investment 
adviser.
    (b) The term retail investor has the meaning set forth in Sec.  
240.17a-14.
0
3. Section 240.15l-3 is added to read as follows:


Sec.  240.15l-3  Disclosure of Registration Status.

    (a) A broker or dealer shall prominently disclose that it is 
registered with the Commission as a broker-dealer in print or 
electronic retail investor communications.
    (b) A natural person who is an associated person of a broker or 
dealer shall prominently disclose that he or she is an associated 
person of a broker-dealer registered with the Commission in print or 
electronic retail investor communications.
    (c) Such disclosures in paragraphs (a) and (b) shall be provided in 
the following manner:
    (1) For print communications, such status must be displayed in a 
type size at least as large as and of a font style different from, but 
at least as prominent as, that used in the majority of the 
communication. In addition, such disclosure must be presented in the 
body of the communication and not in a footnote.
    (2) For electronic communications, or in any publication by radio 
or television, such disclosure must be presented in a manner reasonably 
calculated to draw retail investor attention to it.

[[Page 21547]]

    (d) The term retail investor has the meaning set forth in Sec.  
240.17a-14.
0
4. Section 240.17a-3 is amended by adding paragraph (a)(24) to read as 
follows:


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

    (a) * * *
    (24) A record of the date that each Form CRS was provided to each 
retail investor, including any Form CRS provided before such retail 
investor opens an account.
* * * * *
0
5. Section 240.17a-4 is amended by adding paragraph (e)(10) to read as 
follows:


Sec.  240.17a-4  Records to be preserved by certain exchange members, 
brokers and dealers.

* * * * *
    (e) * * *
    (10) All records required pursuant to Sec.  240.17a-3(a)(24), as 
well as a copy of each Form CRS, until at least six years after such 
record or Form CRS is created.
* * * * *
0
6. Section 240.17a-14 is added to read as follows:


Sec.  240.17a-14   Form CRS, for preparation, filing and delivery of 
Form CRS.

    (a) Scope of Section. This section shall apply to every broker or 
dealer registered with the Commission pursuant to section 15 of the Act 
that offers services to a retail investor.
    (b) Form CRS. You must:
    (1) Prepare Form CRS 17 CFR 249.640, by following the instructions 
in the form.
    (2) File your current Form CRS electronically with the Commission 
through the Commission's EDGAR system, and thereafter, file an amended 
Form CRS in accordance with the instructions in the form.
    (3) Amend your Form CRS as required by the instructions in the 
form.
    (c) Delivery of Form CRS. You must:
    (1) Deliver to each retail investor your current Form CRS before or 
at the time the retail investor first engages your services.
    (2) Deliver to each retail investor who is an existing customer 
your current Form CRS before or at the time (i) a new account is opened 
that is different from the retail investor's existing account(s); or 
(ii) changes are made to the retail investor's existing account(s) that 
would materially change the nature and scope of the relationship with 
the retail investor, including before or at the time you recommend that 
the retail investor transfers from an advisory account to a brokerage 
account, transfers from a brokerage account to an advisory account, or 
moves assets from one type of account to another in a transaction not 
in the normal, customary or already agreed course of dealing. Whether a 
change would require delivery of the Form CRS would depend on the 
specific facts and circumstances.
    (3) Post the current Form CRS prominently on your website, if you 
have one, in a location and format that is easily accessible for retail 
investors.
    (4) Communicate any changes made to Form CRS to each retail 
investor who is an existing customer within 30 days after the 
amendments are required to be made and without charge. The 
communication can be made by delivering the current Form CRS or by 
communicating the information in another way to the retail investor.
    (5) Deliver a current Form CRS to each retail investor within 30 
days upon request.
    (d) Other disclosure obligations. Delivering a Form CRS in 
compliance with this section does not relieve you of any other 
disclosure obligations arising under the federal securities laws and 
regulations or other laws or regulations (including the rules of a 
self-regulatory organization).
    (e) Definitions. For purposes of this section:
    (1) Current Form CRS means the most recent version of the Form CRS.
    (2) Retail investor means a customer or prospective customer who is 
a natural person (an individual). This term includes a trust or other 
similar entity that represents natural persons, even if another person 
is a trustee or managing agent of the trust.
    (f) Transition rule. (1) You must begin to comply with this section 
by [INSERT DATE SIX MONTHS AFTER EFFECTIVE DATE OF RULES/FORM], 
including by filing your Form CRS in accordance with paragraph (b)(2) 
of this section by that date.
    (2) Within 30 days after the date by which you are first required 
by paragraph (f)(1) of this section to electronically file your Form 
CRS with the Commission, you must deliver to each of your existing 
customers who is a retail investor your current Form CRS.
    (3) After [INSERT DATE SIX MONTHS AFTER EFFECTIVE DATE OF RULES/
FORM], if you are a newly registered broker or dealer that is subject 
to this section, you must begin to comply with this section by the date 
on which your registration with the Commission becomes effective 
pursuant to Section 15(b) of the Act, including by filing your Form CRS 
in accordance with paragraph (b)(2) of this section by that date.

    Editorial Note: For Federal Register citations affecting Form 
CRS, see the List of CFR Sections Affected, which appears in the 
Finding Aids section of the printed volume and at www.fdsys.gov.

PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934

0
7. The authority citation for part 249 is amended by adding sectional 
authorities to read as follows:

    Authority: 15 U.S.C. 78a et seq. and 7201 et seq.; 12 U.S.C. 
5461 et seq.; 18 U.S.C. 1350; Sec. 953(b), Pub. L. 111-203, 124 
Stat. 1904; Sec. 102(a)(3), Pub. L. 112-106, 126 Stat. 309 (2012); 
Sec. 107, Pub. L. 112-106, 126 Stat. 313, (2012), and Sec. 72001, 
Pub. L. 114-94, 129 Stat. 1312 (2015), unless otherwise noted.
* * * * *
    Section 249.640 is also issued under Public Law 111-203, sec. 
913, 124 Stat. 1376 (2010).
* * * * *
0
8. Section 249.640 is added to read as follows:


Sec.  249.640  Form CRS, Relationship Summary for Broker-Dealers 
Providing Services to Retail Investors, pursuant to Sec.  240.17a-14 of 
this chapter.

    This form shall be prepared and filed by broker-dealers registered 
with the Securities and Exchange Commission pursuant to Section 15 of 
the Act that offer services to a retail investor pursuant to Sec.  
240.17a-14 of this chapter.

PART 275--RULES AND REGULATIONS, INVESTMENT ADVISERS ACT OF 1940

0
9. The general authority citation for part 275 continues to read as 
follows and sectional authorities for 275.204-5 and 275.211h-1 are 
added to read as follows:

    Authority: 15 U.S.C. 80b-2(a)(11)(G), 80b-2(a)(11)(H), 80b-
2(a)(17), 80b-3, 80b-4, 80b-4a, 80b-6(4), 80b-6a, and 80b-11, unless 
otherwise noted.
* * * * *
    Section 275.204-5 is also issued under sec. 913, Public Law 111-
203, sec. 124 Stat. 1827-28 (2010).
    Section 275.211h-1 is also issued under sec. 913, Public Law 
111-203, sec. 124 Stat. 1827-28 (2010).
* * * * *
0
10. Amend Sec.  275.203-1 by revising paragraph(a) to read as follows:


Sec.  275.203-1  Application for investment adviser registration.

    (a) Form ADV. (1) To apply for registration with the Commission as 
an investment adviser, you must complete Form ADV (17 CFR 279.1) by 
following the instructions in the form and you

[[Page 21548]]

must file Part 1A of Form ADV, the firm brochure(s) required by Part 2A 
of Form ADV and Form CRS required by Part 3 of Form ADV electronically 
with the Investment Adviser Registration Depository (IARD) unless you 
have received a hardship exemption under Sec.  275.203-3. You are not 
required to file with the Commission the brochure supplements required 
by Part 2B of Form ADV.
    (2) After [INSERT DATE SIX MONTHS AFTER EFFECTIVE DATE OF RULES/
FORM] the Commission will not accept any initial application for 
registration as an investment adviser that does not include a Form CRS 
that satisfies the requirements of Part 3 of Form ADV.

    Note to paragraph (a)(1): Information on how to file with the 
IARD is available on the Commission's Web site at https://www.sec.gov/iard. If you are not required to deliver a brochure or 
Form CRS to any clients, you are not required to prepare or file a 
brochure or Form CRS, as applicable, with the Commission. If you are 
not required to deliver a brochure supplement to any clients for any 
particular supervised person, you are not required to prepare a 
brochure supplement for that supervised person.

* * * * *
0
11. Amend Sec.  275.204-1 by revising paragraphs (a) and (b) to read as 
follows:


Sec.  275.204-1  Amendments to Form ADV.

    (a) When amendment is required. You must amend your Form ADV (17 
CFR 279.1):
    (1) Parts 1 and 2:
    (i) At least annually, within 90 days of the end of your fiscal 
year; and
    (ii) More frequently, if required by the instructions to Form ADV.
    (2) Part 3 at the frequency required by the instructions to Form 
ADV.
    (b) Electronic filing of amendments. (1) Subject to paragraph 
(b)(3) of this rule, you must file all amendments to Part 1A, Part 2A 
and Part 3 of Form ADV electronically with the IARD, unless you have 
received a continuing hardship exemption under Sec.  275.203-3. You are 
not required to file with the Commission amendments to brochure 
supplements required by Part 2B of Form ADV.
    (2) If you have received a continuing hardship exemption under 
Sec.  275.203-3, you must, when you are required to amend your Form 
ADV, file a completed Part 1A, Part 2A and Part 3 of Form ADV on paper 
with the SEC by mailing it to FINRA.
    (3) Transition to filing Form CRS. You must amend your Form ADV by 
electronically filing with the IARD Form CRS that satisfies the 
requirements of Part 3 of Form ADV (as amended effective [INSERT 
EFFECTIVE DATE OF RULES/FORM]) as part of the next annual updating 
amendment you are required to file after [INSERT DATE SIX MONTHS AFTER 
EFFECTIVE DATE OF RULES/FORM].

    Note to paragraphs (a) and (b): Information on how to file with 
the IARD is available on our Web site at https://www.sec.gov/iard. 
For the annual updating amendment: Summaries of material changes 
that are not included in the adviser's brochure must be filed with 
the Commission as an exhibit to Part 2A in the same electronic file; 
and if you are not required to prepare a brochure, a summary of 
material changes, an annual updating amendment to your brochure, or 
Form CRS you are not required to file them with the Commission. See 
the instructions for Part 2A and Part 3 of Form ADV.

* * * * *
0
12. Section 275.204-2 is amended by revising paragraph (a)(14)(i) as 
follows:


Sec.  275.204-2  Books and records to be maintained by investment 
advisers.

    (a) * * *
    (14)
    (i) A copy of each brochure, brochure supplement and Form CRS, and 
each amendment or revision to the brochure, brochure supplement and 
Form CRS, that satisfies the requirements of Part 2 or Part 3 of Form 
ADV, as applicable [17 CFR 279.1]; any summary of material changes that 
satisfies the requirements of Part 2 of Form ADV but is not contained 
in the brochure; and a record of the dates that each brochure, brochure 
supplement and Form CRS, each amendment or revision thereto, and each 
summary of material changes not contained in a brochure was given to 
any client or to any prospective client who subsequently becomes a 
client.
* * * * *
0
13. Section 275.204-5 is added to read as follows:


Sec.  275.204-5  Delivery of Form CRS.

    (a) General requirements. If you are registered under the Act as an 
investment adviser, you must deliver Form CRS, required by Part 3 of 
Form ADV [17 CFR 279.1], to each retail investor.
    (b) Delivery requirements. You (or a supervised person acting on 
your behalf) must:
    (1) Deliver to each retail investor your current Form CRS before or 
at the time you enter into an investment advisory contract with that 
retail investor.
    (2) Deliver to each retail investor who is an existing client your 
current Form CRS before or at the time (i) a new account is opened that 
is different from the retail investor's existing account(s); or (ii) 
changes are made to the retail investor's existing account(s) that 
would materially change the nature and scope of the relationship with 
the retail investor, including before or at the time you recommend that 
the retail investor transfers from an advisory account to a brokerage 
account, transfers from a brokerage account to an advisory account, or 
moves assets from one type of account to another in a transaction not 
in the normal, customary or already agreed course of dealing. Whether a 
change would require delivery of the Form CRS would depend on the 
specific facts and circumstances.
    (3) Post the current Form CRS prominently on your website, if you 
have one, in a location and format that is easily accessible for retail 
investors.
    (4) Communicate any changes made to Form CRS to each retail 
investor who is an existing client within 30 days after the amendments 
are required to be made and without charge. The communication can be 
made by delivering the amended Form CRS or by communicating the 
information in another way to the retail investor.
    (5) Deliver a current Form CRS to each retail investor within 30 
days upon request.
    (c) Other disclosure obligations. Delivering Form CRS in compliance 
with this section does not relieve you of any other disclosure 
obligations you have to your retail investors under any federal or 
state laws or regulations.
    (d) Definitions. For purposes of this section:
    (1) Current Form CRS means the most recent version of the Form CRS.
    (2) Retail investor means a client or prospective client who is a 
natural person (an individual). This term includes a trust or other 
similar entity that represents natural persons, even if another person 
is a trustee or managing agent of the trust.
    (3) Supervised person means any of your officers, partners or 
directors (or other persons occupying a similar status or performing 
similar functions) or employees, or any other person who provides 
investment advice on your behalf.
    (e) Transition rule.
    (1) Within 30 days after the date by which you are first required 
by Sec.  275.204-1(b)(3) to electronically file your Form CRS with the 
Commission, you must deliver to each of your existing clients who is a 
retail investor your current Form CRS as required by Part 3 of Form 
ADV.
    (2) As of the date by which you are first required to 
electronically file your Form CRS with the Commission, you must begin 
using your Form CRS as required by Part 3 of Form ADV to

[[Page 21549]]

comply with the requirements of paragraph (b) of this section.
0
14. Section 275.211h-1 is added to read as follows:


Sec.  275.211h-1  Disclosure of Registration Status.

    (a) An investment adviser registered under section 203 of the Act 
shall prominently disclose that it is registered with the Commission as 
an investment adviser in print or electronic retail investor 
communications.
    (b) A supervised person of an investment adviser registered under 
section 203 of the Act shall prominently disclose that he or she is a 
supervised person of an investment adviser registered with the 
Commission in print or electronic retail investor communications.
    (c) Such disclosures in paragraphs (a) and (b) of this section 
shall be provided in the following manner:
    (1) For print communications, such status must be displayed in a 
type size at least as large as and of a font style different from, but 
at least as prominent as, that used in the majority of the 
communication. In addition, such disclosure must be presented in the 
body of the communication and not in a footnote.
    (2) For electronic communications, or in any publication by radio 
or television, such disclosure must be presented in a manner reasonably 
calculated to draw retail investor attention to it.
    (d) The term retail investor has the meaning set forth in Rule 204-
5 (Sec.  275.204-5 of this chapter).

PART 279--FORMS PRESCRIBED UNDER THE INVESTMENT ADVISERS ACT OF 
1940

0
15. The authority citation for part 279 is revised to read as follows:

    Authority: The Investment Advisers Act of 1940, 15 U.S.C. 80b-1, 
et seq., Pub. L. 111-203, 124 Stat. 1376.

0
16. Form ADV [referenced in Sec.  279.1] is amended by:
0
a. In the instructions to the form, revising the section entitled 
``Form ADV: General Instructions.'' The revised version of Form ADV: 
General Instructions is attached as Appendix A;
0
b. In the instructions to the form, adding the section entitled ``Form 
ADV, Part 3: Instructions to Form CRS.'' The new version of Form ADV, 
Part 3: Instructions to Form CRS is attached as Appendix B.

    By the Commission.
    Dated: April 18, 2018.

Brent J. Fields,
Secretary.

    Note: The text of Form ADV does not and the amendments will not 
appear in the Code of Federal Regulations.

Appendices

APPENDIX A

FORM ADV (Paper Version)

 UNIFORM APPLICATION FOR INVESTMENT ADVISER REGISTRATION AND

 REPORT FORM BY EXEMPT REPORTING ADVISERS

Form ADV: General Instructions

    Read these instructions carefully before filing Form ADV. 
Failure to follow these instructions, properly complete the form, or 
pay all required fees may result in your application or report being 
delayed or rejected.
    In these instructions and in Form ADV, ``you'' means the 
investment adviser (i.e., the advisory firm).
    If you are a ``separately identifiable department or division'' 
(SID) of a bank, ``you'' means the SID, rather than your bank, 
unless the instructions or the form provide otherwise.
    If you are a private fund adviser filing an umbrella 
registration, ``you'' means the filing adviser and each relying 
adviser, unless the instructions or the form provide otherwise. The 
information in Items 1, 2, 3 and 10 (including corresponding 
schedules) should be provided for the filing adviser only.
    Terms that appear in italics are defined in the Glossary of 
Terms to Form ADV.

1. Where can I get more information on Form ADV, electronic filing, and 
the IARD?

    The SEC provides information about its rules and the Advisers 
Act on its website: <https://www.sec.gov/iard>.
    NASAA provides information about state investment adviser laws 
and state rules, and how to contact a state securities authority, on 
its website: <https://www.nasaa.org>.
    FINRA provides information about the IARD and electronic filing 
on the IARD website: <https://www.iard.com>.

2. What is Form ADV used for?

    Investment advisers use Form ADV to:

 Register with the Securities and Exchange Commission
 Register with one or more state securities authorities
 Amend those registrations;
 Report to the SEC as an exempt reporting adviser
 Report to one or more state securities authorities as an 
exempt reporting adviser
 Amend those reports; and
 Submit a final report as an exempt reporting adviser

3. How is Form ADV organized?

    Form ADV contains five parts:
 Part 1A asks a number of questions about you, your business 
practices, the persons who own and control you, and the persons who 
provide investment advice on your behalf.
    [cir] All advisers registering with the SEC or any of the state 
securities authorities must complete Part 1A.
    [cir] Exempt reporting advisers (that are not also registering 
with any state securities authority) must complete only the 
following Items of Part 1A: 1, 2, 3, 6, 7, 10, and 11, as well as 
corresponding schedules. Exempt reporting advisers that are 
registering with any state securities authority must complete all of 
Form ADV.
 Part 1A also contains several supplemental schedules. The items of 
Part 1A let you know which schedules you must complete.
    [cir] Schedule A asks for information about your direct owners 
and executive officers.
    [cir] Schedule B asks for information about your indirect 
owners.
    [cir] Schedule C is used by paper filers to update the 
information required by Schedules A and B (see Instruction 18).
    [cir] Schedule D asks for additional information for certain 
items in Part 1A.
    [cir] Schedule R asks for additional information about relying 
advisers.
    [cir] Disclosure Reporting Pages (or DRPs) are schedules that 
ask for details about disciplinary events involving you or your 
advisory affiliates.
 Part 1B asks additional questions required by state 
securities authorities. Part 1B contains three additional DRPs. If 
you are applying for SEC registration or are registered only with 
the SEC, you do not have to complete Part 1B. (If you are filing 
electronically and you do not have to complete Part 1B, you will not 
see Part 1B).
 Part 2A requires advisers to create narrative brochures 
containing information about the advisory firm. The requirements in 
Part 2A apply to all investment advisers registered with or applying 
for registration with the SEC, but do not apply to exempt reporting 
advisers. Every application for registration must include a 
narrative brochure prepared in accordance with the requirements of 
Part 2A of Form ADV. See Advisers Act Rule 203-1.
 Part 2B requires advisers to create brochure supplements 
containing information about certain supervised persons. The 
requirements in Part 2B apply to all investment advisers registered 
with or applying for registration with the SEC, but do not apply to 
exempt reporting advisers.
 Part 3 requires advisers to create a relationship summary 
(Form CRS) containing information for retail investors. The 
requirements in Part 3 apply to all investment advisers registered 
or applying for registration with the SEC, but do not apply to 
exempt reporting advisers. Every adviser that has retail investors 
to whom it must deliver a relationship summary must include in the 
application for registration a relationship summary prepared in

[[Page 21550]]

accordance with the requirements of Part 3 of Form ADV. See Advisers 
Act Rule 203-1.

4. When am I required to update my Form ADV?

 SEC- and State-Registered Advisers:
    [cir] Annual updating amendments: You must amend your Form ADV 
each year by filing an annual updating amendment within 90 days 
after the end of your fiscal year. When you submit your annual 
updating amendment, you must update your responses to all items, 
including corresponding sections of Schedules A, B, C, and D and all 
sections of Schedule R for each relying adviser. You must submit 
your summary of material changes required by Item 2 of Part 2A 
either in the brochure (cover page or the page immediately 
thereafter) or as an exhibit to your brochure.
    [cir] Other-than-annual amendments: In addition to your annual 
updating amendment, if you are registered with the SEC or a state 
securities authority, you must amend Part 1 and Part 2 of your Form 
ADV, including corresponding sections of Schedules A, B, C, D, and 
R, by filing additional amendments (other-than-annual amendments) 
promptly, if:
    [ssquf] you are adding or removing a relying adviser as part of 
your umbrella registration;
    [ssquf] information you provided in response to Items 1 (except 
1.O. and Section 1.F. of Schedule D), 3, 9 (except 9.A.(2), 9.B.(2), 
9.E., and 9.F.), or 11 of Part 1A or Items 1, 2.A. through 2.F., or 
2.I. of Part 1B or Sections 1 or 3 of Schedule R becomes inaccurate 
in any way;
    [ssquf] information you provided in response to Items 4, 8, or 
10 of Part 1A, or Item 2.G. of Part 1B, or Section 10 of Schedule R 
becomes materially inaccurate; or
    [ssquf] information you provided in your brochure becomes 
materially inaccurate (see note below for exceptions).
    Notes: Part 1: If you are submitting an other-than-annual 
amendment, you are not required to update your responses to Items 2, 
5, 6, 7, 9.A.(2), 9.B.(2), 9.E., 9.F., or 12 of Part 1A, Items 2.H. 
or 2.J. of Part 1B, Section 1.F. of Schedule D or Section 2 of 
Schedule R even if your responses to those items have become 
inaccurate.
    Part 2: You must amend your brochure supplements (see Form ADV, 
Part 2B) promptly if any information in them becomes materially 
inaccurate. If you are submitting an other-than-annual amendment to 
your brochure, you are not required to update your summary of 
material changes as required by Item 2. You are not required to 
update your brochure between annual amendments solely because the 
amount of client assets you manage has changed or because your fee 
schedule has changed. However, if you are updating your brochure for 
a separate reason in between annual amendments, and the amount of 
client assets you manage listed in response to Item 4.E. or your fee 
schedule listed in response to Item 5.A. has become materially 
inaccurate, you should update that item(s) as part of the interim 
amendment.
 If you are an SEC-registered adviser, you are required to 
file your brochure amendments electronically through IARD. You are 
not required to file amendments to your brochure supplements with 
the SEC, but you must maintain a copy of them in your files.
 If you are a state-registered adviser, you are required to 
file your brochure amendments and brochure supplement amendments 
with the appropriate state securities authorities through IARD.
    [cir] Part 3 amendments: You must amend your relationship 
summary and file your relationship summary amendments in accordance 
with the Form ADV, Part 3 (Form CRS), General Instructions, 6.
 Exempt reporting advisers:
    [cir] Annual Updating Amendments: You must amend your Form ADV 
each year by filing an annual updating amendment within 90 days 
after the end of your fiscal year. When you submit your annual 
updating amendment, you must update your responses to all required 
items, including corresponding sections of Schedules A, B, C, and D.
    [cir] Other-than-Annual Amendments: In addition to your annual 
updating amendment, you must amend your Form ADV, including 
corresponding sections of Schedules A, B, C, and D, by filing 
additional amendments (other-than-annual amendments) promptly if:
    [ssquf] information you provided in response to Items 1 (except 
Item 1.O. and Section 1.F. of Schedule D), 3, or 11 becomes 
inaccurate in any way; or
    [ssquf] information you provided in response to Item 10 becomes 
materially inaccurate.

Failure to update your Form ADV, as required by this instruction, is a 
violation of SEC rules or similar state rules and could lead to your 
registration being revoked.

5. What is SEC umbrella registration and how can I satisfy the 
requirements of filing an umbrella registration?

    An umbrella registration is a single registration by a filing 
adviser and one or more relying advisers who advise only private 
funds and certain separately managed account clients that are 
qualified clients and collectively conduct a single advisory 
business. Absent other facts suggesting that the filing adviser and 
relying adviser(s) conduct different businesses, umbrella 
registration is available under the following circumstances:
    i. The filing adviser and each relying adviser advise only 
private funds and clients in separately managed accounts that are 
qualified clients and are otherwise eligible to invest in the 
private funds advised by the filing adviser or a relying adviser and 
whose accounts pursue investment objectives and strategies that are 
substantially similar or otherwise related to those private funds.
    ii. The filing adviser has its principal office and place of 
business in the United States and, therefore, all of the substantive 
provisions of the Advisers Act and the rules thereunder apply to the 
filing adviser's and each relying adviser's dealings with each of 
its clients, regardless of whether any client of the filing adviser 
or relying adviser providing the advice is a United States person.
    iii. Each relying adviser, its employees and the persons acting 
on its behalf are subject to the filing adviser's supervision and 
control and, therefore, each relying adviser, its employees and the 
persons acting on its behalf are ``persons associated with'' the 
filing adviser (as defined in section 202(a)(17) of the Advisers 
Act).
    iv. The advisory activities of each relying adviser are subject 
to the Advisers Act and the rules thereunder, and each relying 
adviser is subject to examination by the SEC.
    v. The filing adviser and each relying adviser operate under a 
single code of ethics adopted in accordance with SEC rule 204A-1 and 
a single set of written policies and procedures adopted and 
implemented in accordance with SEC rule 206(4)-7 and administered by 
a single chief compliance officer in accordance with that rule.
    To satisfy the requirements of Form ADV while using umbrella 
registration the filing adviser must sign, file, and update as 
required, a single Form ADV (Parts 1 and 2) that relates to, and 
includes all information concerning, the filing adviser and each 
relying adviser (e.g., disciplinary information and ownership 
information), and must include this same information in any other 
reports or filings it must make under the Advisers Act or the rules 
thereunder (e.g., Form PF). The filing adviser and each relying 
adviser must not be prohibited from registering with the SEC by 
section 203A of the Advisers Act (i.e., the filing adviser and each 
relying adviser must individually qualify for SEC registration).
    Unless otherwise specified, references to ``you'' in Form ADV 
refer to both the filing adviser and each relying adviser. The 
information in Items 1, 2, 3 and 10 (including corresponding 
schedules) should be provided for the filing adviser only. A 
separate Schedule R should be completed for each relying adviser. 
References to ``you'' in Schedule R refer to the relying adviser 
only.
    A filing adviser applying for registration with the SEC should 
complete a Schedule R for each relying adviser. If you are a filing 
adviser registered with the SEC and would like to add or delete 
relying advisers from an umbrella registration, you should file an 
other-than-annual amendment and add or delete Schedule Rs as needed.
    Note: Umbrella registration is not available to exempt reporting 
advisers.

6. Where do I sign my Form ADV application or amendment?

    You must sign the appropriate Execution Page. There are three 
Execution Pages at the end of the form. Your initial application, 
your initial report (in the case of an exempt reporting adviser), 
and all amendments to Form ADV must include at least one Execution 
Page.
 If you are applying for or are amending your SEC 
registration, or if you are reporting as an exempt reporting adviser 
or amending your report, you must sign and submit either a:
    [cir] Domestic Investment Adviser Execution Page, if you (the 
advisory firm) are a resident of the United States; or

[[Page 21551]]

    [cir] Non-Resident Investment Adviser Execution Page, if you 
(the advisory firm) are not a resident of the United States.
 If you are applying for or are amending your registration 
with a state securities authority, you must sign and submit the 
State-Registered Investment Adviser Execution Page.

7. Who must sign my Form ADV or amendment?

    The individual who signs the form depends upon your form of 
organization:
 For a sole proprietorship, the sole proprietor.
 For a partnership, a general partner.
 For a corporation, an authorized principal officer.
 For a ``separately identifiable department or division'' 
(SID) of a bank, a principal officer of your bank who is directly 
engaged in the management, direction, or supervision of your 
investment advisory activities.
 For all others, an authorized individual who participates 
in managing or directing your affairs.
    The signature does not have to be notarized, and in the case of 
an electronic filing, should be a typed name.

8. How do I file my Form ADV?

    Complete Form ADV electronically using the Investment Adviser 
Registration Depository (IARD) if:
 You are filing with the SEC (and submitting notice filings 
to any of the state securities authorities), or
 You are filing with a state securities authority that 
requires or permits advisers to submit Form ADV through the IARD.
    Note: SEC rules require advisers that are registered or applying 
for registration with the SEC, or that are reporting to the SEC as 
an exempt reporting adviser, to file electronically through the IARD 
system. See SEC rules 203-1 and 204-4.
    To file electronically, go to the IARD website (www.iard.com), 
which contains detailed instructions for advisers to follow when 
filing through the IARD.
    Complete Form ADV (Paper Version) on paper if:
 You are filing with the SEC or a state securities authority 
that requires electronic filing, but you have been granted a 
continuing hardship exemption. Hardship exemptions are described in 
Instruction 17.
 You are filing with a state securities authority that 
permits (but does not require) electronic filing and you do not file 
electronically.

9. How do I get started filing electronically?

    First, obtain a copy of the IARD Entitlement Package from the 
following website: https://www.iard.com/GetStarted.asp. Second, 
request access to the IARD system for your firm by completing and 
submitting the IARD Entitlement Package. The IARD Entitlement 
Package explains how the form may be submitted. Mail the forms to: 
FINRA Entitlement Group, 9509 Key West Avenue, Rockville, MD 20850.
    When FINRA receives your Entitlement Package, they will assign a 
CRD number (identification number for your firm) and a user I.D. 
code and password (identification number and system password for the 
individual(s) who will submit Form ADV filings for your firm). Your 
firm may request an I.D. code and password for more than one 
individual. FINRA also will create a financial account for you from 
which the IARD will deduct filing fees and any state fees you are 
required to pay. If you already have a CRD account with FINRA, it 
will also serve as your IARD account; a separate account will not be 
established.
    Once you receive your CRD number, user I.D. code and password, 
and you have funded your account, you are ready to file 
electronically.
    Questions regarding the Entitlement Process should be addressed 
to FINRA at 240.386.4848.

10. If I am applying for registration with the SEC, or amending my SEC 
registration, how do I make notice filings with the state securities 
authorities?

    If you are applying for registration with the SEC or are 
amending your SEC registration, one or more state securities 
authorities may require you to provide them with copies of your SEC 
filings. We call these filings ``notice filings.'' Your notice 
filings will be sent electronically to the states that you check on 
Item 2.C. of Part 1A. The state securities authorities to which you 
send notice filings may charge fees, which will be deducted from the 
account you establish with FINRA. To determine which state 
securities authorities require SEC-registered advisers to submit 
notice filings and to pay fees, consult the relevant state 
investment adviser law or state securities authority. See General 
Instruction 1.
    If you are granted a continuing hardship exemption to file Form 
ADV on paper, FINRA will enter your filing into the IARD and your 
notice filings will be sent electronically to the state securities 
authorities that you check on Item 2.C. of Part 1A.

11. I am registered with a state. When must I switch to SEC 
registration?

    If at the time of your annual updating amendment you meet at 
least one of the requirements for SEC registration in Item 2.A.(1) 
to (12) of Part 1A, you must apply for registration with the SEC 
within 90 days after you file the annual updating amendment. Once 
you register with the SEC, you are subject to SEC regulation, 
regardless of whether you remain registered with one or more states. 
See SEC rule 203A-1(b)(2). Each of your investment adviser 
representatives, however, may be subject to registration in those 
states in which the representative has a place of business. See 
Advisers Act section 203A(b)(1); SEC rule 203A-3(a). For additional 
information, consult the investment adviser laws or the state 
securities authority for the particular state in which you are 
``doing business.'' See General Instruction 1.

12. I am registered with the SEC. When must I switch to registration 
with a state securities authority?

    If you check box 13 in Item 2.A. of Part 1A to report on your 
annual updating amendment that you are no longer eligible to 
register with the SEC, you must withdraw from SEC registration 
within 180 days after the end of your fiscal year by filing Form 
ADV-W. See SEC rule 203A-1(b)(2). You should consult state law or 
the state securities authority for the states in which you are 
``doing business'' to determine if you are required to register in 
these states. See General Instruction 1. Until you file your Form 
ADV-W with the SEC, you will remain subject to SEC regulation, and 
you also will be subject to regulation in any states where you 
register. See SEC rule 203A-1(b)(2).

13. I am an exempt reporting adviser. When must I submit my first 
report on Form ADV?

 All exempt reporting advisers:
    You must submit your initial Form ADV filing within 60 days of 
relying on the exemption from registration under either section 
203(l) of the Advisers Act as an adviser solely to one or more 
venture capital funds or section 203(m) of the Advisers Act because 
you act solely as an adviser to private funds and have assets under 
management in the United States of less than $150 million.
 Additional instruction for advisers switching from being 
registered to being exempt reporting advisers:
    If you are currently registered as an investment adviser (or 
have an application for registration pending) with the SEC or with a 
state securities authority, you must file a Form ADV-W to withdraw 
from registration in the jurisdictions where you are switching. You 
must submit the Form ADV-W before submitting your first report as an 
exempt reporting adviser.

14. I am an exempt reporting adviser. Is it possible that I might be 
required to also register with or submit a report to a state securities 
authority?

    Yes, you may be required to register with or submit a report to 
one or more state securities authorities. If you are required to 
register with one or more state securities authorities, you must 
complete all of Form ADV. See General Instruction 3. If you are 
required to submit a report to one or more state securities 
authorities, check the box(es) in Item 2.C. of Part 1A next to the 
state(s) you would like to receive the report. Each of your 
investment adviser representatives may also be subject to 
registration requirements. For additional information about the 
requirements that may apply to you, consult the investment adviser 
laws or the state securities authority for the particular state in 
which you are ``doing business.'' See General Instruction 1.

15. What do I do if I no longer meet the definition of ``exempt 
reporting adviser''?

 Advisers Switching to SEC Registration:
    [cir] You may no longer be an exempt reporting adviser and may 
be required to

[[Page 21552]]

register with the SEC if you wish to continue doing business as an 
investment adviser. For example, you may be relying on section 
203(l) and wish to accept a client that is not a venture capital 
fund as defined in SEC rule 203(l)-1, or you may have been relying 
on SEC rule 203(m)-1 and reported in Section 2.B. of Schedule D to 
your annual updating amendment that you have private fund assets of 
$150 million or more.
    [ssquf] If you are relying on section 203(l), unless you qualify 
for another exemption, you would violate the Advisers Act's 
registration requirement if you accept a client that is not a 
venture capital fund as defined in SEC rule 203(l)-1 before the SEC 
approves your application for registration. You must submit your 
final report as an exempt reporting adviser and apply for SEC 
registration in the same filing.
    [ssquf] If you were relying on SEC rule 203(m)-1 and you 
reported in Section 2.B. of Schedule D to your annual updating 
amendment that you have private fund assets of $150 million or more, 
you must register with the SEC unless you qualify for another 
exemption. If you have complied with all SEC reporting requirements 
applicable to an exempt reporting adviser as such, you have up to 90 
days after filing your annual updating amendment to apply for SEC 
registration, and you may continue doing business as a private fund 
adviser during this time. You must submit your final report as an 
exempt reporting adviser and apply for SEC registration in the same 
filing. Unless you qualify for another exemption, you would violate 
the Advisers Act's registration requirement if you accept a client 
that is not a private fund during this transition period before the 
SEC approves your application for registration, and you must comply 
with all SEC reporting requirements applicable to an exempt 
reporting adviser as such during this 90-day transition period. If 
you have not complied with all SEC reporting requirements applicable 
to an exempt reporting adviser as such, this 90-day transition 
period is not available to you. Therefore, if the transition period 
is not available to you, and you do not qualify for another 
exemption, your application for registration must be approved by the 
SEC before you meet or exceed SEC rule 203(m)-1's $150 million asset 
threshold.
    [cir] You will be deemed in compliance with the Form ADV filing 
and reporting requirements until the SEC approves or denies your 
application. If your application is approved, you will be able to 
continue business as a registered adviser.
    [cir] If you register with the SEC, you may be subject to state 
notice filing requirements. To determine these requirements, consult 
the investment adviser laws or the state securities authority for 
the particular state in which you are ``doing business.'' See 
General Instruction 1.

    Note:  If you are relying on SEC rule 203(m)-1 and you accept a 
client that is not a private fund, you will lose the exemption 
provided by SEC rule 203(m)-1 immediately. To avoid this result, you 
should apply for SEC registration in advance so that the SEC has 
approved your registration before you accept a client that is not a 
private fund.

    The 90-day transition period described above also applies to 
investment advisers with their principal offices and places of 
business outside of the United States with respect to their clients 
who are United States persons (e.g., the adviser would not be 
eligible for the 90-day transition period if it accepted a client 
that is a United States person and is not a private fund).
 Advisers Not Switching to SEC Registration:
    [cir] You may no longer be an exempt reporting adviser but may 
not be required to register with the SEC or may be prohibited from 
doing so. For example, you may cease to do business as an investment 
adviser, become eligible for an exemption that does not require 
reporting, or be ineligible for SEC registration. In this case, you 
must submit a final report as an exempt reporting adviser to update 
only Item 1 of Part 1A of Form ADV.
    [cir] You may be subject to state registration requirements. To 
determine these requirements, consult the investment adviser laws or 
the state securities authority for the particular state in which you 
are ``doing business.'' See General Instruction 1.

16. Are there filing fees?

    Yes. These fees go to support and maintain the IARD. The IARD 
filing fees are in addition to any registration or other fee that 
may be required by state law. You must pay an IARD filing fee for 
your initial application, your initial report, and each annual 
updating amendment. There is no filing fee for an other-than-annual 
amendment, a final report as an exempt reporting adviser, or Form 
ADV-W. The IARD filing fee schedule is published at https://www.sec.gov/iard; https://www.nasaa.org and https://www.iard.com.
    If you are submitting a paper filing under a continuing hardship 
exemption (see Instruction 17), you are required to pay an 
additional fee. The amount of the additional fee depends on whether 
you are filing Form ADV or Form ADV-W. (There is no additional fee 
for filings made on Form ADV-W.) The hardship filing fee schedule is 
available by contacting FINRA at 240.386.4848.

17. What if I am not able to file electronically?

    If you are required to file electronically but cannot do so, you 
may be eligible for one of two types of hardship exemptions from the 
electronic filing requirements.

 A temporary hardship exemption is available if you file 
electronically, but you encounter unexpected difficulties that 
prevent you from making a timely filing with the IARD, such as a 
computer malfunction or electrical outage. This exemption does not 
permit you to file on paper; instead it extends the deadline for an 
electronic filing for seven business days. See SEC rules 203-3(a) 
and 204-4(e).
 A continuing hardship exemption may be granted if you are a 
small business and you can demonstrate that filing electronically 
would impose an undue hardship. You are a small business, and may be 
eligible for a continuing hardship exemption, if you are required to 
answer Item 12 of Part 1A (because you have assets under management 
of less than $25 million) and you are able to respond ``no'' to each 
question in Item 12. See SEC rule 0-7.

    If you have been granted a continuing hardship exemption, you 
must complete and submit the paper version of Form ADV to FINRA. 
FINRA will enter your responses into the IARD. As discussed in 
General Instruction 16, FINRA will charge you a fee to reimburse it 
for the expense of data entry.

18. I am eligible to file on paper. How do I make a paper filing?

    When filing on paper, you must:

 Type all of your responses.
 Include your name (the same name you provide in response to 
Item 1.A. of Part 1A) and the date on every page.
 If you are amending your Form ADV:
    [cir] complete page 1 and circle the number of any item for 
which you are changing your response.
    [cir] include your SEC 801-number (if you have one), or your 
802-number (if you have one), and your CRD number (if you have one) 
on every page.
    [cir] complete the amended item in full and circle the number of 
the item for which you are changing your response.
    [cir] to amend Schedule A or Schedule B, complete and submit 
Schedule C.

    Where you submit your paper filing depends on why you are 
eligible to file on paper:

 If you are filing on paper because you have been granted a 
continuing hardship exemption, submit one manually signed Form ADV 
and one copy to: IARD Document Processing, FINRA, P.O. Box 9495, 
Gaithersburg, MD 20898-9495.

If you complete Form ADV on paper and submit it to FINRA but you do not 
have a continuing hardship exemption, the submission will be returned 
to you.

 If you are filing on paper because a state in which you are 
registered or in which you are applying for registration allows you 
to submit paper instead of electronic filings, submit one manually 
signed Form ADV and one copy to the appropriate state securities 
authorities.

19. Who is required to file Form ADV-NR?

    Every non-resident general partner and managing agent of all 
SEC-registered advisers and exempt reporting advisers, whether or 
not the adviser is resident in the United States, must file Form 
ADV-NR in connection with the adviser's initial application or 
report. A general partner or managing agent of an SEC-registered 
adviser or exempt reporting adviser who becomes a

[[Page 21553]]

non-resident after the adviser's initial application or report has 
been submitted must file Form ADV-NR within 30 days. Form ADV-NR 
must be filed on paper (it cannot be filed electronically).
    Submit Form ADV-NR to the SEC at the following address:
    Securities and Exchange Commission, 100 F Street, NE, 
Washington, DC 20549; Attn: OCIE Registrations Branch.

Failure to file Form ADV-NR promptly may delay SEC consideration of 
your initial application.

Federal Information Law and Requirements

    Sections 203 and 204 of the Advisers Act [15 U.S.C. Sec. Sec.  
80b-3 and 80b-4] authorize the SEC to collect the information 
required by Form ADV. The SEC collects the information for 
regulatory purposes, such as deciding whether to grant registration. 
Filing Form ADV is mandatory for advisers who are required to 
register with the SEC and for exempt reporting advisers. The SEC 
maintains the information submitted on this form and makes it 
publicly available. The SEC may return forms that do not include 
required information. Intentional misstatements or omissions 
constitute federal criminal violations under 18 U.S.C. Sec.  1001 
and 15 U.S.C. Sec.  80b-17.

SEC's Collection of Information

    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 control number. The Advisers Act 
authorizes the SEC to collect the information on Form ADV from 
investment advisers. See 15 U.S.C. Sec. Sec.  80b-3 and 80b-4. 
Filing the form is mandatory.
    The form enables the SEC to register investment advisers and to 
obtain information from and about exempt reporting advisers. Every 
applicant for registration with the SEC as an adviser, and every 
exempt reporting adviser, must file the form. See 17 C.F.R. 
Sec. Sec.  275.203-1 and 204-4. By accepting a form, however, the 
SEC does not make a finding that it has been completed or submitted 
correctly. The form is filed annually by every adviser, no later 
than 90 days after the end of its fiscal year, to amend its 
registration or its report. It is also filed promptly during the 
year to reflect material changes. See 17 C.F.R. Sec.  275.204-1. The 
SEC maintains the information on the form and makes it publicly 
available through the IARD.
    Anyone may send the SEC comments on the accuracy of the burden 
estimate on page 1 of the form, as well as suggestions for reducing 
the burden. The Office of Management and Budget has reviewed this 
collection of information under 44 U.S.C. Sec.  3507.
    The information contained in the form is part of a system of 
records subject to the Privacy Act of 1974, as amended. The SEC has 
published in the Federal Register the Privacy Act System of Records 
Notice for these records.

[Form ADV, Part 3:]\1\ Instructions to Form CRS
---------------------------------------------------------------------------

    \1\ The bracketed text will be included for Form ADV, Part 3 (17 
CFR 279.1) only.
---------------------------------------------------------------------------

General Instructions

    Under rule 17a-14 under the Securities Exchange Act of 1934 and 
rule 204-5 under the Investment Advisers Act of 1940, broker-dealers 
registered under section 15 of the Exchange Act and investment 
advisers registered under section 203 of the Advisers Act are 
required to deliver to retail investors a relationship summary 
disclosing information about the firm. Read all the General 
Instructions as well as the particular item requirements before 
preparing or updating the relationship summary.
    1. Narrative and Graphical Format.
a. The relationship summary must include the required items 
enumerated below. The items require you to provide specific 
information and, in some cases, prescribe the particular wording 
that you must use.
b. You must respond to each item and must provide responses in the 
same order as the items appear in these instructions. Unless 
otherwise noted, you must also present the required information 
within each item in the order listed.
c. Whether in electronic or paper format, the relationship summary 
must not exceed four 8[frac12]'' x 11'' pages if converted to PDF 
format, using at least an 11 point font size and a minimum 0.75'' 
margins on all sides.
d. You may not include disclosure in the relationship summary other 
than disclosure that is required or permitted by these Instructions 
and the applicable item.
e. If you are a dual registrant, present the information in Items 2 
through 4 and Item 6 in a tabular format, comparing advisory 
services and brokerage services side-by-side. In the column 
discussing brokerage services, include the heading ``Broker-Dealer 
Services'' and the sub-heading ``Brokerage Accounts.'' In the column 
discussing investment advisory services, include the heading 
``Investment Adviser Services'' and the sub-heading ``Advisory 
Accounts.'' Dual registrants should not complete Item 5, which must 
be completed by standalone investment advisers and standalone 
broker-dealers.
f. You may use charts, graphs, tables, and other graphics or text 
features to explain the required information, so long as the 
information: (i) is responsive to and meets the requirements in 
these instructions (including space limitations); (ii) is not 
inaccurate or misleading; and (iii) does not, because of the nature, 
quantity, or manner of presentation, obscure or impede understanding 
of the information that must be included. When using interactive 
graphics or tools, you may include instructions on their use and 
interpretation.
g. In a relationship summary that is posted on your website or 
otherwise provided electronically, you must use hyperlinks for any 
document that is cross-referenced in the relationship summary if the 
document is available online. See General Instruction 8.a. You may 
add embedded hyperlinks within the relationship summary in order to 
supplement required disclosures, for example, links to fee 
schedules, conflicts disclosures, the firm's narrative brochure 
required by Part 2A of Form ADV, or other regulatory disclosures.
    2. Plain Language. The items of the relationship summary are 
designed to promote effective communication between you and retail 
investors. Write your relationship summary in plain language, taking 
into consideration retail investors' level of financial experience. 
The relationship summary should be concise and direct. In drafting 
the relationship summary: (i) use short sentences; (ii) use 
definite, concrete, everyday words; (iii) use active voice; (iv) 
avoid legal jargon or highly technical business terms unless you 
clearly explain them or you believe that reasonable retail investors 
will understand them; and (v) avoid multiple negatives. You must 
write the relationship summary as if you are speaking to the retail 
investor, using ``you,'' ``us,'' ``our firm,'' etc.
    Note: The SEC's Office of Investor Education and Advocacy has 
published A Plain English Handbook. You may find the handbook 
helpful in writing your relationship summary. For a copy of this 
handbook, visit the SEC's website at www.sec.gov/news/extra/handbook.htm or call 1-800-732-0330.
    3. Full and Truthful Disclosure. All information in your 
relationship summary must be true and may not omit any material 
facts necessary to make the disclosures required by these 
Instructions and the applicable item not misleading. If a statement 
is inapplicable to your business or would be misleading to a 
reasonable retail investor, you may omit or modify that statement.
    Broker-dealers and investment advisers have disclosure and 
reporting obligations under state and federal law, including, but 
not limited to, obligations under the Exchange Act, the Advisers 
Act, and the respective rules thereunder. Broker-dealers are also 
subject to disclosure obligations under the rules of self-regulatory 
organizations. Delivery of this document will not necessarily 
satisfy the additional disclosure requirements that you have under 
the federal securities laws and regulations or other laws.
    4. Preserving Records. You must maintain a copy of each version 
of the relationship summary and make it available to the SEC staff 
upon request. See SEC Advisers Act rule 204-2(a)(14)(i); SEC 
Exchange Act rule 17a-4.
    5. Initial Filing and Delivery; Transition Provisions.
    a. Initial filing. If you are a registered investment adviser 
and are required to give a relationship summary to a retail 
investor, you must complete Form ADV, Part 3 (Form CRS) and file it 
electronically in a text-searchable format with the Investment 
Adviser Registration Depository (IARD). If

[[Page 21554]]

you are a registered broker-dealer and are required to give a 
relationship summary to a retail investor, you must complete Form 
CRS and file it electronically in a text-searchable format with the 
Electronic Data Gathering, Analysis and Retrieval System 
(``EDGAR'').
    If you do not have any retail investors to whom you must deliver 
a relationship summary, you are not required to prepare one.
    Note to instruction 5(a): If you are a dual registrant and are 
required to give a relationship summary to one or more retail 
investor clients or customers of both your advisory and brokerage 
businesses, you must prepare only one relationship summary and file 
it on IARD and EDGAR.
    Information for investment advisers on how to file with IARD is 
available on the Commission's website at www.sec.gov/iard. 
Information for broker-dealers on how to file with the Commission on 
EDGAR is available on the Commission's website at https://www.sec.gov/edgar.
b. Initial delivery. You must give a relationship summary to each 
retail investor, if you are an investment adviser, before or at the 
time you enter into an investment advisory agreement with the retail 
investor, or if you are a broker-dealer, before or at the time the 
retail investor first engages your services. See SEC Advisers Act 
rule 204-5(b)(1) and SEC Exchange Act rule 17a-14(c)(1). You must 
deliver the relationship summary even if your agreement with the 
retail investor is oral. A dual registrant should deliver the 
relationship summary at the earlier of entering into an investment 
advisory agreement with the retail investor or the retail investor 
engaging the firm's services.
c. Transition provisions for initial filing and delivery after the 
effective date of the new Form CRS requirements.
    (i) If you are a broker-dealer, you must file your initial 
relationship summary with the Commission as required by instruction 
5.a, by [INSERT DATE SIX MONTHS AFTER EFFECTIVE DATE OF RULES/FORM]. 
If you are an investment adviser or a dual registrant, you must 
amend your Form ADV by electronically filing with IARD your initial 
relationship summary as part of the next annual updating amendment 
you are required to file after [INSERT DATE SIX MONTHS AFTER 
EFFECTIVE DATE OF RULES/FORM].
    (ii) As of the date by which you are first required to 
electronically file your relationship summary with the Commission, 
you must begin to deliver your relationship summary to new and 
prospective clients and customers who are retail investors as 
required by Instruction 5.b.
    (iii) Within 30 days after the date by which you are first 
required to electronically file your relationship summary with the 
Commission, you must deliver your relationship summary to each of 
your existing clients and customers who are retail investors.
    6. Updating Relationship Summary.
a. You must update your relationship summary within 30 days whenever 
any information in the relationship summary becomes materially 
inaccurate.
b. You must communicate any changes in the updated relationship 
summary to retail investors who are existing clients or customers of 
the firm within 30 days after the updates are required to be made 
and without charge. You can make the communication by delivering the 
amended relationship summary or by communicating the information in 
another way to the retail investor.
c. You must file each amended relationship summary electronically 
with the Commission, on IARD if you are an investment adviser or 
dual registrant, and on EDGAR if you are a broker-dealer.
    7. Additional Delivery Requirements to Existing Clients and 
Customers.
a. You must deliver the relationship summary to a retail investor 
who is an existing client or customer before or at the time: (i) a 
new account is opened that is different from the retail investor's 
existing account(s); or (ii) changes are made to the retail 
investor's existing account(s) that would materially change the 
nature and scope of your relationship with the retail investor. For 
example, you must deliver a relationship summary before or at the 
time you recommend that the retail investor transfers from an 
investment advisory account to a brokerage account, transfers from a 
brokerage account to an investment advisory account, or moves assets 
from one type of account to another in a transaction not in the 
normal, customary or already agreed course of dealing. Whether a 
change would require delivery of the relationship summary would 
depend on the specific facts and circumstances.
b. You also must deliver the relationship summary to a retail 
investor within 30 days upon the retail investor's request.
    8. Electronic Posting and Manner of Delivery.
a. You must post the current version of the relationship summary 
prominently on your public website, if you have one, in a location 
and format that is easily accessible for retail investors. If you do 
not have a public website, include in your relationship summary a 
toll-free number that retail investors may call to request 
documents.
b. You may deliver the relationship summary electronically, 
including updates, consistent with SEC guidance regarding electronic 
delivery of documents, in particular Use of Electronic Media by 
Broker-Dealers, Transfer Agents, and Investment Advisers for 
Delivery of Information, which you can find at www.sec.gov/rules/concept/33-7288.txt.
c. If the relationship summary is delivered on paper and not as a 
standalone document, you should ensure that it is the first among 
any documents that are delivered at that time.
    9. Definitions.
    For purposes of this Form CRS, the following terms have the 
meanings ascribed to them below:
a. Affiliate: Any persons directly or indirectly controlling or 
controlled by you or under common control with you.
b. Dual registrant: A firm that is dually registered as a broker-
dealer and an investment adviser and offers services to retail 
investors as both a broker-dealer and an investment adviser.
c. Portfolio Manager: An investment adviser that manages investments 
in a wrap fee program.
d. Relationship summary: A written disclosure statement that you 
must provide to retail investors. See Advisers Act rule 204-5; 
Exchange Act rule 17a-14; Form CRS.
e. Retail investor: A prospective or existing client or customer who 
is a natural person (an individual). This term includes a trust or 
other similar entity that represents natural persons, even if 
another person is a trustee or managing agent of the trust.
f. Standalone investment adviser and standalone broker-dealer: A 
standalone investment adviser is a registered investment adviser 
that offers services to retail investors and (i) is not dually 
registered as a broker-dealer or (ii) is dually registered as a 
broker-dealer but does not offer services to retail investors as a 
broker-dealer. A standalone broker-dealer is a registered broker-
dealer that offers services to retail investors and (i) is not 
dually registered as an investment adviser or (ii) is dually 
registered as an investment adviser but does not offer services to 
retail investors as an investment adviser.
g. Wrap fee program: An advisory program under which a specified fee 
or fees not based directly upon transactions in a retail investor's 
account is charged for investment advisory services (which may 
include portfolio management or advice concerning the selection of 
other investment advisers) and the execution of retail investor 
transactions.

[Form ADV, Part 3:] Form CRS

Item 1: Introduction

A. State your name, whether you are registered with the Securities 
and Exchange Commission as a broker-dealer, investment adviser, or 
both, and the date of the relationship summary. This information 
should be disclosed prominently on the first page, and can be 
included in the header or footer.
B. Standalone Broker-Dealers: If you are a standalone broker-dealer, 
include the title ``Is a Brokerage Account Right for You?'' Include 
the following introductory paragraphs (emphasis required):
    ``There are different ways you can get help with your 
investments. You should carefully consider which types of accounts 
and services are right for you.
    We are a broker-dealer and provide brokerage accounts and 
services rather than advisory accounts and services. This document 
gives you a summary of the types of services we provide and how you 
pay. Please ask us for more information. There are some suggested 
questions on page [ ].''

[[Page 21555]]

C. Standalone Investment Advisers: If you are a standalone 
investment adviser, include the title ``Is an Investment Advisory 
Account Right for You?'' Include the following introductory 
paragraphs (emphasis required):
    ``There are different ways you can get help with your 
investments. You should carefully consider which types of accounts 
and services are right for you.
    We are an investment adviser and provide advisory accounts and 
services rather than brokerage accounts and services. This document 
gives you a summary of the types of services we provide and how you 
pay. Please ask us for more information. There are some suggested 
questions on page [ ].''
D. Dual Registrants: If you are a dual registrant, include the title 
``Which Type of Account is Right for You - Brokerage, Investment 
Advisory or Both?'' Include the following introductory paragraphs 
(emphasis required):
    ``There are different ways you can get help with your 
investments. You should carefully consider which types of accounts 
and services are right for you.
    Depending on your needs and investment objectives, we can 
provide you with services in a brokerage account, investment 
advisory account, or both at the same time. This document gives you 
a summary of the types of services we provide and how you pay. 
Please ask us for more information. There are some suggested 
questions on page [ ].''

Item 2: Relationships and Services

A. Include the heading ``[Types of] Relationships and Services.'' If 
you are a standalone broker-dealer or standalone investment adviser, 
omit the bracketed language. If you are a dual registrant, include 
the bracketed language in the heading, and include the following 
after the heading: ``Our accounts and services fall into two 
categories.''
B. Brokerage Account Services: If you are a broker-dealer that 
offers brokerage accounts to retail investors, summarize the 
principal brokerage services that you provide to retail investors. 
You must address the following, unless not applicable:
    1. Include the following (emphasis required): ``If you open a 
brokerage account, you will pay us a transaction-based fee, 
generally referred to as a commission, every time you buy or sell an 
investment.''
    2. If you offer accounts in which you offer recommendations to 
retail investors, state that the retail investor may select 
investments or you may recommend investments for the retail 
investor's account, but the retail investor will make the ultimate 
investment decision regarding the investment strategy and the 
purchase or sale of investments. If you only offer accounts in which 
you do not offer recommendations to retail investors (e.g., 
execution-only brokerage services), state that the retail investor 
will select the investments and the retail investor will make the 
ultimate investment decision regarding the investment strategy and 
the purchase or sale of investments.
    3. State if you offer to retail investors additional services, 
including, for example: (a) assistance with developing or executing 
the retail investor's investment strategy (e.g., you discuss the 
retail investor's investment goals or you design with the retail 
investor a strategy to achieve the retail investor's investment 
goals), or (b) monitoring the performance of the retail investor's 
account. Indicate whether these services can be offered as 
additional services or are part of the standard brokerage account 
services, and whether a retail investor will pay more for these 
services. If you offer monitoring (as reflected in (b) above), as 
part of the standard brokerage account services, indicate how 
frequently you monitor the performance. Briefly describe any regular 
communications you have with retail investors, including the 
frequency and method of the communications.
    4. If you significantly limit the types of investments available 
to retail investors in any accounts, include the following: ``We 
offer a limited selection of investments. Other firms could offer a 
wider range of choices, some of which might have lower costs.'' You 
significantly limit the types of investments if, for example, you 
only offer one type of asset (e.g., mutual funds, exchange-traded 
funds, or variable annuities), you only offer mutual funds or other 
investments sponsored or managed by you or an affiliate (i.e., 
proprietary products), or you only offer a small number of 
investments. If such limits only apply to certain accounts that you 
offer, identify those accounts.
C. Investment Advisory Account Services: If you are an investment 
adviser that offers investment advisory accounts to retail 
investors, summarize the principal investment advisory services that 
you provide to retail investors. You must address the following, 
unless not applicable:
    1. State the type of fee you receive as compensation if the 
retail investor opens an investment advisory account. For example, 
state if you charge an on-going asset-based fee based on the value 
of cash and investments in the advisory account, a fixed fee, or 
some other fee arrangement. Emphasize the type of fee in bold and 
italicized font. If you are a standalone adviser, also state how 
frequently you assess the fee.
    2. State that you offer advice on a regular basis, or, if you do 
not offer advice on a regular basis, state how frequently you offer 
advice. State the services you offer to retail investors including, 
for example, (a) assistance with developing the retail investor's 
investment strategy (e.g., you discuss the retail investor's 
investment goals or you design with the retail investor a strategy 
to achieve the retail investor's investment goals); or (b) how 
frequently you monitor the retail investor's accounts. Briefly 
describe any regular communications you have with retail investors, 
including the frequency and method of the communications.
    3. State if you offer advisory accounts for which you exercise 
discretion (i.e., discretionary accounts), accounts where you do not 
exercise discretion (i.e., non-discretionary accounts), or both. 
Emphasize the type of account (discretionary and non-discretionary) 
in bold and italicized font. If you offer a discretionary account, 
state that it allows you to buy and sell investments in the retail 
investor's account, without asking the retail investor in advance. 
If you offer a non-discretionary account, state that you give advice 
and the retail investor decides what investments to buy and sell.
    4. If you significantly limit the types of investments available 
to retail investors in any accounts, include the following: ``Our 
investment advice will cover a limited selection of investments. 
Other firms could provide advice on a wider range of choices, some 
of which might have lower costs.'' You significantly limit the types 
of investments if, for example, you only offer one type of asset 
(e.g., mutual funds, exchange-traded funds, or variable annuities), 
you only offer mutual funds or other investments sponsored or 
managed by you or an affiliate (i.e., proprietary products), or you 
only offer a small number of investments. If such limits only apply 
to certain accounts that you offer, identify those accounts.
D. Affiliate Services: If you are a standalone investment adviser or 
standalone broker-dealer and have affiliates that offer to retail 
investors brokerage or advisory services, respectively, you may 
state that you provide retail investors with certain brokerage or 
advisory services of your affiliates, as applicable.

Item 3: Standard of Conduct

A. Include the heading ``Our Obligations to You'' and the following 
language after the heading: ``We must abide by certain laws and 
regulations in our interactions with you.''
B. Broker-Dealers: If you are a broker-dealer that offers brokerage 
accounts to retail investors, include the following:
    1. ``[We must act in your best interest and not place our 
interests ahead of yours when we recommend an investment or an 
investment strategy involving securities.] When we provide any 
service to you, we must treat you fairly and comply with a number of 
specific obligations. Unless we agree otherwise, we are not required 
to monitor your portfolio or investments on an ongoing basis.'' 
Include the bracketed language only if you offer recommendations 
subject to Exchange Act Rule 15l-1 (``Regulation Best Interest'').
    2. ``Our interests can conflict with your interests. [When we 
provide recommendations, we must eliminate these conflicts or tell 
you about them and in some cases reduce them].''

[[Page 21556]]

Include the bracketed language only if you offer recommendations 
subject to Regulation Best Interest.
C. Investment Advisers: If you are an investment adviser that offers 
investment advisory accounts to retail investors, include the 
following:
    1. ``We are held to a fiduciary standard that covers our entire 
investment advisory relationship with you. [For example, we are 
required to monitor your portfolio, investment strategy and 
investments on an ongoing basis.]'' If you do not provide ongoing 
advice (for example, if you only provide a one-time financial plan), 
omit the bracketed sentence.
    2. ``Our interests can conflict with your interests. We must 
eliminate these conflicts or tell you about them in a way you can 
understand, so that you can decide whether or not to agree to 
them.''

Item 4: Summary of Fees and Costs

A. Include the heading ``Fees and Costs'' and the following language 
after the heading: ``Fees and costs affect the value of your account 
over time. Please ask your financial professional to give you 
personalized information on the fees and costs that you will pay.''
B. Brokerage Account Fees and Costs: If you are a broker-dealer that 
offers brokerage accounts to retail investors, summarize the 
principal fees and costs that retail investors will incur.
    1. If you are a dual registrant include the following (emphasis 
required): ``Transaction-based fees. You will pay us a fee every 
time you buy or sell an investment. This fee, commonly referred to 
as a commission, is based on the specific transaction and not the 
value of your account.'' If you are a standalone broker-dealer 
include the following: ``The fee you pay is based on the specific 
transaction and not the value of your account.''
    2. Include the following (emphasis required):
    (a) ``With stocks or exchange-traded funds, this fee is usually 
a separate commission. With other investments, such as bonds, this 
fee might be part of the price you pay for the investment (called a 
``mark-up'' or ``mark down''). With mutual funds, this fee 
(typically called a ``load'') reduces the value of your 
investment.''
    (b) State that some investments impose additional fees that will 
reduce the value of retail investors' investments over time and 
provide examples of such investments that you offer to retail 
investors (e.g., mutual funds and variable annuities). Also state 
that a retail investor could be required to pay fees when certain 
investments are sold (e.g., surrender charges for selling variable 
annuities).
    3. State whether your fees vary and are negotiable, and describe 
the key factors that you believe would help a reasonable retail 
investor understand the fee that he or she is likely to pay for your 
services (e.g., how much the retail investor buys or sells, what 
type of investment the retail investor buys or sells, and what kind 
of account the retail investor has with you).
    4. State, if applicable, that a retail investor will also pay 
other fees in addition to the firm's principal fees. List other fees 
the retail investor will pay, including, but not limited to, 
custodian fees, account maintenance fees and account inactivity 
fees.
    5. Include the following: ``The more transactions in your 
account, the more fees we charge you. We therefore have an incentive 
to encourage you to engage in transactions.''
    6. If you are a dual registrant include the following: ``From a 
cost perspective, you may prefer a transaction-based fee if you do 
not trade often or if you plan to buy and hold investments for 
longer periods of time.''
C. Investment Advisory Account Fees and Costs: If you are an 
investment adviser that offers investment advisory accounts to 
retail investors, summarize the principal fees and costs that retail 
investors will incur. Your determination of the principal fees for 
investment advisory services should align with the type of fee(s) 
that you report in response to Form ADV Part 1A, Item 5.E. Include 
information about each type of fee you report that is responsive to 
this Item 4.C.
    1. If you are a dual registrant include the following if you 
charge an asset-based fee (emphasis required): ``Asset-based fees. 
You will pay an on-going fee [at the end of each quarter] based on 
the value of the cash and investments in your advisory account.'' 
Replace the brackets with how frequently you assess the fee. If you 
charge another type of fee instead of an asset-based fee for your 
advisory services, briefly describe that fee and how frequently it 
is assessed.
    2. Include the following: ``The amount paid to our firm and your 
financial professional generally does not vary based on the type of 
investments we select on your behalf. [The asset-based fee reduces 
the value of your account and will be deducted from your account.]'' 
Include the bracketed language if you charge an ongoing asset-based 
fee for your advisory accounts. If you charge another type of fee, 
succinctly describe how it is assessed and the impact it has on the 
value of the retail investor's account.
    3. If you provide advice to retail investors about investing in 
a wrap fee program (and do not also offer retail investors another 
type of advisory account), include the following (emphasis 
required): ``We offer advisory accounts called wrap fee programs. In 
a wrap fee program, the asset-based fee will include most 
transaction costs and fees to a broker-dealer or bank that will hold 
your assets (called ``custody''), and as a result wrap fees are 
typically higher than non-wrap advisory fees.'' If you offer retail 
investors a wrap fee program as well as another type of advisory 
account, include the following (emphasis required): ``For some 
advisory accounts, called wrap fee programs, the asset-based fee 
will include most transaction costs and custody services, and as a 
result wrap fees are typically higher than non-wrap advisory fees.''
    4. State that some investments impose additional fees that will 
reduce the value of retail investors' investments over time and 
provide examples of such investments that you offer to retail 
investors (e.g., mutual funds and variable annuities). Also state 
that a retail investor could be required to pay fees when certain 
investments are sold (e.g., surrender charges for selling variable 
annuities).
    5. State whether your fees vary and are negotiable, and describe 
the key factors that you believe would help a reasonable retail 
investor understand the fee that he or she is likely to pay for your 
services (e.g., the services your receive and the amount of assets 
in your account).
    6. State, if applicable, that a retail investor will pay 
transaction-based fees when you buy and sell an investment for the 
retail investor (e.g., commissions paid to broker-dealers for buying 
or selling investments) in addition to the firm's principal fee it 
charges retail investors for the firm's advisory accounts. Also 
state, if applicable, that a retail investor will pay fees to a 
broker-dealer or bank that will hold the retail investor's assets 
and that this is called custody. List other fees the retail investor 
will pay, including, but not limited to, account maintenance 
services.
    7. If you provide advice to retail investors about investing in 
a wrap fee program, include the following: ``Although transaction 
fees are usually included in the wrap program fee, sometimes you 
will pay an additional transaction fee (for investments bought and 
sold outside the wrap fee program).''
    8. If you charge an ongoing asset-based fee, include the 
following: ``The more assets you have in the advisory account, 
including cash, the more you will pay us. We therefore have an 
incentive to increase the assets in your account in order to 
increase our fees. You pay our fee [insert frequency of fee (e.g., 
quarterly)] even if you do not buy or sell.'' Replace the brackets 
with the frequency of your fee.
    9. If you provide advice to retail investors about investing in 
a wrap fee program, also include the following: ``Paying for a wrap 
fee program could cost more than separately paying for advice and 
for transactions if there are infrequent trades in your account.''
    10. If you are a dual registrant that charges an ongoing asset-
based fee, include the following: ``An asset-based fee may cost more 
than a transaction-based fee, but you may prefer an asset-based fee 
if you want continuing advice or want someone to make investment 
decisions for you.'' If you provide advice to retail investors about 
investing in a wrap fee program, also include the following: ``You 
may prefer a wrap fee program if you prefer the certainty of a 
[insert frequency of the wrap fee (e.g., quarterly)] fee regardless

[[Page 21557]]

of the number of transactions you have.'' Replace the brackets with 
the frequency of the wrap fee.

Item 5: Comparisons to be provided by standalone investment advisers 
and standalone broker-dealers

A. If you are a standalone investment adviser, include the heading 
``Compare with Typical Brokerage Accounts,'' and include the 
following under the heading (emphasis required): ``You could also 
open a brokerage account with a broker-dealer, where you will pay a 
transaction-based fee, generally referred to as a commission, when 
the broker-dealer buys or sells an investment for you.'' Include 
``Features of a typical brokerage account include:'' and then 
include the following statements, each set off by a bullet point 
(except as specified below), in the following order:
    1. ``With a broker-dealer, you may select investments or the 
broker-dealer may recommend investments for your account, but the 
ultimate decision for your investment strategy and the purchase and 
sale of investments will be yours.''
    2. ``A broker-dealer must act in your best interest and not 
place its interests ahead of yours when the broker-dealer recommends 
an investment or an investment strategy involving securities. When a 
broker-dealer provides any service to you, the broker-dealer must 
treat you fairly and comply with a number of specific obligations. 
Unless you and the broker-dealer agree otherwise, the broker-dealer 
is not required to monitor your portfolio or investments on an 
ongoing basis.''
    3. ``If you were to pay a transaction-based fee in a brokerage 
account, the more trades in your account, the more fees the broker-
dealer charges you. So it has an incentive to encourage you to trade 
often.''
    4. Include ``You can receive advice in either type of account, 
but you may prefer paying:'' and then present the following 
information in this sub-item in a tabular format, comparing a 
transaction-based fee and an asset-based fee side-by-side. In one 
column, include the following (emphasis required): ``a transaction-
based fee from a cost perspective, if you do not trade often or if 
you plan to buy and hold investments for longer periods of time.'' 
In the other column, include the following (emphasis required): ``an 
asset-based fee if you want continuing advice or want someone to 
make investment decisions for you, even though it may cost more than 
a transaction-based fee.''
B. If you are a standalone broker-dealer, include the heading 
``Compare with Typical Advisory Accounts,'' and include the 
following under the heading (emphasis required): ``You could also 
open an advisory account with an investment adviser, where you will 
pay an ongoing asset-based fee that is based on the value of the 
cash and investments in your advisory account.'' Include ``Features 
of a typical advisory account include:'' and then include the 
following statements, each set off by a bullet point (except as 
specified below), in the following order (emphasis required):
    1. ``Advisers provide advice on a regular basis. They discuss 
your investment goals, design with you a strategy to achieve your 
investment goals, and regularly monitor your account.''
    2. ``You can choose an account that allows the adviser to buy 
and sell investments in your account without asking you in advance 
(a ``discretionary account'') or the adviser may give you advice and 
you decide what investments to buy and sell (a ``non-discretionary 
account'').''
    3. ``Advisers are held to a fiduciary standard that covers the 
entire investment advisory relationship. For example, advisers are 
required to monitor your portfolio, investment strategy and 
investments on an ongoing basis.''
    4. ``If you were to pay an asset-based fee in an advisory 
account, you would pay the fee periodically, even if you do not buy 
or sell. You may also choose to work with an investment adviser who 
provides investment advice for an hourly fee, or provides a 
financial plan for a one-time fee.''
    5. ``For an adviser that charges an asset-based fee, the more 
assets you have in an advisory account, including cash, the more you 
will pay the adviser. So the adviser has an incentive to increase 
the assets in your account in order to increase its fees.''
    6. Include ``You can receive advice in either type of account, 
but you may prefer paying:'' and then present the following 
information in this sub-item in a tabular format, comparing a 
transaction-based fee and an asset-based fee side-by-side. In one 
column, include the following (emphasis required): ``an asset-based 
fee if you want continuing advice or want someone to make investment 
decisions for you, even though it may cost more than a transaction-
based fee.'' In the other column, include the following (emphasis 
required): ``a transaction-based fee from a cost perspective if you 
do not trade often or if you plan to buy and hold investments for 
longer periods of time.''

Item 6. Conflicts of Interest

A. Include the heading, ``Conflicts of Interest.'' Standalone 
broker-dealers must include the following after the heading: ``We 
benefit from our recommendations to you.'' Standalone investment 
advisers must include the following after the heading: ``We benefit 
from the advisory services we provide to you.'' Dual registrants 
must include the following after the heading: ``We benefit from the 
services we provide to you.''
B. Briefly describe the following conflicts of interest, as they are 
applicable to you. If all or a portion of a conflict is inapplicable 
to your business, omit that conflict or portion thereof. If you are 
a dual registrant and a conflict only applies to your brokerage 
accounts or to your investment advisory accounts, only include that 
conflict in the applicable column.
    1. State that you have a financial incentive to offer or 
recommend the retail investor to invest in certain investments 
because (a) they are issued, sponsored or managed by you or your 
affiliates, (b) third parties compensate you when you recommend or 
sell the investments, or (c) both. Provide examples of such 
investments. State that your financial professionals receive 
additional compensation if the retail investor buys these 
investments.
    2. State that you have an incentive to offer or recommend the 
retail investor to invest in certain investments because the manager 
or sponsor of those investments or another third party (such as an 
intermediary) shares with you revenue it earns on those investments. 
Provide examples of such investments.
    3. State that you can buy investments from a retail investor, 
and sell investments to a retail investor, from your own accounts 
(called ``acting as principal''). State that you can earn a profit 
on these trades, and that you have an incentive to encourage the 
retail investor to trade with you. If this activity is part of your 
investment advisory business, state that the retail investor's 
specific approval on each such transaction is required.

Item 7. Additional Information.

A. Include the heading, ``Additional Information'' and include the 
following after the heading: ``We encourage you to seek out 
additional information.''
B. Include the following: ``We have legal and disciplinary events'' 
if you or one of your financial professionals currently disclose, or 
are required to disclose, the following information:
    1. Disciplinary information in your Form ADV (Item 11 of Part 1A 
or Item 9 of Part 2A).
    2. Legal or disciplinary events in your Form BD (Items 11 A-K) 
(except to the extent such information is not released to 
BrokerCheck, pursuant to FINRA Rule 8312).
    3. Disclosures for any of your financial professionals in Items 
14 A-M on Form U4 (Uniform Application for Securities Industry 
Registration or Transfer), or in Items 7(a) and 7(c)-(f) of Form U5 
(Uniform Termination Notice for Securities Industry Registration) or 
on Form U6 (Uniform Disciplinary Action Reporting Form) (except to 
the extent such information is not released to BrokerCheck, pursuant 
to FINRA Rule 8312).
C. Regardless of your response to Item 7.B, you must state the 
following: ``Visit Investor.gov for a free and simple search tool to 
research our firm and our financial professionals.''
D. Include the following: ``To report a problem to the SEC, visit 
Investor.gov or call the SEC's toll-free investor assistance line at 
(800) 732-0330. [To

[[Page 21558]]

report a problem to FINRA, [ ].] If you have a problem with your 
investments, investment account or a financial professional, contact 
us in writing at [insert your primary business address].'' If you 
are a broker-dealer or dual registrant, include the bracketed 
language. It is your responsibility to review the current telephone 
numbers for the SEC and FINRA no less often than annually and update 
as necessary.
E. State where the retail investor can find additional information 
about your brokerage and investment advisory services.
    1. If you are a broker-dealer, state that for additional 
information about your brokers and services, visit BrokerCheck, your 
website, and the retail investor's account agreement. Include a link 
to the portion of your website that provides up-to-date information 
for retail investors and the following link to BrokerCheck: 
Brokercheck.Finra.org. If you do not have a public firm website, 
then you must include a toll-free telephone number where retail 
investors can request up-to-date information.
    2. If you are an investment adviser, state that for additional 
information on your investment advisory services, see your Form ADV 
brochure on IAPD on Investor.gov and any brochure supplement a 
financial professional provides. If you maintain your current Form 
ADV brochure on your public website, then you must state the website 
address. If you do not have a public firm website or if you do not 
maintain your current Form ADV brochure on your public website, then 
you must include the following link: adviserinfo.sec.gov. If you do 
not have a public firm website, then you also must include a toll-
free telephone number where retail investors can request up-to-date 
information.

Item 8. Key Questions to Ask.

    Under the heading ``Key Questions to Ask,'' include the key 
questions below and the following: ``Ask our financial professionals 
these key questions about our investment services and accounts.''
    Use formatting to make the questions more noticeable and 
prominent (for example, by using larger font, a text box around the 
heading or questions, different font, or lines to offset the 
questions from the other sections). You may modify or omit portions 
of any questions that you determine are inapplicable to your 
business. If you are a standalone broker-dealer or standalone 
investment adviser, you should modify the questions below to reflect 
the type of account you offer to retail investors (e.g., advisory or 
brokerage account).
    Advisers that provide automated advice or broker-dealers that 
provide services only online without a particular individual with 
whom a retail investor can discuss these questions must include a 
section or page on their website that answers each of the below 
questions and should provide a hyperlink in the relationship summary 
to that section or page. If you provide automated advice but make a 
financial professional available to discuss the existing account 
with a retail investor, you may wish to consider making the 
financial professional available to discuss these questions with the 
retail investor.
1. Given my financial situation, why should I choose an advisory 
account? Why should I choose a brokerage account?
2. Do the math for me. How much would I pay per year for an advisory 
account? How much for a typical brokerage account? What would make 
those fees more or less? What services will I receive for those 
fees?
3. What additional costs should I expect in connection with my 
account?
4. Tell me how you and your firm make money in connection with my 
account. Do you or your firm receive any payments from anyone 
besides me in connection with my investments?
5. What are the most common conflicts of interest in your advisory 
and brokerage accounts? Explain how you will address those conflicts 
when providing services to my account.
6. How will you choose investments to recommend for my account?
7. How often will you monitor my account's performance and offer 
investment advice?
8. Do you or your firm have a disciplinary history? For what type of 
conduct?
9. What is your relevant experience, including your licenses, 
education and other qualifications? Please explain what the 
abbreviations in your licenses are and what they mean.
10. Who is the primary contact person for my account, and is he or 
she a representative of an investment adviser or a broker-dealer? 
What can you tell me about his or her legal obligations to me? If I 
have concerns about how this person is treating me, who can I talk 
to?
    In addition to the abovementioned questions, you may also 
include any other frequently asked questions you receive following 
these questions. You may not, however, exceed fourteen questions in 
total.

Appendix C

Hypothetical Relationship Summary for a Dually Registered 
Investment Adviser and Broker-Dealer Prepared By SEC Staff--For 
Illustrative Purposes Only

Which Type of Account is Right for You--Brokerage, Investment Advisory 
or Both?

    There are different ways you can get help with your investments. 
You should carefully consider which types of accounts and services 
are right for you.
    Depending on your needs and investment objectives, we can 
provide you with services in a brokerage account, investment 
advisory account, or both at the same time. This document gives you 
a summary of the types of services we provide and how you pay. 
Please ask us for more information. There are some suggested 
questions on page 4.
BILLING CODE 8011-01-P

[[Page 21559]]

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[[Page 21560]]


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[[Page 21561]]


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[[Page 21562]]


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[[Page 21563]]



Appendix D

Hypothetical Relationship Summary for a Registered Broker-Dealer 
Prepared By SEC Staff--For Illustrative Purposes Only

Is A Brokerage Account Right For You?

    There are different ways you can get help with your investments. 
You should carefully consider which types of accounts and services 
are right for you.
    We are a broker-dealer and provide brokerage accounts and 
services rather than advisory accounts and services. This document 
gives you a summary of the types of services we provide and how you 
pay. Please ask us for more information. There are some suggested 
questions on page 4.
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[[Page 21564]]


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[[Page 21565]]


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[[Page 21566]]


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Appendix E

Hypothetical Relationship Summary for a Registered Investment 
Adviser Prepared By SEC Staff--For Illustrative Purposes Only

Is An Investment Advisory Account Right For You?

    There are different ways you can get help with your investments. 
You should carefully consider which types of accounts and services 
are right for you.
    We are an investment adviser and provide advisory accounts and 
services rather than brokerage accounts and services. This document 
gives you a summary of the types of services we provide and how you 
pay. Please ask us for more information. There are some suggested 
questions on page 3.

[[Page 21567]]

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[[Page 21568]]


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[[Page 21569]]


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[[Page 21570]]


[GRAPHIC] [TIFF OMITTED] TP09MY18.015

Your Relationship with Your Financial Professional: Feedback on the 
Relationship Summary

    We would like to know what you think about a proposed 
Relationship Summary that describes your relationship with your 
investment adviser or your broker-dealer (your firm) and your 
financial professionals. This document summarizes:
 the services the firm offers and the types of fees and 
costs associated with those services;
 the firm's obligations to you;
 certain conflicts of interest;
 how to find additional information about the firm and its 
financial professionals and research disciplinary history for the 
firm or its financial professionals;
 how to report a problem with your investments, investment 
account or a financial professional; and
 some questions to ask your financial professional to get 
more information.
    It is important to us at the SEC to understand what you, the 
investor, think so that we can make it easier for you to choose the 
type of investment services relationship that is right for you. We 
prepared sample Relationship Summaries to illustrate what they may 
look like.
    [rtarr8] Sample Relationship Summary for a broker-dealer
    [rtarr8] Sample Relationship Summary for an investment adviser
    [rtarr8] Sample Relationship Summary for firms that are both an 
investment adviser and broker-dealer
    Please take a few minutes to review one or more of the samples 
and answer any or all of these questions. Please provide your 
comments by August 7, 2018 - and thank you for your feedback!
    If you are interested in background information on the proposed 
Relationship Summary, or want to provide feedback on additional 
questions, click here (https://www.sec.gov/rules/proposed/2018/34-83063.pdf).

Questions

1. Overall, do you find the Relationship Summary useful? If not, how 
would you change it?
2. How useful is each section of the Relationship Summary? Please 
consider explaining your responses in the comments.
[GRAPHIC] [TIFF OMITTED] TP09MY18.016


[[Page 21571]]


3. Please answer the following questions. Please consider explaining 
your responses in the comments.
---------------------------------------------------------------------------

    \1\ Not applicable for firms that are both an investment adviser 
and broker-dealer.
[GRAPHIC] [TIFF OMITTED] TP09MY18.017

BILLING CODE 8011-01-C
4. Are there topics in the Relationship Summary that are too 
technical or that could be improved? If so, what topics and how can 
they be improved?
5. Is there additional information that we should require in the 
Relationship Summary, such as more specific information about the 
firm or additional information about fees? Is that because you do 
not receive the information now, or because you would also like to 
see it presented in this summary document, or both? Is there any 
information that should be made more prominent?
6. Is the Relationship Summary an appropriate length? If not, should 
it be longer or shorter?
7. Do you find the `Key Questions to Ask' useful? Would the 
questions improve the quality of your discussion with your financial 
professional? If not, why not?
8. Do you have any additional suggestions to improve the 
Relationship Summary? Is there anything else you would like to tell 
us?

How to Provide Feedback

    You can send us feedback in the following ways (include the file 
number S7-08-18 in your response):

------------------------------------------------------------------------
 
------------------------------------------------------------------------
Mail...................................  Secretary, Securities and
                                          Exchange Commission 100 F
                                          Street, NE Washington, DC,
                                          20549-1090
Email..................................  [email protected]
SEC Website............................  https://www.sec.gov/rules/proposed.shtml
------------------------------------------------------------------------

    We will post your feedback on our website. Your submission will 
be posted without change; we do not redact or edit personal 
identifying information from submissions. You should only make 
submissions that you wish to make available publicly.

Thank you!

[FR Doc. 2018-08583 Filed 5-8-18; 8:45 am]
BILLING CODE 8011-01-P

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